Business context and reporting period
Cree, Inc. filed this Form 10-K for the fiscal year ended June 27, 2021 (FY2021), not a standalone “2020 Q4” report. The filing’s fourth quarter ended June 27, 2021. Continuing operations were the Wolfspeed wide-bandgap semiconductor business, focused on silicon carbide (SiC) and gallium nitride (GaN) materials and devices for power and RF applications. The company completed the sale of its LED Products business on March 1, 2021 and planned to change its corporate name to Wolfspeed later in calendar 2021.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Continuing-operations revenue | $525.6 million | $470.7 million |
| Gross profit / margin | $164.6 million / 31.3% | $158.5 million / 33.7% |
| Operating loss | $313.9 million | $224.1 million |
| Net loss from continuing operations | $341.3 million | $197.6 million |
| Net loss attributable to controlling interest, including discontinued operations | $523.9 million | $191.7 million |
| Continuing-operations diluted loss per share | $3.04 | $1.83 |
Revenue increased 12%, primarily on higher power and RF device demand and increased power-device capacity. Gross profit rose, but gross margin declined due to unfavorable product mix and higher factory costs as capacity expanded. FY2021 operating loss included a $73.9 million charge for abandoned Durham campus construction; R&D expense increased 17% to $177.8 million.
In the fourth quarter, revenue was $145.8 million, gross profit was $43.8 million, and continuing-operations net loss was $145.2 million. The quarter included the $73.9 million long-lived-asset abandonment charge.
Cash flow, liquidity and debt
- Cash, cash equivalents and short-term investments were $1.155 billion at year-end, down $85.1 million from FY2020.
- Cash used in operating activities was $112.5 million for continuing operations and $125.5 million including discontinued operations. Cash used in investing activities was $448.6 million; cash provided by financing activities was $504.1 million.
- Property and equipment purchases were $570.5 million; net of $10.7 million in reimbursements, purchases were $559.8 million, versus $229.9 million in FY2020.
- Convertible notes had $999.8 million principal outstanding ($424.8 million due 2023 and $575.0 million due 2026) and an $823.9 million net carrying amount. The $125 million revolving credit facility was undrawn at year-end.
- Inventory increased to $166.6 million from $121.9 million. The cash conversion cycle increased to 107 days from 55 days, mainly due to higher inventory and lower accounts payable.
Material changes and unusual items
- The LED Business sale provided $50 million upfront and a $125 million unsecured note, plus potential earnout consideration of $2.5 million to $125 million, also payable by note. FY2021 discontinued-operations loss included $112.6 million of goodwill impairment, $19.5 million of held-for-sale asset impairment, a $29.1 million loss on sale and selling costs.
- The company raised approximately $500 million gross ($489.1 million net) through an at-the-market stock offering, issuing 4.22 million shares. It also received $66.4 million from liquidating its ENNOSTAR investment.
- Interest expense increased to $45.4 million from $34.9 million. Non-operating expense was $26.3 million, compared with net non-operating income of $18.5 million in FY2020, which had included debt-extinguishment and arbitration gains.
- Three customers represented more than 10% of FY2021 continuing revenue: STMicroelectronics 18%, Arrow Electronics 13%, and Sumitomo 10%.
Outlook, risks and contingencies
Management emphasized investment-led growth in SiC materials, power devices and RF products. The Marcy, New York SiC fabrication facility was expected to start production in FY2022; management expected approximately $80 million of FY2022 start-up and pre-production costs. FY2022 net capital investment was targeted at approximately $475 million, including approximately $300 million of expected New York State reimbursements. The company expected facility construction, equipment and related costs to exceed $1 billion through FY2024, with up to $500 million in state grant reimbursements subject to agreement conditions.
Management said working capital, the credit facility and expected operating cash flows should meet operating and capital needs for at least 12 months. It cautioned that COVID-19 effects on demand, labor, suppliers, logistics and production remained uncertain. Other principal risks include manufacturing yield and capacity ramp, supply-chain constraints and semiconductor shortages, customer concentration, competition and pricing, trade restrictions, execution of the factory build-out, and litigation and intellectual-property exposure. Management disclosed that a possible Luxembourg restructuring could allow release of up to $121.8 million of valuation allowance, but there was no assurance it would occur or be recognized.
Most important facts for investors to verify
- Confirm the reporting period: this is FY2021, with Q4 ended June 27, 2021, despite the request metadata’s “2020 Q4” label.
- Track gross-margin trends, factory utilization, yields and the cost and timing of the Marcy facility ramp, including FY2022 start-up costs and capital spending.
- Assess the quality and timing of LED sale consideration: the $125 million note, contingent earnout, buyer credit risk and any retained liabilities or transition obligations.
- Monitor operating cash burn, inventory growth, state grant reimbursement conditions, and the company’s ability to fund planned investment while servicing convertible debt.
- Evaluate customer concentration and ongoing supply, logistics, COVID-19, trade and litigation risks; distinguish continuing results from discontinued LED operations.