Cree, Inc.
CREE INC (Form: 10-Q, Received: 04/22/2015 16:28:51)
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 March 29, 2015
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 April 15, 2015 , was 109,114,990 .


Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended March 29, 2015
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.
 
 

2

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
CREE, INC.
CONSOLIDATED BALANCE SHEETS
 
March 29,
2015
 
June 29,
2014
 
(unaudited)
 
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$204,728

 

$286,824

Short-term investments
577,313

 
875,642

Total cash, cash equivalents and short-term investments
782,041

 
1,162,466

Accounts receivable, net
216,247

 
225,160

Income tax receivable
1,521

 

Inventories
299,360

 
284,780

Deferred income taxes
29,344

 
29,414

Prepaid expenses and other current assets
69,949

 
72,071

Total current assets
1,398,462

 
1,773,891

Property and equipment, net
654,248

 
605,713

Goodwill
616,345

 
616,345

Intangible assets, net
322,229

 
336,423

Other long-term investments
76,865

 

Other assets
11,703

 
11,997

Total assets

$3,079,852

 

$3,344,369

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable, trade

$124,966

 

$202,294

Accrued salaries and wages
41,745

 
50,527

Income taxes payable

 
14,848

Other current liabilities
33,554

 
38,986

Total current liabilities
200,265

 
306,655

Long-term liabilities:

 

Long-term debt
150,000

 

Deferred income taxes
14,243

 
12,173

Other long-term liabilities
24,376

 
35,395

Total long-term liabilities
188,619

 
47,568

Commitments and contingencies (Note 11)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at March 29, 2015 and June 29, 2014; none issued and outstanding

 

Common stock, par value $0.00125; 200,000 shares authorized at March 29, 2015 and June 29, 2014; 109,929 and 120,114 shares issued and outstanding at March 29, 2015 and June 29, 2014, respectively
136

 
149

Additional paid-in-capital
2,261,085

 
2,190,011

Accumulated other comprehensive income, net of taxes
7,308

 
11,405

Retained earnings
422,439

 
788,581

Total shareholders’ equity
2,690,968

 
2,990,146

Total liabilities and shareholders’ equity

$3,079,852

 

$3,344,369

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

3


CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
 
(In thousands, except per share amounts)
Revenue, net

$409,519

 

$405,259

 

$1,250,348

 

$1,211,351

Cost of revenue, net
284,111

 
255,265

 
852,341

 
754,822

Gross profit
125,408

 
149,994

 
398,007

 
456,529

Operating expenses:
 
 
 
 

 

Research and development
43,823

 
46,626

 
137,537

 
132,805

Sales, general and administrative
71,860

 
65,368

 
213,927

 
197,589

Amortization or impairment of acquisition-related intangibles
6,749

 
7,257

 
19,743

 
21,800

Loss on disposal or impairment of long-lived assets
1,459

 
364

 
3,641

 
1,781

Total operating expenses
123,891

 
119,615

 
374,848

 
353,975

Operating income
1,517

 
30,379

 
23,159

 
102,554

Non-operating (expense) income, net
(866
)
 
3,152

 
3,766

 
9,373

Income before income taxes
651

 
33,531

 
26,925

 
111,927

Income tax expense

 
5,367

 
2,993

 
17,585

Net income

$651

 

$28,164

 

$23,932

 

$94,342

Earnings per share:
 
 
 
 

 

Basic
$0.01

 

$0.23

 
$0.21

 

$0.78

Diluted
$0.01

 

$0.23

 
$0.21

 

$0.77

Weighted average shares used in per share calculation:
 
 
 
 

 

Basic
110,662

 
121,535

 
115,177

 
120,677

Diluted
111,590

 
123,695

 
116,304

 
123,140

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

4


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

 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
 
(In thousands)
Net income

$651

 

$28,164

 

$23,932

 

$94,342

Other comprehensive income:
 
 
 
 
 
 
 
Currency translation (loss)
(2,071
)
 
(163
)
 
(3,971
)
 
(28
)
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($741), ($126), $86 and ($1,191), respectively
1,186

 
191

 
(126
)
 
1,901

Other comprehensive (loss) income
(885
)
 
28

 
(4,097
)
 
1,873

Comprehensive (loss) income

($234
)
 

$28,192

 

$19,835

 

$96,215

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


5


CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income

$23,932

 

$94,342

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
130,393

 
120,219

Stock-based compensation
49,260

 
46,261

Excess tax benefit from stock-based payment arrangements
(1,656
)
 
(18,396
)
Impairment of acquisition-related intangibles
254

 

