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Cree Reports Financial Results For The

The following excerpt is from the company's SEC filing.

Quarter of Fiscal Year

DURHAM, N.C.,

April 26, 2016

- Cree, Inc. (Nasdaq: CREE), a market leader in LED lighting, today announced revenue of

$367 million

for its

quarter of fiscal

, ended

March 27, 2016

. This compares to revenue of

$410 million

reported for the

, and $436 million reported for the

second

. GAAP net income for the

$152 thousand

per diluted share, compared to GAAP net income of

$476 thousand

per diluted share, for the

. On a non-GAAP basis, net inc ome for the

$17 million

per diluted share, compared to non-GAAP net income for the

$25 million

per diluted share.

“Q3 operating results were in-line with the preliminary estimates we provided on April 5th,” stated Chuck Swoboda, Cree Chairman and CEO. “I believe we’ve addressed the root causes that led to our recent business challenges. We improved customer responsiveness in March, and we’re optimistic that this, combined with new product momentum, will drive sequential growth in fiscal Q4.”

Financial Metrics

(in thousands, except per share amounts and percentages)

Third Quarter

Change

(unaudited)

Revenue, net

366,919

409,519

(42,600

Gross margin

Operating margin

Net income (loss)

Earnings (loss) per diluted share

Non-GAAP

16,943

24,727

(7,784

Earnings per diluted share

As revised to reflect the correction of an immaterial error. For additional information, see the Company’s Form 10-Q for the quarterly period ended March 27, 2016 to be filed with the Securities and Exchange Commission on April 27, 2016.

Gross margin

decreased

from 30.8% in

on a GAAP basis and

on a non-GAAP basis.

Cash and investments

increased

$3 million

$620 million

Accounts receivable, net

$4 million

$179 million

, with days sales outstanding of

Inventory

$18 million

$298 million

and represents

days of inventory.

Cash from operations was $

15 million

, free cash flow was

$(6) million

and share repurchases were

of fiscal 2016.

Recent Business Highlights

Expanded our lighting product portfolio with the introduction of Essentia

by Cree, a new brand of commercial lighting products that offer a broad range of high quality lighting solutions at a great value;

Introduced the Cree

LED Street Luminaire, the first of a generation of streetlights that deliver LED energy savings and reliability in a warm color temperature that is preferred in many residential applications;

Announced SmartCast

Power over Ethernet (PoE), an intuitively simple, scalable and open platform that enables the Internet of Things (IoT) for buildings through better light, and SmartCast

Manager, innovative software that unlocks the potential of better LED technology as the engine of limitless applications beyond light;

Released the next generation of the XLamp

XP-G platform, the XLamp XP-G3 LED, which delivers 31 percent more lumens than our prior generation, as well as improved lumen density, voltage characteristics and reliability;

Announced TrueWhitePlus

Technology, a spectral control breakthrough that sets a new standard for what is possible with LED light;

Introduced two new XLamp CXA2 high density LED arrays that double lumen output and deliver the highest lumen density in the industry for their LES (light emitting surface) size;

Announced an agreement with Pilot Flying J, the largest operator of travel centers in North America, to install indoor and outdoor LED lighting at select locations.

Business Outlook

For its

fourth

ending

June 26, 2016

, Cree targets revenue in a range of

$370 million

$395 million

, with GAAP gross margin targeted to be

+/- and non-GAAP gross margin targeted to be

+/-. Our GAAP gross margin targets include stock-based compensation expense of approximately

, while our non-GAAP targets do not. GAAP operating expenses are targeted to be approximately

$117 million

, and non-GAAP operating expenses are targeted to be approximately

$98 million

. The GAAP tax rate is targeted at

+/- and the non-GAAP tax rate is targeted at

+/- for the

. GAAP net (loss) income is targeted at

$(3) million

$(0.03)

per diluted share, excluding any net changes associated with Cree’s Lextar investment. Non-GAAP net income is targeted in a range of

$16 million

$22 million

per diluted share. The GAAP and non-GAAP per diluted share targets are based on an estimated

101 million

diluted weighted average shares. Targeted non-GAAP earnings exclude

per diluted share of expenses related to stock-based compensation expense, the amortization or impairment of acquisition-related intangibles and any net changes associated with Cree’s Lextar investment.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. EST today to review the highlights of the fiscal

quarter results and the fiscal

quarter business outlook, including significant factors and assumptions underlying the targets noted above.

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

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

About Cree, Inc.

Cree is a market-leading innovator of lighting-class LEDs, lighting products and semiconductor products for power and radio frequency (RF) applications. Cree believes in better light experiences and is delivering new innovative LED technology that transforms the way people experience light through high-quality interior and exterior LED lighting solutions.

Cree’s product families include LED lighting systems and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, power-switching devices and RF devices. Cree’s products are driving improvements in applications such as general illumination, electronic signs and signals, power supplies and inverters.

