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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2018
or
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21154
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12666826&doc=12
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina
 
56-1572719
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4600 Silicon Drive
Durham, North Carolina
 
27703
(Address of principal executive offices)
 
(Zip Code)
(919) 407-5300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [    ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [ X ] No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]
 
Accelerated filer [    ]
Non-accelerated filer [    ]
 
Smaller reporting company [    ]
 
 
 
 
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 Securities Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No[ X]
The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of January 25, 2019, was 103,224,252.


Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended December 30, 2018
INDEX
 
Description
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

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PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
CREE, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
December 30,
2018
 
June 24,
2018
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$356,033

 

$118,924

Short-term investments
367,635

 
268,161

Total 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 (Note 2)
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

Commitments and contingencies (Note 12)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at December 30, 2018 and June 24, 2018; none issued and outstanding

 

Common stock, par value $0.00125; 200,000 shares authorized at December 30, 2018 and June 24, 2018; 103,073 issued and outstanding at December 30, 2018 and 101,488 shares issued and outstanding at June 24, 2018
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

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 
 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
 
(In thousands, except per share amounts)
 
 
 
 
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

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
)
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
)
(Loss) earnings per share:
 
 
 
 
 
 

Basic

($0.02
)
 

$0.14

 

($0.13
)
 

($0.06
)
Diluted

($0.02
)
 

$0.14

 

($0.13
)
 

($0.06
)
Weighted average shares used in per share calculation:
 
 
 
 
 
 
 
Basic
102,871

 
99,184

 
102,396

 
98,499

Diluted
102,871

 
100,763

 
102,396

 
98,499

The accompanying notes are an integral part of the consolidated financial statements.

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CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 
Three Months Ended
 
Six Months Ended
 
December 30,
2018
 
December 24,
2017
 
December 30,
2018
 
December 24,
2017
 
(In thousands)
 
 
 
 
Net (loss) income

($2,481
)
 

$13,752

 

($13,614
)
 

($6,120
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation (loss) gain
(877
)
 
(424
)
 
(533
)
 
1,218

Net unrealized gain (loss) on available-for-sale securities, net of tax benefit of $0 and $0, respectively
1,069

 
(3,660
)
 
794

 
(3,700
)
Other comprehensive income (loss):
192

 
(4,084
)
 
261

 
(2,482
)
Comprehensive (loss) income
(2,289
)
 
9,668

 
(13,353
)
 
(8,602
)
Net (loss) income attributable to non-controlling interest
(31
)
 
31

 
(97
)
 
16

Comprehensive (loss) income attributable to controlling interest

($2,258
)
 

$9,637

 

($13,256
)
 

($8,618
)
The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 24, 2018
101,488

 

$127

 

$2,549,123

 

($482,710
)
 

$596

 

$2,067,136

 

$4,945

 

$2,072,081

Net loss

 

 

 
(11,067
)
 

 
(11,067
)
 
(67
)
 
(11,134
)
Currency translation gain, net of tax benefit of $0

 

 

 

 
343

 
343

 

 
343

Unrealized loss on available-for-sale securities, net of tax expense of $0

 

 

 

 
(275
)
 
(275
)
 

 
(275
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(10,999
)
 
(67
)
 
(11,066
)
Income tax expense from stock option exercises

 

 
(10,828
)
 

 

 
(10,828
)
 

 
(10,828
)
Stock-based compensation

 

 
12,117

 

 

 
12,117

 

 
12,117

Exercise of stock options and issuance of shares
1,032

 
1

 
15,503

 

 

 
15,504

 

 
15,504

Adoption of ASC 606

 

 

 
10,299

 

 
10,299

 

 
10,299

Convertible note issuance

 

 
110,591

 

 

 
110,591

 

 
110,591

Balance at September 23, 2018
102,520

 

$128

 

$2,676,506

 

($483,478
)
 

$664

 

$2,193,820

 

$4,878

 

$2,198,698

Net loss

 

 

 
(2,450
)
 

 
(2,450
)
 
(31
)
 
(2,481
)
Currency translation loss, net of tax benefit of $0

 

 

 

 
(877
)
 
(877
)
 

