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August 16, 2016 4:04 PM EDT



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): August 16, 2016



CREE, INC.
(Exact name of registrant as specified in its charter)


North Carolina
0-21154
56-1572719
(State or other jurisdiction of
incorporation)
(Commission File
Number)
(I.R.S. Employer
Identification Number)

4600 Silicon Drive
 
Durham, North Carolina
27703
(Address of principal executive offices)
(Zip Code)


(919) 407-5300
Registrant’s telephone number, including area code

N/A
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ]    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ]    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ]    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ]    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))








Item 2.02
Results of Operations and Financial Condition
    
On August 16, 2016, Cree, Inc. (the “Company”) issued a press release announcing results for the fiscal quarter and year ended June 26, 2016.  The press release is attached as Exhibit 99.1 and incorporated into this report by reference.
 
The information in this Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Furthermore, the information in this report shall not be deemed incorporated by reference into the filings of the Company under the Securities Act of 1933, as amended.

Item 9.01
Financial Statements and Exhibits
    
(d)    Exhibits

 
Exhibit No.
 
Description of Exhibit
 
 
 
 
 
99.1
 
Press release dated August 16, 2016




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
CREE, INC.
 
 
 
 
 
 
 
 
 
By:
 
/s/ Michael E. McDevitt
 
 
 
Michael E. McDevitt
 
 
 
Executive Vice President and Chief Financial Officer


Date: August 16, 2016
 




EXHIBIT INDEX


 
Exhibit No.
 
Description of Exhibit
 
 
 
 
 
99.1
 
Press release dated August 16, 2016




Exhibit 99.1


 

FOR IMMEDIATE RELEASE
 

Contact:
Raiford Garrabrant
Cree, Inc.
Director, Investor Relations
Phone: 919-407-7895
Fax: 919-407-5615


Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2016

 
DURHAM, N.C., August 16, 2016 - Cree, Inc. (Nasdaq: CREE), a market leader in LED lighting, today announced revenue of $388 million for its fourth quarter of fiscal 2016, ended June 26, 2016. This represents a 2% increase compared to revenue of $382 million reported for the fourth quarter of fiscal 2015, and a 6% increase compared to the third quarter of fiscal 2016. GAAP net loss for the fourth quarter was $11 million, or $0.11 per diluted share, compared to GAAP net loss of $88 million, or $0.83 per diluted share, for the fourth quarter of fiscal 2015. On a non-GAAP basis, net income for the fourth quarter of fiscal 2016 was $19 million, or $0.19 per diluted share, compared to non-GAAP net loss for the fourth quarter of fiscal 2015 of $21 million, or $0.19 per diluted share.

For fiscal year 2016, Cree reported revenue of $1.62 billion, which represents a 1% decrease compared to revenue of $1.63 billion for fiscal 2015. GAAP net loss was $22 million, or $0.21 per diluted share, compared to net loss of $65 million, or $0.57 per diluted share, for fiscal 2015. On a non-GAAP basis, net income for fiscal year 2016 was $88 million, or $0.86 per diluted share, compared to $71 million or $0.63 per diluted share, for fiscal 2015.

“Fiscal 2016 was a year of progress towards our goal to build a more focused and valuable LED lighting technology company,” stated Chuck Swoboda, Cree Chairman and CEO. “We successfully restructured the LED business, improved commercial lighting fundamentals, refocused our consumer business on premium LED bulbs, and unlocked significant value with the agreement to sell Wolfspeed."





1

Q4 2016 Financial Metrics
(in thousands, except per share amounts and percentages)

 
Fourth Quarter
 
 
 
 
 
2016
 
2015
 
Change
 
(unaudited)
 
(unaudited)
 
 
 
 
Revenue, net
$
388,413

 
$
382,157

 
$
6,256

 
2
%
GAAP
 
 
 
 
 
 
 
Gross margin
29.1
 %
 
20.1
 %
 
 
 
 
Operating margin
(1.2
)%
 
(25.1
)%
 
 
 
 
Net loss
$
(10,641
)
 
$
(88,100
)
 
$
77,459

 
88
%
Loss per diluted share
$
(0.11
)
 
$
(0.83
)
 
$
0.72

 
87
%
Non-GAAP
 
 
 
 
 
 
 
Gross margin
30.8
 %
 
20.9
 %
 
 
 
 
Operating margin
5.5
 %
 
(7.4
)%
 
 
 
 
Net income (loss)
$
18,918

 
$
(20,718
)
 
$
39,636

 
191
%
Earnings (loss) per diluted share
$
0.19

 
$
(0.19
)
 
$
0.38

 
200
%


•
Gross margin decreased from Q3 of fiscal 2016 to 29.1% on a GAAP basis, and increased to 30.8% on a non-GAAP basis.
•
Cash and investments decreased by $15 million from Q3 of fiscal 2016 to $605 million.
•
Accounts receivable, net decreased by $13 million from Q3 of fiscal 2016 to $166 million, with days sales outstanding of 38.
•
Inventory increased by $2 million from Q3 of fiscal 2016 to $300 million and represents 98 days of inventory.
•
Free cash flow was $41 million for Q4 of fiscal 2016, a $47 million increase sequentially.

