Edgar Filing: CREE INC

10Q FORM 3Q FY2013

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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 31, 2013

[ ] 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 17, 2013, was 117,923,891.

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CREE, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2013

INDEX



Description		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2013 (unaudited) and June 24, 2012	3

	Consolidated Statements of Income for the three and nine months ended March 31, 2013 (unaudited) and March 25, 2012 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2013 (unaudited) and March 25, 2012 (unaudited)	5

	Consolidated Statements of Cash Flow for the nine months ended March 31, 2013 (unaudited) and March 25, 2012 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

SIGNATURE		47
Exhibit Index		48

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CREE, INC.

CONSOLIDATED BALANCE SHEETS



	March 31, 2013		June 24, 2012
	(unaudited)
	(Thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	178,438	$	178,885
Short-term investments	758,613		565,628
Total cash, cash equivalents, and short-term investments	937,051		744,513
Accounts receivable, net	181,877		152,258
Inventories	195,743		188,849
Deferred income taxes	22,410		21,744
Prepaid expenses and other current assets	62,831		56,917
Total current assets	1,399,912		1,164,281
Property and equipment, net	550,237		582,461
Intangible assets, net	362,442		376,075
Goodwill	616,345		616,345
Other assets	8,552		8,336
Total assets	$	2,937,488	$	2,747,498
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	112,416	$	78,873
Accrued salaries and wages	40,286		29,837
Income taxes payable	4,405		3,834
Other current liabilities	41,459		36,633
Total current liabilities	198,566		149,177
Long-term liabilities:
Deferred income taxes	15,926		15,609
Other long-term liabilities	14,797		22,695
Total long-term liabilities	30,723		38,304
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at March 31, 2013 and June 24, 2012; none issued and outstanding	—		—
Common stock, par value $0.00125; 200,000 shares authorized at March 31, 2013 and June 24, 2012; 117,869 and 115,906 shares issued and outstanding at March 31, 2013 and June 24, 2012, respectively	146		144
Additional paid-in-capital	1,951,011		1,861,502
Accumulated other comprehensive income, net of taxes	11,121		11,133
Retained earnings	745,921		687,238
Total shareholders’ equity	2,708,199		2,560,017
Total liabilities and shareholders’ equity	$	2,937,488	$	2,747,498

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 31, 2013		March 25, 2012			March 31, 2013		March 25, 2012
	(Thousands, except per share amounts)
Revenue, net	$	348,934	$	284,801		$	1,010,973	$	857,899
Cost of revenue, net	215,924		185,388			628,438		555,340
Gross profit	133,010		99,413			382,535		302,559
Operating expenses:
Research and development	39,036		36,148			116,524		106,436
Sales, general and administrative	62,140		50,074			174,885		144,789
Amortization of acquisition-related intangibles	7,719		7,368			23,108		18,660
Loss on disposal or impairment of long-lived assets	863		816			2,385		2,088
Total operating expenses	109,758		94,406			316,902		271,973
Operating income	23,252		5,007			65,633		30,586
Non-operating income:
Other non-operating income (expense), net	494		324			2,622		1,187
Interest income, net	2,018		1,859			5,756		5,628
Income before income taxes	25,764		7,190			74,011		37,401
Income tax expense (benefit)	3,607		(2,299		)	15,328		3,015
Net income	$	22,157	$	9,489		$	58,683	$	34,386
Earnings per share:
Basic	$	0.19	$	0.08		$	0.51	$	0.30
Diluted	$	0.19	$	0.08		$	0.50	$	0.30
Shares used in per share calculation:
Basic	116,682		115,641			116,059		114,348
Diluted	118,608		116,074			116,768		114,879

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

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CREE, INC.

(UNAUDITED)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended					Nine Months Ended
	March 31, 2013			March 25, 2012		March 31, 2013			March 25, 2012
	(In thousands)
Net income	$	22,157		$	9,489	$	58,683		$	34,386
Other comprehensive income:
Currency translation (loss) gain, net of tax benefit (expense) of $90, $(167), $(1) and $55, respectively	(145		)	273		5			(89		)
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $(75), $(290), $(22) and $915, respectively	67			480		(17		)	(1,512		)
Other comprehensive (loss) income	(78		)	753		(12		)	(1,601		)
Comprehensive income	$	22,079		$	10,242	$	58,671		$	32,785