 
(877
)
Unrealized gain on available-for-sale securities, net of tax expense of $0

 

 

 

 
1,069

 
1,069

 

 
1,069

Comprehensive loss

 

 

 

 

 
(2,258
)
 
(31
)
 
(2,289
)
Income tax benefit from stock option exercises

 

 
9,278

 

 

 
9,278

 

 
9,278

Stock-based compensation

 

 
13,635

 

 

 
13,635

 

 
13,635

Exercise of stock options and issuance of shares
553

 
1

 
4,182

 

 

 
4,183

 

 
4,183

Balance at December 30, 2018
103,073

 

$129

 

$2,703,601

 

($485,928
)
 

$856

 

$2,218,658

 

$4,847

 

$2,223,505

The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 25, 2017
97,674

 

$121

 

$2,419,517

 

($202,742
)
 

$5,909

 

$2,222,805

 

 

$2,222,805

Net loss

 

 

 
(19,857
)
 

 
(19,857
)
 
(16
)
 
(19,873
)
Currency translation gain, net of tax benefit of $0

 

 

 

 
1,642

 
1,642

 

 
1,642

Unrealized loss on available-for-sale securities, net of tax expense of $0

 

 

 

 
(39
)
 
(39
)
 

 
(39
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(18,254
)
 
(16
)
 
(18,270
)
Income tax expense from stock option exercises

 

 
(3,798
)
 

 

 

($3,798
)
 

 
(3,798
)
Stock-based compensation

 

 
10,226

 

 

 

$10,226

 

 
10,226

Exercise of stock options and issuance of shares
371

 

 
118

 

 

 

$118

 

 
118

Contributions from non-controlling interests



 

 

 

 

$—

 
4,900

 
4,900

Balance at September 24, 2017
98,045

 

$121

 

$2,426,063

 

($222,599
)
 

$7,512

 

$2,211,097

 

$4,884

 

$2,215,981

Net income

 

 

 
13,721

 
 
 
13,721

 
31

 
13,752

Currency translation loss, net of tax benefit of $0

 

 

 

 
(424
)
 
(424
)
 

 
(424
)
Unrealized loss on available-for-sale securities, net of tax expense of $0

 

 

 

 
(3,660
)
 
(3,660
)
 

 
(3,660
)
Comprehensive income

 

 

 

 

 
9,637

 
31

 
9,668

Income tax expense from stock option exercises

 

 
(849
)
 

 

 
(849
)
 

 
(849
)
Stock-based compensation

 

 
11,780

 

 

 
11,780

 

 
11,780

Exercise of stock options and issuance of shares
1,843

 
2

 
46,430

 

 

 
46,432

 

 
46,432

Balance at December 24, 2017
99,888

 

$123

 

$2,483,424

 

($208,878
)
 

$3,428

 

$2,278,097

 

$4,915

 

$2,283,012

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

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

($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

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

CREE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation and New Accounting Standards
Overview
Cree, Inc. (the Company) is an innovator of wide bandgap semiconductor products for power and radio-frequency (RF) applications, lighting-class light emitting diode (LED) products, and lighting products. The Company's products are targeted for applications such as transportation, power supplies, inverters, wireless systems, indoor and outdoor lighting, electronic signs and signals, and video displays.
The Company's Wolfspeed segment's products consist of silicon carbide (SiC) and gallium nitride (GaN) materials, power devices and RF devices based on silicon (Si) and wide bandgap semiconductor materials. The Company's materials products and power devices are used in solar, electric vehicles, motor drives, power supplies and transportation applications. The Company's materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
The Company's LED Products segment's products consist of LED chips and LED components. The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.
The Company's Lighting Products segment's products primarily consist of LED lighting systems and lamps. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, Wisconsin, Arkansas, California and China. The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, Arizona, Arkansas, California, Wisconsin, Italy and China (including Hong Kong).
Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.
The Company's three reportable segments are:
Wolfspeed
LED Products
Lighting Products
For financial results by reportable segment, please refer to Note 13, "Reportable Segments."
Basis of Presentation
The consolidated financial statements presented herein have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive (loss) income, shareholders' equity and cash flows at December 30, 2018, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 24, 2018 has been derived from the audited financial statements as of that date.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2018 (fiscal 2018). The results of operations for the three and six months ended December 30, 2018 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 30, 2019 (fiscal 2019).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.