Recent Business Highlights:
                
•
Reached an agreement to sell Wolfspeed to Infineon for $850 million in cash;

•
Released many new Lighting products, including the following:

▪LN Series suspended luminaire
▪HXB Series LED high bay luminaire
▪ZR FD LED Series troffer
▪RSW™ LED street luminaires
▪OSQ™ 28L outdoor area and flood LED luminaire
▪Essentia® by Cree LED downlight and track light portfolios
▪XSP HO Series roadway luminaire
▪Next-generation CPY-20L™ LED canopy luminaires
▪SmartCast® Manager software

•
Launched the following new LED products:
▪XLamp® XT-E HE LED
▪XLamp MHB-B LED
▪XLamp XQ-E Photo Red LED


2






•
Received a favorable Initial Determination ruling from the U.S. International Trade Commission in the company's case against Feit Electric and its Asian supplier, Unity Opto;

•
Reached favorable agreements to settle patent disputes with Harvatek and Kingbright.

Business Outlook:

For its first quarter of fiscal 2017 ending September 25, 2016, Cree targets consolidated revenue, which includes both continued and discontinued operations, in a range of $356 million to $378 million. Consolidated GAAP net income is targeted at $5 million to $6 million, or $0.05 to $0.06 per diluted share. Consolidated non-GAAP net income is targeted in a range of $10 million to $16 million, or $0.10 to $0.16 per diluted share. Targeted consolidated non-GAAP earnings exclude $23 million of expenses related to stock-based compensation expense, the amortization or impairment of acquisition-related intangibles and transaction costs associated with the sale of the Wolfspeed business. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

For continuing operations, revenue is targeted in a range of $310 million to $330 million. GAAP net income from continuing operations is targeted at $2 million to $3 million, or $0.02 to $0.03 per diluted share. Non-GAAP net income from continued operations is targeted in a range of $6 million to $11 million, or $0.06 to $0.11 per diluted share. Targeted non-GAAP earnings from continuing operations exclude $20 million of expenses related to stock-based compensation expense and the amortization or impairment of acquisition-related intangibles. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

For discontinued operations, revenue is targeted in a range of $46 million to $48 million. GAAP net income from discontinued operations is targeted at $2 million to $3 million, or $0.02 to $0.03 per diluted share. Non-GAAP net income from discontinued operations is targeted in a range of $4 million to $5 million, or $0.04 to $0.05 per diluted share. Targeted non-GAAP earnings from continuing discontinued operations exclude $3 million of expenses related to stock-based compensation expense, the amortization or impairment of acquisition-related intangibles and transaction costs associated with the sale of the Wolfspeed business.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. Eastern time today to review the highlights of the fourth quarter and fiscal year 2016 results and the fiscal first quarter 2017 business outlook, including significant factors and assumptions underlying the targets noted above.

The conference call will be available to the public through a live audio web broadcast via the Internet. For webcast details, visit Cree's website at investor.cree.com/events.cfm.

Supplemental financial information, including the non-GAAP reconciliation attached to this press release, is available on Cree's website at investor.cree.com/results.cfm.

About Cree, Inc.

Cree is a market-leading innovator of lighting-class LEDs, lighting products and semiconductor products for power and radio frequency (RF) applications. Cree believes in better light experiences and is delivering new innovative LED technology that transforms the way people experience light through high-quality interior and exterior LED lighting solutions.


3

Cree’s product families include LED lighting systems and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, power-switching devices and RF devices. Cree’s products are driving improvements in applications such as general illumination, electronic signs and signals, power supplies and inverters.

For additional product and Company information, please refer to www.cree.com.

Non-GAAP Financial Measures:

This press release highlights the Company's financial results on both a GAAP and a non-GAAP basis. The GAAP results include certain costs, charges and expenses which are excluded from non-GAAP results. By publishing the non-GAAP measures, management intends to provide investors with additional information to further analyze the Company's performance, core results and underlying trends. Cree's management evaluates results and makes operating decisions using both GAAP and non-GAAP measures included in this press release. Non-GAAP results are not prepared in accordance with GAAP and non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

Forward Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our commercial Lighting results will continue to suffer if new issues arise regarding the new ERP system we implemented in the third quarter of fiscal 2016 for this business; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our ability to lower costs; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that our products fail to perform or fail to meet customer requirements or expectations, resulting in significant additional costs, including costs associated with the potential recall of our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor's products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that the sale of our Wolfspeed business to Infineon may be delayed or may not occur; the ability to obtain regulatory approval or the possibility that such regulatory approval may result in the imposition of conditions that could cause the parties to abandon the Wolfspeed transaction; the risk that one or more of the conditions to closing of the Wolfspeed transaction may not be satisfied; the possibility that anticipated benefits of the proposed Wolfspeed transaction will not be realized, including the amount of cash to be realized by Cree from the transaction or our resulting ability to pursue select strategic transactions and stock repurchases; potential business uncertainty, including changes to existing business relationships during the pendency before closing that could affect our financial performance; the risk that our investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk that we have an increasingly complex supply chain and its ability to scale to enable maintaining a sufficient supply of raw materials; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including

4

the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures or investments generally; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 28, 2015, and subsequent reports filed with the SEC. These forward-looking statements represent Cree's judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

Cree®, Essentia®, SmartCast® and XLamp® are registered trademarks and CPY-20L™, RSW™, OSQ™, and Wolfspeed™ are trademarks of Cree, Inc.


