Cree, Inc.
CREE INC (Form: 8-K, Received: 04/25/2017 16:04:13)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): April 25, 2017



CREE, INC.
(Exact name of registrant as specified in its charter)


North Carolina
0-21154
56-1572719
(State or other jurisdiction of
incorporation)
(Commission File
Number)
(I.R.S. Employer
Identification Number)

4600 Silicon Drive
 
Durham, North Carolina
27703
(Address of principal executive offices)
(Zip Code)


(919) 407-5300
Registrant’s telephone number, including area code

N/A
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ]    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ]    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ]    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ]    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company     [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     [ ]






Item 2.02
Results of Operations and Financial Condition
    
On April 25, 2017 , Cree, Inc. (the “Company”) issued a press release announcing results for the fiscal quarter ended March 26, 2017 .  The press release is attached as Exhibit 99.1 and incorporated into this report by reference.
 
The information in this Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Furthermore, the information in this report shall not be deemed incorporated by reference into the filings of the Company under the Securities Act of 1933, as amended.

Item 9.01
Financial Statements and Exhibits
    
(d)      Exhibits

 
Exhibit No.
 
Description of Exhibit
 
 
 
 
 
99.1
 
Press release dated April 25, 2017






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
CREE, INC.
 
 
 
 
 
 
 
 
 
By:
 
/s/ Michael E. McDevitt
 
 
 
Michael E. McDevitt
 
 
 
Executive Vice President and Chief Financial Officer


Date: April 25, 2017
 





EXHIBIT INDEX


 
Exhibit No.
 
Description of Exhibit
 
 
 
 
 
99.1
 
Press release dated April 25, 2017





Exhibit 99.1


 
LOGO042115A17.GIF






April 25, 2017


Cree Reports Financial Results for the Third Quarter of Fiscal Year 2017


DURHAM, N.C. -- Cree, Inc. (Nasdaq: CREE) today announced financial results for its third quarter of fiscal 2017, ended March 26, 2017, which results include the Company’s Wolfspeed segment being reported as part of the Company’s continuing operations. While the sale of Wolfspeed to Infineon Technologies AG (“Infineon”) was targeted to close during the quarter, the agreement was formally terminated on March 6, 2017 because the Committee on Foreign Investment in the United States (CFIUS) determined that the transaction could not be approved due to national security concerns. As a result, the Company's third fiscal quarter financial results included two items that would not have occurred if the Wolfspeed sale had closed. First, the Company was required to record an income tax expense charge of $86 million in the quarter to establish a valuation allowance on its US deferred tax assets and other deferred charges. In addition, the Company recorded an additional $12 million in expenses, net of tax, primarily associated with the resumption and catch-up of depreciation and amortization on Wolfspeed’s long lived assets, which was partially offset by the Infineon termination fee. Wolfspeed depreciation and amortization of its long lived assets had been suspended while the assets had been held for sale pending the closing of the Wolfspeed transaction.

Revenue for the third quarter of fiscal 2017 was $342 million , which represents a 7% decrease compared to revenue of $367 million for the third quarter of fiscal 2016 and a 15% decrease compared to the second quarter of fiscal 2017. GAAP net loss for the third quarter of fiscal 2017 was $99 million , or $1.02 per diluted share. This compares to GAAP net income of $152 thousand , or $0.00 per diluted share, for the third quarter of fiscal 2016. On a non-GAAP basis, net income for the third quarter of fiscal 2017 was $749 thousand , or $0.01 per diluted share, compared to non-GAAP net income for the third quarter of fiscal 2016 of $17 million , or $0.17 per diluted share. Excluding the two items mentioned above, which were not factored into the financial targets provided on January 24, 2017 based on the Company’s belief at that time that the Wolfspeed sale would be consummated, non-GAAP net income would have been $11 million, or $0.11 per diluted share, which is within the target range provided on January 24.

"Q3 non-GAAP results were within our target range,” stated Chuck Swoboda, Cree Chairman and CEO. “Our Wolfspeed and LED Products businesses performed at or above their targets for the quarter, while Lighting Products came in a little below plan due to softer market conditions and the lingering effects of the third party product driver issue that we mentioned in Q2. We believe the factors that impacted our lighting business are temporary and we target improvement in all three businesses in Q4.”



