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): January 30, 2019



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 January 30, 2019, Cree, Inc. (the “Company”) issued a press release announcing results for the fiscal quarter ended December 30, 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: January 30, 2019
 



Exhibit

Exhibit 99.1


 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12663167&doc=3




January 30, 2019


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


DURHAM, N.C. -- Cree, Inc. (Nasdaq: CREE) today announced financial results for its second quarter of fiscal 2019, ended December 30, 2018. Revenue for the second quarter of fiscal 2019 was $413 million, which represents a 12% increase compared to revenue of $368 million for the second quarter of fiscal 2018. GAAP net loss for the second quarter of fiscal 2019 was $2 million, or $0.02 per diluted share. This compares to a GAAP net income of $14 million, or $0.14 per diluted share, for the second quarter of fiscal 2018. On a non-GAAP basis, net income for the second quarter of fiscal 2019 was $23 million, or $0.23 per diluted share, compared to non-GAAP net loss for the second quarter of fiscal 2018 of $1 million, or $0.01 per diluted share.

“We delivered excellent results in the second quarter, with non-GAAP earnings per share that exceeded the top end of our target range driven by another record quarter for Wolfspeed combined with gross margin improvement in all three businesses," stated Gregg Lowe, Cree CEO. "This performance is particularly gratifying when considering the current challenges associated with tariffs and global trade tensions. While we’re certainly not immune to the turmoil in our served markets, our business is demonstrating a resiliency that we believe shows we are on the right track with our strategy.”

Business Outlook:

For its third quarter of fiscal 2019 ending March 31, 2019, Cree targets revenue in a range of $385 million to $405 million. GAAP net loss is targeted at $5 million to $13 million, or $0.05 to $0.12 per diluted share. Non-GAAP net income is targeted to be in a range of $13 million to $19 million, or $0.13 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, interest accretion on our convertible notes' issue costs and fair value adjustments, and executive severance. 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 second quarter results and the fiscal 2019 third 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.

1


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 fully realize the anticipated benefits of the acquisition of the Infineon Technologies AG (Infineon) RF Power business; 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

2


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
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
Revenue, net

$413,036

 

$367,870

 

$821,303

 

$728,268

Cost of revenue, net
277,806

 
275,267

 
557,905

 
535,333

Gross profit
135,230

 
92,603

 
263,398

 
192,935

Gross margin percentage
32.7
%
 
25.2
 %
 
32.1
%
 
26.5
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
49,181

 
39,776

 
95,146

 
81,635

Sales, general and administrative
72,120

 
68,076

 
144,810

 
131,040

Amortization or impairment of acquisition-related intangibles
6,345

 
6,792

 
14,840

 
13,584

Loss on disposal or impairment of long-lived assets
178

 
4,262

 
671

 
7,087

Total operating expenses
127,824

 
118,906

 
255,467

 
233,346

 
 
 
 
 
 
 
 
Operating income (loss)
7,406

 
(26,303
)
 
7,931

 
(40,411
)
Operating loss percentage
1.8
%
 
(7.2
)%
 
1.0
%
 
(5.5
)%
 
 
 
 
 
 
 
 
Non-operating (expense) income, net
(5,464
)
 
26,729

 
(14,968
)
 
25,662

Income (loss) before income taxes
1,942

 
426

 
(7,037
)
 
(14,749
)
Income tax expense (benefit)
4,423

 
(13,326
)
 
6,577

 
(8,629
)
Net (loss) income
(2,481
)
 
13,752

 
(13,614
)
 
(6,120
)
Net (loss) income attributable to non-controlling interest
(31
)
 
31

 
(97
)
 
16

Net (loss) income attributable to controlling interest

($2,450
)
 

$13,721

 

($13,517
)
 

($6,136
)
 
 
 
 
 
 
 
 
Diluted loss per share

($0.02
)
 

$0.14

 

($0.13
)
 

($0.06
)
 
 
 
 
 
 
 
 
Shares used in diluted per share calculation
102,871

 
100,763

 
102,396

 
98,499





4



CREE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
December 30,
2018
 
June 24,
2018
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents, and short-term investments