Loss on disposal or impairment of long-lived assets
3,641

 
1,781

Amortization of premium/discount on investments
4,809

 
7,674

Loss on equity method investment
2,991

 

Foreign exchange loss on equity method investment
710

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
7,579

 
(29,829
)
Inventories
(15,101
)
 
(53,511
)
Prepaid expenses and other assets
800

 
13,008

Accounts payable, trade
(69,330
)
 
29,016

Accrued salaries and wages and other liabilities
(44,583
)
 
17,605

Net cash provided by operating activities
93,699

 
228,170

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(158,277
)
 
(119,614
)
Purchases of short-term investments
(254,883
)
 
(510,401
)
Proceeds from maturities of short-term investments
337,331

 
365,005

Proceeds from sale of property and equipment
122

 
117

Proceeds from sale of short-term investments
207,551

 
22,387

Purchases of patent and licensing rights
(14,550
)
 
(14,755
)
Purchase of other long-term investments
(80,566
)
 

Net cash provided by (used in) investing activities
36,728

 
(257,261
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt borrowings
440,000

 

Payments on long-term debt borrowings
(290,000
)
 

Net proceeds from issuance of common stock
26,832

 
89,476

Excess tax benefit from stock-based payment arrangements
1,656

 
18,396

Repurchases of common stock
(390,088
)
 
(107
)
Net cash (used in) provided by financing activities
(211,600
)
 
107,765

Effects of foreign exchange changes on cash and cash equivalents
(923
)
 
95

Net (decrease) increase in cash and cash equivalents
(82,096
)
 
78,769

Cash and cash equivalents:
 
 
 
Beginning of period
286,824

 
190,069

End of period

$204,728

 

$268,838

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

6


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


Note 1 – Basis of Presentation and New Accounting Standards
Overview
Cree, Inc. (the Company) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and wide band gap semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
The Company's LED products consist of LED components, LED chips and silicon carbide (SiC) materials. The Company's success in selling LED products depends upon its ability to offer innovative products and to enable its customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.
The Company's lighting products primarily consist of LED lighting systems and bulbs. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
In addition, the Company develops, manufactures and sells power and RF devices based on wide band gap semiconductor materials such as SiC and gallium nitride (GaN). The Company's power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. The Company's RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).
The majority of the Company's products are manufactured at its production facilities located in North Carolina, Wisconsin and China. The Company also uses contract manufacturers for certain aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, California, Wisconsin, India and China (including Hong Kong).

Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.
The Company's three reportable segments are:
LED Products
Lighting Products
Power and RF Products

For financial results by reportable segment, please refer to Note 12, "Reportable Segments."
Basis of Presentation
The consolidated balance sheet at March 29, 2015 , the consolidated statements of income for the three and nine months ended March 29, 2015 and March 30, 2014 , the consolidated statements of comprehensive income for the three and nine months ended March 29, 2015 and March 30, 2014 , and the consolidated statements of cash flows for the nine months ended March 29, 2015 and March 30, 2014 (collectively, the 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 fairly state the consolidated financial position, results of operations and cash flows at March 29, 2015 , and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 29, 2014 has been derived from the audited financial statements as of that date.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2014 (fiscal 2014 ). The results of operations for the three and nine months ended March 29, 2015 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 28, 2015 (fiscal 2015 ).

7


The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.
Certain fiscal 2014 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2015 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity. The fiscal 2015 consolidated financial statements also include an immaterial adjustment to a previously capitalized patent amount.
New Accounting Standards
Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASU provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers. The effective date will be the first quarter of the Company's fiscal year ending June 24, 2018, using one of two retrospective application methods. The Company is currently analyzing the impact of this new accounting guidance.
Note 2 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
 
March 29, 2015
 
June 29, 2014
Billed trade receivables

$255,145

 

$255,374

Unbilled contract receivables
2,103

 
1,557


257,248

 
256,931

Allowance for sales returns, discounts and other incentives
(37,071
)
 
(29,010
)
Allowance for bad debts
(3,930
)
 
(2,761
)
Accounts receivable, net

$216,247

 

$225,160

Inventories
The following table summarizes the components of inventories (in thousands):
 
March 29, 2015
 
June 29, 2014
Raw material

$86,586

 

$95,594

Work-in-progress
100,007

 
92,889

Finished goods
112,767

 
96,297

Inventories

$299,360

 

$284,780


8


Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
 
March 29, 2015
 
June 29, 2014
Accrued taxes

$12,829

 

$19,835

Accrued professional fees
8,319

 
5,373

Accrued warranty
7,224

 
5,842

Accrued other
5,182

 
7,936

Other current liabilities

$33,554

 