1


Reconciliation of Results to Previously Announced Targets

The following table illustrates how the results for the third quarter of fiscal 2017, when adjusted for the items relating to the termination of the Wolfspeed transaction discussed above, compare to the targets announced when the Company believed the Wolfspeed transaction would be consummated during the quarter (in thousands, except per share amounts).

 
Three Months Ended
 
March 26, 2017, As Reported
 
Wolfspeed Transaction Termination Adjustments
 
March 26, 2017, As Adjusted
 
March 26, 2017 Guidance Targets
GAAP:
 
 
 
 
 
 
 
Revenue

$341,505

 

$—

 

$341,505

 
$340 million to $370 million
Net loss

($99,013
)
 

$98,392

 

($621
)
 
($1 million) to $3 million
Diluted loss per share

($1.02
)
 

$1.01

 

($0.01
)
 
($0.01) to $0.03
 

 
 
 

 
 
Shares used in diluted per share calculation
97,346

 
97,346

 
97,346

 
 
 
 
 
 
 
 
 
 
Non-GAAP:
 
 
 
 
 
 
 
Revenue

$341,505

 

$—

 

$341,505

 
$340 million to $370 million
Net income

$749

 

$10,344

 

$11,093

 
$10 million to $18 million
Diluted earnings per share

$0.01

 

$0.10

 

$0.11

 
$0.10 to $0.18
 
 
 
 
 
 
 
 
Shares used in diluted per share calculation
97,346

 
97,346

 
97,346

 
 

For additional information and reconciliations with respect to these amounts, please see the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

The $98.4 million GAAP Wolfspeed transaction termination adjustments above represent (a) the establishment of the tax valuation allowance of $85.5 million, plus (b) the resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets of $17.7 million, minus (c) the Wolfspeed transaction termination fee of $12.5 million and plus (d) transaction costs related to the Wolfspeed transaction termination of $4.3 million, plus (3) the income tax effect of items (b), (c) and (d) of $3.4 million.

The $10.3 million non-GAAP Wolfspeed transaction termination adjustments above represent the resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets of $15.2 million, net of the income tax effect of $4.9 million. The GAAP depreciation and amortization adjustment is $2.5 million greater because it includes the amortization of Wolfspeed acquired intangibles where the non-GAAP adjustment does not.

Announcement of Joint Venture :

Today Cree also announced that it is forming a joint venture, to be called Cree Venture LED Company Ltd., with San'an Optoelectronics Company Inc. (Xiamen, China) to produce and deliver to market high performing, mid-power lighting class LEDs in an exclusive arrangement to serve the expanding markets of North and South America, Europe and Japan.

Business Outlook :

For its fourth quarter of fiscal 2017 ending June 25, 2017, Cree targets revenue in a range of $340 million to $360 million. GAAP net loss is targeted at a $16 million loss to $22 million loss, or a $0.16 to $0.23 loss per diluted share.

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Non-GAAP net income is targeted in a range of $2 million to $7 million, or $0.02 to $0.07 per diluted share. Targeted non-GAAP income excludes $23 million, net of tax, of expenses related to stock-based compensation expense and the amortization or impairment of acquisition-related intangibles. Our fourth quarter GAAP and non-GAAP targets include $3 million+/- of expenses related to non-recurring costs from our Lighting Products business right-sizing initiatives and joint venture start-up costs. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. Eastern time today to review the highlights of the fiscal 2017 third quarter results and the fiscal 2017 fourth quarter business outlook, including significant factors and assumptions underlying the targets noted above.

The conference call will be available to the public through a live audio web broadcast via the internet. For webcast details, visit Cree's website at investor.cree.com/events.cfm .

Supplemental financial information, including the non-GAAP reconciliation attached to this press release, is available on Cree's website at investor.cree.com/results.cfm .

About Cree, Inc.

Cree is a leading innovator of lighting-class LEDs, lighting products and wide bandgap semiconductor products for power and radio frequency (RF) applications. Cree’s product families include LED lighting systems and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, SiC materials, power devices and RF devices. Cree’s products are driving improvements in applications such as commercial and consumer general illumination, video screens, electronic signs and signals, motor drives, power supplies, EV charging, solar, traction, transportation, radar, communications, telecom, data link and broadband amplifiers.

