CREE 2015 ANNUAL REPORT WWW.CREE.COM Dear Shareholders,
This year, Cree is celebrating the 30th anniversary of our founding.
We are proud of the accomplishments we’ve achieved through a relentless
focus on innovation and a persistent drive to challenge the status quo and
find a better way to do things. The technology Cree has developed over the
past thirty years has enabled our customers to do things not previously
possible and continues to empower the world to do more all while
consuming less energy.
While we have done a lot, we have more to do. In a technology business,
We target growing our LED Products business by expanding our product
there is no finish line, only a constant focus on creating a better future.
offerings with new high-power and mid-power products to increase share
This tireless pursuit of disruptive technologies is what drives our three
value with existing customers as well as open new applications for our
businesses to change industries, and we see a bright future for all three.
technology. We recently started shipping LED components for automotive
Fiscal 2017 was a year of progress for the company, even as we faced
components from our recently launched JV with San’an. This business
several challenges that affected our financial results. While our financial
continues to execute well, and is in a good position to grow in the year ahead.
forward lighting applications and we’re sampling new mid-power LED
results were lower than 2016, the results do not necessarily reflect the
progress we’ve made this past year.
The Lighting Products business is focused on a number of key areas
to drive revenue and profit growth including stronger sales channels,
Our Wolfspeed business continues to perform very well with growth in
new product portfolio expansion, improving operational execution
all three product lines – power, RF and materials. This growth is being
and recruiting new talent to the organization. Our efforts have shown
driven by new design wins related to electric vehicle systems, battery
encouraging initial results with the commercial business regaining
storage and other industrial applications that are bringing SiC power
momentum late last fiscal year.
into the mainstream. The LED business made progress in 2017 despite
a challenging competitive environment as we continued to innovate to
I want to thank all of the many investors for their support in my role as
differentiate our products in the market. The lighting business also
CEO over the past 16 years. My time at the company has seen Cree grow
showed improvement at the end of the year, as margins improved and
from a small company providing blue LEDs and SiC wafers to a global
we continued to make progress improving service levels and rebuilding
leader in LEDs, lighting and power and RF devices. We have always strived
customer momentum with our channel partners.
to build a great company for our shareholders, customers and employees
For fiscal 2018, I believe we are well positioned to grow revenue and
great progress, and we aren’t slowing down.
earnings, as we see progress in all three areas of the business. Our
financial strength and balance sheet provides the ability to invest as
Our success over the last 30 years has been the result of great teamwork
needed to grow the business, and also to consider potential acquisitions
by many talented people across the company. I’m confident that we have
in lighting.
the team in place to deliver continued success in the years ahead.
by inventing new technology that makes the world better. We’ve made
Our focus for Wolfspeed in 2018 is on expanding manufacturing capacity
for each product line, as we are currently capacity constrained. Ongoing
investments target new materials capacity coming on-line in fiscal Q2
with a doubling of capacity for materials by the end of calendar 2018.
We target new power and RF capacity coming on-line in fiscal Q4 with a
doubling of capacity for power devices by the end of calendar 2018. We
target substantial growth in these markets over the next several years,
and we are planning for additional capacity expansion to support growth
beyond 2018.
Chuck Swoboda
Chairman and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 25, 2017
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
(Address of principal executive offices)
27703
(Zip Code)
(919) 407-5300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.00125 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
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
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 during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant as of December 23, 2016, the last business day of the registrant’s
most recently completed second fiscal quarter, was $2,673,618,543 (based on the closing sale price of $27.46 per share).
The number of shares of the registrant’s Common Stock, $0.00125 par value per share, outstanding as of August 18, 2017 was 97,684,861.
__________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held October 24,
2017 are incorporated by reference into Part III.
CREE, INC.
FORM 10-K
For the Fiscal Year Ended June 25, 2017
INDEX
Part I
Item 1.
Business..........................................................................................................................................................
Item 1A.
Risk Factors....................................................................................................................................................
Item 1B.
Unresolved Staff Comments ..........................................................................................................................
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Properties........................................................................................................................................................
Legal Proceedings ..........................................................................................................................................
Mine Safety Disclosures.................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................
Selected Financial Data ..................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.........................
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk .......................................................................
Item 8.
Item 9.
Financial Statements and Supplementary Data..............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................
Item 9A.
Controls and Procedures.................................................................................................................................
Item 9B.
Other Information...........................................................................................................................................
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Directors, Executive Officers and Corporate Governance.............................................................................
Executive Compensation................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......
Certain Relationships and Related Transactions, and Director Independence...............................................
Principal Accountant Fees and Services.........................................................................................................
Exhibits and Financial Statement Schedules..................................................................................................
SIGNATURES ...................................................................................................................................................................
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Forward-Looking Information
Information set forth in this Annual Report on Form 10-K 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 Annual 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 Item 1A of this Annual Report.
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PART I
Item 1. Business
Overview
Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and
wide bandgap 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. As discussed more fully below, we operate in three reportable segments: Lighting Products, LED Products and
Wolfspeed.
Our lighting products primarily consist of LED lighting systems and lamps. We design, manufacture and sell lighting fixtures and
lamps for the commercial, industrial and consumer markets.
Our LED products consist of LED chips and LED components. Our LED products enable our customers to develop and market
LED-based products for lighting, video screens, automotive and other industrial applications.
Our Wolfspeed business consists of silicon carbide (SiC) materials, power devices and RF devices based on wide bandgap
semiconductor materials such as SiC and gallium nitride (GaN). Our materials products and power devices are used in solar, electric
vehicles, motor drives, power supplies and transportation applications. Our RF devices are used in military communications, radar,
satellite and telecommunication applications.
As discussed more fully in Note 1, “Business,” in our consolidated financial statements included in Item 8 of this Annual Report,
on July 13, 2016, we executed a definitive agreement to sell the Wolfspeed business to Infineon Technologies AG (Infineon).
Beginning in July 2016, the Company classified the results of the Wolfspeed business as discontinued operations in the Company's
consolidated statements of loss for all periods presented and classified the related assets and liabilities associated with the
discontinued operations as held for sale in the consolidated balance sheets. On March 6, 2017, the definitive agreement with
Infineon was terminated. As a result of the termination of the agreement, we have reclassified the results of the Wolfspeed business
as continuing operations in our consolidated statements of loss, and presented it as a separate reportable segment, for all periods
presented. Additionally, the related assets and liabilities associated with the discontinued operations were reclassified as held and
used in the consolidated balance sheets for all periods presented.
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 products and aspects of product fabrication, assembly and packaging. We operate
research and development facilities in North Carolina, Arkansas, California, Wisconsin, India, Italy 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 8 of
this Annual Report.
Recent Developments
On April 25, 2017, we announced that we intended to form a joint venture, to be called Cree Venture LED Company, Ltd. (Cree
Venture LED), with San’an Optoelectronics Co., Ltd. (San’an) 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,
and serve China and the rest of the world on a non-exclusive basis.
Effective July 17, 2017, we entered into a Shareholders Agreement with San’an and Cree Venture LED pursuant to which we and
San’an funded our contributions to Cree Venture LED and agreed upon the management and operation of Cree Venture LED. We
contributed $5.1 million for a 51% ownership interest and San’an contributed $4.9 million for a 49% ownership interest. Cree
Venture LED will have a five-member board of directors, three of which will be designated by Cree and two of which will be
designated by San’an.
In connection with forming Cree Venture LED and entering into the Shareholders Agreement, Cree Venture LED and San’an also
entered into a manufacturing agreement pursuant to which San’an will supply Cree Venture LED with mid-power LED products,
and we and Cree Venture LED entered into a sales agency agreement pursuant to which we will be the independent sales
representative of Cree Venture LED in the exclusive markets, among certain other ancillary agreements related to the transaction.
5
We target that the parties will finish establishing Cree Venture LED and begin first product qualifications with customers during
the remainder of calendar 2017.
Reportable Segments
Our three reportable segments are:
• Lighting Products
• LED Products
• Wolfspeed
Reportable segments are components of an entity that have separate financial data that the entity’s Chief Operating Decision Maker
(CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.
For further information about our reportable segments, please refer to Note 14, “Reportable Segments,” in our consolidated financial
statements included in Item 8 of this Annual Report.
Products by Reportable Segment
Lighting Products Segment
Lighting Products revenue was $701.5 million, $889.1 million, and $906.5 million, representing 48%, 55%, and 56% of our revenue
for the fiscal years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively. Lighting Products gross profit was $196.2
million, $238.2 million and $235.5 million and gross margin was 28%, 27% and 26% for the fiscal years 2017, 2016 and 2015,
respectively.
Our Lighting Products segment primarily consists of LED lighting systems and lamps. We design, manufacture and sell lighting
systems for indoor and outdoor applications, with our primary focus on LED lighting systems for the commercial, industrial and
consumer markets. Lighting products are sold to distributors, retailers and direct to customers. Our portfolio of lighting products
is designed for use in settings such as office and retail space, restaurants and hospitality, schools and universities, manufacturing,
healthcare, airports, municipal, residential, street lighting and parking structures, among other applications.
LED Products Segment
LED Products revenue was $550.3 million, $551.2 million and $555.0 million representing 37%, 34%, and 34% of revenue for
the fiscal years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively. LED Products gross profit was $151.7 million,
$173.8 million and $159.0 million and gross margin was 28%, 32% and 29% for the fiscal years 2017, 2016 and 2015, respectively.
Our LED Products segment includes LED chips and LED components.
LED Chips
Our LED chip products include blue and green LED chips based on GaN and related materials. LED chips or die are solid state
electronic components used in a number of applications and are currently available in a variety of brightness levels, wavelengths
(colors) and sizes. We use our LED chips in the manufacturing of our LED components. Customers use our blue and green LED
chips in a variety of applications including video screens, gaming displays, function indicator lights and automotive backlights,
headlamps and directional indicators. Customers may also combine our blue LED chips with phosphors to create white LEDs,
which are used in various applications for indoor and outdoor illumination and backlighting, full-color display screens, liquid
crystal display (LCD) backlighting, white keypads and the camera flash function.
LED Components
Our LED components include a range of packaged LED products, from our XLamp® LED components and LED modules for
lighting applications to our high-brightness LED components.
Our XLamp LED components and LED modules are designed to meet a broad range of market needs for lighting applications
including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting.
We use our XLamp LED components in our own lighting products. We also sell XLamp LED components externally to customers
and distributors for use in a variety of products, primarily for lighting applications.
6
Our high-brightness LED components consist of surface mount (SMD) and through-hole packaged LED products. Our SMD LED
component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage,
general illumination, transportation, gaming and specialty lighting. Our through-hole packaged LED component products are
available in a full range of colors primarily designed for the signage market and provide users with color and brightness consistency
across a wide viewing area.
Wolfspeed Segment
Wolfspeed revenue was $221.2 million, $176.3 million, and $171.0 million, representing 15%, 11% and 10% of our revenue for
the fiscal years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively. Wolfspeed gross profit was $103.5 million,
$94.6 million and $99.7 million and gross margin was 47%, 54% and 58% for the fiscal years 2017, 2016 and 2015, respectively.
Our Wolfspeed segment includes SiC materials, power devices and RF devices.
SiC Materials
Our SiC materials products consist of crystals, bare and epitaxial wafers. Our SiC materials are targeted for customers who use
them to manufacture products for RF, power switching, gemstones and other applications. Corporate, government and university
customers also buy SiC materials for research and development directed at RF and high power devices.
Power Devices
Our power device products consist of SiC Schottky diodes, metal oxide semiconductor field effect transistors (MOSFETs), power
modules and gate driver boards. Our power products provide increased efficiency, faster switching speeds and reduced system
size and weight over comparable silicon-based power devices. Power products are sold primarily to customers and distributors
for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies and
other applications.
RF Devices
Our RF devices consist of GaN die, high-electron mobility transistors (HEMT) and monolithic microwave integrated circuits
(MMICs), which are optimized for military, telecom and other commercial applications. Our RF devices are made from SiC and
GaN and provide improved efficiency, bandwidths and frequency of operation as compared to silicon or GaAs. We also provide
custom die manufacturing for GaN HEMTs and MMICs that allow a customer to design its own custom RF circuits to be fabricated
by us, or have us design and fabricate products that meet their specific requirements.
Financial Information about Geographic Areas of Customers and Assets
We derive a significant portion of our revenue from product sales to international customers. For information concerning geographic
areas of our customers and geographic information concerning our long-lived assets, please see Note 14, “Reportable Segments,”
in our consolidated financial statements included in Item 8 of this Annual Report. International operations expose us to risks that
are different from operating in the United States, including foreign currency translation and transaction risk, risk of changes in tax
laws, application of import/export laws and regulations and other risks described further in Item 1A, “Risk Factors,” of this Annual
Report.
Research and Development
We invest significant resources in research and development. Our research and development activity includes efforts to:
•
•
•
•
•
•
increase the quality, performance and diameter of our substrate and epitaxial materials;
continually improve our manufacturing processes;
develop brighter, more efficient and lower cost LED chip and component products;
create new, and improve existing, LED components;
improve existing LED lighting products and develop new LED lighting systems and related controls; and
develop higher power diodes/switches and higher power/linearity RF devices.
7
When our customers participate in funding our research and development programs, we recognize the amount funded as a reduction
of research and development expenses to the extent that our customers’ funding does not exceed our respective research and
development costs. Research and development expenses were $158.5 million, $168.8 million and $182.8 million for the fiscal
years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively. For further information about our research and
development, see “Research and Development” in Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations."
Sales and Marketing
We continue to make investments to expand our sales, marketing, technical applications support, and distribution capabilities to
sell our lighting products and further enable new and existing customers to implement LED and power technology into their
products. We also continue to make investments to promote and build market awareness of the Cree brand. Our sales, marketing
and technical applications teams include personnel throughout North America, Asia and Europe.
Customers
We have historically had a few key customers who represented more than 10% of our consolidated revenue. In fiscal 2017, revenue
from Arrow Electronics, Inc. (Arrow) accounted for 12% of our total consolidated revenue. In fiscal 2016, revenue from Arrow
accounted for 10% of our total consolidated revenue. In fiscal 2015, revenue from Arrow and The Home Depot, Inc. (Home Depot)
accounted for 12% and 11% of our total consolidated revenue, respectively. Arrow is a customer of our LED Products and Wolfspeed
segments. Home Depot is a customer of our Lighting Products segment. For further discussion regarding customer concentration,
please see Note 15, “Concentrations of Risk,” in our consolidated financial statements included in Item 8 of this Annual Report.
The loss of any large customer could have a material adverse effect on our business and results of operations.
Distribution
A substantial portion of our products are sold to distributors. Distributors stock inventory and sell our products to their own customer
base, which may include: value added resellers, manufacturers who incorporate our products into their own manufactured goods
and ultimate end users of our products. We also utilize third-party sales representatives who generally do not maintain a product
inventory; instead, their customers place orders directly with us or through distributors. We also sell a portion of our products
through retailers, which stock inventory and sell our products directly to consumers.
Seasonality
Our Lighting Products segment historically has experienced, and in the future may experience, seasonally lower lighting fixture
sales due to winter weather, impacting our fiscal second and third quarters. In addition, the retail lighting industry has historically
had seasonally lower sales of light bulbs in the summer, which has impacted our fiscal fourth quarter and which may impact our
fiscal first quarter. Our LED Products segment historically has experienced, and in the future may experience, seasonally lower
sales during our fiscal third quarter due to the Chinese New Year holiday. Our Wolfspeed segment is not generally subject to
seasonality.
Our sales also vary based on other factors such as customer demand and government regulation.
If anticipated sales or shipments do not occur when expected, our results of operations for that quarter, and potentially for future
quarters, may be adversely affected.
Backlog
Our backlog at June 25, 2017, the last day of our 2017 fiscal year, was approximately $453.7 million, compared with a backlog
of approximately $181.7 million at June 26, 2016, the last day of our 2016 fiscal year. Because of the generally short cycle time
between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which at times may
be made without significant penalty), we do not believe that our backlog, as of any particular date, is necessarily indicative of
actual net revenue for any future period. Additionally, our June 25, 2017 backlog contained $36.3 million of research contracts
signed with the U.S. Government, for which approximately $29.5 million had not been appropriated as of the last day of fiscal
2017. Our June 26, 2016 backlog contained $45.0 million of research contracts signed with the U.S. Government, for which
approximately $33.7 million was not appropriated as of the last day of fiscal 2016. Our backlog could be adversely affected if the
U.S. Government exercises its rights to terminate our government contracts or does not appropriate and allocate all of the funding
contemplated by the contracts.
8
Sources of Raw Materials
We depend on a number of suppliers for certain raw materials, components and equipment used in manufacturing our products,
including certain key materials and equipment used in critical stages of our manufacturing processes. We generally purchase these
limited source items pursuant to purchase orders and have limited guaranteed supply arrangements with our suppliers. Our suppliers,
located around the world, can be subject to many constraints limiting supply that are beyond our control. We believe our current
supply of essential materials is sufficient to meet our needs. However, shortages have occurred from time to time and could occur
again.
Competition by Reportable Segment
Our success depends on our ability to keep pace with the evolving technology standards of the industries we serve. These industries
are characterized by rapid technological change, frequent introduction of new products, short product life cycles, changes in end
user and customer requirements, and a competitive pricing environment. The evolving nature of these industries may render our
existing or future products obsolete, noncompetitive or unmarketable. Any of these developments could have an adverse effect on
our business, results of operations and financial condition.
Lighting Products Segment
Our Lighting Products segment currently faces competition from lighting fixture companies and lamp manufacturers. Lighting
companies such as Acuity Brands, Inc., the Cooper Lighting division of Eaton Corporation plc, General Electric Company, Hubbell
Incorporated, Koninklijke Philips Electronics N.V. (Philips) and OSRAM Opto Semiconductors GmbH (OSRAM) are the main
competitors in this market, but there are also many small and medium sized lighting competitors.
Our LED lighting products compete against traditional lighting products that use incandescent, fluorescent, halogen, ceramic metal
halide, high pressure sodium or other lighting technologies. Our LED lighting products compete against traditional lighting products
based upon superior energy savings, extended life, improved lighting quality and lower total cost of ownership. We also compete
with LED-based products from other lamp and fixture companies, some of which are customers for our LED chips and LED
components. Our products compete on the basis of color quality and consistency, superior light output, reduced energy consumption,
brand, customer service and lower total cost of ownership.
LED Products Segment
Our LED Products segment’s primary competitors are Nichia Corporation (Nichia), OSRAM, Philips and Samsung LED Company
(Samsung).
LED Chips
The primary competition for our LED chip products comes from companies that manufacture and/or sell nitride-based LED chips.
We consider Nichia to be a competitor because it sells LED chips to a select number of LED packaging companies and it sells
packaged LEDs that most often compete directly with packaged LEDs made and sold by our chip customers. We believe, based
on industry information, that Nichia currently has the largest market share for nitride-based LEDs.
There are many other LED chip producers who sell blue, green and white LED chip products, including OSRAM, Epistar
Corporation and San’an. These competitors make products for a variety of applications in a range of performance levels that
compete directly with our LED chip products.
Overall, we believe that performance, price and strength of intellectual property are the most significant factors to compete
successfully in the nitride LED market. We believe our products are well positioned to meet the market performance requirements;
however, there is significant pricing pressure from a number of competitors, including new companies based in China. We
continually strive to improve our competitive position by developing brighter and higher performing LED chips while focusing
on lowering costs.
LED Components
The market for lighting class LED components is concentrated primarily in indoor and outdoor commercial lighting; specialty
lighting, including torch lamps (flashlights); color changing architectural lighting; signs and signals; and transportation. Nichia,
OSRAM, Lumileds Holding B.V., MLS, Everlight, Seoul Semiconductor and Samsung are the main competitors in these markets.
These companies sell LED components that compete indirectly with our target customers for LED chips and compete directly
with our XLamp LED components and LED modules. There are a large number of other companies, primarily based in Asia, that
offer products designed to compete both directly and indirectly with our LED components in lighting and other applications. We
are positioning our XLamp LED components and LED modules to compete in this market based on performance, price and usability.
9
Our high-brightness LED components compete with a larger number of companies around the world in a variety of applications
including signage, video, transportation, gaming and specialty lighting. We are positioning our high-brightness LED components
to compete in this market based on performance, price, availability and usability.
Wolfspeed Segment
SiC Materials
We have continued to maintain our well-established leadership position in the sale of SiC bulk material, SiC wafer and SiC and
GaN epitaxy products. As market adoption of the technology grows with rapidly expanding power and RF device designs, we are
experiencing increased competition from companies such as Dow Corning, II-VI Advanced Materials, SiCrystal, Nippon Steel
and Sumitomo Metal Corporation. We believe our leading technology and leveraged production scale position us to reliably supply
production volumes to the device manufacturers in the market.
Power Devices
Our SiC-based power devices compete with SiC power semiconductor solutions offered by Infineon, Microsemi Corporation,
Mitsubishi Electric Corporation, Rohm Co. Ltd. and STMicroelectronics, Inc. Our products also compete with existing
semiconductor devices offered by a variety of manufacturers. Our power products compete in the power semiconductor market
on the basis of performance, reliability and overall system price.
RF Devices
Our RF devices compete with M/A-COM Technology Solutions Inc., Microsemi Corporation, Mitsubishi Electric Corporation,
Sumitomo Electric Device Innovations, Inc. and Qorvo, Inc. which all offer GaN RF products that compete directly with our GaN
HEMT products. Our products also compete with a variety of companies offering silicon and GaAs-based products. Our products
compete in the RF semiconductor market on the basis of reliability, performance, design predictability and overall system price.
Patents and Other Intellectual Property Rights
We believe it is important to protect our investment in technology by obtaining and enforcing intellectual property rights, including
rights under patent, trademark, trade secret and copyright laws. We seek to protect inventions we consider significant by applying
for patents in the United States and other countries when appropriate. We have also acquired, through license grants, purchases
and assignments, rights to patents on inventions originally developed by others. As of June 25, 2017, we owned or were the
exclusive licensee of 2,105 issued U.S. patents and approximately 3,082 foreign patents with various expiration dates extending
up to 2041. We do not consider our business to be materially dependent upon any one patent, and we believe our business will not
be materially adversely affected by the expiration of any one patent. For proprietary technology that is not patented, we generally
seek to protect the technology and related know-how and information as trade secrets by keeping confidential the information that
we believe provides us with a competitive advantage. We attempt to create strong brands for our products and promote our products
through trademarks that distinguish them in the market. We may license our customers to use our trademarks in connection with
the sale of our products, and we monitor for the proper and authorized use of our marks.
Licensing activities and lawsuits to enforce intellectual property rights, particularly patent rights, are a common aspect of the
semiconductor, LED and lighting industries, and we attempt to ensure respect for our intellectual property rights through appropriate
actions. The breadth of our intellectual property rights and the extent to which they can be successfully enforced varies across
jurisdictions. We both make and receive inquiries regarding possible patent infringements and possible violations of other
intellectual property rights in the normal course of business. Depending on the circumstances, we may seek to negotiate a license
or other acceptable resolution. If we are unable to achieve a resolution by agreement, we may seek to enforce our rights or defend
our position through litigation. Patent litigation in particular is expensive and the outcome is often uncertain. We believe that the
strength of our portfolio of patent rights is important in helping us resolve or avoid such disputes with other companies in our
industry.
Environmental Regulation
We are subject to a variety of federal, state and local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are
responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our
manufacturing processes. Failure to comply with such provisions could result in fines and other liabilities to the government or
third parties, injunctions requiring us to suspend or curtail operations or other remedies, and could have a material adverse effect
on our business.
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Working Capital
For a discussion of our working capital practices, see “Liquidity and Capital Resources” in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations."
Employees
As of June 25, 2017, we employed 6,039 regular full and part-time employees. We also employ individuals on a temporary full-
time basis and use the services of contractors as necessary. Certain of our employees in various countries outside of the United
States are subject to laws providing representation rights.
Available Information
Our website address is www.cree.com. We make available free of charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, including Interactive Data Files, and Current Reports on Form 8-K, and amendments to these
reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.
These reports may be accessed from our website by following the links under “Investors,” then “SEC Filings.” The information
found on our website is not part of this or any other report we file with or furnish to the SEC. We have no duty to update or revise
any forward-looking statements in this Annual Report or in other reports filed with the SEC, whether as a result of new information,
future events or otherwise, unless we are required to do so by law. A copy of this Annual Report and our other reports is available
without charge upon written request to Investor Relations, Cree, Inc., 4600 Silicon Drive, Durham, North Carolina 27703.
Item 1A. Risk Factors
Described below are various risks and uncertainties that may affect our business. If any of the risks described below actually
occurs, our business, financial condition or results of operations could be materially and adversely affected.
Our operating results are substantially dependent on the acceptance of new products.
Our future success may depend on our ability to deliver new, higher performing and lower cost solutions for existing and new
markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and
we must secure production orders for those products from our customers. The development of new products is a highly complex
process, and we have in some instances experienced delays in completing the development and introduction of new products which
has impacted our results in the past, such as in our fiscal 2016 third quarter and beyond. Our research and development efforts are
aimed at solving increasingly complex problems, and we do not expect that all of our projects will be successful. The successful
development, introduction and acceptance of new products depend on a number of factors, including the following:
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achievement of technology breakthroughs required to make commercially viable products;
the accuracy of our predictions for market requirements;
our ability to predict, influence and/or react to evolving standards;
acceptance of our new product and systems designs;
acceptance of new technology in certain markets;
the availability of qualified research and development personnel;
our timely completion of product designs and development;
our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired
specifications and at competitive costs;
our ability to effectively transfer increasingly complex products and technology from development to manufacturing;
our customers’ ability to develop competitive products incorporating our products; and
• market acceptance of our products and our customers’ products.
If any of these or other similar factors becomes problematic, we may not be able to deliver and introduce new products in a timely
or cost-effective manner.
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We face significant challenges managing our growth strategy.
Our potential for growth depends significantly on the adoption of our products within the markets we serve and for other applications,
and our ability to affect this rate of adoption. In order to manage our growth and business strategy effectively relative to the
uncertain pace of adoption, we must continue to:
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expand the capability of information systems to support a more complex business;
• maintain, expand and purchase adequate manufacturing facilities and equipment, as well as secure sufficient third-party
manufacturing resources, to meet customer demand;
• manage an increasingly complex supply chain that has the ability to supply an increasing number of raw materials,
subsystems and finished products with the required specifications and quality, and deliver on time to our manufacturing
facilities, our third party manufacturing facilities, or our logistics operations;
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expand research and development, sales and marketing, technical support, distribution capabilities, manufacturing
planning and administrative functions;
• manage organizational complexity and communication;
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expand the skills and capabilities of our current management team;
add experienced senior level managers and executives;
attract and retain qualified employees; and
adequately maintain and adjust the operational and financial controls that support our business.
