Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2018

DURHAM, N.C.--(BUSINESS WIRE)--Aug. 14, 2018-- Cree, Inc. (Nasdaq: CREE) today announced revenue of $409 million for its fourth quarter of fiscal 2018, ended June 24, 2018. This represents a 14% increase compared to revenue of $359 million reported for the fourth quarter of fiscal 2017, and a 15% increase compared to the third quarter of fiscal 2018. GAAP net loss for the fourth quarter was $33 million, or $0.33 per diluted share, compared to GAAP net loss of $6 million, or $0.06 per diluted share, for the fourth quarter of fiscal 2017. On a non-GAAP basis, net income for the fourth quarter of fiscal 2018 was $12 million, or $0.11 per diluted share, compared to non-GAAP net income for the fourth quarter of fiscal 2017 of $4 million, or $0.04 per diluted share.

For fiscal year 2018, Cree reported revenue of $1.49 billion, which represents a 1% increase when compared to revenue of $1.47 billion for fiscal 2017. GAAP net loss was $280 million, or $2.81 per diluted share, which includes a $247.5 million impairment charge attributable to Cree's Lighting Products segment taken in the third fiscal quarter. This compares to a GAAP net loss of $98 million, or $1.00 per diluted share, for fiscal 2017. On a non-GAAP basis, net income for fiscal year 2018 was $19 million, or $0.19 per diluted share, compared to $50 million, or $0.50 per diluted share, for fiscal 2017.

“Fiscal year 2018 finished with good momentum, with fourth quarter non-GAAP earnings per share that exceeded the top end of our range driven by Wolfspeed growth and gross margin improvement," stated Gregg Lowe, Cree CEO. "The demand for Silicon Carbide and GaN technologies continues to grow, as evidenced by the excellent results of our Wolfspeed business. We are expanding our manufacturing footprint and broadening our product portfolio to extend our leadership position in this market and drive growth."

Business Outlook:

For its first quarter of fiscal 2019 ending September 23, 2018, Cree targets revenue in a range of $395 million to $415 million. GAAP net loss is targeted at $9 million to $14 million, or $0.09 to $0.14 per diluted share. Non-GAAP net income is targeted in a range of $10 million to $14 million, or $0.10 to $0.14 per diluted share. Targeted GAAP and non-GAAP earnings reflect the negative impact of approximately $0.02 per diluted share for the tariffs that went into effect on July 6, 2018. Targeted non-GAAP income excludes $23 million of pre-tax expenses related to stock-based compensation expense, Lighting Products restructuring costs and the amortization 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.

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 2018 results and the fiscal first quarter 2019 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 an innovator of Wolfspeed™ power and radio frequency (RF) semiconductors, lighting class LEDs and lighting products. Cree’s Wolfspeed product families include SiC materials, power-switching devices and RF devices targeted for applications such as electric vehicles, fast charging inverters, power supplies, telecom and military and aerospace. Cree’s LED product families include blue and green LED chips, high-brightness LEDs and lighting-class power LEDs targeted for indoor and outdoor lighting, video displays, transportation and specialty lighting applications. Cree’s LED lighting systems and lamps serve indoor and outdoor applications.

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 those 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 Products segment results will continue to suffer if new issues arise regarding issues related to product quality 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, including bringing on additional capacity on a timely basis to meet customer demand; the risk that longer manufacturing lead times may cause customers to fulfill their orders with a competitor's products instead; the risk that the economic and political uncertainty caused by the already imposed and proposed tariffs by the United States on Chinese goods, and corresponding Chinese tariffs in response, may negatively impact demand for our products; 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 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 warranty returns or the potential recall of our products; 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; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; the risk that we are not able to enter into acceptable contractual arrangements with the significant customers of the acquired Infineon Technologies AG (Infineon) RF Power business or otherwise not fully realize anticipated benefits of the transaction; 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 our investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk posed by managing an increasingly complex supply chain that has the ability to supply a sufficient quantity of raw materials, subsystems and finished products with the required specifications and quality; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; risks relating to confidential information theft or misuse, including through cyber-attacks or cyber intrusion; our ability to complete development and commercialization of products under development, such as our pipeline of Wolfspeed products, improved LED chips, LED components, and LED lighting products; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures, joint ventures 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 25, 2017, 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® is a registered trademark and Wolfspeed is a trademark of Cree, Inc.