5


CREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share amounts and percentages)
(unaudited)
 
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Revenue, net
$
388,413

 
$
382,157

 
$
1,616,627

 
$
1,632,505

Cost of revenue, net
275,390

 
305,467

 
1,129,553

 
1,158,586

Gross profit
113,023

 
76,690

 
487,074

 
473,919

Gross margin percentage
29.1
 %
 
20.1
 %
 
30.1
 %
 
29.0
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
41,485

 
45,260

 
168,848

 
182,797

Sales, general and administrative
68,609

 
76,803

 
283,052

 
290,730

Amortization or impairment of acquisition-related intangibles
7,290

 
6,477

 
28,732

 
26,220

Loss on disposal or impairment of long-lived assets
430

 
44,081

 
16,913

 
47,722

Total operating expenses
117,814

 
172,621

 
497,545

 
547,469

 
 
 
 
 
 
 
 
Operating loss
(4,791
)
 
(95,931
)
 
(10,471
)
 
(73,550
)
Operating loss percentage
(1.2
)%
 
(25.1
)%
 
(0.6
)%
 
(4.5
)%
 
 
 
 
 
 
 
 
Non-operating income (expense), net
1,040

 
(14,155
)
 
(13,035
)
 
(10,389
)
Loss from operations before income taxes
(3,751
)
 
(110,086
)
 
(23,506
)
 
(83,939
)
Income tax expense (benefit)
6,890

 
(21,986
)
 
(1,970
)
 
(19,247
)
Net loss
$
(10,641
)
 
$
(88,100
)
 
$
(21,536
)
 
$
(64,692
)
 
 
 
 
 
 
 
 
Diluted loss per share
$
(0.11
)
 
$
(0.83
)
 
$
(0.21
)
 
$
(0.57
)
 
 
 
 
 
 
 
 
Shares used in diluted per share calculation
100,663

 
106,558

 
101,783

 
113,022



6


CREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
June 26,
2016
 
June 28,
2015
 
(unaudited)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents, and short-term investments
$
605,305

 
$
713,191

Accounts receivable, net
165,611

 
186,157

Income tax receivable
6,304

 
—

Inventories
300,317

 
280,576

Deferred income taxes
—

 
39,190

Prepaid expenses
26,810

 
29,932

Other current assets
44,788

 
54,851

Assets held for sale
4,347

 
4,353

Total current assets
1,153,482

 
1,308,250

Property and equipment, net
599,723

 
635,072

Goodwill
618,828

 
616,345

Intangible assets, net
302,810

 
310,729

Other long-term investments
40,179

 
57,595

Deferred income taxes
38,564

 
8,951

Other assets
9,249

 
11,091

Total assets
$
2,762,835

 
$
2,948,033

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, trade
$
129,060

 
$
163,128

Accrued salaries and wages
44,642

 
45,415

Income taxes payable
—

 
2,035

Other current liabilities
46,072

 
44,208

Total current liabilities
219,774

 
254,786

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt
160,000

 
200,000

Deferred income taxes
943

 
10,211

Other long-term liabilities
14,294

 
21,084

Total long-term liabilities
175,237

 
231,295

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock
125

 
131

Additional paid-in-capital
2,359,584

 
2,285,554

Accumulated other comprehensive income, net of taxes
8,728

 
5,798

(Accumulated deficit)/retained earnings
(613
)
 
170,469

Total shareholders’ equity
2,367,824

 
2,461,952

Total liabilities and shareholders’ equity
$
2,762,835

 
$
2,948,033



7

CREE, INC.
FINANCIAL RESULTS BY OPERATING SEGMENT
(in thousands, except percentages)
(unaudited)

The following table reflects the results of the Company's reportable segments as reviewed by the Company's Chief Executive Officer, its Chief Operating Decision Maker or CODM, for the three months and year ended June 26, 2016 and the three months and year ended June 28, 2015. The CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment. As such, total segment revenue is equal to the Company's consolidated revenue.

