Cree, Inc.
CREE INC (Form: 10-Q, Received: 10/20/2011 06:00:49)
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 September 25, 2011
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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [ X ] No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]
  
Accelerated filer [    ]
Non-accelerated filer [    ]  (Do not check if a smaller reporting company)
  
Smaller reporting company [    ]

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 October 12, 2011 , was 115,940,496.


Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended September 25, 2011
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.
CONSOLIDATED BALANCE SHEETS
 
September 25,
2011
 
June 26,
2011
 
(unaudited)
 
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
139,173

 
$
390,598

Short-term investments
493,055

 
695,199

Total cash, cash equivalents, and short-term investments
632,228

 
1,085,797

Accounts receivable, net
165,694

 
118,469

Income tax receivable
1,655

 
6,796

Inventories
203,625

 
176,482

Deferred income taxes
18,615

 
17,857

Prepaid expenses and other current assets
58,855

 
51,494

Total current assets
1,080,672

 
1,456,895

Property and equipment, net
606,856

 
555,929

Intangible assets, net
390,501

 
102,860

Goodwill
613,843

 
326,178

Other assets
5,460

 
4,860

Total assets
$
2,697,332

 
$
2,446,722

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable, trade
$
74,122

 
$
76,593

Accrued salaries and wages
25,705

 
18,491

Income taxes payable
12,576

 
15,493

Other current liabilities
39,975

 
29,739

Total current liabilities
152,378

 
140,316

Long-term liabilities:

 

Deferred income taxes
21,902

 
21,902

Other long-term liabilities
25,015

 
22,940

Total long-term liabilities
46,917

 
44,842

Commitments and contingencies (Note 11)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at September 25, 2011 and June 26, 2011; none issued and outstanding

 

Common stock, par value $0.00125; 200,000 shares authorized at September 25, 2011 and June 26, 2011; 115,939 and 109,607 shares issued and outstanding at September 25, 2011 and June 26, 2011, respectively
144

 
136

Additional paid-in-capital
1,817,748

 
1,593,530

Accumulated other comprehensive income, net of taxes
12,519

 
13,091

Retained earnings
667,626

 
654,807

Total shareholders’ equity
2,498,037

 
2,261,564

Total liabilities and shareholders’ equity
$
2,697,332

 
$
2,446,722

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 INCOME
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
(Thousands, except per share amounts)
Revenue, net
$
268,980

 
$
268,437

Cost of revenue, net
170,952

 
137,908

Gross profit
98,028

 
130,529

Operating expenses:
 
 
 
Research and development
34,402

 
24,732

Sales, general and administrative
45,539

 
29,202

Amortization of acquisition related intangibles
3,925

 
2,706

Loss on disposal or impairment of long-lived assets
775

 
472

Total operating expenses
84,641

 
57,112

Operating income
13,387

 
73,417

Non-operating income:
 
 
 
Other non-operating income (loss), net
974

 
(62
)
Interest income, net
1,969

 
2,016

Income from operations before income taxes
16,330

 
75,371

Income tax expense
3,511

 
17,335

Net income
$
12,819

 
$
58,036

Earnings per share:
 
 
 
Basic net income per share
$
0.11

 
$
0.54

Diluted net income per share
$
0.11

 
$
0.53

Shares used in per share calculation:
 
 
 
Basic
111,866

 
107,701

Diluted
112,543

 
109,617

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

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CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net income
$
12,819

 
$
58,036

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,128

 
24,396

Stock-based compensation
11,440

 
8,004

Excess tax benefit from share-based payment arrangements
(261
)
 
(2,974
)
Loss on disposal or impairment of long-lived assets
775

 
472

Amortization of premium/discount on investments
1,922

 
3,759

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(21,725
)
 
(5,378
)
Inventories
12,431

 
(13,527
)
Prepaid expenses and other assets
1,811

 
434

Accounts payable, trade
(13,708
)
 
15,186

Accrued salaries and wages and other liabilities
4,013

 
110

Net cash provided by operating activities
41,645

 
88,518

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(33,962
)
 
(61,649
)
Purchases of investments
(80,874
)
 
(117,114
)
Proceeds from maturities of investments
42,590

 
67,571

Proceeds from sale of property and equipment
2

 
1

Proceeds from sale of available-for-sale investments
236,518

 
30,061

Purchase of Ruud Lighting, net of cash acquired
(456,008
)
 

Purchases of patent and licensing rights
(4,159
)
 
(2,072
)
Net cash used in investing activities
(295,893
)
 
(83,202
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
2,094

 
6,690

Excess tax benefit from share-based payment arrangements
261

 
2,974

Net cash provided by financing activities
2,355

 
9,664

Effects of foreign exchange changes on cash and cash equivalents
468

 
172

Net increase (decrease) in cash and cash equivalents
(251,425
)
 
15,152

Cash and cash equivalents:
 
 
 
Beginning of period
390,598

 
397,431

End of period
$
139,173

 
$
412,583

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

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Table of Contents

CREE, INC.
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Basis of Presentation and Changes in Significant Accounting Policies
Overview

Cree, Inc. (the "Company") is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. The Company's products are driving improvements in applications such as general illumination, video displays, automotive, electronic signs and signals, power supplies and solar inverters.

The Company develops and manufactures semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs), sapphire and other materials used for electronic and opto-electronic applications.

The Company's LED products consist of LED components, LED chips, and SiC wafers. As the Company develops and improves its LED technology and the market continues to focus on energy efficiency, the Company believes the potential market for LED lighting will continue to expand. The Company's success in selling LED products depends upon its ability to drive adoption and offer innovative products and solutions that enable its customers to succeed in the market. By driving adoption, the Company believes it can influence the growth of the market and open more opportunities for LEDs.

The Company's lighting products consist of both LED and traditional lighting systems. The Company designs, manufactures and sells lighting systems for indoor and outdoor applications, with its primary focus on LED lighting systems for the commercial and industrial markets. The Company also uses its LED systems expertise to accelerate LED adoption and expand the market for its LED components. The Company's products are marketed under numerous brands, such as Cree LED Lighting ® , Ruud Lighting ® , BetaLED ® , e-conolight ® and Kramer Lighting ® .

In addition, the Company develops, manufactures and sells power and RF products, such as power and RF devices. The Company's power products are made from SiC and provide faster switching speeds than comparable silicon-based power devices. The Company's RF devices are made from SiC or GaN and produce higher power densities as compared to silicon or gallium arsenide.

The majority of the Company's products are manufactured at production facilities located in North Carolina, Wisconsin and China. The Company also uses contract manufacturers for certain aspects of its product fabrication, packaging and assembly. The Company operates research and development facilities in North Carolina, California, Wisconsin and China.

The Company currently operates its business as one reportable segment.

Basis of Presentation
The consolidated balance sheet at September 25, 2011 and the consolidated statements of income for the three months ended September 25, 2011 and September 26, 2010 , and the consolidated statements of cash flows for the three months ended September 25, 2011 and September 26, 2010 (“consolidated financial statements”) have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows at September 25, 2011 , and for all periods presented, have been made. The consolidated balance sheet at June 26, 2011 has been derived from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these financial statements 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 26, 2011 (“fiscal 2011 ”). The results of operations for the period ended September 25, 2011 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 24, 2012 (“fiscal 2012 ”).
Certain fiscal 2011 amounts in the accompanying consolidated financial statements have been reclassified to conform to the

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fiscal 2012 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.
Recently Adopted Accounting Pronouncements
Fair Value Disclosures
In January 2010, the Financial Accounting Standards Board (the "FASB") issued amended standards requiring additional fair value disclosures. The amended standards require disclosures of transfers in and out of Levels 1 and 2 of the fair value hierarchy, as well as requiring gross basis disclosures for purchases, sales, issuances and settlements within the Level 3 reconciliation. Additionally, the update clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 or Level 3. The Company adopted the new guidance in the third quarter of fiscal 2010, except for the disclosures related to purchases, sales, issuance and settlements, which was effective for the Company beginning in the first quarter of fiscal 2012. Because these new standards are related primarily to disclosures, their adoption has not had a significant impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
Presentation of Comprehensive Income
In June 2010, the FASB issued new guidance concerning the presentation of total comprehensive income and its components. Under this guidance an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance will become effective for the Company beginning in the third quarter of fiscal 2012. The Company's adoption of the new accounting guidance is not expected to have a significant impact on its consolidated financial statements.
Goodwill Impairment Testing
On September 15, 2011, the FASB issued updated guidance concerning the testing of goodwill for impairment.  This guidance modifies goodwill impairment testing by allowing the inclusion of qualitative factors in the assessment of whether a two-step goodwill impairment test is necessary.   Thus, entities are no longer required to calculate the fair value of a reporting unit unless they conclude through an assessment of qualitative factors that it is more likely than not that the unit's carrying value is greater than its fair value.  When an entity's qualitative assessment reveals that goodwill impairment is more likely than not, the entity must perform the two-step goodwill impairment test.   This guidance becomes effective for the Company in the second quarter of fiscal 2012.  The Company's adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.

Note 2.    Acquisitions
Acquisition of Ruud Lighting, Inc.
On August 17, 2011, the Company executed a Stock Purchase Agreement with all of the shareholders of Ruud Lighting, Inc. ("Ruud Lighting"). Pursuant to the terms of the Stock Purchase Agreement and concurrently with the execution of the Stock Purchase Agreement, the Company acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of 6.1 million shares of the Company's common stock and $372.2 million cash, subject to certain post-closing adjustments. Prior to the Company completing its acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC ("E-conolight"). Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction with Ruud Lighting, the Company funded Ruud Lighting's re-acquisition of E-conolight and paid off Ruud Lighting's outstanding debt in the aggregate amount of approximately $85 million . The acquisition allows the Company to expand its product portfolio into outdoor LED lighting.

The acquisitions of Ruud Lighting and E-conolight have been accounted for as business combinations in accordance with ASC 805 Business Combinations and, as such, the Ruud Lighting and E-conolight assets acquired and liabilities assumed have been recorded at their respective fair values. The determination of fair value for the identifiable tangible and intangible assets acquired and liabilities assumed requires extensive use of estimates and judgments. Significant estimates and assumptions include, but are not limited to: estimating future cash flows and determining the appropriate discount rate.

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The total purchase price for this acquisition is as follows (in thousands):
Cash consideration paid to stockholders
$
372,235

Fair value of common stock issued by the Company (1)
211,040

Fair value of debt paid on behalf of stockholders
84,991

Total purchase price
$
668,266

(1) Represents 6,074,833 shares of the Company's common stock at $34.74 per share, the closing share price on August 17, 2011. The shares are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to 25% of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, (ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.

