Edgar Filing: CREE INC

10Q FORM 3Q FY2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 25, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21154

CREE, INC.

(Exact name of registrant as specified in its charter)



North Carolina		56-1572719
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(919) 407-5300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer [X]				Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)				Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No[ X]

The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of April 11, 2012, was 116,152,940.

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CREE, INC.

FORM 10-Q

For the Quarterly Period Ended March 25, 2012

INDEX



Description		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 25, 2012 (unaudited) and June 26, 2011	3

	Consolidated Statements of Income for the three and nine months ended March 25, 2012 (unaudited) and March 27, 2011 (unaudited)	4

	Consolidated Statements of Cash Flow for the nine months ended March 25, 2012 (unaudited) and March 27, 2011 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	38

SIGNATURE		40

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CREE, INC.

CONSOLIDATED BALANCE SHEETS



	March 25, 2012		June 26, 2011
	(unaudited)
	(Thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	191,057	$	390,598
Short-term investments	519,037		695,199
Total cash, cash equivalents, and short-term investments	710,094		1,085,797
Accounts receivable, net	168,208		118,469
Income tax receivable	1,201		6,796
Inventories	196,835		176,482
Deferred income taxes	18,854		17,857
Prepaid expenses and other current assets	56,340		51,494
Total current assets	1,151,532		1,456,895
Property and equipment, net	594,468		555,929
Intangible assets, net	380,356		102,860
Goodwill	616,982		326,178
Other assets	7,670		4,860
Total assets	$	2,751,008	$	2,446,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	90,556	$	76,593
Accrued salaries and wages	34,196		18,491
Income taxes payable	1,955		15,493
Other current liabilities	33,142		29,739
Total current liabilities	159,849		140,316
Long-term liabilities:
Deferred income taxes	21,902		21,902
Other long-term liabilities	24,509		22,940
Total long-term liabilities	46,411		44,842
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at March 25, 2012 and June 26, 2011; none issued and outstanding	—		—
Common stock, par value $0.00125; 200,000 shares authorized at March 25, 2012 and June 26, 2011; 116,165 and 109,607 shares issued and outstanding at March 25, 2012 and June 26, 2011, respectively	144		136
Additional paid-in-capital	1,843,975		1,593,530
Accumulated other comprehensive income, net of taxes	11,436		13,091
Retained earnings	689,193		654,807
Total shareholders’ equity	2,544,748		2,261,564
Total liabilities and shareholders’ equity	$	2,751,008	$	2,446,722

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

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CREE, INC.

(UNAUDITED)

CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended					Nine Months Ended
	March 25, 2012			March 27, 2011		March 25, 2012		March 27, 2011
	(Thousands, except per share amounts)
Revenue, net	$	284,801		$	219,168	$	857,899	$	744,588
Cost of revenue, net	185,388			127,773		555,340		401,518
Gross profit	99,413			91,395		302,559		343,070
Operating expenses:
Research and development	36,148			31,016		106,436		84,981
Sales, general and administrative	50,074			37,603		144,789		100,171
Amortization of acquisition-related intangibles	7,368			2,693		18,660		8,105
Loss on disposal or impairment of long-lived assets	816			405		2,088		1,306
Total operating expenses	94,406			71,717		271,973		194,563
Operating income	5,007			19,678		30,586		148,507
Non-operating income:
Other non-operating income, net	324			106		1,187		107
Interest income, net	1,859			2,170		5,628		6,356
Income from operations before income taxes	7,190			21,954		37,401		154,970
Income tax (benefit) expense	(2,299		)	3,073		3,015		28,278
Net income	$	9,489		$	18,881	$	34,386	$	126,692
Earnings per share:
Basic net income per share	$	0.08		$	0.17	$	0.30	$	1.17
Diluted net income per share	$	0.08		$	0.17	$	0.30	$	1.15
Shares used in per share calculation:
Basic	115,641			108,948		114,348		108,338
Diluted	116,074			110,323		114,879		110,007

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

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CREE, INC.

(UNAUDITED)

CONSOLIDATED STATEMENTS OF CASH FLOW



	Nine Months Ended
	March 25, 2012			March 27, 2011

Cash flows from operating activities:
Net income	$	34,386		$	126,692
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	104,855			78,456
Stock-based compensation	34,884			28,293
Excess tax benefit from share-based payment arrangements	(263		)	(10,152		)
Loss on disposal or impairment of long-lived assets	2,088			1,306
Amortization of premium/discount on investments	6,099			11,711
Changes in operating assets and liabilities:
Accounts receivable	(25,321		)	(8,542		)
Inventories	19,184			(56,788		)
Prepaid expenses and other assets	7,004			(12,012		)
Accounts payable, trade	(430		)	18,047
Accrued salaries and wages and other liabilities	(11,909		)	9,911
Net cash provided by operating activities	170,577			186,922
Cash flows from investing activities:
Purchases of property and equipment	(75,206		)	(189,233		)
Payment of LLF contingent consideration	—			(13,159		)
Purchases of investments	(234,622		)	(309,472		)
Proceeds from maturities of investments	127,805			224,298
Proceeds from sale of property and equipment	5			1
Proceeds from sale of available-for-sale investments	274,453			78,258
Purchase of Ruud Lighting, net of cash acquired	(456,008		)	—
Purchases of patent and licensing rights	(11,959		)	(8,821		)
Net cash used in investing activities	(375,532		)	(218,128		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	4,035			33,616
Excess tax benefit from share-based payment arrangements	263			10,152
Net cash provided by financing activities	4,298			43,768
Effects of foreign exchange changes on cash and cash equivalents	1,116			420
Net (decrease) increase in cash and cash equivalents	(199,541		)	12,982
Cash and cash equivalents:
Beginning of period	390,598			397,431
End of period	$	191,057		$	410,413

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

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CREE, INC.

(UNAUDITED)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Changes in Significant Accounting Policies

Overview

Cree, Inc. (the "Company") is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as general illumination, video displays, automotive, electronic signs and signals, power supplies and solar inverters.

The Company develops and manufactures semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs), sapphire and other materials used for electronic and opto-electronic applications.

The Company's LED products consist of LED components, LED chips, and SiC wafers. As LED technology improves, the Company believes the potential market for LED lighting will continue to expand. The Company's success in selling LED products depends upon its ability to drive adoption and offer innovative products and solutions that enable its customers to develop and market LED based products that successfully compete against traditional lighting products.