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

Non-GAAP Financial Measures:

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

Forward Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our commercial Lighting results will continue to suffer if new issues arise regarding issues related to product quality of supplied components for this business; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our

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ability to lower costs; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that our products fail to perform or fail to meet customer requirements or expectations, resulting in significant additional costs, including costs associated with warranty returns or the potential recall of our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor's products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that our investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk that we have an increasingly complex supply chain and its ability to scale to enable maintaining a sufficient supply of raw materials, subsystems and finished products with the required specifications and quality; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures, joint ventures or investments generally; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 26, 2016, and subsequent reports filed with the SEC. These forward-looking statements represent Cree's judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

Cree ® is a registered trademark and Wolfspeed is a trademark of Cree, Inc.


4




CREE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share amounts and percentages)
 
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
Revenue, net

$341,505

 

$366,919

 

$1,114,064

 

$1,228,214

Cost of revenue, net
255,429

 
257,886

 
777,490

 
854,163

Gross profit
86,076

 
109,033

 
336,574

 
374,051

Gross margin percentage
25.2
 %
 
29.7
 %
 
30.2
 %
 
30.5
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
41,451

 
41,871

 
119,292

 
127,363

Sales, general and administrative
68,165

 
64,489

 
213,136

 
214,443

Amortization or impairment of acquisition-related intangibles
8,362

 
7,318

 
20,707

 
21,442

Loss (gain) on disposal or impairment of long-lived assets
500

 
(104
)
 
1,541

 
16,483

Wolfspeed transaction termination fee
(12,500
)
 

 
(12,500
)
 

Total operating expenses
105,978

 
113,574

 
342,176

 
379,731

 
 
 
 
 
 
 
 
Operating loss
(19,902
)
 
(4,541
)
 
(5,602
)
 
(5,680
)
Operating loss percentage
(5.8
)%
 
(1.2
)%
 
(0.5
)%
 
(0.5
)%
 
 
 
 
 
 
 
 
Non-operating income (expense), net
9,865

 
717

 
4,946

 
(14,075
)
Loss before income taxes
(10,037
)
 
(3,824
)
 
(656
)
 
(19,755
)
Income tax expense (benefit)
88,976

 
(3,976
)
 
91,574

 
(8,860
)
Net (loss) income

($99,013
)
 

$152

 

($92,230
)
 

($10,895
)
 
 
 
 
 
 
 
 
Diluted (loss) earnings per share

($1.02
)
 

$—

 

($0.93
)
 

($0.11
)
 
 
 
 
 
 
 
 
Shares used in diluted per share calculation
97,346

 
101,221

 
98,791

 
102,157





5



CREE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
March 26,
2017
 
June 26,
2016
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents, and short-term investments

$591,877

 

$605,305

Accounts receivable, net
149,508

 
165,611

Income tax receivable
7,453

 
6,304

Inventories
291,133

 
303,542

Prepaid expenses
23,200

 
26,810

Other current assets
32,138

 
44,788

Current assets held for sale
4,062

 
4,347

Total current assets
1,099,371

 
1,156,707

Property and equipment, net
574,275

 
599,723

Goodwill
618,828

 
618,828

Intangible assets, net
281,535

 
302,810

Other long-term investments
42,759

 
40,179

Deferred income taxes
12,140

 
38,564

Other assets
8,266

 
9,249

Total assets

$2,637,174

 

$2,766,060

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

$124,968

 

$132,286

Accrued salaries and wages
41,818

 
44,642

Other current liabilities
40,615

 
46,071

Total current liabilities
207,401

 
222,999

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt
153,000

 
160,000

Deferred income taxes
46,699

 
943

Other long-term liabilities
19,827

 
14,294

Total long-term liabilities
219,526

 
175,237

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock
120

 
125

Additional paid-in-capital
2,403,741

 
2,359,584

Accumulated other comprehensive income, net of taxes
3,240

 
8,728

Accumulated deficit
(196,854
)
 
(613
)
Total shareholders’ equity
2,210,247

 
2,367,824

Total liabilities and shareholders’ equity

$2,637,174

 

$2,766,060




6


CREE, INC.
UNAUDITED FINANCIAL RESULTS BY OPERATING SEGMENT
(in thousands, except percentages)

The following table reflects the results of the Company's reportable segments as reviewed by the Company's Chief Executive Officer, its Chief Operating Decision Maker or CODM, for the three and nine months ended March 26, 2017 and the three and nine months ended March 27, 2016. The CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment. As such, total segment revenue is equal to the Company's consolidated revenue.
 