$38,986

Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
 
March 29, 2015
 
June 29, 2014
Currency translation gain

$4,578

 

$8,549

Net unrealized gain on available-for-sale securities
2,730

 
2,856

Accumulated other comprehensive income, net of taxes

$7,308

 

$11,405

Non-Operating (Expense) Income, net
The following table summarizes the components of non-operating (expense) income, net (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
Foreign currency gain (loss), net

$776

 

($368
)
 

($1,820
)
 

$109

Gain on sale of investments, net
107

 
15

 
883

 
25

Loss on equity method investment
(3,670
)
 

 
(2,991
)
 

Interest income, net
1,823

 
3,415

 
7,441

 
8,562

Other, net
98

 
90

 
253

 
677

Non-operating (expense) income, net

($866
)
 

$3,152

 

$3,766

 

$9,373

Reclassifications Out of Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the amounts reclassified out of accumulated other comprehensive income, net of taxes (in thousands):
Accumulated Other Comprehensive Income Component
 
Amount Reclassified Out of Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statements of Income
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
 
 
Net unrealized gain on available-for-sale securities, net of taxes
 

$107

 

$15

 

$883

 

$25

 
Non-operating (expense) income, net
 
 
107

 
15

 
883

 
25

 
Income before income taxes
 
 

 
2

 
98

 
4

 
Income tax expense
 
 

$107

 

$13

 

$785

 

$21

 
Net income

9


Note 3 – Investments
Investments consisted primarily of municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities . All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's approximately 13% common stock ownership interest in Lextar Electronics Corporation, which was completed in December 2014. This investment is accounted for under the equity method utilizing the fair value option.
The following tables summarize short-term investments (in thousands):
 
 
March 29, 2015
 
 
Amortized    
Cost
 
Gross Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Estimated Fair 
Value
Municipal bonds
 

$188,994

 

$1,951

 

($71
)
 

$190,874

Corporate bonds
 
153,535

 
2,589

 
(33
)
 
156,091

U.S. agency securities
 

 

 

 

Non-U.S. certificates of deposit
 
230,348

 

 

 
230,348

Non-U.S. government securities
 

 

 

 

Total short-term investments
 

$572,877

 

$4,540

 

($104
)
 

$577,313

 
 
 
 
 
 
 
 
 
 
 
June 29, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Municipal bonds
 

$291,869

 

$2,323

 

($12
)
 

$294,180

Corporate bonds
 
200,177

 
2,283

 
(114
)
 
202,346

U.S. agency securities
 
18,994

 
141

 

 
19,135

Non-U.S. certificates of deposit
 
352,928

 

 

 
352,928

Non-U.S. government securities
 
7,025

 
28

 

 
7,053

Total short-term investments
 

$870,993

 

$4,775

 

($126
)
 

$875,642


10


The following tables present the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities):
 
 
March 29, 2015
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$31,776

 

($71
)
 

$—

 

$—

 

$31,776

 

($71
)
Corporate bonds
 
15,373

 
(33
)
 

 

 
15,373

 
(33
)
Total
 

$47,149

 

($104
)
 

$—

 

$—

 

$47,149

 

($104
)
Number of securities with an unrealized loss
 
 
 
29

 
 
 

 
 
 
29

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 29, 2014
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$7,906

 

($8
)
 

$1,520

 

($4
)
 

$9,426

 

($12
)
Corporate bonds
 
15,696

 
(31
)
 
13,049

 
(83
)
 
28,745

 
(114
)
Total
 

$23,602

 

($39
)
 

$14,569

 

($87
)
 

$38,171

 

($126
)
Number of securities with an unrealized loss
 
 
 
13

 
 
 
7

 
 
 
20

The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses from the sale of investments are included in Non-operating (expense) income, net in the Consolidated Statements of Income and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.
The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be other-than-temporary on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its securities to be impaired as of March 29, 2015 and June 29, 2014 .
The contractual maturities of short-term investments as of March 29, 2015 were as follows (in thousands):
 
 
Within One    
Year
 
After One,
Within Five    
Years
 
After Five,
Within Ten    
Years
 
After Ten    
Years
 
Total
Municipal bonds

$14,400

 

$140,878

 

$35,596

 

$—

 

$190,874

Corporate bonds
24,706

 
99,571

 
31,814

 

 
156,091

Non-U.S. certificates of deposit
230,348

 

 

 

 
230,348

Total short-term investments

$269,454

 

$240,449

 

$67,410

 

$—

 

$577,313


11


Note 4 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. As of March 29, 2015 , financial assets utilizing Level 1 inputs included money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit, non-U.S. government securities and common stock of non-U.S. corporations. Level 2 assets are valued using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of March 29, 2015 . There were no transfers between Level 1 and Level 2 during the nine months ended March 29, 2015 .

