Inventory: Still Concerned

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By TMFOrangeblood
November 5, 2002

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When first-quarter earnings were released, I posted that the inventory situation had finally dropped back into my comfort range:

"This quarter, revenue increased by 13% over the prior-year period, while total inventory actually dropped 6%.

I still want to see the breakdown for raw materials, work-in-process, and finished goods, but for now I feel much better about things."

Well, having now seen the breakdown, I don't think I feel better after all. Finished goods are still piling up at an alarming rate (percentage number at the right of each quarter represents change from prior-year period:

                      Sep         Jun           Mar
2002        2002          2002  
Total Revenues      48,811  13% 37,800 -15%  33,376 -37%  
Raw materials        4,075 -10%  3,908 -14%   4,029  -3%  
Work in process      6,094 -14%  6,629   7%   7,844  19%  

Finished goods       8,432  58%  9,724  85%   8,927  74%  
Reserve              2,678       2,295        5,988       
Tot. Inv            15,923  -6% 17,966  18%  14,812  -7%

So, although total inventory decreased by 6%, finished goods actually increased 58% over the prior September quarter. All the decrease in total inventory came from raw materials and work in process, plus the $2.7 million reserve. Here's what the 10-Q has to say:

"Of the total reserve amount, $2.3 million is attributable to the Cree Microwave segment and $400,000 is attributable to the Cree segment.... [Cree Microwave stuff omitted]

Cree segment results for the three months ended September 29, 2002 included a $1.0 million write off of the initial XBright� chips that were developed during fiscal 2002. An improved chip has replaced these devices and this write down was recorded as a research and development expense as the initial devices were prematurely launched and are now obsolete. The Company also recorded a $185,000 lower of cost or market adjustment to certain LED products based on management's estimate of an average sales price for the products. This adjustment was recorded to cost of revenue in the first quarter of fiscal 2003."

In adding up the writedowns mentioned in the 10-Q for the Cree segment and Cree Microwave, I came up with $2.124 million that was recorded either as a cost of revenue or an R&D expense... with more to come in fiscal 2003 from Cree Microwave.

I badly need someone like madmarv to interpret this, but it looks like net income would have been 55% higher in the quarter -- $6.1 million instead of $3.9 million -- if it weren't for the inventory problems.

Another question: If Cree is selling all the LEDs it can make, why aren't raw materials and work in process increasing sequentially as well as year-over-year, and why are finished goods still increasing instead of decreasing?

Thanks for any help,


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