Three Months Ended
 
 
 
 
 
March 26,
2017
 
March 27,
2016
 
Change
Lighting Products revenue

$154,045

 

$187,714

 

($33,669
)
 
(18
)%
Percent of revenue
45
%
 
51
%
 
 
 
 
LED Products revenue
131,327

 
135,552

 
(4,225
)
 
(3
)%
Percent of revenue
39
%
 
37
%
 
 
 
 
Wolfspeed revenue
56,133

 
43,653

 
12,480

 
29
 %
Percent of revenue
16
%
 
12
%
 
 
 
 
Total revenue

$341,505

 

$366,919

 

($25,414
)
 
(7
)%

 
Nine Months Ended
 
 
 
 
 
March 26,
2017
 
March 27,
2016
 
Change
Lighting Products revenue

$546,805

 

$690,715

 

($143,910
)
 
(21
)%
Percent of revenue
49
%
 
56
%
 
 
 
 
LED Products revenue
406,858

 
407,873

 
(1,015
)
 
 %
Percent of revenue
37
%
 
33
%
 
 
 
 
Wolfspeed revenue
160,401

 
129,626

 
30,775

 
24
 %
Percent of revenue
14
%
 
11
%
 
 
 
 
Total revenue

$1,114,064

 

$1,228,214

 

($114,150
)
 
(9
)%

 
Three Months Ended
 
 
 
 
 
March 26,
2017
 
March 27,
2016
 
Change
Lighting Products gross profit

$35,355

 

$48,808

 

($13,453
)
 
(28
)%
Lighting Products gross margin
23.0
%
 
26.0
%
 
 
 
 
LED Products gross profit
32,385

 
42,829

 
(10,444
)
 
(24
)%
LED Products gross margin
24.7
%
 
31.6
%
 
 
 
 
Wolfspeed gross profit
26,396

 
22,750

 
3,646

 
16
 %
Wolfspeed gross margin
47.0
%
 
52.1
%
 
 
 
 
Unallocated costs
(3,459
)
 
(5,354
)
 
1,895

 
(35
)%
Depreciation and amortization adjustment
(4,601
)
 

 
(4,601
)
 
N/A
Consolidated gross profit

$86,076

 

$109,033

 

($22,957
)
 
(21
)%
Consolidated gross margin
25.2
%
 
29.7
%
 
 
 
 

7



 
Nine Months Ended
 
 
 
 
 
March 26,
2017
 
March 27,
2016
 
Change
Lighting Products gross profit

$159,415

 

$190,531

 

($31,116
)
 
(16
)%
Lighting Products gross margin
29.2
%
 
27.6
%
 
 
 
 
LED Products gross profit
115,499

 
127,645

 
(12,146
)
 
(10
)%
LED Products gross margin
28.4
%
 
31.3
%
 
 
 
 
Wolfspeed gross profit
74,737

 
70,990

 
3,747

 
5
 %
Wolfspeed gross margin
46.6
%
 
54.8
%
 
 
 
 
Unallocated costs
(13,077
)
 
(15,115
)
 
2,038

 
(13
)%
Consolidated gross profit

$336,574

 

$374,051

 

($37,477
)
 
(10
)%
Consolidated gross margin
30.2
%
 
30.5
%
 
 
 
 


Reportable Segments Description

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

Financial Results by Reportable Segment

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

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

Certain costs are not allocated when evaluating segment performance. These unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company's 401(k) Plan. In addition, as a result of the termination of the Wolfspeed sale transaction the Company recognized the depreciation and amortization "catch-up" that would have been recognized had the Wolfspeed assets been continuously held and used. This catch-up depreciation and amortization adjustment was also not allocated when evaluating segment performance for the three months ended March 26, 2017.