12


The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
 
March 29, 2015
 
June 29, 2014
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. certificates of deposit

$—

 

$15,000

 

$—

 

$15,000

 

$—

 

$—

 

$—

 

$—

Money market funds
16,805

 

 

 
16,805

 
40,031

 

 

 
40,031

Total cash equivalents
16,805

 
15,000

 

 
31,805

 
40,031

 

 

 
40,031

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
190,874

 

 
190,874

 

 
294,180

 

 
294,180

Corporate bonds

 
156,091

 

 
156,091

 

 
202,346

 

 
202,346

U.S. agency securities

 

 

 

 

 
19,135

 

 
19,135

Non-U.S. certificates of deposit

 
230,348

 

 
230,348

 

 
352,928

 

 
352,928

Non-U.S. government securities

 

 

 

 

 
7,053

 

 
7,053

Total short-term investments

 
577,313

 

 
577,313

 

 
875,642

 

 
875,642

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

 
76,865

 

 
76,865

 

 

 

 

Total other long-term investments

 
76,865

 

 
76,865

 

 

 

 

Total assets

$16,805

 

$669,178

 

$—

 

$685,983

 

$40,031

 

$875,642

 

$—

 

$915,673

Note 5 – Intangible Assets
The following table presents the components of intangible assets, net (in thousands):
 
March 29, 2015
 
June 29, 2014
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships

$136,920

 

($70,737
)
 

$66,183

 

$137,440

 

($66,970
)
 

$70,470

Developed technology
162,760

 
(86,902
)
 
75,858

 
162,760

 
(72,921
)
 
89,839

Non-compete agreements
10,244

 
(7,467
)
 
2,777

 
10,244

 
(5,997
)
 
4,247

Trade names, finite-lived
520

 
(520
)
 

 
520

 
(516
)
 
4

Patent and licensing rights
146,675

 
(48,944
)
 
97,731

 
134,607

 
(42,424
)
 
92,183

Total intangible assets with finite lives
457,119

 
(214,570
)
 
242,549

 
445,571

 
(188,828
)
 
256,743

Trade names, indefinite-lived
79,680

 


 
79,680

 
79,680

 


 
79,680

Total intangible assets

$536,799

 

($214,570
)
 

$322,229

 

$525,251

 

($188,828
)
 

$336,423

For the three and nine months ended March 29, 2015 , total amortization of finite-lived intangible assets was $9.0 million and $27.0 million , respectively. For the three and nine months ended March 30, 2014 , total amortization of finite-lived intangible assets was $9.5 million and $28.3 million , respectively.

13


Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands):
Fiscal Year Ending
 
June 28, 2015 (remainder of fiscal 2015)

$8,808

June 26, 2016
35,057

June 25, 2017
33,036

June 24, 2018
31,842

June 30, 2019
19,308

Thereafter
114,498

Total future amortization expense

$242,549


Note 6 – Long-term Debt
On January 9, 2015, the Company entered into a new credit agreement (New Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo Bank) and other lenders party thereto for a $500 million secured revolving line of credit under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2020. Proceeds of the initial loans made under the New Credit Agreement were used to repay amounts outstanding under the Company's previous $150 million unsecured credit agreement with Wells Fargo Bank, entered into on August 12, 2014.
The Company classifies balances outstanding under its line of credit as Long-term debt in the Consolidated Balance Sheets. At March 29, 2015 , the Company had $150 million outstanding under the New Credit Agreement and $350 million available for borrowing. For the three and nine months ended March 29, 2015 , the average interest rate under these credit agreements was 0.96% and 0.92% , respectively. The average commitment fee percentage for these credit agreements was 0.09% for the three and nine months ended March 29, 2015 . The Company was in compliance with all covenants in the New Credit Agreement at March 29, 2015 .
Note 7 – Shareholders’ Equity
As of March 29, 2015 , pursuant to an approval by the Board of Directors to increase the amount of the stock repurchase program, the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $550 million for all purchases from June 30, 2014 through the expiration of the program on June 28, 2015 . During the nine months ended March 29, 2015 , the Company repurchased 11.2 million shares of common stock for $390.1 million under the stock repurchase program.
Note 8 – Earnings Per Share
The following table presents the computation of basic earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
Net income

$651

 

$28,164

 

$23,932

 

$94,342

Weighted average common shares
110,662

 
121,535

 
115,177

 
120,677

Basic earnings per share

$0.01

 

$0.23

 

$0.21

 

$0.78


14


The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share amounts):  
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
Net income

$651

 

$28,164

 

