Filing identity and reporting period
Important mismatch: The supplied filing is Cree, Inc.’s Form 10-K for the fiscal year ended June 29, 2014—not a Wolfspeed, Inc. filing or a 2013 Q4 report. The figures below summarize the filing provided.
Cree made LED chips and components, LED lighting products, and silicon-carbide power and gallium-nitride RF products. It reported three segments: LED Products, Lighting Products, and Power and RF Products.
Financial performance and liquidity
| Metric | FY ended June 29, 2014 | Prior comparable year |
|---|---|---|
| Revenue | $1.648 billion | $1.386 billion |
| Gross profit / margin | $618.8 million / 38% | $523.3 million / 38% |
| Operating income / margin | $134.3 million / 8% | $96.5 million / 7% |
| Net income | $124.2 million | $86.9 million |
| Diluted EPS | $1.01 | $0.74 |
| Operating cash flow | $319.3 million | $285.2 million |
| Cash, cash equivalents and short-term investments | $1.162 billion | $1.024 billion |
| Working capital | $1.467 billion | $1.308 billion |
At year-end, Cree reported no debt and no outstanding borrowings on its line of credit. Total assets were $3.344 billion and shareholders’ equity was $2.990 billion. Capital expenditures were $178.6 million, up from $77.5 million; management targeted about $200 million of capital investment for FY2015. Inventory rose to $284.8 million from $197.0 million, and days of inventory supply increased to 94 from 76. The cash conversion cycle was 74 days versus 75.
Segments and material changes
- LED Products: Revenue rose 4% to $833.7 million; gross margin increased to 46% from 43%. Average selling prices fell 13%, partly offset by higher unit sales and manufacturing cost improvements.
- Lighting Products: Revenue grew 43% to $706.4 million, the main growth driver. Gross margin declined to 28% from 30%, while average selling prices fell 30%, reflecting product mix and lower-priced consumer products.
- Power and RF Products: Revenue increased 20% to $107.5 million; gross margin rose to 56% from 54%, supported by higher volume and cost improvements.
Consolidated revenue increased 19%, and gross profit rose 18%, while gross margin remained flat at 38%. R&D expense increased 16% to $181.4 million; selling, general and administrative expense increased 13% to $268.5 million. The effective tax rate declined to 16% from 19%, mainly reflecting tax credits.
Outlook, risks and unusual items
For FY2015, management expected continued intense competition and targeted revenue growth in all three segments, with LED lighting as the largest growth driver, and incremental operating margin through revenue growth outpacing expense growth. Priorities included lowering customer upfront costs, building the Cree brand, expanding use of manufacturing partners, and investing in product development and capacity. The filing did not provide a specific revenue or EPS forecast.
- Key risks include LED adoption and demand uncertainty, continuing price pressure, production capacity and yield execution, reliance on limited-source suppliers, customer and distributor concentration, and product warranty or quality claims. Arrow represented 13% of FY2014 revenue and Home Depot 11%.
- Year-end backlog was approximately $193.2 million, down from $216.0 million; it included $34.3 million of U.S. government research contracts, about $26.0 million of which was not yet appropriated. Management cautioned backlog may not predict future revenue.
- Cree recorded a $3.2 million impairment of the Ruud Lighting trade name. It also recorded an $18.4 million liability for unrecognized tax benefits, including a significant increase associated with a change in tax depreciation methodology.
- After year-end, Cree entered a $150 million unsecured revolving credit agreement, maturing in 2017. It also agreed to invest about $83 million for an approximately 13% stake in Lextar and pursue a supply and IP licensing arrangement; closing was subject to approvals and other conditions.
- Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Investor verification priorities
- Verify the issuer and period: this is Cree FY2014, not Wolfspeed 2013 Q4.
- Assess whether Lighting Products growth can persist while selling prices and segment margins decline.
- Track inventory growth, cash conversion, capital spending, and resulting cash generation.
- Review the tax depreciation-methodology uncertainty and the remaining tax-credit assumptions.
- Check government contract appropriations and the conditions and completion of the Lextar investment and supply agreement.