Filing context
The supplied filing is Cree, Inc.’s Form 10-K for the 52-week fiscal year ended June 24, 2018, filed August 20, 2018. It is not a Wolfspeed, Inc. filing; Wolfspeed is reported as one of Cree’s three segments. The request metadata’s “2017 Q4” does not match the filing period.
Cree develops and sells wide-bandgap semiconductor products, LED products and lighting systems. Its segments are Wolfspeed, LED Products and Lighting Products.
Financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1.494 billion | $1.473 billion |
| Gross profit / margin | $407.6 million / 27.3% | $434.6 million / 29.5% |
| Operating loss | $329.1 million | $18.7 million |
| Net loss attributable to controlling interest | $280.0 million | $98.1 million |
| Diluted loss per share | $2.81 | $1.00 |
| Cash from operating activities | $167.4 million | $215.9 million |
| Purchases of property and equipment | $185.7 million | $86.9 million |
| Cash, cash equivalents and short-term investments | $387.1 million | $610.9 million |
| Long-term debt | $292.0 million | $145.0 million |
Working capital was $641.8 million, down from $888.6 million. The company reported a $500 million revolving credit facility, with $292 million drawn and $167.4 million available at year-end; it was in compliance with its covenants. Cash and short-term investments declined by $223.9 million. Investing cash use was $423.9 million, including $429.2 million of net cash expenditures for the RF Power acquisition; financing provided $242.7 million. Approximate operating cash flow less property-and-equipment purchases was negative $18.3 million.
Material changes and segment performance
- Consolidated revenue grew 1%, but gross profit fell 6% and gross margin declined about 2.2 percentage points.
- Wolfspeed: Revenue rose 49% to $328.6 million; gross profit rose 53% to $158.5 million and margin edged up to 48%. Growth reflected higher unit sales, product mix and RF Power business sales. Cree cited demand above Wolfspeed production capacity.
- LED Products: Revenue rose 8% to $596.3 million, while gross margin fell from 28% to 26% amid pricing pressure and less favorable mix.
- Lighting Products: Revenue declined 19% to $568.8 million; gross profit fell 44% to $108.9 million and margin dropped from 28% to 19%. The filing cites weaker commercial and consumer demand, quality-related project holds, lower factory utilization, higher warranty reserves and the absence of a prior-year patent-license fee.
- Lighting Products revenue had already declined 21% in FY2017. The segment’s share of consolidated revenue fell to 38% from 48% in FY2017 and 55% in FY2016.
Outlook, risks and unusual items
- Cree recorded a $247.5 million non-cash goodwill impairment charge for Lighting Products after revising its long-range strategy and forecasts. It also approved a restructuring plan with estimated charges of $8.8 million; $6.0 million had been incurred by year-end, with completion expected in the first quarter of FY2019.
- On March 6, 2018, Cree acquired Infineon’s RF Power business for a base purchase price of $429 million. From acquisition through year-end, the business contributed $29.0 million revenue and a net loss of $11.7 million. Purchase-price allocations were preliminary. Cree also formed Cree Venture LED with San’an Optoelectronics to address mid-power LEDs.
- Management’s priorities were to invest in Wolfspeed growth, focus LED Products on differentiated offerings, and seek modest Lighting Products revenue growth and improved margins through quality, channel relationships and execution. Cree targeted approximately $220 million of FY2019 capital investment, primarily for Wolfspeed capacity and infrastructure. It did not provide consolidated revenue or earnings guidance in the supplied text.
- Key risks include execution of Wolfspeed capacity expansion and the targeted transition from 100mm to 150mm substrates; intense pricing competition in LEDs; Lighting Products quality and warranty exposure; reliance on distributors and a major customer; supply constraints; and international trade and currency risks. Arrow Electronics accounted for 13% of FY2018 revenue. The filing says U.S. tariffs and the 2018 ZTE export ban affected or could affect demand, revenue and profit.
- Product warranty liabilities were $34.6 million at year-end, primarily related to Lighting Products. Litigation outcomes were described as not reasonably estimable; management did not expect current proceedings to materially harm the company, while acknowledging possible adverse outcomes.
- The Tax Cuts and Jobs Act affected tax accounting; the reported FY2018 tax benefit was $37.5 million, and the company maintained a full valuation allowance against U.S. deferred tax assets.
Investor verification points
- Confirm the correct issuer and period: this is Cree, Inc.’s FY2018 10-K, not a Wolfspeed, Inc. FY2017 Q4 filing.
- Review the assumptions behind the $247.5 million Lighting Products goodwill impairment and the segment’s recovery plan, restructuring costs and warranty reserve.
- Assess whether Wolfspeed can convert constrained demand into profitable shipments, including the 150mm production transition and the acquired RF Power business’s integration and preliminary valuation.
- Reconcile liquidity and investment capacity with rising debt, capital spending plans and acquisition-related cash use; review credit-facility availability and covenants.
- Track LED pricing and margins, distributor inventory and customer concentration, and potential tariff or export-control effects.