$23,932

 

$94,342

Weighted average common shares - basic
110,662

 
121,535

 
115,177

 
120,677

Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights
928

 
2,160

 
1,127

 
2,463

Weighted average common shares - diluted
111,590

 
123,695

 
116,304

 
123,140

Diluted earnings per share

$0.01

 

$0.23

 

$0.21

 

$0.77

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the three and nine months ended March 29, 2015 , there were 7.7 million and 6.8 million , respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive. For the three and nine months ended March 30, 2014 , there were 3.1 million and 2.4 million , respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.
Note 9 – Stock-Based Compensation
Overview of Employee Stock-Based Compensation Plans
The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. The Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which stock options, restricted stock and restricted stock units are currently outstanding.
The Company’s stock-based awards can be either service-based or performance-based.  Performance-based conditions are generally tied to future financial and/or operating performance of the Company. The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.
The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. The ESPP limits employee contributions to 15% of each employee’s compensation (as defined in the plan) and allows employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants purchase the Company’s common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.

15


Stock Option Awards
The following table summarizes stock option awards outstanding as of March 29, 2015 and changes during the nine months then ended (numbers of shares in thousands):  
 
Number of Shares
 
Weighted Average Exercise Price
Outstanding at June 29, 2014
8,922

 

$41.85

Granted
3,377

 

$44.73

Exercised
(683
)
 

$28.71

Forfeited or expired
(602
)
 

$48.30

Outstanding at March 29, 2015
11,014

 

$43.19

Restricted Stock Awards and Units
A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of March 29, 2015 , and changes during the nine months then ended is as follows (numbers of awards and units in thousands):  
 
Number of
  RSAs/RSUs  
 
Weighted Average 
Grant-Date Fair Value
Nonvested at June 29, 2014
860

 

$46.81

Granted
457

 

$44.66

Vested
(352
)
 

$46.28

Forfeited
(52
)
 

$47.25

Nonvested at March 29, 2015
913

 

$45.91

Stock-Based Compensation Valuation and Expense
The Company accounts for its employee stock-based compensation plans 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.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s stock option and ESPP awards. 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, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, 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 RSAs and RSUs, the 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 recognized net of estimated forfeitures such that expense is recognized 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.

16


Total stock-based compensation expense was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
Income Statement Classification:
 
 
 
 
 
 
 
Cost of revenue, net

$3,158

 

$3,129

 

$9,511

 

$8,357

Research and development
4,212

 
3,912

 
12,795

 
11,453

Sales, general and administrative
8,694

 
8,970

 
26,954

 
26,451

Total stock-based compensation expense

$16,064

 

$16,011

 

$49,260

 

$46,261

Note 10 – Income Taxes
The variation between the Company's effective income tax rate and the U.S. statutory rate of 35% is due to a percentage of the Company's projected income for the full year being derived from international locations with lower tax rates than the U.S. and the impact of tax credits available in the current year. A change in the mix of pretax income of the Company's various tax jurisdictions can have a material impact on the Company's periodic effective tax rate.
U.S. GAAP requires a two-step approach to recognizing and measuring 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 second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.
As of June 29, 2014 , the Company's liability for unrecognized tax benefits was $18.4 million . During the nine months ended March 29, 2015 , there was a $0.2 million decrease to the amount of unrecognized tax benefits following statute expirations. As a result, the total liability for unrecognized tax benefits as of March 29, 2015 was $18.2 million . If any portion of this $18.2 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 $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of statute requirements.
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 prior to 2012. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2011. For foreign purposes, the Company is generally no longer subject to tax examinations for tax periods 2004 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment.
Note 11 – Commitments and Contingencies
Warranties
The following table summarizes the changes in the Company's product warranty liabilities (in thousands):
Balance at June 29, 2014

$6,822

Warranties accrued in current period
6,658

Expenditures
(5,330
)
Balance at March 29, 2015

$8,150

Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from 90 days to 10 years . The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The warranty reserves, which are primarily related to Lighting Products, are evaluated quarterly based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates. As of March 29, 2015 , $0.9 million of the Company's product warranty liabilities were classified as long-term.
Litigation
The Company is currently a party to various legal proceedings.  While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or

17


overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur.  An unfavorable ruling could include money damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways.  Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company’s business, results of operation, financial position and overall trends.  The outcomes in these matters are not reasonably estimable.
Note 12 – Reportable Segments