The Company incurred total transaction costs related to the acquisition of approximately $3.6 million , of which, $3.1 million were expensed during the first quarter of fiscal 2012 in accordance with U.S. GAAP.

The purchase price for this acquisition has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):

Tangible assets:

Cash and cash equivalents
$
3,081

Accounts receivable
25,698

Inventories
39,330

Property and equipment
45,946

Other assets
4,727

Total tangible assets
$
118,782

Intangible assets:

Developed technology
$
96,300

Customer relationships
84,820

Trade names
82,950

In-process research & development
15,050

Non-compete agreements
9,800

Goodwill
287,431

Total intangible assets
$
576,351

Liabilities assumed:

Accounts payable
$
12,943

Accrued expenses and liabilities
10,116

Warranty liabilities
2,600

Other long-term liabilities
1,208

Total liabilities assumed
$
26,867

Net assets acquired
668,266


The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available through the balance sheet date and are provisional. The Company believes that this information provides a reasonable basis for estimating the fair values but is waiting for certain additional information necessary to finalize those amounts, which includes certain post-closing working capital and related adjustments, certain vendor related pre-acquisition contingencies, a certain insurance reimbursement, potential uncertain tax positions related to foreign subsidiaries and certain litigation that existed at the closing date. Thus, the provisional measurements of fair value reflected are subject to change.

Acquired finished goods and work-in-process inventory was valued at its estimated selling price less the sum of costs of disposal and a reasonable profit allowance for the Company's selling effort and, with respect to work-in-process inventory,

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estimated costs to complete. This resulted in a fair value adjustment that increased finished goods inventory approximately $1.5 million . Raw material inventory has been valued at current replacement cost, resulting in a write down of approximately $0.7 million . As the Company sells the acquired inventory, its costs of revenue will reflect the increased valuation of the inventory, which will reduce the Company's gross margins until such inventory is sold.

The identifiable assets acquired as a result of the acquisition will be amortized over their respective estimated useful lives as follows (in thousands, except for years):

Asset Amount
Estimated Life in Years
Developed technology
$
96,300

7 to 10
Customer relationships
84,820

7 to 20
Trade names (indefinite lived)
81,520

-
Trade names (definite lived)
1,430

3
In-process research and development (1)
15,050

6 to 7
Non-compete agreements
9,800

5
Total identifiable assets
$
288,920


(1) Initially, in-process research and development ("IPR&D") is classified as indefinite-lived assets until completion or abandonment. Therefore, amortization of IPR&D does not begin until the technological and market risk(s) no longer exist. During the interim, IPR&D intangibles are subject to annual testing for impairment or when there are indicators of impairment.

The fair value of the developed technology, IPR&D and customer relationship assets were estimated using an income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair value of the Ruud Lighting and e-conolight trade names were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be paid if the Company did not own the Ruud Lighting “BetaLED” brand and had to license the Ruud Lighting and e-conolight trade names. The Company derived the hypothetical royalty income from the projected revenues of Ruud Lighting and e-conolight products.  Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.

Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce. The Company is currently assessing its reporting units for purposes of assessing Goodwill impairment as a result of the Ruud Lighting acquisition. This valuation is preliminary and subject to change.

As a result of the Company's U.S. tax election under Internal Revenue Code section 338(h)(10), the acquisition did not result in the recording of an opening net deferred tax position as the deferred tax asset resulting from excess tax deductible goodwill equally offsets the deferred tax liability resulting from excess book over tax basis in the underlying assets acquired.

The assets, liabilities, and operating results of Ruud Lighting have been included in the Company's consolidated financial statements from the date of acquisition.

The amounts of revenue and net income of Ruud Lighting in the Company's Consolidated Statements of Income from and including August 17, 2011 to September 25, 2011 are as follows (in thousands, except per share data):

 
Amounts
Revenue
$
22,343

Loss from operations
(522
)
Net loss
(664
)
Basic net loss per share
$
(0.01
)
Diluted net loss per share
$
(0.01
)

The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if

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the Ruud Lighting transaction occurred at the beginning of the fiscal year for the period presented (in thousands, except per share data):

Three Months Ended

September 25,
2011
September 26,
2010
Revenue
$
299,312

$
310,296

Income from operations
8,788

68,146

Net income
8,853

53,602

Earnings per share, basic
$
0.08

$
0.47

Earnings per share, diluted
$
0.08

$
0.46


The total revenue for Ruud Lighting included in the pro forma table above was $53.8 million and $47.3 million for the three months ended September 25, 2011 and September 26, 2010 , respectively.

Acquisition of LED Lighting Fixtures, Inc.
On February 29, 2008 the Company acquired LED Lighting Fixtures, Inc. (“LLF”) through a wholly owned subsidiary that merged into Cree, Inc. on June 27, 2010. The Company acquired all of the outstanding share capital of LLF in exchange for total upfront consideration of $80.8 million , consisting of (1)  $16.5 million in cash, (2) approximately 1.9 million shares of the Company’s common stock valued at $58.8 million , and (3) the assumption of fully vested LLF employee stock options valued at $4.5 million . The Company incurred transaction costs of approximately $1 million consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Under the acquisition terms, additional consideration of up to $26.4 million would become payable to the former shareholders of LLF if defined product development targets and key employee retention measures were achieved over the three calendar years following the acquisition.
LLF met the conditions necessary for the earn-out payment for the calendar years ended December 31, 2008, 2009 and 2010 . As a result, the Company made a cash payment in the amount of $4.4 million to the former shareholders of LLF in the third quarter of fiscal 2009 , a cash payment in the amount of $8.8 million to the former shareholders of LLF in the third quarter of fiscal 2010 , and a final cash payment in the amount of $13.2 million to the former shareholders of LLF in the third quarter of fiscal 2011 . These incremental payments were treated as additional purchase price and resulted in an increase to goodwill in the Company’s consolidated financial statements.
The assets, liabilities, and operating results of LLF have been included in the Company’s consolidated financial statements from the date of acquisition and are reflected in all periods presented in the accompanying financial statements.

Note 3.    Financial Statement Details
Accounts Receivable, net
The following is a summary of the components of accounts receivable, net (in thousands):
 
 
September 25,
2011
 
June 26,
2011
Billed trade receivables
$
183,705

 
$
137,799

Unbilled contract receivables
1,485

 
1,038


185,190

 
138,837

Allowance for sales returns, discounts, and other incentives
(17,964
)
 
(19,615
)
Allowance for bad debts
(1,532
)
 
(753
)
Total accounts receivable, net
$
165,694

 
$
118,469


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Inventories
The following is a summary of the components of inventories (in thousands):
 
 
September 25,
2011
 
June 26,
2011
Raw material
$
56,057

 
$
38,781

Work-in-progress
78,380

 
74,816

Finished goods
69,188

 
62,885

Total inventories
$
203,625

 
$
176,482

Revenues, net
Revenues were comprised of the following product groups (in thousands, except percentages):

 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
LED products
$
196,778

 
$
228,765

Percent of revenue
73
%
 
85
%
Lighting products
$
51,673

 
$
15,601

Percent of revenue
19
%
 
6
%
Power and RF products
$
20,529

 
$
24,071

Percent of revenue
8
%
 
9
%
Total revenue
$
268,980

 
$
268,437


Note 4.    Investments
Short-term investments consist of high grade municipal and corporate bonds and other debt securities. The Company classifies its marketable securities as available-for-sale. This is based upon management’s determination that the underlying cash invested in these securities is available for operations as necessary.

The following table provides a summary of marketable investments by type (in thousands):
 

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September 25, 2011
 
 
Amortized    
Cost
 
Gross Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
 Estimated Fair 
Value
Municipal bonds
 
$
216,321

 
$
3,462

 
$
(1
)
 
$
219,782

Corporate bonds
 
171,268

 
1,777

 
(572
)
 
172,473

Certificates of deposit
 
43,003

 
4

 
(2
)
 
43,005

Commercial paper
 
7,146

 

 

 
7,146

U.S. agency securities
 
49,088

 
582

 
(36
)
 
49,634

Non-U.S. government securities
 
1,016

 

 
(1
)
 
1,015

Total
 
$
487,842

 
$
5,825

 
$
(612
)
 
$
493,055

 
 
 
 
 
 
 
 
 
 
 
June 26, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Municipal bonds
 
$
391,465

 
$
3,943

 
$
(10
)
 
$
395,398

Corporate bonds
 
207,241

 
2,312

 
(115
)
 
209,438

Certificates of deposit
 
10,003

 
12

 

 
10,015

Municipal variable rate demand notes
 
295

 

 

 
295

Commercial paper
 
4,999

 

 

 
4,999

U.S. agency securities
 
67,244

 
807

 
(2
)
 
68,049

Non-U.S. government securities
 
6,986

 
19

 

 
7,005

Total
 
$
688,233

 
$
7,093

 
$
(127
)
 
$
695,199

The contractual maturities of marketable investments at September 25, 2011 were as follows (in thousands):
 
 
September 25, 2011
 
    Within One    
Year
 
After One,
    Within Five    
Years
 
After Five,
    Within Ten    
Years
 
    After Ten    
Years
 
Total
Municipal bonds
$
69,171

 
$
150,611

 
$

 
$

 
$
219,782

Corporate bonds
71,676

 
100,797

 

 

 
$
172,473

Certificates of deposit
38,001

 
5,004

 

 

 
$
43,005

Commercial paper
7,146

 

 

 

 
$
7,146

U.S. agency securities
10,343

 
39,291

 

 

 
$
49,634

Non-U.S. government securities

 
1,015

 

 

 
$
1,015

Total
$
196,337

 
$
296,718

 
$

 
$

 
$
493,055


Note 5.    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 broken down 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

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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 and short-term investments. As of September 25, 2011 , financial assets utilizing Level 1 inputs included money market funds and investments traded on active securities exchanges. Financial assets utilizing Level 2 inputs included certificates of deposit, corporate bonds, municipal bonds and variable rate demand notes, and U.S. agency securities. Level 2 assets are valued using a third-party pricing services 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 does not have any significant financial assets requiring the use of Level 3 inputs. There were no transfers between Level 1 and Level 2 during the three months ended September 25, 2011 .
The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy and using the lowest level of input (in thousands):
 
 
Financial Instruments Carried at Fair Value
as of September 25, 2011
 
Financial Instruments Carried at Fair Value as of June 26, 2011
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
20,000

 
$

 
$
20,000

 
$

 
$

 
$

 
$

Money market funds
3,643

 

 

 
3,643

 
7,386

 

 

 
7,386

Total cash equivalents
3,643

 
20,000

 

 
23,643

 
7,386

 

 

 
7,386

Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
219,782

 

 
219,782

 

 
395,398

 

 
395,398

Corporate bonds

 
172,473

 

 
172,473

 

 
209,438

 

 
209,438

Municipal variable rate demand notes

 

 

 

 

 
295

 

 
295

Certificates of deposit

 
43,005

 

 
43,005

 

 
10,015

 

 
10,015

Commercial paper

 
7,146

 

 
7,146

 

 
4,999

 

 
4,999

U.S. agency securities

 
49,634

 

 
49,634

 

 
68,049

 

 
68,049

Non-U.S. government securities

 
1,015

 

 
1,015

 

 
7,005

 

 
7,005

Total short-term investments

 
493,055

 

 
493,055

 

 
695,199

 

 
695,199

Total assets
$
3,643

 
$
513,055

 
$

 
$
516,698

 
$
7,386

 
$
695,199

 
$

 
$
702,585


The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains from the sale of investments of approximately $1.0 million are included in “Other non-operating income, net” 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 fair value has been below 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 recovery in market value.