$723,668

 

$387,085

Accounts receivable, net
192,052

 
153,875

Income tax receivable
1,295

 
2,434

Inventories
313,312

 
296,015

Prepaid expenses
25,314

 
28,310

Other current assets
20,570

 
20,191

Current assets held for sale

 
2,180

Total current assets
1,276,211

 
890,090

Property and equipment, net
675,940

 
661,319

Goodwill
620,330

 
620,330

Intangible assets, net
374,219

 
390,054

Other long-term investments
48,431

 
57,501

Deferred income taxes
7,939

 
6,451

Other assets
11,480

 
11,800

Total assets

$3,014,550

 

$2,637,545

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

$143,455

 

$151,307

Accrued salaries and wages
59,974

 
53,458

Income taxes payable
2,092

 

Accrued contract liabilities
53,912

 

Other current liabilities
35,292

 
43,528

Total current liabilities
294,725

 
248,293

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt

 
292,000

Convertible notes, net
458,000

 

Deferred income taxes
2,235

 
3,056

Other long-term liabilities
36,085

 
22,115

Total long-term liabilities
496,320

 
317,171

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock
129

 
127

Additional paid-in-capital
2,703,601

 
2,549,123

Accumulated other comprehensive income, net of taxes
856

 
596

Accumulated deficit
(485,928
)
 
(482,710
)
Total shareholders’ equity
2,218,658

 
2,067,136

Non-controlling interest
4,847

 
4,945

Total liabilities and equity

$3,014,550

 

$2,637,545




5


CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net (loss) income

($13,614
)
 

($6,120
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
79,438

 
74,634

Amortization of debt issuance costs and discount
7,197

 

Stock-based compensation
25,062

 
22,162

Loss on disposal or impairment of long-lived assets
671

 
7,087

Amortization of premium/discount on investments
1,545

 
2,631

Loss (gain) on equity investment
8,544

 
(21,479
)
Foreign exchange loss (gain) on equity investment
526

 
(672
)
Deferred income taxes
(1,969
)
 
(11,801
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(38,104
)
 
(4,203
)
Inventories
(16,782
)
 
11,339

Prepaid expenses and other assets
3,054

 
5,014

Accounts payable, trade
(9,195
)
 
17,925

Accrued salaries and wages and other liabilities
79,893

 
9,295

Net cash provided by operating activities
126,266

 
105,812

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(73,305
)
 
(85,222
)
Purchases of patent and licensing rights
(5,461
)
 
(4,932
)
Proceeds from sale of property and equipment
234

 
380

Purchases of short-term investments
(210,669
)
 
(158,327
)
Proceeds from maturities of short-term investments
83,754

 
138,435

Proceeds from sale of short-term investments
26,692

 
11,938

Net cash used in investing activities
(178,755
)
 
(97,728
)
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

 
160,000

Payments on long-term debt borrowings
(387,000
)
 
(181,000
)
Proceeds from convertible notes
575,000

 

Payments of debt issuance costs
(12,938
)
 

Net proceeds from issuance of common stock
19,672

 
46,550

Net cash provided by financing activities
289,734

 
28,600

Effects of foreign exchange changes on cash and cash equivalents
(136
)
 
407

Net increase in cash and cash equivalents
237,109

 
37,091

Cash and cash equivalents:
 
 
 
Beginning of period
118,924

 
132,597

End of period

$356,033

 

$169,688

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

$16,348

 

$19,039


6


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 and six months ended December 30, 2018 and the three and six months ended December 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
 
 
 
 
 
December 30,
2018
 
December 24,
2017
 
Change
Wolfspeed revenue

$135,331

 

$70,572

 

$64,759

 
92
 %
Percent of revenue
32.8
%
 
19.2
%
 
 
 
 
LED Products revenue
145,172

 
152,682

 
(7,510
)
 
(5
)%
Percent of revenue
35.1
%
 
41.5
%
 
 
 
 
Lighting Products revenue
132,533

 
144,616

 
(12,083
)
 