         

CREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(in thousands, except per share amounts and percentages)

(unaudited)

         
    Three Months Ended   Year Ended
    June 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
Revenue, net   $409,454     $358,939     $1,493,680     $1,473,000  
Cost of revenue, net   293,803     260,938     1,086,038     1,038,428  
Gross profit   115,651     98,001     407,642     434,572  
Gross margin percentage   28.2 %   27.3 %   27.3 %   29.5 %
                 
Operating expenses:                
Research and development   42,447     39,257     164,321     158,549  
Sales, general and administrative   82,194     64,039     283,489     277,175  
Amortization or impairment of acquisition-related intangibles   9,735     6,792     30,772     27,499  
Loss on disposal or impairment of long-lived assets   1,889     980     10,692     2,521  
Goodwill impairment charges           247,455      
Wolfspeed transaction termination fee               (12,500 )
Total operating expenses   136,265     111,068     736,729     453,244  
                 
Operating loss   (20,614 )   (13,067 )   (329,087 )   (18,672 )
Operating loss percentage   (5.0 )%   (3.6 )%   (22.0 )%   (1.3 )%
                 
Non-operating (expense) income, net   (4,369 )   9,057     11,642     14,008  
Loss from operations before income taxes   (24,983 )   (4,010 )   (317,445 )   (4,664 )
Income tax expense (benefit)   8,288     1,880     (37,522 )   93,454  
Net loss   (33,271 )   (5,890 )   (279,923 )   (98,118 )
Net (loss) income attributable to noncontrolling interest   (15 )       45      
Net loss attributable to controlling interest   ($33,256 )   ($5,890 )   ($279,968 )   ($98,118 )
                 
Diluted loss per share   ($0.33 )   ($0.06 )   ($2.81 )   ($1.00 )
                 
Shares used in diluted per share calculation   100,981     97,548     99,530     98,487  
                 
         

CREE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

         
    June 24,
2018
  June 25,
2017
     
ASSETS        
Current assets:        
Cash, cash equivalents, and short-term investments   $387,085     $610,938  
Accounts receivable, net   153,875     148,392  
Income tax receivable   2,434     8,040  
Inventories   296,015     284,385  
Prepaid expenses   28,310     23,305  
Other current assets   20,191     23,390  
Current assets held for sale   2,180     2,180  
Total current assets   890,090     1,100,630  
Property and equipment, net   661,319     581,263  
Goodwill   620,330     618,828  
Intangible assets, net   390,054     274,315  
Other long-term investments   57,501     50,366  
Deferred income taxes   6,451     11,763  
Other assets   11,800     12,702  
Total assets   $2,637,545     $2,649,867  
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable, trade   $151,307     $133,185  
Accrued salaries and wages   53,458     41,860  
Other current liabilities   43,528     36,978  
Total current liabilities   248,293     212,023  
         
Long-term liabilities:        
Long-term debt   292,000     145,000  
Deferred income taxes   3,056     49,860  
Other long-term liabilities   22,115     20,179  
Total long-term liabilities   317,171     215,039  
         
Shareholders’ equity:        
Common stock   125     121  
Additional paid-in-capital   2,549,125     2,419,517  
Accumulated other comprehensive income, net of taxes   596     5,909  
Accumulated deficit   (482,710 )   (202,742 )
Total shareholders’ equity   2,067,136     2,222,805  
Noncontrolling interest   4,945      
Total liabilities and shareholders’ equity   $2,637,545     $2,649,867  
             
     

CREE, INC.

UNAUDITED CONSOLIDATED CASH FLOWS

(in thousands)