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

Non-GAAP Financial Measures:

This press release highlights the Company's financial results on both a GAAP and a non-GAAP basis. The GAAP results include certain costs, charges and expenses which are excluded from non-GAAP results. By publishing the non-GAAP measures, management intends to provide investors with additional information to further analyze the Company's performance, core results and underlying trends. Cree's management evaluates results and makes operating decisions using both GAAP and non-GAAP measures included in this press release. Non-GAAP results

are not prepared in accordance with GAAP and non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

Forward Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our commercial Lighting results will continue to suffer if new issues arise regarding the new ERP system we implemented in the third quarter of fiscal 2016 for this business; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our ability to lower costs; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor's products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that our equity method investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk that we have an increasingly complex supply chain and its ability to scale to enable maintaining a sufficient supply of raw materials; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures or investments; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 28, 2015, and subsequent reports filed with the SEC. These forward-looking statements represent Cree's judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

, Essentia

, SmartCast

and XLamp

are registered trademarks and RSW

and TrueWhitePlus

are trademarks of Cree, Inc.

CREE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Three Months Ended

Nine Months Ended

March 29, 2015*

1,228,214

1,250,348

Cost of revenue, net

257,886

284,371

854,163

853,119

Gross profit

109,033

125,148

374,051

397,229

Gross margin percentage

Operating expenses:

Research and development

41,871

43,823

127,363

137,537

Sales, general and administrative

64,489

71,860

214,443

213,927

Amortization or impairment of acquisition-related intangibles

21,442

19,743

(Gain) loss on disposal or impairment of long-lived assets

16,483

Total operating expenses

113,574

123,891

379,731

374,848

Operating (loss) income

(4,541

(5,680

22,381

Operating income percentage

Non-operating income (expense), net

(14,075

(Loss) income before income taxes

(3,824

(19,755

26,147

Income tax (benefit) expense

(3,976

(8,860

(10,895

23,408

Diluted earnings (loss) per share

Shares used in diluted per share calculation:

101,221

111,590

102,157

116,304

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

June 28, 2015*

ASSETS

Current assets:

Cash, cash equivalents, and short-term investments

620,450

713,191

178,606

186,157

Income tax receivable

12,261

Inventories

297,860

280,576

Deferred income taxes

39,190

Prepaid expenses

20,755

29,932

Other current assets

57,807

54,851

Assets held for sale

Total current assets

1,193,439

1,308,250

Property and equipment, net

612,072

635,072

Goodwill

618,828

616,345

Intangible assets, net

309,919

310,729

Other long-term investments

41,661

57,595

28,578

Other assets

11,091

Total assets

2,814,145

2,948,033

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable, trade

129,963

163,128

Accrued salaries and wages

45,993

45,415

Income taxes payable

Other current liabilities

42,046

44,208

Total current liabilities

218,002

254,786

Long-term liabilities:

Long-term debt

225,000

200,000

10,211

Other long-term liabilities

16,416

21,084

Total long-term liabilities

242,686

231,295

Shareholders’ equity:

Common stock

Additional paid-in-capital

2,336,099

2,285,554

Accumulated other comprehensive income, net of taxes

Retained earnings

10,028

170,469

Total shareholders’ equity

2,353,457

2,461,952

Total liabilities and shareholders’ equity

UNAUDITED FINANCIAL RESULTS BY OPERATING SEGMENT

(in thousands, except percentages)

The following table reflects the results of the Company's reportable segments as reviewed by the Company's Chief Executive Officer, its Chief Operating Decision Maker or CODM, for the

three and nine

months ended

March 29, 2015

. The CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment. As such, total segment revenue is equal to the Company's consolidated revenue.

Lighting Products revenue

187,714

224,109

(36,395

Percent of revenue

LED Products revenue

150,189

154,384

(4,195

Power and RF Products revenue

29,016

31,026

(2,010

Total revenue

690,715

677,363

13,352

451,759

479,851

(28,092

85,740

93,134

(7,394

(22,134

Lighting Products gross profit

48,808

58,315

(9,507

Lighting Products gross margin

LED Products gross profit

52,102

55,358

(3,256

LED Products gross margin

Power and RF Products gross profit

13,477

16,484

(3,007

Power and RF Products gross margin

Unallocated costs

(5,354

(5,009

Consolidated gross profit

(16,115

Consolidated gross margin

190,531

178,608

11,923

156,489

182,406

(25,917

42,146

51,601

(9,455

(15,115

(15,386

(23,178

Reportable Segments Description

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

Financial Results by Reportable Segment

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

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

Certain costs are not allocated when evaluating segment performance. These unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company's 401(k) Plan.

Non-GAAP Measures of Financial Performance

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

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release. In this press release, Cree also presents its target for non-GAAP expenses, which are expenses less stock-based compensation expense, amortization or impairment of acquisition-related intangibles and net changes associated with equity method investments.

Non-GAAP measures presented in this press release are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cree's results of

operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate Cree's results of operations in conjunction with the corresponding GAAP measures.

Cree believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors' and management's overall understanding of the Company's current financial performance and the Company's prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value. In addition, because Cree has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company's financial reporting.