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 31, 2013			March 25, 2012
	(In thousands)
Cash flows from operating activities:
Net income	$	58,683		$	34,386
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	114,370			104,855
Stock-based compensation	40,945			34,884
Excess tax benefit from share-based payment arrangements	(3,636		)	(263		)
Loss on disposal or impairment of long-lived assets	2,385			2,088
Amortization of premium/discount on investments	7,075			6,099
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	(29,624		)	(25,321		)
Inventories	(6,866		)	19,184
Prepaid expenses and other assets	(6,472		)	7,004
Accounts payable, trade	33,495			(430		)
Accrued salaries and wages and other liabilities	13,715			(11,909		)
Net cash provided by operating activities	224,070			170,577
Cash flows from investing activities:
Purchases of property and equipment	(55,406		)	(75,206		)
Purchases of available-for-sale investments	(533,884		)	(234,622		)
Proceeds from maturities of available-for-sale investments	297,740			127,805
Proceeds from sale of property and equipment	301			5
Proceeds from sale of available-for-sale investments	36,089			274,453
Purchase of acquired business, net of cash acquired	—			(456,008		)
Purchases of patent and licensing rights	(15,794		)	(11,959		)
Net cash used in investing activities	(270,954		)	(375,532		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	43,352			4,035
Excess tax benefit from share-based payment arrangements	3,636			263
Repurchases of common stock	(638		)	—
Net cash provided by financing activities	46,350			4,298
Effects of foreign exchange changes on cash and cash equivalents	87			1,116
Net change in cash and cash equivalents	(447		)	(199,541		)
Cash and cash equivalents:
Beginning of period	178,885			390,598
End of period	$	178,438		$	191,057

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 indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, solar inverters and wireless systems.

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) and other materials used for electronic and opto-electronic applications.

The Company's LED products consist of LED components, LED chips, and SiC materials. 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 the ability to offer innovative products and its ability to enable its customers to develop and market LED based products that successfully compete and drive LED adoption against traditional lighting products.

The Company's lighting products consist of both LED and traditional lighting systems. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.

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 for a given power level. The Company's RF devices are made from GaN and produce higher power densities as compared to silicon or gallium arsenide.

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

The Company currently operates its business as three reportable segments:


•	LED Products


•	Lighting Products


•	Power and RF Products

Basis of Presentation

The consolidated balance sheet at March 31, 2013, the consolidated statements of income for the three and nine months ended March 31, 2013 and March 25, 2012, the consolidated statements of comprehensive income for the three and nine months ended March 31, 2013 and March 25, 2012, and the consolidated statements of cash flow for the nine months ended March 31, 2013 and March 25, 2012 (collectively, the “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 31, 2013, and for all periods presented, have been made. All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 24, 2012 has been derived from the audited financial statements as of that date. The nine month period ended March 31, 2013 includes one additional week as compared to the nine month period ended March 25, 2012.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These financial statements should 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 24, 2012 (“fiscal 2012”). The results of operations for the three and nine months ended March 31, 2013 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 30, 2013 (“fiscal 2013”).

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The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.

Certain fiscal 2012 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2013 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

Recently Adopted Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board ("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 a 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 deferred the presentation requirement for other comprehensive income reclassifications on the face of the financial statements. This guidance, as amended, became effective for the Company beginning in the first quarter of fiscal 2013. The Company's adoption of the new accounting guidance did not have a significant impact on the consolidated financial statements.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an accounting standards update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which seeks to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. In particular, the ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (e.g., inventory) instead of directly to income or expense in the same reporting period.

The ASU applies to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply for all reporting periods presented, both annual and interim periods. For public entities, the ASU is effective prospectively for reporting periods beginning after December 15, 2012. This guidance became effective for the Company beginning in the third quarter of fiscal 2013. The Company's adoption of the new accounting guidance did not have a significant impact on the consolidated financial statements.

Note 2. Acquisitions

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 valued at approximately $211.0 million and $372.2 million cash, subject to certain post-closing adjustments. The acquisition allowed 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 repaid Ruud Lighting's outstanding debt in the aggregate amount of approximately $85.0 million.

Following the acquisition, the Company recorded certain post-closing purchase price adjustments resulting in a $2.3 million reduction to the purchase price and a total purchase price of approximately $666.0 million.

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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. These transaction costs were included in "Sales, general and administrative" expense in the consolidated statements of income. Ruud Lighting is included in the Lighting Products segment.

