Filing summary
Filing and period: The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended March 27, 2016 (the third quarter of Cree fiscal 2016), not a Wolfspeed, Inc. 10-Q for 2015 Q3. Cree described a proposed IPO of its Power and RF business under the Wolfspeed name; completion was uncertain.
Business context and results
Cree reported three segments: Lighting Products, LED Products, and Power and RF Products. Its products serve lighting, semiconductor, power electronics, and wireless markets. The company cited intense competition, pricing pressure, and uncertain LED adoption.
| Metric | Quarter ended March 27, 2016 | Nine months ended March 27, 2016 |
|---|---|---|
| Revenue | $366.9 million, down 10% year over year | $1,228.2 million, down 2% |
| Gross profit / margin | $109.0 million / 29.7%, versus $125.1 million / 30.6% | $374.1 million / 30.5%, versus $397.2 million / 31.8% |
| Operating income (loss) | $(4.5) million, versus $1.3 million | $(5.7) million, versus $22.4 million |
| Net income (loss) | $0.2 million, versus $0.5 million; diluted EPS rounded to $0.00 | $(10.9) million, versus $23.4 million; diluted EPS $(0.11), versus $0.20 |
Quarterly revenue fell in each segment: Lighting Products to $187.7 million (down 16%), LED Products to $150.2 million (down 3%), and Power and RF Products to $29.0 million (down 6%). For the nine-month period, Lighting revenue grew 2%, while LED revenue fell 6% and Power and RF revenue fell 8%. LED and Power and RF margins declined year over year; Lighting’s nine-month margin improved.
Cash flow, liquidity, and debt
For the nine months, operating cash flow was $138.8 million, compared with $93.7 million. Investing activities used $50.7 million, including $99.7 million of property and equipment purchases and $12.5 million net spend on the APEI acquisition. Financing activities used $111.2 million, including $149.6 million of share repurchases. Cash and cash equivalents declined $24.1 million to $115.6 million.
Cash, cash equivalents, and short-term investments totaled $620.5 million, down from $713.2 million at June 28, 2015. The company had $225 million outstanding on its $500 million secured revolving credit line, with $275 million available; it reported covenant compliance. Current assets were $1.193 billion and current liabilities $218.0 million. Inventory rose to $297.9 million, and the cash conversion cycle increased to 103 days from 79 days.
Changes, outlook, and notable items
- Drivers and challenges: Lighting sales were affected by lower commercial fixture volume, customer-service disruption during an IT-system conversion, product delays, a slower North American retrofit market, and weaker consumer bulb sales. LED pricing faced global competition. Power and RF unit sales were lower, particularly RF units.
- Management priorities: Cree said it aimed to improve commercial Lighting execution and margins, deliver LED results in a range similar to the third quarter, expand Power and RF, and manage operating expenses. It expected markets to expand but remain highly competitive through the rest of calendar 2016.
- Capital spending and IPO: Fiscal 2016 capital investment was targeted at approximately $120 million. The proposed Wolfspeed IPO was intended to raise capital for Power and RF growth and potentially help investors recognize the businesses’ value, but might not occur or occur on favorable terms.
- Restructuring: The LED restructuring, which ended in the second quarter, involved $102.3 million of cumulative charges, including asset disposal/impairment and inventory and channel reserves. No restructuring charges were incurred in the reported quarter; Cree recorded a $1.1 million gain on asset sales related to the plan.
- Accounting revision: Cree corrected prior-period patent amortization errors. The aggregate pretax error through the second quarter of fiscal 2016 was $6.8 million; prior periods shown were revised. The company said the errors were not material to those prior periods individually or in aggregate, but would have been material to the current interim statements if not corrected.
- Other exposures: Nine-month results included a $13.7 million loss on the Lextar equity-method investment and $4.3 million of foreign-currency losses. Unrecognized tax benefits were $18.3 million; the company said $4.3 million could change over the next 12 months. A voluntary recall of linear LED T8 lamps due to overheating and melting remained a contingency; management expected most costs to be recoverable from insurance. Legal outcomes were not reasonably estimable, and unfavorable outcomes could be material.
Key facts for investors to verify
- Confirm the intended issuer and period: this is Cree’s fiscal Q3 2016 filing, not a Wolfspeed 2015 Q3 filing.
- Track whether commercial Lighting recovers from IT disruption, delayed products, and weaker market demand, and whether inventory and the cash conversion cycle improve.
- Assess continued LED pricing pressure and the effect of new Power and RF product ramps on segment margins.
- Check progress and terms of any Wolfspeed IPO, and related costs or changes in consolidation.
- Review the Lextar investment valuation, tax-audit developments, warranty and recall costs, and outcomes of legal proceedings.
- Monitor capital spending, share repurchases, revolver borrowings, and covenant compliance.