Market Overview

Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2018

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Cree, Inc. (NASDAQ:CREE) today announced revenue of $409 million for
its fourth quarter of fiscal 2018, ended June 24, 2018. This represents
a 14% increase compared to revenue of $359 million reported for the
fourth quarter of fiscal 2017, and a 15% increase compared to the third
quarter of fiscal 2018. GAAP net loss for the fourth quarter was $33
million, or $0.33 per diluted share, compared to GAAP net loss of $6
million, or $0.06 per diluted share, for the fourth quarter of fiscal
2017. On a non-GAAP basis, net income for the fourth quarter of fiscal
2018 was $12 million, or $0.11 per diluted share, compared to non-GAAP
net income for the fourth quarter of fiscal 2017 of $4 million, or $0.04
per diluted share.

For fiscal year 2018, Cree reported revenue of $1.49 billion, which
represents a 1% increase when compared to revenue of $1.47 billion for
fiscal 2017. GAAP net loss was $280 million, or $2.81 per diluted share,
which includes a $247.5 million impairment charge attributable to Cree's
Lighting Products segment taken in the third fiscal quarter. This
compares to a GAAP net loss of $98 million, or $1.00 per diluted share,
for fiscal 2017. On a non-GAAP basis, net income for fiscal year 2018
was $19 million, or $0.19 per diluted share, compared to $50 million, or
$0.50 per diluted share, for fiscal 2017.

"Fiscal year 2018 finished with good momentum, with fourth quarter
non-GAAP earnings per share that exceeded the top end of our range
driven by Wolfspeed growth and gross margin improvement," stated Gregg
Lowe, Cree CEO. "The demand for Silicon Carbide and GaN technologies
continues to grow, as evidenced by the excellent results of
our Wolfspeed business. We are expanding our manufacturing footprint and
broadening our product portfolio to extend our leadership position in
this market and drive growth."

Business Outlook:

For its first quarter of fiscal 2019 ending September 23, 2018, Cree
targets revenue in a range of $395 million to $415 million. GAAP net
loss is targeted at $9 million to $14 million, or $0.09 to $0.14 per
diluted share. Non-GAAP net income is targeted in a range of $10 million
to $14 million, or $0.10 to $0.14 per diluted share. Targeted GAAP and
non-GAAP earnings reflect the negative impact of approximately $0.02 per
diluted share for the tariffs that went into effect on July 6, 2018.
Targeted non-GAAP income excludes $23 million of pre-tax expenses
related to stock-based compensation expense, Lighting Products
restructuring costs and the amortization of acquisition-related
intangibles. 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 fourth quarter and fiscal year 2018 results
and the fiscal first quarter 2019 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 an innovator of Wolfspeed™ power and radio frequency (RF)
semiconductors, lighting class LEDs and lighting products. Cree's
Wolfspeed product families include SiC materials, power-switching
devices and RF devices targeted for applications such as electric
vehicles, fast charging inverters, power supplies, telecom and military
and aerospace. Cree's LED product families include blue and green LED
chips, high-brightness LEDs and lighting-class power LEDs targeted for
indoor and outdoor lighting, video displays, transportation and
specialty lighting applications. Cree's LED lighting systems and lamps
serve indoor and outdoor applications.

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 those 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 Products segment results will continue to suffer if
new issues arise regarding issues related to product quality 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 ability
to lower costs; the risk that our results will suffer if we are unable
to balance fluctuations in customer demand and capacity, including
bringing on additional capacity on a timely basis to meet customer
demand; the risk that longer manufacturing lead times may cause
customers to fulfill their orders with a competitor's products instead;
the risk that the economic and political uncertainty caused by the
already imposed and proposed tariffs by the United States on Chinese
goods, and corresponding Chinese tariffs in response, may negatively
impact demand for our products; 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 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; 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; 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; the risk
that we are not able to enter into acceptable contractual arrangements
with the significant customers of the acquired Infineon Technologies AG
(Infineon) RF Power business or otherwise not fully realize anticipated
benefits of the transaction; 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 posed by
managing an increasingly complex supply chain that has the ability to
supply a sufficient quantity of raw materials, subsystems and finished
products with the required specifications and quality; the risk we may
be required to record a significant charge to earnings if our goodwill
or amortizable assets become impaired; risks relating to confidential
information theft or misuse, including through cyber-attacks or cyber
intrusion; our ability to complete development and commercialization of
products under development, such as our pipeline of Wolfspeed products,
improved LED chips, LED components, and LED lighting products; 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 25, 2017, 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.

