Document


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): October 16, 2018



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))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company    [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    [ ]






Item 2.02
Results of Operations and Financial Condition
    
On October 16, 2018, Cree, Inc. (the “Company”) issued a press release announcing results for the fiscal quarter ended September 23, 2018.  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
 






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/ Neill P. Reynolds
 
 
 
Neill P. Reynolds
 
 
 
Executive Vice President and Chief Financial Officer


Date: October 16, 2018
 



Exhibit

Exhibit 99.1


 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12500235&doc=3




October 16, 2018


Cree Reports Financial Results for the First Quarter of Fiscal Year 2019


DURHAM, N.C. -- Cree, Inc. (Nasdaq: CREE) today announced financial results for its first quarter of fiscal 2019, ended September 23, 2018. Revenue for the first quarter of fiscal 2019 was $408 million, which represents a 13% increase compared to revenue of $360 million for the first quarter of fiscal 2018. GAAP net loss for the first quarter of fiscal 2019 was $11 million, or $0.11 per diluted share. This compares to a GAAP net loss of $20 million, or $0.20 per diluted share, for the first quarter of fiscal 2018. On a non-GAAP basis, net income for the first quarter of fiscal 2019 was $22 million, or $0.22 per diluted share, compared to non-GAAP net income for the first quarter of fiscal 2018 of $4 million, or $0.04 per diluted share.

“Fiscal year 2019 is off to a strong start, with first quarter non-GAAP earnings per share that exceeded the top end of our target range driven by another quarter of robust growth in Wolfspeed combined with strong gross margin improvement in LED Products and Lighting," stated Gregg Lowe, Cree CEO. "This is an excellent result given the headwinds facing the businesses related to tariffs and global trade tensions. While these headwinds may persist for some time, we remain optimistic about the opportunity to increase shareholder value over the long term by executing our strategic plan.”

Business Outlook:

For its second quarter of fiscal 2019 ending December 30, 2018, Cree targets revenue in a range of $398 million to $418 million. GAAP net loss is targeted at $5 million to $10 million, or $0.05 to $0.10 per diluted share. Non-GAAP net income is targeted to be in a range of $15 million to $19 million, or $0.15 to $0.19 earnings per diluted share. Targeted non-GAAP income excludes $25 million of expenses, net of tax, related to stock-based compensation expense, the amortization or impairment of acquisition-related intangibles and interest accretion on our convertible notes' issue costs and fair value adjustments. 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 fiscal 2019 first quarter results and the fiscal 2019 second quarter 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.

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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 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's 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 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 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,

2


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 24, 2018, 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® and Wolfspeed® are registered trademarks of Cree, Inc.

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CREE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(in thousands, except per share amounts and percentages)
 
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Revenue, net

$408,267

 

$360,398

Cost of revenue, net
280,099

 
260,066

Gross profit
128,168

 
100,332

Gross margin percentage
31.4
%
 
27.8
 %
 
 
 
 
Operating expenses:
 
 
 
Research and development
45,965

 
41,859

Sales, general and administrative
72,690

 
62,964

Amortization or impairment of acquisition-related intangibles
8,495

 
6,792

Loss on disposal or impairment of long-lived assets
493

 
2,825

Total operating expenses
127,643

 
114,440

 
 
 
 
Operating income (loss)
525

 
(14,108
)
Operating loss percentage
0.1
%
 
(3.9
)%
 
 
 
 
Non-operating expense, net
(9,505
)
 
(1,068
)
Loss before income taxes
(8,980
)
 
(15,176
)
Income tax expense
2,154

 
4,697

Net loss
(11,134
)
 
(19,873
)
Net loss attributable to non-controlling interest
(67
)
 
(16
)
Net loss attributable to controlling interest

($11,067
)
 

($19,857
)
 
 
 
 
Diluted loss per share
($0.11
)
 

($0.20
)
 
 
 
 
Shares used in diluted per share calculation
101,884

 
97,811





4



CREE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
September 23,
2018
 
June 24,
2018
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents, and short-term investments

$665,540

 

$387,085

Accounts receivable, net
207,565

 
153,875

Income tax receivable
2,837

 
2,434

Inventories
306,389

 
296,015

Prepaid expenses
26,674

 
28,310

Other current assets
20,793

 
20,191

Current assets held for sale

 
2,180

Total current assets
1,229,798

 
890,090

Property and equipment, net
668,299

 
661,319

Goodwill
620,330

 
620,330

Intangible assets, net
381,396

 
390,054

Other long-term investments
50,240

 
57,501

Deferred income taxes
5,713

 
6,451

Other assets
11,838

 
11,800

Total assets

$2,967,614

 

$2,637,545

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

$147,214

 

