Cree, Inc.
Oct 20, 2015

Cree Reports Financial Results for the First Quarter of Fiscal Year 2016

DURHAM, N.C.--(BUSINESS WIRE)-- Cree, Inc. (Nasdaq: CREE), a market leader in LED lighting, today announced revenue of $425.5 million for its first quarter of fiscal 2016, ended September 27, 2015. This represents a 1% decrease compared to revenue of $427.7 million reported for the first quarter of fiscal 2015, and an 11% increase compared to the fourth quarter of fiscal 2015. GAAP net loss for the first quarter was $23.6 million, or $0.23 per diluted share, compared to GAAP net income of $11.1 million, or $0.09 per diluted share, for the first quarter of fiscal 2015. On a non-GAAP basis, net income for the first quarter of fiscal 2016 was $22.1 million, or $0.21 per diluted share, compared to non-GAAP net income for the first quarter of fiscal 2015 of $29.6 million, or $0.24 per diluted share. During the first quarter of fiscal 2016, Cree recognized $15.9 million of costs related to the LED business restructuring that was announced on June 24, 2015. The restructuring charges included factory capacity and overhead cost reductions which are included in the GAAP results only.

"Fiscal 2016 is off to a good start, with Q1 revenue and profits above the middle of our targeted range, driven by strong demand for commercial LED lighting and a solid quarter for our LED business," stated Chuck Swoboda, Cree Chairman and CEO. "We're confident in our strategy and optimistic about the future, as the commercial lighting business is growing, the LED results recovered nicely in Q1 and Power and RF design momentum is strong."

Q1 2016 Financial Metrics

(in thousands, except per share amounts and percentages)

      First Quarter          
2016     2015 Change
(unaudited) (unaudited)
Revenue, net $ 425,489 $ 427,672 $   (2,183 ) (1 )%
GAAP
Gross margin 31.0 % 31.8 %
Operating margin (2.0 )% 2.7 %
Net (loss) income $ (23,623 ) $ 11,130 $ (34,753 ) (312 )%
(Loss) earnings per diluted share $ (0.23 ) $ 0.09 $ (0.32 ) (356 )%
Non-GAAP
Gross margin 31.7 % 32.4 %
Operating margin 6.9 % 8.2 %
Net income $ 22,119 $ 29,550 $ (7,431 ) (25 )%
Earnings per diluted share $ 0.21 $ 0.24 $ (0.03 ) (13 )%

Recent Business Highlights:

Business Outlook:

For its second quarter of fiscal 2016 ending December 27, 2015, Cree targets revenue in a range of $425 million to $445 million, with GAAP gross margin targeted to be 31.0%+/- and non-GAAP gross margin targeted to be 31.7%+/-. Our GAAP gross margin targets include stock-based compensation expense of approximately $3.1 million, while our non-GAAP targets do not. GAAP operating expenses are targeted to be approximately $129 million, and non-GAAP operating expenses are targeted to be approximately $106 million. The tax rate is targeted at 25.0%+/- for the second quarter of fiscal 2016. GAAP net income is targeted at $1 million to $7 million, or $0.01 to $0.06 per diluted share. Non-GAAP net income is targeted in a range of $21 million to $27 million, or $0.21 to $0.26 per diluted share. The GAAP and non-GAAP per diluted share targets are based on an estimated 103 million diluted weighted average shares. Targeted non-GAAP earnings exclude $0.20 per diluted share of expenses related to stock-based compensation expense, the amortization or impairment of acquisition-related intangibles, net changes associated with our Lextar investment, and charges associated with the LED business restructuring.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. EST today to review the highlights of the fiscal 2016 first quarter results and the fiscal 2016 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 leading the LED lighting revolution and making energy-wasting traditional lighting technologies obsolete through the use of energy-efficient, mercury-free LED lighting. Cree is a market-leading innovator of lighting-class LEDs, lighting products and semiconductor products for power and radio frequency (RF) applications.

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

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

Non-GAAP Financial Measures:

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

Forward Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that 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 customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor's products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that our equity method investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk that we have an increasingly complex supply chain and its ability to scale to enable maintaining a sufficient supply of raw materials; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures or investments; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 28, 2015, and subsequent reports filed with the SEC. These forward-looking statements represent Cree's judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

Cree® and XLamp® are registered trademarks, and KR8TM, LR6TM and WolfspeedTM are trademarks of Cree, Inc.

CREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(in thousands, except per share amounts and percentages)

(unaudited)

 
Three Months Ended
September 27,
2015
      September 28,
2014
Revenue, net $ 425,489 $ 427,672
Cost of revenue, net 293,741   291,852  
Gross profit 131,748 135,820
Gross margin percentage 31.0 % 31.8 %
 
Operating expenses:
Research and development 43,540 46,725
Sales, general and administrative 75,263 69,692
Amortization or impairment of acquisition-related intangibles 7,062 6,499
Loss on disposal or impairment of long-lived assets 14,573   1,447  
Total operating expenses 140,438 124,363
 
Operating (loss) income (8,690 ) 11,457
Operating (loss) income percentage (2.0 )% 2.7 %
 
Non-operating (loss) income, net (22,806 ) 2,904  
(Loss) income before income taxes (31,496 ) 14,361
Income tax (benefit) expense (7,873 ) 3,231  
Net (loss) income $ (23,623 ) $ 11,130  
 
 
Diluted (loss) earnings per share $ (0.23 ) $ 0.09
 
Shares used in diluted per share calculation: 103,473 121,143
 

CREE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

     

September 27,
2015

  June 28,
2015
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments $ 632,082 $ 713,191
Accounts receivable, net 193,781 186,157
Income tax receivable 9,481
Inventories 289,089 280,576
Deferred income taxes 38,572 39,190
Prepaid expenses 26,284 29,932
Other current assets 55,383 54,851
Assets held for sale 6,871   4,353
Total current assets 1,251,543 1,308,250
Property and equipment, net 635,763 635,072
Goodwill 618,842 616,345
Intangible assets, net 330,777 317,154
Other long-term investments 34,611 57,595
Other assets 19,596   19,984
Total assets $ 2,891,132   $ 2,954,400
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 158,140 $ 163,128
Accrued salaries and wages 48,014 45,415
Income taxes payable 2,035
Other current liabilities 45,664   44,208
Total current liabilities 251,818 254,786
 
Long-term liabilities:
Long-term debt 207,000 200,000
Deferred income taxes 21,975 12,174
Other long-term liabilities 21,455   21,084
Total long-term liabilities 250,430 233,258
 
Shareholders' equity:
Common stock 128 131
Additional paid-in-capital 2,300,875 2,285,554
Accumulated other comprehensive income, net of taxes 6,231 5,798
Retained earnings 81,650   174,873
Total shareholders' equity 2,388,884   2,466,356
Total liabilities and shareholders' equity $ 2,891,132   $ 2,954,400
 

CREE, INC.

FINANCIAL RESULTS BY OPERATING SEGMENT

(in thousands, except percentages)

(unaudited)

 

The following table reflects the results of the Company's reportable segments as reviewed by the Company's Chief Executive Officer, its Chief Operating Decision Maker or CODM, for the three months ended September 27, 2015 and the three months September 28, 2014. 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 27,
2015
  September 28,
2014
  Change
Lighting Products revenue $ 248,031 $ 223,086 $ 24,945 11 %
Percent of revenue 58 % 52 %
LED Products revenue 148,208 173,590 (25,382 ) (15 )%
Percent of revenue 35 % 41 %
Power and RF Products revenue 29,250 30,996 (1,746 ) (6 )%
Percent of revenue 7 % 7 %  
Total revenue $ 425,489   $ 427,672   $ (2,183 ) (1 )%
 
 
Three Months Ended
September 27,
2015
September 28,
2014
  Change
Lighting Products gross profit $ 69,081 $ 55,592 $ 13,489 24 %
Lighting Products gross margin 27.9 % 24.9 %
LED Products gross profit 52,659 67,624 (14,965 ) (22 )%
LED Products gross margin 35.5 % 39.0 %
Power and RF Products gross profit 14,323 17,857 (3,534 ) (20 )%
Power and RF Products gross margin 49.0 % 57.6 %
Unallocated costs (4,315 ) (5,253 ) 938   (18 )%
Consolidated gross profit $ 131,748   $ 135,820   $ (4,072 ) (3 )%
Consolidated gross margin 31.0 % 31.8 %

Reportable Segments Description

The Company's Lighting Products segment primarily consists of LED lighting systems and bulbs. The Company's LED Products segment includes LED components, LED chips, and silicon carbide materials. The Company's Power and RF Products segment includes power devices and RF devices.

Financial Results by Reportable Segment

The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit presented in the preceding table to the Company's consolidated income before taxes.

The Company allocates direct costs and indirect costs to each segment's cost of revenue. The allocation methodology is based on a reasonable measure of utilization considering the specific facts and circumstances of the cost being allocated.

Certain costs are not allocated when evaluating segment performance. These unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company's 401(k) Plan.

Cree, Inc.

Non-GAAP Measures of Financial Performance

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

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release. In this press release, Cree also presents its target for non-GAAP expenses, which are expenses less stock-based compensation expense, charges for amortization or impairment of acquisition-related intangibles, asset retirement charges, net changes associated with equity method investments and charges associated with LED business restructuring.

