Cree, Inc. Form 10-Q Summary
Issuer and period: The filing is by Cree, Inc. (now identified in the request as Wolfspeed), not a standalone Wolfspeed, Inc. filing. It covers the unaudited first quarter of fiscal 2018, the three months ended September 24, 2017; comparatives are the three months ended September 25, 2016. Wolfspeed is one of Cree’s three reportable segments.
Financial results and liquidity
| Metric | Quarter ended Sep. 24, 2017 | Comparable quarter |
|---|---|---|
| Revenue | $360.4 million | $371.2 million |
| Gross profit / margin | $100.3 million / 27.8% | $109.9 million / 29.6% |
| Operating loss | $14.1 million | $5.2 million |
| Net loss attributable to controlling interest | $19.9 million; diluted loss per share $0.20 | Net income $0.6 million; diluted earnings per share $0.01 |
| Operating cash flow | $54.1 million | $18.1 million |
At September 24, cash, cash equivalents and short-term investments totaled $624.9 million, up from $610.9 million at June 25, 2017. Current assets were $1.106 billion and current liabilities $229.4 million. Long-term debt was $141.0 million, down from $145.0 million; $359 million remained available under the $500 million revolving credit facility, maturing January 2020. The company reported covenant compliance and said liquidity should suffice for operations and capital expenditures for at least 12 months.
Investing cash outflow was $34.3 million, including $36.5 million of property and equipment purchases. Financing cash outflow was $0.8 million. Cash and cash equivalents increased $19.5 million to $152.1 million. Management attributed higher operating cash flow primarily to working capital; inventory declined to $277.9 million from $284.4 million.
Material changes and segment performance
- Total revenue declined 3% year over year, while gross profit fell 9% and gross margin contracted 1.8 percentage points.
- Lighting Products: Revenue fell 19% to $149.7 million; gross margin declined to 21.3% from 26.8%. Management cited weak North American commercial demand, lower unit volume, earlier driver-quality holds, lower factory utilization, and higher warranty reserves.
- LED Products: Revenue rose 5% to $144.5 million, but gross margin fell to 26.9% from 30.4%, reflecting competitive pricing and less favorable product mix.
- Wolfspeed: Revenue increased 33% to $66.2 million and gross margin improved to 49.0% from 47.0%. Management cited higher unit volume and selling prices, favorable product mix, improved utilization, and better production yields.
- Research and development expense rose 5% to $41.9 million, primarily to advance 150mm development and next-generation power and RF devices. Losses on disposal or impairment of long-lived assets increased to $2.8 million, mainly from demolition and relocation costs tied to Wolfspeed capacity expansion.
Outlook, commentary, and risks
- Management targeted approximately $220 million of fiscal 2018 capital investment, primarily for infrastructure supporting longer-term growth. It identified Wolfspeed capacity and technology investment, Lighting Products margin improvement, LED product expansion, and customer service as priorities. The filing gives no specific revenue or earnings forecast.
- The company aimed to convert most Wolfspeed power production from 100mm to 150mm substrates during fiscal 2018. Management warned execution delays or cost overruns could affect results; Wolfspeed demand was exceeding production capacity, with longer customer lead times.
- Cree formed Cree Venture LED with San’an: Cree funded $5.1 million for a 51% interest and consolidates the venture; San’an owns 49%. The venture began customer sales during the quarter.
- The company recorded a $3.3 million loss on its Lextar equity investment. Further share-price declines could produce additional losses and, management warned, materially adversely affect results.
- A voluntary recall of linear LED T8 replacement lamps followed an overheating and melting hazard. Cree expected most costs to be recoverable through insurance and the financial impact to be immaterial. Product warranty liabilities were $30.2 million, including $13.5 million classified as long-term.
- Management described ongoing legal proceedings but said outcomes were not reasonably estimable; unfavorable outcomes could include damages or restrictions on product sales. Other stated risks include pricing pressure, demand and capacity fluctuations, supplier constraints, product quality, execution of expansion plans, and changing tax rates.
- CEO Gregg Lowe’s appointment became effective September 27, 2017, shortly after quarter-end, following the announced transition from Charles Swoboda. The filing identifies transition execution as a risk.
Most important facts for investors to verify
- Whether Lighting Products demand, driver-quality issues, warranty costs, and gross margin stabilize.
- Whether Wolfspeed capacity expansion and the 150mm transition meet schedule, yield, and cost targets while addressing customer lead times.
- Whether planned fiscal 2018 capital spending is funded by operating cash generation and produces expected capacity and returns.
- Whether LED and Wolfspeed pricing, product mix, and utilization sustain segment growth and margins.
- Potential additional Lextar investment losses, T8 recall costs and insurance recovery, and outcomes of unresolved legal proceedings.
- Execution of the CEO transition and the Cree Venture LED arrangement.