$151,307

Accrued salaries and wages
56,552

 
53,458

Income taxes payable
137

 

Accrued contract liabilities
51,250

 

Other current liabilities
38,443

 
43,528

Total current liabilities
293,596

 
248,293

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt

 
292,000

Convertible notes, net
452,590

 

Deferred income taxes
2,331

 
3,056

Other long-term liabilities
20,399

 
22,115

Total long-term liabilities
475,320

 
317,171

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock
127

 
127

Additional paid-in-capital
2,676,507

 
2,549,123

Accumulated other comprehensive income, net of taxes
664

 
596

Accumulated deficit
(483,478
)
 
(482,710
)
Total shareholders’ equity
2,193,820

 
2,067,136

Non-controlling interest
4,878

 
4,945

Total liabilities and equity

$2,967,614

 

$2,637,545




5


CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss

($11,134
)
 

($19,873
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,812

 
37,400

Amortization of debt issuance costs and discount
1,786

 

Stock-based compensation
12,053

 
10,135

Loss on disposal or impairment of long-lived assets
494

 
2,824

Amortization of premium/discount on investments
787

 
1,310

Loss on equity investment
6,664

 
3,267

Foreign exchange loss (gain) on equity investment
597

 
(199
)
Deferred income taxes
(2
)
 
3,133

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(53,559
)
 
(5,996
)
Inventories
(10,144
)
 
6,960

Prepaid expenses and other assets
96

 
9,323

Accounts payable, trade
(3,703
)
 
6,442

Accrued salaries and wages and other liabilities
50,245

 
(603
)
Net cash provided by operating activities
33,992

 
54,123

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(36,589
)
 
(36,450
)
Purchases of patent and licensing rights
(3,153
)
 
(2,476
)
Proceeds from sale of property and equipment
230

 
327

Purchases of short-term investments
(145,843
)
 
(117,607
)
Proceeds from maturities of short-term investments
58,300

 
119,928

Proceeds from sale of short-term investments
24,790

 
1,974

Net cash used in investing activities
(102,265
)
 
(34,304
)
Cash flows from financing activities:
 
 
 
Proceeds from issuing shares to non-controlling interest

 
4,900

Payment of acquisition-related contingent consideration

 
(1,850
)
Proceeds from long-term debt borrowings
95,000

 
95,000

Payments on long-term debt borrowings
(387,000
)
 
(99,000
)
Proceeds from convertible notes
575,000

 

Payments of debt issuance costs
(12,938
)
 

Net proceeds from issuance of common stock
15,491

 
119

Net cash provided by (used in) financing activities
285,553

 
(831
)
Effects of foreign exchange changes on cash and cash equivalents
113

 
473

Net increase in cash and cash equivalents
217,393

 
19,461

Cash and cash equivalents:
 
 
 
Beginning of period
118,924

 
132,597

End of period

$336,317

 

$152,058

Supplemental disclosure of cash flow information:
 
 
 
Significant non-cash transactions:
 
 
 
Accrued property and equipment

$15,445

 

$18,909


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

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 ended September 23, 2018 and the three months ended September 24, 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
 
 
 
 
 
September 23,
2018
 
September 24,
2017
 
Change
Wolfspeed revenue

$127,375

 

$66,154

 

$61,221

 
93
 %
Percent of revenue
31.2
%
 
18.4
%
 
 
 
 
LED Products revenue
146,802

 
144,520

 
2,282

 
2
 %
Percent of revenue
36.0
%
 
40.1
%
 
 
 
 
Lighting Products revenue
134,090

 
149,724

 
(15,634
)
 
(10
)%
Percent of revenue
32.8
%
 
41.5
%
 
 
 
 
Total revenue

$408,267

 

$360,398

 

$47,869

 
13
 %

 
Three Months Ended
 
 
 
 
 
September 23,
2018
 
September 24,
2017
 
Change
Wolfspeed gross profit

$60,415

 

$32,398

 

$28,017

 
86
 %
Wolfspeed gross margin
47.4
%
 
49.0
%
 
 
 
 
LED Products gross profit
41,283

 
38,810

 
2,473

 
6
 %
LED Products gross margin
28.1
%
 
26.9
%
 
 
 
 
Lighting Products gross profit
31,058

 
31,883

 
(825
)
 
(3
)%
Lighting Products gross margin
23.2
%
 
21.3
%
 
 
 
 
Unallocated costs
(3,376
)
 
(2,759
)
 
(617
)
 
(22
)%
COGS acquisition related costs
(1,212
)
 

 
(1,212
)
 
(100
)%
Consolidated gross profit

$128,168

 

$100,332

 

$27,836

 
28
 %
Consolidated gross margin
31.4
%
 
27.8
%
 
 
 
 

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 include 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 costs being allocated.