The Company's lighting products consist of both LED and traditional lighting systems. The Company designs, manufactures and sells lighting systems for indoor and outdoor applications, with its primary focus on LED lighting systems for the commercial and industrial markets. The Company also uses its LED systems expertise to accelerate LED lighting adoption and expand the market for its LED components.

In addition, the Company develops, manufactures and sells power and RF devices. The Company's power products are made from SiC and provide faster switching speeds than comparable silicon-based power devices. The Company's RF devices are made from SiC or GaN and produce higher power densities as compared to silicon or gallium arsenide.

The majority of the Company's products are manufactured at production facilities located in North Carolina, Wisconsin and China. The Company also uses contract manufacturers for certain aspects of its product fabrication, packaging and assembly. The Company operates research and development facilities in North Carolina, California, Wisconsin and China.

The Company currently operates its business as one reportable segment.

Basis of Presentation

The consolidated balance sheet at March 25, 2012 and the consolidated statements of income for the three and nine months ended March 25, 2012 and March 27, 2011, and the consolidated statements of cash flows for the nine months ended March 25, 2012 and March 27, 2011 (“consolidated financial statements”) have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows at March 25, 2012, and for all periods presented, have been made. The consolidated balance sheet at June 26, 2011 has been derived from the audited financial statements as of that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2011 (“fiscal 2011”). The results of operations for the three and nine months ended March 25, 2012 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 24, 2012 (“fiscal 2012”).

Certain fiscal 2011 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2012 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

Recently Adopted Accounting Pronouncements

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Fair Value Disclosures

In January 2010, the Financial Accounting Standards Board (the "FASB") issued amended standards requiring additional fair value disclosures. The amended standards require disclosures of transfers in and out of Levels 1 and 2 of the fair value hierarchy, as well as requiring gross basis disclosures for purchases, sales, issuances and settlements within the Level 3 reconciliation. Additionally, the update clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 or Level 3. The Company adopted the new guidance in the third quarter of fiscal 2010, except for the disclosures related to purchases, sales, issuance and settlements, which was effective for the Company beginning in the first quarter of fiscal 2012. Because these new standards are related primarily to disclosures, their adoption has not had a significant impact on the Company's consolidated financial statements.

Goodwill Impairment Testing

On September 15, 2011, the FASB issued updated guidance concerning the testing of goodwill for impairment. This guidance modifies goodwill impairment testing by allowing the inclusion of qualitative factors in the assessment of whether a two-step goodwill impairment test is necessary. Thus, entities are no longer required to calculate the fair value of a reporting unit unless they conclude through an assessment of qualitative factors that it is more likely than not that the unit's carrying value is greater than its fair value. When an entity's qualitative assessment reveals that goodwill impairment is more likely than not, the entity must perform the two-step goodwill impairment test. This guidance became effective for the Company in the second quarter of fiscal 2012. The Company's adoption of this guidance has not had a significant impact on its consolidated financial statements.

Recently Issued Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the FASB issued new guidance concerning the presentation of total comprehensive income and its components. Under this guidance an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance also requires an entity to present on the face of the financial statements reclassification adjustments from other comprehensive income to net income. In December 2011, the FASB issued an accounting standards update that defers the presentation requirement for other comprehensive income reclassifications on the face of the financial statements. This guidance, as amended, will become effective for the Company beginning in the first quarter of the fiscal year ending June 30, 2013. The Company's adoption of the new accounting guidance is not expected to have a significant impact on its consolidated financial statements.

Note 2. Acquisitions

Acquisition of Ruud Lighting, Inc.

On August 17, 2011, the Company entered into a Stock Purchase Agreement with all of the shareholders of Ruud Lighting, Inc. ("Ruud Lighting"). Pursuant to the terms of the Stock Purchase Agreement and concurrently with the execution of the Stock Purchase Agreement, the Company acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of 6.1 million shares of the Company's common stock and $372.2 million cash, subject to certain post-closing adjustments. In the third quarter of fiscal 2012 the Company finalized certain post-closing working capital adjustments with the former shareholders of Ruud Lighting, resulting in a $1.6 million reduction in the purchase price. This adjustment to the purchase price has been reflected as a reduction of goodwill. The acquisition allows the Company to expand its product portfolio into outdoor LED lighting.

Prior to the Company completing its acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC ("E-conolight"). Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction with Ruud Lighting, the Company funded Ruud Lighting's re-acquisition of E-conolight and paid off Ruud Lighting's outstanding debt in the aggregate amount of approximately $85.0 million.

The acquisitions of Ruud Lighting and E-conolight have been accounted for as business combinations in accordance with ASC 805 Business Combinations and, as such, the Ruud Lighting and E-conolight assets acquired and liabilities assumed have been recorded at their respective fair values. The determination of fair value for the identifiable tangible and intangible assets acquired and liabilities assumed requires extensive use of estimates and judgments. Significant estimates and assumptions include, but are not limited to: estimating future cash flows and determining the appropriate discount rate.

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The total purchase price for this acquisition is as follows (in thousands):



Cash consideration paid to stockholders	$	372,235
Fair value of common stock issued by the Company ⁽¹⁾	211,040
Fair value of debt paid on behalf of stockholders	84,991
Post-closing working capital adjustment ⁽²⁾	(1,623		)
Total purchase price	$	666,643

⁽¹⁾ Represents 6,074,833 shares of the Company's common stock at $34.74 per share, the closing share price on August 17, 2011. The shares are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to 25% of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, (ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.

⁽²⁾ In accordance with the stock purchase agreement, the post-closing working capital adjustment was composed of approximately $1.0 million in cash and the return of 15,895 shares of the Company's common stock, each of which were received in the fourth quarter of fiscal 2012.

The Company incurred total transaction costs related to the acquisition of approximately $3.6 million, of which, $3.1 million were expensed in the first quarter of fiscal 2012 in accordance with U.S. GAAP.