The Company's operating and reportable segments are:
LED Products
Lighting Products
Power and RF Products
Reportable Segments Description
The Company's LED Products segment includes LED chips, LED components and SiC materials. The Company's Lighting Products segment primarily consists of LED lighting systems and bulbs. The Company's Power and RF Products segment includes power devices and RF devices.
Financial Results by Reportable Segment
The table below reflects the results of the Company's reportable segments as reviewed by the Chief Operating Decision Maker (CODM) for the three and nine months ended March 29, 2015 and March 30, 2014 . The Company's CODM is the Chief Executive Officer. The Company used the same accounting policies to derive the segment results reported below as those used in the Company's consolidated financial statements.
The Company's CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in the segment revenue presented in the table below. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.
The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the Consolidated Statements of Income must be included to reconcile the consolidated gross profit presented in the table below to the Company's consolidated income before income taxes.
In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment's cost of revenue. The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment. The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated.
Unallocated costs in the table below consisted primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company’s 401(k) plan . These costs were not allocated to the reportable segments’ gross profit because the Company’s CODM does not review them regularly when evaluating segment performance and allocating resources.

18


Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages):
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
Revenue:
 
 
 
 
 
 
 
LED Products revenue

$154,384

 

$201,119

 

$479,851

 

$634,164

Lighting Products revenue
224,109

 
176,691

 
677,363

 
498,265

Power and RF Products revenue
31,026

 
27,449

 
93,134

 
78,922

Total revenue

$409,519

 

$405,259

 

$1,250,348

 

$1,211,351

 
 
 
 
 
 
 
 
Gross Profit and Gross Margin:
 
 
 
 
 
 
 
LED Products gross profit

$55,358

 

$91,634

 

$182,406

 

$290,931

LED Products gross margin
35.9
%
 
45.6
%
 
38.0
%
 
45.9
%
Lighting Products gross profit
58,315

 
48,487

 
178,608

 
136,731

Lighting Products gross margin
26.0
%
 
27.4
%
 
26.4
%
 
27.4
%
Power and RF Products gross profit
16,484

 
15,675

 
51,601

 
44,452

Power and RF Products gross margin
53.1
%
 
57.1
%
 
55.4
%
 
56.3
%
Total segment gross profit
130,157

 
155,796

 
412,615

 
472,114

Unallocated costs
(4,749
)
 
(5,802
)
 
(14,608
)
 
(15,585
)
Consolidated gross profit

$125,408

 

$149,994

 

$398,007

 

$456,529

Consolidated gross margin
30.6
%
 
37.0
%
 
31.8
%
 
37.7
%

Assets by Reportable Segment
Inventories are the only assets reviewed by the Company's CODM when evaluating segment performance and allocating resources to the segments. The CODM reviews all of the Company's assets other than inventories on a consolidated basis.
Unallocated inventories in the table below were not allocated to the reportable segments because the Company’s CODM does not review them when evaluating performance and allocating resources to each segment. Unallocated inventories consisted primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company’s 401(k) plan .
Inventories for each of the Company's segments were as follows (in thousands):
 
March 29,
2015
 
June 29,
2014
LED Products
$
128,061

 
$
123,249

Lighting Products
155,294

 
148,757

Power and RF Products
11,306

 
8,019

Total segment inventories
294,661

 
280,025

Unallocated inventories
4,699

 
4,755

Consolidated inventories
$
299,360

 
$
284,780



19


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 except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (the SEC), 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.

Executive Summary
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 fiscal year ended June 29, 2014 . 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 wide band gap semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
Our LED products consist of LED components, LED chips and silicon carbide (SiC) materials. Our success in selling LED products depends upon our ability to offer innovative products and to enable our customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.
Our lighting products primarily consist of LED lighting systems. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.
In addition, we develop, manufacture and sell power and RF devices based on wide band gap semiconductor materials such as SiC and gallium nitride (GaN). Our power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Our RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).
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 product fabrication, assembly and packaging. We operate research and development facilities in North Carolina, California, Wisconsin, India and China (including Hong Kong).
Cree, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 1 of this Quarterly Report.
Reportable Segments
Our three reportable segments are:
LED Products
Lighting Products
Power and RF Products