Note 6.    Intangible Assets
Intangible Assets, net
The following table reflects the components of intangible assets, net (in thousands):
 

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September 25,
2011
 
June 26,
2011
Customer relationships
$
137,440

 
$
52,620

Developed technology
148,160

 
51,860

In-process research and development
15,050

 

Non-compete agreements
9,800

 

Patent and license rights
170,767

 
83,884


$
481,217

 
$
188,364

Accumulated amortization
(90,716
)
 
(85,504
)
Intangible assets, net
$
390,501

 
$
102,860

Total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, recognized during the three months ended September 25, 2011 was $5.3 million. For the three months ended September 26, 2010 , total amortization expense, including amortization of acquisition related intangibles, patents and license rights was $3.8 million .
Total annual amortization expense of intangible assets is estimated to be as follows (in thousands):
Fiscal Year Ending
 
June 24, 2012
$
31,452

June 30, 2013
33,955

June 29, 2014
31,802

June 28, 2015
28,715

June 26, 2016
28,533


Goodwill
Goodwill increased by $287.7 million during the three months ended September 25, 2011 due to the acquisition of Ruud Lighting. Refer to “Note 2. Acquisitions” for the calculation of total goodwill recognized on the purchase.

Note 7.    Shareholders’ Equity
In connection with the acquisition of Ruud Lighting, the Company issued 6.1 million shares of common stock valued at approximately $211.0 million . The shares are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to 25% of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, (ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.
As of September 25, 2011 , the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $200.0 million for all purchases from June 16, 2011 through the expiration of the program, as authorized by the Board of Directors and extended through June 24, 2012 . During the three months ended September 25, 2011 , the Company did not repurchase any shares under the repurchase program.
The following presents a summary of activity in comprehensive income, net (in thousands):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
Net income
$
12,819

 
$
58,036

Other comprehensive income:
 
 
 
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $661 and $565 respectively
(1,092
)
 
933

Currency Translation Gain
$
520

 
$

Comprehensive income
$
12,247

 
$
58,969



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During the first quarter of fiscal 2012 , approximately $1.0 million of unrealized gains were reclassified out of accumulated other comprehensive income into earnings for the period, and are included in "Other non-operating income, net" in the Consolidated Statements of Income of this Quarterly Report on Form 10-Q.

Note 8.    Earnings Per Share
The following presents the computation of basic earnings per share (in thousands, except per share data):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
Basic:
 
Net income
$
12,819

 
$
58,036

Weighted average common shares
111,866

 
107,701

Basic earnings per share
$
0.11

 
$
0.54

The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share data):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
Diluted:
 
 
 
Net income
$
12,819

 
$
58,036

Weighted average common shares - basic
111,866

 
107,701

Dilutive effect of stock options, unvested shares and ESPP purchase rights
677

 
1,916

Weighted average common shares - diluted
112,543

 
109,617

Diluted earnings per share
$
0.11

 
$
0.53

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share. For the three months ended September 25, 2011 , there were 5.3 million shares not included in calculating diluted earnings per share because their effect was antidilutive. For the three months ended September 26, 2010 , there were 0.8 million shares not included in calculating diluted earnings per share because their effect was antidilutive.

Note 9.  Stock-Based Compensation
The Company currently has one equity-based compensation plan from which stock-based compensation awards can be granted to employees and directors. In addition, the Company has plans that have been terminated as to future grants, but under which options are currently outstanding. The Company also has an Employee Stock Purchase Plan that provides employees with the opportunity to purchase the Company’s common stock at 15% less than the fair market value of the common stock at two designated times each year.
Stock Option Awards
The following table summarizes outstanding option awards as of September 25, 2011 , and changes during the three months then ended (shares in thousands):
 
 
Number of Shares
 
Weighted-Average Exercise Price
Outstanding at June 26, 2011
6,467

 
$
39.56

Granted
2,809

 
30.98

Exercised
(91
)
 
24.18

Forfeited or expired
(67
)
 
46.45

Outstanding at September 25, 2011
9,118

 
$
37.02


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Restricted Stock and Stock Unit Awards
A summary of nonvested shares of restricted stock and stock unit awards outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of September 25, 2011 , and changes during the three months then ended, follows (shares in thousands):
 
Number of
  Shares/Units  
 
Weighted-
Average Grant-
Date Fair
Value
Nonvested at June 26, 2011
509

 
$
40.87

Granted
227

 
30.97

Vested
(177
)
 
38.29

Forfeited
(6
)
 
40.21

Nonvested at September 25, 2011
553

 
$
37.64

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plan using the fair value method. The fair value method requires the Company to estimate the grant date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

To estimate the fair value of the Company's stock option awards the Company currently uses the Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company's financial statements.

For restricted stock and stock unit awards, grant date fair value is based upon the market price of the Company's common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
Total stock-based compensation expense was as follows (in thousands):
 
Three Months Ended
Income Statement Classification
September 25,
2011
 
September 26,
2010
Cost of goods sold
$
1,714

 
$
1,132

Research and development
2,428

 
1,815

Sales, general and administrative
7,298

 
5,057

Total operating expenses
9,726

 
6,872

Total
$
11,440

 
$
8,004


Note 10.  Income Taxes
The variation between the Company’s effective income tax rate and the U.S. statutory rate of 35 percent is primarily due to the consolidation of its foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on the Company’s periodic effective tax rate.

Under U.S. GAAP, a two-step approach is followed to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The

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second step is to measure the tax benefit as the largest amount that is cumulatively more than 50 percent likely to be realized upon ultimate settlement.
At June 26, 2011 , the Company had recorded $7.0 million of unrecognized tax benefits. During the three months ended September 25, 2011 , there were no changes to that amount of recognized tax benefits. As a result, the total amount of unrecognized tax benefits as of September 25, 2011 is $7.0 million . If any portion of this $7.0 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that approximately $2.6 million of gross unrecognized tax benefits will change in the next 12 months.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the consolidated statements of income. As of September 25, 2011 , the Company had accrued $33 thousand of interest and penalties.
The Company files U.S. federal, U.S. state, and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years ended June 29, 2008 and prior. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2001 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2008 . The Company is currently under examination by the Internal Revenue Service for fiscal 2009. The Company is also currently under inquiry by the Hong Kong Inland Revenue Department for fiscal 2008 and fiscal 2009 .

Note 11.    Commitments and Contingencies
Warranties
The following table summarizes the changes in the Company's product warranty liabilities (in thousands):
Balance at June 26, 2011
$
2,235

Acquisition warranties beginning balance
2,600

Costs accrued for new warranty contracts
82

Changes in estimates for pre-existing warranties
(400
)
Expenditures
(657
)
Balance at September 25, 2011
$
3,860

Product warranties are provided for at the time the Company recognizes revenue. The warranty periods range from ninety (90) days to ten years. The Company estimates these warranty liabilities as a percentage of revenue, based on historical knowledge of warranty costs and expected future warranty costs. If actual product failure rates materially differ from these estimates, revisions to the estimated warranty liability would be required. The Company evaluates its warranty reserve on a quarterly basis.
Litigation

The Company is a party to various legal proceedings, including those described in our Annual Report on Form 10-K for the year ended June 26, 2011, as updated below, and the additional proceedings noted below. Unless otherwise indicated, the potential losses for claims against the Company in these matters are not reasonably estimable.

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SemiLEDs Litigation
As previously reported, the Company is the plaintiff in an action against SemiLEDs Corporation and its subsidiaries, Helios Crew Corp. and SemiLEDs Optoelectronics Co., Ltd., commenced October 8, 2010 in the U.S. District Court for the District of Delaware. The complaint as amended seeks injunctive relief and damages and alleges that the defendants are infringing six U.S. patents owned by the Company relating to light-emitting diodes: No. 7,737,459, entitled "High Output Group III Nitride Light Emitting Diodes"; No. 7,211,833, entitled "Light Emitting Diodes Including Barrier Layers/Sublayers"; No. 7,611,915, entitled "Methods for Manufacturing Light Emitting Diodes Including Barrier Layers/Sublayers"; No. 6,657,236, entitled "Enhanced Light Extraction in LEDs Through the Use of Internal and External Optical Elements"; No. 7,795,623, entitled "Light Emitting Devices Having Current Reducing Structures and Methods of Forming Light Emitting Devices Having Current Reducing Structures"; and No. 7,557,380, entitled "Light Emitting Devices Having a Reflective Bond Pad and Methods of Fabricating Light Emitting Devices Having Reflective Bond Pads." The defendants have filed an answer and counterclaims in which they deny any infringement and seek a declaratory judgment that all of the patents are invalid and that one of the patents is unenforceable. 