The following table presents the allocation of the purchase price for this acquisition to the assets acquired and liabilities assumed based on their estimated fair values and resulting residual goodwill (in thousands):



	August 17, 2011 (As initially reported)		Measurement Period Adjustments			August 17, 2011 (As adjusted)
Tangible assets:
Cash and cash equivalents	$	3,081	$	—		$	3,081
Accounts receivable	25,698		(375		)	25,323
Inventories	39,330		(461		)	38,869
Property and equipment	45,946		(233		)	45,713
Other assets	4,727		—			4,727
Total tangible assets	$	118,782	$	(1,069	)	$	117,713
Intangible assets:
Developed technology	$	96,300	$	—		$	96,300
Customer relationships	84,820		—			84,820
Trade names	82,950		—			82,950
In-process research & development	15,050		—			15,050
Non-compete agreements	9,800		—			9,800
Goodwill	287,431		3,371			290,802
Total intangible assets	$	576,351	$	3,371		$	579,722
Liabilities assumed:
Accounts payable	$	12,943	$	—		$	12,943
Accrued expenses and liabilities	10,116		902			11,018
Warranty liabilities	2,600		3,023			5,623
Other long-term liabilities	1,208		—			1,208
Total liabilities assumed	$	26,867	$	3,925		$	30,792
Net assets acquired	$	668,266	$	(1,623	)	$	666,643

The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available through the balance sheet date and are provisional. The Company believes that this information provides a reasonable basis for estimating the fair values but is waiting for certain additional information necessary to finalize those amounts, including certain

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litigation and taxes. Thus, the provisional measurements of fair value reflected are subject to change.

Acquired finished goods and work-in-process inventory was valued at its estimated selling price less the sum of costs of disposal and a reasonable profit allowance for the Company's selling effort and, with respect to work-in-process inventory, estimated costs to complete. This resulted in a fair value adjustment that increased finished goods inventory approximately $1.5 million. Raw material inventory has been valued at current replacement cost, resulting in a write down of approximately $0.7 million. As of March 25, 2012, the Company has recognized the net step up of $0.8 million in its cost of revenue.

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
Developed technology	$	96,300	7 to 10
Customer relationships	84,820		7 to 20
Trade names (indefinite lived)	82,880		-
Trade names (definite lived)	70		3
In-process research and development⁽¹⁾	15,050		6 to 7
Non-compete agreements	9,800		5
Total identifiable intangible assets	$	288,920

(1) Initially, in-process research and development ("IPR&D") is classified as indefinite-lived assets until completion or abandonment. Therefore, amortization of IPR&D does not begin until the technological and market risk(s) no longer exist. During the interim, IPR&D intangibles are subject to annual testing for impairment or when there are indicators of impairment.

The fair value of the developed technology, IPR&D and customer relationship assets were estimated using an income approach. Under this method, an intangible asset's fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. The fair value of the Ruud Lighting and e-conolight trade names were estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on a hypothetical royalty stream that would be paid if the Company did not own the Ruud Lighting “BetaLED” brand and had to license the Ruud Lighting and e-conolight trade names. The Company derived the hypothetical royalty income from the projected revenues of Ruud Lighting and e-conolight products. Cash flows were assumed to extend through the remaining economic useful life of each class of intangible asset.

Goodwill largely consists of geographic expansion of product sales, manufacturing and other synergies of the combined companies, and the value of the assembled workforce.

As a result of the Company's U.S. tax election under Internal Revenue Code section 338(h)(10), the acquisition did not result in the recording of an opening net deferred tax position as the deferred tax asset resulting from excess tax deductible goodwill equally offsets the deferred tax liability resulting from excess book over tax basis in the underlying assets acquired.

The assets, liabilities, and operating results of Ruud Lighting have been included in the Company's consolidated financial statements from the date of acquisition. The results of Ruud Lighting reflected in the Company's Consolidated Statements of Income from the date of acquisition (August 17, 2011) to March 25, 2012 are as follows (in thousands, except per share data):



	Three Months Ended			Since Acquisition Date to
	March 25, 2012			March 25, 2012
Revenue	$	56,598		$	140,089
Operating Income/(Loss)	(1,376		)	(251		)
Net Income/(Loss)	(1,207		)	(552		)
Basic net income/(loss) per share	$	(0.01	)	$	—
Diluted net income/(loss) per share	$	(0.01	)	$	—

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Amortization expense related to identifiable intangible assets associated with the Ruud Lighting acquisition, included in the table above, was $5.2 million and $12.1 million, for the three months ended March 25, 2012 and the period since acquisition date to March 25, 2012, respectively.

The following supplemental pro forma information (in thousands, except per share data) presents the financial results as if the Ruud Lighting transaction had occurred at the beginning of the 2011 fiscal year for the nine months ended March 25, 2012 and the three and nine months ended March 27, 2011. Financial results for the three months ended March 25, 2012, which are included in the Consolidated Statements of Income, are actual results and therefore have not been presented in the table below.



	Three Months Ended		Nine Months Ended
	March 27, 2011		March 25, 2012		March 27, 2011
Revenue	$	266,524	$	888,231	$	890,040
Operating Income	18,321		28,879		142,369
Net income	16,443		32,401		121,876
Earnings per share, basic	$	0.14	$	0.28	$	1.07
Earnings per share, diluted	$	0.14	$	0.28	$	1.05

The total revenue for Ruud Lighting included in the pro forma table above was $49.3 million for the three months ended March 27, 2011. The total revenue for Ruud Lighting included in the pro forma table above was $171.6 million and $156.7 million for the nine months ended March 25, 2012 and March 27, 2011, respectively. These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Ruud Lighting to give effect to events that are directly attributable to the Ruud Lighting transactions, including the elimination of sales to Ruud Lighting prior to acquisition, additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property and equipment and intangible assets, had been applied at the beginning of the 2011 fiscal year, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the nine months ended March 25, 2012 are one-time acquisition costs of $3.1 million attributable to the Ruud Lighting transaction. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the 2011 fiscal year, nor is it indicative of any future results.

Acquisition of LED Lighting Fixtures, Inc.

On February 29, 2008 the Company acquired LED Lighting Fixtures, Inc. (“LLF”) through a wholly owned subsidiary that merged into Cree, Inc. on June 27, 2010. The Company acquired all of the outstanding share capital of LLF in exchange for total upfront consideration of $80.8 million, consisting of (1) $16.5 million in cash, (2) approximately 1.9 million shares of the Company’s common stock valued at $58.8 million, and (3) the assumption of fully vested LLF employee stock options valued at $4.5 million. The Company incurred transaction costs of approximately $1.0 million consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Under the acquisition terms, additional consideration of up to $26.4 million would become payable to the former shareholders of LLF if defined product development targets and key employee retention measures were achieved over the three calendar years following the acquisition.