 
Three Months Ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Change
Lighting Products revenue
$
198,418

 
$
229,139

 
$
(30,721
)
 
(13
)%
Lighting Products percent of revenue
51
%
 
60
%
 
 
 
 
LED Products revenue
159,076

 
122,231

 
36,845

 
30
 %
LED Products percent of revenue
41
%
 
32
%
 
 
 
 
Power and RF Products revenue
30,919

 
30,787

 
132

 
—
 %
Power and RF Products percent of revenue
8
%
 
8
%
 
 
 
 
Total revenue
$
388,413

 
$
382,157

 
$
6,256

 
2
 %

 
Year Ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Change
Lighting Products revenue
$
889,133

 
$
906,502

 
$
(17,369
)
 
(2
)%
Lighting Products percent of revenue
55
%
 
56
%
 
 
 
 
LED Products revenue
610,835

 
602,082

 
8,753

 
1
 %
LED Products percent of revenue
38
%
 
37
%
 
 
 
 
Power and RF Products revenue
116,659

 
123,921

 
(7,262
)
 
(6
)%
Power and RF Products percent of revenue
7
%
 
7
%
 
 
 
 
Total revenue
$
1,616,627

 
$
1,632,505

 
$
(15,878
)
 
(1
)%

 
Three Months Ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Change
Lighting Products gross profit
$
51,168

 
$
56,934

 
$
(5,766
)
 
(10
)%
Lighting Products gross margin
25.8
%
 
24.8
%
 
 
 
 
LED Products gross profit
55,878

 
8,506

 
47,372

 
557
 %
LED Products gross margin
35.1
%
 
7.0
%
 
 
 
 
Power and RF Products gross profit
13,923

 
16,163

 
(2,240
)
 
(14
)%
Power and RF Products gross margin
45.0
%
 
52.5
%
 
 
 
 
Contract manufacturer dispute related expenses
(2,108
)
 
—

 
(2,108
)
 


T8 product recall charges
(1,349
)
 
—

 
(1,349
)
 


Unallocated costs
(4,489
)
 
(4,913
)
 
424

 
9
 %
Consolidated gross profit
$
113,023

 
$
76,690

 
$
36,333

 
47
 %
Consolidated gross margin
29.1
%
 
20.1
%
 
 
 
 


8

 
Year Ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Change
Lighting Products gross profit
$
241,699

 
$
235,542

 
$
6,157

 
3
 %
Lighting Products gross margin
27.2
%
 
26.0
%
 
 
 
 
LED Products gross profit
212,367

 
190,912

 
21,455

 
11
 %
LED Products gross margin
34.8
%
 
31.7
%
 
 
 
 
Power and RF Products gross profit
56,069

 
67,764

 
(11,695
)
 
(17
)%
Power and RF Products gross margin
48.1
%
 
54.7
%
 
 
 
 
Contract manufacturer dispute related expenses
(2,108
)
 
—

 
(2,108
)
 
 
T8 product recall charges
(1,349
)
 
—

 
(1,349
)
 
 
Unallocated costs
(19,604
)
 
(20,299
)
 
695

 
3
 %
Consolidated gross profit
$
487,074

 
$
473,919

 
$
13,155

 
3
 %
Consolidated gross margin
30.1
%
 
29.0
%
 
 
 
 
Reportable Segments Description
The Company's Lighting Products segment primarily consists of LED lighting systems and bulbs. The Company's LED Products segment includes LED components, LED chips, and silicon carbide materials. The Company's Power and RF Products segment includes power devices and RF devices.
Financial Results by Reportable Segment
The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit presented in the preceding table to the Company's consolidated income before taxes.
The Company allocates direct costs and indirect costs to each segment's cost of revenue. The allocation methodology is based on a reasonable measure of utilization considering the specific facts and circumstances of the cost being allocated.
Certain costs are not allocated when evaluating segment performance. These unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company 401(k) Plan.

Cree, Inc.
Non-GAAP Measures of Financial Performance

To supplement the Company's consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, Cree uses non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP gross margin, non-GAAP operating income, non-GAAP non-operating income, net, non-GAAP net income, non-GAAP earnings per diluted share and free cash flow.

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release. In this press release, Cree also presents its target for non-GAAP expenses, which are expenses less expenses in the various categories described below. Both our GAAP targets and non-GAAP targets do not include any estimated changes in the fair value of our Lextar investment.
Non-GAAP measures presented in this press release are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cree's results of

9

operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate Cree's results of operations in conjunction with the corresponding GAAP measures.
Cree believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value. In addition, because Cree has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.
For its internal budgeting process, and as discussed further below, Cree's management uses financial statements that do not include the items listed below and the income tax effects associated with the foregoing. Cree's management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.
Cree excludes the following items from one or more of its non-GAAP measures when applicable:
Contract manufacturer dispute related expenses. The Company has recognized charges associated with a dispute with a former Lighting Products contract manufacturer, whom Cree ceased utilizing as of the end of 2014. Because these charges relate to amounts from prior fiscal years, Cree does not consider these charges to be reflective of ongoing operating results.
T8 product recall charges. The Company has recognized charges associated with the product recall of its Linear LED T8 Replacement Lamps and the associated discontinuance of this product line. Because these charges relate to the exit from a market segment, Cree does not consider these charges to reflective of ongoing operating results.
Stock-based compensation expense. This expense consists of expenses for stock options, restricted stock, performance stock awards and employee stock purchases through its ESPP. Cree excludes stock-based compensation expenses from its non-GAAP measures because they are non-cash expenses that Cree does not believe are reflective of ongoing operating results.
Amortization or impairment of acquisition-related intangibles. Cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. Cree excludes these items because they arise from Cree's prior acquisitions and have no direct correlation to the ongoing operating results of Cree's business.
Asset retirement charges. Cree has recognized charges for the impact of the decision to abandon or retire certain property and equipment prior to the end of their estimated useful lives. Because these charges relate to assets which have been or will be retired prior to the end of their estimated useful lives, Cree does not consider these charges to be reflective of ongoing operating results.
LED business restructuring charges or gains. In June 2015, Cree’s board of directors approved a plan to restructure the LED business. The restructuring, which was completed during fiscal 2016, reduced excess capacity and overhead in order to improve the cost structure moving forward. The components of the restructuring include the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions. Because these charges relate to assets which have been retired prior to the end of their estimated useful lives and severance costs for eliminated positions, Cree does not consider these charges to be reflective of ongoing operating results. Similarly, Cree does not consider realized gains on the sale of assets relating to the restructuring to be reflective of ongoing operating results.
Changes in the fair value of our Lextar investment. The Company's common stock ownership investment in Lextar Electronics Corporation is accounted for utilizing the fair value option. As such, changes in fair value are recognized in income, including fluctuations due to the exchange rate between the New Taiwan Dollar and the United States Dollar. Cree excludes the impact of these gains or losses from its non-GAAP measures because they are non-cash impacts that Cree does not believe are reflective of ongoing operating results. Additionally, Cree excludes the impact of dividends received on its Lextar investment as Cree does not believe it is reflective of ongoing operating results.