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Table of Contents

Recently Issued Accounting Pronouncements Adopted
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09: Revenue from Contracts with Customers (Topic 606). The FASB has subsequently issued multiple ASUs which amend and clarify the guidance in Topic 606. The ASU establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASU provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers. The Company adopted this standard on June 25, 2018. The cumulative effect of this adjustment recorded to beginning retained earnings as of June 25, 2018 was $10.3 million, and the Company did not recognize a discrete tax impact related to the opening deferred tax balance as of June 25, 2018 due to the full U.S. valuation allowance. The Company recognized a loss of revenue of approximately $1.6 million for the six months ended December 30, 2018, and expects the ongoing effect to be immaterial to the consolidated financial statements. See Note 2, "Revenue Recognition," for discussion of the impacted financial statement line items.
Goodwill Impairment Testing
In January 2017, the FASB issued ASU No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to continue to perform Step 1 of the goodwill impairment test. The Company early adopted this standard in the third quarter of fiscal 2018.
Fair Value Measurement Disclosure
In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements required for fair value measurements. The Company early adopted this standard in the first quarter of fiscal 2019.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The Company early adopted this standard in the first quarter of fiscal 2019. There was no significant impact on the financial statements.
Nonemployee Stock Compensation
In June 2018, the FASB issued ASU 2018-07: Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The Company early adopted this standard in the second quarter of fiscal 2019. There was no material impact upon adoption of this standard.
Recently Issued Accounting Pronouncements Pending Adoption
Leases
In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842) and ASU 2018-10: Codification Improvements to Topic 842, Leases. The FASB has subsequently issued multiple ASUs which amend and clarify the guidance in Topic 842. These ASUs require that a lessee recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For income statement purposes, leases are still required to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The effective date will be the first quarter of the Company's fiscal year ending June 28, 2020, using the modified retrospective method. The Company is currently analyzing the impact of this new pronouncement.

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Note 2 – Revenue Recognition
Effective June 25, 2018, the Company adopted ASC Topic 606: “Revenue from Contracts with Customers," and all related accounting standard updates, using the modified retrospective method applied to contracts not completed as of June 25, 2018. Results for all reporting periods subsequent to adoption are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic revenue recognition policy under ASC Topic 605: “Revenue Recognition."
The Company follows a five-step approach defined by the new standard for recognizing revenue, consisting of (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
Master supply or distributor agreements are in place with the majority of the Company's customers and contain terms and conditions including, but not limited to payment, delivery, incentives, and warranty. These agreements typically do not require minimum purchase commitments. In the case an agreement is not present, the Company considers a purchase order, which is governed by the Company’s standard terms and conditions, to be a contract.
Substantially all of the Company's revenue, 98% and 96% in fiscal 2018 and 2017, respectively, is derived from product sales. Revenue is recognized at a point in time based on the Company’s evaluation of when the customer obtains control of the products, and all performance obligations under the terms of the contract are satisfied. If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred based on the contract and shipping terms, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied. Sales of products typically do not include more than one performance obligation.
Pricing terms are negotiated independently on a stand-alone basis. Revenue is measured based on the amount of net consideration the Company expects to be entitled to in exchange for products or services. Variable consideration is recognized as a reduction of net revenue with a corresponding reserve at the time of revenue recognition, and consists primarily of sales incentives or rebates, price concessions, and return allowances. Variable consideration is estimated based on contractual terms, historical analysis of customer purchase volumes, or historical analysis using specific data for the type of consideration being assessed. The Company offers product warranties and establishes liabilities for estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liability estimates are included in cost of sales in the Company’s Consolidated Statements of (Loss) Income, and further detail is presented in Note 12, "Commitments and Contingencies."
Contract liabilities primarily include deferred revenue, price protection guarantees, and various rights of return. These items were previously presented as a reduction of accounts receivable on the consolidated balance sheet. The adjustments do not impact net cash used in operating activities; however, they do impact the changes in operating assets and liabilities for the related accounts within the disclosure of operating activities on the statement of cash flows.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Incidental contract costs that are not material in context of the delivery of products are expensed as incurred. Sales commissions are expensed when the amortization period is less than one year. Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s fulfillment costs as a manufacturer consist of inventory, fixed assets, and intangible assets, all of which are accounted for under the respective guidance for those asset types.
The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are due within 12 months of completion of the performance obligation and invoicing, and therefore do not contain significant financing components.
Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue, and shipping and handling costs are treated as fulfillment activities and included in cost of sales in the Company’s Consolidated Statements of (Loss) Income.
Opening Balance Adjustments
The following table summarizes the impacts of adopting the new revenue standard on the Company's unaudited consolidated balance sheet (in thousands):