     
    Fiscal Years Ended
    June 24,
2018
  June 25,
2017
    (In thousands)
Cash flows from operating activities:        
Net loss   ($279,923 )   ($98,118 )
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization   153,937     150,508  
Stock-based compensation   43,203     47,725  
Excess tax benefit from share-based payment arrangements       2  
Goodwill impairment charges   247,455      
Loss on disposal or impairment of long-lived assets   10,692     2,521  
Amortization of premium/discount on investments   4,809     5,427  
Gain on equity method investment   (7,143 )   (7,543 )
Foreign exchange gain on equity method investment   (550 )   (2,644 )
Deferred income taxes   (40,038 )   74,918  
Changes in operating assets and liabilities, net of effect of acquisition:        
Accounts receivable, net   (4,764 )   16,955  
Inventories   10,998     17,918  
Prepaid expenses and other assets   (5,358 )   17,438  
Accounts payable, trade   14,296     (4,818 )
Accrued salaries and wages and other liabilities   19,744     (4,389 )
Net cash provided by operating activities   167,358     215,900  
Cash flows from investing activities:        
Purchases of property and equipment   (185,688 )   (86,928 )
Purchases of patent and licensing rights   (10,115 )   (12,405 )
Proceeds from sale of property and equipment   614     1,392  
Purchases of short-term investments   (200,688 )   (200,405 )
Proceeds from maturities of short-term investments   224,171     125,922  
Proceeds from sale of short-term investments   176,981     27,174  
Purchase of acquired business, net of cash acquired   (429,162 )    
Net cash used in investing activities   (423,887 )   (145,250 )
Cash flows from financing activities:        
Proceeds from issuing shares to noncontrolling interest   4,900      
Payment of acquisition-related contingent consideration   (1,850 )   (2,775 )
Proceeds from long-term debt borrowings   670,000     468,000  
Payments on long-term debt borrowings   (523,000 )   (483,000 )
Net proceeds from issuance of common stock   92,621     17,716  
Excess tax benefit from share-based payment arrangements       (2 )
Repurchases of common stock       (104,017 )
Net cash provided by (used in) financing activities   242,671     (104,078 )
Effects of foreign exchange changes on cash and cash equivalents   185     (129 )
Net decrease in cash and cash equivalents   (13,673 )   (33,557 )
Cash and cash equivalents:        
Beginning of period   132,597     166,154  
End of period   $118,924     $132,597  
Supplemental disclosure of cash flow information:        
Cash paid for interest   $6,093     $3,588  
Cash paid for income taxes   $1,191     $8,494  
Significant non-cash transactions:        
Accrued property and equipment   $15,028     $10,173  
             

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 (CODM), for the three months and year ended June 24, 2018 and the three months and year ended June 25, 2017. 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 24, 2018   June 25, 2017   Change
Wolfspeed revenue   $110,010     $60,831     $49,179     81 %
Wolfspeed percent of revenue   26.9 %   16.9 %        
LED Products revenue   155,784     143,445     12,339     9 %
LED Products percent of revenue   38.0 %   40.0 %        
Lighting Products revenue   143,660     154,663     (11,003 )   (7 )%
Lighting Products percent of revenue   35.1 %   43.1 %        
Total revenue   $409,454     $358,939     $50,515     14 %
                 
    Year Ended        
    June 24, 2018   June 25, 2017   Change
Wolfspeed revenue   $328,638     $221,231     $107,407     49 %
Wolfspeed percent of revenue   22.0 %   15.0 %        
LED Products revenue   596,284     550,302     45,982     8 %
LED Products percent of revenue   39.9 %   37.4 %        
Lighting Products revenue   568,758     701,467     (132,709 )   (19 )%
Lighting Products percent of revenue   38.1 %   47.6 %        
Total revenue   $1,493,680     $1,473,000     $20,680     1 %
                 
    Three Months Ended        
    June 24, 2018   June 25, 2017   Change
Wolfspeed gross profit   $52,640     $27,698     $24,942     90 %
Wolfspeed gross margin   47.9 %   45.5 %        
LED Products gross profit   42,734     37,206     5,528     15 %
LED Products gross margin   27.4 %   25.9 %        
Lighting Products gross profit   29,116     36,803     (7,687 )   (21 )%
Lighting Products gross margin   20.3 %   23.8 %        
Unallocated costs   (3,540 )   (3,706 )   166     4 %
COGS acquisition related costs   (5,299 )       (5,299 )   (100 )%
Consolidated gross profit   $115,651     $98,001     $17,650     18 %
Consolidated gross margin   28.2 %   27.3 %        
                 
    Year Ended        
    June 24, 2018   June 25, 2017   Change
Wolfspeed gross profit   $158,455     $103,465     $54,990     53 %
Wolfspeed gross margin   48.2 %   46.8 %        
LED Products gross profit   157,914     151,675     6,239     4 %
LED Products gross margin   26.5 %   27.6 %        
Lighting Products gross profit   108,919     196,218     (87,299 )   (44 )%
Lighting Products gross margin   19.2 %   28.0 %        
Unallocated costs   (12,221 )   (16,786 )   4,565     27 %
COGS acquisition related costs   (5,425 )       (5,425 )   (100 )%
Consolidated gross profit   $407,642     $434,572     ($26,930 )   (6 )%
Consolidated gross margin   27.3 %   29.5 %        
                 

Reportable Segments Description

The Company's Wolfspeed segment's products consists of silicon carbide (SiC) and gallium nitride (GaN) materials, and power devices and RF devices based on silicon (Si) and wide bandgap semiconductor materials. The Company's LED Products segment's products consists of LED chips and LED components. The Company's Lighting Products segment's products consist of LED lighting systems and lamps.