As also previously reported, SemiLEDs Corporation and SemiLEDs Optoelectronics Co., Ltd. filed a complaint against the Company in the U.S. District Court for the District of Delaware on August 15, 2011. The complaint seeks injunctive relief and damages for alleged infringement of three U.S. patents relating to light-emitting diodes:  No. 7,615,789, entitled "Vertical Light Emitting Diode Device Structure"; No. 7,646,033, entitled "Systems and Methods for Producing White-Light Emitting Diodes"; and No. D580,888 entitled "Light Emitting Diode Device with Electrode."  In October 2011, the Company filed an answer and counterclaims in which the Company denies any infringement and seeks a declaratory judgment that the asserted claims of the SemiLEDs patents are invalid. In addition, the Company asserted counterclaims against SemiLEDs Corporation and SemiLEDs Optoelectronics Co. seeking injunctive relief and damages for infringement of the following additional U.S. patents owned by the Company relating to light-emitting diodes: No. 6,958,497, entitled "Group III Nitride Based Light Emitting Diode Structures with a Quantum Well and Superlattice, Group III Nitride Based Quantum Well Structures and Group III Nitride Based Superlattice Structures"; and No. 6,515,313, entitled "Efficiency Light Emitters with Reduced Polarization-Induced Charges".
The Fox Group Litigation
As previously reported, The Fox Group, Inc. filed a complaint for patent infringement against the Company in the U.S. District Court for the Eastern District of Virginia on June 29, 2010. The complaint, which sought injunctive relief and damages, asserted that the Company was infringing two U.S. patents relating to high quality silicon carbide material: No. 6,534,026, entitled "Low Defect Density Silicon Carbide" (the "'026 patent"); and No. 6,562,130, entitled "Low Defect Axially Grown Single Crystal Silicon Carbide" (the "'130 patent"). The district court granted summary judgment in favor of the Company in August 2011. The court determined that the Company did not infringe the '026 patent and that the claims of the '130 patent asserted against the Company are invalid. The Fox Group has filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit.
Dow Corning Litigation
Dow Corning Compound Semiconductor Solutions, LLC filed a complaint against the Company in the U.S. District Court for the Eastern District of Michigan on September 27, 2011. The complaint, which was filed following the initiation of patent licensing discussions between the parties, seeks a declaratory judgment that the plaintiff does not infringe three U.S. patents owned by the Company relating to high quality silicon carbide materials and that the patents are invalid. The patents in suit are: No. 7,294,324, entitled “Low Basal Plane Dislocation Bulk Grown SiC Wafers”; No. 7,314,520, entitled “Low 1C Screw Dislocation 3 Inch Silicon Carbide Wafer”; and No. 7,314,521, entitled “Low Micropipe 100 MM Silicon Carbide Wafer.”
Osram Sylvania and Lighting Science Group Litigation
Ruud Lighting, Inc. filed a complaint for patent infringement against Osram Sylvania, Inc. in the U.S. District Court for the Eastern District of Wisconsin on April 2, 2010. The complaint, which seeks injunctive relief and damages, alleges that Osram Sylvania is infringing a U.S. patent owned by Ruud Lighting, No. 7,618,163, entitled "Light-Directing LED Apparatus." Lighting Science Group Corporation has intervened as a co-defendant in the action. Lighting Science Group asserted in its motion to intervene that the accused infringing product was developed jointly by Lighting Science Group and Osram Sylvania and that Lighting Science Group is obligated to defend and indemnify Osram Sylvania against the infringement claims. The defendants have filed an answer denying any infringement and Lighting Science Group has filed counterclaims seeking a declaratory judgment that the patent is invalid and unenforceable.
Cooper Lighting Litigation
Ruud Lighting, Inc. filed a complaint for patent infringement against Cooper Lighting, LLC in the U.S. District Court for the Eastern District of Wisconsin on April 2, 2010. The complaint as amended seeks injunctive relief and damages for

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infringement of two U.S. patents owned by Ruud Lighting: No. 7,686,469, entitled "LED Lighting Fixture"; and No. 7,891,835, entitled “Light-Directed Apparatus with Protected Reflector-Shield and Lighting Fixture Utilizing Same.” Cooper Lighting has filed an answer and counterclaims in which it denies any infringement and seeks a declaratory judgment that the asserted claims of the patents are invalid and that the claims of one of the patents are unenforceable.

Following the commencement of the suit against Cooper Lighting, Illumination Management Solutions, Inc., a California corporation acquired by Cooper Industries, LLC in March 2009, filed a complaint for patent infringement against Ruud Lighting in the U.S. District Court for the Eastern District of Texas on June 7, 2010. The complaint alleges that Ruud Lighting is infringing a U.S. patent owned by Illumination Management Solutions, No. 7,674,018, entitled "LED Device for Wide Beam Generation." It also alleges that Ruud Lighting and one of its founders, Alan Ruud, who served on the plaintiff's board of directors during 2006 and 2007, conspired to have Mr. Ruud breach fiduciary obligations by misusing information obtained from the plaintiff to file patent applications and obtain patents assigned to Ruud Lighting. The complaint seeks injunctive relief, damages and an order directing Ruud Lighting to transfer to the plaintiff any interest in patent applications and patents relating to the plaintiff's business that Mr. Ruud assigned to Ruud Lighting during or as a result of his fiduciary relationship with the plaintiff. In December 2010, the court ordered the action transferred to the U.S. District Court for the Eastern District of Wisconsin. In April 2011, the Wisconsin court stayed the case until a ruling was made in a related case, described below, on whether to retain the related case in the Eastern District of Wisconsin.

Illumination Management Solutions filed a complaint in the U.S. District Court for the Central District of California on June 8, 2010. As amended, the complaint names as defendants Ruud Lighting, Alan Ruud and his son Christopher Ruud. The complaint alleges that the individual defendants breached fiduciary duties to the plaintiff and that Ruud Lighting and the individual defendants conspired to breach these duties by misusing information obtained from the plaintiff to file patent applications and obtain patents assigned to Ruud Lighting. The complaint seeks damages and an order directing Ruud Lighting and Alan Ruud to transfer to the plaintiff any interest in patent applications and patents relating to the plaintiff's business that Mr. Ruud assigned to Ruud Lighting during or as a result of his fiduciary relationship with the plaintiff. In December 2010, the court ordered the action transferred to the U.S. District Court for the Eastern District of Wisconsin. The plaintiff subsequently filed a motion seeking to have the action re-transferred to California; the Wisconsin court denied the motion in September 2011.

Note 12. Related Party Transactions

On August 17, 2011, in connection with the Company's acquisition of Ruud Lighting, two of the prior shareholders of Ruud Lighting, Alan Ruud and Christopher Ruud, executed offer letters for continued employment with Ruud Lighting. Also on August 17, 2011, subsequent to the Company's acquisition of Ruud Lighting and pursuant to an Aircraft Purchase and Sale Agreement and a Joint Ownership Agreement with Ruud Lighting, each of Alan Ruud (through LSA, LLC, a limited liability company of which Mr. Ruud is the sole member (“LSA”)) and Christopher Ruud (through Light Speed Aviation, LLC, a limited liability company of which Christopher Ruud is the sole member (“Light Speed”)) acquired a 10% interest in an aircraft previously purchased by Ruud Lighting, resulting in Ruud Lighting owning an 80% interest in the aircraft. Each of LSA and Light Speed acquired its ownership in the aircraft for a purchase price of approximately $0.9 million for a combined interest of 20% or $1.9 million which is included in the Consolidated Statements of Cash Flow as cash provided by investing activities, under the caption "Purchase of Ruud, net of cash acquired."

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made and we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report.
The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 26, 2011 . Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview

Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. Our products are driving improvements in applications such as general illumination, video displays, automotive, electronic signs and signals, power supplies and solar inverters.

We develop and manufacture semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs), sapphire and other materials used for electronic and opto-electronic applications.

Our LED products consist of LED components, LED chips, and SiC wafers. As we develop and improve our LED technology and the market continues to focus on energy efficiency, we believe the potential market for LED lighting will continue to expand. Our success in selling LED products depends upon our ability to drive adoption and offer innovative products and solutions that enable our customers to succeed in the market. By driving adoption we believe we can influence the growth of the market and open more opportunities for LEDs.

Our lighting products consist of both LED and traditional lighting systems. We design, manufacture and sell lighting systems for indoor and outdoor applications, with our primary focus on LED lighting systems for the commercial and industrial markets. We also use our LED systems expertise to accelerate LED adoption and expand the market for our LED components. Our lighting products are marketed under numerous brands, such as Cree LED Lighting ® , Ruud Lighting ® , BetaLED ® , e-conolight ® and Kramer Lighting ® .

In addition, we develop, manufacture and sell power and RF products, such as power and RF devices. Our power products are made from SiC and provide faster switching speeds than comparable silicon-based power devices. Our RF devices are made from SiC or GaN and produce higher power densities as compared to silicon or gallium arsenide devices.

The majority of our products are manufactured at our production facilities located in North Carolina, Wisconsin and China. We also use contract manufacturers for certain aspects of our products fabrication, packaging and assembly. We operate research and development facilities in North Carolina, California, Wisconsin and China.

We currently operate our business as one reportable segment.

Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:

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Overall Demand for Products and Applications using LEDs. Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown in recent years, adoption of LEDs for general lighting is relatively new and faces significant challenges before widespread adoption. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain, and demand dynamics in the market. These uncertainties make demand difficult to forecast for us and our customers.
Intense and Constantly Evolving Competitive Environment. Competition in the industry is intense and new companies have entered and are entering the LED market, with many companies making significant investments in LED production equipment. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share and to increase the utilization of their production capacity. To remain competitive, market participants must continuously increase product performance and reduce costs to offset lower average sales prices. To address this pricing pressure, we have invested in the development of 150mm wafer production, which is intended to reduce our costs of producing LED chips. Certain of our competitors also have announced the intention to produce, or have begun producing, LED chips using 150mm wafers.
Technological Innovation and Advancement. Innovations and advancements in LED technology continue to expand the potential commercial application of LEDs particularly in the general illumination market. However, new technologies or standards could emerge, or improvements could be made in existing technologies, that reduce or limit the demand for LEDs in certain markets.
Regulatory Actions Concerning Energy Efficiency. Many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency, even in some cases banning forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. While this trend is generally positive, there have been some political efforts in the United States to change or limit the effectiveness of these new regulations.
Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation commonly occurs.

Highlights of the First Quarter Fiscal 2012
The following is a summary of our financial results for the three months ended September 25, 2011:
We acquired Ruud Lighting to accelerate the LED lighting revolution;
Our year over year revenues increased slightly to $269.0 million from $268.4 million , which includes approximately $20 million in net sales from our acquisition of Ruud Lighting;
We achieved operating income of $13.4 million in the first quarter of fiscal 2012 compared to $73.4 million in the first quarter of fiscal 2011. Net income per diluted share was $0.11 compared to $0.53 for the first quarter of fiscal 2011;
Inventory increased to $203.6 million at September 25, 2011 compared to $176.5 million at June 26, 2011 due to the acquisition of Ruud Lighting;
We spent $34.0 million on capital expenditures in the first quarter of fiscal 2012 compared to $61.6 million in the first quarter of fiscal 2011; and
Combined cash, cash equivalents and marketable investments decreased to $632.2 million at September 25, 2011 compared to $1,085.8 million at June 26, 2011, primarily due to the acquisition of Ruud Lighting.