   

CREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(in thousands, except per share amounts and percentages)

(unaudited)

 
Three Months Ended Year Ended
June 24,
2018
  June 25,
2017
June 24,
2018
  June 25,
2017
Revenue, net $409,454 $358,939 $1,493,680 $1,473,000
Cost of revenue, net 293,803   260,938   1,086,038   1,038,428  
Gross profit 115,651 98,001 407,642 434,572
Gross margin percentage 28.2 % 27.3 % 27.3 % 29.5 %
 
Operating expenses:
Research and development 42,447 39,257 164,321 158,549
Sales, general and administrative 82,194 64,039 283,489 277,175
Amortization or impairment of acquisition-related intangibles 9,735 6,792 30,772 27,499
Loss on disposal or impairment of long-lived assets 1,889 980 10,692 2,521
Goodwill impairment charges 247,455
Wolfspeed transaction termination fee       (12,500 )
Total operating expenses 136,265 111,068 736,729 453,244
 
Operating loss (20,614 ) (13,067 ) (329,087 ) (18,672 )
Operating loss percentage (5.0 )% (3.6 )% (22.0 )% (1.3 )%
 
Non-operating (expense) income, net (4,369 ) 9,057   11,642   14,008  
Loss from operations before income taxes (24,983 ) (4,010 ) (317,445 ) (4,664 )
Income tax expense (benefit) 8,288   1,880   (37,522 ) 93,454  
Net loss (33,271 ) (5,890 ) (279,923 ) (98,118 )
Net (loss) income attributable to noncontrolling interest (15 )   45    
Net loss attributable to controlling interest ($33,256 ) ($5,890 ) ($279,968 ) ($98,118 )
 
Diluted loss per share ($0.33 ) ($0.06 ) ($2.81 ) ($1.00 )
 
Shares used in diluted per share calculation 100,981 97,548 99,530 98,487
 
   

CREE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 
June 24,
2018
June 25,
2017
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments $387,085 $610,938
Accounts receivable, net 153,875 148,392
Income tax receivable 2,434 8,040
Inventories 296,015 284,385
Prepaid expenses 28,310 23,305
Other current assets 20,191 23,390
Current assets held for sale 2,180   2,180  
Total current assets 890,090 1,100,630
Property and equipment, net 661,319 581,263
Goodwill 620,330 618,828
Intangible assets, net 390,054 274,315
Other long-term investments 57,501 50,366
Deferred income taxes 6,451 11,763
Other assets 11,800   12,702  
Total assets $2,637,545   $2,649,867  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $151,307 $133,185
Accrued salaries and wages 53,458 41,860
Other current liabilities 43,528   36,978  
Total current liabilities 248,293 212,023
 
Long-term liabilities:
Long-term debt 292,000 145,000
Deferred income taxes 3,056 49,860
Other long-term liabilities 22,115   20,179  
Total long-term liabilities 317,171 215,039
 
Shareholders' equity:
Common stock 125 121
Additional paid-in-capital 2,549,125 2,419,517
Accumulated other comprehensive income, net of taxes 596 5,909
Accumulated deficit (482,710 ) (202,742 )
Total shareholders' equity 2,067,136   2,222,805  
Noncontrolling interest 4,945    
Total liabilities and shareholders' equity $2,637,545   $2,649,867  
 
 

CREE, INC.

UNAUDITED CONSOLIDATED CASH FLOWS

(in thousands)