We are also increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to
maintain financial accuracy and efficiency. For example, the implementation of a new information technology platform at our
Racine operations in our 2016 fiscal third quarter led to service interruptions that resulted in lower commercial lighting orders and
revenues during that quarter and beyond. Allocation and effective management of the resources necessary to successfully implement,
integrate, train personnel and sustain this new platform will remain critical to ensure that we are not subject to transaction errors,
processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property through a security
breach in the near term. Additionally, we face these same risks if we fail to allocate and effectively manage the resources necessary
to build, implement, upgrade, integrate and sustain appropriate technology infrastructure over the longer term.
While we intend to focus on managing our costs and expenses, over the long term we expect to invest to support our growth and
may have additional unexpected costs. Such investments take time to become fully operational, and we may not be able to expand
quickly enough to exploit targeted market opportunities. In connection with our efforts to cost-effectively manage our growth, we
have increasingly relied on contractors for production capacity, logistics support and certain administrative functions including
hosting of certain information technology software applications. If our contract manufacturers, original design manufacturers
(ODMs) or other service providers do not perform effectively, we may not be able to achieve the expected cost savings and may
incur additional costs to correct errors or fulfill customer demand. Depending on the function involved, such errors may also lead
to business disruption, processing inefficiencies, the loss of or damage to intellectual property through security breach, or an impact
on employee morale. Our operations may also be negatively impacted if any of these contract manufacturers, ODMs or other
service providers do not have the financial capability to meet our growing needs. There are also inherent execution risks in starting
up a new factory or expanding production capacity, whether one of our own factories or that of our contract manufacturers or
ODMs, or moving production to different contract manufacturers or ODMs, that could increase costs and reduce our operating
results, including design and construction cost overruns, poor production process yields and reduced quality control.
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We operate in industries that are subject to significant fluctuation in supply and demand and ultimately pricing that affects
our revenue and profitability.
The industries we serve are in different stages of adoption and are characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving standards, short product life-cycles in the case of the LED industry and fluctuations
in product supply and demand. The LED, power and RF industries have experienced significant fluctuations, often in connection
with, or in anticipation of, product cycles and changes in general economic conditions. The semiconductor industry is characterized
by rapid technological change, high capital expenditures, short product life cycles and continuous advancements in process
technologies and manufacturing facilities. As the markets for our products mature, additional fluctuations may result from variability
and consolidations within the industry’s customer base. These fluctuations have been characterized by lower product demand,
production overcapacity, higher inventory levels and increased pricing pressure. These fluctuations have also been characterized
by higher demand for key components and equipment used in, or in the manufacture of, our products resulting in longer lead times,
supply delays and production disruptions.
We have experienced these conditions in our business and may experience such conditions in the future, which could have a
material negative impact on our business, results of operations or financial condition. For example, in the fourth quarter of fiscal
2015, we commenced a restructuring plan for our LED business that reduced excess capacity and overhead as well as increased
reserves as the result of a more aggressive pricing environment. The restructuring activity ended in the second quarter of fiscal
2016.
In addition, as we diversify our product offerings and as pricing differences in the average selling prices among our product lines
widen, a change in the mix of sales among our product lines may increase volatility in our revenue and gross margin from period
to period.
If we are unable to effectively develop, manage and expand our sales channels for our products, our operating results may
suffer.
We have expanded into business channels that are different from those in which we have historically operated as we grow our
business and sell more lighting, LED, power and RF products. Our sales agents have in the past and may in the future choose to
drop our product lines from their portfolio to avoid losing access to our competitors’ products, resulting in a disruption in the
project pipeline and lower than targeted sales for our products. Our sales agents have the ability to shift business to different
suppliers within their product portfolio based on a number of factors, including customer service and new product availability. We
sell a portion of our lighting products through retailers who may alter their promotional pricing or inventory strategies, which
could impact our targeted sales of these products. If we are unable to effectively penetrate these channels or develop alternate
channels to ensure our products are reaching the intended customer base, our financial results may be adversely impacted. In
addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products or
that we will be able to manufacture and deliver them in the timeline established by our customers.
We sell a substantial portion of our products to distributors. We rely on distributors to develop and expand their customer base as
well as anticipate demand from their customers. If they are not successful, our growth and profitability may be adversely impacted.
Distributors must balance the need to have enough products in stock in order to meet their customers’ needs against their internal
target inventory levels and the risk of potential inventory obsolescence. The risks of inventory obsolescence are especially relevant
to technological products. The distributors’ internal target inventory levels vary depending on market cycles and a number of
factors within each distributor over which we have very little, if any, control. Distributors also have the ability to shift business to
different manufacturers within their product portfolio based on a number of factors, including new product availability and
performance.
We typically recognize revenue on products sold to distributors when the item is shipped and title passes to the distributor (sell-
in method). Certain distributors have limited rights to return inventory under stock rotation programs and have limited price
protection rights for which we make estimates. We evaluate inventory levels in the distribution channel, current economic trends
and other related factors in order to account for these factors in our judgments and estimates. As inventory levels and product
return trends change, we may have to revise our estimates and incur additional costs, and our gross margins and operating results
could be adversely impacted.
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The markets in which we operate are highly competitive and have evolving technical requirements.
The markets for our products are highly competitive. In the LED market, we compete with companies that manufacture and sell
LED chips and LED components. In the lighting market, we compete with companies that manufacture and sell traditional and
LED lighting products, many of which have larger and more established sales channels. In the semiconductor market, we compete
with companies that have greater market share, name recognition and technical resources than we do. Competitors continue to
offer new products with aggressive pricing, additional features and improved performance. Competitive pricing pressures remain
a challenge and continue to accelerate the rate of decline in our sales prices, particularly in our LED Products and Wolfspeed
segments. Aggressive pricing actions by our competitors in our businesses could reduce margins if we are not able to reduce costs
at an equal or greater rate than the sales price decline.
With the growth potential for LEDs, we will continue to face increased competition in the future across our businesses. If the
investment in capacity exceeds the growth in demand, such as exists in the current LED market, the LED market is likely to become
more competitive with additional pricing pressures. Additionally, new technologies could emerge or improvements could be made
in existing technologies that may also reduce the demand for lighting and LEDs in certain markets. There are also new technologies,
such as organic LEDs (OLEDs), which could potentially reduce LED demand for backlighting, potentially impacting the overall
LED market.
As competition increases, we need to continue to develop new products that meet or exceed the needs of our customers. Therefore,
our ability to continually produce more efficient and lower cost LEDs, lighting products and power and RF products that meet the
evolving needs of our customers will be critical to our success. Competitors may also try to align with some of our strategic
customers. This could lead to lower prices for our products, reduced demand for our products and a corresponding reduction in
our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect
on our business, results of operations or financial condition.
Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and
capacity.
As customer demand for our products changes, we must be able to adjust our production capacity to meet demand. We are continually
taking steps to address our manufacturing capacity needs for our products. If we are not able to increase or decrease our production
capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels, we may not be able to
achieve our financial targets. For example, our Wolfspeed business is currently experiencing demand in excess of our production
capacity, which is resulting in longer manufacturing lead times to customers as we manage our constrained capacity. While we
began in fiscal 2016 making significant investments to expand our materials, power and RF device capacity and continue to do
so, these investments take time to bring in, install and get fully qualified. As a result, we may be unable to build or qualify such
new capacity on a timely basis to meet customer demand and customers may fulfill their orders with one of our competitors instead.
In addition, as we introduce new products and change product generations, we must balance the production and inventory of prior
generation products with the production and inventory of new generation products, whether manufactured by us or our contract
manufacturers, to maintain a product mix that will satisfy customer demand and mitigate the risk of incurring cost write-downs
on the previous generation products, related raw materials and tooling.
Due to the proportionately high fixed cost nature of our business (such as facility costs), if demand does not materialize at the rate
forecasted, we may not be able to scale back our manufacturing expenses or overhead costs to correspond to the demand. This
could result in lower margins and adversely impact our business and results of operations. Additionally, if product demand decreases
or we fail to forecast demand accurately, our results may be adversely impacted due to higher costs resulting from lower factory
utilization, causing higher fixed costs per unit produced. For example, in the third quarter of fiscal 2017, we had lower overall
lighting demand which led to higher costs per unit produced from our Racine factory, thereby reducing gross margins for our
Lighting Products segment. Further, we may be required to recognize impairments on our long-lived assets or recognize excess
inventory write-off charges, as we did in the fourth quarter of fiscal 2015. We may in the future be required to recognize excess
capacity charges, which would have a negative impact on our results of operations.
In addition, our efforts to improve quoted delivery lead-time performance may result in corresponding reductions in order backlog.
A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net revenue and operating
results.
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If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional
costs, including costs associated with the recall of those items.
The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability
standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products.
In some cases, our products may contain undetected defects or flaws that only become evident after shipment and installation. For
example, during the second and third quarters of fiscal 2017, we determined that the quality of several of our commercial lighting
products were possibly impacted by third party supplied drivers that did not meet specifications. Therefore, we increased our
product warranty reserves for potential future warranty claims. Even if our products meet standard specifications, our customers
may attempt to use our products in applications for which they were not designed or in products that were not designed or
manufactured properly, resulting in product failures and creating customer satisfaction issues.
We have experienced product quality, performance or reliability problems from time to time and defects or failures may occur in
the future. If failures or defects occur, they could result in significant losses or product recalls due to:
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costs associated with the removal, collection and destruction of the product;
payments made to replace product;
costs associated with repairing the product;
the write-down or destruction of existing inventory;
insurance recoveries that fail to cover the full costs associated with product recalls;
lost sales due to the unavailability of product for a period of time;
delays, cancellations or rescheduling of orders for our products; or
increased product returns.
A significant product recall could also result in adverse publicity, damage to our reputation and a loss of customer or consumer
confidence in our products. We also may be the target of product liability lawsuits or regulatory proceedings by the Consumer
Product Safety Commission (CPSC) and could suffer losses from a significant product liability judgment or adverse CPSC finding
against us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard.
We provide warranty periods ranging from 90 days to 10 years on our products. The standard warranty on nearly all of our new
LED lighting products, which now represent the majority of our revenue, is 10 years. Although we believe our reserves are
appropriate, we are making projections about the future reliability of new products and technologies, and we may experience
increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty
expense and costs associated with customer support.
We rely on a number of key sole source and limited source suppliers and are subject to high price volatility on certain commodity
inputs, variations in parts quality, and raw material consistency and availability.
We depend on a number of sole source and limited source suppliers for certain raw materials, components, services and equipment
used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes.
Although alternative sources generally exist for these items, qualification of many of these alternative sources could take up to
six months or longer. Where possible, we attempt to identify and qualify alternative sources for our sole and limited source suppliers.
We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements
with such suppliers. Some of our sources can have variations in attributes and availability which can affect our ability to produce
products in sufficient volume or quality. We do not control the time and resources that these suppliers devote to our business, and
we cannot be sure that these suppliers will perform their obligations to us. Additionally, general shortages in the marketplace of
certain raw materials or key components may adversely impact our business. In the past, we have experienced decreases in our
production yields when suppliers have varied from previously agreed upon specifications or made other modifications we do not
specify, which impacted our cost of revenue.
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Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively
impacting ours. This risk may increase if an economic downturn negatively affects key suppliers or a significant number of our
other suppliers. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us
from meeting commercial demand for our products. If we were to lose key suppliers, if our key suppliers were unable to support
our demand for any reason or if we were unable to identify and qualify alternative suppliers, our manufacturing operations could
be interrupted or hampered significantly.
We rely on arrangements with independent shipping companies for the delivery of our products from vendors and to customers
both in the United States and abroad. The failure or inability of these shipping companies to deliver products or the unavailability
of shipping or port services, even temporarily, could have a material adverse effect on our business. We may also be adversely
affected by an increase in freight surcharges due to rising fuel costs and added security.
In our fabrication process we consume a number of precious metals and other commodities, which are subject to high price volatility.
Our operating margins could be significantly affected if we are not able to pass along price increases to our customers. In addition,
production could be disrupted by the unavailability of the resources used in production such as water, silicon, electricity and gases.
Future environmental regulations could restrict supply or increase the cost of certain of those materials.
We depend on a limited number of customers, including distributors and retailers, for a substantial portion of our revenue,
and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating
results.
We receive a significant amount of our revenue from a limited number of customers, including distributors and retailers, one of
which represented 12% of our consolidated revenue in fiscal 2017. Most of our customer orders are made on a purchase order
basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their purchasing
behavior with little or no notice to us for various reasons, including developing, or, in the case of our distributors, their customers
developing, their own product solutions; choosing to purchase or distribute product from our competitors; incorrectly forecasting
end market demand for their products; or experiencing a reduction in their market share in the markets for which they purchase
our products. In the case of retailers, these customers may alter their promotional pricing; increase promotion of competitors'
products over our products; or reduce their inventory levels; all of which could negatively impact our financial condition and
results of operations. If our customers alter their purchasing behavior, if our customers’ purchasing behavior does not match our
expectations or if we encounter any problems collecting amounts due from them, our financial condition and results of operations
could be negatively impacted.
Our results may be negatively impacted if customers do not maintain their favorable perception of our brand and products.
We have a developing brand with increasing value. Maintaining and continually enhancing the value of this brand is critical to the
success of our business. Brand value is based in large part on customer perceptions. Success in promoting and enhancing brand
value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a
number of factors, including adverse publicity about our products (whether valid or not), a failure to maintain the quality of our
products (whether perceived or real), the failure of our products or Cree to deliver consistently positive consumer experiences, the
products becoming unavailable to consumers or consumer perception that we have acted in an irresponsible manner. Damage to
our brand, reputation or loss of customer confidence in our brand or products could result in decreased demand for our products
and have a negative impact on our business, results of operations or financial condition.
Variations in our production could impact our ability to reduce costs and could cause our margins to decline and our operating
results to suffer.
All of our products are manufactured using technologies that are highly complex. The number of usable items, or yield, from our
production processes may fluctuate as a result of many factors, including but not limited to the following:
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variability in our process repeatability and control;
contamination of the manufacturing environment;
equipment failure, power outages, fires, flooding, information or other system failures or variations in the manufacturing
process;
lack of consistency and adequate quality and quantity of piece parts, other raw materials and other bill of materials items;
inventory shrinkage or human errors;
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defects in production processes (including system assembly) either within our facilities or at our suppliers; and
any transitions or changes in our production process, planned or unplanned.
In the past, we have experienced difficulties in achieving acceptable yields on certain products, which has adversely affected our
operating results. We may experience similar problems in the future, and we cannot predict when they may occur or their severity.
In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost
efficiencies from other production advances. Failure to achieve these planned improvements or advances could have a significant
impact on our margins and operating results.
In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in providing a
more cost effective manufacturing process. If we are unable to make this transition in a timely or cost effective manner, our results
could be negatively impacted.
Global economic conditions could materially adversely impact demand for our products and services.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about global economic
conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment,
negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material
negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial
condition. For example, any economic and political uncertainty caused by the United Kingdom's impending exit from the European
Union may negatively impact demand for our products.
Additionally, our international sales are subject to variability as our selling prices become less competitive in countries with
currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing
in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens
against the foreign currencies in which we are billed.
If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.
From time to time, we evaluate strategic opportunities available to us for product, technology or business transactions, such as
business acquisitions, investments, joint ventures, divestitures, or spin-offs. If we choose to enter into such transactions, we face
certain risks including:
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the failure of an acquired business, investee or joint venture to meet our performance and financial expectations;
identification of additional liabilities relating to an acquired business;
loss of existing customers of our current and acquired businesses due to concerns that new product lines may be in
competition with the customers’ existing product lines;
difficulty integrating an acquired business's operations, personnel and financial and operating systems into our current
business;
diversion of management attention;
difficulty separating the operations, personnel and financial and operating systems of a spin-off or divestiture from our
current business;
the possibility we are unable to complete the transaction and expend substantial resources without achieving the desired
benefit;
the inability to obtain required regulatory agency approvals;
uncertainty of the financial markets or circumstances that cause conditions that are less favorable and/or different than
expected; and
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expenses incurred to complete a transaction may be significantly higher than anticipated.
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We may not be able to adequately address these risks or any other problems that arise from our prior or future acquisitions,
investments, joint ventures, divestitures or spin-offs. Any failure to successfully evaluate strategic opportunities and address risks
or other problems that arise related to any such business transaction could adversely affect our business, results of operations or
financial condition.
As a result of our continued expansion into new markets, we may compete with existing customers who may reduce their orders.
Through acquisitions and organic growth, we continue to expand into new markets and new market segments. Many of our existing
customers who purchase our LED products or Wolfspeed substrate materials develop and manufacture products using those wafers,
chips and components that are offered into the same lighting, power and RF markets. As a result, some of our current customers
perceive us as a competitor in these market segments. In response, our customers may reduce or discontinue their orders for our
LED or Wolfspeed substrate materials products. This reduction in or discontinuation of orders could occur faster than our sales
growth in these new markets, which could adversely affect our business, results of operations or financial condition.
Our revenue is highly dependent on our customers’ ability to produce, market and sell more integrated products.
Our revenue in our LED Products and Wolfspeed segments depends on getting our products designed into a larger number of our
customers’ products and in turn, our customers’ ability to produce, market and sell their products. For example, we have current
and prospective customers that create, or plan to create, lighting systems using our LED components. Even if our customers are
able to develop and produce LED lighting products or products that incorporate our power and RF products, there can be no
assurance that our customers will be successful in marketing and selling these products in the marketplace.
Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely
affect our business, results of operations or financial condition.
We have revenue, operations, manufacturing facilities and contract manufacturing arrangements in foreign countries that expose
us to certain risks. For example, fluctuations in exchange rates may affect our revenue, expenses and results of operations as well
as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including
the following:
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protection of intellectual property and trade secrets;
tariffs, customs, trade sanctions, trade embargoes and other barriers to importing/exporting materials and products in a
cost effective and timely manner, or changes in applicable tariffs or custom rules;
the burden of complying with and changes in U.S. or international taxation policies;
timing and availability of export licenses;
rising labor costs;
disruptions in or inadequate infrastructure of the countries where we operate;
difficulties in collecting accounts receivable;
difficulties in staffing and managing international operations; and
the burden of complying with foreign and international laws and treaties.
In some instances, we have received and may continue to receive incentives from foreign governments to encourage our investment
in certain countries, regions or areas outside of the United States. In particular, we have received and may continue to receive such
incentives in connection with our operations in Asia, as Asian national and local governments seek to encourage the development
of the technology industry. Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other
measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or
eliminated by governmental authorities at any time or as a result of our inability to maintain minimum operations necessary to
earn the incentives. Any reduction or elimination of incentives currently provided for our operations could adversely affect our
business and results of operations. These same governments also may provide increased incentives to or require production processes
that favor local companies, which could further negatively impact our business and results of operations.
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Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors, including those which may result
from the new U.S. presidential administration and the U.S. Congress, if any, may have a material adverse effect on our business
in the future, or may require us to exit a particular market or significantly modify our current business practices. Abrupt political
change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also
result in an adverse effect on our business and results of operations. For example, the results of the United Kingdom’s referendum
on whether to remain a part of the European Union have created political and economic uncertainty not only in the United Kingdom,
but in many European countries in which we do business. There could be further uncertainty as the United Kingdom negotiates
the future terms of its relationship with the European Union following its withdrawal.
In order to compete, we must attract, motivate and retain key employees, and our failure to do so could harm our results of
operations.
Hiring and retaining qualified executives, scientists, engineers, technical staff and sales personnel is critical to our business, and
competition for experienced employees in our industry can be intense. As a global company, this issue is not limited to the United
States, but includes our other locations such as Europe and China. For example, there is substantial competition in China for
qualified and capable personnel, particularly experienced engineers and technical personnel, which may make it difficult for us to
recruit and retain qualified employees. Also, within Huizhou, China, there are other large companies building manufacturing plants
that will likely compete for qualified employees. If we are unable to staff sufficient and adequate personnel at our China facilities,
we may experience lower revenue or increased manufacturing costs, which would adversely affect our results of operations.
To help attract, motivate and retain key employees, we use benefits such as stock-based compensation awards. If the value of such
awards does not appreciate, as measured by the performance of the price of our common stock or if our stock-based compensation
otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which
could harm our business and results of operations.
On May 19, 2017, we announced that we were accelerating the succession planning process for our chief executive officer and
that Charles M. Swoboda will step down from his executive positions and as a member of the Board of Directors following a
transition period. Our CEO search process, which is being led by a search committee of the Board, to identify a candidate for a
permanent Chief Executive Officer and President continues, and we are working with an executive search firm to assist with the
process of identifying and evaluating both internal and external candidates. There are no assurances concerning the timing or
outcome of our search for a new Chief Executive Officer. Our ability to execute our business strategies and attract and retain key
executives may be adversely affected by the uncertainty associated with the transition to a successor Chief Executive Officer.
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency,
performance, use or other aspects of our products could impact the demand for our products.
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance
or other aspects of our products may impact the demand for our products. Demand for our products may also be impacted by
changes in government and/or industry policies, standards or regulations that discourage the use of certain traditional lighting
technologies. These constraints may be eliminated or delayed by legislative action, which could have a negative impact on demand
for our products. Our ability and the ability of our competitors to meet these new requirements could impact competitive dynamics
in the market.
If governments, their agencies or utilities reduce their demand for our products or discontinue or curtail their funding, our
business may suffer.
Changes in governmental budget priorities could adversely affect our business and results of operations. U.S. and foreign
government agencies have purchased products directly from us and products from our customers, and U.S. government agencies
have historically funded a portion of our research and development activities. When the government changes budget priorities,
such as in times of war or financial crisis, or reallocates its research and development spending to areas unrelated to our business,
our research and development funding and our product sales to government entities and government-funded customers are at risk.
For example, demand and payment for our products and our customers’ products may be affected by public sector budgetary cycles,
funding authorizations or utility rebates. Funding reductions or delays could negatively impact demand for our products. If
government or utility funding is discontinued or significantly reduced, our business and results of operations could be adversely
affected.
19
We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, and therefore, impairment
of our investments or lower investment income could harm our earnings.
We are exposed to market value and inherent interest rate risk related to our investment portfolio. We have historically invested
portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, municipal
bonds, certificates of deposit, government securities and other fixed interest rate investments. The primary objective of our cash
investment policy is preservation of principal. However, these investments are generally not Federal Deposit Insurance Corporation
insured and may lose value and/or become illiquid regardless of their credit rating.
From time to time, we have also made investments in public and private companies that engage in complementary businesses. For
example, during fiscal 2015 we made an investment in Lextar Electronics Corporation (Lextar), a public company in Taiwan. An
investment in another company is subject to the risks inherent in the business of that company and to trends affecting the equity
markets as a whole. Investments in publicly held companies are subject to market risks and, like our investment in Lextar, may
not be liquidated easily. As a result, we may not be able to reduce the size of our position or liquidate our investments when we
deem appropriate to limit our downside risk. Should the value of any such investments we hold decline, the related write-down in
value could have a material adverse effect on our financial condition and results of operations. For example, the value of our Lextar
investment declined from the date of our investment in December 2014 through the end of fiscal 2017 with variability between
quarters, and may continue to decline in the future. As required by Rule 3-09 of Regulation S-X, we filed Lextar’s financial
statements, prepared by Lextar and audited by its independent public accounting firm, as of and for the years ended December 31,
2015 and 2014 as an exhibit to this Annual Report.
Litigation could adversely affect our operating results and financial condition.
We are often involved in litigation, primarily patent litigation. Defending against existing and potential litigation will likely require
significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect
our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful or if we are
unable to achieve a favorable resolution, we could be liable for damage awards that could materially affect our results of operations
and financial condition.
Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights, which could adversely impact
our relationship with certain customers. Any such litigation may require us to spend a substantial amount of time and money and
could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in any such
litigation.
Our business may be impaired by claims that we, or our customers, infringe the intellectual property rights of others.
Vigorous protection and pursuit of intellectual property rights characterize our industry. These traits have resulted in significant
and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement
of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical
personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in
such litigation, we could be required to:
•
•
•
•
•
•
•
pay substantial damages;
indemnify our customers;
stop the manufacture, use and sale of products found to be infringing;
incur asset impairment charges;
discontinue the use of processes found to be infringing;
expend significant resources to develop non-infringing products or processes; or
obtain a license to use third party technology.
20
There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect
to our products. In addition, our customers may face infringement claims directed to the customer’s products that incorporate our
products, and an adverse result could impair the customer’s demand for our products. We have also promised certain of our
customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the
products we supply. Under these indemnification obligations, we may be responsible for future payments to resolve infringement
claims against them.
From time to time, we receive correspondence asserting that our products or processes are or may be infringing patents or other
intellectual property rights of others. If we believe the assertions may have merit or in other appropriate circumstances, we may
take steps to seek to obtain a license or to avoid the infringement. We cannot predict, however, whether a license will be available;
that we would find the terms of any license offered acceptable; or that we would be able to develop an alternative solution. Failure
to obtain a necessary license or develop an alternative solution could cause us to incur substantial liabilities and costs and to suspend
the manufacture of affected products.
There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and patents licensed to us. We intend to continue to file
patent applications in the future, where appropriate, and to pursue such applications with U.S. and certain foreign patent authorities.
Our existing patents are subject to expiration and re-examination and we cannot be sure that additional patents will be issued on
any new applications around the covered technology or that our existing or future patents will not be successfully contested by
third parties. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing
technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant
commercial protection, especially as new competitors enter the market.
We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual
property rights. The actions we take to establish and protect trademarks, patents and other intellectual property rights may not be
adequate to prevent imitation of our products by others, and therefore, may adversely affect our sales and our brand and result in
the shift of customer preference away from our products. Further, the actions we take to establish and protect trademarks, patents
and other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and
management, even if the litigation or other action results in a determination favorable to us.
We also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing
activities. We try to protect this information through appropriate efforts to maintain its secrecy, including requiring employees and
third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality
agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements
or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known
or be independently discovered by others.
We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.
Goodwill and purchased intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually and
more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We
assess the recoverability of the unamortized balance of our finite-lived intangible assets when indicators of potential impairment
are present. Factors that may indicate that the carrying value of our goodwill or other intangible assets may not be recoverable
include a decline in our stock price and market capitalization and slower growth rates in our industry. The recognition of a significant
charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill or other intangible
assets could adversely impact our results of operations.
We may be subject to confidential information theft or misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary
and other confidential information. Our security measures may be breached as the result of industrial or other espionage actions
of outside parties, employee error, malfeasance or otherwise, and as a result, an unauthorized party may obtain access to our
systems. Additionally, outside parties may attempt to access our confidential information through other means, for example by
fraudulently inducing our employees to disclose confidential information. We actively seek to prevent, detect and investigate any
unauthorized access, which sometimes occurs. We might be unaware of any such access or unable to determine its magnitude and
effects. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result
of such an incident could adversely affect our competitive position and the value of our investment in research and development
could be reduced. Our business could be subject to significant disruption and we could suffer monetary or other losses.
21
We are subject to risks related to international sales and purchases.
We expect that revenue from international sales will continue to represent a significant portion of our total revenue. As such, a
significant slowdown or instability in relevant foreign economies, including economic instability in Europe, or lower investments
in new infrastructure could have a negative impact on our sales. We also purchase a portion of the materials included in our products
from overseas sources.