Business Outlook

We project that the markets for our products will remain highly competitive during the remainder of fiscal 2012. We anticipate focusing on the following key areas in response to this competitive environment:
Build on our market leadership and drive adoption of LED lighting. We are focused on developing innovative new LED lighting systems to drive adoption, and new LED components that enable our customers to deliver a more competitive payback versus traditional lighting. We recognize that our leadership in lighting systems can sometimes raise questions with our component customers, but we believe this product line has helped us set new standards in the market and disrupt the status quo in the lighting industry. We recently acquired Ruud Lighting, a leading innovator of LED lighting products, which we believe gives us a stronger product portfolio to drive LED adoption and expand the

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market for LED lighting. We plan to continue to invest in both our LED lighting and LED component product lines to increase performance, enable lower lighting system costs with shorter paybacks and find new ways to drive the market and obsolete old, energy-wasting lighting technology.
A ccelerate cost reductions and drive operational improvements to increase the profitability of our business. We target lower LED costs from the conversion to 150mm wafers, higher factory utilization, as well as yield and productivity improvements. We plan to lower LED lighting system costs with new product designs that are under development and we target improved operating leverage from higher revenues across our LED lighting systems and component product lines.
Expand the power and RF product line beyond niche applications. SiC power devices can deliver better performance and increased payback against silicon (Si) based power devices in applications where efficiency and reliability is an important criteria. We target continued investment in R&D for new diode and switch products focused on more mainstream and higher volume power switching applications. We are managing the product line through a slowdown in solar inverter demand, which we believe is a temporary market correction. We target the combination of new products, improved market demand and expanded sales coverage to drive growth in the product line.

Results of Operations
The following table sets forth certain consolidated statement of income data for the periods indicated:
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
(in thousands, except per share amounts and percentages)
Dollars
 
% of Revenue
 
Dollars
 
% of Revenue
Revenue, net
$
268,980

 
100
%
 
$
268,437

 
100
 %
Cost of revenue, net
170,952

 
64
%
 
137,908

 
51
 %
Gross profit
98,028

 
36
%
 
130,529

 
49
 %
Research and development
34,402

 
13
%
 
24,732

 
9
 %
Sales, general and administrative
45,539

 
17
%
 
29,202

 
11
 %
Amortization of acquisition related intangibles
3,925

 
1
%
 
2,706

 
1
 %
Loss on disposal or impairment of long-lived assets
775

 
%
 
472

 
 %
Operating income
13,387

 
5
%
 
73,417

 
27
 %
Other non-operating income (loss), net
974

 
%
 
(62
)
 
 %
Interest income, net
1,969

 
1
%
 
2,016

 
1
 %
Income from operations before income taxes
16,330

 
6
%
 
75,371

 
28
 %
Income tax expense
3,511

 
1
%
 
17,335

 
6
 %
Net income
12,819

 
5
%
 
58,036

 
22
 %
Diluted earnings per share
$
0.11

 
 
 
$
0.53

 
 

Revenues

Our revenues are presented below in the following categories: LED products, lighting products and power and RF products, which represents a change from our prior presentation. Revenues for the three months ended September 25, 2011 and September 26, 2010 were comprised of the following (in thousands, except percentages):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
LED products
$
196,778

 
$
228,765

 
$
(31,987
)
 
(14
)%
Percent of revenues
73
%
 
85
%
 
 
 
 
Lighting products
51,673

 
15,601

 
36,072

 
231
 %
Percent of revenues
19
%
 
6
%
 
 
 
 
Power and RF products
20,529

 
24,071

 
(3,542
)
 
(15
)%
Percent of revenues
8
%
 
9
%
 
 
 
 
Total revenues
$
268,980

 
$
268,437

 
$
543

 
 %

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LED Products
We derive the largest portion of our revenue from the sale of our LED products which comprised approximately 73% and 85% of our total revenues for the first quarter of fiscal 2012 and fiscal 2011, respectively.
    
Revenue from LED products decreased approximately 14% to $196.8 million in the first quarter of fiscal 2012 from $228.8 million in the first quarter of fiscal 2011 . This decrease was driven by weaker demand for LED chips and a more aggressive pricing environment. Although, there was weaker demand for LED chips, the blended average selling price (ASP) for our LED products increased by 21.8% in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 . This increase was primarily due to a higher product mix of LED components, which have a higher ASP.
Lighting Products
Revenue from lighting products increased approximately 231% to $51.7 million in the first quarter of fiscal 2012 from $15.6 million in the first quarter of fiscal 2011 . This increase was due to an increase in both the sales of our existing products and the sales of Ruud Lighting outdoor products, which represent an addition to our existing indoor lighting portfolio.
Power and RF Products
Revenues from power and RF products comprised approximately 8% and 9% of our total revenues for the first quarter of fiscal 2012 and fiscal 2011 , respectively.

Revenue from power and RF decreased approximately 15% to $20.5 million in the first quarter of fiscal 2012 from $24.1 million in the first fiscal quarter of 2011 . The decrease in our power and RF products revenue was primarily due to a slow down in demand in the solar inverter and power supply markets.
Gross Profit
Cost of revenue includes materials, labor and overhead costs incurred internally or paid to contract manufacturers to produce our products. Gross profit in dollars and gross margin were as follows (in thousands, except percentages):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
Total gross profit
$
98,028

 
$
130,529

 
$
(32,501
)
 
(25
)%
Gross margin
36
%
 
49
%
 
 
 
 

Gross profit in the first quarter of fiscal 2012 decreased approximately 25% to $98.0 million from $130.5 million in the first quarter of fiscal 2011 . Additionally, for the first quarter of fiscal 2012 our gross margin decreased to 36% from 49% in the first quarter of fiscal 2011. Factors contributing to the decrease in gross profit and gross margin were a more aggressive pricing environment and lower factory utilization.
Research and Development

Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consist primarily of employee compensation and benefits, occupancy costs, consulting costs and the cost of development equipment and supplies.

The following sets forth our research and development expenses in dollars and as a percentage of revenues (in thousands, except percentages):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
Research and development
$
34,402

 
$
24,732

 
$
9,670

 
39
%
Percent of revenues
13
%
 
9
%
 
 
 
 

Research and development expenses in the first quarter of fiscal 2012 increased 39% to $34.4 million from $24.7 million in the first quarter of fiscal 2011 . The increase was primarily due to increased spending to support the transition to 150mm wafer capabilities as well as continued research and development activities focused on new LED chips, LED components, LED lighting products, power products and the incremental research and development expense incurred from the acquisition of Ruud Lighting. Our research and development expenses vary significantly from quarter to quarter based on a number of factors,

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including: the timing of new product introductions, timing of expenditures and the number and nature of our ongoing research and development activities. However, we anticipate that in general our research and development expenses will continue to increase over time to support future growth.

Sales, General and Administrative

Sales, general and administrative expenses are composed primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, legal, finance, information technology and human resources personnel) and consist of 1) salaries and related compensation costs, 2) consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs), 3) facilities and insurance costs, and 4) travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenues (in thousands, except percentages):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
Sales, general and administrative
$
45,539

 
$
29,202

 
$
16,337

 
56
%
Percent of revenues
17
%
 
11
%
 
 
 
 

Sales, general and administrative expenses in the first quarter of fiscal 2012 increased 56% to $45.5 million from $29.2 million in the first quarter of fiscal 2011 . The increase in the first quarter of fiscal 2012 from fiscal 2011 is primarily due to an increase in spending on sales and marketing as we continue to expand our direct sales resources and channels and invest in building the Cree brand and incremental sales, general and administrative expenses from our acquisition of Ruud Lighting. Additionally, costs increased due to increased legal costs associated with patent litigation and the transaction costs associated with the acquisition of Ruud Lighting.
Amortization of Acquisition Related Intangibles
As a result of our acquisitions, we have recorded various intangible assets that require amortization, including customer relationships and developed technologies. During fiscal 2007, we acquired INTRINSIC Semiconductor Corporation and COTCO Luminant Device Limited (now Cree Hong Kong Limited) (COTCO), resulting in $63.7 million of amortizable intangible assets principally composed of customer relationships and developed technology. In fiscal 2008, we acquired LLF, resulting in an additional $41.2 million of amortizable intangible assets. These intangible assets are principally composed of developed technology that specifically relates to technologies underlying the development of LED lighting products for the general illumination market. During fiscal 2012, we acquired Ruud Lighting, resulting in $207.4 million of amortizable intangible assets consisting of developed technology, customer relationships, trade names, in-process research and development, and non-compete agreements. Amortization of intangible assets related to our acquisitions is as follows (in thousands, except percentages):
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
INTRINSIC
$
186

 
$
186

 
$

 
 %
COTCO
1,264

 
1,734

 
(470
)
 
(27
)%
LLF
750

 
786

 
(36
)
 
(5
)%
Ruud Lighting
1,725

 

 
1,725

 
 %
Total
$
3,925

 
$
2,706

 
$
1,219

 
45
 %
Loss on Disposal or Impairment of Long-Lived Assets

We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our equipment for possible impairments in value. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands, except percentages):
 

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Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
Loss on disposal or impairment of long-lived assets, net
$
775

 
$
472

 
$
303

 
64
%

We recorded a net loss of $0.8 million on the disposal of long-lived assets in the first quarter of fiscal 2012 compared to a net loss of $0.5 million in the first quarter of fiscal 2011 . The causes of the fiscal 2012 and fiscal 2011 net losses include the disposal of equipment due to manufacturing process changes and the impairment of certain capitalized patent costs.
Non-Operating Income
The following table sets forth our non-operating income (in thousands, except percentages):
 
 
Three Months Ended
 
September 25,
2011
 
September 26,
2010
 
Change
Other non-operating income (loss), net
$
974

 
$
(62
)
 
$
1,036

 
(1,671
)%
Interest income, net
1,969

 
2,016

 
(47
)
 
(2
)%
Total
$
2,943

 
$
1,954

 
$
989

 
51
 %

We have no debt or lines of credit and we are in a net interest income position. We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities, municipal bonds, and other fixed interest rate investments. The primary objective of our investment policy is preservation of principal.