10

Recognition of deferred IPO (Initial Public Offering) costs. The Company has recognized an expense for previously deferred IPO costs due to the delay in the anticipated timing of the planned initial public offering of Wolfspeed, our Power and RF Products segment plus the non-LED Materials and gemstones business, as required by SEC guidance. Cree excludes the impact of this expense as Cree does not consider this charge to be reflective of ongoing operating results.
Transaction costs associated with the sale of the Wolfspeed business. The Company has incurred transaction costs in conjunction with the proposed sale of its Wolfspeed business to Infineon. Because these costs were incurred relative to a portion of the business which will be reported as discontinued operations in fiscal 2017, Cree does not consider these charges to be reflective on ongoing operating results.
Income tax effects of the foregoing non-GAAP items. This amount is used to present each of the amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income.
Cree expects to incur many of these same expenses, including income taxes associated with these expenses, in future periods. In addition to the non-GAAP measures discussed above, Cree also uses free cash flow as a measure of operating performance and liquidity. Free cash flow represents operating cash flows less net purchases of property and equipment and patent and licensing rights. Cree considers free cash flow to be an operating performance and a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, a portion of which can then be used to, among other things, invest in Cree's business, make strategic acquisitions, strengthen the balance sheet and repurchase stock. A limitation of the utility of free cash flow as a measure of operating performance and liquidity is that it does not represent the residual cash flow available to the company for discretionary expenditures, as it is excludes certain mandatory expenditures such as debt service.


11



CREE, INC.
Reconciliation of GAAP to Non-GAAP Measures
(in thousands, except per share amounts and percentages)
(unaudited)


Non-GAAP Gross Margin
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
GAAP gross profit
$
113,023

 
$
76,690

 
$
487,074

 
$
473,919

GAAP gross margin percentage
29.1
%
 
20.1
%
 
30.1
%
 
29.0
%
Adjustments:
 
 
 
 
 
 
 
Contract manufacturer dispute related expenses
2,108

 
—

 
2,108

 
—

T8 product recall charges
1,349

 
—

 
1,349

 
—

Stock-based compensation expense
3,170

 
3,325

 
12,394

 
12,836

Non-GAAP gross profit
$
119,650

 
$
80,015

 
$
502,925

 
$
486,755

Non-GAAP gross margin percentage
30.8
%
 
20.9
%
 
31.1
%
 
29.8
%


Non-GAAP Operating Income (Loss)
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
GAAP operating loss
$
(4,791
)
 
$
(95,931
)
 
$
(10,471
)
 
$
(73,550
)
GAAP operating income percentage
(1.2
)%
 
(25.1
)%
 
(0.6
)%
 
(4.5
)%
Adjustments:
 
 
 
 
 
 
 
Contract manufacturer dispute related expenses
2,108

 
—

 
2,108

 
—

T8 product recall charges
1,349

 
—

 
1,349

 
—

Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of revenue, net
3,170

 
3,325

 
12,394

 
12,836

Research and development
3,289

 
3,728

 
13,842

 
16,524

Sales, general and administrative
7,952

 
7,988

 
32,491

 
34,941

Total stock-based compensation expense
14,411

 
15,041

 
58,727

 
64,301

Amortization or impairment of acquisition-related intangibles
7,290

 
6,477

 
28,732

 
26,220

Asset retirement charges
—

 
—

 
—

 
3,139

Costs associated with LED business restructuring
133

 
45,981

 
17,710

 
45,981

Recognition of deferred IPO costs
—

 
—

 
1,810

 
—

Costs associated with sale of Power & RF business
1,041

 
—

 
1,745

 
—

Total adjustments to GAAP operating loss
26,332

 
67,499

 
112,181

 
139,641

Non-GAAP operating income (loss)
$
21,541

 
$
(28,432
)
 