LLF met the conditions necessary for the earn-out payment for the calendar years ended December 31, 2008, 2009 and 2010. As a result, the Company made a cash payment in the amount of $4.4 million to the former shareholders of LLF in the third quarter of fiscal 2009, a cash payment in the amount of $8.8 million to the former shareholders of LLF in the third quarter of fiscal 2010, and a final cash payment in the amount of $13.2 million to the former shareholders of LLF in the third quarter of fiscal 2011. These incremental payments were treated as additional purchase price and resulted in an increase to goodwill in the Company’s consolidated financial statements.

The assets, liabilities, and operating results of LLF have been included in the Company’s consolidated financial statements from the date of acquisition and are reflected in all periods presented in the accompanying financial statements.

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Note 3. Financial Statement Details

Accounts Receivable, net

The following is a summary of the components of accounts receivable, net (in thousands):



	March 25, 2012			June 26, 2011
Billed trade receivables	$	182,508		$	137,799
Unbilled contract receivables	1,854			1,038
	184,362			138,837
Allowance for sales returns, discounts, and other incentives	(14,391		)	(19,615		)
Allowance for bad debts	(1,763		)	(753		)
Total accounts receivable, net	$	168,208		$	118,469

Inventories

The following is a summary of the components of inventories (in thousands):



	March 25, 2012		June 26, 2011
Raw material	$	61,486	$	38,781
Work-in-progress	76,461		74,816
Finished goods	58,888		62,885
Total inventories	$	196,835	$	176,482

Revenues, net

Revenues were comprised of the following product groups (in thousands, except percentages):



	Three Months Ended						Nine Months Ended
	March 25, 2012			March 27, 2011			March 25, 2012			March 27, 2011
LED products	$	180,944		$	172,439		$	571,884		$	611,188
Percent of revenue	64		%	79		%	67		%	82		%
Lighting products	$	86,527		$	21,829		$	233,936		$	57,145
Percent of revenue	30		%	10		%	27		%	8		%
Power and RF products	$	17,330		$	24,900		$	52,079		$	76,255
Percent of revenue	6		%	11		%	6		%	10		%
Total revenue	$	284,801		$	219,168		$	857,899		$	744,588

Note 4. Investments

Short-term investments consist of high grade municipal and corporate bonds and other debt securities. The Company classifies its marketable securities as available-for-sale. This is based upon management’s determination that the underlying cash invested in these securities is available for operations as necessary.

The following table provides a summary of marketable investments by type (in thousands):

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	March 25, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds	$	202,208	$	2,377	$	(143	)	$	204,442
Corporate bonds	179,893		1,912		(88		)	181,717
Certificates of deposit	65,000		—		—			65,000
U.S. agency securities	64,283		486		(2		)	64,767
Non-U.S. government securities	3,112		—		(1		)	3,111
Total	$	514,496	$	4,775	$	(234	)	$	519,037

	June 26, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds	$	391,465	$	3,943	$	(10	)	$	395,398
Corporate bonds	207,241		2,312		(115		)	209,438
Certificates of deposit	10,003		12		—			10,015
Municipal variable rate demand notes	295		—		—			295
Commercial paper	4,999		—		—			4,999
U.S. agency securities	67,244		807		(2		)	68,049
Non-U.S. government securities	6,986		19		—			7,005
Total	$	688,233	$	7,093	$	(127	)	$	695,199

The following table presents the gross unrealized losses and estimated fair value of the Company's investment securities, aggregated by investment type and length of time that individual investments securities have been in a continuous unrealized loss position (in thousands):



	March 25, 2012
	Less than 12 Months					Greater than 12 Months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Municipal bonds	$	21,888	$	(143	)	$	—	$	—	$	21,888	$	(143	)
Corporate bonds	25,936		(88		)	—		—		25,936		(88		)
U.S. agency securities	2,997		(2		)	—		—		2,997		(2		)
Non-U.S. government securities	3,111		(1		)	—		—		3,111		(1		)
Total	$	53,932	$	(234	)	$	—	$	—	$	53,932	$	(234	)
Number of securities with an unrealized loss			26					—				26

	June 26, 2011
	Less than 12 Months					Greater than 12 Months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Municipal bonds	$	14,348	$	(10	)	$	—	$	—	$	14,348	$	(10	)
Corporate bonds	20,484		(115		)	—		—		20,484		(115		)
U.S. agency securities	6,518		(2		)	—		—		6,518		(2		)
Total	$	41,350	$	(127	)	$	—	$	—	$	41,350	$	(127	)
Number of securities with an unrealized loss			20					—				20

The contractual maturities of marketable investments at March 25, 2012 were as follows (in thousands):

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	March 25, 2012
	Within One Year		After One, Within Five Years		After Five, Within Ten Years		After Ten Years		Total
Municipal bonds	$	86,060	$	118,382	$	—	$	—	$	204,442
Corporate bonds	80,333		101,384		—		—		181,717
Certificates of deposit	65,000		—		—		—		65,000
U.S. agency securities	21,802		42,965		—		—		64,767
Non-U.S. government securities	1,010		2,101		—		—		3,111
Total	$	254,205	$	264,832	$	—	$	—	$	519,037

Note 5. 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 broken down 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. As of March 25, 2012, financial assets utilizing Level 1 inputs included money market funds. Financial assets utilizing Level 2 inputs included certificates of deposit, corporate bonds and municipal bonds, U.S. agency securities and non-U.S. government securities. Level 2 assets are valued using a third-party pricing services 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 does not have any financial assets requiring the use of Level 3 inputs. There were no transfers between Level 1 and Level 2 during the nine months ended March 25, 2012.