The amounts of revenue, operating income (loss), and net income (loss) of Ruud Lighting in the consolidated statements of income from and including August 17, 2011 to March 25, 2012 are as follows (in thousands, except per share data):



	Three Months Ended			Nine Months Ended
	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	)	$	—

The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the Ruud Lighting acquisition occurred as of June 27, 2011 (in thousands, except per share data).



	Nine Months Ended
	March 25, 2012
Revenue	$	888,231
Operating income	28,879
Net income	32,401
Basic net income per share	$	0.28
Diluted net income per share	$	0.28

The total revenue for Ruud Lighting included in the pro forma table above was $171.6 million for the nine month period from June 27, 2011 to March 25, 2012.

Note 3. Financial Statement Details

Accounts Receivable, net

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



	March 31, 2013			June 24, 2012
Billed trade receivables	$	208,807		$	173,145
Unbilled contract receivables	1,364			1,576
	210,171			174,721
Allowance for sales returns, discounts, and other incentives	(25,714		)	(20,681		)
Allowance for bad debts	(2,580		)	(1,782		)
Total accounts receivable, net	$	181,877		$	152,258

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Inventories

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



	March 31, 2013		June 24, 2012
Raw material	$	61,230	$	57,618
Work-in-progress	71,243		74,241
Finished goods	63,270		56,990
Total inventories	$	195,743	$	188,849

Other current liabilities

The following table presents a summary of the components of other current liabilities (in thousands):



	March 31, 2013		June 24, 2012
Accrued taxes	$	15,110	$	11,615
Accrued professional fees	8,403		7,412
Accrued warranty	7,146		5,513
Accrued other	10,800		12,093
Total other current liabilities	$	41,459	$	36,633

Other non-operating income (expense), net

The following table presents a summary of the components of other non-operating income (expense), net (in thousands):



	Three Months Ended				Nine Months Ended
	3/31/2013		3/25/2012		3/31/2013		3/25/2012
Foreign currency gain (loss), net	$	296	$	190	$	424	$	211
Gain on sale of investments, net	48		4		84		1,001
Other, net	150		130		2,114		(25		)
Total other non-operating income (expense), net	$	494	$	324	$	2,622	$	1,187

Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents a summary of the amounts reclassified out of accumulated other comprehensive income (in thousands):



Accumulated Other Comprehensive Income Component	Amount Reclassified from Accumulated Other Comprehensive Income									Affected Line Item in the Statement of Income
	Three Months Ended					Nine Months Ended
	3/31/2013		3/25/2012			3/31/2013		3/25/2012
Net unrealized gain (loss) on available-for-sale securities, net of tax expense (benefit)
	$	43	$	4		$	80	$	1,001	Other non-operating income (expense), net
	43		4			80		1,001		Income before income taxes
	6		(1		)	17		81		Income tax expense (benefit)
	$	37	$	5		$	63	$	920	Net income

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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 based upon management’s determination that the underlying cash invested in these securities is available for operations as necessary.

The following tables provide a summary of marketable investments by type (in thousands):



	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds	$	246,957	$	1,496	$	(61	)	$	248,392
Corporate bonds	176,963		2,468		(101		)	179,330
Certificates of deposit	265,000		—		—			265,000
U.S. agency securities	56,391		333		(1		)	56,723
Non-U.S. government securities	9,139		29		—			9,168
Total	$	754,450	$	4,326	$	(163	)	$	758,613

	June 24, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds	$	209,626	$	2,036	$	(58	)	$	211,604
Corporate bonds	144,942		1,848		(123		)	146,667
Certificates of deposit	130,000		—		—			130,000
U.S. agency securities	68,156		450		(7		)	68,599
Non-U.S. government securities	8,746		15		(3		)	8,758
Total	$	561,470	$	4,349	$	(191	)	$	565,628

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The following tables present 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 31, 2013
	Less than 12 Months					Greater than 12 Months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Municipal bonds	$	25,869	$	(61	)	$	—	$	—	$	25,869	$	(61	)
Corporate bonds	37,174		(101		)	—		—		37,174		(101		)
U.S. agency securities	2,002		(1		)	—		—		2,002		(1		)
Total	$	65,045	$	(163	)	$	—	$	—	$	65,045	$	(163	)
Number of securities with an unrealized loss			33					—				33