$
101,710

 
$
66,091

Non-GAAP operating income (loss) percentage
5.5
 %
 
(7.4
)%
 
6.3
 %
 
4.0
 %


12

Non-GAAP Non-Operating Income, net
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
GAAP non-operating income (loss), net
$
1,040

 
$
(14,155
)
 
$
(13,035
)
 
$
(10,389
)
Adjustment:
 
 
 
 
 
 
 
Net changes in the fair value of Lextar investment
(59
)
 
16,689

 
15,832

 
20,390

Non-GAAP non-operating income, net
981

 
2,534

 
2,797

 
10,001



Non-GAAP Net Income (Loss)
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
GAAP net loss
$
(10,641
)
 
$
(88,100
)
 
$
(21,536
)
 
$
(64,692
)
Adjustments:
 
 
 
 
 
 
 
Contract manufacturer dispute related expenses
2,108

 
—

 
2,108

 
—

T8 product recall charges
1,349

 
—

 
1,349

 
—

Stock-based compensation expense
14,411

 
15,041

 
58,727

 
64,301

Amortization or impairment of acquisition-related intangibles
7,290

 
6,477

 
28,732

 
26,220

Asset retirement charges
—

 
—

 
—

 
3,139

Costs associated with LED business restructuring
133

 
45,981

 
17,710

 
45,981

Recognition of deferred IPO costs
—

 
—

 
1,810

 
—

Costs associated with sale of Power & RF business
1,041

 
—

 
1,745

 
—

Net changes in the fair value of Lextar investment
(59
)
 
16,689

 
15,832

 
20,390

Total adjustments to GAAP net loss before provision for income taxes
26,273

 
84,188

 
128,013

 
160,031

Income tax effect *
3,286

 
(16,806
)
 
(18,937
)
 
(24,421
)
Non-GAAP net income (loss)
$
18,918

 
$
(20,718
)
 
$
87,540

 
$
70,918

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Non-GAAP diluted net income (loss) per share
$
0.19

 
$
(0.19
)
 
$
0.86

 
$
0.63

 
 
 
 
 
 
 
 
Shares used in diluted net income (loss) per share calculation
 
 
 
 
 
 
 
Non-GAAP shares used
100,663

 
106,558

 
101,783

 
113,022

*Estimated income tax effect is based upon the Company's overall consolidated effective tax rate for the given period.                                        











13

Free Cash Flow
 
Three Months Ended
 
Year Ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Cash flow from operations
$
64,553

 
$
87,554

 
$
203,316

 
$
181,254

Less: PP&E spending
(20,326
)
 
(47,883
)
 
(120,018
)
 
(206,160
)
Less: Patents spending
(3,409
)
 
(4,940
)
 
(14,443
)
 
(19,491
)
Total free cash flow
$
40,818

 
$
34,731

 
$
68,855

 
$
(44,397
)














14

CREE, INC.
PRO FORMA DISCONTINUED OPERATIONS
(unaudited)
(in thousands, except per share amounts and percentages)

The reconciliation tables below present Cree’s historical GAAP information on a pro forma basis excluding the amounts attributable to the Wolfspeed business that will be presented as discontinued operations beginning in Cree's first quarter of fiscal 2017 ending September 25, 2016.
 
 Three Months Ended
 September 27, 2015
 Three Months Ended
December 27, 2015
 Three Months Ended
 March 27, 2016
 Three Months Ended
 June 26, 2016
 Twelve Months Ended
 June 26, 2016
 
 As Reported
Discontinued Operations
 Pro
forma
 As Reported
Discontinued Operations
 Pro
forma
 As Reported
Discontinued Operations
 Pro
forma
 As Reported
Discontinued Operations
 Pro
forma
 As Reported
Discontinued Operations
 Pro
forma
Revenue, net
$
425,489

$
(43,939
)
$
381,550

$
435,806

$
(42,048
)
$
393,758

$
366,919

$
(43,670
)
$
323,249

$
388,413

$
(46,717
)
$
341,696

$
1,616,627

$
(176,374
)
$
1,440,253

Cost of revenue, net
294,916

(20,556
)
274,360

301,361

(18,706
)
282,655

257,886

(21,863
)
236,023

275,390

(23,820
)
251,570

1,129,553

(84,945
)
1,044,608

Gross profit
130,573

(23,383
)
107,190

134,445

(23,342
)
111,103

109,033

(21,807
)
87,226

113,023

(22,897
)
90,126

487,074

(91,429
)
395,645

Gross margin percentage
 
53.2
%
28.1
%
 
0.555

28.2
%
 
49.9
%
27
%
 
49
%
26.4
%
 
51.8
%
27.5
%
Operating expenses:
 
—

 
 
—

 
 
—

 
 
—

 
 
 
 
