Issuer and reporting period
The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended December 25, 2011 (fiscal Q2 2012), with six-month comparisons to December 26, 2010. It is not filed under the name Wolfspeed; verify the issuer and filing before associating these results with Wolfspeed. Cree reported one business segment, spanning LED products, lighting systems, and power and RF devices.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $304.1 | $257.0 | $573.1 | $525.4 |
| Gross profit / margin | $105.1 / 35% | $121.1 / 47% | $203.1 / 35% | $251.7 / 48% |
| Operating income / margin | $12.2 / 4% | $55.4 / 22% | $25.6 / 4% | $128.8 / 25% |
| Net income | $12.1 | $49.8 | $24.9 | $107.8 |
| Diluted EPS | $0.10 | $0.45 | $0.22 | $0.98 |
| Operating cash flow | Not separately stated for quarter | $122.2 | $145.8 |
Liquidity, debt, and cash flow
At December 25, cash, cash equivalents, and short-term investments totaled $687.2 million, down from $1,085.8 million at June 26, 2011. Current assets were $1,104.5 million and current liabilities $149.2 million; working capital was $955.4 million, versus $1,316.6 million at fiscal year-end. The company reported no debt or active lines of credit.
Six-month operating cash flow was $122.2 million. Investing activities used $344.7 million, including $456.0 million paid for Ruud Lighting, net of acquired cash; capital expenditures were $53.0 million. Cash and cash equivalents declined by $218.9 million to $171.7 million. Management said liquidity and expected operating cash flows should meet needs for at least the next 12 months. Fiscal 2012 capital expenditure target: approximately $75–$80 million.
Material changes and drivers
- Quarterly revenue grew 18%, but operating income fell 78% and net income fell 76% year over year. Gross margin declined 12 percentage points, to 35%.
- Management attributed margin pressure primarily to aggressive LED pricing and lower factory utilization. LED product revenue declined 8% in the quarter; lighting product revenue rose 386%, substantially reflecting the Ruud Lighting acquisition and increased sales of existing products. Power and RF revenue fell 48%, amid weaker solar-inverter demand and delayed military-program orders.
- Ruud Lighting was acquired August 17, 2011, for total purchase consideration of $668.3 million, including cash, stock, and debt paid on behalf of sellers. Its reported results contributed $61.1 million of quarterly revenue and $1.3 million of quarterly net income from acquisition date. Purchase-price allocation remained provisional; acquired intangibles and goodwill increased, and amortization and acquired-inventory step-up weighed on reported results.
- Six-month operating cash flow decreased 16% year over year, primarily due to lower net income. Inventory was $187.4 million at quarter-end, down from $203.6 million at September 25; the cash conversion cycle improved to 94 days from 104 days at June 26.
Outlook, risks, and unusual items
Management expected highly competitive markets through the remainder of fiscal 2012. Priorities included growing LED-lighting adoption, reducing costs and improving operations, and expanding power and RF products. Cree said it was slowing the conversion to 150mm wafer production to optimize existing 100mm capacity, with broader conversion dependent on business needs over the next three to six quarters. No specific revenue or earnings guidance was provided in the supplied text.
Key disclosed risks include uncertain LED adoption and demand, pricing pressure and excess industry capacity, execution and integration risks from acquisitions, manufacturing yields and capacity utilization, customer and distributor concentration, supply constraints, international and foreign-exchange exposure, and intellectual-property litigation. The filing describes a Cooper Lighting-related dispute involving Ruud Lighting, including claims seeking damages and patent ownership; potential losses were not stated as reasonably estimable. A separate Dow Corning action sought declarations concerning Cree patents, and Cree moved to dismiss it. The company reported $7.0 million of unrecognized tax benefits, with approximately $2.6 million possibly changing within 12 months.
Other notable items: approximately $3.1 million of Ruud transaction costs were expensed in Q1; the company made no share repurchases in the first six months. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the registrant: the filing identifies Cree, Inc., not Wolfspeed, and verify the requested issuer’s corporate and ticker history.
- Assess whether reported growth is sustainable without acquisition contributions; compare actual results with the filing’s Ruud pro forma figures and understand their assumptions.
- Track LED pricing, factory utilization, and gross-margin recovery alongside the planned capital spending and 150mm transition.
- Review Ruud’s provisional purchase accounting, goodwill and intangible-asset balances, amortization, acquired inventory costs, and integration performance.
- Monitor operating cash generation, liquidity after the acquisition, and the outcome and potential exposure of the disclosed litigation and tax matters.