 
Fiscal Years Ended
June 24,
2018
  June 25,
2017
(In thousands)
Cash flows from operating activities:
Net loss ($279,923 ) ($98,118 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 153,937 150,508
Stock-based compensation 43,203 47,725
Excess tax benefit from share-based payment arrangements 2
Goodwill impairment charges 247,455
Loss on disposal or impairment of long-lived assets 10,692 2,521
Amortization of premium/discount on investments 4,809 5,427
Gain on equity method investment (7,143 ) (7,543 )
Foreign exchange gain on equity method investment (550 ) (2,644 )
Deferred income taxes (40,038 ) 74,918
Changes in operating assets and liabilities, net of effect of
acquisition:
Accounts receivable, net (4,764 ) 16,955
Inventories 10,998 17,918
Prepaid expenses and other assets (5,358 ) 17,438
Accounts payable, trade 14,296 (4,818 )
Accrued salaries and wages and other liabilities 19,744   (4,389 )
Net cash provided by operating activities 167,358   215,900  
Cash flows from investing activities:
Purchases of property and equipment (185,688 ) (86,928 )
Purchases of patent and licensing rights (10,115 ) (12,405 )
Proceeds from sale of property and equipment 614 1,392
Purchases of short-term investments (200,688 ) (200,405 )
Proceeds from maturities of short-term investments 224,171 125,922
Proceeds from sale of short-term investments 176,981 27,174
Purchase of acquired business, net of cash acquired (429,162 )  
Net cash used in investing activities (423,887 ) (145,250 )
Cash flows from financing activities:
Proceeds from issuing shares to noncontrolling interest 4,900
Payment of acquisition-related contingent consideration (1,850 ) (2,775 )
Proceeds from long-term debt borrowings 670,000 468,000
Payments on long-term debt borrowings (523,000 ) (483,000 )
Net proceeds from issuance of common stock 92,621 17,716
Excess tax benefit from share-based payment arrangements (2 )
Repurchases of common stock   (104,017 )
Net cash provided by (used in) financing activities 242,671   (104,078 )
Effects of foreign exchange changes on cash and cash equivalents 185   (129 )
Net decrease in cash and cash equivalents (13,673 ) (33,557 )
Cash and cash equivalents:
Beginning of period 132,597   166,154  
End of period $118,924   $132,597  
Supplemental disclosure of cash flow information:
Cash paid for interest $6,093 $3,588
Cash paid for income taxes $1,191 $8,494
Significant non-cash transactions:
Accrued property and equipment $15,028 $10,173
 

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

(unaudited)

The following table reflects the results of the Company's reportable
segments as reviewed by the Company's Chief Executive Officer, its Chief
Operating Decision Maker (CODM), for the three months and year ended
June 24, 2018 and the three months and year ended June 25, 2017. 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
June 24, 2018   June 25, 2017 Change
Wolfspeed revenue $110,010 $60,831 $49,179 81 %
Wolfspeed percent of revenue 26.9 % 16.9 %
LED Products revenue 155,784 143,445 12,339 9 %
LED Products percent of revenue 38.0 % 40.0 %
Lighting Products revenue 143,660 154,663 (11,003 ) (7 )%
Lighting Products percent of revenue 35.1 % 43.1 %  
Total revenue $409,454   $358,939   $50,515   14 %
 
Year Ended
June 24, 2018 June 25, 2017 Change
Wolfspeed revenue $328,638 $221,231 $107,407 49 %
Wolfspeed percent of revenue 22.0 % 15.0 %
LED Products revenue 596,284 550,302 45,982 8 %
LED Products percent of revenue 39.9 % 37.4 %
Lighting Products revenue 568,758 701,467 (132,709 ) (19 )%
Lighting Products percent of revenue 38.1 % 47.6 %  
Total revenue $1,493,680   $1,473,000   $20,680   1 %
 
Three Months Ended
June 24, 2018 June 25, 2017 Change
Wolfspeed gross profit $52,640 $27,698 $24,942 90 %
Wolfspeed gross margin 47.9 % 45.5 %
LED Products gross profit 42,734 37,206 5,528 15 %
LED Products gross margin 27.4 % 25.9 %
Lighting Products gross profit 29,116 36,803 (7,687 ) (21 )%
Lighting Products gross margin 20.3 % 23.8 %
Unallocated costs (3,540 ) (3,706 ) 166 4 %
COGS acquisition related costs (5,299 )   (5,299 ) (100 )%
Consolidated gross profit $115,651   $98,001   $17,650   18 %
Consolidated gross margin 28.2 % 27.3 %
 
Year Ended
June 24, 2018 June 25, 2017 Change
Wolfspeed gross profit $158,455 $103,465 $54,990 53 %
Wolfspeed gross margin 48.2 % 46.8 %
LED Products gross profit 157,914 151,675 6,239 4 %
LED Products gross margin 26.5 % 27.6 %
Lighting Products gross profit 108,919 196,218 (87,299 ) (44 )%
Lighting Products gross margin 19.2 % 28.0 %
Unallocated costs (12,221 ) (16,786 ) 4,565 27 %
COGS acquisition related costs (5,425 )   (5,425 ) (100 )%
Consolidated gross profit $407,642   $434,572   ($26,930 ) (6 )%
Consolidated gross margin 27.3 % 29.5 %
 

Reportable Segments Description

The Company's Wolfspeed segment's products consists of silicon carbide
(SiC) and gallium nitride (GaN) materials, and power devices and RF
devices based on silicon (Si) and wide bandgap semiconductor materials.
The Company's LED Products segment's products consists of LED chips and
LED components. The Company's Lighting Products segment's products
consist of LED lighting systems and lamps.

