Wolfspeed, Inc. — 10-Q Summary
Entity and period: The filing is by Cree, Inc. (now associated with the Wolfspeed name); Wolfspeed is one of its three reportable segments. It covers the fiscal second quarter ended December 30, 2018, and the six months then ended. Comparative periods ended December 24, 2017. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 30, 2018 | Six months ended Dec. 30, 2018 |
|---|---|---|
| Revenue | $413.0; up 12% year over year | $821.3; up 13% |
| Gross profit / margin | $135.2 / 32.7%, versus $92.6 / 25.2% | $263.4 / 32.1%, versus $192.9 / 26.5% |
| Operating income (loss) | $7.4, versus $(26.3) | $7.9, versus $(40.4) |
| Net income (loss) attributable to controlling interest | $(2.5), versus $13.7 | $(13.5), versus $(6.1) |
| Diluted earnings (loss) per share | $(0.02), versus $0.14 | $(0.13), versus $(0.06) |
- Segment mix: Quarterly revenue was Wolfspeed $135.3 million, LED Products $145.2 million, and Lighting Products $132.5 million. Wolfspeed revenue grew 92%, reflecting organic growth and the Infineon RF Power acquisition; LED Products fell 5% and Lighting Products fell 8%.
- Cash flow: Six-month operating cash flow was $126.3 million, versus $105.8 million. Investing cash outflow was $178.8 million, including net purchases of short-term investments; financing cash inflow was $289.7 million, principally from convertible notes and repayment of revolving debt. Cash and cash equivalents increased to $356.0 million.
- Liquidity: Cash, cash equivalents, and short-term investments totaled $723.7 million at December 30, versus $387.1 million at June 24, 2018. The company reported $1,276.2 million in current assets and $294.7 million in current liabilities.
- Debt: The company issued $575 million principal amount of 0.875% convertible notes due 2023; net carrying value was $458 million after discount and issuance costs. The $500 million revolving facility had no borrowings outstanding; the filing reports $168 million available for borrowing in compliance with covenants. The company said it was covenant-compliant.
- Investment and other items: Six-month non-operating expense was $15.0 million, versus $25.7 million of non-operating income a year earlier, chiefly reflecting an $8.5 million loss on the Lextar equity investment versus a $21.5 million gain. Six-month tax expense was $6.6 million despite a pretax loss; the company cited valuation allowances and other tax factors.
Material changes versus the prior comparable period
- Revenue growth and improved consolidated gross margin and operating results were driven mainly by Wolfspeed growth and better gross margins in LED and Lighting Products.
- Wolfspeed’s revenue nearly doubled, but its gross margin edged down to 47.6% for the six-month period from 48.7%, which management attributed primarily to product mix.
- LED Products and Lighting Products revenue declined. Management linked LED softness partly to market uncertainty related to U.S.-China tariffs and trade tensions; Lighting weakness reflected softness in the North American commercial lighting market and a focus on higher-margin business.
- Despite positive operating income, the six-month net loss widened, mainly because non-operating results swung from a prior-period Lextar gain to a current-period loss, alongside tax expense.
- The company completed its Lighting Products restructuring in the quarter; cumulative charges were $10.0 million, including severance, facility consolidation, asset disposal, and inventory reserves.
Outlook, commentary, risks, and contingencies
- Outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management targeted approximately $220 million of fiscal 2019 capital investment, primarily for infrastructure supporting longer-term growth. It said liquidity, the notes proceeds, revolver availability, and expected operating cash flow should cover operating and capital needs for at least 12 months.
- Strategy: Management plans to invest in Wolfspeed SiC and RF growth; focus LED Products on differentiated applications; and seek modest Lighting Products revenue growth and higher margins through product quality, channel relationships, execution, and product innovation.
- Capacity and demand: The filing says some Wolfspeed demand exceeds production capacity, with extended lead times. Risks include delays qualifying expanded capacity and transitioning power production from 100mm to 150mm substrates. Demand, pricing, and product mix are exposed to market cycles, competition, trade measures, and customer adoption.
- Acquisition: The Infineon RF Power business was acquired in March 2018 for a base purchase price of $429 million, and its results are included in Wolfspeed. Integration and realization of expected benefits remain risks.
- Contingencies and unusual items: The company voluntarily recalled linear LED T8 replacement lamps over overheating and melting concerns and expected most costs to be recoverable from insurance, with an immaterial financial impact. Warranty liabilities totaled $33.5 million. Management said pending litigation outcomes were not reasonably estimable and unfavorable outcomes could materially affect the business.
- Other risks: The filing highlights tariffs and international exposure, intense competition and pricing pressure, supply constraints, product quality and warranty claims, customer concentration, acquisition integration, and volatility in the Lextar investment. It also notes significant historical goodwill impairment, including a $247.5 million charge in fiscal 2018.
Important facts for investors to verify
- How much of Wolfspeed’s growth is organic versus attributable to the Infineon acquisition, and whether constrained capacity and the 150mm transition affect delivery and margins.
- Whether LED and Lighting Products revenue trends, including tariff exposure and commercial-market softness, improve or persist.
- Cash conversion and inventory: inventory rose to $313.3 million, and the cash conversion cycle increased to 87 days from 79 days, mainly due to higher days of inventory supply.
- The terms and potential dilution or cash settlement effects of the $575 million convertible notes, and the distinction between the $500 million commitment and $168 million currently available under covenant conditions.
- Future Lextar fair-value movements, tax provision and valuation allowances, and any changes to the expected costs or insurance recovery for the T8 lamp recall.