	June 24, 2012
	Less than 12 Months					Greater than 12 Months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Municipal bonds	$	30,102	$	(58	)	$	—	$	—	$	30,102	$	(58	)
Corporate bonds	30,550		(123		)	—		—		30,550		(123		)
U.S. agency securities	3,014		(7		)	—		—		3,014		(7		)
Non-U.S. government securities	1,543		(3		)	—		—		1,543		(3		)
Total	$	65,209	$	(191	)	$	—	$	—	$	65,209	$	(191	)
Number of securities with an unrealized loss			33					—				33

The contractual maturities of marketable investments at March 31, 2013 were as follows (in thousands):



	March 31, 2013
	Within One Year		After One, Within Five Years		After Five, Within Ten Years		After Ten Years		Total
Municipal bonds	$	59,355	$	189,037	$	—	$	—	$	248,392
Corporate bonds	25,404		151,426		2,500		—		179,330
Certificates of deposit	265,000		—		—		—		265,000
U.S. agency securities	20,145		36,578		—		—		56,723
Non-U.S. government securities	3,012		6,156		—		—		9,168
Total	$	372,916	$	383,197	$	2,500	$	—	$	758,613

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.

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Observable inputs are obtained from independent sources and can be validated by a third party, whereas, unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:


•	Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.


•	Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.


•	Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments. As of March 31, 2013, 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 31, 2013.

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):



	March 31, 2013								June 24, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Municipal bonds	$	—	$	—	$	—	$	—	$	—	$	3,000	$	—	$	3,000
Money market funds	3,564		—		—		3,564		31,318		—		—		31,318
Total cash equivalents	3,564		—		—		3,564		31,318		3,000		—		34,318
Short-term investments:
Municipal bonds	—		248,392		—		248,392		—		211,604		—		211,604
Corporate bonds	—		179,330		—		179,330		—		146,667		—		146,667
Certificates of deposit	—		265,000		—		265,000		—		130,000		—		130,000
U.S. agency securities	—		56,723		—		56,723		—		68,599		—		68,599
Non-U.S. government securities	—		9,168		—		9,168		—		8,758		—		8,758
Total short-term investments	—		758,613		—		758,613		—		565,628		—		565,628
Total assets	$	3,564	$	758,613	$	—	$	762,177	$	31,318	$	568,628	$	—	$	599,946

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 31, 2013 of approximately $84 thousand are included in "Other non-operating income (expense), 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.

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Note 6. Derivative Instruments and Hedging Activities

The Company operates internationally and thus is exposed to potential adverse changes in foreign currency exchange rates. In the third quarter of fiscal 2013, the Company entered into a foreign currency forward contract (a derivative instrument) as a means of reducing its exposure to foreign currency rate changes on accounts payable denominated in a foreign currency. The primary purpose of the Company's foreign currency hedging activities is to protect against the volatility of earnings associated with foreign currency transactions. The Company's strategy is to enter into foreign currency forward contracts so that losses or gains resulting from its foreign currency exposures are offset by gains or losses on the forward currency forward contracts in order to mitigate the risk and volatility associated with its foreign currency transactions. Such derivative instruments contain credit risk to the extent that the counterparty fails to perform under the contract. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of nonperformance by counterparties.

Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. The Company did not designate its foreign currency forward contract as a hedge for accounting purposes, and accordingly, the Company adjusted the contract to fair value by recognizing a gain on the derivative instrument in current earnings within "Other non-operating income (expense), net".

The Company continually monitors its exposure to fluctuations in foreign currency exchange rates. The Company may enter into additional foreign currency forward contracts in the future to mitigate its changing exposure to foreign currency exchange rate fluctuations, principally related to payables and receivables generated from sales and purchases denominated in non-functional currencies. The Company's intent is that foreign currency forward contracts will have terms corresponding to the duration and will mature upon settlement of the underlying asset or liability. The Company does not hold or issue financial instruments for speculative or trading purposes.

There were no foreign currency forward contracts outstanding as of March 31, 2013 or June 24, 2012.

The weighted average total notional amount of foreign currency forward contracts outstanding during the three months ended March 31, 2013 was $102 thousand, purchased in U.S. dollar equivalents. The weighted average total notional amount of foreign currency forward contracts outstanding during the nine months ended March 31, 2013 was $33 thousand, purchased in U.S. dollar equivalents.