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy and using the lowest level of input (in thousands):

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	March 25, 2012								June 26, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents
Certificates of deposit	$	—	$	30,000	$	—	$	30,000	$	—	$	—	$	—	$	—
Money market funds	14,620		—		—		14,620		7,386		—		—		7,386
Total cash equivalents	14,620		30,000		—		44,620		7,386		—		—		7,386
Short-term investments
Municipal bonds	—		204,442		—		204,442		—		395,398		—		395,398
Corporate bonds	—		181,717		—		181,717		—		209,438		—		209,438
Municipal variable rate demand notes	—		—		—		—		—		295		—		295
Certificates of deposit	—		65,000		—		65,000		—		10,015		—		10,015
Commercial paper	—		—		—		—		—		4,999		—		4,999
U.S. agency securities	—		64,767		—		64,767		—		68,049		—		68,049
Non-U.S. government securities	—		3,111		—		3,111		—		7,005		—		7,005
Total short-term investments	—		519,037		—		519,037		—		695,199		—		695,199
Total assets	$	14,620	$	549,037	$	—	$	563,657	$	7,386	$	695,199	$	—	$	702,585

The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains from the sale of investments for the nine months ended March 25, 2012 of approximately $1.0 million are included in “Other non-operating income, net” 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 fair value has been below 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 recovery in market value.

Note 6. Intangible Assets

The following table reflects the components of intangible assets, net (in thousands):



	March 25, 2012			June 26, 2011
Customer relationships	$	137,440		$	52,620
Developed technology	148,160			51,860
In-process research and development	15,050			—
Non-compete agreements	10,240			—
Patent and license rights	176,087			83,884
	$	486,977		$	188,364
Accumulated amortization	(106,621		)	(85,504		)
Intangible assets, net	$	380,356		$	102,860

Total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, recognized during the three and nine months ended March 25, 2012 was $8.9 and $22.9 million, respectively. For the three and nine months ended March 27, 2011, total amortization expense, including amortization of acquisition related intangibles, patents and license rights was $3.9 and $11.6 million, respectively.

Total annual amortization expense of intangible assets is estimated to be as follows (in thousands):

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Fiscal Year Ending
June 24, 2012	$	31,452
June 30, 2013	33,955
June 29, 2014	31,802
June 28, 2015	28,715
June 26, 2016	28,533

Goodwill

Goodwill increased by $290.8 million during the nine months ended March 25, 2012 due to the acquisition of Ruud Lighting. Refer to “Note 2. Acquisitions” for the calculation of total goodwill recognized on the purchase.

Note 7. Shareholders’ Equity

In connection with the acquisition of Ruud Lighting, the Company issued 6.1 million shares of common stock valued at approximately $211.0 million. As discussed in "Note 2. Acquisitions", the post-closing working capital adjustment included the return of 15,895 shares of the Company's common stock, which were received in the fourth quarter of fiscal 2012.

The shares issued in connection with the acquisition are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to 25% of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, (ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.

As of March 25, 2012, the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $200.0 million for all purchases from June 16, 2011 through the expiration of the program, as authorized by the Board of Directors and extended through June 24, 2012. During the nine months ended March 25, 2012, the Company did not repurchase any shares under the repurchase program.

The following presents a summary of activity in comprehensive income, net (in thousands):



	Three Months Ended				Nine Months Ended
	March 25, 2012		March 27, 2011		March 25, 2012			March 27, 2011
Net income	$	9,489	$	18,881	$	34,386		$	126,692
Other comprehensive income:
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $(290), $(46), $915 and $566 respectively	480		77		(1,512		)	(935		)
Currency Translation Gain (Loss)	440		—		(144		)	—
Comprehensive income	$	10,409	$	18,958	$	32,730		$	125,757

For the nine months ended March 25, 2012 approximately $1.0 million of unrealized gains were reclassified out of accumulated other comprehensive income into earnings for the period, and are included in "Other non-operating income, net" in the Consolidated Statements of Income.

Note 8. Earnings Per Share

The following presents the computation of basic earnings per share (in thousands, except per share data):



	Three Months Ended				Nine Months Ended
	March 25, 2012		March 27, 2011		March 25, 2012		March 27, 2011
Basic:
Net income	$	9,489	$	18,881	$	34,386	$	126,692
Weighted average common shares	115,641		108,948		114,348		108,338
Basic earnings per share	$	0.08	$	0.17	$	0.30	$	1.17

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The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share data):



	Three Months Ended				Nine Months Ended
	March 25, 2012		March 27, 2011		March 25, 2012		March 27, 2011
Diluted:
Net income	$	9,489	$	18,881	$	34,386	$	126,692
Weighted average common shares - basic	115,641		108,948		114,348		108,338
Dilutive effect of stock options, unvested shares and ESPP purchase rights	433		1,375		531		1,669
Weighted average common shares - diluted	116,074		110,323		114,879		110,007
Diluted earnings per share	$	0.08	$	0.17	$	0.30	$	1.15

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share. For the three and nine months ended March 25, 2012, there were 7.9 and 6.8 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive. For three and nine months ended March 27, 2011, there were 2.4 and 1.8 million shares, respectively, not included in calculating diluted earnings per share because their effect was antidilutive.

Note 9. Stock-Based Compensation

The Company currently has one equity-based compensation plan from which stock-based compensation awards can be granted to employees and directors. In addition, the Company has plans that have been terminated as to future grants, but under which options are currently outstanding. The Company also has an Employee Stock Purchase Plan ("ESPP") that provides employees with the opportunity to purchase the Company’s common stock at a discount. The ESPP was amended in the second quarter of fiscal 2012 to increase the six-month participation period to a twelve-month participation period, divided into two equal six-month purchase periods and provide for a look-back feature. At the end of each six-month period, employees purchase the Company's common stock through the ESPP at 15% less than 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 amendment also provides for an automatic reset feature to start participants on a new twelve-month participation period if the share value declines during the first six-month purchase period.

Stock Option Awards

The following table summarizes outstanding option awards as of March 25, 2012, and changes during the nine months then ended (shares in thousands):



	Number of Shares		Weighted-Average Exercise Price
Outstanding at June 26, 2011	6,467		$	39.56
Granted	3,000		30.62
Exercised	(175	)	23.38
Forfeited or expired	(420	)	40.30
Outstanding at March 25, 2012	8,872		$	36.82

Restricted Stock and Stock Unit Awards

A summary of nonvested shares of restricted stock and stock unit awards outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of March 25, 2012, and changes during the nine months then ended, follows (shares in thousands):

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	Number of Shares/Units		Weighted- Average Grant- Date Fair Value
Nonvested at June 26, 2011	509		$	40.87
Granted	232		30.88
Vested	(179	)	38.44
Forfeited	(28	)	35.37
Nonvested at March 25, 2012	534		$	37.63

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plan 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.