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 loss must be included to reconcile the consolidated gross profit presented in the preceding table to the Company's consolidated loss 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's 401(k) Plan.

The cost of goods sold (COGS) acquisition related cost adjustment includes inventory fair value amortization of the fair value increase to inventory recognized at the date of acquisition, and acquisition costs resulting from the purchase of certain assets from Infineon'sRF Power (RF Power) business in our fiscal third quarter, impacting cost of revenue for fiscal 2018. These costs were not allocated to the reportable segments’ gross profit for fiscal 2018 because they represent an adjustment which does not provide comparability to the corresponding prior period and therefore were not reviewed by our CODM when evaluating segment performance and allocating resources.

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 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:

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.

Costs associated with purchase of RF Power business. The Company incurred transaction, transition, and integration costs in fiscal 2018 in conjunction with the purchase of certain assets of the RF Power business. Additionally, this includes the inventory cost basis step-up on the acquired inventories. Cree excludes these items because they have no direct correlation to the ongoing operating results of Cree's business.

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.

LED Products segment restructuring charges or gains. In June 2015, Cree’s board of directors approved a plan to restructure the LED Products segment. 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 included 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.

Lighting Products segment restructuring charges or gains. In April 2018, the Company approved a plan to restructure the Lighting Products segment. The restructuring, which is expected to be completed during the first quarter of fiscal 2019, aims to realign the Company's cost base with the long-range business strategy that was announced February 26, 2018. The components of the restructuring include the sale or abandonment of certain equipment, facility consolidation, and 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 believe these charges are reflective of ongoing operating results. Similarly, Cree does not consider the realized losses on sale of assets relating to the restructuring to be reflective of ongoing operating results.

Goodwill impairment charges. The Company determined that the carrying value of the Lighting Products segment was in excess of the segment's fair value during the third quarter of fiscal 2018 in connection with the preparation of the financial statements for such period, resulting in an impairment charge. Cree excludes this item from its non-GAAP measures because it is a non-cash expense that Cree does not believe to be reflective of ongoing operating results.

Transaction costs and termination fee associated with the terminated sale of the Wolfspeed business. The Company incurred transaction costs in conjunction with the previously proposed sale of its Wolfspeed business to Infineon. In addition, as a result of the termination of the agreement to sell the Wolfspeed business, Infineon paid a termination fee to the Company. Because these costs were incurred, and the termination fee received, relative to a portion of the business which was previously reported as discontinued operations in fiscal 2017, Cree does not consider the transaction costs and the receipt of termination fees to be reflective of ongoing operating results, and as such, has excluded these items from its non-GAAP measures.

Severance pay associated with termination of key executive personnel. The Company incurred costs in fiscal 2018 in conjunction with the termination of key executive personnel. Cree excludes these items because they have no direct correlation to the ongoing operating results of Cree's business.

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.

Foreign exchange gain on acquisition of RF Power business. The Company incurred foreign exchange gains on hedges purchased for the RF Power business asset purchase. Cree excludes the impact of this gain because it is not considered to be reflective of ongoing operations.

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. Non-GAAP net income is presented using a non-GAAP tax rate. The Company’s non-GAAP tax rate represents a recalculation of the GAAP tax rate reflecting the exclusion of the non-GAAP items.

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 excludes certain mandatory expenditures such as debt service.