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 loss must be included to reconcile the
consolidated gross profit presented in the preceding table to the
Company's consolidated loss 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.

The cost of goods sold (COGS) acquisition related cost adjustment
includes inventory fair value amortization of the fair value increase to
inventory recognized at the date of acquisition, and acquisition costs
resulting from the purchase of certain assets from Infineon's RF Power
(RF Power) business in our fiscal third quarter, impacting cost of
revenue for fiscal 2018. These costs were not allocated to the
reportable segments' gross profit for fiscal 2018 because they represent
an adjustment which does not provide comparability to the corresponding
prior period and therefore were not reviewed by our CODM when evaluating
segment performance and allocating resources.

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.

Costs associated with purchase of RF Power business. The Company
incurred transaction, transition, and integration costs in fiscal 2018
in conjunction with the purchase of certain assets of the RF Power
business. Additionally, this includes the inventory cost basis step-up
on the acquired inventories. Cree excludes these items because they have
no direct correlation to the ongoing operating results of Cree's
business.

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 Products segment restructuring charges or gains. In June
2015, Cree's board of directors approved a plan to restructure the LED
Products segment. 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 on the sale of assets relating to the restructuring to be
reflective of ongoing operating results.

Lighting Products segment restructuring charges or gains. In
April 2018, the Company approved a plan to restructure the Lighting
Products segment. The restructuring, which is expected to be completed
during the first quarter of fiscal 2019, aims to realign the Company's
cost base with the long-range business strategy that was announced
February 26, 2018. The components of the restructuring include the sale
or abandonment of certain equipment, facility consolidation, and
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 believe
these charges are reflective of ongoing operating results. Similarly,
Cree does not consider the realized losses on sale of assets relating to
the restructuring to be reflective of ongoing operating results.

Goodwill impairment charges. The Company determined that the
carrying value of the Lighting Products segment was in excess of the
segment's fair value during the third quarter of fiscal 2018 in
connection with the preparation of the financial statements for such
period, resulting in an impairment charge. Cree excludes this item from
its non-GAAP measures because it is a non-cash expense that Cree does
not believe to be reflective of ongoing operating results.

Transaction costs and termination fee associated with the terminated
sale of the Wolfspeed business.
The Company 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, and the
termination fee received, relative to a portion of the business which
was previously reported as discontinued operations in fiscal 2017, Cree
does not consider the transaction costs and the receipt of termination
fees to be reflective of ongoing operating results, and as such, has
excluded these items from its non-GAAP measures.

Severance pay associated with termination of key executive personnel.
The Company incurred costs in fiscal 2018 in conjunction with the
termination of key executive personnel. Cree excludes these items
because they have no direct correlation to the ongoing operating results
of Cree's business.

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 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.

Foreign exchange gain on acquisition of RF Power business. The
Company incurred foreign exchange gains on hedges purchased for the RF
Power business asset purchase. Cree excludes the impact of this gain
because it is not considered to be reflective of ongoing operations.

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 excludes certain mandatory
expenditures such as debt service.

   

CREE, INC.

Reconciliation of GAAP to Non-GAAP Measures

(in thousands, except per share amounts and percentages)

(unaudited)

 
Non-GAAP Gross Margin
Three Months Ended Year Ended
June 24,
2018
  June 25,
2017
June 24,
2018
  June 25,
2017
GAAP gross profit $115,651 $98,001 $407,642 $434,572
GAAP gross margin percentage 28.2 % 27.3 % 27.3 % 29.5 %
Adjustments:
Stock-based compensation expense 1,970 2,415 7,372 10,427
Costs related to the RF Power acquisition 5,299     5,425    
Non-GAAP gross profit $122,920   $100,416   $420,439   $444,999  
Non-GAAP gross margin percentage 30.0 % 28.0 % 28.1 % 30.2 %
 