The table below provides a summary of the effect of the derivative instrument on the unaudited condensed consolidated statements of income (in thousands):



Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Net Income	Amount of Gain (Loss) Recognized in Net Income
		Three months ended				Nine Months Ended
		March 31, 2013		March 25, 2012		March 31, 2013		March 25, 2012
Foreign currency forward contract	Other non-operating income (expense), net	$	8	$	—	$	8	$	—

The above gain on the derivative instrument includes the cost of entering into the contract (i.e. forward points), and was generally offset by a corresponding foreign currency loss on the underlying hedged transaction (i.e. accounts payable). The net gain on both the derivative instrument and the corresponding hedged transaction are reflected in "Other non-operating income (expense), net" in the accompanying unaudited consolidated statements of income.

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Note 7. Intangible Assets

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



	March 31, 2013							June 24, 2012
	Gross		Accumulated amortization			Net		Gross		Accumulated amortization			Net
Intangible assets with finite lives:
Customer relationships	$	137,440	$	(57,485	)	$	79,955	$	137,440	$	(51,103	)	$	86,337
Developed technology	162,760		(48,379		)	114,381		160,360		(33,141		)	127,219
Non-compete agreements	10,244		(3,547		)	6,697		10,244		(2,077		)	8,167
Trade names, finite-lived	520		(487		)	33		520		(469		)	51
Patent and license rights	111,672		(33,176		)	78,496		97,812		(28,791		)	69,021
Total intangible assets with finite lives	422,636		(143,074		)	279,562		406,376		(115,581		)	290,795
In-process research and development, indefinite-lived	—					—		2,400					2,400
Trade names, indefinite-lived	82,880					82,880		82,880					82,880
Total intangible assets	$	505,516	$	(143,074	)	$	362,442	$	491,656	$	(115,581	)	$	376,075

Total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, recognized during the three and nine months ended March 31, 2013 was $9.4 million and $28.2 million, respectively. For the three and nine months ended March 25, 2012, total amortization expense, including the amortization of acquisition related intangibles, patents and license rights, was $8.9 million and $22.9 million, respectively.

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



Fiscal Year Ending
June 30, 2013 (remainder of fiscal 2013)	$	9,460
June 29, 2014	35,806
June 28, 2015	32,831
June 26, 2016	32,553
June 25, 2017	30,587
Thereafter	138,325
Total	$	279,562

Note 8. Shareholders’ Equity

As of March 31, 2013, the Company is authorized by the Board of Directors to repurchase shares of its common stock having an aggregate purchase price not exceeding $200.0 million for all purchases from June 14, 2012 through the June 30, 2013 expiration of the program. During the nine months ended March 31, 2013, there were no repurchases of common stock by the Company under the repurchase program.

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Note 9. 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 31, 2013		March 25, 2012		March 31, 2013		March 25, 2012
Basic:
Net income	$	22,157	$	9,489	$	58,683	$	34,386
Weighted average common shares - basic	116,682		115,641		116,059		114,348
Basic earnings per share	$	0.19	$	0.08	$	0.51	$	0.30

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 31, 2013		March 25, 2012		March 31, 2013		March 25, 2012
Diluted:
Net income	$	22,157	$	9,489	$	58,683	$	34,386
Weighted average common shares - basic	116,682		115,641		116,059		114,348
Dilutive effect of stock options, unvested shares and ESPP purchase rights	1,926		433		709		531
Weighted average common shares - diluted	118,608		116,074		116,768		114,879
Diluted earnings per share	$	0.19	$	0.08	$	0.50	$	0.30

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be antidilutive and as such, these shares are not included in calculating diluted earnings per share. For the three and nine months ended March 31, 2013, there were 2.2 million and 8.7 million, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was antidilutive. For the three and nine months ended March 25, 2012, there were 7.9 million and 6.8 million, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was antidilutive.

Note 10. 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.

During the first quarter of fiscal 2013, the Company initiated grants of performance-based stock option and stock unit awards. The compensation expense for an award with a performance condition is based on the probable outcome of that performance condition. Compensation expense is recognized if the Company believes it is probable that the performance condition will be achieved and is adjusted for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.

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 to 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.