8


Cree, Inc.
Non-GAAP Measures of Financial Performance

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

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release. In this press release, Cree also presents its target for non-GAAP expenses, which are expenses less expenses in the various categories described below. Both our GAAP targets and non-GAAP targets do not include any estimated changes in the fair value of our Lextar investment.
Non-GAAP measures presented in this press release are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cree's results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate Cree's results of operations in conjunction with the corresponding GAAP measures.
Cree believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value. In addition, because Cree has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.
For its internal budgeting process, and as discussed further below, Cree's management uses financial statements that do not include the items listed below and the income tax effects associated with the foregoing. Cree's management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.
Cree excludes the following items from one or more of its non-GAAP measures when applicable:
Stock-based compensation expense. This expense consists of expenses for stock options, restricted stock, performance stock awards and employee stock purchases through its ESPP. Cree excludes stock-based compensation expenses from its non-GAAP measures because they are non-cash expenses that Cree does not believe are reflective of ongoing operating results.
Amortization or impairment of acquisition-related intangibles. Cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. Cree excludes these items because they arise from Cree's prior acquisitions and have no direct correlation to the ongoing operating results of Cree's business.
LED business restructuring charges or gains . In June 2015, Cree’s board of directors approved a plan to restructure the LED business. The restructuring, which was completed during fiscal 2016, reduced excess capacity and overhead in order to improve the cost structure moving forward. The components of the restructuring included the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions. Because these charges relate to assets which have been retired prior to the end of their estimated useful lives and severance costs for eliminated positions, Cree does not consider these charges to be reflective of ongoing operating results. Similarly, Cree does not consider realized gains or losses on the sale of assets relating to the restructuring to be reflective of ongoing operating results.
Changes in the fair value of our Lextar investment. The Company's common stock ownership investment in Lextar Electronics Corporation is accounted for utilizing the fair value option. As such, changes in fair value are recognized in income, including fluctuations due to the exchange rate between the New Taiwan Dollar and the United States Dollar. Cree excludes the impact of these gains or losses from its non-GAAP measures because they are non-cash

9


impacts that Cree does not believe are reflective of ongoing operating results. Additionally, Cree excludes the impact of dividends received on its Lextar investment as Cree does not believe it is reflective of ongoing operating results.
Transaction costs and termination fee associated with the terminated sale of the Wolfspeed business. The Company has incurred transaction costs in conjunction with the previously proposed sale of its Wolfspeed business to Infineon. In addition, as a result of the termination of the agreement to sell the Wolfspeed business, Infineon paid a termination fee to the Company. Because these costs were incurred relative to a portion of the business which was previously reported as discontinued operations in fiscal 2017, Cree does not consider these charges to be reflective of ongoing operating results.
Income tax effects of the foregoing non-GAAP items.  This amount is used to present each of the amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income. Non-GAAP net income is presented using a non-GAAP tax rate. The Company’s non-GAAP tax rate represents a recalculation of the GAAP tax rate reflecting the exclusion of the non-GAAP items.
Cree expects to incur many of these same expenses, including income taxes associated with these expenses, in future periods. In addition to the non-GAAP measures discussed above, Cree also uses free cash flow as a measure of operating performance and liquidity. Free cash flow represents operating cash flows less net purchases of property and equipment and patent and licensing rights. Cree considers free cash flow to be an operating performance and a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, a portion of which can then be used to, among other things, invest in Cree's business, make strategic acquisitions, strengthen the balance sheet and repurchase stock. A limitation of the utility of free cash flow as a measure of operating performance and liquidity is that it does not represent the residual cash flow available to the company for discretionary expenditures, as it is excludes certain mandatory expenditures such as debt service.

10


CREE, INC.
Unaudited Reconciliation of GAAP to Non-GAAP Measures
(in thousands, except per share amounts and percentages)

Non-GAAP Gross Margin
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
GAAP gross profit

$86,076

 

$109,033

 

$336,574

 

$374,051

GAAP gross margin percentage
25.2
%
 
29.7
%
 
30.2
%
 
30.5
%
Adjustment:
 
 
 
 
 
 
 
Stock-based compensation expense
2,229

 
3,078

 
8,012

 
9,221

Non-GAAP gross profit

$88,305

 

$112,111

 

$344,586

 

$383,272

Non-GAAP gross margin percentage
25.9
%
 
30.6
%
 
30.9
%
 
31.2
%


Non-GAAP Operating Income
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
GAAP operating loss

($19,902
)
 

($4,541
)
 

($5,602
)
 

($5,680
)
GAAP operating loss percentage
(5.8
)%
 
(1.2
)%
 
(0.5
)%
 
(0.5
)%
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense:
 
 
 
 
 
 
 