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Balance as of June 24, 2018
 
Adjustments
 
Opening Balance as of June 25, 2018
Assets:
 
 
 
 
 
Accounts Receivable

$153,875

 

$51,823

 

$205,698

Liabilities:
 
 
 
 
 
Accrued Contract Liabilities

 
(51,143
)
 
(51,143
)
Other Current Liabilities
(43,528
)
 
2,535

 
(40,993
)
Other Long-Term Liabilities
(22,115
)
 
2,535

 
(19,580
)
Stockholders' Equity:
 
 
 
 
 
Accumulated Deficit
(482,710
)
 
10,299

 
(472,411
)
Revenue Disaggregation
The following table presents disaggregated revenue by geography (in thousands):
 
Three Months Ended
 
Six Months Ended
 
December 30, 2018
 
December 24, 2017
 
December 30, 2018
 
December 24, 2017
United States

$174,852

 

$175,839

 

$358,982

 

$344,392

China
106,060

 
103,888

 
207,170

 
194,385

Europe
70,571

 
40,353

 
146,760

 
88,623

Other
61,553

 
47,790

 
108,391

 
100,868

Total Revenue

$413,036

 

$367,870

 

$821,303

 

$728,268

Note 3 – Acquisition
Infineon Technologies AG Radio Frequency Power Business
On March 6, 2018, the Company acquired certain assets of the Infineon Technologies AG (Infineon) Radio Frequency Power Business (RF Power), pursuant to an asset purchase agreement with Infineon in exchange for a base purchase price of $429 million, subject to certain adjustments. As part of the agreement, the Company paid $427 million of cash on the purchase date and agreed to purchase certain additional non-U.S. property and equipment related to the RF Power business from Infineon for approximately $2 million, which was completed during the fourth quarter of fiscal 2018. The acquisition allows the Company to expand its product portfolio into the wireless market.
The acquisition of the RF Power business from Infineon was accounted for as a business combination. The assets, liabilities, and operating results of the RF Power business have been included in the Company's consolidated financial statements from the date of acquisition. Additionally, the RF Power business's results from operations are reported as part of the Company's Wolfspeed segment. The results of the RF Power business are reflected in the Company's Consolidated Statements of (Loss) Income for the three and six months ended December 30, 2018.
The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):

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Table of Contents

Assets:
 
Inventories

$22,500

Property and equipment
11,722

Other assets
433

Intangible assets
149,000

Goodwill
248,957

Total Assets
432,612

Liabilities assumed:

Accounts payable
(39
)
Accrued expenses and liabilities
(3,411
)
Total liabilities assumed
(3,450
)
Net assets acquired

$429,162

The amortization periods for intangible assets acquired are as follows (in thousands, except for years):
 
Asset Amount
 
Estimated Life in Years
Lease agreement

$1,000

 
10
Customer relationships
92,000

 
15
Developed technology
44,000

 
14
Non-compete agreements
12,000

 
4
Total identifiable intangible assets

$149,000

 
 
The weighted average amortization periods for intangibles was 13.8 years. Goodwill largely consists of manufacturing and other synergies of the combined companies, and the value of the assembled workforce. For tax purposes, in accordance with Internal Revenue Code Section 197, $245 million of goodwill will be amortized over 15 years.
The Company incurred total transaction costs related to the acquisition of approximately $0.1 million which were expensed in the first and second quarter of fiscal 2019 in accordance with U.S. GAAP.
Supplemental Pro Forma Financial Information
The following unaudited pro forma consolidated financial information reflects the results of operations of the Company as if the RF Power transaction had occurred at the beginning of the fiscal year prior to the fiscal year of acquisition, after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
 
