Wolfspeed, Inc. — 10-Q summary
Filing and period: The supplied filing is Cree, Inc.’s Form 10-Q for the quarter ended March 29, 2020 (fiscal 2020 third quarter), filed April 30, 2020—not a 2019 quarter. Wolfspeed is one of Cree’s two reportable segments. The company had sold its Lighting Products business unit in May 2019; prior-period results were recast to show that business as discontinued operations.
Financial results
| Metric | Three months ended March 29, 2020 | Nine months ended March 29, 2020 |
|---|---|---|
| Revenue | $215.5 million, down 21% year over year | $698.2 million, down 16% |
| Gross profit and margin | $61.4 million; 28.5% (36.7% prior year) | $197.5 million; 28.3% (36.5% prior year) |
| Operating income (loss) | $(49.8) million, versus $(11.1) million | $(145.1) million, versus $9.7 million |
| Net loss from continuing operations | $(61.4) million; $(0.57) per diluted share | $(151.7) million; $(1.41) per diluted share |
| Cash from continuing operating activities | Not presented for the quarter | $(39.5) million, versus $179.7 million |
Segments: Quarterly Wolfspeed revenue was $113.9 million, down 19%; gross margin was 39.9%, versus 48.7%. LED Products revenue was $101.6 million, down 23%; gross margin was 20.0%, versus 27.9%. For the nine months, Wolfspeed revenue fell 10% to $362.3 million and LED Products revenue fell 21% to $335.9 million.
Liquidity and debt: At March 29, 2020, cash and cash equivalents were $323.0 million and short-term investments were $529.9 million, totaling $852.9 million, compared with $1,051.4 million at June 30, 2019. Current assets were $1,230.2 million and current liabilities $251.4 million. Convertible notes had a $575.0 million principal balance and $486.3 million net carrying value. The $125 million revolver had no borrowings; the filing reported $87.6 million available for borrowing. Total assets were $2,737.9 million and total equity $1,945.0 million.
Cash flow and investment: Nine-month capital spending on property and equipment was $168.9 million, versus $93.3 million a year earlier. Cash used in investing activities was $152.2 million and cash provided by financing activities was $14.4 million. Cash and cash equivalents declined $177.5 million during the period. Management targeted approximately $240 million in fiscal 2020 capital investment.
Material changes and unusual items
- Revenue and gross margins declined across both continuing segments. Management cited COVID-19-related supply, labor, output and customer effects, trade tensions, softer LED demand, lower factory utilization, product mix and lower yields on new Wolfspeed product introductions.
- Wolfspeed’s nine-month gross profit was also affected by an $8.3 million inventory reserve for product manufactured for Huawei, after U.S. export restrictions led Cree to suspend shipments to Huawei.
- Nine-month other operating expense rose to $31.8 million from $14.3 million, including $20.4 million of project, transformation and transaction costs, $5.0 million of factory start-up costs and $3.5 million of factory optimization restructuring costs. The company expects approximately $70 million of factory optimization restructuring charges through 2024.
- Quarterly non-operating expense included a $19.1 million loss on the Lextar equity investment, partly offset by an $8.0 million arbitration award for defective inventory. The nine-month net loss also included a $5.1 million discrete tax benefit related to the CARES Act.
- On April 21, 2020, after quarter end, Cree issued $575 million principal amount of 1.75% convertible notes due 2026, receiving approximately $561.4 million net proceeds. It used approximately $144.3 million to repurchase $150.2 million principal amount of its 2023 notes; the remainder was intended for general corporate purposes.
Outlook, risks and contingencies
- Management said COVID-19’s effects on operations, results and cash flows remained uncertain, and expected the pandemic to materially affect future results, including fiscal 2021. It did not expect a material effect on liquidity or financial position at the filing date, but warned that impacts could grow if conditions worsened. Manufacturing operations were designated essential, with employee safety measures in place.
- The company planned continued investment in Wolfspeed silicon carbide and GaN capacity, including facilities in Durham, North Carolina. A proposed Marcy, New York facility had not begun construction, and the company was evaluating its effect on future restructuring charges.
- Key risks include disruptions to supply, labor, production and customer demand; trade and export restrictions; pricing pressure and factory underutilization; successful execution of capacity expansion and product introductions; and volatility in the Lextar investment. Management cited an expected EPA settlement penalty of approximately $0.3 million. Other legal outcomes were not reasonably estimable.
- Management believed working capital, revolver availability and anticipated operating cash flows would cover operations and capital expenditures for at least 12 months. This assessment is subject to the stated uncertainty around COVID-19 and operating cash generation.
Important facts for investors to verify
- Confirm the filing identity and period: the document is Cree, Inc.’s fiscal 2020 Q3 10-Q, with Wolfspeed reported as a segment.
- Assess whether subsequent filings show revenue, yields and margins recovering, and how COVID-19, customer demand and the Huawei restrictions affected both segments.
- Track actual capital spending, factory ramp and utilization, the Marcy project decision, and restructuring charges against management’s plans.
- Review liquidity and debt after the April 2020 notes issuance and repurchase, including the revolver’s borrowing availability and future cash burn.
- Monitor the Lextar investment valuation, potential tax and legal developments, and whether investment losses or other contingencies become material.