Research and development
43,540

(10,809
)
32,731

41,952

(10,389
)
31,563

41,871

(11,179
)
30,692

41,485

(12,035
)
29,450

168,848

(44,412
)
124,436

Sales, general and administrative
75,263

(4,945
)
70,318

74,691

(6,701
)
67,990

64,489

(4,809
)
59,680

68,609

(6,378
)
62,231

283,052

(22,833
)
260,219

Amortization or impairment of acquisition-related intangibles
7,062

(594
)
6,468

7,062

(594
)
6,468

7,318

(864
)
6,454

7,290

(865
)
6,425

28,732

(2,917
)
25,815

Loss on disposal or impairment of long-lived assets
14,573

(5,007
)
9,566

2,014

(1
)
2,013

(104
)
(165
)
(269
)
430

(6
)
424

16,913

(5,179
)
11,734

Total operating expenses
140,438

(21,355
)
119,083

125,719

(17,685
)
108,034

113,574

(17,017
)
96,557

117,814

(19,284
)
98,530

497,545

(75,341
)
422,204

Operating (loss) income
(9,865
)
(2,028
)
(11,893
)
8,726

(5,657
)
3,069

(4,541
)
(4,790
)
(9,331
)
(4,791
)
(3,613
)
(8,404
)
(10,471
)
(16,088
)
(26,559
)
Non-operating (expense) income, net
(22,806
)
—

(22,806
)
8,014

—

8,014

717

—

717

1,040

—

1,040

(13,035
)
—

(13,035
)
(Loss) income from continuing operations before income taxes
(32,671
)
(2,028
)
(34,699
)
16,740

(5,657
)
11,083

(3,824
)
(4,790
)
(8,614
)
(3,751
)
(3,613
)
(7,364
)
(23,506
)
(16,088
)
(39,594
)
Income tax (benefit) expense
(8,182
)
(625
)
(8,807
)
3,298

(1,742
)
1,556

(3,976
)
(1,475
)
(5,451
)
6,890

(1,113
)
5,777

(1,970
)
(4,955
)
(6,925
)
Net (loss) income from continuing operations
(24,489
)
(1,403
)
(25,892
)
13,442

(3,915
)
9,527

152

(3,315
)
(3,163
)
(10,641
)
(2,500
)
(13,141
)
(21,536
)
(11,133
)
(32,669
)
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from operations of Wolfspeed
—

2,028

2,028

—

5,657

5,657

—

4,790

4,790

—

3,613

3,613

—

16,088

16,088

Income tax (benefit) expense
—

625

625

—

1,742

1,742

—

1,475

1,475

—

1,113

1,113

—

4,955

4,955

(Loss) income on discontinued operations
—

1,403

1,403

—

3,915

3,915

—

3,315

3,315

—

2,500

2,500

—

11,133

11,133

Net (loss) income
$
(24,489
)
$
—

$
(24,489
)
$
13,442

$
—

$
13,442

$
152

$
—

$
152

$
(10,641
)
$
—

$
(10,641
)
$
(21,536
)
$
—

$
(21,536
)
Basic (loss) earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.24
)
$
(0.01
)
$
(0.25
)
$
0.13

$
(0.04
)
$
0.09

$
—

$
(0.03
)
$
(0.03
)
$
(0.11
)
$
(0.02
)
$
(0.13
)
$
(0.21
)
$
(0.11
)
$
(0.32
)
Discontinued operations, net of tax
—

0.01

0.01

—

0.04

0.04

—

0.03

0.03

—

0.02

0.02

—

0.11

0.11

Net (loss) income
$
(0.24
)
$
—

$
(0.24
)
$
0.13

$
—

$
0.13

$
—

$
—

$
—

$
(0.11
)
$
—

$
(0.11
)
$
(0.21
)
$
—

$
(0.21
)
Diluted (loss) earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.24
)
$
(0.01
)
$
(0.25
)
$
0.13

$
(0.04
)
$
0.09

$
—

$
(0.03
)
$
(0.03
)
$
(0.11
)
$
(0.02
)
$
(0.13
)
$
(0.21
)
$
(0.11
)
$
(0.32
)
Discontinued operations, net of tax
—

0.01

0.01

—

0.04

0.04

—

0.03

0.03

—

0.02

0.02

—

0.11

0.11

Net (loss) income
$
(0.24
)
$
—

$
(0.24
)
$
0.13

$
—

$
0.13

$
—

$
—

$
—

$
(0.11
)
$
—

$
(0.11
)
$
(0.21
)
$
—

$
(0.21
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
103,473
103,473
103,473
102,391
102,391
102,391
100,606
100,606
100,606
100,663
100,663
100,663
101,783
101,783
101,783
Diluted
103,473
103,473
103,473
102,521
102,521
102,521
101,221
101,221
101,221
100,663
100,663
100,663
100,663
100,663
100,663

15

CREE, INC.
PRO FORMA SEGMENT RECLASSIFICATION
TWELVE TRAILING MONTHS ENDED JUNE 2016
(unaudited)
(in thousands, except percentages)

The reconciliation tables below compare Cree’s historical GAAP segment information presentation to the pro-forma segment information for each segment as reclassified to reflect the sale of the Wolfspeed business. The Wolfspeed business includes certain operations formerly part of the LED Product segment relating to the silicon carbide substrate business for power, RF and gemstone applications.