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 stock-based compensation expense, amortization or impairment of acquisition-related intangibles, asset retirement charges, charges associated with LED business restructuring, net changes associated with equity method investments and the income taxes 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.

As described above, 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 and employee stock purchases through its ESPP. Cree excludes stock-based compensation expenses from its non-GAAP measures because they are non-cash expenses that Cree does not believe are reflective of ongoing operating results.

Amortization or impairment of acquisition-related intangibles. Cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. Cree excludes these items because they arise from Cree's prior acquisitions and have no direct correlation to the ongoing operating results of Cree's business.

Asset retirement charges. Cree has recognized charges for the impact of the decision to abandon or retire certain property and equipment prior to the end of their estimated useful lives. Because these charges relate to assets which have been or will be retired prior to the end of their estimated useful lives, Cree does not consider these charges to be reflective of ongoing operating results.

Costs associated with LED business restructuring. In June 2015, Cree's board of directors approved a plan to restructure the LED business. The restructuring is expected to reduce excess capacity and overhead in order to improve the cost structure moving forward. The components of the restructuring include the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions. Because these charges relate to assets which have been or will be retired prior to the end of their estimated useful lives and severance costs for eliminated positions, Cree does not consider these charges to be reflective of ongoing operating results.

Net changes associated with equity method investments. The Company's common stock ownership investment in Lextar Electronics Corporation is accounted for under the equity method 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.

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 (loss) income.

Cree expects to incur stock-based compensation expense, amortization or impairment of acquisition-related intangibles, asset retirement charges, charges associated with LED business restructuring and net changes associated with equity method investments in future periods, including income taxes associated with all of the foregoing. In addition to the non-GAAP measures discussed above, Cree also uses free cash flow as a measure of operating performance. 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 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, 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 financial performance is that it does not represent the total increase or decrease in the Company's cash balance for the period.

CREE, INC.

Reconciliation of GAAP to Non-GAAP Measures

(in thousands, except per share amounts and percentages)

(unaudited)

Non-GAAP Gross Margin

 
Three Months Ended
September 27,
2015
    September 28,
2014
GAAP gross profit $ 131,748 $ 135,820
GAAP gross margin percentage 31.0 % 31.8 %
Adjustment:
Stock-based compensation expense 3,027   2,905  
Non-GAAP gross profit $ 134,775   $ 138,725  
Non-GAAP gross margin percentage 31.7 % 32.4 %
 

Non-GAAP Operating Income

Three Months Ended
September 27,
2015
September 28,
2014
GAAP operating (loss) income $ (8,690 ) $ 11,457
GAAP operating (loss) income percentage (2.0 )% 2.7 %
Adjustments:
Stock-based compensation expense:
Cost of revenue, net 3,027 2,905
Research and development 3,531 4,471
Sales, general and administrative 8,512   9,383  
Total stock-based compensation expense 15,070 16,759
Amortization or impairment of acquisition-related intangibles 7,062 6,499
Asset retirement charges

511

 

Costs associated with LED business restructuring 15,913    
Total adjustments to GAAP operating income 38,045   23,769  
Non-GAAP operating income $ 29,355   $ 35,226  
Non-GAAP operating income percentage 6.9 % 8.2 %
 

Non-GAAP Non-Operating Income, net

Three Months Ended

September 27,
2015
September 28,
2014
GAAP non-operating (loss) income, net $ (22,806 ) $ 2,904
Adjustment:
Net changes associated with equity method investments 22,944    
Non-GAAP non-operating income, net $ 138   $ 2,904  
 

Non-GAAP Net Income

 
Three Months Ended
September 27,
2015
  September 28,
2014
GAAP net (loss) income $ (23,623 ) $ 11,130
Adjustments
Stock-based compensation expense 15,070 16,759
Amortization or impairment of acquisition-related intangibles 7,062 6,499
Net changes associated with equity method investments 22,944
Asset retirement charges 511
Costs associated with LED business restructuring 15,913    
Total adjustments to GAAP net income before provision for income taxes 60,989 23,769
Income tax effect * (15,247 ) (5,349 )
Non-GAAP net income $ 22,119   $ 29,550  
 
Earnings per share
Non-GAAP diluted net income per share $ 0.21 $ 0.24
 
Shares used in diluted net income per share calculation
Non-GAAP shares used 103,473 121,143
 

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

Free Cash Flow

Three Months Ended
September 27,
2015
  September 28,
2014
Cash flows from operations $ 46,834 $ 13,284
Less: PP&E spending (49,883 ) (63,446 )
Less: Patents spending (4,314 ) (4,806 )

Total free cash flow

$ (7,363 ) $ (54,968 )

Cree, Inc.
Raiford Garrabrant
Director, Investor Relations
Phone: 919-407-7895
Fax: 919-407-5615
investorrelations@cree.com

Source: Cree, Inc.

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