For its internal budgeting process, and as discussed further below, Cree's management uses financial statements that do not include stock-based compensation expense, amortization or impairment of acquisition-related intangibles, asset retirement charges, gains or charges associated with LED business restructuring, net changes associated with equity method investments, recognition of deferred Initial Public Offering (IPO) costs and the income taxes associated with the foregoing. Cree's management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company's financial results.

As described above, Cree excludes the following items from one or more of its non-GAAP measures when applicable:

Stock-based compensation expense.

This expense consists of expenses for stock options, restricted stock, performance stock awards and employee stock purchases through its ESPP. Cree excludes stock-based compensation expenses from its non-GAAP measures because they are non-cash expenses that Cree does not believe are reflective of ongoing operating results.

Amortization or impairment of acquisition-related intangibles.

Cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. Cree excludes these items because they arise from Cree's prior acquisitions and have no direct correlation to the ongoing operating results of Cree's business.

Asset retirement charges.

Cree has recognized charges for the impact of the decision to abandon or retire certain property and equipment prior to the end of their estimated useful lives. Because these charges relate to assets which have been or will be retired prior to the end of their estimated useful lives, Cree does not consider these charges to be reflective of ongoing operating results.

LED business restructuring charges or gains

. In June 2015, Cree’s board of directors approved a plan to restructure the LED business. The restructuring which was completed during Cree's second quarter of fiscal 2016 reduced excess capacity and overhead in order to improve the cost structure moving forward. The components of the restructuring include the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions. Because these charges relate to assets which have been retired prior to the end of their estimated useful lives and severance costs for eliminated positions, Cree does not consider these charges to be reflective of ongoing operating results. Similarly, Cree does not consider realized gains on the sale of assets relating to the restructuring to be reflective of ongoing operating results.

Net changes associated with equity method investments.

The Company's common stock ownership investment in Lextar Electronics Corporation is accounted for under the equity method utilizing the fair value option. As such, changes in fair value are recognized in income, including fluctuations due to the exchange rate between the New Taiwan Dollar and the United States Dollar. Cree excludes the impact of these gains or losses from its non-GAAP measures because they are non-cash impacts that Cree does not believe are reflective of ongoing operating results. Additionally, Cree excludes the impact of dividends received on its Lextar investment as Cree does not believe it is reflective of ongoing operating results.

Recognition of deferred IPO (Initial Public Offering) costs.

The Company has recognized an expense for previously deferred IPO costs due to the delay in the anticipated timing of the planned initial public offering of Wolfspeed, our Power and RF Products segment, as required by SEC guidance. Cree excludes the impact of this expense as Cree does not consider this charge to be reflective of ongoing operating results.

Income tax effects of the foregoing non-GAAP items.

This amount is used to present each of the amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income.

Cree expects to incur stock-based compensation expense, amortization or impairment of acquisition-related intangibles and net changes associated with equity method investments in future periods, including income taxes associated with all of the foregoing. In addition to the non-GAAP measures discussed above, Cree also uses free cash flow as a measure of operating performance. Free cash flow represents operating cash flows less net purchases of property and equipment and patent and licensing rights. Cree considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, which can then be used to, among other things, invest in Cree's business, make strategic acquisitions, strengthen the balance sheet and repurchase stock. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the Company's cash balance for the period.

Unaudited Reconciliation of GAAP to Non-GAAP Measures

Non-GAAP Gross Margin

GAAP gross profit

GAAP gross margin percentage

Adjustment:

Non-GAAP gross profit

112,110

128,306

383,275

406,740

Non-GAAP gross margin percentage

Non-GAAP Operating Income

GAAP operating (loss) income

GAAP operating income percentage

Adjustments:

Stock-based compensation expense:

10,554

12,795

24,538

26,954

Total stock-based compensation expense

14,855

16,064

44,316

49,260

LED business restructuring charges (gains)

(1,139

17,576

Recognition of deferred IPO costs

Total adjustments to GAAP operating income

21,034

24,557

85,144

72,142

Non-GAAP operating income

16,493

25,814

79,464

94,523

Non-GAAP operating income percentage

Non-GAAP Non-Operating Income, net

GAAP non-operating income (loss), net

15,892

Non-GAAP non-operating income, net

Non-GAAP Net Income

Total adjustments to GAAP net income before provision for income taxes

21,244

26,781

101,036

75,843

Income tax effect **

(4,453

(2,530

(22,109

(8,582

68,032

90,669

Earnings per share

Non-GAAP diluted net income per share

Shares used in diluted net income per share calculation

Non-GAAP shares used

Estimated income tax effect is based upon the Company's overall consolidated effective tax rate for the given period.

Free Cash Flow

Cash flows from operations

14,967

65,647

138,763

93,699

Less: PP&E spending

(17,888

(44,902

(99,692

(158,277

Less: Patents spending

(3,406

(4,946

(11,034

(14,550

Total free cash flow

(6,327

15,799

28,037

(79,128

Source: Cree, Inc.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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