 
 
Three Months Ended
 September 27, 2015
 
Three Months Ended
 December 27, 2015
 
Three Months Ended
 March 27, 2016
 
Three Months Ended
 June 26, 2016
 
Twelve Months Ended
 June 26, 2016
 
 
Reported
 
Change
 
Adjusted
 
Reported
 
Change
 
Adjusted
 
Reported
 
Change
 
Adjusted
 
Reported
 
Change
 
Adjusted
 
Reported
 
Change
 
Adjusted
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lighting Products
$
248,031

 
$
—

 
$
248,031

 
$
254,970

 
$
—

 
$
254,970

 
$
187,714

 
$
—

 
$
187,714

 
$
198,418

 
$
—

 
$
198,418

 
$
889,133

 
$
—

 
$
889,133

 
Percent of Revenue
58
%
 
 
 
58
%
 
59
%
 
 
 
59
%
 
51
%
 
 
 
51
%
 
51
%
 
 
 
51
%
 
55
%
 
 
 
55
%
 
LED Products
148,208

 
(14,689
)
 
133,519

 
153,362

 
(14,574
)
 
138,788

 
150,189

 
(14,654
)
 
135,535

 
159,076

 
(15,798
)
 
143,278

 
610,835

 
(59,715
)
 
551,120

 
Percent of Revenue
35
%
 
 
 
31
%
 
35
%
 
 
 
32
%
 
41
%
 
 
 
37
%
 
41
%
 
 
 
37
%
 
38
%
 
 
 
34
%
 
Wolfspeed
29,250

 
14,689

 
43,939

 
27,474

 
14,574

 
42,048

 
29,016

 
14,654

 
43,670

 
30,919

 
15,798

 
46,717

 
116,659

 
59,715

 
176,374

 
Percent of Revenue
7
%
 
 
 
10
%
 
6
%
 
 
 
10
%
 
8
%
 
 
 
12
%
 
8
%
 
 
 
12
%
 
7
%
 
 
 
11
%
 
Total
$
425,489

 
$
—

 
$
425,489

 
$
435,806

 
$
—

 
$
435,806

 
$
366,919

 
$
—

 
$
366,919

 
$
388,413

 
$
—

 
$
388,413

 
$
1,616,627

 
$
—

 
$
1,616,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit/ Gross Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lighting Products
$
69,081

 
$
—

 
$
69,081

 
$
72,642

 
$
—

 
$
72,642

 
$
48,808

 
$
—

 
$
48,808

 
$
51,168

 
$
—

 
$
51,168

 
$
241,699

 
$
—

 
$
241,699

 
Gross Margin
27.9
%
 
 
 
27.9
%
 
28.5
%
 
 
 
28.5
%
 
26.0
%
 
 
 
26.0
%
 
25.8
%
 
 
 
25.8
%
 
27.2
%
 
 
 
27.2
%
 
LED Products
51,668

 
(9,793
)
 
41,875

 
52,719

 
(9,780
)
 
42,939

 
52,102

 
(9,272
)
 
42,830

 
55,878

 
(9,708
)
 
46,170

 
212,367

 
(38,553
)
 
173,814

 
Gross Margin
34.9
%
 
66.7
%
 
31.4
%
 
34.4
%
 
67.1
%
 
30.9
%
 
34.7
%
 
63.3
%
 
31.6
%
 
35.1
%
 
61.5
%
 
32.2
%
 
34.8
%
 
64.6
%
 
31.5
%
 
Wolfspeed
14,323

 
9,060

 
23,383

 
14,346

 
8,996

 
23,342

 
13,477

 
8,330

 
21,807

 
13,923

 
8,974

 
22,897

 
56,069

 
35,360

 
91,429

 
Gross Margin
49.0
%
 
61.7
%
 
53.2
%
 
52.2
%
 
61.7
%
 
55.5
%
 
46.4
%
 
56.8
%
 
49.9
%
 
45.0
%
 
56.8
%
 
49.0
%
 
48.1
%
 
59.2
%
 
51.8
%
 
Contract manufacturer dispute related expenses
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,108
)
 
—

 
(2,108
)
 
(2,108
)
 
—

 
(2,108
)
 
T8 product recall charges
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,349
)
 
—

 
(1,349
)
 
(1,349
)
 
—

 
(1,349
)
 
Unallocated costs
(4,499
)
 
733

 
(3,766
)
 
(5,262
)
 
784

 
(4,478
)
 
(5,354
)
 
942

 
(4,412
)
 
(4,489
)
 
734

 
(3,755
)
 
(19,604
)
 
3,193

 
(16,411
)
 
Total
$
130,573

 
$
—

 
$
130,573

 
$
134,445

 
$
—

 
$
134,445

 
$
109,033

 
$
—

 
$
109,033

 
$
113,023

 
$
—

 
$
113,023

 
$
487,074

 
$
—

 
$
487,074

 
Gross Margin
30.7
%
 
 
 
30.7
%
 
30.8
%
 
 
 
30.8
%
 
29.7
%
 
 
 
29.7
%
 
29.1
%
 
 
 
29.1
%
 
30.1
%
 
 
 
30.1
%

16

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