Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for the three months ended September 23, 2018 (the first quarter of fiscal 2019), compared with the three months ended September 24, 2017. Although the request identifies Wolfspeed, the filing’s registrant is Cree, Inc.; Wolfspeed is one of Cree’s three reportable segments.
Cree sells wide-bandgap semiconductor products, LED products and lighting products. The quarter includes the acquired Infineon RF Power business in Wolfspeed’s results.
Financial results and liquidity
| Metric | Q1 FY2019 | Prior comparable quarter |
|---|---|---|
| Revenue | $408.3 million | $360.4 million |
| Gross profit / margin | $128.2 million / 31.4% | $100.3 million / 27.8% |
| Operating income (loss) | $0.5 million | $(14.1) million |
| Net loss | $(11.1) million | $(19.9) million |
| Diluted loss per share | $(0.11) | $(0.20) |
| Operating cash flow | $34.0 million | $54.1 million |
- Revenue rose 13%. Wolfspeed revenue increased 93% to $127.4 million; LED Products revenue rose 2% to $146.8 million; Lighting Products revenue fell 10% to $134.1 million.
- Gross margin improved 3.6 percentage points. Segment margins were 47.4% for Wolfspeed, 28.1% for LED Products and 23.2% for Lighting Products.
- Operating expenses were $127.6 million, up from $114.4 million. Net non-operating expense rose to $9.5 million, primarily reflecting a $6.6 million loss on the Lextar investment and interest expense.
- At September 23, 2018, cash and cash equivalents were $336.3 million and short-term investments were $329.2 million, totaling $665.5 million. Working capital was approximately $936.2 million.
- Operating cash flow declined 37%, with management citing inventory build. Investing cash outflow was $102.3 million, including $36.6 million of property and equipment purchases and net purchases of short-term investments.
- Financing provided $285.6 million, principally from issuing $575 million of convertible notes, offset in part by net repayment of $292 million on the credit line. Cash and cash equivalents increased $217.4 million during the quarter.
- The company had $452.6 million of convertible notes, net of discount and issuance costs, and no balance outstanding on its $500 million revolving facility. Although the full commitment was $500 million, the filing reported $112 million available for borrowing under applicable covenants.
Material changes, outlook and risks
- Wolfspeed growth reflected organic expansion and the Infineon RF Power acquisition, as well as 52% more units sold and a 29% increase in average selling prices. Its margin declined from 49.0% to 47.4%, mainly because of product mix.
- LED Products benefited from demand in outdoor illumination, video screens and mid-power applications. Lighting Products sales were weaker amid North American commercial-market softness, lower consumer demand and the company’s focus on higher-margin business.
- Cree adopted ASC 606 using the modified retrospective method. It recorded a $10.3 million increase to opening retained earnings and recognized approximately $1.6 million less revenue in the quarter; management expected the ongoing effect to be immaterial.
- The company issued 0.875% convertible senior notes due September 2023, with $575 million aggregate principal and an initial conversion price of approximately $59.97 per share. Conversion, redemption and repurchase provisions may affect future dilution, cash needs and debt obligations.
- Management said liquidity, the notes proceeds, operating cash flows and credit availability should cover operating and capital needs for at least the next 12 months. It targeted approximately $220 million of capital investment in fiscal 2019, primarily for infrastructure and growth priorities.
- Management’s priorities include investing in Wolfspeed growth, focusing LED Products on differentiated offerings, and improving Lighting Products margins and execution. The Lighting Products restructuring, revised in September to add cost-saving measures, was expected to finish in the second quarter of fiscal 2019; estimated total charges were $10.5 million, of which $10.4 million had been incurred by quarter-end.
- Key risks include uncertain adoption and demand, competition and pricing pressure, capacity constraints and execution of the 100mm-to-150mm Wolfspeed production transition, supply-chain dependence, tariffs and other trade restrictions, and integration of the Infineon acquisition. The filing also cites customer concentration, foreign-exchange exposure, potential litigation and product-quality risks.
- Cree disclosed a voluntary recall of linear LED T8 replacement lamps due to overheating and melting hazards. It expected most recall costs to be recoverable from insurance, with an immaterial financial impact, but recovery and ultimate costs remain worth monitoring. Litigation outcomes were not reasonably estimable.
Important facts for investors to verify
- Confirm the company and period: the filing is Cree, Inc.’s Q1 FY2019 10-Q, not a filing under the Wolfspeed, Inc. registrant name.
- Assess how much of Wolfspeed’s reported growth came from the Infineon acquisition versus organic growth, and whether capacity expansion can meet demand without margin pressure.
- Track cash conversion and inventory: inventory rose to $306.4 million, and the cash conversion cycle increased to 85 days from 79 days.
- Review the convertible-note terms, potential dilution, interest accounting and credit-facility covenant limits; available revolver borrowing was $112 million despite a $500 million commitment.
- Monitor Lighting Products restructuring costs, sales recovery and the T8 lamp recall, including insurance recoveries.
- Watch Lextar’s share price and related investment losses, which contributed $6.6 million of non-operating expense this quarter.