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Stock Option Awards

The following table summarizes outstanding option awards as of March 31, 2013, and changes during the nine months then ended (shares in thousands):



	Number of Shares		Weighted-Average Exercise Price
Outstanding at June 24, 2012	8,800		$	36.71
Granted	3,354		28.31
Exercised	(1,569	)	27.79
Forfeited or expired	(453	)	37.41
Outstanding at March 31, 2013	10,132		$	35.28

Restricted Stock and Stock Unit Awards

A summary of nonvested shares of restricted stock and stock unit awards outstanding as of March 31, 2013, and changes during the nine months then ended, is as follows (shares in thousands):



	Number of Shares/Units		Weighted- Average Grant- Date Fair Value
Nonvested at June 24, 2012	517		$	37.41
Granted	350		28.11
Vested	(181	)	35.16
Forfeited	(7	)	29.86
Nonvested at March 31, 2013	679		$	33.29

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-valuation model. The determination of the fair value of stock-based payment awards on the date of grant using an option-valuation 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 reduced by estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

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



	Three Months Ended				Nine Months Ended
Income Statement Classification	March 31, 2013		March 25, 2012		March 31, 2013		March 25, 2012
Cost of revenue, net	$	2,334	$	2,104	$	6,875	$	5,433
Research and development	3,441		2,738		10,445		7,769
Sales, general and administrative	8,140		7,407		23,625		21,682
Total	$	13,915	$	12,249	$	40,945	$	34,884

Note 11. Income Taxes

The variation between the Company's effective income tax rate and the U.S. statutory rate of 35 percent is primarily due to (i) the inclusion, in the third quarter of fiscal 2013, of the tax benefit related to the retroactive reinstatement and extension of the research and development credit, including the cumulative effect of the decrease in the Company's full year estimated effective tax rate as a result, and (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. The research and development credit, which had previously expired on December 31, 2011, was reinstated as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2013.

U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50 percent likely to be realized upon ultimate settlement.

As of June 24, 2012, the Company's liability for unrecognized tax benefits was $4.4 million. During the nine months ended March 31, 2013, there were no changes to the amount of unrecognized tax benefits. As a result, the total liability for unrecognized tax benefits as of March 31, 2013 was $4.4 million. If any portion of this $4.4 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 $3.4 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute requirements.

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. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2009. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2002 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 the fiscal year ended June 29, 2008 ("fiscal 2008") through the fiscal year ended June 27, 2010 ("fiscal 2010"). The Company is also currently under audit by the German Federal Central Tax Office for fiscal 2008 through fiscal 2010.

Note 12. Commitments and Contingencies

Warranties

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



Balance at June 24, 2012	$	5,513
Warranties accrued in current period	2,873
Changes in estimates for pre-existing warranties	787
Expenditures	(2,027		)
Balance at March 31, 2013	$	7,146

Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from ninety days to ten years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The warranty reserves, which are primarily related to Lighting products, are

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evaluated on a quarterly basis based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates.

Litigation

The Company is a party to various legal proceedings, including those described in the Company's Annual Report on Form 10-K for fiscal 2012 and in the Company's Quarterly Reports on Form 10-Q for the first and second quarters of fiscal 2013. The following is provided as an update to the Company's legal proceedings as contained in those reports. Unless otherwise indicated, the potential losses for claims against the Company in these matters are not reasonably estimable.

Cooper Lighting Litigation

In addition to the previously disclosed litigation with Cooper Lighting, on February 19, 2013, the Company, as successor-in-interest to Ruud Lighting, Inc., filed a third complaint for patent infringement against Cooper Lighting in the U.S. District Court for the Eastern District of Wisconsin. The complaint seeks injunctive relief and damages for infringement of two U.S. patents owned by the Company, No. 8,282,239, entitled “Light-Directing Apparatus with Protected Reflector-Shield and Lighting Fixture Utilizing Same” and No. 8,070,306, entitled “LED Lighting Fixture.”

Also, as previously reported, Illumination Management Solutions, Inc., a subsidiary of Cooper Lighting, LLC, filed a complaint for patent infringement against Ruud Lighting in the U.S. District Court for the Eastern District of Texas on June 7, 2010. The action was later transferred to the U.S. District Court for the Eastern District of Wisconsin. As amended in January 2012, the complaint alleged that Ruud Lighting infringed two U.S. patents owned by Illumination Management Solutions, No. 7,674,018 and No. 7,993,036, each entitled "LED Device for Wide Beam Generation." It also alleged that Ruud Lighting and its then president, Alan Ruud, who served on the plaintiff's board of directors in 2006 and 2007 when Ruud Lighting was a shareholder of the plaintiff, conspired to misuse confidential information obtained from the plaintiff to file patent applications and to obtain patents assigned to Ruud Lighting. The complaint sought injunctive relief, damages and ownership of the patent applications and patents alleged to have been wrongfully filed and obtained. The court in October 2012 granted partial summary judgment in favor of Ruud Lighting, finding that most of the accused products did not infringe either of the asserted patents. The court in February 2013 entered final judgment in which the court 1) dismissed the claims relating to most of the accused products, finding that they did not infringe either of the asserted patents; 2) dismissed with prejudice and with the consent of the parties the claims with respect to the remaining accused products; 3) severed the conspiracy claim, which was subsequently voluntarily dismissed; and 4) dismissed the remaining claims and counterclaims without prejudice. In March 2013, the plaintiffs filed a notice of appeal from this judgment to the U.S. Court of Appeals for the Federal Circuit.

