Business context and reporting period
This is Cree, Inc.’s unaudited Form 10-Q for the quarter ended September 29, 2019, the first quarter of fiscal 2020—not a filing by a separate Wolfspeed, Inc. Wolfspeed is a Cree reportable segment. Cree focused on wide-bandgap semiconductors and LED products; it had sold its Lighting Products business unit in May 2019 and reports that business as discontinued operations.
Financial performance and liquidity
| Metric | Quarter ended Sep. 29, 2019 | Comparable quarter ended Sep. 23, 2018 |
|---|---|---|
| Revenue | $242.8 million | $274.2 million |
| Gross profit / margin | $74.2 million / 30.6% | $98.3 million / 35.8% |
| Operating income (loss) | $(38.9) million | $10.8 million |
| Net loss | $(37.8) million | $(11.1) million |
| Diluted loss per share | $(0.35) | $(0.11) |
| Operating cash flow | $(20.0) million from continuing operations | $41.1 million from continuing operations |
| Property and equipment purchases | $42.0 million | $31.0 million |
Wolfspeed revenue was $127.7 million, essentially flat year over year, with gross margin of 46.2% versus 47.4%. LED Products revenue fell to $115.1 million from $146.8 million, and its gross margin declined to 19.2% from 28.1%. Consolidated gross margin also reflected higher unallocated costs.
At quarter-end, cash and cash equivalents were $433.3 million and short-term investments were $560.6 million, totaling $993.9 million, down from $1,051.4 million at June 30, 2019. Current assets were $1,353.0 million and current liabilities were $242.7 million. Convertible notes had $575.0 million principal and a $474.7 million net carrying amount; the company had no revolving-credit borrowings and reported $325.4 million available to borrow under its $500 million facility. The filing says it was covenant-compliant and expected liquidity to cover operating needs and capital expenditures for at least 12 months.
Material changes versus the prior comparable period
- Revenue declined 11%, primarily as LED Products revenue fell 22%; Wolfspeed revenue was nearly unchanged.
- Wolfspeed’s average selling price rose 50% while units sold fell 33%, attributed to product mix and weaker demand in some power and RF products. LED Products units fell 9% and average selling price fell 14%.
- Lower LED demand and factory underutilization reduced LED gross profit. Research and development expense increased 20% to $43.7 million, primarily reflecting continued investment in silicon carbide and gallium nitride technologies. SG&A increased 31% to $57.6 million, primarily due to stock-based compensation, profit sharing and professional services.
- Non-operating results improved by $11.3 million, chiefly because of a $3.5 million gain on the Lextar investment versus a $6.7 million loss in the prior-year quarter. This helped offset, but did not prevent, a substantially larger operating loss.
- The prior-year quarter included a $10.3 million loss from discontinued operations; the current quarter had no discontinued-operations activity.
- Cash used in continuing operations was $20.0 million versus $41.1 million provided previously. Cash and cash equivalents fell $67.2 million during the quarter. Investing cash use was $52.3 million, including $42.0 million of property and equipment purchases.
Outlook, commentary, risks and unusual items
- No specific near-term revenue or earnings guidance is provided. Management’s stated priorities include expanding Wolfspeed capacity and technology, focusing LED efforts on differentiated offerings, and improving customer service.
- For fiscal 2020, the company targeted approximately $198 million of capital investment, primarily for infrastructure supporting longer-term growth. A multi-year factory-optimization plan is expected to incur approximately $70 million of restructuring charges through 2024. The company announced plans for a new fabrication facility in Marcy, New York, alongside expansion in Durham, North Carolina, and was evaluating the impact on future restructuring charges.
- The May 2019 sale of Lighting Products generated $219.0 million in net cash proceeds, subject to adjustments; the company recorded a $66.2 million sale loss and may receive an earnout. It remains subject to transition-service and LED-supply arrangements with the buyer.
- The company suspended shipments to Huawei after its May 2019 addition to the U.S. Entity List, citing reduced revenue and profit at least in the near term and increased inventory of products intended for Huawei. It also cited U.S.-China tariffs and trade uncertainty as demand and cost risks.
- Other material risks discussed include uncertain adoption of new products, competition and pricing pressure, capacity expansion and manufacturing yields, customer and distributor concentration, supply constraints, intellectual-property litigation, and potential investment-value volatility. Litigation outcomes were not reasonably estimable; management said unfavorable outcomes could materially affect the business.
- The company adopted lease accounting guidance on July 1, 2019, recognizing $12.2 million of lease liabilities and $12.3 million of corresponding right-of-use assets, with no material operating-results impact. It also disclosed prior-period cash-flow presentation corrections for stock-award tax withholding, which management concluded were not material.
Important facts for investors to verify
- Confirm the issuer and period: the filing is for Cree, Inc., fiscal Q1 2020, and Wolfspeed is a segment—not a standalone Wolfspeed, Inc. 10-Q.
- Track whether Wolfspeed growth and planned capacity expansion can offset weakness in LED Products, while monitoring utilization, yields, and the transition to larger substrates.
- Assess the persistence of trade restrictions, tariffs, and lost or constrained Huawei sales, including related inventory exposure.
- Compare actual capital spending and restructuring charges with the fiscal 2020 target and multi-year plan; monitor liquidity and operating cash flow as investment continues.
- Review the convertible notes’ $575.0 million principal, conversion and repurchase terms, and the availability and covenants of the revolving credit facility.
- Monitor the Lextar investment, Lighting Products earnout and retained obligations, and any developments in legal or tax contingencies.