Business context and reporting period
Important filing mismatch: The supplied filing is Cree, Inc.’s unaudited Form 10-Q for the quarter ended March 25, 2012 (fiscal 2012 Q3), not a Wolfspeed, Inc. filing for 2011 Q3. Figures below summarize the filing as provided; amounts are in U.S. dollars.
Cree develops and sells LED components and chips, LED and traditional lighting systems, and power and radio-frequency devices. It reports one business segment. The quarter included Ruud Lighting, acquired in August 2011, whose outdoor lighting products expanded Cree’s lighting business.
Financial results and condition
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $284.8m | $219.2m | $857.9m | $744.6m |
| Gross profit / margin | $99.4m / 34.9% | $91.4m / 41.7% | $302.6m / 35.3% | $343.1m / 46.1% |
| Operating income / margin | $5.0m / 1.8% | $19.7m / 9.0% | $30.6m / 3.6% | $148.5m / 19.9% |
| Net income | $9.5m | $18.9m | $34.4m | $126.7m |
| Diluted EPS | $0.08 | $0.17 | $0.30 | $1.15 |
Cash flow: For the nine months, operating cash flow was $170.6m (down from $186.9m); investing cash outflow was $375.5m, including the Ruud acquisition; financing cash flow was $4.3m. Cash and cash equivalents declined $199.5m to $191.1m. Capital expenditures were $75.2m for the nine-month period.
Liquidity and debt: Cash, cash equivalents and short-term investments totaled $710.1m at March 25, 2012, down from $1,085.8m at June 26, 2011. Working capital was $991.7m. The company reported no debt or active credit lines.
Material changes versus comparable periods
- Q3 revenue rose 30% year over year, mainly reflecting Ruud Lighting and higher lighting-product sales. LED-product revenue rose 5%, while power and RF revenue fell 30%.
- Nine-month revenue rose 15%, but gross profit fell 12% and operating income fell sharply. The filing attributes margin pressure to aggressive LED pricing, lower factory utilization and a higher share of lighting products.
- Lighting-product revenue increased to $86.5m in Q3 from $21.8m, substantially reflecting Ruud sales. Ruud contributed $56.6m of Q3 revenue and a $1.2m net loss since acquisition for the quarter.
- Q3 revenue was lower than the prior quarter ($284.8m versus $304.1m); gross margin improved slightly sequentially to 34.9% from 34.6%, while operating income declined to $5.0m from $12.2m.
Outlook, risks and unusual items
Management expected highly competitive markets for the remainder of fiscal 2012. It planned continued investment in LED lighting and components, cost reduction and operational improvements, and power/RF product development. Management cited a slowdown in solar-inverter demand and delayed military-related RF orders. The filing gives no specific revenue or earnings forecast; it targets fiscal 2012 capital expenditures of approximately $75m–$80m.
Management believed available liquidity and expected operating cash flows would meet needs for at least 12 months. It was delaying the pace of its 150mm wafer conversion to use existing 100mm capacity, while continuing work toward conversion over the next three to six quarters. Management also reported disruption in the indoor-lighting project pipeline following consolidation of sales agents.
Notable items include the $666.6m Ruud Lighting purchase price, funded partly with $372.2m cash consideration and approximately $85.0m of debt payoff; the acquisition also involved 6.1m Cree shares. Purchase-price fair values remained provisional, including pending information on certain litigation and taxes. Q3 included a $2.0m net tax benefit related to settlement of prior-year audits; the nine-month effective tax rate was 8.1%. Unrecognized tax benefits were $5.0m, and approximately $0.6m could change within 12 months. Product warranty liabilities were $5.8m.
Principal risks include LED adoption uncertainty, pricing pressure and overcapacity, manufacturing yields and capacity utilization, customer and distributor concentration, supplier constraints, acquisition integration, patent litigation and other intellectual-property claims, and foreign-market, tax and currency risks. Cree stated its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and reporting period: the provided document is Cree, Inc., fiscal 2012 Q3—not Wolfspeed, Inc., 2011 Q3.
- Assess whether revenue growth from Ruud can translate into sustained operating profitability, given the substantial year-over-year margin decline.
- Track LED pricing, factory utilization, inventory and the effects of the delayed wafer conversion and lighting-sales channel changes.
- Review Ruud integration, provisional acquisition accounting and potential changes to acquired asset values or liabilities.
- Review developments in patent litigation, tax examinations and other contingencies; the filing does not quantify the potential outcome of litigation.