Our international sales and purchases are subject to numerous U.S. and foreign laws and regulations, including, without limitation,
tariffs, trade sanctions, trade barriers, trade embargoes, regulations relating to import-export control, technology transfer
restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt
Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and
regulations, we could be liable for administrative, civil or criminal liabilities, and, in the extreme case, we could be suspended or
debarred from government contracts or have our export privileges suspended, which could have a material adverse effect on our
business.
International sales and purchases are also subject to a variety of other risks, including risks arising from currency fluctuations,
collection issues and taxes. We have entered and may in the future enter into foreign currency derivative financial instruments in
an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the
future, and, even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations.
Our business may be adversely affected by uncertainties in the global financial markets and our or our customers’ or suppliers’
ability to access the capital markets.
Global financial markets continue to reflect uncertainty. Given these uncertainties, there could be future disruptions in the global
economy, financial markets and consumer confidence. If economic conditions deteriorate unexpectedly, our business and results
of operations could be materially and adversely affected. For example, our customers, including our distributors and their customers,
may experience difficulty obtaining the working capital and other financing necessary to support historical or projected purchasing
patterns, which could negatively affect our results of operations.
Although we believe we have adequate liquidity and capital resources to fund our operations internally and under our existing line
of credit, our inability to access the capital markets on favorable terms in the future, or at all, may adversely affect our financial
performance. The inability to obtain adequate financing from debt or capital sources in the future could force us to self-fund
strategic initiatives or even forego certain opportunities, which in turn could potentially harm our performance.
Changes in our effective tax rate may affect our results.
Our future effective tax rates may be affected by a number of factors including:
•
•
•
•
•
•
•
•
•
•
the jurisdiction in which profits are determined to be earned and taxed;
changes in government administrations, such as the new U.S. presidential administration and U.S. Congress, as well as
in the states and countries in which we operate;
changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles;
the resolution of issues arising from tax audits with various authorities;
changes in the valuation of our deferred tax assets and liabilities. For example, in the third quarter of fiscal 2017 we
recognized a full valuation allowance against our U.S. deferred tax assets and other deferred charges primarily due to
our three-year cumulative pre-tax loss position in the U.S. and the termination of the Wolfspeed sale transaction, which
was anticipated to generate U.S. taxable income;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes, including impairment of goodwill in connection with acquisitions;
changes in available tax credits;
the recognition and measurement of uncertain tax positions;
variations in realized tax deductions for certain stock-based compensation awards (such as non-qualified stock options
and restricted stock) from those originally anticipated; and
22
•
the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes or any changes in
legislation that may result in these earnings being taxed within the U.S., regardless of our decision regarding repatriation
of funds.
Any significant increase or decrease in our future effective tax rates could impact net loss for future periods. In addition, the
determination of our income tax provision requires complex estimations, significant judgments and significant knowledge and
experience concerning the applicable tax laws. To the extent our income tax liability materially differs from our income tax
provisions due to factors, including the above, which were not anticipated at the time we estimated our tax provision, our net
income (loss) or cash flows could be affected.
Failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of
operations.
The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array
of environmental, health and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations
could result in:
•
•
•
•
regulatory penalties, fines, legal liabilities and the forfeiture of certain tax benefits;
suspension of production;
alteration of our fabrication, assembly and test processes; and
curtailment of our operations or sales.
In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials
could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require
us to acquire pollution abatement or remediation equipment, modify our product designs or incur other expenses, such as permit
costs, associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be
subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such
materials in our manufacturing, assembly and test processes or products. Any of these restrictions could harm our business and
results of operations by increasing our expenses or requiring us to alter our manufacturing processes.
Our results could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies,
including changes in the accounting standards to be applied.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results
(see “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results
of Operations included in Part II, Item 7 of this Annual Report). Such methods, estimates and judgments are, by their nature, subject
to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates
and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations or financial
condition.
Likewise, our results may be impacted due to changes in the accounting standards to be applied, such as the increased use of fair
value measurement standards and changes in revenue recognition requirements.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as an influenza outbreak
within our workforce, or man-made catastrophic event could cause delays in completing sales, continuing production or performing
other critical functions of our business, particularly if a catastrophic event occurred at our primary manufacturing locations or our
subcontractors' locations. Any of these events could severely affect our ability to conduct normal business operations and, as a
result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable as well, such
as impacts to our customers, which could cause delays in new orders, delays in completing sales or even order cancellations.
23
Our stock price may be volatile.
Historically, our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in
our revenue, earnings and margins over the past few years, and variations between our actual financial results and the published
expectations of analysts. For example, the closing price per share of our common stock on the NASDAQ Global Select Market
ranged from a low of $21.12 to a high of $28.98 during the 12 months ended June 25, 2017. If our future operating results or
margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.
Speculation and opinions in the press or investment community about our strategic position, financial condition, results of operations
or significant transactions can also cause changes in our stock price. In particular, speculation around our market opportunities for
energy efficient lighting may have a dramatic effect on our stock price, especially as various government agencies announce their
planned investments in energy efficient technology, including lighting.
We have outstanding debt which could materially restrict our business and adversely affect our financial condition, liquidity
and results of operations.
Our indebtedness consists of borrowings from our revolving line of credit. Our ability to pay interest and repay the principal for
our indebtedness is dependent upon our ability to manage our business operations and generate sufficient cash flows to service
such debt. There can be no assurance that we will be able to manage any of these risks successfully.
The level of outstanding debt under this line of credit may adversely affect our operating results and financial condition by, among
other things:
•
•
•
•
increasing our vulnerability to downturns in our business, to competitive pressures and to adverse general economic and
industry conditions;
requiring the dedication of an increased portion of our expected cash flows from operations to service our indebtedness,
thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures, research
and development and stock repurchases;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
placing us at a competitive disadvantage compared to our peers that may have less indebtedness than we have by limiting
our ability to borrow additional funds needed to operate and grow our business; and
•
increasing our interest expense if interest rates increase.
Our line of credit requires us to maintain compliance with certain financial ratios. In addition, our line of credit contains certain
restrictions that could limit our ability to, among other things: incur additional indebtedness, dispose of assets, create liens on
assets, make acquisitions or engage in mergers or consolidations, and engage in certain transactions with our subsidiaries and
affiliates. These restrictions could limit our ability to plan for or react to changing business conditions, or could otherwise restrict
our business activities and plans.
Our ability to comply with our loan covenants may also be affected by events beyond our control and if any of these restrictions
or terms is breached, it could lead to an event of default under our line of credit. A default, if not cured or waived, may permit
acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further extensions of credit
under our line of credit. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the
accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us or at all.
24
Regulations related to conflict-free minerals may force us to incur additional expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability
concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining
countries. As a result, in August 2012 the SEC established new annual disclosure and reporting requirements for those companies
who may use “conflict” minerals mined from the DRC and adjoining countries in their products. Our most recent disclosure
regarding our due diligence was filed in May 2017 for calendar year 2016. These requirements could affect the sourcing and
availability of certain minerals used in the manufacture of our products. As a result, we may not be able to obtain the relevant
minerals at competitive prices and there will likely be additional costs associated with complying with the due diligence procedures
as required by the SEC. In addition, because our supply chain is complex, we may face reputational challenges with our customers
and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due
diligence procedures, and we may incur additional costs as a result of changes to product, processes or sources of supply as a
consequence of these requirements.
Item 1B. Unresolved Staff Comments
Not applicable.
25
Item 2. Properties
The table below sets forth information with respect to our significant owned and leased facilities as of June 25, 2017. The sizes
of the locations represent the approximate gross square footage of each site’s buildings.
Location
Owned Facilities
Durham, NC..........................
Research Triangle Park, NC .
Racine, WI ............................
Huizhou, China .....................
Total owned ...................
Leased Facilities
Durham, NC..........................
Laredo, TX............................
Goleta, CA ............................
Yorkville, WI........................
Pleasant Prairie, WI ..............
Fayetteville, AR....................
Sesto Fiorentino, Italy...........
Hong Kong............................
Misc. sales and support
offices ...................................
Total leased....................
Size (approximate gross square footage)
Segment
Utilization1
Total
Production
Facility
Services and
Warehousing
Administrative
Function
Housing /
Other
All
3
1
2
1
1
1,2
1
1
3
1,2
All
All
966,844
203,995
802,845
823,951
2,797,635
536,169
90,613
160,000
332,271
1,119,053
189,430
100,545
25,623
79,016
147,877
26,265
63,670
38,913
66,189
737,528
15,200
—
—
—
—
10,956
20,672
—
—
46,828
83,860
62,855
418,000
116,568
681,283
167,584
97,545
1,882
77,316
145,477
—
24,998
8,958
15,477
539,237
346,815
50,527
224,845
41,764
663,951
6,646
3,000
23,741
1,700
2,400
15,309
18,000
29,955
50,712
151,463
—
—
—
333,348
333,348
—
—
—
—
—
—
—
—
—
Total gross square footage.........
3,535,163
1,165,881
1,220,520
815,414
333,348
1 Segments listed in the “Segment Utilization” column above are identified as follows: 1) Lighting Products; 2) LED Products
and 3) Wolfspeed.
In the United States, our corporate headquarters as well as our primary research and development and manufacturing operations
are located at the Durham, North Carolina facilities that we own. These Durham facilities sit on 149 acres of land that we own.
Our power and RF products are primarily produced at our owned manufacturing facility located in Research Triangle Park, North
Carolina. This facility sits on 55 acres of land that we own. Domestically, our lighting products are primarily produced at our
owned facility in Racine, Wisconsin, which sits on 33 acres of land that we own, and a leased facility in Durham, North Carolina.
LED products are produced at our owned manufacturing facilities located in Huizhou, Guangdong Province, China. We also own
dormitories for housing our Chinese employees near and adjacent to the owned manufacturing facilities. The owned manufacturing
facilities, dormitories, and support buildings are located on land that is leased from the Chinese government through two leases.
The first land lease is for twelve acres that expires in June 2057 and supports the manufacturing facilities. The second land lease
is for five acres that expires in December 2082 and is used for dormitory buildings.
We also maintain sales and support offices, through our subsidiaries, in leased office premises in North America, Asia, and Europe.
In addition, we lease a facility in Goleta, California that is used for research and development and administrative functions.
Item 3. Legal Proceedings
The information required by this item is set forth under Note 13, “Commitments and Contingencies,” in our consolidated financial
statements included in Item 8 of this Annual Report, and is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
26
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Information
Our common stock is traded on the NASDAQ Global Select Market and is quoted under the symbol CREE. There were 324 holders
of record of our common stock as of August 18, 2017. The following table sets forth, for the quarters indicated, the high and low
closing sales prices as reported by NASDAQ.
First Quarter.........................................................................
Second Quarter ....................................................................
Third Quarter .......................................................................
Fourth Quarter .....................................................................
Fiscal 2017
Fiscal 2016
High
Low
High
Low
$28.98
27.58
28.83
27.24
$23.19
21.12
25.56
21.70
$27.56
28.16
32.44
30.14
$23.95
22.12
24.07
22.43
We have never paid cash dividends on our common stock and do not anticipate that we will do so in the foreseeable future. Our
credit agreement with Wells Fargo Bank, National Association and other lenders party thereto, contains certain dividend distribution
restrictions. Applicable state laws may also limit the payment of dividends. Our present policy is to retain earnings, if any, to
provide funds to invest in our business.
27
Stock Performance Graph
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to
be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the
Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange
Act, except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total return on our common stock with the cumulative total returns of the NASDAQ
Composite Index and the NASDAQ Electronic Components Index for the five-year period commencing June 24, 2012. The stock
price performance shown on the graph below is not necessarily indicative of future price performance.
Comparison of Five-Year Cumulative Total Return*
Among Cree, Inc., the NASDAQ Composite Index and the NASDAQ Electronic Components Index
*
Assumes (1) $100 invested on June 24, 2012 in Cree, Inc. Common Stock, the NASDAQ Composite Index and the
NASDAQ Electronic Components Index and (2) the immediate reinvestment of all dividends.
Cree, Inc.
6/24/2012
$100.00
6/30/2013
$261.06
6/29/2014
$198.28
6/28/2015
$110.43
6/26/2016
$94.85
6/25/2017
$100.60
NASDAQ Composite Index
100.00
119.38
156.20
182.53
167.12
225.01
NASDAQ Electronic
Components Index
100.00
118.23
150.86
166.70
163.71
232.96
28
Sale of Unregistered Securities
There were no unregistered securities sold during fiscal 2017.
Stock Repurchase Program
On August 24, 2016, our Board of Directors approved our fiscal 2017 stock repurchase program authorizing us to repurchase
shares of common stock having an aggregate purchase price not exceeding $300 million for all purchases from August 24, 2016
through the expiration of the program on June 25, 2017. There were no shares repurchased under the stock repurchase program
in the fourth quarter of fiscal 2017.
Since the inception of our stock repurchase program in January 2001 through June 25, 2017, we have repurchased 38.7 million
shares of our common stock at an average price of $28.66 per share with an aggregate value of $1.1 billion. The repurchase program
could be implemented through open market or privately negotiated transactions at the discretion of our management.
On June 14, 2017, our Board of Directors approved our fiscal 2018 stock repurchase program authorizing us to repurchase shares
of common stock having an aggregate purchase price not exceeding $200 million for all purchases from June 26, 2017 through
the expiration of the program on June 24, 2018.
Item 6. Selected Financial Data
The consolidated statement of (loss) income data set forth below with respect to the fiscal years ended June 25, 2017, June 26,
2016, and June 28, 2015 and the consolidated balance sheet data at June 25, 2017 and June 26, 2016 are derived from, and are
qualified by reference to, the audited consolidated financial statements included in Item 8 of this Annual Report and should be
read in conjunction with those financial statements and notes thereto. The consolidated statement of income data for the fiscal
years ended June 29, 2014 and June 30, 2013 and the consolidated balance sheet data at June 28, 2015, June 29, 2014, and June 30,
2013 are derived from audited consolidated financial statements not included herein.
Selected Consolidated Financial Data
(In thousands, except per share data)
Consolidated Statement of (Loss) Income
Revenue, net ....................................................
Operating (loss) income ..................................
Net (loss) income.............................................
(Loss) earnings per share.................................
Basic ................................................................
Diluted .............................................................
Weighted average shares used in per share
calculation:
June 25,
2017
June 26,
2016
Fiscal Years Ended
June 28,
2015
June 29,
2014
June 30,
2013
$1,473,000
(18,672)
(98,118)
$1,616,627
(10,471)
(21,536)
$1,632,505
(73,550)
(64,692)
$1,647,641
133,236
123,490
$1,385,982
95,454
86,227
($1.00)
($1.00)
($0.21)
($0.21)
($0.57)
($0.57)
$1.02
$1.00
$0.74
$0.73
Basic ................................................................
Diluted .............................................................
98,487
98,487
101,783
101,783
113,022
113,022
120,623
122,914
116,621
117,979
Consolidated Balance Sheet Data
Total cash, cash equivalents and short-term
investments ......................................................
Working capital................................................
Total assets.......................................................
Total long-term liabilities ................................
Total shareholders’ equity................................
June 25,
2017
June 26,
2016
June 28,
2015
June 29,
2014
June 30,
2013
$610,938
888,607
$605,305
933,708
2,649,867
2,766,060
215,039
175,237
$713,191
$1,162,466
$1,023,915
1,053,464
2,948,033
231,295
1,467,236
3,338,981
45,943
1,308,355
3,048,062
37,061
2,222,805
2,367,824
2,461,952
2,986,383
2,803,590
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes
thereto, 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 our consolidated financial statements included
in Item 8 of this Annual Report. 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 bandgap 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. As discussed more fully below, we operate in three reportable segments: Lighting Products, LED Products and
Wolfspeed.
Our lighting products primarily consist of LED lighting systems and lamps. We design, manufacture and sell lighting fixtures and
lamps for the commercial, industrial and consumer markets.
Our LED products consist of LED chips and LED components. Our LED products enable our customers to develop and market
LED-based products for lighting, video screens, automotive and other industrial applications.
Our Wolfspeed business consists of silicon carbide (SiC) materials, power devices and RF devices based on wide bandgap
semiconductor materials such as SiC and gallium nitride (GaN). Our materials products and power devices are used in solar,
electric vehicles, motor drives, power supplies and transportation applications. Our RF devices are used in military communications,
radar, satellite and telecommunication applications.
As discussed more fully in Note 1, “Business,” in our consolidated financial statements included in Item 8 of this Annual Report,
on July 13, 2016, we executed a definitive agreement to sell the Wolfspeed business to Infineon Technologies AG (Infineon).
Beginning in July 2016, the Company classified the results of the Wolfspeed business as discontinued operations in the Company’s
consolidated statements of loss for all periods presented and classified the related assets and liabilities associated with the
discontinued operations as held for sale in the consolidated balance sheets. On March 6, 2017, the definitive agreement with
Infineon was terminated. As a result of the termination of the agreement, we have reclassified the results of the Wolfspeed business
as continuing operations in our consolidated statements of loss, and presented it as a separate reportable segment, for all periods
presented. Additionally, the related assets and liabilities associated with the discontinued operations were reclassified as held and
used in the consolidated balance sheets for all periods presented.
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 products and aspects of product fabrication, assembly and packaging. We operate
research and development facilities in North Carolina, Arkansas, California, Wisconsin, India, Italy 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 8 of
this Annual Report.
Reportable Segments
Our three reportable segments are:
• Lighting Products
• LED Products
• Wolfspeed
Reportable segments are components of an entity that have separate financial data that the entity’s Chief Operating Decision Maker
(CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.
30
Our 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 our segment revenue disclosure. As such, total segment revenue is
equal to our consolidated revenue.
Our 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 to our consolidated loss before income
taxes.
For financial results by reportable segment, please refer to Note 14, “Reportable Segments,” in our consolidated financial statements
included in Item 8 of this Annual 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, SiC power devices and GaN RF devices. Our potential
for growth depends significantly on the continued adoption of LEDs, the adoption of SiC and GaN substrate and
device products in the power and RF markets, and our ability to win new designs for these applications. Demand
also fluctuates based on various market cycles, continuously evolving industry supply chains, and evolving
competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for
us and our customers.
•
•
•
•
Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many
companies have made significant investments in product development and production equipment. 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 the LED, lighting, power and RF markets we
serve. To remain competitive, market participants must continuously increase product performance, reduce costs and
develop improved ways to serve their customers. To address these competitive pressures, we invest in research and
development activities to support new product development, lower product costs and deliver higher levels of
performance to differentiate our products in the market. In addition, we invest in systems, people and new processes
to improve our ability to deliver a better overall experience for our customers.
Lighting Sales Channel Development. Commercial lighting is usually sold through lighting agents and distributors
in the North American lighting market. The lighting agents typically have exclusive sales rights for a defined territory
and are typically aligned with one large lighting company for a large percentage of their product sales. The size,
quality and capability of the lighting agent has a significant effect on winning new projects and sales in a given
geographic market. While these agents sell other lighting products, the large traditional lighting companies have
taken steps to prevent their channel partners from selling competing product lines. We are constantly working to
improve the capabilities of our existing channel partners and increase our share of their sales as well as develop new
partners to improve our sales effectiveness in each geographic market.
Technological Innovation and Advancement. Innovations and advancements in LEDs, lighting and power and RF
technologies continue to expand the potential commercial application for our products. 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.
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.
Fiscal 2017 Overview
The following is a summary of our financial results for the year ended June 25, 2017:
• Our year-over-year revenue decreased by $144 million to $1.5 billion.
• Gross margin remained flat at 30%. Gross profit decreased by $53 million to $435 million.
31
• Operating loss was $19 million in fiscal 2017 compared to operating loss of $10 million in fiscal 2016. Net loss per
diluted share was $1.00 in fiscal 2017 compared to net loss per diluted share of $0.21 in fiscal 2016.
• Combined cash, cash equivalents and short-term investments remained flat at $0.6 billion at June 25, 2017 and
June 26, 2016. Cash provided by operating activities was $216 million in fiscal 2017, compared to $203 million in
fiscal 2016.
• We spent $104 million to repurchase 4.4 million shares of our common stock during fiscal 2017.
• We spent $87 million on purchases of property and equipment in fiscal 2017 compared to $120 million in fiscal
2016.
Business Outlook
While we believe that the markets for our products will remain highly competitive during fiscal 2018, we believe we are uniquely
positioned as a market leading innovator in all three business segments and target growth in all three businesses over the next
several years. These businesses are in different phases of their growth plans and generally operate on different market cycles. This
is targeted to provide better business diversity and less cyclical results over time.
We are focused on the following priorities to support our goals of delivering higher revenue and profits over time:
•
Invest in the Wolfspeed business to increase capacity and further develop the technology to support longer term growth
opportunities in SiC materials, SiC power devices and modules, and GaN RF devices.
• Grow Lighting Products revenue and improve margins by investing in our channel relationships, improving execution,
continuing to deliver innovative lighting solutions and by potentially acquiring complimentary businesses that are
accretive to our earnings.
• Grow the LED Products business by expanding our product offering with new products that leverage our market leadership
to serve a larger share of existing customers’ LED demand, while also opening new applications for our technology.
•
Improve the customer experience and service levels in all of our businesses.
32
Results of Operations
The following table sets forth certain consolidated statement of loss data for the periods indicated (in thousands, except per share
amounts and percentages):
June 25, 2017
Fiscal Years Ended
June 26, 2016
June 28, 2015
Dollars
% of
Revenue
Dollars
% of
Revenue
Dollars
% of
Revenue
277,175
158,549
Revenue, net ........................................ $1,473,000
1,038,428
Cost of revenue, net..............................
Gross profit .........................................
434,572
Research and development...................
Sales, general and administrative .........
Amortization or impairment of
acquisition-related intangibles..............
Loss on disposal or impairment of
long-lived assets ...................................
Wolfspeed transaction termination fee.
Operating loss .....................................
Non-operating income (expense), net ..
Loss before income taxes ...................
Income tax (benefit) expense ...............
Net loss.................................................
Basic loss per share ..............................
Diluted loss per share ...........................
2,521
(12,500)
(18,672)
93,454
($98,118)
14,008
(4,664)
($1.00)
($1.00)
27,499
100 % $1,616,627
100 % $1,632,505
100 %
70 % 1,129,553
487,074
30 %
11 %
19 %
168,848
283,052
70 % 1,158,586
473,919
30 %
10 %
18 %
182,797
290,730
2 %
28,732
2 %
26,220
0 %
(1 )%
(1)%
1 %
— %
16,913
—
(10,471)
(13,035)
(23,506)
(1,970)
6 %
(7)% ($21,536)
($0.21)
($0.21)
47,722
1 %
—
— %
(73,550)
(1)%
(10,389)
(1 )%
(83,939)
(1)%
(19,247)
— %
(1)% ($64,692)
($0.57)
($0.57)
71 %
29 %
11 %
18 %
2 %
3 %
— %
(5)%
(1 )%
(5)%
(1 )%
(4)%
LED Business Restructuring
In June 2015, our Board of Directors approved a plan to restructure the LED Products business. The restructuring reduced excess
capacity and overhead in order to improve the cost structure moving forward. The primary components of the restructuring include
the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions.
The restructuring activity ended in the second quarter of fiscal 2016. During fiscal 2016, we realized $18.8 million in LED
restructuring charges, which were partially offset by a $1.1 million gain on the sale of long-lived assets related to the restructuring
which were sold for a value in excess of their estimated net realizable value during fiscal 2016.
The following table summarizes the actual charges incurred (in thousands):
Capacity and overhead cost
reductions
Loss on disposal or impairment of
long-lived assets ...............................
Severance expense............................
Lease termination and facility
consolidation costs ...........................
Increase in channel inventory
reserves.............................................
Increase in inventory reserves ..........
Total restructuring charges.............
Amounts
incurred
during
fiscal year
2015
Amounts
incurred
during
fiscal year
2016
Cumulative
amounts
incurred
through
fiscal year
2016
Affected Line Item in the Consolidated
Statements of Loss
$42,716
2,019
$15,506
264
$58,222
Loss on disposal or impairment of long-
lived assets
2,283 Sales, general and administrative expenses
1,246
3,079
4,325 Sales, general and administrative expenses
26,479
11,091
—
—
26,479 Revenue, net
11,091 Cost of revenue, net
$83,551
$18,849
$102,400
33
Revenue
Revenue was comprised of the following (in thousands, except percentages):
Lighting Products..............
Percent of revenue..........
LED Products....................
Percent of revenue..........
Wolfspeed .........................
Percent of revenue..........
Total revenue......
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Year-Over-Year Change
2016 to 2017
2015 to 2016
$701,467
$889,133
$906,502
($187,666)
(21)% ($17,369)
(2)%
48%
55%
56%
550,302
551,156
554,987
(854)
— %
(3,831)
(1)%
37%
34%
34%
221,231
176,338
171,016
44,893
25 %
5,322
3 %
15%
11%
10%
$1,473,000
$1,616,627
$1,632,505
($143,627)
(9)% ($15,878)
(1)%
Our consolidated revenue decreased 9% to $1.5 billion in fiscal 2017 compared to $1.6 billion in fiscal 2016. Lighting Products
revenue decreased by 21% and LED Products revenue decreased slightly, while Wolfspeed revenue increased by 25%. For the
fiscal year ended 2016, our consolidated revenue remained flat at $1.6 billion compared to fiscal 2015. Lighting Products revenue
and LED Products revenue decreased by 2% and 1%, respectively, while Wolfspeed revenue increased by 3%.
Lighting Products Segment Revenue
Lighting Products revenue represented approximately 48%, 55%, and 56% of our total revenue for fiscal 2017, 2016 and 2015
respectively. Lighting Products revenue was $701.5 million, $889.1 million, and $906.5 million for fiscal 2017, 2016 and 2015
respectively.
Lighting Products revenue decreased 21% to $701.5 million in fiscal 2017 from $889.1 million in fiscal 2016. This decrease was
the result of a 15% decrease in units sold and an 11% decrease in average selling prices (ASP), partially offset by the incremental
revenue associated with a patent license issuance fee in connection with a new patent license agreement. The decrease in units
sold in fiscal 2017 compared to fiscal 2016 was due to lower sales in both our commercial and consumer channels. The decrease
in ASP in fiscal 2017 compared to fiscal 2016 was primarily due to lower consumer bulb prices year over year.
Lighting Products revenue decreased 2% to $889.1 million in fiscal 2016 from $906.5 million in fiscal 2015. This decrease was
the result of lower consumer lighting sales which offset higher commercial lighting sales. The number of units sold decreased 22%
in fiscal 2016 compared to fiscal 2015 due to lower consumer bulb sales and a change in mix, which was partially offset by an
increase in ASP. The ASP increased 26% in fiscal 2016 compared to fiscal 2015 primarily due to a higher mix of commercial
lighting fixtures, which have a higher ASP than our other lighting products.
LED Products Segment Revenue
LED Products revenue represented 37%, 34%, and 34% of our total revenue for fiscal 2017, 2016 and 2015, respectively. LED
Products revenue was $550.3 million, $551.2 million, and $555.0 million for fiscal 2017, 2016 and 2015, respectively.