20

Table of Contents

For further information about our reportable segments, please refer to Note 12, "Reportable Segments," in our consolidated financial statements included in Item 1 of this Quarterly Report.
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
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 the market for LED lighting has grown in recent years, adoption of LEDs for general lighting is still relatively low and faces 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 LED and lighting industry is intense. Many companies have made significant investments in LED development and production equipment. Traditional lighting companies and new entrants are investing in LED-based lighting products as LED adoption has gained momentum. Traditional lighting companies have taken steps to try and limit access to their sales channels, including lighting agents and distributors. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications to LED-based solutions. To remain competitive, market participants must continuously increase product performance and reduce costs. To address these competitive pressures, we have invested in research and development activities to support new product development and to deliver higher levels of performance and lower costs to differentiate our products in the market.
Technological Innovation and Advancement. Innovations and advancements in LED, power and RF technologies continue to expand the potential commercial application for our products, particularly in the general illumination, power electronics and wireless markets. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.
Regulatory Standards Concerning Energy Efficiency. Government agencies are involved in setting standards for energy efficient lighting, which can affect market acceptance and the availability of rebates from government agencies or third parties such as utilities. While this trend is generally positive, these regulations are affected by changing political priorities and evolving technical standards which can modify 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 is common.
Overview of the Nine Months Ended March 29, 2015
The following is a summary of our financial results for the nine months ended March 29, 2015 :

Revenue increased to $1.3 billion for the nine months ended March 29, 2015 from $1.2 billion for the nine months ended March 30, 2014 .
Gross profit decreased to $398 million for the nine months ended March 29, 2015 from $457 million for the nine months ended March 30, 2014 . Gross margin declined to 31.8% for the nine months ended March 29, 2015 from 37.7% for the nine months ended March 30, 2014 .
Operating income decreased to $23 million for the nine months ended March 29, 2015 from $103 million for the nine months ended March 30, 2014 . Net income per diluted share decreased to $0.21 for the nine months ended March 29, 2015 from $0.77 for the nine months ended March 30, 2014 .

21

Table of Contents

Cash, cash equivalents and short-term investments, net of line of credit borrowings, decreased to $0.6 billion at March 29, 2015  compared to $1.2 billion at June 29, 2014 . Cash provided by operating activities was $94 million for the nine months ended March 29, 2015 compared to $228 million for the nine months ended March 30, 2014 .
Inventories increased to $299 million at March 29, 2015 compared to $285 million at June 29, 2014 .
Purchases of property and equipment were $158 million for the nine months ended March 29, 2015 compared to $120 million for the nine months ended March 30, 2014 .
Business Outlook
We project that the markets for our products will remain highly competitive during fiscal 2015 . We anticipate focusing on the following key areas, among others, in response to this competitive environment:

Build financial momentum. We target generating incremental operating margin over time through revenue growth and incremental operating leverage across the business. In fiscal 2015, we target revenue growth in Lighting Products and Power and RF Products, while LED Products revenue is targeted to be lower for the fiscal year. We have developed a new LED technology platform that is targeted to drive new design wins for our market leading high power LED products in fiscal 2016. We currently target incremental operating leverage from higher revenues in our fourth quarter of fiscal 2015 and in fiscal 2016.

Drive innovation to lower upfront customer cost and further improve payback. The LED lighting market has been enabled with tremendous innovation over the last decade with technology improvements in LEDs and LED lighting systems. We believe we can further accelerate LED lighting adoption by continuing to innovate in LEDs and LED lighting systems to lower the upfront cost and make the payback even more compelling. The approach also applies to our Power and RF product lines, where today our technology has tremendous technical benefits but a higher upfront cost. We are focused on developing the next generation devices that improve payback and expand the market for these products.

Drive LED lighting growth and build the Cree brand. We target growth in both the LED fixture and LED bulb product lines, driven by the new products we released over the last year and continued innovation in the year ahead. We plan to continue to drive awareness of the Cree brand and LED lighting in both the consumer and commercial markets.

Expand our work with third party manufacturers to enable growth in LEDs and LED Lighting. We work with third party manufacturers for the production of LEDs and LED lighting products. Our internal team is focused primarily on the high-performance, high-power LEDs that differentiate Cree in the market. We work with external manufacturers on mid-power LEDs. As demand increases for LED lighting and LEDs, we plan to expand production at both our manufacturing partners and our own factories over time to support our targeted growth, optimize our factory utilization and focus our capital spending on higher value products.

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Results of Operations
The following table sets forth certain consolidated statement of income data for the periods indicated (in thousands, except per share amounts and percentages):
 
