Filing summary
Entity and period: The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended December 28, 2014, not a filing under the name Wolfspeed, Inc. It reports Cree’s fiscal second quarter and first six months of fiscal 2015; the comparable periods ended December 29, 2013. The filing describes Cree’s LED Products, Lighting Products, and Power and RF Products businesses.
Financial performance
| Metric | Quarter ended Dec. 28, 2014 | Six months ended Dec. 28, 2014 |
|---|---|---|
| Revenue | $413.2 million, versus $415.1 million | $840.8 million, versus $806.1 million |
| Gross profit and margin | $136.8 million; 33.1%, versus $155.8 million; 37.5% | $272.6 million; 32.4%, versus $306.5 million; 38.0% |
| Operating income | $10.2 million, versus $35.4 million | $21.6 million, versus $72.2 million |
| Net income | $12.2 million, versus $35.7 million | $23.3 million, versus $66.2 million |
| Diluted EPS | $0.10, versus $0.29 | $0.20, versus $0.54 |
| Cash from operations | Not separately presented for the quarter | $28.1 million, versus $168.0 million |
For the six-month period, operating expenses rose to $251.0 million from $234.4 million, including higher research and development and selling, general and administrative spending. The tax provision was $3.0 million for the six months, versus $12.2 million; the company cited the reinstated research and development tax credit and other tax factors. The second-quarter tax benefit included $1.9 million from that credit.
Segments and material changes
- LED Products: Six-month revenue fell 25% to $325.5 million; segment gross margin declined to 39.0% from 46.0%. Management attributed the decrease to weaker global demand, fewer units sold, and lower pricing.
- Lighting Products: Six-month revenue rose 41% to $453.3 million and gross profit increased, while gross margin slipped to 26.5% from 27.4%, mainly due to a higher mix of lower-margin LED bulbs.
- Power and RF Products: Six-month revenue rose 21% to $62.1 million; gross margin increased to 56.5% from 55.9%, with higher revenue, product mix, and factory utilization cited as factors.
Overall, six-month revenue grew 4%, but lower LED sales and margins more than offset growth in Lighting and Power and RF, materially reducing gross profit, operating income, and net income. In the quarter, revenue was nearly flat year over year while earnings declined.
Cash, liquidity, debt, and capital allocation
- At December 28, 2014, cash, cash equivalents, and short-term investments totaled $829.9 million, down from $1.162 billion at June 29, 2014. Current assets were $1.488 billion and current liabilities $244.9 million.
- Inventories increased to $332.5 million from $284.8 million. The cash conversion cycle lengthened to 104 days from 74 days, primarily reflecting more days of inventory and fewer days of payables.
- Operating cash flow was $28.1 million for six months, down from $168.0 million. Investing activities provided $33.2 million, including proceeds from investment sales, while capital expenditures were $113.4 million and the Lextar investment was $80.6 million. Financing activities used $147.6 million, including $320.3 million of share repurchases.
- Debt was $150 million at quarter-end under an unsecured revolving facility, with no borrowing availability remaining. On January 9, 2015, the company repaid that balance and entered a new $500 million revolving credit agreement, maturing January 9, 2020. The new facility is secured by 65% of the equity interests in first-tier foreign subsidiaries and includes leverage and interest-coverage covenants.
- The company repurchased 9.3 million shares for $320.3 million during the six months. Its authorization allowed up to $550 million of repurchases through June 28, 2015.
Outlook, commentary, and risks
Management expected markets to remain highly competitive during fiscal 2015. It targeted revenue growth in Lighting Products and Power and RF Products, while anticipating lower full-year LED Products revenue. It expected incremental operating leverage in the second half versus the first half, supported by higher revenue and a new LED technology platform intended to drive design wins later in the fiscal year. The company also targeted approximately $200 million of fiscal 2015 capital investment, primarily for infrastructure and longer-term growth.
Management cited LED adoption uncertainty, pricing pressure and competition, demand and inventory volatility, execution of capacity expansion, and dependence on sales channels, distributors, customers, and suppliers as key business risks. Other disclosed risks include product quality and warranty claims, foreign exchange exposure, intellectual property litigation, and changing tax and regulatory conditions. The company reported various legal proceedings; outcomes were not reasonably estimable, and management said an unfavorable result could have a material adverse impact. Warranty periods ranged from 90 days to 10 years; warranty liabilities were $7.8 million at quarter-end. Management stated that liquidity was adequate for operating needs and capital expenditures for at least the next 12 months. It reported no off-balance-sheet arrangements and concluded disclosure controls were effective.
Key facts for investors to verify
- Confirm the issuer and security: this source identifies the registrant as Cree, Inc., although the request metadata names Wolfspeed, Inc.
- Assess whether LED demand, unit sales, and pricing stabilized, and whether the new technology platform produced the projected design wins.
- Track consolidated and segment gross margins, especially LED Products margins and the effect of lower-priced bulb mix in Lighting Products.
- Check whether operating cash flow recovered and inventory and the 104-day cash conversion cycle improved.
- Review use of the $500 million credit facility, covenant headroom, capital spending, and continued share repurchases.
- Monitor warranty accruals, legal proceedings, and the company’s ability to achieve its stated fiscal 2015 growth and second-half operating-leverage objectives.