To estimate the fair value of the Company's stock option awards the Company currently uses the Black-Scholes option-pricing model. 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, risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including 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 restricted stock and stock unit awards, 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 recorded net of estimated forfeitures such that expense is recorded 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.

Total stock-based compensation expense was as follows (in thousands):



	Three Months Ended				Nine Months Ended
Income Statement Classification	March 25, 2012		March 27, 2011		March 25, 2012		March 27, 2011
Cost of goods sold	$	2,104	$	1,440	$	5,433	$	3,924
Research and development	2,738		2,259		7,769		6,256
Sales, general and administrative	7,407		6,612		21,682		18,113
Total operating expenses	10,145		8,871		29,451		24,369
Total	$	12,249	$	10,311	$	34,884	$	28,293

Note 10. Income Taxes

The variation between the Company's effective income tax rate and the U.S. statutory rate of 35 percent is due to (i) the net tax benefit related to the prior year audit settlement recorded during the third quarter of fiscal 2012, (ii) a higher percentage of the Company's projected income for the full year being derived from international locations with lower tax rates than the U.S., (iii) the cumulative effect of reducing the Company's full year estimated effective tax rate as a result of the items discussed in (i) and (ii), and (iv) the increased impact of tax credits relative to lower year over year pre-tax income.

Under U.S. GAAP, a two-step approach is followed to recognize and measure 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 percent likely to be realized

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upon ultimate settlement.

At June 26, 2011, the Company had recorded $7.0 million of unrecognized tax benefits. During the nine months ended March 25, 2012, there was a $2.0 million decrease to the amount of unrecognized tax benefits due to the settlement of prior year tax audits. As a result, the total amount of unrecognized tax benefits as of March 25, 2012 is $5.0 million. If any portion of this $5.0 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 $600 thousand of gross unrecognized tax benefits will change in the next 12 months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the consolidated statements of income. As of March 25, 2012, the Company had accrued $32 thousand of interest and penalties.

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 ended June 28, 2009 and prior. During the third quarter of fiscal 2012, the Company settled its federal examination with the Internal Revenue Service for fiscal 2009. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2008. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2001 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. The Company is currently under inquiry by the Hong Kong Inland Revenue Department for fiscal 2008 through fiscal 2010.

Note 11. Commitments and Contingencies

Warranties

The following table summarizes the changes in the Company's product warranty liabilities (in thousands):



Balance at June 26, 2011	$	2,235
Acquisition related warranties (See Note 2)	5,623
Warranties accrued in current period	732
Changes in estimates for pre-existing warranties	(658		)
Expenditures	(2,121		)
Balance at March 25, 2012	$	5,811

Product warranties are provided for at the time the Company recognizes revenue. The warranty periods range from ninety days to ten years. The Company estimates these warranty liabilities as a percentage of revenue, based on historical knowledge of warranty costs and expected future warranty costs. If actual product failure rates materially differ from these estimates, revisions to the estimated warranty liability would be required. The Company evaluates its warranty reserve on a quarterly basis.

Litigation

The Company is a party to various legal proceedings. Information regarding material legal proceedings is contained in our Annual Report on Form 10-K for the year ended June 26, 2011, and updates to that disclosure, are contained in our Quarterly Report on Form 10-Q for the first and second quarters of fiscal 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made and we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that

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could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report.

The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended June 26, 2011. 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 semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as general illumination, video displays, automotive, electronic signs and signals, power supplies and solar inverters.

We develop and manufacture semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs), sapphire and other materials used for electronic and opto-electronic applications.

Our LED products consist of LED components, LED chips, and SiC wafers. As LED technology improves, we believe the potential market for LED lighting will continue to expand. Our success in selling LED products depends upon our ability to drive adoption and offer innovative products and solutions that enable our customers to develop and market LED based products that successfully compete against traditional lighting products.

Our lighting products consist of both LED and traditional lighting systems. We design, manufacture and sell lighting systems for indoor and outdoor applications, with our primary focus on LED lighting systems for the commercial and industrial markets. We also use our LED systems expertise to accelerate LED lighting adoption and expand the market for our LED components.

In addition, we develop, manufacture and sell power and RF devices. Our power products are made from SiC and provide faster switching speeds than comparable silicon-based power devices. Our RF devices are made from SiC or GaN and produce higher power densities as compared to silicon or gallium arsenide devices.

The majority of our products are manufactured at our production facilities located in North Carolina, Wisconsin and China. We also use contract manufacturers for certain aspects of our products fabrication, packaging and assembly. We operate research and development facilities in North Carolina, California, Wisconsin and China.

We currently operate our business as one reportable segment.

Industry Dynamics and Trends

There are a number of industry factors that affect our business which include, among others:

•

Overall Demand for Products and Applications using LEDs. Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown in recent years, adoption of LEDs for general lighting is relatively new and faces significant challenges before widespread adoption. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain, and demand dynamics in the market. These uncertainties make demand difficult to forecast for us and our customers.

•

Intense and Constantly Evolving Competitive Environment. Competition in the industry is intense and new companies have entered and are entering the LED market, with many companies making significant investments in LED production equipment. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share and to increase the utilization of their production capacity. Currently, many LED suppliers are reporting excess or underutilized factory capacity which generally leads to a more aggressive pricing environment. To remain competitive, market participants must continuously increase product performance and reduce costs to offset lower average sales prices. To address this pricing pressure, we have invested in cost reduction activities including lower cost product designs, yield and productivity improvements,

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and the development of 150mm wafer production, which is intended to reduce our costs of producing LED chips. The effectiveness of these activities will vary based on overall factory utilization rates, which are driven primarily by market demand.


•	Technological Innovation and Advancement. Innovations and advancements in LED technology continue to expand the potential commercial application of LEDs particularly in the general illumination market. However, new technologies or standards could emerge, or improvements could be made in existing technologies, that reduce or limit the demand for LEDs in certain markets.

•

Regulatory Actions Concerning Energy Efficiency. Many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency, even in some cases banning forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. While this trend is generally positive, there have been some political efforts in the United States to change or limit the effectiveness of these new regulations.