December 24, 2017
 
December 24, 2017
Revenue
 
$393,119
 
$778,358
Net income (loss)
 
11,002

 
(17,550
)
Earnings per share, basic
 

$0.11

 

($0.18
)
Earnings per share, diluted
 

$0.11

 

($0.18
)
These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the RF Power business to give effect to events and transactions that are directly attributable to the RF Power business transactions, including the elimination of sales by the Company to the RF Power business prior to acquisition, additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property and equipment and intangible assets had been applied at the beginning of fiscal 2017, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the three months and six months ended December 24, 2017 are one-time acquisition costs and foreign currency gains attributable to the RF Power business of $0.1 million. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal 2017, nor is it indicative of any future results.

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Table of Contents

Arkansas Power Electronics International, Inc.
On July 8, 2015, the Company closed on the acquisition of Arkansas Power Electronics International, Inc. (APEI), a global leader in power modules and power electronics applications, pursuant to a merger agreement with APEI and certain shareholders of APEI, whereby the Company acquired all of the outstanding share capital of APEI in exchange for a base purchase price of $13.8 million, subject to certain adjustments. In addition, if certain goals were achieved over the subsequent two years, additional cash payments totaling up to $4.6 million were to be made to the former APEI shareholders. Payments totaling $2.8 million were made to the former APEI shareholders in July 2016 based on achievement of the first-year goals. The final payment of $1.9 million was made in July 2017 based on achievement of the second-year goals. In connection with this acquisition, APEI became a wholly owned subsidiary of the Company, renamed Cree Fayetteville, Inc. (Cree Fayetteville). Cree Fayetteville is not considered a significant subsidiary of the Company and its results from operations are reported as part of the Company's Wolfspeed segment.
Note 4 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
 
December 30, 2018
 
June 24, 2018
Billed trade receivables

$192,432

 

$215,077

Unbilled contract receivables
3,655

 
966


196,087

 
216,043

Allowance for sales returns, discounts and other incentives

 
(56,800
)
Allowance for bad debts
(4,035
)
 
(5,368
)
Accounts receivable, net

$192,052

 

$153,875

Inventories
The following table summarizes the components of inventories (in thousands):
 
December 30, 2018
 
June 24, 2018
Raw material

$97,682

 

$95,890

Work-in-progress
106,103

 
104,300

Finished goods
109,527

 
95,825

Inventories

$313,312

 

$296,015

Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
 
December 30, 2018
 
June 24, 2018
Accrued taxes

$10,178

 

$8,053

Accrued professional fees
5,910

 
4,911

Accrued warranty
15,358

 
15,752

Accrued other
3,846

 
14,812

Other current liabilities

$35,292

 

$43,528


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Table of Contents

Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
 
December 30, 2018
 
June 24, 2018
Currency translation gain

$4,541

 

$5,075

Net unrealized loss on available-for-sale securities
(3,685
)
 
(4,479
)
Accumulated other comprehensive income, net of taxes

$856

 

$596

Non-Operating (Expense) Income, net
The following table summarizes the components of non-operating (expense) income, net (in thousands):
 
Three Months Ended
Six Months Ended
 
December 30, 2018
 
December 24, 2017
December 30, 2018
 
December 24, 2017
Foreign currency gain (loss), net

$27

 

$462


($571
)
 

$1,228

(Loss) gain on sale of investments, net
(107
)
 
1

(107
)
 
47

(Loss) gain on equity investment, net
(1,880
)
 
24,746

(8,524
)
 
21,479

Interest (expense) income, net
(3,671
)
 
1,467

(6,032
)
 
2,617

Other, net
167

 
53

266

 
291

Non-operating (expense) income, net

($5,464
)
 

$26,729


($14,968
)
 

$25,662

The change in (loss) gain on equity investment, net is due to the decrease in the Lextar Electronics Corporation (Lextar) stock price.
Reclassifications Out of Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the amounts reclassified out of accumulated other comprehensive income, net of taxes (in thousands):
Accumulated Other Comprehensive Income Component
 