Non-GAAP Operating Income
Three Months Ended Year Ended
June 24,
2018
June 25,
2017
June 24,
2018
June 25,
2017
GAAP operating loss ($20,614 ) ($13,067 ) ($329,087 ) ($18,672 )
GAAP operating income percentage (5.0 )% (3.6 )% (22.0 )% (1.3 )%
Adjustments:
Stock-based compensation expense:
Cost of revenue, net 1,970 2,415 7,372 10,427
Research and development 1,553 2,151 8,383 10,619
Sales, general and administrative 6,361   4,741   27,448   26,679  
Total stock-based compensation expense 9,884 9,307 43,203 47,725
Costs related to the RF Power acquisition 9,567 13,891
Amortization or impairment of acquisition-related intangibles 9,735 6,792 30,772 27,499
Costs associated with LED business restructuring 15
Costs associated with Lighting business restructuring 5,964 5,964
Goodwill impairment charges 247,455
Transaction costs related to the terminated sale of the Wolfspeed
business
121 11,947
Wolfspeed transaction termination fee (12,500 )
Executive severance     6,223    
Total adjustments to GAAP operating loss 35,150   16,220   347,508   74,686  
Non-GAAP operating income $14,536   $3,153   $18,421   $56,014  
Non-GAAP operating income percentage 3.6 % 0.9 % 1.2 % 3.8 %
 
Non-GAAP Non-Operating Income, net
Three Months Ended Year Ended
June 24,
2018
June 25,
2017
June 24,
2018
June 25,
2017
GAAP non-operating (loss) income, net ($4,369 ) $9,057 $11,642 $14,008
Adjustment:
Net changes in the fair value of Lextar investment 2,359 (7,607 ) (7,696 ) (10,203 )
Foreign exchange gain on RF Power acquisition     (1,941 )  
Non-GAAP non-operating (loss) income, net ($2,010 ) $1,450   $2,005   $3,805  
 
Non-GAAP Net Income
Three Months Ended Year Ended
June 24,
2018
June 25,
2017
June 24,
2018
June 25,
2017
GAAP net loss ($33,256 ) ($5,890 ) ($279,968 ) ($98,118 )
Adjustments:
Stock-based compensation expense 9,884 9,307 43,203 47,725
Costs related to the RF Power acquisition 9,567 13,891
Amortization or impairment of acquisition-related intangibles 9,735 6,792 30,772 27,499
Costs associated with LED business restructuring 15
Costs associated with Lighting business restructuring 5,964 5,964
Goodwill impairment charges 247,455
Transaction costs related to the terminated sale of the Wolfspeed
business
121 11,947
Wolfspeed transaction termination fee (12,500 )
Executive severance 6,223
Net changes in the fair value of Lextar investment 2,359 (7,607 ) (7,696 ) (10,203 )
Foreign exchange gain on RF Power acquisition     (1,941 )  
Total adjustments to GAAP net loss before provision for income taxes 37,509 8,613 337,871 64,483
Income tax effect * 7,291   1,102   (39,072 ) 83,353  
Non-GAAP net income $11,544   $3,825   $18,831   $49,718  
 
Income per share
Non-GAAP diluted net income per share $0.11 $0.04 $0.19 $0.50
 
Shares used in diluted net income per share calculation
Non-GAAP shares used 100,981 97,548 99,530 98,487
 
*Estimated income tax effect is based upon the Company's overall
consolidated effective tax rate for the given period.
 
Free Cash Flow
Three Months Ended Year Ended
June 24,
2018
June 25,
2017
June 24,
2018
June 25,
2017
Cash flow from operations $41,937 $52,746 $167,358 $215,900
Less: PP&E spending (57,256 ) (30,033 ) (185,688 ) (86,928 )
Less: Patents spending (2,202 ) (3,529 ) (10,115 ) (12,405 )
Total free cash flow ($17,521 ) $19,184   ($28,445 ) $116,567  
 
 

CREE, INC.

Business Outlook Unaudited GAAP to Non-GAAP Reconciliation

(in millions)

 
Three Months Ended
September 23, 2018
GAAP net loss outlook range ($9) to ($14)
Adjustments:
Stock-based compensation expense 12
Amortization or impairment of acquired intangibles 9
Lighting Products restructuring costs 2
Total adjustments to GAAP net loss before provision for income taxes 23
Income tax effect 0 to 1
Non-GAAP net income outlook range $10 to $14

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