Business context and reporting period
The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended December 30, 2012 (fiscal Q2 2013), not a filing in the name of Wolfspeed, Inc. Cree reported three segments: LED Products, Lighting Products, and Power and RF Products. The current and comparative periods include an additional week relative to the prior-year periods.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Quarter comparisons are against the quarter ended December 25, 2011; six-month comparisons are against the six months ended December 25, 2011.
| Metric | Fiscal Q2 2013 | Prior-year quarter | Six months FY2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $346.3 | $304.1 | $662.0 | $573.1 |
| Gross profit / margin | $133.5 / 38.5% | $105.1 / 34.6% | $249.5 / 37.7% | $203.1 / 35.4% |
| Operating income / margin | $25.1 / 7.2% | $12.2 / 4.0% | $42.4 / 6.4% | $25.6 / 4.5% |
| Net income | $20.4 | $12.1 | $36.5 | $24.9 |
| Diluted EPS | $0.18 | $0.10 | $0.31 | $0.22 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $178.3 | $122.2 |
For the six months, investing activities used $185.6 million, including $30.4 million of property and equipment purchases and $10.0 million for patent and licensing rights; financing activities provided $7.7 million. Cash and cash equivalents were $179.6 million, and short-term investments were $706.2 million at December 30, 2012. Working capital was $1.122 billion. The company reported no debt or active lines of credit.
Segment revenue for the quarter was LED Products $201.0 million (up 4% year over year), Lighting Products $122.7 million (up 28%), and Power and RF Products $22.6 million (up 59%). Segment gross margins were 41.9%, 33.7%, and 56.6%, respectively.
Material changes versus prior period
- Quarterly revenue rose 14% and net income rose 69% year over year; six-month revenue increased 16% and net income increased 47%.
- Quarterly gross margin improved to 38.5% from 34.6%, supported by cost reductions, product mix, new lower-cost products, and higher factory utilization. Management also cited quarter-over-quarter margin improvement to 38.5% from 36.8% in fiscal Q1.
- Lighting Products was the largest contributor to six-month revenue growth, partly reflecting the inclusion of a full first quarter of Ruud Lighting sales in fiscal 2013. LED Products six-month revenue was down 1%, despite higher unit volumes, as selling prices declined.
- Quarterly R&D expense increased 11% to $39.9 million and SG&A increased 22% to $60.1 million. SG&A growth reflected lighting sales and marketing investment, the Ruud acquisition, and added personnel.
- The effective tax rate rose to 26.0% from 13.0% for the quarter and to 24.3% from 17.6% for six months, principally due to a greater share of income from higher-tax U.S. operations and a lower relative benefit from credits.
- The cash conversion cycle improved to 76 days from 94 days at June 24, 2012, according to management.
Outlook, commentary, risks and contingencies
Management gave no specific revenue or EPS forecast in the supplied filing. It expected highly competitive markets during fiscal 2013 and outlined priorities to accelerate LED lighting adoption, grow LED component sales, develop Power and RF applications, and improve costs and manufacturing processes. Capital expenditures for fiscal 2013 were targeted to be similar to fiscal 2012 levels; management anticipated R&D expense would generally increase over time.
Management said available cash, investments, operating cash generation, and potential capital-market access were expected to meet liquidity needs for at least the next 12 months. The company stated that its investments were investment grade and that unrealized losses were considered temporary. A change in cash-management policy permitted investments rated A grade or better, versus AA grade or better previously.
Key risks include uncertain LED adoption and demand, pricing pressure and competition, customer and distributor concentration, supply constraints, manufacturing yield and capacity execution, product quality and warranty costs, international and foreign-exchange exposure, and intellectual-property litigation. The filing describes multiple ongoing patent disputes, including claims involving Cooper Lighting and Illumination Management Solutions; potential losses were generally not reasonably estimable. Dynacraft claims were dismissed, but the plaintiff appealed. The Fox Group’s adverse patent ruling was affirmed, with a rehearing petition pending.
Other notable items: six-month other non-operating income included a one-time payment connected with the SemiLEDs patent-litigation settlement. The American Taxpayer Relief Act reinstated the R&D tax credit after quarter-end; management said the resulting tax benefit would be recognized in fiscal Q3 and estimated it would have been $1.5 million if recognized in Q2. Unrecognized tax benefits were $4.4 million, and about $2.2 million could change within 12 months. Product warranty liabilities were $7.2 million at quarter-end; stated warranty terms ranged from 90 days to 10 years. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the provided 10-Q identifies Cree, Inc., while the request metadata names Wolfspeed, Inc.
- Assess whether revenue and margin improvements are sustainable given lower LED selling prices, competitive conditions, and the additional week in the comparison periods.
- Review segment performance, especially the drivers of Power and RF margin expansion and the contribution of the Ruud Lighting acquisition to Lighting Products growth.
- Track operating cash generation, capital spending, inventory, and the composition and credit quality of the $706.2 million short-term investment portfolio.
- Monitor the patent matters, tax audits and uncertain tax positions, warranty accruals, and the timing and amount of the R&D tax-credit benefit.