LED Products revenue decreased slightly to $550.3 million in fiscal 2017 from $551.2 million in fiscal 2016. This decrease was
primarily the result of a decrease in licensing revenue mostly offset by increased product sales. The number of units sold increased
7% which was partially offset by 5% decrease in ASPs. The decrease in ASP in fiscal 2017 compared to fiscal 2016 was due to
competitive pricing pressures.
LED Products revenue decreased 1% to $551.2 million in fiscal 2016 from $555.0 million in fiscal 2015. This decrease was
primarily a result of a reduction in ASP due to increased global competition for LED products which impacted both our LED chip
and LED component product lines, partially offset by an increase in the overall number of units sold and an increase in license
revenue associated with new patent license agreements. The ASP decreased 11% in fiscal 2016 compared to fiscal 2015 and the
overall number of units sold increased 12% in fiscal 2016 compared to fiscal 2015.
Wolfspeed Segment Revenue
Wolfspeed revenue represented approximately 15%, 11%, and 10% of our total revenue for fiscal 2017, 2016 and 2015, respectively.
Wolfspeed revenue was $221.2 million, $176.3 million, and $171.0 million for fiscal 2017, 2016 and 2015, respectively.
34
Wolfspeed revenue increased 25% to $221.2 million in fiscal 2017 from $176.3 million in fiscal 2016. This increase was primarily
the result of a 29% increase in the number of units sold and a 2% increase in ASP, which were partially offset by a decrease in
contract revenue. The increase in units sold in fiscal 2017 compared to fiscal 2016 was the result of increases across all products.
The increase in ASP in fiscal 2017 compared to fiscal 2016 was primarily due to a greater mix of higher priced material substrate
and RF device products.
Wolfspeed revenue increased 3% to $176.3 million in fiscal 2016 from $171.0 million in fiscal 2015. This increase was primarily
the result of higher substrate and contract revenue, partially offset by lower device sales. ASPs increased 17% in fiscal 2016
compared to fiscal 2015, partially offset by a 17% decrease in the number of units sold. The increase in ASP was due to a higher
substrate sale mix and a greater mix of higher priced power and RF products. The decrease in units sold was primarily the result
of lower RF units sold.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows (in thousands, except percentages):
Lighting Products gross profit ........... $196,218
June 25,
2017
Fiscal Years Ended
June 26,
2016
$238,242
June 28,
2015
$235,542
Year-Over-Year Change
2016 to 2017
($42,024)
(18)%
2015 to 2016
$2,700
1 %
Lighting Products gross margin....
LED Products ....................................
LED Products Gross Margin........
Wolfspeed gross profit.......................
Wolfspeed gross margin................
Unallocated costs...............................
28%
27%
26%
151,675
173,814
158,955
(22,139)
(13)%
14,859
9 %
28%
32%
29%
103,465
94,622
99,721
8,843
9 %
(5,099)
(5)%
(16,786)
Consolidated gross profit ......... $434,572
Consolidated gross margin ......
30%
(19,604)
$487,074
30%
29%
47%
54%
58%
(20,299)
$473,919
2,818
($52,502)
(14)%
(11)%
695
$13,155
(3)%
3 %
Our consolidated gross profit decreased 11% to $434.6 million in fiscal 2017 from $487.1 million in fiscal 2016. Our consolidated
gross margin remained flat at 30% in fiscal 2017 and in fiscal 2016. Our consolidated gross profit increased 3% to $487.1 million
in fiscal 2016 from $473.9 million in fiscal 2015. Our consolidated gross margin increased to 30% in fiscal 2016 from 29% in
fiscal 2015.
Lighting Products Segment Gross Profit and Gross Margin
Lighting Products gross profit was $196.2 million, $238.2 million, and $235.5 million in fiscal 2017, 2016 and 2015, respectively.
Lighting Products gross margin was 28%, 27%, and 26% in fiscal 2017, 2016 and 2015, respectively.
Lighting Products gross profit decreased 18% to $196.2 million in fiscal 2017 from $238.2 million in fiscal 2016. Lighting Products
gross margin increased to 28% in fiscal 2017 from 27% in fiscal 2016. Lighting Products gross profit decreased primarily due to
lower lighting product sales, higher commercial lighting product warranty reserves, and lower factory utilization, which were
partially offset by a patent license issuance fee. Lighting Products gross margin increased due to the patent license issuance fee
revenue, partially offset by the higher commercial lighting product warranty reserves and lower factory utilization from lower
lighting product sales.
Lighting Products gross profit increased 1% to $238.2 million in fiscal 2016 from $235.5 million in fiscal 2015. Lighting Products
gross margin increased to 27% in fiscal 2016 from 26% in fiscal 2015. Lighting Products gross profit and gross margin increased
due to a more favorable mix of commercial lighting fixtures and the benefit of factory cost reductions.
LED Products Segment Gross Profit and Gross Margin
Our LED Products gross profit was $151.7 million, $173.8 million, and $159.0 million in fiscal 2017, 2016 and 2015, respectively.
LED Products gross margin was 28%, 32%, and 29% in fiscal 2017, 2016 and 2015, respectively.
35
LED Products gross profit decreased 13% to $151.7 million in fiscal 2017 from $173.8 million in fiscal 2016, and LED Products
gross margin decreased to 28% in fiscal 2017 from 32% in fiscal 2016. LED Products gross profit and gross margin decreased
due to lower license revenue, lower pricing resulting from the increased global competition for LED products and a less favorable
mix of LED products sold.
LED Products gross profit increased 9% to $173.8 million in fiscal 2016 from $159.0 million in fiscal 2015, and LED Products
gross margin increased to 32% in fiscal 2016 from 29% in fiscal 2015. LED Products gross profit and gross margin increased due
to higher license revenue and higher units sold, partially offset by lower pricing. In fiscal 2015, LED Products gross profit and
gross margin were negatively impacted by increases in channel inventory reserves and inventory reserves pursuant to our
restructuring plan, as well as lower factory utilization resulting from lower demand and our targeted actions in the latter half of
fiscal 2015 to reduce inventory balances for our LED Products segment.
Wolfspeed Segment Gross Profit and Gross Margin
Wolfspeed gross profit was $103.5 million, $94.6 million, and $99.7 million in fiscal 2017, 2016 and 2015, respectively. Wolfspeed
gross margin was 47%, 54%, and 58% in fiscal 2017, 2016 and 2015, respectively.
Wolfspeed gross profit increased 9% to $103.5 million in fiscal 2017 from $94.6 million in fiscal 2016. Wolfspeed gross margin
decreased to 47% in fiscal 2017 from 54% in fiscal 2016. Wolfspeed gross profit increased primarily due to higher revenue.
Wolfspeed gross margin decreased primarily due to costs associated with new product ramp ups and changes in product mix.
Wolfspeed gross profit decreased 5% to $94.6 million in fiscal 2016 from $99.7 million in fiscal 2015. Wolfspeed gross margin
decreased to 54% in fiscal 2016 from 58% in fiscal 2015. Wolfspeed gross profit and gross margin decreased primarily due to
costs associated with new product ramp ups and changes in product mix.
Unallocated Costs
Unallocated costs were $16.8 million, $19.6 million, and $20.3 million for fiscal 2017, 2016 and 2015, respectively. These costs
consisted primarily of manufacturing employees’ stock-based compensation, expenses for profit sharing and quarterly or annual
incentive plans and matching contributions under our 401(k) plan. These costs were not allocated to the reportable segments’ gross
profit because our CODM does not review them regularly when evaluating segment performance and allocating resources.
Unallocated costs decreased by $2.8 million in fiscal 2017 compared to fiscal 2016, primarily due to lower stock-based compensation
incurred as a result of our lower average share price.
Unallocated costs decreased by $0.7 million in fiscal 2016 compared to fiscal 2015, primarily due to lower stock-based compensation
incurred as a result of our lower average share price.
For further information on the allocation of costs to segment gross profit, refer to Note 14, “Reportable Segments,” in our
consolidated financial statements included in Item 8 of this Annual Report.
Research and Development
Research and development expenses include costs associated with the development of new products, enhancements of existing
products and general technology research. These costs consisted primarily of employee salaries and related compensation costs,
occupancy costs, consulting costs and the cost of development equipment and supplies.
The following sets forth our research and development expenses in dollars and as a percentage of revenue (in thousands, except
percentages):
Research and development .... $158,549
June 25,
2017
Fiscal Years Ended
June 26,
2016
$168,848
June 28,
2015
$182,797
Percent of revenue ..........
11%
10%
11%
Year-Over-Year Change
2016 to 2017
2015 to 2016
($10,299)
(6)% ($13,949)
(8)%
Research and development expenses decreased in fiscal 2017 to $158.5 million compared to $168.8 million in fiscal 2016, which
decreased from $182.8 million in fiscal 2015. The decrease in fiscal 2017 compared to fiscal 2016 was primarily due to cost
management and the nature of current research and development projects. The decrease in fiscal 2016 compared to fiscal 2015
was primarily due to a shift in emphasis to lighting-related research and development, which is inherently less expensive than
LED research and development.
36
Our research and development expenses vary significantly from year to year based on a number of factors, including the timing
of new product introductions and the number and nature of our ongoing research and development activities.
Sales, General and Administrative
Sales, general and administrative expenses were comprised primarily of costs associated with our sales and marketing personnel
and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and
consisted of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside
legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel
and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of
revenue (in thousands, except percentages):
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Year-Over-Year Change
2016 to 2017
2015 to 2016
Sales, general and
administrative .........................
Percent of revenue...........
$277,175
$283,052
$290,730
($5,877)
(2)%
($7,678)
(3)%
19%
18%
18%
Sales, general and administrative expenses in fiscal 2017 decreased 2% to $277.2 million from $283.1 million in fiscal 2016,
which was a 3% decrease from $290.7 million in fiscal 2015. The decrease in fiscal 2017 compared to fiscal 2016 was primarily
due to lower spending on corporate sales and marketing expenses related to lower sales and a decrease in litigation spending
partially offset by higher Wolfspeed transaction expenses. The decrease in fiscal 2016 compared to fiscal 2015 was primarily due
to lower spending on corporate sales and marketing expenses related to lower sales, partially offset by an increase in legal fees
associated with intellectual property protection and enforcement.
Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships,
developed technology, non-compete agreements and trade names.
Amortization of intangible assets related to our acquisitions was as follows (in thousands, except percentages):
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Customer relationships ...............
Developed technology ................
Non-compete agreements ...........
Trade names, finite-lived ............
Total.....................................
$6,235
20,860
404
—
$27,499
$6,374
20,321
2,037
—
$28,732
$5,614
18,642
1,960
4
$26,220
Year-Over-Year Change
2016 to 2017
($139)
539
(1,633)
—
($1,233)
(2)%
3 %
(80)%
— %
(4)%
2015 to 2016
$760
1,679
77
(4)
$2,512
14 %
9 %
4 %
(100)%
10 %
Amortization of acquisition-related intangibles decreased in fiscal 2017 compared to fiscal 2016 primarily due to less amortization
expense for customer relationships and non-compete agreements in fiscal 2017. This decrease was partially offset by an increase
in the amortization of developed technology related to the acquisition of Arkansas Power Electronics International, Inc. (APEI)
that was placed in service in the fourth quarter of fiscal 2016. Amortization of acquisition-related intangibles increased in fiscal
2016 compared to fiscal 2015 primarily due to the amortization of intangibles related to the APEI acquisition as discussed in Note
3, “Acquisition,” in our consolidated financial statements in Part II, Item 8 of this Annual Report.
37
Loss on Disposal or Impairment of Long-Lived Assets
We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business
as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of
technological obsolescence or changes in our production process, we regularly review our equipment and capitalized patent costs
for possible impairment. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands,
except percentages):
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Year-Over-Year Change
2016 to 2017
2015 to 2016
Loss on disposal or impairment
of long-lived assets .....................
$2,521
$16,913
$47,722
($14,392)
(85)% ($30,809)
(65)%
We recognized a net loss of $2.5 million, $16.9 million, and $47.7 million on the disposal of long-lived assets in fiscal years 2017,
2016, and 2015, respectively. The decrease in net loss in fiscal 2017 compared to fiscal 2016 was primarily due to the planned
sale or abandonment of certain long-lived assets in fiscal 2016 to reduce excess manufacturing capacity pursuant to our restructuring
plan discussed above. The net losses in fiscal 2016 and fiscal 2015 were primarily due to the planned sale or abandonment of
certain long-lived assets to reduce excess manufacturing capacity pursuant to our restructuring plan discussed above.
Wolfspeed Transaction Termination Fee
As discussed more fully in Note 1, “Business,” in our consolidated financial statements included in Item 8 of this Annual Report,
as a result of the termination of the agreement to sell the Wolfspeed business to Infineon, Infineon paid us a termination fee of
$12.5 million in cash on March 10, 2017.
Non-Operating Income (Expense), net
The following table sets forth our non-operating income (expense), net (in thousands, except percentages):
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Gain on sale of investments, net...................
Gain (loss) on equity investment..................
Dividends from equity investment ...............
Interest income, net ......................................
Foreign currency gain (loss), net..................
Other, net ......................................................
Non-operating income (expense), net ...
$93
7,543
16
3,696
2,460
200
$14,008
$238
(15,357)
1,655
4,472
(4,500)
457
($13,035)
$925
(22,624)
2,581
9,086
(929)
572
($10,389)
Year-Over-Year Change
(61)%
(149)%
2016 to 2017
($145)
22,900
(1,639)
(776)
6,960
(257)
$27,043
2015 to 2016
($687)
7,267
(926)
(4,614)
(3,571)
(115)
(56)%
(207)% ($2,646)
(99)%
(17)%
(155)%
(74)%
(32)%
(36)%
(51)%
384 %
(20)%
25 %
During fiscal 2017, 2016 and 2015, we were in a net interest income position. Our short-term investments consisted primarily of
municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities.
The primary objective of our investment policy is preservation of principal. Other long-term investments consisted of our
approximately 15% common stock ownership interest in Lextar Electronics Corporation (Lextar), which was completed in
December 2014. This investment was accounted for under the equity method from the date of investment until June 2016 when
we chose for our representative not to stand for re-election as a member of the Lextar board of directors. We utilize the fair value
option in accounting for our investment in Lextar.
Gain on sale of investments, net. Gain on sale of investments, net was $93 thousand, $238 thousand and $925 thousand in fiscal
2017, fiscal 2016 and fiscal 2015, respectively. Gain on sale of investments, net decreased in fiscal 2017 primarily due to lower
sales of investments. Gain on sale of investments, net decreased in fiscal 2016 primarily due to lower sales of investments.
38
Gain (loss) on equity investment. Gain on equity investment was $7.5 million in fiscal 2017 and loss on equity investment was
$15.4 million and $22.6 million in fiscal 2016 and fiscal 2015, respectively. We had a gain on equity investment in fiscal 2017
due to the increase in the fair value of our Lextar investment. We had a loss on equity investment in fiscal 2016 and fiscal 2015
due to decreases in the fair value of our Lextar investment. Lextar’s stock is publicly traded on the Taiwan Stock Exchange and
its share price increased from 15.70 New Taiwanese Dollars (TWD) at June 26, 2016 to 18.40 TWD at June 25, 2017. Lextar's
share price declined from 30 TWD at the date of our investment in December 2014 to 21.55 TWD at June 28, 2015 and to 15.70
TWD at June 26, 2016. This volatile stock price trend may continue in the future given the risks inherent in Lextar’s business and
trends affecting the Taiwan and global equity markets. Any future stock price changes will be recorded as further gains or losses
on equity investment based on the increase or decrease, respectively, in the fair value of the investment during the applicable fiscal
period. Further losses could have a material adverse effect on our results of operations.
Dividends from equity investment. Dividends from equity investment were $0.0 million, $1.7 million and $2.6 million in fiscal
2017, fiscal 2016 and fiscal 2015, respectively, due to our Lextar investment.
Interest income, net. Interest income, net was $3.7 million, $4.5 million and $9.1 million in fiscal 2017, fiscal 2016 and fiscal
2015, respectively. The decrease in interest income, net in fiscal 2017 compared to fiscal 2016 was primarily due to lower invested
balances and higher interest expense due to overall higher borrowings associated with our line of credit, partially offset by higher
investment yields. The decrease in interest income, net in fiscal 2016 compared to fiscal 2015 was primarily due to lower invested
balances and higher interest expense due to overall higher borrowings associated with our line of credit, partially offset by higher
investment yields.
Foreign currency gain (loss), net. Foreign currency gain (loss), net consisted primarily of remeasurement adjustments resulting
from our Lextar investment and consolidating our international subsidiaries. The foreign currency gain, net in fiscal 2017 was
primarily due to favorable fluctuations in the exchange rate between both the Chinese Yuan and the Euro and the United States
Dollar which was partially offset by an unfavorable fluctuation in the exchange rate between the TWD and the United States Dollar
related to our Lextar investment. The foreign currency loss, net in fiscal 2016 was primarily due to unfavorable fluctuation in the
exchange rate between the TWD and the United States Dollar related to our Lextar investment and unfavorable fluctuation in the
exchange rate between the Chinese Yuan and the United States Dollar. The foreign currency gain, net for fiscal 2015 was primarily
due to unfavorable fluctuation in the exchange rate between the TWD and the United States Dollar related to our Lextar investment
and unfavorable fluctuation in the exchange rate between the Euro and the United States Dollar.
Other, net. Other, net was $200 thousand, $457 thousand and $572 thousand in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Income Tax Expense (Benefit)
The following table sets forth our income tax expense (benefit) in dollars and our effective tax rate (in thousands, except
percentages):
June 25,
2017
Income tax expense (benefit)...... $93,454
Effective tax rate..................
(2,004)%
Fiscal Years Ended
June 26,
2016
June 28,
2015
($19,247)
23%
($1,970)
8%
Year-Over-Year Change
2016 to 2017
2015 to 2016
95,424
(4,844)%
17,277
(90)%
We recognized income tax expense of $93.5 million in fiscal 2017 as compared to income tax benefit of $2.0 million in fiscal
2016. The decrease in the effective tax rate from 8% in fiscal 2016 to (2,004)% in fiscal 2017 was due to the establishment of a
valuation allowance against our U.S. deferred tax assets and other deferred charges in a period of a pre-tax loss, as discussed more
fully in Note 12 “Income Taxes” to our audited financial statements in Part II, Item 8 of this Annual Report. The decrease in the
effective tax rate from 23% in fiscal 2015 to 8% in fiscal 2016 was primarily due to the establishment of a valuation allowance
on foreign net operating loss carryovers during fiscal 2016.
The variation between our effective income tax rate and the U.S. statutory rate of 35 percent is due to: (i) changes in our valuation
allowances against deferred tax assets in the U.S. and Luxembourg, (ii) income derived from international locations with lower
tax rates than the U.S., and (iii) tax credits generated.
39
Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses and working capital requirements, including outlays for research and development,
capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable
securities, cash generated from operations and availability under our line of credit. Our ability to generate cash from operations
has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and
investing needs. We have a $500 million line of credit as discussed in Note 8, “Long-term Debt,” in our consolidated financial
statements included in Part II, Item 8 of this Annual Report. The purpose of this facility is to provide short term flexibility to
optimize returns on our cash and investment portfolio while funding share repurchases, capital expenditures and other general
business needs.
Based on past performance and current expectations, we believe our current working capital, availability under our line of credit
and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures
for at least the next 12 months. We may use a portion of our available cash and cash equivalents, line of credit or funds underlying
our marketable securities to repurchase shares of our common stock pursuant to repurchase programs authorized by our Board of
Directors. With our strong working capital position, we believe that we have the ability to continue to invest in further development
of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our
product portfolio, secure key intellectual properties or expand our production capacity.
From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or
investments in complementary businesses, and we anticipate continuing to make such evaluations. We may also access capital
markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary
businesses or other significant assets or for other strategic opportunities.
Contractual Obligations
At June 25, 2017, payments to be made pursuant to significant contractual obligations are as follows (in thousands):
Operating lease obligations................................
Purchase obligations ..........................................
Long-term debt...................................................
Interest payments on long-term debt1 ................
Other long-term liabilities2 ................................
Total contractual obligations ...........................
Less than
One Year
Payments Due by Period
Three to
Five Years
One to
Three Years
More Than
Five Years
$4,905
111,576
—
3,031
—
$119,512
$6,256
4,374
145,000
6,062
—
$161,692
$2,042
4,058
—
1,919
—
$8,019
$1,259
4,725
—
—
—
$5,984
Total
$14,462
124,733
145,000
11,012
—
$295,207
1Interest payments on long-term debt are based on the interest rate at June 25, 2017.
2 Other long-term liabilities as of June 25, 2017 included long-term tax contingencies and other tax liabilities of $49.9 million,
deferred liabilities of $0.4 million and other long-term contingent liabilities (for example, warranties) of $19.8 million. These
liabilities were not included in the table above as they will either not be settled in cash and/or the timing of any payments is
uncertain.
Operating lease obligations include rental amounts due on leases of certain office and manufacturing space under the terms of
non-cancelable operating leases. These leases expire at various times through April 2024. Most of the lease agreements provide
for rental adjustments for increases in base rent, property taxes and general property maintenance that would be recognized as
rent expense, if applicable.
Purchase obligations represent purchase commitments, including open purchase orders and contracts, and are generally related to
the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment.
40
Financial Condition
The following table sets forth our cash, cash equivalents and short-term investments (in thousands):
Cash and cash equivalents...............................................................................
Short-term investments ...................................................................................
Total cash, cash equivalents and short-term investments ........................
$132,597
478,341
$610,938
$166,154
439,151
$605,305
June 25,
2017
June 26,
2016
Change
($33,557)
39,190
$5,633
Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital. The significant
components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable
and inventories reduced by trade accounts payable.
The following table presents the components of our cash conversion cycle:
Three Months Ended
June 25,
2017
June 26,
2016
Change
Days of sales outstanding (a) ..........................................................................
Days of supply in inventory (b) ......................................................................
Days in accounts payable (c) ..........................................................................
Cash conversion cycle..............................................................................
37
98
(46)
89
38
99
(43)
94
(1)
(1)
(3)
(5)
a)
b)
c)
Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending
net trade receivables and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts
receivable, net of applicable allowances and reserves, by the average net revenue per day for the respective 90 day period.
Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI
is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending
inventory by average cost of revenue, net per day for the respective 90 day period.
Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment.
DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. DPO is calculated by
dividing ending accounts payable by the average cost of revenue, net per day for the respective 90 day period.
The decrease in the cash conversion cycle was primarily driven by an increase in days in accounts payable and decreases in days
of sales outstanding and in days of supply in inventory.
As of June 25, 2017, we had unrealized losses on our investments of $0.3 million. All of our investments had investment grade
ratings, and any such investments that were in an unrealized loss position at June 25, 2017 were in such position due to interest
rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability
to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect
to receive the full principal or recover our cost basis in these securities. The declines in value of the securities in our portfolio are
considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of June 25, 2017.
41
Cash Flows
In summary, our cash flows were as follows (in thousands):
Cash provided by operating activities................
Cash used in investing activities ........................
Cash (used in) provided by financing activities.
Effect of foreign exchange changes...................
Net (decrease) increase in cash and cash
equivalents .........................................................
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Year-Over-Year Change
2016 to 2017
2015 to 2016
$215,900
(145,250)
(104,078)
(129)
$203,316
(7,903)
(167,859)
(1,110)
$181,254
(16,137)
(311,353)
(878)
$12,584
(137,347)
63,781
981
$22,062
8,234
143,494
(232)
($33,557)
$26,444
($147,114)
($60,001)
$173,558
The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.
Cash Flows from Operating Activities
Net cash provided by operating activities increased to $215.9 million in fiscal 2017 from $203.3 million in fiscal 2016, primarily
due to cash generated from working capital, partially offset by a higher net loss in fiscal 2017 as compared to fiscal 2016. Net
cash provided by operating activities increased to $203.3 million in fiscal 2016 from $181.3 million in fiscal 2015, primarily due
to a lower net loss in fiscal 2016 as compared to fiscal 2015.
Cash Flows from Investing Activities
Our investing activities primarily relate to transactions within our short-term investments, purchases of property and equipment
and payments for patents and licensing rights. Net cash used in investing activities was $145.3 million in fiscal 2017 compared
to $7.9 million in fiscal 2016. Purchases of property, equipment and patent rights decreased by $35.1 million in fiscal 2017
compared to fiscal 2016. Net purchases of short-term investments increased $181.1 million in fiscal 2017 compared to fiscal 2016.
This year over year increase was primarily due to a decrease in proceeds from the sale and maturities of short-term investments,
partially offset by a decrease in short-term investment purchase activity. Fiscal 2016 included $12.5 million in net expenditures
to acquire APEI.
Net cash used in investing activities was $7.9 million in fiscal 2016 compared to $16.1 million in fiscal 2015. Purchases of property,
equipment and patent rights decreased by $91.2 million in fiscal 2016 compared to fiscal 2015. Net proceeds from the sale of
short-term investments decreased $156 million in fiscal 2016 compared to fiscal 2015. This year over year decrease was primarily
due to a decrease in proceeds from the sale and maturities of short-term investments, partially offset by a decrease in short-term
investment purchase activity. Fiscal 2016 included $12.5 million in net expenditures to acquire APEI while fiscal 2015 included
the $80.6 million investment in Lextar.
For fiscal 2018, we target approximately $220 million of capital investment, which is primarily related to infrastructure projects
to support our longer term growth and strategic priorities.
Cash Flows from Financing Activities
Net cash used in financing activities was $104.1 million in fiscal 2017 compared to net cash used by financing activities of $167.9
million in fiscal 2016. Our financing activities for fiscal 2017 primarily consisted of repurchases of common stock of $104.0
million and net payments on long-term debt borrowings of $15.0 million on our line of credit, partially offset by proceeds of $17.7
million from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employee
stock purchase plan, including the excess tax benefit on those exercises. Fiscal 2017 included payment of $2.8 million in acquisition-
related contingent consideration related to our fiscal 2016 acquisition of APEI.
In fiscal 2016, net cash used in financing activities was $167.9 million compared to net cash provided by financing activities of
$311.4 million in fiscal 2015. Our financing activities in fiscal 2016 primarily consisted of repurchases of common stock of $149.6
million and net payments on long-term borrowings of $40.0 million on our line of credit, partially offset by proceeds of $21.7
million from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employee
stock purchase plan, including the excess tax benefit on those exercises.
42
On August 24, 2016, the Board of Directors approved our fiscal 2017 stock repurchase program, authorizing us to repurchase
shares of our common stock having an aggregate purchase price not exceeding $300 million for all purchases from August 24,
2016 through the expiration of the program on June 25, 2017.
On June 14, 2017, the Board of Directors approved our fiscal 2018 stock repurchase program, authorizing us to repurchase shares
of our common stock having an aggregate purchase price not exceeding $200 million for all purchases from June 26, 2017 through
the expiration of the program on June 24, 2018. Since the inception of our stock repurchase program in 2001, we have repurchased
38.7 million shares of our common stock at an average price of $28.66 per share with an aggregate value of $1.1 billion. The
repurchase program may be implemented through open market or privately negotiated transactions at the discretion of our
management.
