Wolfspeed-related filing summary: Cree, Inc. Form 10-Q
Registrant clarification: This is Cree, Inc.’s unaudited Form 10-Q, not a standalone Wolfspeed, Inc. filing. Cree reported its Power and RF Products business as a segment and said it had filed a confidential registration statement for a proposed Wolfspeed IPO. The quarter ended December 27, 2015; comparisons are with the quarter ended December 28, 2014. Six-month results cover the same fiscal-year periods.
Financial results
| Metric | Quarter ended Dec. 27, 2015 | Six months ended Dec. 27, 2015 |
|---|---|---|
| Revenue | $435.8 million, up 5% | $861.3 million, up 2% |
| Gross profit / margin | $135.2 million / 31.0% | $266.9 million / 31.0% |
| Operating income | $9.4 million | $0.7 million |
| Net income (loss) | $14.0 million | ($9.7 million) |
| Diluted earnings (loss) per share | $0.14 | ($0.09) |
| Operating cash flow | Not separately provided here | $123.8 million |
For the six months, operating cash flow rose from $28.1 million a year earlier, which management attributed primarily to working-capital cash generation. Capital spending was $81.8 million, versus $113.4 million; Cree targeted approximately $135 million of capital investment for fiscal 2016. Cash, cash equivalents and short-term investments totaled $617.2 million at period-end, down from $713.2 million at June 28, 2015. Cash and cash equivalents alone were $90.6 million.
At December 27, 2015, long-term debt was $205 million under a $500 million revolving credit facility, with $295 million available. The facility matured January 2020; Cree reported compliance with its covenants. Current assets were $1.175 billion and current liabilities $235.6 million. Management said liquidity, credit availability and expected operating cash flows should cover operating and capital needs for at least 12 months.
Segment performance and material changes
| Segment | Quarter revenue, year-over-year | Six-month revenue, year-over-year | Six-month gross margin |
|---|---|---|---|
| Lighting Products | $255.0 million, up 11% | $503.0 million, up 11% | 28.2%, versus 26.5% |
| LED Products | $153.4 million, up 1% | $301.6 million, down 7% | 35.1%, versus 39.0% |
| Power and RF Products | $27.5 million, down 12% | $56.7 million, down 9% | 50.5%, versus 56.5% |
Lighting growth reflected stronger commercial fixture sales and higher average selling prices, partly offset by lower unit volumes. LED Products faced pricing pressure from global competition; six-month average selling price fell 17%, partly offset by 10% more units sold. Power and RF revenue was affected by fewer RF units sold; segment margins also weakened, which Cree attributed to product mix. Consolidated gross margin fell to 31.0% for the six months from 32.4% a year earlier. The six-month operating result also included $16.6 million of losses on disposal or impairment of long-lived assets, primarily related to the LED restructuring.
Outlook, unusual items and risks
- Management expected markets to expand while remaining highly competitive. Its fiscal 2016 objectives included overall revenue growth and higher operating margins, growing commercial lighting, stabilizing LED, expanding Power and RF, and controlling operating expenses. These are targets, not quantified revenue or margin guidance.
- The LED restructuring was intended to reduce excess capacity and overhead. Cumulative estimated charges were $102.3 million, including asset disposal or impairment, severance and facility costs, and channel and inventory reserves. $18.7 million was incurred during the six months ended December 27, 2015.
- Cree acquired Arkansas Power Electronics International in July 2015 for an estimated total purchase price of $18.6 million, including contingent consideration. Its results were included in Power and RF and were not significant to Cree overall.
- A six-month $12.9 million loss on the Lextar equity-method investment contributed to non-operating losses; the quarter included a $7.0 million gain as Lextar’s share price recovered. Cree cited continued share-price volatility as a risk.
- The proposed Wolfspeed IPO was intended to raise capital for the business’s growth, but completion, terms and proceeds were uncertain. Cree warned that it might not occur and could entail added expenses, staffing challenges and other effects.
- Other disclosed risks include intense competition and price erosion, uncertain LED adoption and demand, capacity and yield management, product defects and warranty or recall costs, supplier constraints, foreign-exchange exposure, and legal and intellectual-property proceedings. Cree said litigation outcomes were not reasonably estimable. A voluntary recall of linear LED T8 replacement lamps remained subject to insurance recovery; management expected an immaterial financial impact.
Important facts for investors to verify
- Confirm the entity and scope: the filing is Cree’s consolidated report, with Wolfspeed presented as its Power and RF Products business, not as a standalone registrant.
- Track whether LED pricing and segment margins stabilize, and whether the restructuring delivers the expected cost benefits.
- Assess the sustainability of operating cash flow, planned capital spending, share repurchases and debt usage; Cree repurchased $131.7 million of stock in the six-month period.
- Monitor Lextar valuation changes, the status and terms of any Wolfspeed IPO, and the potential effect of either on Cree’s results and capital allocation.
- Review developments in litigation, the T8 lamp recall and warranty reserves, and the disclosed tax uncertainty, including the Italian tax audit.