Other non-operating income, net, is comprised primarily of gains on sales of investments and foreign exchange gains and losses. The increase for the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 is primarily from gains on sales of investments related to our acquisition of Ruud Lighting.
  
Income Tax Expense
The following table sets forth our income tax expense in dollars (in thousands, except percentages) and our effective tax rate:
 
 
Three Months Ended
 
September 25, 2011
 
September 26, 2010
 
Change
Income tax expense
$
3,511

 
$
17,335

 
$
(13,824
)
 
(80
)%
Effective Tax Rate
21.5
%
 
23.0
%
 
 
 
 

The variation between our effective tax rate and the U.S. statutory rate of 35% is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a material impact on our periodic effective tax rate.

We recorded income tax expense of $3.5 million for an effective tax rate of 21.5% in the first quarter of fiscal 2012 as compared to income tax expense of $17.3 million for an effective tax rate of 23.0% in the first quarter of fiscal 2011 . The decrease in our effective tax rate is primarily due to a higher percentage of income in lower tax jurisdictions outside the United States.

Liquidity and Capital Resources
Overview

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable investments and cash generated from operations. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have no debt or lines of credit and have minimal lease commitments.


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On August 17, 2011, we acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of 6.1 million shares of our common stock and $372.2 million cash, subject to certain post-closing adjustments. Prior to the completion of our acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight, LLC. Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction, we funded Ruud Lighting's re-acquisition of E-conolight and paid off Ruud Lighting's outstanding debt in the aggregate amount of approximately $85.0 million . The cash consideration and debt payoff were funded from cash on hand, which reduced our available cash to fund our operating expenses and working capital by approximately $457.2 million .

Based on past performance and current expectations, we believe our cash and cash equivalents, investments, cash generated from operations and our ability to access capital markets will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, contractual obligations, commitments and other liquidity requirements associated with our operations through at least the next 12 months.

From time to time, we evaluate strategic opportunities, including potential acquisitions, divestitures or investments in complementary businesses and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of new debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.
Financial Condition

Our liquidity and capital resources depend on our cash flows from operations and our working capital. Our working capital decreased to $928.3 million as of September 25, 2011 from $1,316.6 million at June 26, 2011 , primarily due to cash used to fund our acquisition of Ruud Lighting in the first quarter of fiscal 2012 . The following table presents the components of our cash conversion cycle for our first quarter of fiscal 2012 and fourth quarter of fiscal 2011 :
 
 
September 25, 2011
 
June 26,
2011
 
Change
Days of sales outstanding (a)
55
 
44
 
11

 
25
 %
Days of supply in inventory (b)
107
 
106
 
1

 
1
 %
Days in accounts payable (c)
(39)
 
(46)
 
7

 
(15
)%
Cash conversion cycle
123
 
104
 
19

 
18
 %

(a)
Days of sales outstanding (DSO) calculates the average collection period of our accounts receivable. DSO is based on the ending net trade receivables and the most recent quarterly revenue for each period. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts and revenue reserves, by average net revenue for the current quarter (90 days).
(b)
Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on net ending inventory and the most recent quarterly cost of sales for each period. DSI is calculated by dividing net ending inventory by average cost of goods sold for the current quarter (90 days).
(c)
Days in accounts payable (DPO) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold for the current quarter (90 days).

Overall, our cash conversion cycle, or days to cash, increased primarily due to our acquisition of Ruud Lighting, which increased accounts receivable, inventory and accounts payable, while only adding one month of sales and cost of sales.

As of September 25, 2011 , all of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 25, 2011 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below our cost basis, the financial condition of the entity in which the investment is made, and our ability and intent to hold the investment for a period of time that may be sufficient for anticipated recovery in market value. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of September 25, 2011 .


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We believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for the remainder of fiscal 2012 . We have and may continue to use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties, or expand our production capacity.

Cash Flows
In summary, our cash flows were as follows (in thousands, except percentages):
 
 
Three Months Ended
 
September 25, 2011
 
September 26, 2010
 
Change
Cash provided by operating activities
$
41,645

 
$
88,518

 
$
(46,873
)
 
(53
)%
Cash used in investing activities
(295,893
)
 
(83,202
)
 
(212,691
)
 
256
 %
Cash provided by financing activities
2,355

 
9,664

 
(7,309
)
 
(76
)%
Effects of foreign exchange changes
468

 
172

 
296

 
172
 %
Net (decrease) increase in cash and cash equivalents
$
(251,425
)
 
$
15,152

 
$
(266,577
)
 
(1,759
)%
The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.
Cash Flows from Operating Activities
Net cash provided by operating activities was $41.6 million in the first quarter of fiscal 2012 compared to $88.5 million for the first quarter of fiscal 2011 . This decrease was primarily driven by a year over year decline in our net income.
Cash Flows from Investing Activities
Our investing activities primarily relate to transactions within our investments, strategic acquisitions, purchase of property, plant and equipment and purchase of patent and license rights. Net cash used in investing activities was $295.9 million for the first quarter of fiscal 2012 compared to $83.2 million for the first quarter of fiscal 2011 . This year over year increase to cash used in investing activities was primarily the result of the payment of cash for our acquisition of Ruud Lighting in the first quarter of fiscal 2012 , which was partially offset by an increase in our proceeds from the sale and maturity of investments, which were liquidated to pay for the Ruud Lighting acquisition.

We will continue to closely monitor our capital expenditures, while making strategic investments to develop our existing products, pursue strategic initiatives where appropriate, and invest in our manufacturing and information technology infrastructure to meet the needs of our business. We target committing capital of approximately $150 to $160 million in fiscal 2012 for capital expenditures.

Cash Flows from Financing Activities
Net cash provided by financing activities was $2.4 million for the first quarter of fiscal 2012 compared to $9.7 million for the first quarter of fiscal 2011 . This change was primarily due to the issuance of shares related to option exercises.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 25, 2011 , we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into leases primarily for certain of our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 26, 2011 , in the section entitled “Contractual Obligations” for the future minimum lease payments due under our operating leases as of June 26, 2011 .
Critical Accounting Policies and Estimates
For information about our other critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates”

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section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 26, 2011 .
Recent Accounting Pronouncements
See Note 1, "Basis of Presentation and Changes in Significant Accounting Policies," to our unaudited financial statements in Part I, Item 1 of this Quarterly Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about our market risks, see Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 26, 2011.

Item 4.     Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by the Form 10-Q, our disclosure controls and procedures are effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods required by the United States Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We routinely review our internal control over financial reporting and from time to time make changes intended to enhance the effectiveness of our internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the first quarter of fiscal 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II – OTHER INFORMATION



Item 1.     Legal Proceedings
The information required by this item is set forth under Note 11 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, and is incorporated herein by reference.
Item 1A. Risk Factors
Described below are various risks and uncertainties that may affect our business. The descriptions below include material changes to and supersede the description of the risk factors affecting our business previously disclosed in “Part I, Item IA. Risk Factors” of our Annual Report on Form 10-K and any subsequent periodic reports. If any of the risks described below actually occurs, our business, financial condition or results of operations could be materially and adversely affected.

We face significant challenges managing our growth as the market adopts LEDs for general lighting.
Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown rapidly in recent years, adoption of LEDs for general lighting is relatively new, still limited and faces significant challenges before widespread adoption. In order to manage our growth and business strategy effectively in light of uncertainty related to the pace of adoption, we must continue to:
maintain, expand and purchase adequate manufacturing facilities and equipment to meet customer demand;
maintain a sufficient supply of raw materials to support our growth;
expand research and development, sales and marketing, technical support, distribution capabilities and administrative functions;
expand the skills and capabilities of our current management team;
add experienced senior level managers; and
attract and retain qualified employees.
While we intend to focus on managing our costs and expenses, over the long term we expect to invest substantially to support our growth and may have additional unexpected costs. For example, we purchased a 565,000 -square-foot facility in Huizhou, Guangdong Province, China to support LED chip and LED component production in 2009 , and we are targeting to expand LED wafer production at our facility in North Carolina. However, such investments take time to become fully operational, and we may not be able to expand quickly enough to exploit targeted market opportunities. There are also inherent execution risks in starting up a new factory or expanding production capacity that could increase costs and reduce our operating results, including design and construction cost overruns, poor production process yields and reduced quality control during the start-up phase.

We are also increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build, implement and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property through security breach.

In connection with our efforts to cost-effectively manage our growth, we have increasingly relied on contractors for production capacity, logistics support and certain administrative functions including hosting of certain information technology software applications. If these service providers do not perform effectively, we may not be able to achieve the expected cost savings and may incur additional costs to correct errors or fulfill customer demand. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies or the loss of or damage to intellectual property through security breach, or impact employee morale. Our operations may also be negatively impacted if any of these service providers do not have the financial capability to meet our growing needs.

If we are unable to effectively develop, manage and expand our sales and distribution channels for our products, our operating results may suffer.
We have expanded into business channels that are different from those in which we have historically operated as we grow our business and sell LED lighting products and more LED components versus LED chips. For example, lighting sales agents may choose to drop our product lines from their portfolio to avoid losing access to our competitors' lighting products. If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the appropriate customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate or develop these

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channels, we cannot guarantee that customers will accept our products or that we will be able to manufacture and deliver them in the timeline established by our customers.

We sell a substantial portion of our products to distributors. We rely on distributors to develop and expand their customer base as well as anticipate demand from their customers. If they are not successful, our growth and profitability may be adversely impacted. Distributors must balance the need to have enough products in stock in order to meet their customers' needs against their internal target inventory levels and the risk of potential inventory obsolescence. The risks of inventory obsolescence are especially true with technological products. The distributors' internal target inventory levels vary depending on market cycles and a number of factors within each distributor over which we have very little, if any control.

We typically recognize revenue on product sold to distributors when the item is shipped and title passes to the distributor (sell-in method). Certain distributors have limited rights to return inventory under stock rotation programs and have limited price protection rights for which we make estimates. We evaluate inventory levels in the distribution channel, current economic trends and other related factors in order to account for these factors in our judgments and estimates. As inventory levels and product return trends change, we revise our estimates and our operating results could be impacted.

The markets in which we operate are highly competitive and have evolving technical requirements.
The markets for our products are highly competitive. In the LED market, we compete with companies that manufacture or sell LED chips and LED components. In the lighting market we compete with companies that manufacture and sell traditional and LED lighting products. Competitors continue to offer new products with aggressive pricing and improved performance. Competitive pricing pressures may change and could accelerate the rate of decline of our average sales prices.