Fair Value
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, we use 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 we are 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 we perform recurring fair value remeasurements are cash equivalents and short-term investments.
As of June 25, 2017, financial assets utilizing Level 1 inputs included money market funds. Financial assets utilizing Level 2
inputs included municipal bonds, corporate bonds, non-U.S. certificates of deposit, commercial paper, 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. We do not have any financial assets requiring the use of Level 3 inputs. Please refer to Note
6, “Fair Value of Financial Instruments,” to the consolidated financial statements included in Item 8 of this Annual Report for
further information.
Financial and Market Risks
We are exposed to financial and market risks, including changes in interest rates, currency exchange rates and commodities risk.
We have entered and may in the future enter into foreign currency derivative financial instruments in an effort to manage or hedge
some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do,
foreign currency fluctuations may still have a material adverse effect on our results of operations and financial performance. All
of the potential changes noted below are based on sensitivity analysis performed on our financial positions at June 25, 2017 and
June 26, 2016. Actual results may differ materially.
Interest Rates
We maintain an investment portfolio principally composed of money market funds, municipal bonds, corporate bonds, commercial
paper and certificates of deposit. In order to minimize risk, our cash management policy permits us to acquire investments rated
“A” grade or better. As of June 25, 2017 and June 26, 2016, our cash equivalents and short-term investments had a fair value of
$482.1 million and $439.9 million, respectively. If interest rates were to hypothetically increase by 100 basis points, the fair value
of our cash equivalents and short-term investments would decrease by $8.8 million at June 25, 2017 and $9.6 million at June 26,
2016. We do not believe that a 10% change in interest rates would have a significant impact on our financial position, results of
operations or cash flows.
43
As of June 25, 2017, we maintained a secured revolving line of credit under which we can borrow, repay and reborrow loans from
time to time prior to its scheduled maturity date of January 9, 2020. At June 25, 2017 and June 26, 2016, we had $145 million and
$160 million outstanding, respectively, under the line of credit. If interest rates were to increase by 100 basis points, the annual
interest incurred under our line of credit would have increased by $1.5 million at June 25, 2017 and $1.6 million at June 26, 2016.
Currency Exchange Rates
Because we operate internationally and have transactions denominated in foreign currencies, including the Chinese Yuan and Euro,
among others, we are exposed to currency exchange rate risks. As a result, fluctuations in exchange rates may adversely affect
our expenses and results of operations as well as the value of our assets and liabilities. Our primary exposures relate to the exchange
rates between (1) the U.S. Dollar and the Chinese Yuan and (2) the U.S. Dollar and the Taiwanese Dollar. A hypothetical 10%
increase in the value of the U.S. Dollar compared to the Chinese Yuan would result in a potential gain of approximately $0.4
million at June 25, 2017 and a potential loss of $1.0 million at June 26, 2016. The potential loss in fair value resulting from a
hypothetical 10% increase in the value of the U.S. Dollar compared to the Taiwanese Dollar was approximately $5.0 million at
June 25, 2017 and $4.2 million at June 26, 2016.
Commodities
We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes. General economic
conditions, market specific changes or other factors outside of our control may affect the pricing of these commodities. We do not
use financial instruments to hedge commodity prices.
Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of
off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from
unconsolidated entities. As of June 25, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)
(ii) of SEC Regulation S-K.
We have entered into operating leases primarily for certain of our U.S. and international facilities in the normal course of business.
Future minimum lease payments under our operating leases as of June 25, 2017 are detailed above in “Liquidity and Capital
Resources” in the section entitled “Contractual Obligations.”
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In the application of U.S. GAAP, we are
required to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period
are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To
the extent that there are material differences between these estimates and actual results, our future financial statement presentation
of our financial condition or results of operations may be affected.
We evaluate our estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations,
valuation of inventories, tax related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible
assets, other contingencies and litigation, among others. We base our estimates on historical experience and on various other
assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our significant accounting policies are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting
Policies,” to the consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our
most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of
operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting
policies and the related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
We recognize product revenue when the earnings process is complete, as evidenced by persuasive evidence of an arrangement
(typically in the form of a purchase order), when the sales price is fixed or determinable, collection of revenue is reasonably
assured, and title and risk of loss have passed to the customer.
44
We provide our customers with limited rights of return for non-conforming shipments and product warranty claims. We estimate
an allowance for anticipated sales returns based upon an analysis of historical sales returns and other relevant data. We recognize
an allowance for non-conforming returns at the time of sale as a reduction of product revenue and as a reduction to the related
accounts receivable balance. We recognize a liability for product warranty claims at the time of sale as an increase to cost of
revenue.
For the year ended June 25, 2017, 56% of our revenue was from sales to distributors. Distributors stock inventory and sell our
products to their own customer base, which may include: value added resellers; manufacturers who incorporate our products into
their own manufactured goods; or ultimate end users of our products. We recognize revenue upon shipment of our products to our
distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model as opposed to a “sell-through” or
“point-of-sale” model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.
Our distributors may be provided limited rights that allow them to return a portion of inventory (product exchange rights or stock
rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under
our “ship and debit” program or other targeted sales incentives. When determining our net revenue, we make significant judgments
and estimates corresponding with product shipments. We recognize a reserve for estimated future returns, changes in selling prices,
and other targeted sales incentives when product ships. We also recognize an asset for the estimated value of product returns that
we believe will be returned to inventory in the future and resold, and these estimates are based upon historical data, current
economic trends, distributor inventory levels and other related factors. Our financial condition and operating results are dependent
upon our ability to make reliable estimates. Actual results may vary and could have a significant impact on our operating results.
From time to time, we will issue a new price book for our products, and provide a credit to certain distributors for inventory
quantities on hand if required by our agreement with the distributor. This practice is known as price protection. These credits are
applied against the reserve that we establish upon initial shipment of product to the distributor.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for
the products purchased within our standard commercial terms. Subsequent to the initial product purchase, a distributor may request
a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part
to that customer. If we approve an allowance and the distributor resells the product to the target customer, we credit the distributor
according to the allowance we approved. These credits are applied against a reserve we establish upon initial shipment of product
to the distributor.
In addition, we run sales incentive programs with certain distributors and retailers, such as product rebates and cooperative
advertising campaigns. We recognize these incentives at the time they are offered to customers and record a credit to their account
with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing expense depending on the
type of sales incentive.
Warranties
Product warranties are estimated and recognized at the time we recognize revenue. The warranty periods range from 90 days to
10 years. We estimate these warranty liabilities at the time of sale, based on historical and projected incident rates and expected
future warranty costs. We estimate costs related to product recalls based on a formal campaign soliciting repair or return of that
product when they are deemed probable and reasonably estimable. We evaluate our warranty reserves on a quarterly basis 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 our reliability estimates. Actual product
failure rates that materially differ from our estimates could have a significant impact on our operating results.
45
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) method or an average cost
method; and with market not to exceed net realizable value. We write-down our inventories for estimated obsolescence equal to
the difference between the cost of the inventory and its estimated market value based upon an aging analysis of the inventory on
hand, specifically known inventory-related risks (such as technological obsolescence), and assumptions about future demand. We
also analyze sales levels by product type, including historical and estimated future customer demand for those products to determine
if any additional reserves are appropriate. For example, we adjust for items that are considered obsolete based upon changes in
customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product. Any
adjustment to our inventories as a result of an estimated obsolescence or net realizable condition is reflected as a component of
our cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent
improvements in facts and circumstances do not result in the restoration or increase in that newly established lower-cost basis.
In order to determine what costs can be included in the valuation of inventories, we determine normal capacity for our manufacturing
facilities based on historical patterns. If our estimates regarding customer demand are inaccurate, or market conditions or technology
change in ways that are less favorable than those projected by management, we may be required to take excess capacity charges
in accordance with U.S. GAAP, which could have an adverse effect on our operating results.
Deferred Tax Asset Valuation Allowances
In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate
if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction. This consideration
includes a variety of factors such as historical and projected future taxable income and prudent and feasible tax planning strategies.
When we establish or increase a valuation allowance, our income tax expense increases in the period such determination is made.
If we decrease a valuation allowance, our income tax expense decreases in the period such a determination is made.
Tax Contingencies
We are subject to periodic audits of our income tax returns by federal, state, local and foreign agencies. These audits typically
include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income
among various tax jurisdictions. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification Topic 740, “Income Taxes” (ASC 740), we regularly evaluate the exposures associated with our various tax filing
positions. ASC 740 states that a tax benefit should not be recognized for financial statement purposes for an uncertain tax filing
position where it is not more likely than not (likelihood of greater than 50%) for being sustained by the taxing authorities based
on the technical merits of the position.
In accordance with the provisions of ASC 740, we have established unrecognized tax benefits (as a reduction to the deferred tax
asset or as an increase to other liabilities) to reduce some or all of the tax benefit of any of our tax positions at the time we determine
that the positions become uncertain based upon one of the following: the tax position is not “more likely than not” to be sustained;
the tax position is “more likely than not” to be sustained, but for a lesser amount; or the tax position is “more likely than not” to
be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or
not a tax position is uncertain, we presume the tax position will be examined by the relevant taxing authority that has full knowledge
of all relevant information; the technical merits of a tax position are derived from authorities such as legislation and statutes,
legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and
each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We
adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and
circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and
fully resolved. To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay
amounts in excess of what we have recognized, our effective tax rate in a given financial statement period could be materially
affected. An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the
year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
46
Stock-Based Compensation
We account for awards of stock-based compensation under our employee stock-based compensation plans using the fair value
method. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation
expense over the requisite service period or vesting term. We currently use the Black-Scholes option-pricing model to estimate
the fair value of our stock option and Employee Stock Purchase Plan (ESPP) awards. The determination of the fair value of stock-
based awards on the date of grant using an option-pricing model is affected by our then current 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 our financial statements. For restricted stock and stock unit awards, grant date fair value is based upon
the market price of our 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.
We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures
differ from initial estimates. Our determination of an estimated forfeiture rate is primarily based upon a review of historical
experience but may also include consideration of other facts and circumstances we believe are indicative of future activity. The
assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this
recognition as compensation expense is adjusted to reflect instruments that actually vest.
If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, we may be required
to adjust compensation expense, which could be material to our results of operations.
Long-Lived Assets
We evaluate long-lived assets such as property, equipment and finite-lived intangible assets, such as patents, for impairment
whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be
recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a
significant change in the way an asset is being used, or a significant change, delay or departure in our strategy for that asset. Our
assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our
assumptions, which, we believe, are consistent with the assumptions hypothetical marketplace participants use. Factors that we
must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales
volumes, prices, cost of capital, tax rates, and capital spending. These factors are often interdependent and therefore do not change
in isolation. If impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are
less than the carrying amounts of the asset or assets. If so, an impairment loss is measured and recognized.
After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts
and circumstances do not result in the reversal of a previously recognized impairment loss.
Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including
estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market
prices when available and independent appraisals as appropriate to determine fair value.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values,
we may be required to recognize additional impairment losses which could be material to our results of operations.
Goodwill
We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential
impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. We conduct impairment
testing for goodwill at the reporting unit level. Reporting units, as defined by FASB Accounting Standards Codification Topic
350, “Intangibles - Goodwill and Other” (ASC 350), may be operating segments as a whole or an operation one level below an
operating segment, referred to as a component. We have determined that our reporting units are our three operating and reportable
segments.
47
We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that
a reporting unit’s carrying value is greater than its fair value. Such factors may include the following, among others: a significant
decline in the reporting unit’s expected future cash flows; a sustained, significant decline in our stock price and market capitalization;
a significant adverse change in legal factors or in the business climate, unanticipated competition; and slower growth rates; as
well as changes in management, key personnel, strategy, and customers. If our qualitative assessment indicates that goodwill
impairment is more likely than not, we perform the two-step impairment test. Alternatively, we may bypass the qualitative test
and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, we compare the fair value of the reporting unit to its carrying value, including
goodwill. We derive a reporting unit’s fair value through a combination of the market approach (a guideline transaction method)
and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset
pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values
are reconciled back to our consolidated market capitalization.
If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the
carrying value of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure
possible goodwill impairment loss. During the second step, we hypothetically value the reporting unit’s tangible and intangible
assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the
reporting unit’s goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit’s goodwill
exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed
the carrying value of the reporting unit’s goodwill. Once an impairment loss is recognized, the adjusted carrying value of the
goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Indefinite-Lived Intangible Assets
We test indefinite-lived intangible assets for impairment at least annually in the fiscal fourth quarter, or when indications of potential
impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. Our impairment test
may begin with a qualitative test to determine whether it is more likely than not that an indefinite-lived intangible asset’s carrying
value is greater than its fair value. In performing this test, we may consider the following qualitative factors, among others: a
significant decline in expected future cash flows; changes in industry and market conditions such as the deterioration in the
environment in which we operate or an increased competitive environment; changes in management, key personnel, strategy, or
customers; as well as other economic factors. If our qualitative assessment indicates that asset impairment is more likely than not,
we perform a quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset to its carrying value.
Alternatively, we may bypass the qualitative test and initiate impairment testing with the quantitative impairment test.
Determining the fair value of indefinite-lived intangible assets entails significant estimates and assumptions including, but not
limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product
revenue, developing appropriate discount rates, estimating probability rates for the successful completion of development projects,
continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible
assets acquired.
If the fair value of the indefinite-lived intangible asset exceeds its carrying value, we conclude that no impairment has occurred.
If the carrying value of the indefinite-lived intangible asset exceeds its fair value, we recognize an impairment loss in an amount
equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes
the new accounting basis of the indefinite-lived intangible asset.
Contingent Liabilities
We provide for contingent liabilities in accordance with U.S. GAAP, under which a loss contingency is charged to income when
(1) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the
amount of the loss can be reasonably estimated.
48
Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is considered
probable and the amount can be reasonably estimated, we reflect the estimated loss in our results of operations. Significant judgment
is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably
estimable. Because of uncertainties related to these matters, accruals are based on the best information available at the time. Further,
estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts
that may have been included in the accompanying consolidated financial statements. In determining the probability of an
unfavorable outcome of a particular contingent liability and whether such liability is reasonably estimable, we consider the
individual facts and circumstances related to the liability, opinions of legal counsel and recent legal rulings by the appropriate
regulatory bodies, among other factors. As additional information becomes available, we reassess the potential liability related to
our pending and threatened claims and litigation and may revise our estimates accordingly. Such revisions in the estimates of the
potential liabilities could have a material impact on our results of operations and financial position. See also a discussion of specific
contingencies in Note 13, “Commitments and Contingencies,” to our consolidated financial statements in Item 8 of this Annual
Report.
Recent Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements in
Item 8 of this Annual Report for a description of recent accounting pronouncements, including the expected dates of adoption and
estimated effects, if any, on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Financial and Market Risks” included in Management’s Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this Annual Report.
49
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ..............................................................................................
Consolidated Balance Sheets as of June 25, 2017 and June 26, 2016 ...............................................................................
Consolidated Statements of Loss for the years ended June 25, 2017, June 26, 2016 and June 28, 2015 ..........................
Consolidated Statements of Comprehensive Loss for the years ended June 25, 2017, June 26, 2016 and June 28, 2015
Consolidated Statements of Cash Flows for the years ended June 25, 2017, June 26, 2016 and June 28, 2015...............
Consolidated Statements of Shareholders’ Equity for the years ended June 25, 2017, June 26, 2016 and June 28, 2015
Notes to Consolidated Financial Statements......................................................................................................................
Page
51
52
53
54
55
56
57
50
Report of Independent Registered Public Accounting Firm
To Board of Directors and Shareholders of Cree, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of loss, comprehensive
loss, cash flows and shareholders’ equity present fairly, in all material respects, the financial position of Cree, Inc. and its
subsidiaries at June 25, 2017 and June 26, 2016, and the results of their operations and their cash flows for each of the three
years in the period ended June 25, 2017 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of June 25, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, appearing under Item 9A, Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 23, 2017
51
CREE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents ...........................................................................................
Short-term investments................................................................................................
Total cash, cash equivalents and short-term investments.....................................
Accounts receivable, net..............................................................................................
Income tax receivable..................................................................................................
Inventories ...................................................................................................................
Prepaid expenses .........................................................................................................
Other current assets .....................................................................................................
Current assets held for sale..........................................................................................
Total current assets...............................................................................................
Property and equipment, net ...............................................................................................
Goodwill .............................................................................................................................
Intangible assets, net...........................................................................................................
Other long-term investments ..............................................................................................
Deferred income taxes ........................................................................................................
Other assets.........................................................................................................................
Total assets..................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade...............................................................................................
Accrued salaries and wages.........................................................................................
Other current liabilities................................................................................................
Total current liabilities..........................................................................................
Long-term liabilities:
Long-term debt ............................................................................................................
Deferred income taxes.................................................................................................
Other long-term liabilities ...........................................................................................
Total long-term liabilities.....................................................................................
Commitments and contingencies (Note 13)
Shareholders’ equity:
June 25,
2017
June 26,
2016
(In thousands, except par value)
$132,597
478,341
610,938
148,392
8,040
284,385
23,305
23,390
2,180
1,100,630
581,263
618,828
274,315
50,366
11,763
12,702
$2,649,867
$133,185
41,860
36,978
212,023
145,000
49,860
20,179
215,039
$166,154
439,151
605,305
165,611
6,304
303,542
26,810
44,788
4,347
1,156,707
599,723
618,828
302,810
40,179
38,564
9,249
$2,766,060
$132,286
44,642
46,071
222,999
160,000
943
14,294
175,237
Preferred stock, par value $0.01; 3,000 shares authorized at June 25, 2017 and
June 26, 2016; none issued and outstanding ...............................................................
—
—
Common stock, par value $0.00125; 200,000 shares authorized at June 25, 2017
and June 26, 2016; 97,674 and 100,829 shares issued and outstanding at June 25,
2017 and June 26, 2016, respectively..........................................................................
Additional paid-in-capital............................................................................................
Accumulated other comprehensive income, net of taxes ............................................
Accumulated deficit.....................................................................................................
Total shareholders’ equity ....................................................................................
Total liabilities and shareholders’ equity....................................................
121
2,419,517
5,909
(202,742)
2,222,805
$2,649,867
125
2,359,584
8,728
(613)
2,367,824
$2,766,060
The accompanying notes are an integral part of the consolidated financial statements.
52
CREE, INC.
CONSOLIDATED STATEMENTS OF LOSS
June 25,
2017
Fiscal Years Ended
June 26,
2016
(In thousands, except per share data)
June 28,
2015
Revenue, net........................................................................................
Cost of revenue, net ............................................................................
Gross profit .........................................................................................
Operating expenses:
Research and development ..........................................................
Sales, general and administrative.................................................
Amortization or impairment of acquisition-related intangibles...
Loss on disposal or impairment of long-lived assets ...................
Wolfspeed transaction termination fee.........................................
Total operating expenses.......................................................
Operating loss .....................................................................................
Non-operating income (expense), net .................................................
Loss before income taxes ....................................................................
Income tax expense (benefit) ..............................................................
Net loss .................................................................................
Loss per share:
Basic.............................................................................................
Diluted..........................................................................................
Weighted average shares used in per share calculation:
Basic.............................................................................................
Diluted..........................................................................................
$1,473,000
1,038,428
434,572
$1,616,627
1,129,553
487,074
$1,632,505
1,158,586
473,919
158,549
277,175
27,499
2,521
(12,500)
453,244
(18,672)
14,008
(4,664)
93,454
($98,118)
($1.00)
($1.00)
98,487
98,487
168,848
283,052
28,732
16,913
—
497,545
(10,471)
(13,035)
(23,506)
(1,970)
($21,536)
($0.21)
($0.21)
101,783
101,783
182,797
290,730
26,220
47,722
—
547,469
(73,550)
(10,389)
(83,939)
(19,247)
($64,692)
($0.57)
($0.57)
113,022
113,022
The accompanying notes are an integral part of the consolidated financial statements.
53
CREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Net loss.................................................................................................
Other comprehensive (loss) income:
Currency translation loss, net of tax benefit of $0, $0 and $0,
respectively...........................................................................................
Net unrealized (loss) gain on available-for-sale securities, net of tax
(expense) benefit of $0, ($1,936), and $1,284, respectively ................
Other comprehensive (loss) income ..................................................
Comprehensive loss ............................................................................
June 25,
2017
Fiscal Years Ended
June 26,
2016
(In thousands)
June 28,
2015
($98,118)
($21,536)
($64,692)
(153)
(362)
(3,563)
(2,666)
(2,819)
($100,937)
3,292
2,930
($18,606)
(2,044)
(5,607)
($70,299)
The accompanying notes are an integral part of the consolidated financial statements.
54
CREE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 25,
2017
Fiscal Years Ended
June 26,
2016
(In thousands)
June 28,
2015
Cash flows from operating activities:
Net loss............................................................................................................................
Adjustments to reconcile net loss to net cash provided by operating activities:
($98,118)
($21,536)
($64,692)
Depreciation and amortization ................................................................................
Stock-based compensation ......................................................................................
Excess tax benefit from share-based payment arrangements..................................
Impairment of acquisition-related intangibles.........................................................
Loss on disposal or impairment of long-lived assets ..............................................
Amortization of premium/discount on investments ................................................
(Gain)/loss on equity method investment................................................................
Foreign exchange (gain)/loss on equity method investment...................................
Deferred income taxes.............................................................................................
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable, net .........................................................................................
Inventories...............................................................................................................
Prepaid expenses and other assets...........................................................................
Accounts payable, trade ..........................................................................................
Accrued salaries and wages and other liabilities.....................................................
Net cash provided by operating activities.....................................................
Cash flows from investing activities:
Purchases of property and equipment .....................................................................
Purchases of patent and licensing rights .................................................................
Proceeds from sale of property and equipment.......................................................
Purchases of short-term investments.......................................................................
Proceeds from maturities of short-term investments...............................................
Proceeds from sale of short-term investments ........................................................
Purchase of other long-term investments ................................................................
Purchase of acquired business, net of cash acquired...............................................
Net cash used in investing activities.............................................................
Cash flows from financing activities:
Payment of acquisition-related contingent consideration .......................................
Proceeds from long-term debt borrowings..............................................................
Payments on long-term debt borrowings ................................................................
Net proceeds from issuance of common stock........................................................
Excess tax benefit from share-based payment arrangements..................................
Repurchases of common stock................................................................................
Net cash used in financing activities ............................................................
Effects of foreign exchange changes on cash and cash equivalents........................................
Net (decrease) increase in cash and cash equivalents .............................................................
Cash and cash equivalents:
150,508
47,725
2
—
2,521
5,427
(7,543)
(2,644)
74,918
16,955
17,918
17,438
(4,818)
(4,389)
215,900
(86,928)
(12,405)
1,392
(200,405)
125,922
27,174
—
—
(145,250)
(2,775)
468,000
(483,000)
17,716
(2)
(104,017)
(104,078)
(129)
(33,557)
159,145
58,728
(12)
—
16,913
5,314
15,357
2,057
(15,839)
21,800
(23,269)
8,103
(12,090)
(11,355)
203,316
(120,018)
(14,443)
5,296
(220,823)
312,524
42,074
—
(12,513)
(7,903)
—
653,000
(693,000)
21,682
12
(149,553)
(167,859)
(1,110)
26,444
173,323
64,299
(1,395)
254
47,722
6,152
22,624
347
(21,346)
37,853
3,528
(11,112)
(44,796)
(31,507)
181,254
(206,160)
(19,491)
285
(349,802)
419,802
219,795
(80,566)
—
(16,137)
—
695,000
(495,000)
36,929
1,395
(549,677)
(311,353)
(878)
(147,114)
Beginning of period ......................................................................................
End of period ................................................................................................
166,154
$132,597
139,710
$166,154
286,824
$139,710
Supplemental disclosure of cash flow information:
Cash paid for interest...............................................................................................
Cash paid for income taxes
$3,588
$8,494
$3,110
$14,722
$1,002
$28,834
Significant non-cash transactions:
Accrued property and equipment ............................................................................
$10,173
$3,721
$24,243
The accompanying notes are an integral part of the consolidated financial statements.
55
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock
Number
of Shares
Par Value
Additional
Paid-in
Capital
(Accumulated
deficit)/
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
(In thousands)
Balance at June 29, 2014.......................
Net loss............................................
120,114
—
$149
—
$2,190,011
—
$784,818
(64,692)
$11,405
—
$2,986,383
(64,692)
Currency translation loss, net of tax
benefit of $0 ....................................
Unrealized loss on available-for-
sale securities, net of tax benefit of
$1,284..............................................
Comprehensive income ...................
Income tax expense from stock
option exercises ...............................
Repurchased shares .........................
Stock-based compensation ..............
Exercise of stock options and
issuance of shares ............................
Balance at June 28, 2015.......................
Net loss............................................
Currency translation loss, net of tax
benefit of $0 ....................................
Unrealized gain on available-for-
sale securities, net of tax expense
of $1,936..........................................
Comprehensive income ...................
Income tax expense from stock
option exercises ...............................
Repurchased shares .........................
Stock-based compensation ..............
Exercise of stock options and
issuance of shares ............................
Balance at June 26, 2016.......................
Net loss............................................
Currency translation loss, net of tax
benefit of $0 ....................................
Unrealized loss on available-for-
sale securities, net of tax expense
of $0.................................................
Comprehensive loss.........................
Income tax expense from stock
option exercises ...............................
Repurchased shares .........................
Stock-based compensation ..............
Exercise of stock options and
issuance of shares ............................
Balance at June 25, 2017.......................
—
—
—
(16,034)
—
1,427
105,507
—
—
—
—
(5,842)
—
1,164
100,829
—
—
—
—
(4,460)
—
1,305
97,674
—
—
—
(20)
—
2
$131
—
—
—
—
(7)
—
—
—
(1,010)
—
64,720
31,833
$2,285,554
—
—
—
(3,525)
—
58,425
1
$125
—
19,130
$2,359,584
—
—
—
—
(6)
—
2
—
—
(253)
—
46,813
13,373
—
—
—
(549,657)
—
—
$170,469
(21,536)
—
—
—
(149,546)
—
—
($613)
(98,118)
—
—
—
(104,011)
—
—
(3,563)
(3,563)
(2,044)
—
—
(2,044)
(70,299)
(1,010)
(549,677)
64,720
—
$5,798
—
31,835
$2,461,952
(21,536)
(362)
(362)
3,292
—
—
—
3,292
(18,606)
(3,525)
(149,553)
58,425
—
$8,728
—
19,131
$2,367,824
(98,118)
(153)
(153)
(2,666)
—
—
—
(2,666)
(100,937)
(253)
(104,017)
46,813
13,375
$121
$2,419,517
($202,742)
$5,909
$2,222,805
The accompanying notes are an integral part of the consolidated financial statements.
56
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Business
Overview
Cree, Inc. (the Company) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and wide
bandgap 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 lighting products primarily consist of LED lighting systems and lamps. The Company designs, manufactures and
sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
The Company's LED products consist of LED chips and LED components. The Company's LED products enable its customers
to develop and market LED-based products for lighting, video screens, automotive and other industrial applications.