Cost of revenue, net
2,229

 
3,078

 
8,012

 
9,221

Research and development
2,542

 
3,694

 
8,468

 
10,554

Sales, general and administrative
6,790

 
8,084

 
21,937

 
24,539

Total stock-based compensation expense
11,561

 
14,856

 
38,417

 
44,314

Amortization or impairment of acquisition-related intangibles
8,362

 
7,318

 
20,707

 
21,442

LED business restructuring charges
(5
)
 
(1,139
)
 
15

 
17,576

Transaction costs related to the terminated sale of the Wolfspeed business
6,854

 
287

 
11,826

 
2,515

Wolfspeed transaction termination fee
(12,500
)
 

 
(12,500
)


Total adjustments to GAAP operating loss
14,272

 
21,322

 
58,465

 
85,847

Non-GAAP operating (loss) income

($5,630
)
 

$16,781

 

$52,863

 

$80,167

Non-GAAP operating (loss) income percentage
(1.6
)%
 
4.6
 %
 
4.7
 %
 
6.5
 %


Non-GAAP Non-Operating Income, net
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
GAAP non-operating income (loss), net

$9,865

 

$717

 

$4,946

 

($14,075
)
Adjustment:
 
 
 
 
 
 
 
Net changes associated with equity method investments
(8,445
)
 
210

 
(2,596
)
 
15,892

Non-GAAP non-operating income, net

$1,420

 

$927

 

$2,350

 

$1,817




11


Non-GAAP Net Income
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
GAAP net (loss) income

($99,013
)
 

$152

 

($92,230
)
 

($10,895
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
11,561

 
14,856

 
38,417

 
44,314

Amortization or impairment of acquisition-related intangibles
8,362

 
7,318

 
20,707

 
21,442

LED business restructuring charges
(5
)
 
(1,139
)
 
15

 
17,576

Transaction costs related to the terminated sale of the Wolfspeed business
6,854

 
287

 
11,826

 
2,515

Wolfspeed transaction termination fee
(12,500
)
 

 
(12,500
)
 

Net changes associated with equity method investments
(8,445
)
 
210

 
(2,596
)
 
15,892

Total adjustments to GAAP net (loss) income before provision for income taxes
5,827

 
21,532

 
55,869

 
101,739

Income tax effect
93,935

 
(4,489
)
 
82,188

 
(22,226
)
Non-GAAP net income

$749

 

$17,195

 

$45,827

 

$68,618

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

$0.01

 

$0.17

 

$0.46

 

$0.67

 
 
 
 
 
 
 
 
Shares used in non-GAAP diluted earnings per share calculation
 
 
 
 
 
 
 
Non-GAAP shares used
97,346

 
101,221

 
98,791

 
102,157



Free Cash Flow
 
Three Months Ended
 
Nine Months Ended
 
March 26,
2017
 
March 27,
2016
 
March 26,
2017
 
March 27,
2016
Cash flows from operations

$43,440

 

$14,967

 

$163,154

 

$138,763

Less: PP&E spending
(21,684
)
 
(17,888
)
 
(56,895
)
 
(99,692
)
Less: Patents spending
(3,040
)
 
(3,406
)
 
(8,876
)
 
(11,034
)
Total free cash flow

$18,716

 

($6,327
)
 

$97,383

 

$28,037


12


Reconciliation of Results to Previously Announced Targets Detail


GAAP Net Income as Adjusted for Wolfspeed Transaction Termination
 
Three Months Ended
 
March 26, 2017
GAAP net loss, as above

($99,013
)
Adjustments:
 
Valuation allowance against U.S. deferred tax assets and other deferred charges
85,540

Resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets
17,651

Wolfspeed transaction termination fee
(12,500
)
Transaction costs related to the terminated sale of the Wolfspeed business
4,341

Income tax effect
3,360

Total adjustments
98,392

GAAP net income as adjusted for Wolfspeed transaction termination

($621
)


Non-GAAP Net Income as Adjusted for Wolfspeed Transaction Termination
 
Three Months Ended
 
March 26, 2017
Non-GAAP net income, as above

$749

Adjustments:
 
Resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets
15,226

Income tax effect
(4,882
)
Total adjustments
10,344

Non-GAAP net income as adjusted for Wolfspeed transaction termination

$11,093




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

Source: Cree, Inc.

13