With the growth potential for LEDs, we may face increased competition in the future. If the investment in new capacity exceeds the growth in demand, the LED market is likely to become more competitive with additional pricing pressures. Additionally, new technologies could emerge or improvements could be made in existing technologies that may also reduce the demand for LEDs in certain markets.

As competition increases, in order to continue to grow our business, we need to continue to develop new products that meet or exceed the needs of our customers. Additionally, we anticipate that increased competition will result in pressure to lower the selling prices of our products. Therefore, our ability to continually produce more efficient, higher brightness LEDs that meet the evolving needs of our customers at lower costs will be critical to our success. Competitors may also try to align with some of our strategic customers. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations or financial condition.

If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.
From time to time, we evaluate strategic opportunities available to us for product, technology or business transactions, such as business acquisitions or divestitures. We acquired Ruud Lighting in August 2011 and LED Lighting Fixtures, Inc. (LLF) in February 2008 . If we choose to enter into such transactions, we face certain risks, such as the failure of an acquired business to meet our performance expectations, diversion of management attention, retention of existing customers of our current and acquired businesses due to concerns that new product lines may be in competition with the customers of existing product lines or otherwise, and difficulty integrating an acquired business's operations, personnel and financial and operating systems into our current business.

We may not be able to adequately address these risks or any other problems that arise from our recent or future acquisitions or divestitures. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any such business transaction could adversely affect our business, results of operations or financial condition.

We depend on a limited number of customers, including distributors, for a substantial portion of our revenues, and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating results.
We receive a significant amount of our revenues from a limited number of customers, including distributors. Most of our customer orders are made on a purchase order basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their past purchasing behavior with little or no notice to us for various reasons, including: developing, or, in the case of our distributors, their customers developing, their own product solutions; choosing to purchase product from our competitors; incorrectly forecasting end market demand for their products; or experiencing a reduction in their market share in the markets for which they purchase our products. If our customers alter their past (or expected) purchasing behavior, or if we encounter any problems collecting amounts due from them, our financial condition and results of

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operations could be negatively impacted.

We operate in an industry that is subject to significant fluctuation in supply and demand that affects our LED revenue and profitability.
The LED lighting industry is in the early stages of adoption and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. The industry has experienced significant fluctuations, often in connection with, or in anticipation of product cycles and declines in general economic conditions. These fluctuations have been characterized by lower product demand, production overcapacity, higher inventory levels and increased pricing pressure. We have experienced these conditions in our business in the past, are currently experiencing these conditions, and may experience such conditions in the future, which could have a material negative impact on our business and results of operations.

Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity.
As customer demand for our products changes, we must be able to ramp up or adjust our production capacity to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. For example, we purchased a 565,000 -square-foot facility in Huizhou, Guangdong Province, China to support LED chip and LED component production in 2009 and continue to expand LED wafer production at our facility in North Carolina. If we are not able to increase our production capacity at our targeted rate, or if there are unforeseen costs associated with adjusting our capacity levels, we may not be able to achieve our financial targets.

Conversely, due to the proportionately high fixed cost nature of our business (such as facility expansion costs), if demand does not increase at the rate forecasted, we may not be able to manage manufacturing expenses or overhead costs at the same rate as demand.  This could result in lower margins and adversely impact our business and results of operations.  Additionally, if product demand decreases or we fail to forecast demand accurately, we may be required to record impairments on our long-lived assets or record excess inventory write off charges. We have in the past and may in the future be required to record excess capacity charges, which would have a negative impact on our results of operations.

In addition, our efforts to improve quoted delivery lead-time performance may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results.

As a result of our continued expansion into new markets existing customers may reduce orders.
Through acquisitions and organic growth, including our recent acquisition of Ruud Lighting, we continue to expand into new markets. Many of our existing customers who purchase our LED chips and LED components develop and manufacture products using those chips and components that are offered into the same markets. As a result, our current customers may perceive us as a competitor in these new markets. In response, our customers may reduce or discontinue their orders for our products. This reduction in or discontinuation of orders could occur faster than our sales growth in these new markets, which could adversely affect our business, results of operations or financial condition.

Our LED revenues are highly dependent on our customers' ability to produce, market and sell more integrated products using our LED products.
Our LED revenues depend on getting our products designed into a larger number of our customers' products and in turn, our customers' ability to produce, market and sell their products. For example, we have current and prospective customers that create, or plan to create, lighting systems using our LED components. However, the traditional lighting industry is still developing technical expertise with LED related designs, which may limit the success of our customers' products. Even if our customers are able to develop and produce LED lighting products, there can be no assurance that our customers will be successful in marketing and selling these products in the marketplace.

We also have current and prospective customers that create white LED components using our blue LEDs, in combination with phosphors. Sales of blue LED chips are highly dependent upon our customers' ability to procure efficient phosphors, develop high quality and highly efficient white LED components and gain access to the necessary intellectual property rights. Even if our customers are able to develop competitive white LED components using our blue LED chips, there can be no assurance that our customers will be successful in the marketplace.

The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance or other aspects of LED lighting or changes in government and/or industry policies, standards or regulations

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that discourage the use of certain traditional lighting technologies, could impact the demand for our LED products.
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance or other aspects of LED lighting may impact the demand for our LED products. For example, in the second half of calendar year 2010 the Chinese government delayed purchases of LED street and tunnel lighting while developing new standards for the required performance for such lighting products in China. The process resulted in reduced demand for those lighting applications and continues to limit our ability to forecast demand for those applications in the short term.

Demand for our LED products may also be impacted by changes in government and/or industry policies, standards or regulations that discourage the use of certain traditional lighting technologies. For example, the Energy Independence and Security Act of 2007 in the United States imposes constraints on the sale of incandescent lights beginning in 2012. These constraints may be eliminated or delayed by legislative action, which could have a negative impact on demand for our products.

If governments, their agencies or regulated utilities discontinue or curtail their funding, or reduce their demand for our products, our business may suffer.
Changes in governmental budget priorities could adversely affect our business and results of operations.  Historically, U.S. government agencies have funded a portion of our research and development activities.  In addition, U.S. and foreign government agencies have purchased products directly from us and products from our customers.  When the government changes budget priorities, such as in times of war or financial crisis, our research and development funding and our product sales are at risk.  For example, demand and payment for our products and our customers' products may be affected by public sector budgetary cycles, funding authorizations, or utility rebates. Funding reductions or delays could negatively impact demand for our products. In particular, if U.S. government funding is discontinued or significantly reduced, our business and results of operations could be adversely affected. 

Variations in our production yields could impact our ability to reduce costs and could cause our margins to decline and our operating results to suffer.
All of our products are manufactured using technologies that are highly complex. The number of usable items, or yield, from our production processes may fluctuate as a result of many factors, including but not limited to the following:
variability in our process repeatability and control;
contamination of the manufacturing environment;
equipment failure, power outages, system failures or variations in the manufacturing process;
lack of consistency and adequate quality and quantity of piece parts and other raw materials, and other bill of materials items;
production yield loss, inventory shrinkage or human errors;
defects in production processes (including system assembly) either within our facilities or at our contractors; and
any transitions or changes in our production process, planned or unplanned.
In the past, we have experienced difficulties in achieving acceptable yields on certain products, which has adversely affected our operating results. We may experience similar problems in the future, and we cannot predict when they may occur or their severity.

In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in allowing for a more cost effective manufacturing process. If we are unable to make this transition in a timely or cost effective manner, our results could be negatively impacted.

In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost efficiencies from other production advances. Failure to achieve these planned improvements or advances could significantly affect our margins and operating results.

Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as an influenza outbreak within our workforce, or man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, particularly if a catastrophic event occurred at our single site for SiC wafer manufacturing. This could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable as well, such as impacts to our customers and their supply chain, which could cause delays in new orders, delays in completing sales or even order cancellations.

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Our operating results are substantially dependent on the development and acceptance of new products.
Our future success may depend on our ability to develop new and lower cost solutions for existing and new markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we historically have experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all of our projects will be successful. The successful development and introduction of these new products depends on a number of factors, including the following:
achievement of technology breakthroughs required to make commercially viable devices;
the accuracy of our predictions for market requirements beyond near term visibility;
our ability to predict, influence, and/or react to evolving standards;
acceptance of our new product designs;
acceptance of new technology in certain markets;
the availability of qualified research and development personnel;
our timely completion of product designs and development;
our ability to expand direct customer sales and influence key distribution customers to adopt our products;
our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired specifications and at competitive costs for commercial sales;
our ability to effectively transfer products and technology developed in one country to our manufacturing facilities in other countries;
our customers' ability to develop competitive products incorporating our products; and
acceptance of our customers' products by the market.
If any of these or other factors becomes problematic, we may not be able to develop and introduce these new products in a timely or cost-effective manner.

If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.
The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.

We have experienced product quality, performance or reliability problems from time to time and defects or failures may occur in the future. If failures or defects occur, we may need to recall our products. These recalls could result in significant losses due to:
costs associated with the removal, collection and destruction of the product recalled;
payments made to replace recalled product;
a rise in warranty expense and costs associated with customer support;
the write down or destruction of existing inventory subject to the recall;
lost sales due to the unavailability of product for a period of time;
delays, cancellations or rescheduling of orders for our products; or
increased product returns.
We also may be the target of product liability lawsuits, and could suffer losses from a significant product liability judgment against us if the use of our products at issue is determined to have caused injury. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of customer confidence in our products.

Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.
As a result of acquisitions and organic growth, we have operations, manufacturing facilities and contract manufacturing

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arrangements in foreign countries that expose us to certain risks. For example, fluctuations in exchange rates may affect our revenues, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:
protection of intellectual property and trade secrets;
tariffs, customs and other barriers to importing/exporting materials and products in a cost effective and timely manner;
timing and availability of export licenses;
rising labor costs;
disruptions in or inadequate infrastructure of the foreign countries where we operate;
difficulties in accounts receivable collections;
difficulties in staffing and managing international operations;
the burden of complying with foreign and international laws and treaties; and
the burden of complying with and changes in international taxation policies.
In some instances, we have been provided and may continue to receive competing incentives from foreign governments to encourage our investment in certain countries, regions, or areas outside of the United States. In particular, we have received and may continue to receive such incentives in connection with our operations in Asia, as Asian national and local governments seek to encourage the development of the technology industry. Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations. These same governments also may provide increased incentives to or require production processes that favor local companies, which could further negatively impact our business and results of operations.

Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.

Litigation could adversely affect our operating results and financial condition.
We are often involved in patent infringement litigation as described in Note 11, “Commitments and Contingencies,” to our consolidated financial statements included in Item 1 of this Quarterly Report and as described in more detail in Note 13, "Commitments and Contingencies" to our consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 26, 2011. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially affect our results of operations and financial condition.

Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights. Any such litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in any such litigation.

Our business may be impaired by claims that we, or our customers, infringe the intellectual property rights of others.
Vigorous protection and pursuit of intellectual property rights characterize our industry. These traits have resulted in significant and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:
pay substantial damages;
indemnify our customers;
stop the manufacture, use and sale of products found to be infringing;
incur asset impairment charges;
discontinue the use of processes found to be infringing;
expend significant resources to develop non-infringing products or processes; or
obtain a license to use third party technology.
There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with

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respect to our products. In addition, our customers may face infringement claims directed to the customer's products that incorporate our products, and an adverse result could impair the customer's demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under these indemnification obligations, we may be responsible for future payments to resolve infringement claims against them.

From time to time, we receive correspondence asserting that our products or processes are or may be infringing patents or other intellectual property rights of others. If we believe the assertions may have merit or in other appropriate circumstances, we take steps to seek to obtain a license or to avoid the infringement. However, we cannot predict whether a license will be available; that we would find the terms of any license offered acceptable; or that we would be able to develop an alternative solution. Failure to obtain a necessary license or develop an alternative solution could cause us to incur substantial liabilities and costs and to suspend the manufacture of affected products.

There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and patents licensed to us. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and foreign patent authorities.

However, our existing patents are subject to expiration and we cannot be sure that additional patents will be issued on any new applications around the covered technology or that our existing or future patents will not be successfully contested by third parties. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.

We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. The actions we take to establish and protect trademarks, patents, and other intellectual property rights may not be adequate to prevent imitation of our products by others, and therefore, may adversely affect our sales and our brand and result in the shift of customer preference away from our products. Further, the actions we take to establish and protect trademarks, patents and other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation or other action results in a determination favorable to us.

We also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.

We may be subject to intellectual property theft or misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our systems. Additionally, outside parties may attempt to fraudulently induce employees to disclose sensitive information in order to gain access to our systems. We actively seek to prevent, detect and investigate any unauthorized access, which sometimes occurs. We might be unaware of any such access or unable to determine its magnitude and effects. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development could be reduced. Our business could be subject to significant disruption, and we could suffer monetary or other losses.

Our business may be adversely affected by uncertainties in the global financial markets and our or our customers' or suppliers' ability to access the capital markets.
Global financial markets continue to reflect uncertainty about a sustained global economic recovery. Given these uncertainties, there could be future disruptions in the global economy, financial markets and consumer confidence. If economic conditions deteriorate unexpectedly, our business and results of operations could be materially and adversely affected. For example, our customers, including our distributors and their customers, may continue to experience difficulty obtaining the financing necessary to support historical or projected purchasing patterns, which could negatively affect our results of operations.


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Although we believe we have adequate liquidity and capital resources to fund our operations internally, our inability to access the capital markets on favorable terms in the future, or at all, may adversely affect our financial performance. The inability to obtain adequate financing from debt or capital sources in the future could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn could potentially harm our performance.

We are subject to risks related to international sales and purchases.
We expect that revenue from international sales will continue to represent the majority of our total revenue. In fiscal 2011, approximately 76% of our revenue was derived from sales to non-U.S. customers, with approximately 36% of revenue from sales to customers in China. As such, a significant slowdown in these foreign economies or lower investments in new infrastructure could have a negative impact on our sales. We also purchase a portion of the materials included in our products from overseas sources.

Our international sales and purchases are subject to numerous U.S. and foreign laws and regulations, including, without limitation, tariffs, trade barriers, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and regulations, we could be liable for administrative, civil or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or have our export privileges suspended, which could have a material adverse effect on our business.

International sales and purchases are also subject to a variety of other risks, including risks arising from currency fluctuations, collection issues and taxes. Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies in which we are billed.

We have not entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign exchange rate risk.

We rely on a number of key sole source and limited source suppliers, and are subject to high price volatility on certain commodity inputs, variations in parts quality, and raw material consistency and availability.
We depend on a number of sole source and limited source suppliers for certain raw materials, including rare earth elements, components, services and equipment used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes. Although alternative sources generally exist for these items, qualification of many of these alternative sources could take up to six months or longer. Where possible, we attempt to identify and qualify alternative sources for our sole and limited source suppliers.

We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements with such suppliers. Some of our sources can have variations in attributes and availability which can affect our ability to produce products in sufficient volume or quality. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. Additionally, general shortages in the marketplace of certain raw materials or key components, such as passive electrical components used in LED lighting applications, may adversely impact our business. In the past, we have experienced decreases in our production yields when suppliers have varied from previously agreed upon specifications that have impacted our cost of sales.

Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. This risk may increase if an economic downturn negatively affects key suppliers or a significant number of our other suppliers. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us from meeting commercial demand for our products. If we were to lose key suppliers, our key suppliers were unable to support our demand for any reason, or we were unable to identify and qualify alternative suppliers, our manufacturing operations could be interrupted or hampered significantly.

We rely on arrangements with independent shipping companies for the delivery of our products from vendors and to customers in both the United States and abroad. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security.

In our fabrication process we consume a number of precious metals and other commodities, which are subject to high price volatility. Our operating margins could be significantly affected if we are not able to pass along price increases to our

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customers. In addition, production could be disrupted by the unavailability of the resources used in production such as water, silicon, electricity and gases. Future environmental regulations could restrict supply or increase the cost of certain of those materials.

Changes in our effective tax rate may have an adverse effect on our results.
Our future effective tax rates may be adversely affected by a number of factors including:
the jurisdiction in which profits are determined to be earned and taxed;
changes in government administrations, such as the Presidency and Congress of the U.S. as well as in the states and countries in which we operate;
changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles;
the resolution of issues arising from tax audits with various authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;
changes in available tax credits;
the recognition and measurement of uncertain tax positions;
the lack of sufficient excess tax benefits (credits) in our additional paid in capital (APIC) pool in situations where our realized tax deductions for certain stock-based compensation awards (such as non-qualified stock options and restricted stock) are less than those originally anticipated; and
the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes, or any changes in legislation that may result in these earnings being taxed within the U.S., regardless of our decision regarding repatriation of funds.
For example, proposals have been made by various U.S. governmental bodies to change the U.S. tax laws that include, among other things, limiting U.S. tax deductions for expenses related to un-repatriated foreign-source income and modifying the U.S. foreign tax credit rules. Although the scope of the proposed changes is unclear, it is possible that these or other changes in U.S. tax laws could increase our U.S. income tax liability and adversely affect our profitability. At this time, we cannot determine the timing that the proposed changes, if enacted, would become effective.

Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the determination of our income tax provision requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. To the extent our income tax liability materially differs from our income tax provisions and accruals due to factors, including the above, which were not anticipated at the time we estimated our tax provision, our net income or cash flows could be adversely affected.

Our stock price may be volatile.
Historically, our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in our revenue, earnings and margins over the past few years and variations between our actual financial results and the published expectations of analysts. For example, the closing price per share of our common stock on the NASDAQ Global Select Market ranged from a low of $33.15 in fiscal 2011 to a high of $75.63 in the same fiscal year. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.

Speculation in the press or investment community about our strategic position, financial condition, results of operations, or significant transactions can also cause changes in our stock price. In particular, speculation around our market opportunities for energy efficient lighting may have a dramatic effect on our stock price, especially as various government agencies announce their planned investments in energy efficient technology, including lighting.

In order to compete, we must attract, motivate and retain key employees, and our failure to do so could harm our results of operations.
Hiring and retaining qualified executives, scientists, engineers, technical staff and sales personnel is critical to our business, and competition for experienced employees in our industry can be intense. As a global company, this issue is not limited to the United States, but includes our other locations such as Europe and China. For example, there is substantial competition in China for qualified and capable personnel, particularly experienced engineers and technical personnel, which may make it difficult for us to recruit and retain qualified employees. Also, within Huizhou, China, there are other large companies building

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manufacturing plants that will likely attract qualified employees. If we are unable to staff sufficient and adequate personnel at our China facilities, we may experience lower revenues or increased manufacturing costs, which would adversely affect our results of operations.

To help attract, motivate and retain key employees, we use benefits such as stock-based compensation awards, which include non-qualified stock options and restricted stock. If the value of such stock awards does not appreciate, as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which could harm our business and results of operations.

Our failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of operations.
The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
regulatory penalties, fines, legal liabilities, and the forfeiture of certain tax benefits;
suspension of production;
alteration of our fabrication, assembly and test processes; and
curtailment of our operations or sales.
In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify our product designs or incur other expenses, such as permit costs, associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our manufacturing processes. For example, under the recently adopted greenhouse gas regulations in the U.S., most of our manufacturing facilities in the U.S. may be considered “major sources” under the Clean Air Act in 2011. This change could likely result in increased costs for our U.S. operations, such as increased control and remediation requirements, additional monitoring, recordkeeping and reporting costs.

We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.
We are required under generally accepted accounting principles to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets or goodwill may not be recoverable include a decline in stock price and market capitalization and slower growth rates in our industry. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our amortizable intangible assets or goodwill is determined to exist. This could adversely impact our results of operations.

Our results could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies, including changes in the accounting regulations to be applied.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results (see “Critical Accounting Policies and Estimates” in our Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 26, 2011.) Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results.

Likewise, our results may be impacted due to changes in the accounting rules to be applied, such as the increased use of fair value measurement rules, proposed changes in revenue recognition requirements, and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards.



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We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, and therefore, impairment of our investments or lower investment income could harm our earnings.
We are exposed to market value and inherent interest rate risk related to our investment portfolio. We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities and other fixed interest rate investments. The primary objective of our investment policy is preservation of principal. However, our investments are generally not FDIC insured and may lose value and/or become illiquid regardless of their rating.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Other than in connection with our previously disclosed acquisition of Ruud Lighting, there were no sales of unregistered securities during the first quarter of fiscal 2012. The following table summarizes our stock repurchase activity for the first quarter of fiscal 2012 (in thousands, except per share data):

Period
Total number of shares purchased (1)
Average price paid per share
Total number of shares purchased as a part of publicly announced program <