The Company’s Wolfspeed business consists of silicon carbide (SiC) materials, power devices and RF devices based on wide
bandgap semiconductor materials such as SiC and gallium nitride (GaN). The Company’s materials products and power devices
are used in solar, electric vehicles, motor drives, power supplies and transportation applications. The Company’s RF devices are
used in military communications, radar, satellite and telecommunication applications.
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 products and aspects of product fabrication, assembly and
packaging. The Company operates research and development facilities in North Carolina, Arkansas, California, Wisconsin, India,
Italy 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:
• Lighting Products
• LED Products
• Wolfspeed
For financial results by reportable segment, please refer to Note 14, “Reportable Segments.”
Termination of Wolfspeed Sale Transaction
On July 13, 2016, the Company executed an Asset Purchase Agreement (the APA) with Infineon, which was approved by both
the Company’s Board of Directors and Infineon’s Supervisory Board. Pursuant to the APA, the Company agreed to sell to Infineon,
and Infineon agreed to (i) purchase from the Company (a) the assets comprising the Company’s power and RF product lines
(formerly the Company's Power and RF Products segment), including manufacturing facilities and equipment, inventory,
intellectual property rights, contracts, real estate, and the outstanding equity interests of Cree Fayetteville, Inc, one of the Company’s
wholly-owned subsidiaries, and (b) certain related portions of the Company’s SiC materials and gemstones business previously
included within the LED Products segment and (ii) assume certain liabilities related to the Wolfspeed business.
Beginning in July 2016, the Company classified the results of the Wolfspeed business as discontinued operations in the Company’s
consolidated statements of loss for all periods presented. The Company also ceased recording depreciation and amortization of
long-lived assets of the Wolfspeed business upon classification as discontinued operations in July 2016. Additionally, the related
assets and liabilities associated with the discontinued operations were classified as held for sale in the consolidated balance sheets.
57
On February 16, 2017, the Company announced that the APA would be terminated as the Company and Infineon were unable to
identify alternatives to modify the transaction to address the national security concerns of, and obtain approval from, the Committee
on Foreign Investment in the United States, one of the closing conditions under the APA. On March 6, 2017, the Company and
Infineon entered into a Termination Agreement pursuant to which the APA was terminated. Pursuant to the APA and the Termination
Agreement, Infineon paid the Company a termination fee of $12.5 million in cash on March 10, 2017, which is included in
Wolfspeed transaction termination fee in the Company’s consolidated statements of loss and in net cash provided by operating
activities in the Company’s consolidated statements of cash flows.
As a result of the announcement of the termination of the APA and the Company’s decision to continue operating the Wolfspeed
business, as of February 16, 2017, the Company reclassified the results of the Wolfspeed business as continuing operations in the
Company’s consolidated statements of loss, and presented it as a separate reportable segment for all periods presented. Additionally,
the related assets and liabilities of the Wolfspeed business were reclassified as held and used in the consolidated balance sheets
for all periods presented. The long-lived assets were measured at the lower of their carrying amount before being classified as
held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the assets been
continuously classified as held and used, or their fair value at the date of the subsequent decision not to sell.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is a 52 or 53-week period ending on the last Sunday in the month of June. The Company’s 2017, 2016
and 2015 fiscal years were 52-week fiscal years. The Company’s 2018 fiscal year will be a 52-week fiscal year.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the
current year presentation. These reclassifications had no effect on previously reported net loss or shareholders’ equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (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. The Company evaluates its estimates
on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax
related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies
and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from
those estimates.
Segment Information
U.S. GAAP requires segmentation based on an entity’s internal organization and reporting of revenue and operating income based
upon internal accounting methods commonly referred to as the “management approach.” Operating segments are defined as
components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating
decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. The
Company’s CODM is its Chief Executive Officer. The Company has determined that it currently has three operating and reportable
segments.
58
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three
months or less when purchased. Cash and cash equivalents are stated at cost, which approximates fair value. The Company holds
cash and cash equivalents at several major financial institutions, which often exceed insurance limits set by the Federal Deposit
Insurance Corporation (FDIC). The Company has not historically experienced any losses due to such concentration of credit risk.
Investments
Investments in certain securities may be classified into three categories:
• Held-to-Maturity – Debt securities that the entity has the positive intent and ability to hold to maturity, which are
reported at amortized cost.
• Trading – Debt and equity securities that are bought and held principally for the purpose of selling in the near term,
which are reported at fair value, with unrealized gains and losses included in earnings.
• Available-for-Sale – Debt and equity securities not classified as either held-to-maturity or trading securities, which
are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component
of shareholders’ equity.
The Company reassesses the appropriateness of the classification (i.e. held-to-maturity, trading or available-for-sale) of its
investments at the end of each reporting period.
When the fair value of an investment declines below its original cost, the Company considers all available evidence to evaluate
whether the decline is other-than-temporary. Among other things, the Company considers the duration and extent of the decline
and economic factors influencing the capital markets. For the fiscal years ended June 25, 2017, June 26, 2016, and June 28, 2015,
the Company had no other-than-temporary declines below the cost basis of its investments. The Company utilizes specific
identification in computing realized gains and losses on the sale of investments. Realized gains and losses on the sale of investments
are reported in other income and expense.
Investments in marketable securities with maturities beyond one year may be classified as short-term based on their highly liquid
nature and because such marketable securities represent the investment of cash that is available for current operations.
Other long-term investments consist of the Company's approximately 15% common stock ownership interest in Lextar Electronics
Corporation (Lextar), which the Company acquired in December 2014. This investment was accounted for under the equity
method from the date of investment until June 2016 when the Company chose for its representative not to stand for re-election as
a member of the Lextar board of directors. The Company utilizes the fair value option in accounting for its investment in Lextar.
The Company has determined that for its fiscal years ended June 26, 2016 and June 28, 2015, Lextar has met the conditions of a
significant subsidiary under Rule 1-02(w) of Regulation S-X for which the Company is required, pursuant to Rule 3-09 of Regulation
S-X, to file separate financial statements as an exhibit to its Annual Report on Form 10-K. As such, separate financial statements
for Lextar, prepared by Lextar and audited by its independent public accounting firm, are filed as Exhibit 99.1 to the Company's
Annual Report.
Inventories
Inventories are stated at lower of cost or market, with cost determined on a first-in, first-out (FIFO) method or an average cost
method; and with market not to exceed net realizable value. The Company writes down its inventory balances for estimates of
excess and obsolete amounts. These write-downs are recognized as a component of cost of revenue. At the point of the write-
down, a new lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do
not result in the restoration or increase in that newly established lower-cost basis. The Company recognized charges for write-
downs in inventories of $7.3 million, $3.6 million and $15.2 million, for fiscal 2017, 2016 and 2015, respectively.
59
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the assets’ estimated useful lives. Leasehold
improvements are amortized over the lesser of the asset life or the life of the related lease. In general, the Company’s policy for
useful lives is as follows:
Machinery and equipment ....................
Buildings and building improvements .
Furniture and fixtures ...........................
Aircraft and vehicles ............................
Leasehold improvements......................
3 to 15 years
5 to 40 years
3 to 5 years
5 to 20 years
Shorter of estimated useful life or lease term
Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are
capitalized and depreciated over their estimated useful lives. The cost and related accumulated depreciation of the assets are
removed from the accounts upon disposition and any resulting gain or loss is reflected in operating income.
Shipping and Handling Costs
Shipping and handling costs are included in Cost of revenue, net in the Consolidated Statements of Loss and are recognized as a
period expense during the period in which they are incurred.
Goodwill and Intangible Assets
The Company recognizes the assets acquired and liabilities assumed in business combinations at their respective fair values at the
date of acquisition, with any excess purchase price recognized as goodwill. Valuation of intangible assets entails significant
estimates and assumptions including, but not limited to, estimating future cash flows from product revenue, developing appropriate
discount rates, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of
the intangible assets acquired.
Goodwill
The Company recognizes goodwill as an asset representing the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment
at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. The Company
monitors for the existence of potential impairment indicators throughout the fiscal year.
The Company conducts impairment testing for goodwill at the reporting unit level. Reporting units may be operating segments
as a whole or an operation one level below an operating segment, referred to as a component. The Company has determined that
its reporting units are its three operating and reportable segments.
The Company may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely
than not that a reporting unit’s carrying value is greater than its fair value. Such factors may include the following, among others:
a significant decline in the reporting unit’s expected future cash flows; a sustained, significant decline in the Company’s stock
price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition;
and slower growth rates; as well as changes in management, key personnel, strategy and customers. If the Company’s qualitative
assessment indicates that goodwill impairment is more likely than not, the Company performs the two-step goodwill impairment
test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the
two-step goodwill impairment test.
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying
value, including goodwill. The Company derives a reporting unit’s fair value through a combination of the market approach (a
guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount
rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test,
their respective fair values are reconciled back to the Company’s consolidated market capitalization.
60
If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has
occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill
impairment test to measure possible goodwill impairment loss. During the second step, the Company hypothetically values the
reporting unit’s tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination.
Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of its goodwill. If the carrying value
of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the Company recognizes an impairment loss in an
amount equal to the excess, not to exceed the carrying value of the reporting unit’s goodwill. Once an impairment loss is recognized,
the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Indefinite-Lived Intangible Assets
The Company’s indefinite-lived intangible assets are tested for impairment at least annually in the fiscal fourth quarter or when
indications of potential impairment exist. The Company monitors for the existence of potential impairment indicators throughout
the fiscal year.
The Company’s impairment test may begin with a qualitative test to determine whether it is more likely than not that an indefinite-
lived intangible asset’s carrying value is greater than its fair value. In performing this test, the Company may consider the following
qualitative factors, among others: a significant decline in expected future cash flows; changes in industry and market conditions
such as the deterioration in the environment in which the Company operates or an increased competitive environment; changes
in management, key personnel, strategy, or customers; as well as other economic factors. If the Company’s qualitative assessment
indicates that asset impairment is more likely than not, the Company performs a quantitative impairment test by comparing the
fair value of the indefinite-lived intangible asset to its carrying value. Alternatively, the Company may bypass the qualitative test
and initiate impairment testing with the quantitative impairment test. Determining the fair value of indefinite-lived intangible
assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to
complete development projects, estimating future cash flows from product revenue, developing appropriate discount rates,
estimating probability rates for the successful completion of development projects, continuation of customer relationships and
renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
If the fair value of the indefinite-lived intangible asset exceeds its carrying value, then the Company concludes that no impairment
has occurred. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, the Company recognizes an
impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the
adjusted carrying value becomes the new accounting basis of the indefinite-lived intangible asset.
Finite-Lived Intangible Assets
U.S. GAAP requires that intangible assets, other than goodwill and indefinite-lived intangibles, must be amortized over their useful
lives. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from one to 20
years.
Patent rights reflect costs incurred by the Company in applying for and maintaining patents owned by the Company and costs
incurred in purchasing patents and related rights from third parties. Licensing rights reflect costs incurred by the Company in
acquiring licenses under patents owned by others. The Company amortizes both on a straight-line basis over the expected useful
life of the associated patent rights, which is generally the lesser of 20 years from the date of the patent application or the license
period. Royalties payable under licenses for patents owned by others are generally expensed as incurred. The Company reviews
its capitalized patent portfolio and recognizes impairment charges when circumstances warrant, such as when patents have been
abandoned or are no longer being pursued.
Long-Lived Assets
The Company reviews long-lived assets such as property and equipment for impairment based on changes in circumstances that
indicate their carrying amounts may not be recoverable. In making these determinations, the Company uses certain assumptions,
including but not limited to: (1) estimations of the fair market value of the assets and (2) estimations of future cash flows expected
to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset
will be used in the Company’s operations and estimated salvage values.
61
Contingent Liabilities
The Company recognizes contingent liabilities when it is probable that an asset has been impaired or a liability has been incurred
at the date of the financial statements and the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial
statements is required for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss
may have been incurred. See Note 13, “Commitments and Contingencies,” for a discussion of loss contingencies in connection
with pending and threatened litigation. The Company expenses as incurred the costs of defending legal claims against the Company.
Revenue Recognition
The Company recognizes product revenue when the earnings process is complete, as evidenced by persuasive evidence of an
arrangement (typically in the form of a purchase order), when the sales price is fixed or determinable, collection of revenue is
reasonably assured, and title and risk of loss have passed to the customer.
The Company provides its customers with limited rights of return for non-conforming shipments and product warranty claims.
The Company estimates an allowance for anticipated sales returns based upon an analysis of historical sales returns and other
relevant data. The Company recognizes an allowance for non-conforming returns at the time of sale as a reduction of product
revenue and as a reduction to the related accounts receivable balance. The Company recognizes a liability for product warranty
claims at the time of sale as an increase to cost of revenue.
A substantial portion of the Company’s products are sold through distributors. Distributors stock inventory and sell the Company’s
products to their own customer base, which may include: value added resellers; manufacturers who incorporate the Company’s
products into their own manufactured goods; or ultimate end users of the Company’s products. The Company recognizes revenue
upon shipment of its products to its distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model
as opposed to a “sell-through” or “point-of-sale” model, where revenue is deferred and not recognized until the distributor sells
the product through to their customer.
Certain of the Company’s distributors are provided limited rights that allow them to return a portion of inventory (product exchange
rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing
arrangements under the Company’s “ship and debit” program or other targeted sales incentives. These estimates are calculated
based upon historical experience, product shipment analysis, current economic conditions, on-hand inventory at the distributor,
and customer contractual arrangements. The Company believes that it can reasonably and reliably estimate the allowance for
distributor credits at the time of sale. Accordingly, estimates for these rights are recognized at the time of sale as a reduction of
product revenue and as a reduction to the related accounts receivable balance.
From time to time, the Company will issue a new price book for its products, and provide a credit to certain distributors for
inventory quantities on hand if required by the Company’s agreement with the distributor. This practice is known as price protection.
These credits are applied against the reserve that the Company establishes upon initial shipment of product to the distributor.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for
the products purchased within the Company’s standard commercial terms. Subsequent to the initial product purchase, a distributor
may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the
particular part to that customer. If the Company approves an allowance and the distributor resells the product to the target customer,
the Company credits the distributor according to the allowance the Company approved. These credits are applied against the
reserve that the Company establishes upon initial shipment of product to the distributor.
In addition, the Company runs sales incentive programs with certain distributors and retailers, such as product rebates and
cooperative advertising campaigns. The Company recognizes these incentives at the time they are offered to customers and records
a credit to their account with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing
expense depending on the type of sales incentive.
From time to time, the Company may enter into licensing arrangements related to its intellectual property. Revenue from licensing
arrangements is recognized when earned and estimable. The timing of revenue recognition is dependent on the terms of each
license agreement. Generally, the Company will recognize non-refundable upfront licensing fees related to patent licenses
immediately upon receipt of the funds if the Company has no significant future obligations to perform under the arrangement.
However, the Company will defer recognition for licensing fees where the Company has significant future performance
requirements, the fee is not fixed (such as royalties earned as a percentage of future revenue), or the fees are otherwise contingent.
62
Accounts Receivable
For product revenue, the Company typically invoices its customers at the time of shipment for the sales order value of products
shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The
Company does not have any off-balance sheet credit exposure related to any of its customers.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company
becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the
original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to
the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance
for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry
conditions, the current business environment and the Company’s historical experience.
Advertising
The Company expenses the costs of producing advertisements at the time production occurs and expenses the cost of communicating
the advertising in the period in which the advertising is used. Advertising costs are included in Sales, general and administrative
expenses in the Consolidated Statements of Loss and amounted to approximately $13.0 million, $12.6 million, and $25.6 million
for the years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively.
Research and Development
Research and development activities are expensed when incurred.
Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for
the applicable period. Diluted loss per share is determined in the same manner as basic loss per share except that the number of
shares is increased to assume exercise of potentially dilutive stock options, nonvested restricted stock and contingently issuable
shares using the treasury stock method, unless the effect of such increases would be anti-dilutive. Under the treasury stock method,
the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the
Company has not yet recognized, and the amount of tax benefits that would be recognized in additional paid-in capital when the
award becomes deductible are assumed to be used to repurchase shares.
Stock-Based Compensation
The Company recognizes compensation expense for all share-based payments granted based on the fair value of the shares on the
date of grant. Compensation expense is then recognized over the award’s vesting period.
Fair Value of Financial Instruments
Cash and cash equivalents, short-term investments, accounts and interest receivable, accounts payable and other liabilities
approximate their fair values at June 25, 2017 and June 26, 2016 due to the short-term nature of these instruments.
Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible
temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the
tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are
established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
Taxes payable which are not based on income are accrued ratably over the period to which they apply. For example, payroll taxes
are accrued each period end based upon the amount of payroll taxes that are owed as of that date; whereas taxes such as property
taxes and franchise taxes are accrued over the fiscal year to which they apply if paid at the end of a period, or they are amortized
ratably over the fiscal year if they are paid in advance.
63
Sales Taxes
The Company presents sales taxes collected from customers and remitted to governmental authorities on a net basis (i.e. excluded
from revenue and expenses).
Foreign Currency Translation
Foreign currency translation adjustments are recognized in Other comprehensive (loss) income in the Consolidated Statements of
Comprehensive Loss for changes between the foreign subsidiaries’ functional currency and the United States (U.S.) dollar. Foreign
currency translation gains and losses are included in the Company’s equity account balance of Accumulated other comprehensive
income, net of taxes in the Consolidated Balance Sheets until such time that the subsidiaries are either sold or substantially
liquidated.
Because the Company and its subsidiaries transact business in currencies other than the U.S. Dollar, the Company will continue
to experience varying amounts of foreign currency exchange gains and losses for subsidiaries with U.S. dollar functional currency.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09:
Revenue from Contracts with Customers (Topic 606). The FASB has subsequently issued multiple ASUs which amend and clarify
the guidance in 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 Company’s
evaluation of ASU 2014-09 is ongoing and not complete; however, the Company anticipates the primary changes to revenue
recognition to be related to certain patent license arrangements. The FASB has issued and may issue in the future, interpretive
guidance, which may cause our evaluation to change. The effective date will be the first quarter of the Company's fiscal year
ending June 30, 2019 and the Company currently expects to use the modified retrospective method.
Leases
In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842). The ASU requires that a lessee recognize in its statement
of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the
underlying asset for the lease term. The asset will be based on the liability, subject to adjustment, such as for initial direct costs.
For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying
asset not to recognize lease assets and lease liabilities. For income statement purposes, leases are still required to be classified as
either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded
expense pattern. The effective date will be the first quarter of the Company's fiscal year ending June 28, 2020, using a modified
retrospective approach. The Company is currently analyzing the impact of this new pronouncement.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09: Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. The ASU simplifies the current stock compensation guidance for tax consequences. The ASU
requires an entity to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in its income statement.
The ASU also eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a
reduction to taxes payable. For cash flows statement purposes, excess tax benefits should be classified as an operating activity
and cash payments made to taxing authorities on the employee’s behalf for withheld shares should be classified as financing
activity. The effective date will be the first quarter of the Company's fiscal year ending June 24, 2018. The Company's adoption
of this ASU is not expected to impact its consolidated financial statements.
64
Goodwill Impairment Testing
In January 2017, the FASB issued ASU No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. The ASU simplifies the manner in which an entity is required to test for goodwill impairment by eliminating
Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or
negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill
impairment test. The effective date will be the first quarter of the Company's fiscal year ending June 27, 2021. The Company’s
adoption of this guidance is not expected to have a significant impact on its consolidated financial statements.
Note 3 – Acquisition
On July 8, 2015, the Company closed on the acquisition of Arkansas Power Electronics International, Inc. (APEI), a global leader
in power modules and power electronics applications, pursuant to a merger agreement with APEI and certain shareholders of
APEI, whereby the Company acquired all of the outstanding share capital of APEI in exchange for a base purchase price of $13.8
million, subject to certain adjustments. In addition, if certain goals are achieved over the subsequent two years, additional cash
payments totaling up to $4.6 million may be made to the former APEI shareholders. Payments totaling $2.8 million were made
to the former APEI shareholders in July 2016 based on achievement of the first year goals. Payments totaling $1.8 million were
made to the former APEI shareholders in July 2017 based on achievement of the second year goals. In connection with this
acquisition, APEI became a wholly owned subsidiary of the Company, renamed Cree Fayetteville, Inc. (Cree Fayetteville). Cree
Fayetteville is not considered a significant subsidiary of the Company and its results from operations are reported as part of the
Company's Wolfspeed segment.
65
The total purchase price for this acquisition was as follows (in thousands):
Cash consideration paid to shareholders ..................................................................................................
Post closing adjustments ..........................................................................................................................
Contingent consideration..........................................................................................................................
Total purchase price..................................................................................................................................
$13,797
181
4,625
$18,603
The purchase price for this acquisition has been allocated to the assets acquired and liabilities assumed based on their estimated
fair values as follows (in thousands):
Tangible assets:
Cash and cash equivalents ..................................................................................................................
Accounts receivable............................................................................................................................
Inventories ..........................................................................................................................................
Property and equipment......................................................................................................................
Other assets.........................................................................................................................................
Total tangible assets.....................................................................................................................
Intangible assets:
Patents.................................................................................................................................................
Customer relationships .......................................................................................................................
Developed Technology.......................................................................................................................
In-process research & development....................................................................................................
Non-compete agreements ...................................................................................................................
Goodwill .............................................................................................................................................
Total intangible assets..................................................................................................................
Liabilities assumed:
Accounts payable................................................................................................................................
Accrued expenses and liabilities.........................................................................................................
Other long-term liabilities...................................................................................................................
Total liabilities assumed...............................................................................................................
Net assets acquired ................................................................................................................................
$1,284
1,006
143
935
270
3,638
40
4,500
11,403
7,565
231
2,483
26,222
55
1,911
9,291
11,257
$18,603
The identifiable intangible assets acquired as a result of the acquisition will be amortized over their respective estimated useful
lives as follows (in thousands, except for years):
Asset Amount
Estimated Life in
Years
Patents ............................................................................................................
Customer relationships...................................................................................
Developed Technology...................................................................................
In-process research and development1 ...........................................................
Non-compete agreements ...............................................................................
Total identifiable intangible assets........................................................
$40
4,500
11,403
7,565
231
$23,739
20
4
10
7
3
(1) In-process research and development (IPR&D) is initially classified as indefinite-lived assets and tested for impairment at
least annually or when indications of potential impairment exist. The IPR&D was completed in January 2016.
Goodwill largely consists of expansion of product offerings of power modules and power electronics applications, manufacturing
and other synergies of the combined companies, and the value of the assembled workforce.
The assets, liabilities and operating results of APEI have been included in the Company's consolidated financial statements from
the date of acquisition and are not significant to the Company as a whole.
66
Note 4 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
Billed trade receivables...............................................................................................................
Unbilled contract receivables .....................................................................................................
Allowance for sales returns, discounts and other incentives ......................................................
Allowance for bad debts .............................................................................................................
Accounts receivable, net......................................................................................................
June 25,
2017
$205,516
912
206,428
(49,425)
(8,611)
$148,392
June 26,
2016
$217,691
2,135
219,826
(48,710)
(5,505)
$165,611
The following table summarizes the changes in the Company’s allowance for sales returns, discounts and other incentives (in
thousands):
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Balance at beginning of period .......................................................................
Current period claims .................................................................................
Provision for sales returns, discounts and other incentives........................
Balance at end of period ........................................................................
$48,710
(191,325)
192,040
$49,425
$58,094
(163,523)
154,139
$48,710
$29,010
(148,715)
177,799
$58,094
The following table summarizes the changes in the Company’s allowance for bad debts (in thousands):
Balance at beginning of period .......................................................................
Current period provision ............................................................................
Write-offs, net of recoveries.......................................................................
Balance at end of period ........................................................................
$5,505
3,541
(435)
$8,611
$4,941
564
—
$5,505
$2,761
2,184
(4)
$4,941
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Inventories
The following table summarizes the components of inventories (in thousands):
Raw material...............................................................................................................................
Work-in-progress........................................................................................................................
Finished goods ............................................................................................................................
Inventories ...........................................................................................................................
$73,410
100,402
110,573
$284,385
$83,299
96,779
123,464
$303,542
June 25,
2017
June 26,
2016
67
Property and Equipment, net
The following table summarizes the components of property and equipment, net (in thousands):
Furniture and fixtures .................................................................................................................
Land and buildings .....................................................................................................................
Machinery and equipment ..........................................................................................................
Aircraft and vehicles...................................................................................................................
Computer hardware/software......................................................................................................
Leasehold improvements and other ............................................................................................
Construction in progress .............................................................................................................
Accumulated depreciation ..........................................................................................................
Property and equipment, net................................................................................................
June 25,
2017
June 26,
2016
$14,567
399,305
1,185,119
11,138
46,677
6,972
162,450
1,826,228
(1,244,965)
$581,263
$14,280
386,573
1,126,936
10,455
44,095
6,497
150,114
1,738,950
(1,139,227)
$599,723
Depreciation of property and equipment totaled $110.7 million, $118.8 million and $136.3 million for the years ended June 25,
2017, June 26, 2016 and June 28, 2015, respectively.
During the years ended June 25, 2017, June 26, 2016 and June 28, 2015, the Company recognized approximately $1.3 million,
$10.3 million and $44.3 million, respectively, as losses on disposals or impairments of property and equipment. These charges
are reflected in Loss on disposal or impairment of long-lived assets in the Consolidated Statements of Loss.
Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
Accrued taxes.........................................................................................................
Accrued professional fees ......................................................................................
Accrued warranty...................................................................................................
Accrued other.........................................................................................................
Other current liabilities........................................................................................
$11,148
5,545
13,631
6,654
$36,978
$12,720
7,980
20,207
5,164
$46,071
June 25,
2017
June 26,
2016
Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
Currency translation gain.......................................................................................
Net unrealized (loss) gain on available-for-sale securities ....................................
Accumulated other comprehensive income, net of taxes ....................................
$4,471
1,438
$5,909
$4,624
4,104
$8,728
June 25,
2017
June 26,
2016
68
Non-Operating Income (Expense), net
The following table summarizes the components of non-operating (expense) income, net (in thousands):
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Gain on sale of investments, net .....................................................................
Gain (loss) on equity investment ....................................................................
Dividends from equity investment ..................................................................
Interest income, net .........................................................................................
Foreign currency gain (loss), net.....................................................................
Other, net.........................................................................................................
Non-operating income (expense), net .............................................................
$93
7,543
16
3,696
2,460
200
$14,008
$238
(15,357)
1,655
4,472
(4,500)
457
($13,035)
$925
(22,624)
2,581
9,086
(929)
572
($10,389)
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
Net unrealized gain on available-for-sale
securities, net of taxes..............................
Amount Reclassified from Accumulated
Other Comprehensive Income
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Affected Line Item in the
Consolidated Statements of Loss
$93
93
—
$93
$238
238
20
$218
$925 Non-operating income (expense), net
925 Loss before income taxes
210
Income tax expense (benefit)
$715 Net loss
Note 5 – Investments
Investments consist of municipal bonds, corporate bonds, commercial paper and certificates of deposit. All short-term investments
are classified as available-for-sale. Other long-term investments consist of the Company's ownership interest in Lextar.