Amount Reclassified Out of Accumulated Other Comprehensive Loss
 
Affected Line Item in the Consolidated Statements of (Loss) Income
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 30, 2018
 
December 24, 2017
 
December 30, 2018
 
December 24, 2017
 
 
Net unrealized (loss) gain on available-for-sale securities, net of taxes
 

($107
)
 

$1

 

($107
)
 

$47

 
Non-operating (expense) income, net
Less income tax effect
 

 

 

 

 
Income tax expense (benefit)
Total reclassifications
 

($107
)
 

$1

 

($107
)
 

$47

 

Note 5 – Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, variable rate demand notes, commercial paper and certificates of deposit. All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's ownership interest in Lextar.

15

Table of Contents

The following tables summarize short-term investments (in thousands):
 
 
December 30, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$103,164

 

$50

 

($753
)
 

$102,461

Corporate bonds
 
160,973

 
30

 
(949
)
 
160,054

U.S. agency securities
 
4,678

 
1

 
(3
)
 
4,676

U.S. treasury securities
 
44,415

 

 
(43
)
 
44,372

Non-U.S. certificates of deposit
 
53,251

 
430

 

 
53,681

U.S. certificates of deposit
 

 

 

 

Variable rate demand note
 
400

 

 

 
400

Commercial paper
 
1,991

 

 

 
1,991

Total short-term investments
 

$368,872

 

$511

 

($1,748
)
 

$367,635

 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$110,198

 

$17

 

($939
)
 

$109,276

Corporate bonds
 
77,871

 
36

 
(1,150
)
 
76,757

U.S. agency securities
 
3,922

 

 
(38
)
 
3,884

U.S. treasury securities
 

 

 

 

Non-U.S. certificates of deposit
 
77,744

 

 

 
77,744

U.S. certificates of deposit
 
500

 

 

 
500

Variable rate demand note
 

 

 

 

Commercial paper
 

 

 

 

Total short-term investments
 

$270,235

 

$53

 

($2,127
)
 

$268,161



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Table of Contents

The following tables present the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities):
 
 
December 30, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$10,061

 

($17
)
 

$83,126

 

($736
)
 

$93,187

 

($753
)
Corporate bonds
 
99,699

 
(263
)
 
38,162

 
(686
)
 
137,861

 
(949
)
U.S. agency securities
 
3,975

 
(3
)
 

 

 
3,975

 
(3
)
U.S. treasury securities
 
40,478

 
(14
)
 
3,894

 
(29
)
 
44,372

 
(43
)
Total
 

$154,213

 

($297
)
 

$125,182

 

($1,451
)
 

$279,395

 

($1,748
)
Number of securities with an unrealized loss
 
 
 
183

 
 
 
102
 
 
 
285

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$97,470

 

($861
)
 

$3,642

 

($78
)
 

$101,112

 

($939
)
Corporate bonds
 
61,453

 
(1,088
)
 
1,486

 
(62
)
 
62,939

 
(1,150
)
U.S. agency securities
 
3,884

 
(38
)
 

 

 
3,884

 
(38
)
U.S. treasury securities
 

 

 

 

 

 

Total
 

$162,807

 

($1,987
)
 

$5,128

 

($140
)
 

$167,935

 

($2,127
)
Number of securities with an unrealized loss
 
 
 
151

 
 
 
6

 
 
 
157

The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses from the sale of investments are included in non-operating (expense) income, net in the consolidated statements of (loss) income and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.
The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be other-than-temporary on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its securities to be impaired as of December 30, 2018 and June 24, 2018.
The contractual maturities of short-term investments as of December 30, 2018 were as follows (in thousands):
 
 
Within One Year
 
After One, Within Five Years
 
After Five, Within Ten Years
 
After Ten
Years
 
Total
Municipal bonds

$32,068

 

$70,393

 

$—

 

$—

 

$102,461

Corporate bonds
80,423

 
79,631

 

 

 
160,054

U.S. agency securities
3,975

 
701

 

 

 
4,676

U.S. treasury securities
44,372

 

 

 

 
44,372

Non-U.S. certificates of deposit
53,681

 

 

 

 
53,681

Variable rate demand note

 

 

 
400

 
400

Commercial paper
1,991

 

 

 

 
1,991

Total short-term investments

$216,510

 

$150,725

 

$—

 

$400

 

$367,635


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Table of Contents

Note 6 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. As of December 30, 2018, financial assets utilizing Level 1 inputs included money market funds and U.S. treasury securities, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, certificates of deposit, commercial paper, variable rate demand notes and common stock of non-U.S. corporations. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of December 30, 2018.

