Filing identity and reporting period
Important metadata discrepancy: The supplied filing is Cree, Inc.’s Form 10-Q for the quarter ended March 25, 2018 (fiscal 2018 third quarter), not a 2017 Q3 filing for Wolfspeed, Inc. Wolfspeed is reported as one of Cree’s three segments. The interim financial statements are unaudited.
Cree’s businesses were Wolfspeed (SiC/GaN materials and power/RF devices), LED Products, and Lighting Products.
Financial performance
| Metric | Three months ended Mar. 25, 2018 | Nine months ended Mar. 25, 2018 | Prior comparable period |
|---|---|---|---|
| Revenue | $356.0 million | $1,084.2 million | $341.5 million and $1,114.1 million |
| Gross profit / margin | $99.1 million / 27.8% | $292.0 million / 26.9% | $86.1 million / 25.2%; $336.6 million / 30.2% |
| Operating loss | $268.1 million | $308.5 million | $19.9 million and $5.6 million |
| Net loss attributable to controlling interest | $240.6 million; $2.40 per diluted share | $246.7 million; $2.49 per diluted share | $99.0 million and $92.2 million; $1.02 and $0.93 per diluted share |
The current-period operating losses include a $247.5 million noncash goodwill impairment charge for Lighting Products. The quarter also included a $14.0 million loss on the Lextar equity investment, contributing to non-operating expense of $9.7 million. Nine-month non-operating income was $16.0 million.
Segment trends
- Wolfspeed: Revenue increased 46% to $81.9 million in the quarter and 36% to $218.6 million year to date. Nine-month gross margin rose to 48.4% from 46.6%; management cited improved mix, utilization, and yields. Revenue growth reflected higher unit sales, higher average selling prices, and the Infineon acquisition.
- LED Products: Revenue increased 9% to $143.3 million in the quarter and 8% to $440.5 million year to date. Nine-month gross margin declined to 26.1% from 28.4%, primarily due to wafer-factory expansion costs and less favorable mix.
- Lighting Products: Revenue declined 15% to $130.8 million in the quarter and 22% to $425.1 million year to date. Nine-month gross margin fell to 18.8% from 29.2%. The filing cites weaker commercial lighting demand, quality-related project losses, reduced consumer demand, lower factory utilization, warranty costs, and the absence of a prior-year patent-license fee.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $125.4 million, down from $163.2 million. Investing cash outflow was $393.8 million, including the $427.1 million net Infineon RF Power acquisition payment and increased capital spending. Financing cash inflow was $236.3 million, principally reflecting net borrowings.
- Cash and cash equivalents were $101.2 million; short-term investments were $300.2 million. Combined cash and short-term investments totaled $401.5 million, down from $610.9 million at June 25, 2017.
- Long-term debt was $316.0 million under a $500 million revolving credit facility, with $184 million available. The company reported compliance with its covenants; the facility matures January 2022.
- Property and equipment purchases were $128.4 million for the nine months. Management targeted approximately $190 million of capital investment for fiscal 2018, mainly for infrastructure and growth priorities.
- Inventory increased to $309.9 million from $284.4 million. Days of inventory supply rose to 109 from 98; the cash conversion cycle was 90 days versus 89.
Material changes, outlook, and notable items
- Cree acquired specified assets of Infineon’s RF Power business on March 6, 2018 for a base price of $429 million, subject to adjustments. The preliminary allocation included $149 million of identifiable intangibles and $246.3 million of goodwill. The acquired business contributed $4.2 million of revenue and a $2.3 million net loss after acquisition through quarter-end; allocation and useful-life estimates remained preliminary.
- Management’s priorities were to expand Wolfspeed, focus LED Products on differentiated offerings and use the San’an joint venture to address mid-power LEDs, and improve Lighting Products quality, channels, execution, and product mix. The filing provides no specific revenue or earnings forecast.
- In April 2018, Cree approved a Lighting Products restructuring involving planned equipment sales or abandonment, facility consolidation, and position reductions; estimated cost was $7 million.
- Cree voluntarily recalled linear LED T8 replacement lamps because of overheating and melting risk. Management expected most recall costs to be recoverable from insurance and anticipated an immaterial financial impact.
- Management said available working capital, credit availability, and expected operating cash flows should meet operating and capital needs for at least 12 months. Key execution risks include integrating the Infineon business, capacity expansion and the planned transition of most Wolfspeed power production from 100mm to 150mm substrates during calendar 2018.
- Other stated risks include competitive pricing and demand variability, Lighting Products’ recovery and warranty exposure, supply constraints, foreign-exchange and investment-value volatility, tax uncertainty, and legal proceedings. Litigation outcomes were not reasonably estimable. The company also cited possible effects from proposed U.S.-China tariffs and the U.S. export ban affecting ZTE.
Most important facts for investors to verify
- Confirm the intended issuer and period: this is Cree, Inc., fiscal Q3 2018, rather than Wolfspeed, Inc. 2017 Q3.
- Track whether Lighting Products’ demand, margins, quality issues, warranty claims, and restructuring costs improve; assess any additional impairment risk.
- Verify Infineon acquisition integration, final purchase-price allocation, acquired-business performance, and the effect of acquisition debt and spending on liquidity.
- Monitor Wolfspeed capacity expansion, 150mm production conversion, yields, and whether demand can be served without losing orders to competitors.
- Assess whether operating cash generation and the $184 million of remaining credit availability remain adequate alongside planned capital investment and rising inventory.