The following table summarizes short-term investments (in thousands):
Municipal bonds ..................................................................
Corporate bonds...................................................................
Non-U.S. certificates of deposit ..........................................
U.S. certificates of deposit...................................................
Commercial paper ...............................................................
Total short-term investments........................................
June 25, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$2,219
1,925
—
—
—
$4,144
($68)
(195)
—
—
—
($263)
$180,041
177,721
120,379
—
200
$478,341
Amortized
Cost
$177,890
175,991
120,379
—
200
$474,460
69
The following table presents 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):
Municipal bonds...................................
Corporate bonds ...................................
Total...............................................
Number of securities with an
unrealized loss ......................................
Less than 12 Months
Fair Value
$26,816
57,404
$84,220
Unrealized
Loss
($68)
(195)
($263)
67
June 25, 2017
Greater than 12 Months
Unrealized
Loss
Fair Value
$—
—
$—
Total
Fair Value
$26,816
57,404
$84,220
Unrealized
Loss
($68)
(195)
($263)
67
$—
—
$—
—
The following table summarizes short-term investments (in thousands):
Municipal bonds ..................................................................
Corporate bonds...................................................................
Non-U.S. certificates of deposit ..........................................
U.S. certificates of deposit...................................................
Commercial paper ...............................................................
Total short-term investments........................................
June 26, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$3,562
3,074
—
—
—
$6,636
($15)
(73)
—
—
—
($88)
$190,440
168,767
73,127
3,500
3,317
$439,151
Amortized
Cost
$186,893
165,766
73,127
3,500
3,317
$432,603
The following table presents 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):
Municipal bonds...................................
Corporate bonds ...................................
Total...............................................
Number of securities with an
unrealized loss ......................................
Less than 12 Months
Fair Value
$2,936
27,578
$30,514
Unrealized
Loss
($9)
(73)
($82)
22
June 26, 2016
Greater than 12 Months
Unrealized
Loss
Fair Value
$3,535
—
$3,535
Total
Fair Value
$6,471
27,578
$34,049
Unrealized
Loss
($15)
(73)
($88)
25
($6)
—
($6)
3
The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains on
the sale of investments for the fiscal year ended June 25, 2017 of $93 thousand were included in Non-operating income (expense),
net in the Consolidated Statements of Loss 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 investments to be impaired as of June 25, 2017 and June 26, 2016.
70
The contractual maturities of short-term investments at June 25, 2017 were as follows (in thousands):
Municipal bonds.......................................
Corporate bonds .......................................
Non-U.S. certificates of deposit...............
U.S. certificates of deposit .......................
Commercial paper....................................
Total short-term investments ............
Within One
Year
$45,519
48,515
5,755
—
200
$99,989
After One,
Within Five
Years
$107,947
94,637
114,624
—
—
$317,208
After Five,
Within Ten
Years
After Ten
Years
$26,575
34,569
—
—
—
$61,144
$—
—
—
—
—
$—
Total
$180,041
177,721
120,379
—
200
$478,341
Note 6 – 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 and short-term
investments and long-term investments. As of June 25, 2017, financial assets utilizing Level 1 inputs included money market
funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, non-U.S. certificates of deposit,
commercial paper, and common stock of non-U.S. corporations. Level 2 assets are valued based on quoted prices in active markets
for instruments that are similar or 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 June 25, 2017.
There were no transfers between Level 1 and Level 2 during the year ended June 25, 2017.
71
The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
Assets:
Cash equivalents
Municipal bonds........... $
Non-U.S. certificates of
deposit ..........................
Money market funds.....
Total cash
equivalents ............
Short-term investments:
Municipal bonds...........
Corporate bonds ...........
U.S. certificates of
deposit ..........................
Commercial paper ........
Non-U.S. certificates of
deposit ..........................
Total short-term
investments............
Other long-term
investments
Common stock of non-
U.S. corporations..........
Total other long-
term investments ...
Total assets...
June 25, 2017
June 26, 2016
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
— $
1,802
$ — $
1,802
$
— $
— $ — $
—
—
1,184
736
—
1,184
2,538
—
—
—
736
1,184
3,722
—
576
576
137
—
137
—
—
—
137
576
713
— 180,041
— 177,721
— 180,041
— 177,721
— 190,440
— 168,767
— 190,440
— 168,767
—
—
—
200
—
—
—
200
— 120,379
— 120,379
—
—
—
3,500
3,317
73,127
—
—
—
3,500
3,317
73,127
— 478,341
— 478,341
— 439,151
— 439,151
—
50,366
—
50,366
—
40,179
—
40,179
—
$1,184
50,366
$531,245
—
50,366
$— $532,429
—
$576
40,179
$479,467
—
40,179
$— $480,043
Note 7 – Goodwill and Intangible Assets
Goodwill
The Company’s reporting units for goodwill impairment testing are:
• Lighting Products
• LED Products
• Wolfspeed
As of the first day of the fourth quarter of fiscal 2017, the Company performed a step one quantitative goodwill impairment
assessment on each reporting unit. For the step one impairment test, the Company derived each reporting unit's fair value through
a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis).
The Company utilized a discount rate from the capital asset pricing model for the discounted cash flow analysis. Once the reporting
unit fair values were calculated, the Company reconciled the reporting units' relative fair values to the Company's market
capitalization as of the testing date.
The Company then compared the carrying value of each reporting unit, inclusive of its assigned goodwill, to its fair value. The
Company determined that the fair value of each reporting unit exceeded its carrying value, and as a result, step two of the goodwill
impairment test was not necessary.
72
Goodwill by reporting unit as of June 25, 2017 was as follows (in thousands):
LED Products
Lighting Products
Wolfspeed
Consolidated Total
$180,278
$337,781
$100,769
$618,828
Goodwill by reporting unit as of June 26, 2016 was as follows (in thousands):
LED Products
Lighting Products
Wolfspeed
Consolidated Total
$180,278
$337,781
$100,769
$618,828
Intangible Assets
The following table presents the components of intangible assets, net (in thousands):
June 25, 2017
Accumulated
Amortization
Net
Gross
June 26, 2016
Accumulated
Amortization
Intangible assets with finite lives:
Customer relationships.................
Developed technology .................
Non-compete agreements.............
Trade names, finite-lived .............
Patent and licensing rights ...........
Total intangible assets with
finite lives ..................................
Trade names, indefinite-lived.........
Total intangible assets................
Gross
$141,420
181,728
10,475
520
151,985
486,128
79,680
$565,808
($84,673)
(132,747)
(10,398)
(520)
(63,155)
$56,747
48,981
77
—
88,830
(291,493)
194,635
($291,493)
79,680
$274,315
$141,420
181,728
10,475
520
145,780
479,923
79,680
$559,603
Net
$62,982
69,844
481
—
89,823
($78,438)
(111,884)
(9,994)
(520)
(55,957)
(256,793)
223,130
($256,793)
79,680
$302,810
Total amortization of finite-lived intangible assets was $39.8 million, $40.4 million and $37.1 million for the years ended June 25,
2017, June 26, 2016 and June 28, 2015, respectively. Beginning in the third quarter of fiscal 2016, the Company started amortizing
IPR&D assets acquired in the APEI acquisition that were completed during the respective period.
As of the first day of the fourth quarter of fiscal 2017, the Company performed a step one quantitative impairment assessment on
each of the Company’s indefinite-lived trade names. The Company determined that the fair value of each indefinite-lived trade
name was greater than its carrying value and therefore a step two quantitative impairment assessment was not required.
The Company invested $12.4 million, $14.4 million and $19.5 million for the years ended June 25, 2017, June 26, 2016 and
June 28, 2015, respectively, for patent and licensing rights. For the fiscal years ended June 25, 2017, June 26, 2016 and June 28,
2015, the Company recognized $1.2 million, $6.7 million and $3.4 million, respectively, in impairment charges related to its patent
portfolio.
Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands):
Fiscal Year Ending
June 24, 2018..........................................................................................................................................................
June 30, 2019..........................................................................................................................................................
June 28, 2020..........................................................................................................................................................
June 27, 2021..........................................................................................................................................................
June 26, 2022..........................................................................................................................................................
Thereafter ...............................................................................................................................................................
Total future amortization expense..........................................................................................................................
$38,858
37,320
24,463
19,192
17,816
56,986
$194,635
73
Note 8 – Long-term Debt
As of June 25, 2017 the Company had a 500 million secured revolving line of credit pursuant to a credit agreement (the Credit
Agreement) with Wells Fargo Bank, National Association (Wells Fargo) under which the Company can borrow, repay and reborrow
loans from time to time prior to its scheduled maturity date of January 9, 2020.
The Company classifies balances outstanding under its line of credit as long-term debt in the Consolidated Balance Sheets. At
June 25, 2017, the Company had $145 million outstanding under the Credit Agreement and $355 million available for borrowing.
For the year ended June 25, 2017, the average interest rate under the Credit Agreement was 1.56%. The average commitment fee
percentage for the Credit Agreement was 0.11% for the year ended June 25, 2017. For the year ended June 26, 2016, the average
interest rate under the Credit Agreement was 1.14%. The average commitment fee percentage for the Credit Agreement was 0.09%
for the year ended June 26, 2016. The Company was in compliance with all covenants in the Credit Agreement at June 25, 2017.
Note 9 – Shareholders’ Equity
On August 24, 2016, the Board of Directors approved the Company's fiscal 2017 stock repurchase program, authorizing the
Company to repurchase shares of its common stock having an aggregate purchase price not exceeding $300 million for all purchases
from August 24, 2016 through the expiration of the program on June 25, 2017.
During fiscal 2017, the Company repurchased 4.4 million shares of its common stock under the program at an average price of
$23.55 per share with an aggregate value of $104.0 million. The repurchase program could be implemented through open market
or privately negotiated transactions at the discretion of the Company’s management. From the inception of the predecessor stock
repurchase program in January 2001 through June 25, 2017, the Company has repurchased 38.7 million shares of its common
stock at an average price of $28.66 per share with an aggregate value of $1.1 billion.
On June 14, 2017, the Board of Directors approved the Company's fiscal 2018 stock repurchase program, authorizing the Company
to repurchase shares of its common stock having an aggregate purchase price not exceeding $200 million for all purchases from
June 26, 2017 through the expiration of the program on June 24, 2018. The repurchase program may be implemented through
open market or privately negotiated transactions at the discretion of the Company's management. The Company will continue to
determine the time and extent of any repurchases based on its evaluation of market conditions and other factors.
On May 29, 2002, the Board adopted a shareholder rights plan, pursuant to which stock purchase rights were distributed to
shareholders at a rate of one right with respect to each share of common stock held of record as of June 10, 2002. Subsequently
issued shares of common stock also carried stock purchase rights under the plan. The rights plan was designed to enhance the
Board’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect
shareholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. On January 29, 2013, the
shareholder rights plan was amended solely to change the expiration date from September 30, 2018 to April 24, 2017. On April
24, 2017, the shareholder rights plan expired pursuant to its terms and is no longer in effect.
At June 25, 2017, the Company had reserved a total of approximately 19.3 million shares of its common stock for future issuance
as follows (in thousands):
For exercise of outstanding common stock options ................................................................................................
For vesting of outstanding stock units.....................................................................................................................
For future equity awards under 2013 Long-Term Incentive Compensation Plan ...................................................
For future issuance under the Non-Employee Director Stock Compensation and Deferral Program.....................
For future issuance to employees under the 2005 Employee Stock Purchase Plan ................................................
Total common shares reserved .........................................................................................................................
Number of
Shares
10,604
2,347
6,214
65
102
19,332
74
Note 10 – Loss Per Share
The following table presents the computation of basic loss per share (in thousands, except per share amounts):
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Basic:
Net loss.....................................................................................................
Weighted average common shares...........................................................
Basic loss per share ...............................................................................
($98,118)
98,487
($1.00)
($21,536)
101,783
($0.21)
($64,692)
113,022
($0.57)
The following computation reconciles the differences between the basic and diluted loss per share presentations (in thousands,
except per share amounts):
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Diluted:
Net loss.....................................................................................................
Weighted average common shares - basic ...............................................
Weighted average common shares - diluted ............................................
Diluted loss per share...............................................................................
($98,118)
98,487
98,487
($1.00)
($21,536)
101,783
101,783
($0.21)
($64,692)
113,022
113,022
($0.57)
Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share
are considered to be anti-dilutive and as such, these shares are not included in calculating diluted loss per share. For the fiscal
years ended June 25, 2017, June 26, 2016 and June 28, 2015, there were 11.4 million, 11.4 million and 7.0 million, respectively,
of potential common shares not included in the calculation of diluted loss per share because their effect was anti-dilutive.
Note 11 – 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. At June 25, 2017, there were 10.6 million
shares authorized for issuance under the plan and 6.2 million shares remaining for future grants. 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.
75
The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase
common stock at a discount. At June 25, 2017, there were 4.5 million shares authorized for issuance under the ESPP, as amended,
with 0.1 million shares remaining for future issuance. 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.
Stock Option Awards
The following table summarizes option activity as of June 25, 2017 and changes during the fiscal year then ended (numbers of
shares in thousands):
Number of
Shares
Weighted Average
Exercise price
Weighted Average
Remaining
Contractual Term
Total
Intrinsic Value
Outstanding at June 26, 2016..........................
Granted ...........................................................
Exercised.........................................................
Forfeited or expired ........................................
Outstanding at June 25, 2017..........................
Vested and expected to vest at June 25, 2017.
Exercisable at June 25, 2017 ..........................
11,247
1,795
(119)
(2,319)
10,604
10,377
7,297
$40.42
24.50
26.06
38.67
$38.27
$38.54
$42.22
3.49
3.44
2.62
$1,745
$1,593
$233
The total intrinsic value in the table above represents the total pretax intrinsic value, which is the total difference between the
closing price of the Company’s common stock on June 23, 2017 (the last trading day of fiscal 2017) of $25.35 and the exercise
price for in-the-money options that would have been received by the holders if all instruments had been exercised on June 25,
2017. As of June 25, 2017, there was $15.9 million of unrecognized compensation cost related to nonvested stock options, which
is expected to be recognized over a weighted average period of 1.46 years.
The following table summarizes information about stock options outstanding and exercisable at June 25, 2017 (shares in thousands):
Range of Exercise Price
$0.01 to $30.92......................................
$30.93 to $43.94....................................
$43.95 to $45.13....................................
$45.14 to $54.26....................................
$54.27 to $75.55....................................
Total ...............................................
Number
5,422
234
2,074
146
2,728
10,604
Options Outstanding
Options Exercisable
Weighted Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise Price
Weighted
Average
Exercise Price
Number
3.98
3.85
4.06
2.90
2.19
3.49
$26.82
36.05
45.13
49.11
55.43
$38.27
2,868
174
1,405
124
2,726
7,297
$28.31
36.18
45.13
49.27
55.43
$42.22
Other information pertaining to the Company’s stock option awards is as follows (in thousands, except per share data):
Weighted average grant date fair value per share of options ..........................
Total intrinsic value of options exercised........................................................
$8.20
$344
$8.79
$838
$15.27
$9,418
76
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Restricted Stock Awards and Units
A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of June 25, 2017
and changes during the year then ended is as follows (in thousands, except number of shares and units):
Number of
RSAs/RSUs
Weighted Average
Grant-Date Fair Value
Nonvested at June 26, 2016 .......................................................................................
Granted.......................................................................................................................
Vested.........................................................................................................................
Forfeited.....................................................................................................................
Nonvested at June 25, 2017 .......................................................................................
1,631
1,573
(579)
(213)
2,412
$31.66
24.60
34.13
28.48
$26.74
As of June 25, 2017, there was $37.6 million of unrecognized compensation cost related to nonvested awards, which is expected
to be recognized over a weighted average period of 2.38 years.
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.
77
Total stock-based compensation expense was as follows (in thousands):
Income Statement Classification:
Cost of revenue, net ........................................................................................
Research and development..............................................................................
Sales, general and administrative....................................................................
Total stock-based compensation expense.....................................................
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
$10,427
10,619
26,679
$47,725
$12,394
13,842
32,492
$58,728
$12,836
16,524
34,939
$64,299
The weighted average assumptions used to value stock option grants were as follows:
Stock Option Grants:
Risk-free interest rate.....................................................................................
Expected life, in years....................................................................................
Expected volatility .........................................................................................
Dividend yield................................................................................................
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
1.06%
3.80
42.4%
—
1.18%
3.66
43.3%
—
1.17%
3.54
45.2%
—
The following describes each of these assumptions and the Company’s methodology for determining each assumption:
Risk-Free Interest Rate
The Company estimates the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected
life of the award.
Expected Life
The expected life represents the period that the stock option awards are expected to be outstanding. In determining the appropriate
expected life of its stock options, the Company segregates its grantees into categories based upon employee levels that are expected
to be indicative of similar option-related behavior. The expected useful lives for each of these categories are then estimated giving
consideration to (1) the weighted average vesting periods, (2) the contractual lives of the stock options, (3) the relationship between
the exercise price and the fair market value of the Company’s common stock, (4) expected employee turnover, (5) the expected
future volatility of the Company’s common stock, and (6) past and expected exercise behavior, among other factors.
Expected Volatility
The Company estimates expected volatility giving consideration to the expected life of the respective award, the Company’s
current expected growth rate, implied volatility in traded options for its common stock, and the historical volatility of its common
stock.
Expected Dividend Yield
The Company estimates the expected dividend yield by giving consideration to its current dividend policies as well as those
anticipated in the future considering the Company’s current plans and projections.
78
Note 12 – Income Taxes
The following were the components of loss before income taxes (in thousands):
Domestic .........................................................................................................
Foreign ............................................................................................................
Total loss before income taxes.................................................................
June 25,
2017
($43,195)
38,531
($4,664)
Fiscal Years Ended
June 26,
2016
($45,278)
21,772
($23,506)
June 28,
2015
($41,593)
(42,346)
($83,939)
The following were the components of income tax expense (benefit) (in thousands):
Current:
Federal......................................................................................................
Foreign .....................................................................................................
State..........................................................................................................
Total current......................................................................................
Deferred:
Federal......................................................................................................
Foreign .....................................................................................................
State..........................................................................................................
Total deferred....................................................................................
Income tax expense (benefit) ..........................................................................
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
$10,304
7,332
900
18,536
68,199
190
6,529
74,918
$93,454
$5,347
7,278
1,244
13,869
(26,086)
12,340
(2,093)
(15,839)
($1,970)
($12,470)
13,327
1,242
2,099
(7,418)
(12,754)
(1,174)
(21,346)
($19,247)
Actual income tax expense (benefit) differed from the amount computed by applying the U.S. federal tax rate of 35% to pre-tax
earnings as a result of the following (in thousands, except percentages):
79
Federal income tax provision at statutory rate .
(Decrease) increase in income tax expense
resulting from:
State tax provision, net of federal benefit .
State tax credits .........................................
Tax exempt interest ...................................
48C investment tax credit .........................
(Decrease) increase in tax reserve.............
Research and development credits ............
Foreign tax credit ......................................
Increase (decrease) in valuation
allowance ..................................................
Qualified production activities deduction .
Stock-based compensation ........................
Statutory rate differences ..........................
Foreign earnings taxed in U.S...................
Foreign currency fluctuations ...................
Other foreign adjustments .........................
Net operating loss carryback.....................
Provision to return adjustments.................
Other..........................................................
Income tax expense (benefit) .............
June 25,
2017
% of Loss
($1,632)
35%
(727)
(69)
(1,243)
(4,383)
(3,587)
(1,728)
(1,114)
16%
1%
27%
94%
77%
37%
24%
Fiscal Years Ended
June 26,
2016
($8,227)
35%
% of Loss
June 28,
2015
($29,379)
% of
Income
35%
(748)
(269)
(2,019)
(4,334)
(2,138)
(954)
18%
(80) —%
9%
3%
1%
9%
4%
1%
1%
3%
(817)
(585)
(2,413)
(6,826)
8%
(225) —%
2%
(389) —%
(2,081)
—
(520)
2,988
—%
1%
(4)%
(22)%
(2)%
18,738
1,793
(818)
1%
(83) —%
—%
—
—%
391
979
(1)%
($19,247)
23%
108,077
(2,318)%
9,286
(39)%
—
1,346
2,748
1,165
—%
(6)%
(12)%
(5)%
(3)%
748
—%
13
238
(1)%
(10) —%
(5)%
8%
1,265
($1,970)
—
1,389
(5,162)
1,313
841
715
494
165
105
—%
(30)%
111%
(28)%
(18)%
(15)%
(11)%
(4)%
(2)%
$93,454
(2,004)%
80
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
were as follows (in thousands):
June 25,
2017
June 26,
2016
Deferred tax assets:
Compensation ......................................................................................................................
Inventories ...........................................................................................................................
Sales return reserve and allowance for bad debts................................................................
Warranty reserve..................................................................................................................
Federal and state net operating loss carryforwards .............................................................
Federal credits .....................................................................................................................
State credits .........................................................................................................................
48C investment tax credits ..................................................................................................
Investments..........................................................................................................................
Stock-based compensation ..................................................................................................
Deferred revenue .................................................................................................................
Other ....................................................................................................................................
Total gross deferred assets ................................................................................................
Less valuation allowance ..................................................................................................
Deferred tax assets, net ...................................................................................................
Deferred tax liabilities:
Property and equipment.......................................................................................................
Intangible assets...................................................................................................................
Investments..........................................................................................................................
Prepaid taxes and other........................................................................................................
Foreign earnings recapture ..................................................................................................
Total gross deferred liability .............................................................................................
Deferred tax (liability) asset, net ....................................................................................
$3,029
21,042
8,480
10,340
21,776
13,425
3,507
23,525
796
46,922
3,262
2,522
158,626
(107,544)
51,082
(7,443)
(73,692)
(4,102)
(1,461)
(2,481)
(89,179)
($38,097)
$3,176
19,656
6,615
8,013
11,443
8,802
3,286
17,838
872
48,191
4,159
2,792
134,843
(10,770)
124,073
(9,549)
(69,355)
(2,445)
(1,527)
(3,576)
(86,452)
$37,621
The components giving rise to the net deferred tax assets (liabilities) have been included in the Consolidated Balance Sheets as
follows (in thousands):
U.S. federal income taxes....................................................
Foreign income taxes...........................................................
Total net deferred tax assets/(liabilities)..............................
U.S. federal income taxes ...................................................
Foreign income taxes ..........................................................
Total net deferred tax assets/(liabilities) .............................
Balance at June 25, 2017
Assets
Current
$—
—
$—
Noncurrent
$—
11,763
$11,763
Liabilities
Current
Noncurrent
$—
—
$—
($49,103)
(757)
($49,860)
Balance at June 26, 2016
Assets
Liabilities
Current
$—
—
$—
Noncurrent
$26,411
12,153
$38,564
Current
$—
—
$—
Noncurrent
$—
(943)
($943)
81
During the third quarter of fiscal 2017, the Company concluded that it was necessary to recognize a full valuation allowance
against its U.S. deferred tax assets and other deferred charges primarily due to the Company’s three-year cumulative pre-tax loss
position in the U.S. and the termination of the Wolfspeed sale transaction, which was anticipated to generate U.S. taxable income.
Based on this evaluation, during the fiscal year ended June 25, 2017, the Company recorded a valuation allowance of $101.8
million against its U.S. deferred tax assets. In addition, the company recognized a related deferred tax charge of $17.9 million.
During the fourth quarter of fiscal 2016, the Company concluded it is likely that sufficient future taxable income needed to fully
utilize net operating loss carryovers in Luxembourg will not be generated due to additional losses on the Company’s equity method
investment held there. The Company recorded a $9.5 million valuation allowance against the related deferred tax asset, representing
the $32.4 million net operating loss carryover net of tax. During the fiscal year ended June 25, 2017, the Company reduced the
valuation allowance against the loss carryover deferred tax assets by $1.0 million as a result of a decrease in the effective tax rate.
As of June 25, 2017, the Company had approximately $36.2 million of foreign net operating loss carryovers, of which $32.4
million are offset by a valuation allowance. The foreign net operating loss carryovers have no carry forward limitation. As of
June 25, 2017, the Company had approximately $39.3 million of state net operating loss carryovers which are fully offset by a
valuation allowance. Additionally, the Company had $45.7 million of federal and $6.3 million of state income tax credit
carryforwards which are fully offset by a valuation allowance. The state net operating loss carryovers will begin to expire in fiscal
2018. The federal and state income tax credit carryforwards will begin to expire in fiscal 2032 and fiscal 2018, respectively.
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 26, 2016 the Company’s liability for unrecognized tax benefits was $17.7 million. During the fiscal year ended June
25, 2017, the Company recognized a $4.4 million decrease to the liability for unrecognized tax benefits; $3.7 million following
statute expirations, $0.6 million related to settlement of the audit by the Italian Revenue Agency and $0.1 million related to a
decrease in the effective tax rate. As a result, the total liability for unrecognized tax benefits as of June 25, 2017 was $13.3 million.
If any portion of this $13.3 million is recognized, the Company will then include that portion in the computation of its effective
tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is
reasonably possible that approximately $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a
result of statute requirements.
The following is a tabular reconciliation of the Company’s change in uncertain tax positions (in thousands):
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Balance at beginning of period ......................................................................................
Increases related to prior year tax positions ...........................................................
Decreases related to prior year tax positions ..........................................................
Settlements with tax authorities..............................................................................
Expiration of statute of limitations for assessment of taxes ...................................
Balance at end of period ..................................................................................
$17,727
—
(100)
(608)
(3,681)
$13,338
$17,795
617
(530)
—
(155)
$17,727
$18,389
—
(407)
—
(187)
$17,795
82
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Income tax (benefit)
expense line item in the Consolidated Statements of Loss. Total interest and penalties accrued were as follows (in thousands):
Accrued interest and penalties ....................................................................................................
$2
($5)
Total interest and penalties recognized were as follows (in thousands):
June 25,
2017
June 26,
2016
Fiscal Years Ended
June 26,
2016
June 28,
2015
June 25,
2017
Recognized interest and penalties (benefit) ...................................................................
$7
($15)
($94)
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 2014. For U.S. state tax returns, the Company is generally no longer subject
to tax examinations for fiscal years prior to 2013. For foreign purposes, the Company is generally no longer subject to examination
for tax periods 2007 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment
and recapture. On January 20, 2017, the Company settled an ongoing audit by the Italian Revenue Agency for the fiscal year ended
June 30, 2013, resulting in immaterial impact on tax expense.
The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered
indefinitely reinvested outside the United States. As of June 25, 2017, U.S. income taxes were not provided for on a cumulative
total of approximately $262.0 million of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends
to reinvest these earnings in these foreign operations indefinitely. If, at a later date, these earnings were repatriated to the U.S.,
the Company would be required to pay taxes on these amounts. Determination of the amount of any deferred tax liability on these
undistributed earnings is not practicable.