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Table of Contents

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
 
December 30, 2018
 
June 24, 2018
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds

$—

 

$3,368

 

$—

 

$3,368

 

$—

 

$—

 

$—

 

$—

Non-U.S. certificates of deposit

 
130,081

 

 
130,081

 

 
75,499

 

 
75,499

Commercial Paper

 

 

 

 

 
275

 

 
275

Money market funds
1,200

 

 

 
1,200

 
1,992

 

 

 
1,992

Total cash equivalents
1,200

 
133,449

 

 
134,649

 
1,992

 
75,774

 

 
77,766

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
102,461

 

 
102,461

 

 
109,276

 

 
109,276

Corporate bonds

 
160,054

 

 
160,054

 

 
76,757

 

 
76,757

U.S. agency securities

 
4,676

 

 
4,676

 
3,884

 

 

 
3,884

U.S. treasury securities
44,372

 

 

 
44,372

 

 

 

 

U.S. certificates of deposit

 

 

 

 

 
500

 

 
500

Variable rate demand note

 
400

 

 
400

 

 

 

 

Commercial paper

 
1,991

 

 
1,991

 

 

 

 

Non-U.S. certificates of deposit

 
53,681

 

 
53,681

 

 
77,744

 

 
77,744

Total short-term investments
44,372

 
323,263

 

 
367,635

 
3,884

 
264,277

 

 
268,161

Other long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock of non-U.S. corporations

 
48,431

 

 
48,431

 

 
57,501

 

 
57,501

Total other long-term investments

 
48,431

 

 
48,431

 

 
57,501

 

 
57,501

Total assets

$45,572

 

$505,143

 

$—

 

$550,715

 

$5,876

 

$397,552

 

$—

 

$403,428

Note 7– Intangible Assets
Intangible Assets, net
The following table presents the components of intangible assets, net (in thousands):

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Table of Contents

 
December 30, 2018
 
June 24, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships

$233,420

 

($98,954
)
 

$134,466

 

$233,420

 

($92,770
)
 

$140,650

Developed technology
226,728

 
(161,674
)
 
65,054

 
226,728

 
(154,467
)
 
72,261

Non-compete agreements
22,475

 
(12,886
)
 
9,589

 
22,475

 
(11,386
)
 
11,089

Trade names, finite-lived
520

 
(520
)
 

 
520

 
(520
)
 

Patent and licensing rights
161,173

 
(75,743
)
 
85,430

 
159,297

 
(72,923
)
 
86,374

Total intangible assets with finite lives
644,316

 
(349,777
)
 
294,539

 
642,440

 
(332,066
)
 
310,374

Trade names, indefinite-lived
79,680

 

 
79,680

 
79,680

 

 
79,680

Total intangible assets

$723,996

 

($349,777
)
 

$374,219

 

$722,120

 

($332,066
)
 

$390,054

For the three and six months ended December 30, 2018, total amortization of finite-lived intangible assets was $9.6 million and $21.3 million, respectively. For the three and six months ended December 24, 2017, total amortization of finite-lived intangible assets was $9.9 million and $19.8 million, respectively.
Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands):
Fiscal Year Ending
 
June 30, 2019 (remainder of fiscal 2019)

$17,963

June 28, 2020
33,247

June 27, 2021
31,782

June 26, 2022
28,540

June 25, 2023
23,250

Thereafter
159,757

Total future amortization expense

$294,539

Goodwill by reportable segment as December 30, 2018 was as follows (in thousands):
 
Wolfspeed
 
LED Products
 
Lighting Products
 
Consolidated Total
Balance at December 30, 2018

$349,726

 

$180,278

 

$90,326

 

$620,330

Note 8 – Long-term Debt
Revolving Line of Credit
As of December 30, 2018<