(8
)%
Percent of revenue
32.1
%
 
39.3
%
 
 
 
 
Total revenue

$413,036

 

$367,870

 

$45,166

 
12
 %

 
Six Months Ended
 
 
 
 
 
December 30,
2018
 
December 24,
2017
 
Change
Wolfspeed revenue

$262,706

 

$136,726

 

$125,980

 
92
 %
Percent of revenue
32.0
%
 
18.8
%
 
 
 
 
LED Products revenue
291,974

 
297,202

 
(5,228
)
 
(2
)%
Percent of revenue
35.6
%
 
40.8
%
 
 
 
 
Lighting Products revenue
266,623

 
294,340

 
(27,717
)
 
(9
)%
Percent of revenue
32.5
%
 
40.4
%
 
 
 
 
Total revenue

$821,303

 

$728,268

 

$93,035

 
13
 %









7


 
Three Months Ended
 
 
 
 
 
December 30,
2018
 
December 24,
2017
 
Change
Wolfspeed gross profit

$64,681

 

$34,133

 

$30,548

 
89
 %
Wolfspeed gross margin
47.8
%
 
48.4
%
 
 
 
 
LED Products gross profit
43,522

 
38,606

 
4,916

 
13
 %
LED Products gross margin
30.0
%
 
25.3
%
 
 
 
 
Lighting Products gross profit
34,069

 
22,964

 
11,105

 
48
 %
Lighting Products gross margin
25.7
%
 
15.9
%
 
 
 
 
Unallocated costs
(7,028
)
 
(3,100
)
 
(3,928
)
 
(127
)%
COGS acquisition related costs
(14
)
 

 
(14
)
 
(100
)%
Consolidated gross profit

$135,230

 

$92,603

 

$42,627

 
46
 %
Consolidated gross margin
32.7
%
 
25.2
%
 
 
 
 

 
Six Months Ended
 
 
 
 
 
December 30,
2018
 
December 24,
2017
 
Change
Wolfspeed gross profit

$125,096

 

$66,531

 

$58,565

 
88
 %
Wolfspeed gross margin
47.6
%
 
48.7
%
 
 
 
 
LED Products gross profit
84,805

 
77,416

 
7,389

 
10
 %
LED Products gross margin
29.0
%
 
26.0
%
 
 
 
 
Lighting Products gross profit
65,127

 
54,847

 
10,280

 
19
 %
Lighting Products gross margin
24.4
%
 
18.6
%
 
 
 
 
Unallocated costs
(10,404
)
 
(5,859
)
 
(4,545
)
 
(78
)%
COGS acquisition related costs
(1,226
)
 

 
(1,226
)
 
(100
)%
Consolidated gross profit

$263,398

 

$192,935

 

$70,463

 
37
 %
Consolidated gross margin
32.1
%
 
26.5
%
 
 
 
 


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 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.

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.

8


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.

9


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, completed during the second quarter of fiscal 2019, aimed to realign the Company's cost base with the long-range business strategy that was announced February 26, 2018. The components of the restructuring included the sale or abandonment of certain equipment, facility consolidation, and elimination of certain positions. Because these charges related to assets which had 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.
Severance pay associated with termination of executive personnel. The Company incurred costs in fiscal 2018 and fiscal 2019 in conjunction with the termination of certain 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.
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.

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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
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
GAAP gross profit

$135,230

 

$92,603

 

$263,398

 

$192,935

GAAP gross margin percentage
32.7
%
 
25.2
%
 
32.1
%
 
26.5
%
Adjustment:
 
 
 
 
 
 
 
Stock-based compensation expense
2,117

 
1,898

 
3,989

 
3,673

Costs related to the RF Power acquisition
14

 

 
1,226

 

Total adjustments to GAAP gross profit

$2,131

 

$1,898

 

$5,215

 

$3,673

Non-GAAP gross profit

$137,361

 

$94,501

 

$268,613

 

$196,608

Non-GAAP gross margin percentage
33.3
%
 
25.7
%
 
32.7
%
 
27.0
%

Non-GAAP Operating Income
 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
GAAP operating income (loss)