 
Three Months Ended
 
Nine Months Ended
 
March 29,
2015
 
March 30,
2014
 
March 29,
2015
 
March 30,
2014
 
Dollars
 
% of Revenue
 
Dollars
 
% of Revenue
 
Dollars
 
% of Revenue
 
Dollars
 
% of Revenue
Revenue, net

$409,519

 
100
 %
 

$405,259

 
100
%
 

$1,250,348

 
100
%
 

$1,211,351

 
100
%
Cost of revenue, net
284,111

 
69
 %
 
255,265

 
63
%
 
852,341

 
68
%
 
754,822

 
62
%
Gross profit
125,408

 
31
 %
 
149,994

 
37
%
 
398,007

 
32
%
 
456,529

 
38
%
Research and development
43,823

 
11
 %
 
46,626

 
12
%
 
137,537

 
11
%
 
132,805

 
11
%
Sales, general and administrative
71,860

 
18
 %
 
65,368

 
16
%
 
213,927

 
17
%
 
197,589

 
16
%
Amortization or impairment of acquisition-related intangibles
6,749

 
2
 %
 
7,257

 
2
%
 
19,743

 
2
%
 
21,800

 
2
%
Loss on disposal or impairment of long-lived assets
1,459

 
 %
 
364

 
%
 
3,641

 
%
 
1,781

 
%
Operating income
1,517

 
 %
 
30,379

 
7
%
 
23,159

 
2
%
 
102,554

 
8
%
Non-operating (expense) income, net
(866
)
 
 %
 
3,152

 
1
%
 
3,766

 
%
 
9,373

 
1
%
Income before income taxes
651

 
 %
 
33,531

 
8
%
 
26,925

 
2
%
 
111,927

 
9
%
Income tax expense

 
 %
 
5,367

 
1
%
 
2,993

 
%
 
17,585

 
1
%
Net income

$651

 
 %
 

$28,164

 
7
%
 

$23,932

 
2
%
 

$94,342

 
8
%
Basic earnings per share
$0.01

 
 
 

$0.23

 
 
 
$0.21

 
 
 

$0.78

 
 
Diluted earnings per share
$0.01

 
 
 

$0.23

 
 
 
$0.21

 
 
 

$0.77

 
 

Revenue

Revenue was comprised of the following (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
March 29,
2015
 
March 30,
2014
 
Change
 
March 29,
2015
 
March 30,
2014
 
Change
LED Products revenue

$154,384

 

$201,119

 

($46,735
)
 
(23
)%
 

$479,851

 

$634,164

 

($154,313
)
 
(24
)%
Percent of revenue
38
%
 
49
%
 
 
 
 
 
38
%
 
52
%
 
 
 
 
Lighting Products revenue
224,109

 
176,691

 
47,418

 
27
 %
 
677,363

 
498,265

 
179,098

 
36
 %
Percent of revenue
55
%
 
44
%
 
 
 
 
 
54
%
 
41
%
 
 
 
 
Power and RF Products revenue
31,026

 
27,449

 
3,577

 
13
 %
 
93,134

 
78,922

 
14,212

 
18
 %
Percent of revenue
7
%
 
7
%
 
 
 
 
 
8
%
 
7
%
 
 
 
 
Total revenue

$409,519

 

$405,259

 

$4,260

 
1
 %
 

$1,250,348

 

$1,211,351

 

$38,997

 
3
 %
Our consolidated revenue increased to $409.5 million for the three months ended March 29, 2015 from $405.3 million for the three months ended March 30, 2014 . This increase was driven by the 27% increase in Lighting Products and the 13% increase in Power and RF Products revenue that was mostly offset by the 23% decrease in LED Products revenue. For the nine months ended March 29, 2015 , our consolidated revenue increased 3% to $1.3 billion from $1.2 billion for the nine months ended March 30, 2014 . This increase was driven by the 36% increase in Lighting Products revenue and the 18% increase in Power and RF Products revenue, partially offset by the 24% decrease in LED Products revenue.
LED Products Segment Revenue
LED Products revenue represented 38% and 49% of our total revenue for the three months ended March 29, 2015 and March 30, 2014 , respectively.    
LED Products revenue decreased 23% to $154.4 million for the three months ended March 29, 2015 from $201.1 million for the

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three months ended March 30, 2014 and 24% to $479.9 million for the nine months ended March 29, 2015 from $634.2 million for the nine months ended March 30, 2014 . These decreases were the result of an overall decrease in the number of units sold and a reduction in average selling prices (ASP), due to increased global competition for LED products which impacted both our LED chip and LED component product lines. The overall number of units sold decreased 16% and 19%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014 . Additionally, the reduction in ASP was 9% and 7%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014 .
Lighting Products Segment Revenue
Lighting Products revenue represented approximately 55% and 44% of our total revenue for the three months ended March 29, 2015 and March 30, 2014 , respectively.
Lighting Products revenue increased 27% to $224.1 million for the three months ended March 29, 2015 from $176.7 million for the three months ended March 30, 2014 . Lighting Products revenue increased 36% to $677.4 million for the nine months ended March 29, 2015 from $498.3 million for the nine months ended March 30, 2014 . These increases were the result of an overall increase in the number of units sold, partially offset by a reduction in ASP. The overall number of units sold increased 70% and 57%, respectively, for the three and nine months ended