•

Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation commonly occurs.

Financial Results of the Third Quarter Fiscal 2012

The following is a summary for the three months ended March 25, 2012:


•	Revenues decreased to $284.8 million in the third quarter of fiscal 2012 from $304.1 million in the second quarter.


•	Gross margins improved to 34.9% in the third quarter of fiscal 2012 from 34.6% in the second quarter.


•	Operating income was $5.0 million in the third quarter of fiscal 2012 compared to $12.2 million in the second quarter of fiscal 2012. Net income per diluted share was $0.08 compared to $0.10 for the second quarter of fiscal 2012.


•	Inventory increased to $196.8 million at March 25, 2012 compared to $187.4 million at December 25, 2011.


•	We spent $26.1 million on capital expenditures during the three months ended March 25, 2012 compared to $23.0 million during the three months ended December 25, 2011.


•	Combined cash, cash equivalents and marketable investments increased to $710.1 million at March 25, 2012 compared to $687.2 million at December 25, 2011.

Business Outlook

We project that the markets for our products will remain highly competitive during the remainder of fiscal 2012. We anticipate focusing on the following key areas in response to this competitive environment:

•

Build on our market leadership and drive adoption of LED lighting. We are focused on developing innovative new LED lighting systems to drive adoption, and new LED components that enable our customers to deliver a more competitive payback versus traditional lighting. In August 2011, we acquired Ruud Lighting, a leading innovator of LED lighting products, which we believe gives us a stronger product portfolio to drive LED adoption and expand the market for LED lighting. We plan to continue to invest in both our LED lighting and LED component product lines to increase performance, enable lower lighting system costs with shorter paybacks, and find new ways to drive the market and obsolete old, energy-wasting lighting technology.

•

Accelerate cost reductions and drive operational improvements to increase the profitability of our business. We target lower LED costs from new lower cost product designs, yield and productivity improvements and the conversion to 150mm wafers. In the near term, cost reductions may be offset by the aggressive pricing environment and lower factory utilization. It will take time and increased volume to fully realize the benefit of many of these improvements. We are also delaying the rate of conversion to 150mm wafer production to take advantage of existing 100mm capacity to optimize the current factory to deliver the lowest cost in the near term. We are continuing work to enable the full conversion as business needs warrant over the next three to six quarters. We plan to lower LED lighting system costs with new product designs that are under development and we target improved operating leverage over time from higher revenues across our LED lighting systems and component product lines.


•	Expand the power and RF product line beyond niche applications. SiC power devices can deliver better performance

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and increased payback against silicon (Si) based power devices in applications where efficiency and reliability are important criteria. We target continued investment in R&D for new diode and switch products focused on more mainstream and higher volume power switching applications. We are managing the product line through a slowdown in solar inverter demand. We target the combination of new products, improved market demand and expanded sales coverage to drive growth in the product line.

Results of Operations

The following table sets forth certain consolidated statement of income data for the periods indicated:



	Three Months Ended									Nine Months Ended
	March 25, 2012					March 27, 2011				March 25, 2012				March 27, 2011
(in thousands, except per share amounts and percentages)	Dollars			% of Revenue		Dollars		% of Revenue		Dollars		% of Revenue		Dollars		% of Revenue
Revenue, net	$	284,801		100	%	$	219,168	100	%	$	857,899	100	%	$	744,588	100	%
Cost of revenue, net	185,388			65	%	127,773		58	%	555,340		65	%	401,518		54	%
Gross profit	99,413			35	%	91,395		42	%	302,559		35	%	343,070		46	%
Research and development	36,148			13	%	31,016		14	%	106,436		12	%	84,981		11	%
Sales, general and administrative	50,074			18	%	37,603		17	%	144,789		17	%	100,171		13	%
Amortization of acquisition-related intangibles	7,368			3	%	2,693		1	%	18,660		2	%	8,105		1	%
Loss on disposal or impairment of long-lived assets	816			—	%	405		—	%	2,088		—	%	1,306		—	%
Operating income	5,007			2	%	19,678		9	%	30,586		4	%	148,507		20	%
Other non-operating income, net	324			—	%	106		—	%	1,187		—	%	107		—	%
Interest income, net	1,859			1	%	2,170		1	%	5,628		1	%	6,356		1	%
Income from operations before income taxes	7,190			3	%	21,954		10	%	37,401		4	%	154,970		21	%
Income tax (benefit) expense	(2,299		)	(1	)%	3,073		1	%	3,015		—	%	28,278		4	%
Net income	9,489			3	%	18,881		9	%	34,386		4	%	126,692		17	%
Diluted earnings per share	$	0.08				$	0.17			$	0.30			$	1.15

Revenues

Our revenues are presented below in the following categories: LED products, lighting products and power and RF products, which represents a change from our prior presentation. Revenues for the three and nine months ended March 25, 2012 and March 27, 2011 were comprised of the following (in thousands, except percentages):



	Three Months Ended											Nine Months Ended
	March 25, 2012			March 27, 2011			Change					March 25, 2012			March 27, 2011			Change
LED products	$	180,944		$	172,439		$	8,505		5	%	$	571,884		$	611,188		$	(39,304	)	(6	)%
Percent of revenues	64		%	79		%						67		%	82		%
Lighting products	86,527			21,829			64,698			296	%	233,936			57,145			176,791			309	%
Percent of revenues	30		%	10		%						27		%	8		%
Power and RF products	17,330			24,900			(7,570		)	(30	)%	52,079			76,255			(24,176		)	(32	)%
Percent of revenues	6		%	11		%						6		%	10		%
Total revenues	$	284,801		$	219,168		$	65,633		30	%	$	857,899		$	744,588		$	113,311		15	%

LED Products

We derive the largest portion of our revenue from the sale of our LED products which comprised approximately 64% and 79%

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of our total revenues for the third quarter of fiscal 2012 and fiscal 2011, respectively.

Revenue from LED products increased approximately 5% to $180.9 million in the third quarter of fiscal 2012 from $172.4 million in the third quarter of fiscal 2011, primarily the result of an increase in demand for LED components. The blended average selling price (ASP) increased by approximately 2% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011 due to changes in product mix. For the nine months ended March 25, 2012, revenue from our LED products decreased approximately 6% to $571.9 million from $611.2 million for the nine months ended March 27, 2011. This decrease was primarily due to generally weaker demand and downward pricing pressure for our LED chips and components.