$7,406

 

($26,303
)
 

$7,931

 

($40,411
)
GAAP operating income (loss) percentage
1.8
%
 
(7.2
)%
 
1.0
%
 
(5.5
)%
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of revenue, net
2,117

 
1,898

 
3,989

 
3,673

Research and development
2,629

 
1,999

 
4,762

 
4,456

Sales, general and administrative
8,264

 
8,129

 
16,311

 
14,031

Total stock-based compensation expense
13,010

 
12,026

 
25,062

 
22,160

Amortization or impairment of acquisition-related intangibles
6,345

 
6,792

 
14,840

 
13,584

Costs associated with Lighting business restructuring
(497
)
 

 
3,989

 

Costs related to the RF Power acquisition
199

 

 
1,833

 

Executive Severance

 
4,880

 

 
4,880

Total adjustments to GAAP operating loss
19,057

 
23,698

 
45,724

 
40,624

Non-GAAP operating income (loss)

$26,463

 

($2,605
)
 

$53,655

 

$213

Non-GAAP operating income percentage
6.4
%
 
(0.7
)%
 
6.5
%
 
 %


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Non-GAAP Non-Operating Income, net
 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
GAAP non-operating (expense) income, net

($5,464
)
 

$26,729

 

($14,968
)
 

$25,662

Adjustment:
 
 
 
 
 
 
 
Net changes in the fair value of the Lextar investment
1,809

 
(25,219
)
 
9,083

 
(22,151
)
Accretion on convertible notes
5,411

 

 
7,197

 

Non-GAAP non-operating income, net

$1,756

 

$1,510

 

$1,312

 

$3,511


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Non-GAAP Net Income (Loss)
 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
GAAP net (loss) income

($2,450
)
 

$13,721

 

($13,517
)
 

($6,136
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
13,010

 
12,026

 
25,062

 
22,160

Amortization or impairment of acquisition-related intangibles
6,345

 
6,792

 
14,840

 
13,584

Costs associated with Lighting business restructuring
(497
)
 

 
3,989

 

Costs related to the RF Power acquisition
199

 

 
1,833

 

Executive Severance

 
4,880

 

 
4,880

Net changes in the fair value of the Lextar investment
1,809

 
(25,219
)
 
9,083

 
(22,151
)
Accretion of convertible notes
5,411

 

 
7,197

 

Total adjustments to GAAP net loss before provision for income taxes
26,277

 
(1,521
)
 
62,004

 
18,473

Income tax effect
(656
)
 
(12,864
)
 
(3,317
)
 
(8,890
)
Non-GAAP net income (loss)

$23,171

 

($664
)
 

$45,170

 

$3,447

 
 
 
 
 
 
 
 
Non-GAAP earnings (loss) per share
 
 
 
 
 
 
 
Non-GAAP diluted earnings (loss) per share

$0.23

 

($0.01
)
 

$0.44

 

$0.03

 
 
 
 
 
 
 
 
Shares used in non-GAAP diluted earnings (loss) per share calculation
 
 
 
 
 
 
 
Non-GAAP shares used
102,871

 
100,763

 
102,396

 
98,499



Free Cash Flow
 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
Cash flows from operations

$92,274

 

$51,689

 

$126,266

 

$105,812

Less: PP&E spending
(36,716
)
 
(48,772
)
 
(73,305
)
 
(85,222
)
Less: Patents spending
(2,308
)
 
(2,456
)
 
(5,461
)
 
(4,932
)
Total free cash flow

$53,250

 

$461

 

$47,500

 

$15,658












13


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

 
 
Three Months Ended
 
 
March 31, 2019
GAAP net loss outlook range
 
($5) to ($13)
Adjustments:
 
 
Stock-based compensation expense
 
14
Amortization or impairment of acquired intangibles
 
6
Accretion on convertible notes
 
6
Executive severance
 
1
Total adjustments to GAAP net loss before provision for income taxes
 
27
Income tax effect
 
2
Non-GAAP net income outlook range
 
$13 to $19


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

Source: Cree, Inc.


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