         

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 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
GAAP gross profit   $115,651     $98,001     $407,642     $434,572  
GAAP gross margin percentage   28.2 %   27.3 %   27.3 %   29.5 %
Adjustments:                
Stock-based compensation expense   1,970     2,415     7,372     10,427  
Costs related to the RF Power acquisition   5,299         5,425      
Non-GAAP gross profit   $122,920     $100,416     $420,439     $444,999  
Non-GAAP gross margin percentage   30.0 %   28.0 %   28.1 %   30.2 %
                         
Non-GAAP Operating Income        
    Three Months Ended   Year Ended
    June 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
GAAP operating loss   ($20,614 )   ($13,067 )   ($329,087 )   ($18,672 )
GAAP operating income percentage   (5.0 )%   (3.6 )%   (22.0 )%   (1.3 )%
Adjustments:                
Stock-based compensation expense:                
Cost of revenue, net   1,970     2,415     7,372     10,427  
Research and development   1,553     2,151     8,383     10,619  
Sales, general and administrative   6,361     4,741     27,448     26,679  
Total stock-based compensation expense   9,884     9,307     43,203     47,725  
Costs related to the RF Power acquisition   9,567         13,891      
Amortization or impairment of acquisition-related intangibles   9,735     6,792     30,772     27,499  
Costs associated with LED business restructuring               15  
Costs associated with Lighting business restructuring   5,964         5,964      
Goodwill impairment charges           247,455      
Transaction costs related to the terminated sale of the Wolfspeed business       121         11,947  
Wolfspeed transaction termination fee               (12,500 )
Executive severance           6,223      
Total adjustments to GAAP operating loss   35,150     16,220     347,508     74,686  
Non-GAAP operating income   $14,536     $3,153     $18,421     $56,014  
Non-GAAP operating income percentage   3.6 %   0.9 %   1.2 %   3.8 %
                 
Non-GAAP Non-Operating Income, net        
    Three Months Ended   Year Ended
    June 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
GAAP non-operating (loss) income, net   ($4,369 )   $9,057     $11,642     $14,008  
Adjustment:                
Net changes in the fair value of Lextar investment   2,359     (7,607 )   (7,696 )   (10,203 )
Foreign exchange gain on RF Power acquisition           (1,941 )    
Non-GAAP non-operating (loss) income, net   ($2,010 )   $1,450     $2,005     $3,805  
                 
Non-GAAP Net Income        
    Three Months Ended   Year Ended
    June 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
GAAP net loss   ($33,256 )   ($5,890 )   ($279,968 )   ($98,118 )
Adjustments:                
Stock-based compensation expense   9,884     9,307     43,203     47,725  
Costs related to the RF Power acquisition   9,567         13,891      
Amortization or impairment of acquisition-related intangibles   9,735     6,792     30,772     27,499  
Costs associated with LED business restructuring               15  
Costs associated with Lighting business restructuring   5,964         5,964      
Goodwill impairment charges           247,455      
Transaction costs related to the terminated sale of the Wolfspeed business       121         11,947  
Wolfspeed transaction termination fee               (12,500 )
Executive severance           6,223      
Net changes in the fair value of Lextar investment   2,359     (7,607 )   (7,696 )   (10,203 )
Foreign exchange gain on RF Power acquisition           (1,941 )    
Total adjustments to GAAP net loss before provision for income taxes   37,509     8,613     337,871     64,483  
Income tax effect *   7,291     1,102     (39,072 )   83,353  
Non-GAAP net income   $11,544     $3,825     $18,831     $49,718  
                 
Income per share                
Non-GAAP diluted net income per share   $0.11     $0.04     $0.19     $0.50  
                 
Shares used in diluted net income per share calculation                
Non-GAAP shares used   100,981     97,548     99,530     98,487  
                 
*Estimated income tax effect is based upon the Company's overall consolidated effective tax rate for the given period.
 
Free Cash Flow        
    Three Months Ended   Year Ended
    June 24,
2018
  June 25,
2017
  June 24,
2018
  June 25,
2017
Cash flow from operations   $41,937     $52,746     $167,358     $215,900  
Less: PP&E spending   (57,256 )   (30,033 )   (185,688 )   (86,928 )
Less: Patents spending   (2,202 )   (3,529 )   (10,115 )   (12,405 )
Total free cash flow   ($17,521 )   $19,184     ($28,445 )   $116,567  
                 
     

CREE, INC.

Business Outlook Unaudited GAAP to Non-GAAP Reconciliation

(in millions)

     
    Three Months Ended
    September 23, 2018
GAAP net loss outlook range   ($9) to ($14)
Adjustments:    
Stock-based compensation expense   12
Amortization or impairment of acquired intangibles   9
Lighting Products restructuring costs   2
Total adjustments to GAAP net loss before provision for income taxes   23
Income tax effect   0 to 1
Non-GAAP net income outlook range   $10 to $14

 

Source: Cree, Inc.

Cree, Inc.
Raiford Garrabrant, 919-407-7895
Director, Investor Relations
investorrelations@cree.com