Lighting Products

Revenues from lighting products comprised approximately 30% and 10% of our total revenues for the third quarter of fiscal 2012 and fiscal 2011, respectively.

Revenue from lighting products increased approximately 296% to $86.5 million in the third quarter of fiscal 2012 from $21.8 million in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, revenue from our lighting products increased approximately 309% to $233.9 million from $57.1 million for the nine months ended March 27, 2011. These increases were due to sales of products acquired from Ruud Lighting and an increase in the sales of our existing products. Including the Ruud Lighting products acquired, which have a higher overall ASP than our existing products, the ASP for our lighting products increased by approximately 25% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011.

Power and RF Products

Revenues from power and RF products comprised approximately 6% and 11% of our total revenues for the third quarter of fiscal 2012 and fiscal 2011, respectively.

Revenue from power and RF decreased approximately 30% to $17.3 million in the third quarter of fiscal 2012 from $24.9 million in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, revenue from our power and RF products decreased approximately 32% to $52.1 million from $76.3 million for the nine months ended March 27, 2011. The decreases in our power and RF products revenue were primarily due to a lower demand in the solar inverter market and the delay of RF orders related to military programs. Additionally, the ASP for our power and RF products decreased by approximately 27% in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011.

Gross Profit

Cost of revenue includes materials, labor and overhead costs incurred internally or paid to contract manufacturers to produce our products. Gross profit in dollars and gross margin were as follows (in thousands, except percentages):



	Three Months Ended										Nine Months Ended
	March 25, 2012			March 27, 2011			Change				March 25, 2012			March 27, 2011			Change
Total gross profit	$	99,413		$	91,395		$	8,018	9	%	$	302,559		$	343,070		$	(40,511	)	(12	)%
Gross margin	35		%	42		%					35		%	46		%

Gross profit in the third quarter of fiscal 2012 increased approximately 9% to $99.4 million from $91.4 million in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, gross profit decreased approximately 12% to $302.6 million from $343.1 million for the nine months ended March 27, 2011. Additionally, for the third quarter of fiscal 2012 our gross margin decreased to 35% from 42% in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, our gross margin decreased to 35% from 46% for the nine months ended March 27, 2011. Factors contributing to the decrease in gross profit and gross margin were an aggressive pricing environment for LED chips and components, lower factory utilization, and an increased mix of lighting products.

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 consist primarily of employee compensation and benefits, 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 revenues (in thousands, except percentages):

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	Three Months Ended										Nine Months Ended
	March 25, 2012			March 27, 2011			Change				March 25, 2012			March 27, 2011			Change
Research and development	$	36,148		$	31,016		$	5,132	17	%	$	106,436		$	84,981		$	21,455	25	%
Percent of revenues	13		%	14		%					12		%	11		%

Research and development expenses in the third quarter of fiscal 2012 increased 17% to $36.1 million from $31.0 million in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, research and development expenses increased 25% to $106.4 million from $85.0 million for the nine months ended March 27, 2011. These increases were primarily due to increased spending on research and development activities focused on new LED chips, LED components, LED lighting products, power products and the incremental research and development expense incurred from the acquisition of Ruud Lighting. Our research and development expenses vary significantly from quarter to quarter based on a number of factors, including: the timing of new product introductions, timing of expenditures and the number and nature of our ongoing research and development activities. However, we anticipate that in general our research and development expenses will continue to increase over time to support future growth.

Sales, General and Administrative

Sales, general and administrative expenses include costs associated with selling and marketing our products and executive and administrative activities (for example, legal, finance, information technology and human resources personnel). These expenses consist of 1) salaries and related compensation costs, 2) third party agent commissions, 3) consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs), 4) facilities and insurance costs, and 5) travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenues (in thousands, except percentages):



	Three Months Ended										Nine Months Ended
	March 25, 2012			March 27, 2011			Change				March 25, 2012			March 27, 2011			Change
Sales, general and administrative	$	50,074		$	37,603		$	12,471	33	%	$	144,789		$	100,171		$	44,618	45	%
Percent of revenues	18		%	17		%					17		%	13		%

Sales, general and administrative expenses in the third quarter of fiscal 2012 increased 33% to $50.1 million from $37.6 million in the third quarter of fiscal 2011. For the nine months ended March 25, 2012, sales, general and administrative expenses increased 45% to $144.8 million from $100.2 million for the nine months ended March 27, 2011. The increase in sales, general and administrative expenses for both the three and nine months ended March 25, 2012 is primarily due to an increase in spending on sales and marketing for lighting products as we continue to expand our direct sales resources and channels and invest in building and promoting the Cree brands, as well as the incremental sales, general and administrative expenses associated with Ruud Lighting. Additionally, for the nine months ended March 25, 2012 we incurred increased legal costs associated with patent litigation and transaction costs associated with the acquisition of Ruud Lighting.

Amortization of Acquisition Related Intangibles

As a result of our acquisitions, we have recorded various intangible assets that require amortization, including customer relationships and developed technologies. During fiscal 2007, we acquired INTRINSIC Semiconductor Corporation and COTCO Luminant Device Limited (now Cree Hong Kong Limited) (COTCO), resulting in $63.7 million of amortizable intangible assets principally composed of customer relationships and developed technology. In fiscal 2008, we acquired LLF, resulting in an additional $41.2 million of amortizable intangible assets. These intangible assets are principally composed of developed technology that specifically relates to technologies underlying the development of LED lighting products for the general illumination market. During fiscal 2012, we acquired Ruud Lighting, resulting in $206.0 million of amortizable intangible assets consisting of developed technology, customer relationships, trade names, in-process research and development, and non-compete agreements. Amortization of intangible assets related to our acquisitions is as follows (in thousands, except percentages):

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	Three Months Ended									Nine Months Ended
	March 25, 2012		March 27, 2011		Change					March 25, 2012		March 27, 2011		Change
INTRINSIC	$	186	$	186	$	—		—	%	$	558	$	558	$	—		—	%
COTCO	1,265		1,733		(468		)	(27	)%	3,793		5,200		(1,407		)	(27	)%
LLF	750		774