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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 RF Power acquisition costs impacting cost of revenue for fiscal 2019. These costs were not allocated to the reportable segments' gross profit for fiscal 2019 because they represent an adjustment which does not provide comparability to the corresponding prior period and therefore were not reviewed by the Company's CODM when evaluating segment performance and allocating resources.

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 diluted earnings per 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 related to the RF Power acquisition. The Company incurred transaction, transition and integration costs in fiscal 2018 and 2019 in conjunction with the purchase of certain assets of the Infineon Technologies AG RF Power ("RF Power") business. 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.

8


Lighting Products segment restructuring charges or gains. In April 2018, the Company approved a plan to restructure the Lighting Products segment. In September 2018, the Company revised the plan to include additional cost saving initiatives. The restructuring, which is expected to be completed during the second 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.
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.
Accretion on convertible notes. In August 2018, the Company issued $575 million in convertible notes resulting in interest accretion on the convertible notes' issue costs and fair value adjustments. Management considers these items as either limited in term or having no impact on the Company's cash flows, and therefore has excluded such items to facilitate a review of current operating performance and comparisons to our past operating performance.
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.

9


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

Non-GAAP Gross Margin
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
GAAP gross profit

$128,168

 

$100,332

GAAP gross margin percentage
31.4
%
 
27.8
%
Adjustment:
 
 
 
Stock-based compensation expense
1,872

 
1,775

Costs related to the RF Power acquisition
1,212

 

Total adjustments to GAAP gross profit

$3,084

 

$1,775

Non-GAAP gross profit

$131,252

 

$102,107

Non-GAAP gross margin percentage
32.1
%
 
28.3
%

Non-GAAP Operating Income
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
GAAP operating income (loss)

$525

 

($14,108
)
GAAP operating income (loss) percentage
0.1
%
 
(3.9
)%
Adjustments:
 
 
 
Stock-based compensation expense:
 
 
 
Cost of revenue, net
1,872

 
1,775

Research and development
2,133

 
2,457

Sales, general and administrative
8,048

 
5,903

Total stock-based compensation expense
12,053

 
10,135

Amortization or impairment of acquisition-related intangibles
8,495

 
6,792

Costs associated with Lighting business restructuring
4,484

 

Costs related to the RF Power acquisition
1,634

 

Total adjustments to GAAP operating loss
26,666

 
16,927

Non-GAAP operating income

$27,191

 

$2,819

Non-GAAP operating income percentage
6.7
%
 
0.8
 %

Non-GAAP Non-Operating (Expense) Income, net
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
GAAP non-operating (expense), net

($9,505
)
 

($1,068
)
Adjustment:
 
 
 
Net changes in the fair value of the Lextar investment
7,274

 
3,067

Accretion on convertible notes
1,786

 

Non-GAAP non-operating (expense) income, net

($445
)
 

$1,999


10




Non-GAAP Net Income
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
GAAP net loss

($11,067
)
 

($19,857
)
Adjustments:
 
 
 
Stock-based compensation expense
12,053

 
10,135

Amortization or impairment of acquisition-related intangibles
8,495

 
6,792

Costs associated with Lighting business restructuring
4,484

 

Costs related to the RF Power acquisition
1,634

 

Net changes in the fair value of the Lextar investment
7,274

 
3,067

Accretion of convertible notes
1,786

 

Total adjustments to GAAP net loss before provision for income taxes
35,726

 
19,994

Income tax effect
(2,661
)
 
3,974

Non-GAAP net income

$21,998

 

$4,111

 
 
 
 
Non-GAAP earnings per share
 
 
 
Non-GAAP diluted earnings per share

$0.22

 

$0.04

 
 
 
 
Shares used in non-GAAP diluted earnings per share calculation
 
 
 
Non-GAAP shares used
101,884

 
97,811



Free Cash Flow
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Cash flows from operations

$33,992

 

$54,123

Less: PP&E spending
(36,589
)
 
(36,450
)
Less: Patents spending
(3,153
)
 
(2,476
)
Total free cash flow

($5,750
)
 

$15,197





















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CREE, INC.
Business Outlook Unaudited GAAP to Non-GAAP Reconciliation
(in millions)

 
 
Three Months Ended
 
 
December 30, 2018
GAAP net loss outlook range
 
($6) to ($10)
Adjustments:
 
 
Stock-based compensation expense
 
13
Amortization or impairment of acquired intangibles
 
7
Accretion on convertible notes
 
6
Total adjustments to GAAP net loss before provision for income taxes
 
26
Income tax effect
 
0 to 1
Non-GAAP net income outlook range
 
$15 to $19


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

Source: Cree, Inc.


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