Filing summary
Entity and period: The supplied filing is Cree, Inc.’s Form 10-K for the fiscal year ended June 28, 2015—not a Wolfspeed, Inc. 2014 Q4 filing. Cree reported Lighting Products, LED Products, and Power and RF Products. Its Power and RF business was a subsidiary for which Cree was considering an IPO.
Financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1.633 billion | $1.648 billion |
| Gross profit / margin | $475.0 million / 29% | $618.8 million / 38% |
| Operating income (loss) | $(72.5) million | $134.3 million |
| Net income (loss) | $(64.1) million | $124.2 million |
| Diluted EPS | $(0.57) | $1.01 |
| Cash from operations | $181.3 million | $319.3 million |
| Capital expenditures | $206.2 million | $178.6 million |
At June 28, 2015, cash, cash equivalents and short-term investments totaled $713.2 million, down from $1.162 billion a year earlier. Working capital was $1.053 billion. Long-term debt was $200 million, with $300 million available under a $500 million secured revolving facility due in 2020; Cree reported compliance with its covenants. Total assets were $2.954 billion and shareholders’ equity was $2.466 billion.
Segments and period comparison
- Lighting Products: Revenue rose 28% to $906.5 million; gross margin fell to 26% from 28%. Unit volume increased 44%, while average selling price declined 11%.
- LED Products: Revenue fell 28% to $602.1 million; gross margin dropped to 32% from 46%. Units declined 14% and average selling price fell 15%, amid competition, lower utilization and reserve increases.
- Power and RF Products: Revenue increased 15% to $123.9 million; gross margin was 55%, versus 56%. Power-device unit sales grew with higher SiC demand.
Fourth-quarter FY2015 revenue was $382.2 million, compared with $436.3 million in fourth-quarter FY2014. The quarter recorded a net loss of $88.0 million, versus net income of $29.8 million. Gross profit was $76.9 million, down from $162.3 million.
Material changes and unusual items
- In June 2015, Cree approved an LED restructuring to reduce capacity and overhead through equipment disposal or sale, facility consolidation and job reductions. Total estimated charges were $101.9 million; $83.6 million had been incurred by year-end, with remaining charges expected in the first half of FY2016.
- FY2015 included $47.7 million of losses on disposal or impairment of long-lived assets, largely related to the LED restructuring, versus $2.7 million in FY2014. Restructuring also included $26.5 million in channel inventory reserves and $11.1 million in inventory reserves.
- Non-operating results included a $22.6 million loss on Cree’s approximately 13% investment in Lextar, reflecting a decline in its share price, partly offset by $2.6 million in dividends.
- Cree spent approximately $550 million to repurchase 16.0 million shares in FY2015. Cash used in financing was $311.4 million, and cash and investments fell by $449.3 million.
- A voluntary recall of linear LED T8 replacement lamps was announced in June 2015 because of overheating and melting risk. Cree expected most recall costs to be recovered through insurance, with an immaterial financial impact.
- After year-end, on July 8, 2015, Cree completed its acquisition of Arkansas Power Electronics International for a base price of $13.9 million, with up to $4.6 million in potential additional payments.
Outlook, commentary and risks
Management projected approximately 10% overall revenue growth and increasing operating margins in FY2016. Priorities included growing commercial Lighting and improving its margins, stabilizing LED, expanding Power and RF, and controlling operating expenses. Cree targeted approximately $150 million of FY2016 capital investment. It also intended to pursue an IPO of the Power and RF subsidiary, subject to market and other conditions; completion and proceeds were uncertain.
Key risks include intense competition and price erosion—particularly in LED products—uncertain LED adoption and demand, excess capacity and factory utilization, dependence on distributors and major customers, and reliance on limited-source suppliers. Arrow Electronics accounted for 12% of FY2015 revenue and Home Depot for 11%. Other exposures include product quality and warranty costs, international and currency risks, intellectual-property litigation, tax uncertainties, and execution of the restructuring and proposed IPO. Management said pending litigation outcomes were not reasonably estimable, while believing the matters were not expected to materially harm the company; adverse outcomes could nevertheless have a material effect.
Important facts for investors to verify
- Confirm the intended issuer and period: this filing covers Cree, Inc. FY2015, not Wolfspeed, Inc. 2014 Q4.
- Track whether the LED restructuring delivers the expected cost savings and whether additional charges or impairments arise.
- Monitor LED pricing, utilization, reserves and segment margins, alongside Lighting growth and Power and RF demand.
- Review subsequent cash, investment balances, debt and share-repurchase activity; FY2015 cash generation declined while repurchases were substantial.
- Check the status and terms of any Power and RF IPO, including whether Cree retains control and continues consolidation.
- Follow the T8 lamp recall, litigation, warranty exposure and valuation changes in the Lextar investment.