Filing identity and reporting period
Important metadata mismatch: The supplied filing is Cree, Inc.’s Form 10-Q, not a Wolfspeed, Inc. filing. It covers the fiscal quarter ended March 29, 2015 (Cree fiscal 2015 third quarter) and the nine months then ended; the financial statements are unaudited. This does not match the request metadata “WOLFSPEED, INC., 2014 Q3.”
Cree reported three segments: LED Products, Lighting Products, and Power and RF Products. Its products serve lighting, display, power electronics, and wireless applications.
Financial performance and liquidity
| Metric | Three months ended March 29, 2015 | Nine months ended March 29, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $409.5 million | $1,250.3 million | $405.3 million; $1,211.4 million |
| Gross profit / margin | $125.4 million / 30.6% | $398.0 million / 31.8% | $150.0 million / 37.0%; $456.5 million / 37.7% |
| Operating income | $1.5 million | $23.2 million | $30.4 million; $102.6 million |
| Net income | $0.7 million | $23.9 million | $28.2 million; $94.3 million |
| Diluted EPS | $0.01 | $0.21 | $0.23; $0.77 |
- For the nine-month period, revenue rose 3%, but gross profit fell 13%, operating income fell 77%, and diluted EPS fell from $0.77 to $0.21. Quarterly revenue increased 1%, while gross profit fell 16%.
- Nine-month operating cash flow was $93.7 million, down from $228.2 million. Investing activities provided $36.7 million, compared with $257.3 million used in the prior-year period; financing used $211.6 million, versus $107.8 million provided.
- Capital expenditures were $158.3 million for the nine months. Management targeted approximately $200 million of capital investment for fiscal 2015.
- At March 29, cash and cash equivalents were $204.7 million, short-term investments $577.3 million, and long-term debt $150 million. Cash and short-term investments, net of debt, were approximately $632 million. The $500 million revolving credit facility had $350 million available, matured January 9, 2020, and was in covenant compliance.
- Total assets were $3.08 billion; current assets were $1.40 billion and current liabilities $200.3 million. Inventory was $299.4 million, up from $284.8 million at June 29, 2014. The cash conversion cycle increased to 103 days from 74 days.
Segment performance and material changes
| Segment | Quarter revenue, year-over-year | Quarter gross margin, year-over-year | Nine-month revenue, year-over-year |
|---|---|---|---|
| LED Products | $154.4 million, down 23% | 35.9%, down from 45.6% | $479.9 million, down 24% |
| Lighting Products | $224.1 million, up 27% | 26.0%, down from 27.4% | $677.4 million, up 36% |
| Power and RF Products | $31.0 million, up 13% | 53.1%, down from 57.1% | $93.1 million, up 18% |
- LED revenue fell as unit sales and average selling prices declined amid increased global competition. Lighting growth reflected higher unit sales, particularly LED bulbs, partly offset by lower average selling prices and product-mix pressure on margins. Power and RF growth reflected increased adoption of SiC- and GaN-based devices.
- Consolidated margin pressure reflected LED pricing, lower factory utilization, and a greater mix of lower-margin lighting bulbs. SG&A increased 10% in the quarter, principally from patent-enforcement legal costs and lighting sales and marketing.
- Cree invested $80.6 million in Lextar, acquiring an approximately 13% interest, and recorded a $3.7 million quarterly loss on the investment due to a decline in its share price.
- The company repurchased 11.2 million shares for $390.1 million during the nine months. Shares issued and outstanding declined from 120.1 million at June 29, 2014 to 109.9 million at March 29, 2015.
Outlook, risks, and contingencies
- Management expected highly competitive markets through fiscal 2015. It targeted revenue growth in Lighting Products and Power and RF Products, with lower full-year LED Products revenue. It expected incremental operating leverage from higher revenue in fiscal 2015’s fourth quarter and fiscal 2016, but provided no specific quarterly revenue or earnings guidance in the supplied text.
- Management cited a new LED technology platform intended to support high-power LED design wins in fiscal 2016, continued LED lighting and brand investment, and greater use of third-party manufacturing to support growth and manage capacity.
- Key disclosed risks include intense competition and price erosion, uncertain LED adoption and demand, customer and distributor concentration, production yields and capacity utilization, reliance on limited-source suppliers, product quality and warranty costs, international and currency exposure, intellectual-property litigation, and execution of growth investments.
- Product warranty liabilities were $8.2 million at quarter-end; warranty periods range from 90 days to 10 years. Management said existing litigation outcomes were not reasonably estimable and that unfavorable outcomes could materially affect the business, although it did not believe current proceedings would materially harm the company. Unrecognized tax benefits totaled $18.2 million.
- Management stated that working capital, credit availability, and expected operating cash flows should cover operating needs and capital expenditures for at least the next 12 months. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and period: this source is Cree, Inc.’s fiscal 2015 third-quarter 10-Q, not a Wolfspeed 2014 Q3 filing.
- Assess whether LED revenue and margin declines, competitive pricing, and reduced factory utilization persist, and whether Lighting and Power and RF growth can offset them.
- Review cash generation against capital spending, the share-repurchase program, and the $150 million debt balance; note that the filing’s cash-flow statement covers nine months only.
- Monitor inventory and the 103-day cash conversion cycle, along with warranty claims and the Lextar investment’s valuation and performance.
- Review the full risk-factor and legal disclosures for patent disputes, customer/channel exposure, supply constraints, and the execution and returns of planned capacity investment.