During the fiscal year ended June 26, 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing
and distribution operations. This arrangement allows for 0% tax for 10 years starting in the fiscal year ended June 26, 2011. For
the fiscal years 2015, 2016 and 2017, the Company did not meet the requirements for the tax holiday, and as such, no benefit has
been recognized.
Note 13 – Commitments and Contingencies
Warranties
The following table summarizes the changes in the Company’s product warranty liabilities (in thousands):
June 25,
2017
Fiscal Years Ended
June 26,
2016
June 28,
2015
Balance at beginning of period .......................................................................
Warranties accrued in current period.......................................................
Recall costs accrued in current period .....................................................
Expenditures ............................................................................................
Balance at end of period..................................................................................
$21,531
32,024
—
(25,636)
$27,919
$13,968
19,866
5,756
(18,059)
$21,531
$6,822
9,242
5,418
(7,514)
$13,968
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 Company accrues estimated costs related to product recalls based on a formal campaign
soliciting repair or return of that product when they are deemed probable and reasonably estimable. 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 June 25, 2017, $14.3 million of the Company’s product
warranty liabilities were classified as long-term.
83
In June 2015, the Company issued a voluntary recall of its linear LED T8 replacement lamps due to the hazard of overheating and
melting. The Company expects the majority of the costs of the recall to be recoverable from insurance proceeds resulting in an
immaterial impact to the Company's financial results.
Lease Commitments
The Company primarily leases manufacturing, office, housing and warehousing space under the terms of non-cancelable operating
leases. These leases expire at various times through April 2024. The Company recognizes net rent expense on a straight-line basis
over the life of the lease. Rent expense associated with these operating leases totaled approximately $7.0 million, $6.6 million and
$8.2 million for each of the fiscal years ended June 25, 2017, June 26, 2016 and June 28, 2015, respectively. Certain agreements
require that the Company pay property taxes and general property maintenance in addition to the minimum rental payments.
Future minimum rental payments as of June 25, 2017 (under leases currently in effect) are as follows (in thousands):
Fiscal Years Ending
June 24, 2018 ..............................................................................................................................................
June 30, 2019 ..............................................................................................................................................
June 28, 2020 ..............................................................................................................................................
June 27, 2021 ..............................................................................................................................................
June 26, 2022 ..............................................................................................................................................
Thereafter....................................................................................................................................................
Total future minimum rental payments ...............................................................................................
Minimum Rental
Amount
$4,905
3,364
2,892
1,350
692
1,259
$14,462
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
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 14 - Reportable Segments
The Company’s operating and reportable segments are:
• Lighting Products
• LED Products
• Wolfspeed
The Company’s CODM reviews segment performance and allocates resources based upon segment revenue and segment gross
profit.
Reportable Segments Description
Lighting Products Segment
The Company’s Lighting Products segment primarily consists of LED lighting systems and lamps. The Company designs,
manufactures and sells lighting systems for indoor and outdoor applications, with its primary focus on LED lighting systems for
the commercial, industrial and consumer markets. Lighting products are sold to distributors, retailers and direct to customers. The
Company's portfolio of lighting products is designed for use in settings such as office and retail space, restaurants and hospitality,
schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, among
other applications.
84
LED Products Segment
The Company’s LED Products segment includes LED chips and LED components.
LED Chips
The Company's LED chip products include blue and green LED chips based on GaN and related materials. LED chips or die are
solid-state electronic components used in a number of applications and are currently available in a variety of brightness levels,
wavelengths (color) and sizes. The Company uses LED chips internally in the manufacturing of its LED components. Customers
use the blue and green LED chips in a variety of applications including video screens, gaming displays, function indicator lights,
and automotive backlights, headlamps and directional indicators. Customers may also combine blue LED chips with phosphors
to create white LEDs, which are used in various applications for indoor and outdoor illumination and backlighting, full-color
display screens, liquid crystal displays (LCD) backlighting, white keypads and the camera flash function.
LED Components
The Company's LED components include a range of packaged LED products from the Company’s XLamp® LED components
and LED modules for lighting applications to the Company’s high-brightness LED components.
The Company’s XLamp LED components and LED modules are designed to meet a broad range of market needs for lighting
applications including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation
lighting. The Company uses XLamp LED components in its own lighting products. The Company also sells XLamp LED
components externally to customers and distributors for use in a variety of products, primarily for lighting applications.
The Company’s high-brightness LED components consist of surface mount (SMD) and through-hole packaged LED products.
The SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including
video, signage, general illumination, transportation, gaming and specialty lighting. The Company's through-hole packaged LED
component products are available in a full range of colors, primarily designed for the signage market and provide users with color
and brightness consistency across a wide viewing area.
Wolfspeed Segment
The Company’s Wolfspeed segment includes SiC materials, power devices and RF devices.
SiC Materials
The Company’s SiC materials products consist of crystals, bare and epitaxial wafers. The Company’s SiC materials are targeted
for customers who use them to manufacture products for RF, power switching, gemstones and other applications. Corporate,
government and university customers also buy SiC materials for research and development directed at RF and high power devices.
Power Devices
The Company’s power device products consist of SiC Schottky diodes, metal oxide semiconductor field effect transistors
(MOSFETs), power modules and gate driver boards. The Company's power products provide increased efficiency, faster switching
speeds and reduced system size and weight over comparable silicon-based power devices. Power products are sold primarily to
customers and distributors for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies,
industrial power supplies and other applications.
RF Devices
The Company’s RF devices consist of GaN die, high-electron mobility transistors (HEMT) and monolithic microwave integrated
circuits (MMICs), which are optimized for military, telecommunications and other commercial applications. The Company's RF
devices are made from SiC and GaN and provide improved efficiency, bandwidths and frequency of operation as compared to
silicon or GaAs. The Company also provides custom die manufacturing for GaN HEMTs and MMICs that allow a customer to
design its own custom RF circuits to be fabricated by the Company, or have the Company design and fabricate products that meet
the customer's specific requirements.
Financial Results by Reportable Segment
The table below reflects the results of the Company’s reportable segments as reviewed by the CODM for fiscal 2017, 2016 and
2015. The Company used the same accounting policies to derive the segment results reported below as those used in the Company’s
consolidated financial statements.
85
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 loss must be included to reconcile the consolidated gross profit presented in the table below to
the Company’s consolidated loss 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, expenses for
profit sharing and quarterly or annual incentive plans 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.
Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages):
Revenue
Year Ended
June 26,
2016
June 28,
2015
June 25,
2017
Gross Profit and Gross Margin
Year Ended
June 26,
2016
June 28,
2015
June 25,
2017
Lighting Products..........................
$701,467
$889,133
$906,502
$196,218
$238,242
$235,542
Lighting Products gross margin.
LED Products................................
LED Products gross margin.......
Wolfspeed .....................................
Wolfspeed gross margin..............
Total segment reporting.............. $1,473,000
550,302
221,231
Unallocated costs ..........................
Consolidated gross profit .........
Consolidated gross margin ......
Assets by Reportable Segment
28%
27%
26%
551,156
554,987
151,675
173,814
158,955
28%
32%
29%
176,338
171,016
103,465
94,622
99,721
$1,616,627
$1,632,505
47%
54%
58%
451,358
(16,786)
$434,572
506,678
(19,604)
$487,074
494,218
(20,299)
$473,919
30%
30%
29%
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. The following
table sets forth the Company’s inventories by reportable segment for the fiscal years ended June 25, 2017 and June 26, 2016.
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.
86
Inventories for each of the Company's segments were as follows (in thousands):
Lighting Products........................................................................................................ $
LED Products..............................................................................................................
Wolfspeed ...................................................................................................................
Total segment inventories.........................................................................................
Unallocated inventories ..............................................................................................
Consolidated inventories........................................................................................
145,710
$
108,297
26,453
280,460
3,925
$284,385
172,261
104,544
21,871
298,676
4,866
$303,542
June 25, 2017
June 26, 2016
Geographic Information
The Company conducts business in several geographic areas. Revenue is attributed to a particular geographic region based on the
shipping address for the products. The following table sets forth the percentage of revenue from external customers by geographic
area:
June 25, 2017
For the Years Ended
June 26, 2016
June 28, 2015
United States .............................................................................................
China .........................................................................................................
Europe .......................................................................................................
South Korea...............................................................................................
Japan..........................................................................................................
Malaysia ....................................................................................................
Taiwan.......................................................................................................
Other..........................................................................................................
Total percentage of revenue...............................................................
56%
22%
10%
2%
4%
1%
1%
4%
59%
20%
8%
1%
4%
1%
1%
6%
57%
21%
9%
1%
4%
1%
1%
6%
100%
100%
100%
The following table sets forth the Company’s tangible long-lived assets by country (in thousands):
United States...............................................................................................................................
China...........................................................................................................................................
Other ...........................................................................................................................................
Total tangible long-lived assets ...........................................................................................
Note 15 – Concentrations of Risk
June 25,
2017
June 26,
2016
$483,953
94,022
3,288
$488,342
108,183
3,198
$581,263
$599,723
Financial instruments, which may subject the Company to a concentration of risk, consist principally of short-term investments,
cash equivalents, and accounts receivable. Short-term investments consist primarily of municipal bonds, corporate bonds,
commercial paper and certificates of deposit at interest rates that vary by security. The Company’s cash equivalents consist primarily
of money market funds. Certain bank deposits may at times be in excess of the FDIC insurance limits.
The Company sells its products on account to manufacturers, distributors, retailers and others worldwide and generally requires
no collateral.
Revenue from Arrow Electronics, Inc. represented 12%, 10% and 12% of revenue for fiscal 2017, 2016 and 2015, respectively.
Revenue from The Home Depot, Inc. represented 5%, 8% and 11% of revenue for fiscal 2017, 2016 and 2015, respectively.
No customers individually accounted for more than 10% of the consolidated accounts receivable balance at June 25, 2017 and
June 26, 2016.
87
Arrow Electronics, Inc. is a customer of the LED Products and Wolfspeed segments. The Home Depot, Inc. is a customer of the
Lighting Products segment.
Note 16 – Retirement Savings Plan
The Company sponsors one employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended. All U.S. employees are eligible to participate under the 401(k) Plan on the first day of a new fiscal month after
the date of hire. Under the 401(k) Plan, there is no fixed dollar amount of retirement benefits; rather, the Company matches a
defined percentage of employee deferrals, and employees vest in these matching funds over time. Employees choose their
investment elections from a list of available investment options. During the fiscal years ended June 25, 2017, June 26, 2016 and
June 28, 2015, the Company contributed approximately $7.3 million, $7.0 million and $6.9 million to the 401(k) Plan, respectively.
The Pension Benefit Guaranty Corporation does not insure the 401(k) Plan.
Note 17 – Related Party Transactions
In July 2010, Mark Swoboda was appointed Chief Executive Officer of Intematix Corporation (Intematix). Mark Swoboda is the
brother of the Company’s Chairman, Chief Executive Officer and President, Charles M. Swoboda. For a number of years the
Company has purchased raw materials from Intematix pursuant to standard purchase orders in the ordinary course of business.
During fiscal 2017, the Company purchased $2.3 million of raw materials from Intematix, and the Company had $0.0 million
outstanding payable to Intematix as of June 25, 2017. During fiscal 2016, the Company purchased $3.9 million of raw materials
from Intematix, and the Company had $0.3 million outstanding payable to Intematix as of June 26, 2016.
The Company currently owns approximately 15% of the common stock of Lextar, an investment that was purchased in December
2014. As discussed in Note 1, “Business,” this investment was accounted for under the equity method from the date of investment
until June 2016 when the Company chose for its representative not to stand for re-election as a member of the Lextar board of
directors. During fiscal 2016, the Company purchased approximately $31.7 million of inventory from Lextar and the Company
had $7.6 million outstanding payable to Lextar as of June 26, 2016.
Note 18 - Costs Associated with LED Business Restructuring
In June 2015, our Board of Directors approved a plan to restructure the LED Products business. The restructuring reduced excess
capacity and overhead in order to improve the cost structure moving forward. The primary components of the restructuring include
the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions.
The restructuring activity ended in the second quarter of fiscal 2016. During fiscal 2016, the company realized $18.8 million in
LED restructuring charges which were partially offset by a $1.1 million gain on the sale of long-lived assets related to the
restructuring which were sold for a value in excess of their estimated net realizable value during fiscal 2016.
88
The following table summarizes the actual charges incurred (in thousands):
Capacity and overhead cost
reductions
Loss on disposal or
impairment of long-lived
assets ........................................
Amounts
incurred
during
fiscal year
2015
Amounts
incurred
during
fiscal year
2016
Cumulative
amounts
incurred
through
fiscal year
2016
$42,716
$15,506
$58,222
Severance expense ...................
2,019
264
2,283
Affected Line Item
in the Consolidated
Statements of Loss
Loss on disposal or
impairment of long-
lived assets
Sales, general and
administrative
expenses
Sales, general and
administrative
expenses
Lease termination and facility
consolidation costs ...................
Increase in channel inventory
reserves ....................................
Increase in inventory reserves..
Total restructuring charges.....
1,246
3,079
4,325
26,479
11,091
$83,551
—
—
26,479 Revenue, net
11,091 Cost of revenue, net
$18,849
$102,400
In the table above, the lease termination costs relate to the relocation of certain manufacturing operations from a leased facility
in Huizhou, China to a company-owned facility which is also in Huizhou, China. In June 2015, the Company ceased using the
leased facility and recognized a $0.5 million charge for the lease contract termination cost.
In the table above, the severance expense relates to a reduction in manufacturing and support positions. There is not a
significant retention period for impacted employees and all severance was paid in fiscal 2016.
Note 19 - Subsequent Event
On April 25, 2017, the Company announced that it intended to form a joint venture, to be called Cree Venture LED Company,
Ltd. (Cree Venture LED), with San’an Optoelectronics Co., Ltd. (San’an) 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, and serve China and the rest of the world on a non-exclusive basis.
Effective July 17, 2017, the Company entered into a Shareholders Agreement with San’an and Cree Venture LED pursuant to
which the Company and San’an funded their contributions to Cree Venture LED and agreed upon the management and operation
of Cree Venture LED. The Company contributed $5.1 million for a 51% ownership interest and San’an contributed $4.9 million
for a 49% ownership interest. Cree Venture LED will have a five-member board of directors, three of which will be designated
by the Company and two of which will be designated by San’an.
In connection with forming Cree Venture LED and entering into the Shareholders Agreement, Cree Venture LED and San’an also
entered into a manufacturing agreement pursuant to which San’an will supply Cree Venture LED with mid-power LED products,
and Cree Venture LED and the Company entered into a sales agency agreement pursuant to which the Company will be the
independent sales representative of Cree Venture LED in the exclusive markets, among certain other ancillary agreements related
to the transaction.
The Company targets that Cree Venture LED will finish becoming fully established and begin first product qualifications with
customers by the end of calendar 2017.
89
$358,939
$1,473,000
260,938
1,038,428
98,001
(5,890)
($0.06)
($0.06)
434,572
(98,118)
($1.00)
($1.00)
Fiscal Year
2016
$1,616,627
1,129,553
487,074
(21,536)
Note 20 – Quarterly Results of Operations - Unaudited
The following is a summary of the Company’s consolidated quarterly results of operations for each of the fiscal years ended
June 25, 2017 and June 26, 2016 (in thousands, except per share data):
September 25,
2016
December 25,
2016
March 26,
2017
June 25,
2017
Fiscal Year
2017
Revenue, net...........................................
Cost of revenue, net ...............................
Gross profit ............................................
Net loss...................................................
Earnings (loss) per share:
Basic ...............................................
Diluted ............................................
$371,231
261,302
109,929
566
$—
$—
$401,325
260,759
140,566
6,219
$341,505
255,429
86,076
(99,013)
$0.06
$0.06
($1.02)
($1.02)
Revenue, net...........................................
Cost of revenue, net ...............................
Gross profit ............................................
Net (loss) income ...................................
(Loss) earnings per share:
Basic ...............................................
Diluted ............................................
September 27,
2015
$425,489
294,916
130,573
(24,489)
($0.24)
($0.24)
301,361
134,445
13,442
$0.13
$0.13
December 27,
2015
$435,806
March 27,
2016
$366,919
June 26,
2016
$388,413
257,886
109,033
152
275,390
113,023
(10,641)
$—
$—
($0.11)
($0.11)
($0.21)
($0.21)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of the end of the period covered by this Annual Report. Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are
effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and
forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes to Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15
(f) under the Exchange Act, during the fourth quarter of fiscal 2017 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
In the course of our ongoing preparations for making management’s report on internal control over financial reporting as required
by Section 404 of the Sarbanes-Oxley Act of 2002, from time to time we have identified areas in need of improvement and have
taken remedial actions to strengthen the affected controls as appropriate. We make these and other changes to enhance the
effectiveness of our internal controls over financial reporting, which do not have a material effect on our overall internal control.
We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting
on an ongoing basis and will take action as appropriate.
90
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance
to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Our internal control over financial reporting includes those policies and procedures that:
(i)
(ii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
In making the assessment of internal control over financial reporting, our management used the criteria issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework).
Based on that assessment and those criteria, management has concluded that our internal control over financial reporting was
effective as of June 25, 2017.
The effectiveness of our internal control over financial reporting as of June 25, 2017 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report in Item 8 of this Annual Report.
Item 9B. Other Information
Not applicable.
91
Certain information called for in Items 10, 11, 12, 13 and 14 is incorporated by reference from our definitive proxy statement
relating to our annual meeting of shareholders, which will be filed with the SEC within 120 days after the end of fiscal 2017.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
92
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) and (2) The financial statements and reports of independent registered public accounting firm are filed as part of this Annual
Report (see “Index to Consolidated Financial Statements” at Item 8). The financial statement schedules are not included in this
item as they are either not applicable or are included as part of the consolidated financial statements.
(a)(3) The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation
S-K:
EXHIBIT NO.
DESCRIPTION
2.1
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Asset Purchase Agreement, dated as of July 13, 2016, by and among Infineon Technologies AG, Cree, Inc., and
Cree Sweden AB (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K/A,
dated July 13, 2016, filed with the Securities and Exchange Commission on July 18, 2016)
Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange
Commission on August 19, 2002)
Bylaws, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the Company’s Current
Report on Form 8-K, dated January 27, 2015, filed with the Securities and Exchange Commission on January
28, 2015)
Specimen Common Stock Certificate
2004 Long-Term Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, dated October 23, 2012, as filed with the Securities and
Exchange Commission on October 25, 2012)
Addendum to Form of Master Stock Option Award Agreement Terms and Conditions for Grants of
Nonqualified Stock Options to Non-Employee Directors (incorporated herein by reference to Exhibit 10.5 to
the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2009, as filed
with the Securities and Exchange Commission on October 21, 2009)
Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein
by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
September 24, 2006, as filed with the Securities and Exchange Commission on November 2, 2006)
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein
by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
Form of Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with
the Securities and Exchange Commission on October 17, 2012)
Form of Master Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2006, as filed with
the Securities and Exchange Commission on November 2, 2006)
Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities
and Exchange Commission on October 17, 2012)
Non-Employee Director Stock Compensation and Deferral Program (incorporated herein by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009, as filed with the Securities and Exchange Commission on October 21, 2009)
93
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23
10.24
10.25*
Amendment One to Non-Employee Director Stock Compensation and Deferral Program (incorporated herein
by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
Cree, Inc. Severance Plan for Section 16 Officers, as amended (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K, dated October 28, 2013, as filed with the Securities and
Exchange Commission on October 31, 2013)
Change in Control Agreement for Chief Executive Officer, effective December 17, 2012, between Cree, Inc.
and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K, dated December 17, 2012, as filed with the Securities and Exchange Commission on December 20,
2012)
Form of Cree, Inc. Change in Control Agreement for Section 16 Officers other than the Chief Executive Officer
(incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated
December 17, 2012, as filed with the Securities and Exchange Commission on December 20, 2012)
Form of Cree, Inc. Indemnification Agreement for Directors and Officers (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated October 25, 2010, as filed with the
Securities and Exchange Commission on October 29, 2010)
Form of Master Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K, dated August 30, 2013, as filed with the Securities and Exchange
Commission on September 5, 2013)
Form of Stock Unit Award Agreement (Time-Based) (incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2013, as filed with
the Securities and Exchange Commission on October 23, 2013)
Form of Stock Unit Award Agreement (Performance-Based) (incorporated herein by reference to Exhibit 10.8
to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2013, as filed
with the Securities and Exchange Commission on October 23, 2013)
2005 Employee Stock Purchase Plan, as amended (incorporated herein by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K, dated October 29, 2013, as filed with the Securities and Exchange
Commission on October 29, 2013)
Form of Nonqualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2013, as filed with the
Securities and Exchange Commission on January 22, 2014)
Form of Restricted Stock Unit Award Agreement (incorporated herein by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2013, as filed with the
Securities and Exchange Commission on January 22, 2014)
Form of Master Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.4 of the
Company’s Current Report on Form 8-K, dated August 25, 2014, filed with the Securities and Exchange
Commission on August 29, 2014)
2013 Long-Term Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K, dated October 25, 2016, filed with the Securities and Exchange
Commission on October 28, 2016)
Credit Agreement, dated January 9, 2015, by and between Cree, Inc., Wells Fargo Bank, National Association,
as administrative agent and lender, E-conolight LLC, a domestic subsidiary of the Company, as guarantor, and
the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K, dated January 9, 2015, filed with the Securities and Exchange Commission on January 12,
2015)
Credit Agreement Consent, dated as of July 13, 2016, by and between Cree, Inc., Wells Fargo Bank, National
Association, as administrative agent and lender, E-conolight LLC, a domestic subsidiary of the Company, as
guarantor, and the other lenders party to the Credit Agreement (incorporated herein by reference to Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2016, as filed
with the Securities and Exchange Commission on October 19, 2016)
Notice of Grant to Charles M. Swoboda (incorporated herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, dated August 23, 2016, filed with the Securities and Exchange Commission on
August 25, 2016)
94
10.26*
10.27*
10.28*
10.29*
10.30*
10.31
10.32*
21.1
23.1
23.2
31.1
31.2
32.1
32.2
99.1**
101
*
**
Notice of Grant to Michael E. McDevitt (incorporated herein by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K, dated August 23, 2016, filed with the Securities and Exchange Commission on
August 25, 2016)
Management Incentive Compensation Plan, as amended and restated (incorporated herein by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K, dated August 23, 2016, as filed with the Securities
and Exchange Commission on August 25, 2016)
Schedule of Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2015, as filed
with the Securities and Exchange Commission on October 21, 2015)
Form of Performance Share Award Agreement - Section 16 Officer (incorporated herein by reference to Exhibit
10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2015, as
filed with the Securities and Exchange Commission on October 21, 2015)
Change in Control Agreement for Section 16 Officers other than the Chief Executive Officer, dated July 13,
2016, by and between Cree, Inc. and Franco Plastina (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K, dated July 13, 2016, filed with the Securities and Exchange
Commission on July 18, 2016)
Termination Agreement, dated as of March 6, 2017, by and between Cree, Inc. and Infineon Technologies AG
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, March 6, 2017, filed
with the Securities and Exchange Commission on March 7, 2017)
Separation, General Release and Consulting Agreement, dated May 18, 2017, between Cree, Inc. and Charles
M. Swoboda (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
dated May 18, 2017, as filed with the Securities and Exchange Commission on May 24, 2017)
Subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP
Consent of KPMG
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Audited financial statements of Lextar Electronics Corporation as of and for the years ended December 31,
2015 and 2014.
The following materials from Cree, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 25, 2017
formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii)
Consolidated Statements of Loss; (iii) Consolidated Statements of Comprehensive Loss; (iv) Consolidated
Statements of Cash Flows; (v) Consolidated Statements of Shareholders' Equity; and (vi) Notes to Consolidated
Financial Statements
Management contract or compensatory plan
The financial statements as of and for the years ended December 31, 2015 and 2014 of Lextar Electronics
Corporation, prepared by Lextar and audited by its independent public accounting firm, are included in this Annual
Report pursuant to Rule 3-09 of Regulation S-X.
95
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CREE, INC.
Date: August 23, 2017
By:
/s/ CHARLES M. SWOBODA
Charles M. Swoboda
Chairman, Chief Executive Officer and
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ CHARLES M. SWOBODA
Charles M. Swoboda
Chairman, Chief Executive Officer and President
August 23, 2017
/s/ MICHAEL E. MCDEVITT
Michael E. McDevitt
Executive Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
/s/ CLYDE R. HOSEIN
Clyde R. Hosein
/s/ ROBERT A. INGRAM
Robert A. Ingram
/s/ DARREN R. JACKSON
Darren R. Jackson
/s/ C. HOWARD NYE
C. Howard Nye
/s/ JOHN B. REPLOGLE
John B. Replogle
/s/ THOMAS H. WERNER
Thomas H. Werner
/s/ ANNE C. WHITAKER
Anne C. Whitaker
Director
Director
Director
Director
Director
Director
Director
August 23, 2017
August 23, 2017
August 23, 2017
August 23, 2017
August 23, 2017
August 23, 2017
August 23, 2017
August 23, 2017
96
NOTES
NOTES
2016
CORPORATE INFORMATION
Corporate Headquarters
Cree, Inc.
4600 Silicon Drive
Durham, NC 27703-8475
Phone: 919.407.5300
Fax: 919.407.5615
www.cree.com
Independent Auditor
PricewaterhouseCoopers LLP
Raleigh, NC
Transfer Agent and Registrar
American Stock Transfer & Trust Company
56 Maiden Lane, Plaza Level
New York, NY 10038
Phone: 800.937.5449
www.amstock.com
Investor Relations
Raiford Garrabrant
Phone: 919.407.7895
Additional investor materials may be obtained without
charge by contacting Investor Relations
Annual Meeting of Shareholders
The annual meeting of shareholders will be held on
Oct. 24, 2017 at 10 a.m. at the Cree Lighting Experience Center,
located at 4408 Silicon Drive, Durham, North Carolina 27703
Additional Information
The company’s stock is traded on the NASDAQ Global
Select Market and is quoted under the symbol “CREE”.
Executive Officers
Charles M. Swoboda
Chairman and Chief Executive Officer
Michael E. McDevitt
Executive Vice President and Chief Financial Officer
Daniel J. Castillo
Executive Vice President and President – Lighting
Board of Directors
Clyde R. Hosein
Former CFO
RingCentral, Inc.
Robert A. Ingram
General Partner
Hatteras Venture Partners
Darren R. Jackson
Retired CEO
Advance Auto Parts, Inc.
C. Howard Nye
Chairman, CEO and President
Martin Marietta Materials, Inc.
John B. Replogle
CEO and President
Seventh Generation, Inc.
Charles M. Swoboda
Chairman and CEO
Cree, Inc.
Thomas H. Werner
CEO
SunPower Corporation
Anne C. Whitaker
CEO and President
Novoclem Therapeutics, Inc.
Cree® and XLamp® are registered trademarks, and the Cree logo and Wolfspeed™ are trademarks of Cree, Inc. E-conolight® is a registered trademark of E-conolight LLC.
CREE 2015 ANNUAL REPORT WWW.CREE.COM