Dow Corning Litigation

Dow Corning Compound Semiconductor Solutions, LLC filed a complaint against the Company in the U.S. District Court for the Eastern District of Michigan on September 27, 2011. The complaint sought a declaratory judgment that the plaintiff did not infringe three U.S. patents owned by the Company relating to high quality silicon carbide materials and that the patents are invalid. The patents in suit were: No. 7,294,324, entitled “Low Basal Plane Dislocation Bulk Grown SiC Wafers”; No. 7,314,520, entitled “Low 1C Screw Dislocation 3 Inch Silicon Carbide Wafer”; and No. 7,314,521, entitled “Low Micropipe 100 MM Silicon Carbide Wafer.” The district court dismissed the action with prejudice in March 2013 for lack of subject matter jurisdiction on the grounds that at the time the complaint was filed there was no substantial or immediate controversy between the parties regarding the patents-in-suit.

The Fox Group Litigation

The Fox Group, Inc. filed a complaint for patent infringement against the Company in the U.S. District Court for the Eastern District of Virginia on June 29, 2010. The complaint, which sought injunctive relief and damages, asserted that the Company was infringing two U.S. patents relating to high quality silicon carbide material: No. 6,534,026, entitled "Low Defect Density Silicon Carbide" (the "'026 patent"); and No. 6,562,130, entitled "Low Defect Axially Grown Single Crystal Silicon Carbide" (the "'130 patent"). The district court granted summary judgment in favor of the Company in August 2011. The court determined that the Company did not infringe the '026 patent and that the claims of the '130 patent asserted against the Company are invalid. The Fox Group appealed the judgment to the U.S. Court of Appeals for the Federal Circuit, which affirmed the judgment. The Fox Group's petition for a rehearing was denied in February 2013.

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Lighting Science Group Litigation

Lighting Science Group Corporation filed a complaint for patent infringement against the Company in the U.S. District Court for the Middle District of Florida on April 10, 2013. The complaint seeks injunctive relief and damages for alleged infringement of U.S. patent No. 8.201,968, entitled “Low Profile Light."

Note 13. Reportable Segments

The Company's three operating and reportable segments include:


•	LED Products


•	Lighting Products


•	Power and RF Products

Reportable Segments Description

The Company's LED Products segment includes LED components, LED chips, and SiC materials. The Company's Lighting Products segment consists of both LED and traditional lighting systems, with its primary focus on LED lighting. The Company's Power and RF Products segment includes power devices and RF devices.

Financial Results by Reportable Segment

The following table reflects the results of the Company's reportable segments as reviewed by the Chief Operating Decision Maker (CODM) for the three and nine months ended March 31, 2013 and March 25, 2012. The Company's CODM is the Chief Executive Officer.

The Company uses substantially the same accounting policies to derive the segment results reported below as those used in the Company's consolidated financial statements.

The Company's CODM does not review inter-segment revenue when evaluating segment performance and allocating resources to each segment. Thus, inter-segment revenue is not included in the segment revenues presented in the following table. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.

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

In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment's cost of sales. The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment. The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated. Inventory is normally transferred between the Company's reportable segments at cost. However, due to the vertically-integrated nature of the Company's business and the fixed cost nature of the Company's manufacturing operations, the Company will apportion lower of cost or market write-downs on products among the segments involved in producing the products. The lower of cost or market write-down is apportioned based on each segments' proportional production cost and is reported as an increase to each segment's cost of sales. The Company's CODM evaluates segment performance and resource allocation after apportionment of any lower of cost or market write-downs. For the three and nine months ended March 31, 2013, the Company allocated $2.2 million for a lower of cost or market write-down from the Lighting Products segment to the LED Products segment.

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Unallocated costs in the table below are not reviewed by the CODM when evaluating segment performance and allocating resources to each segment. These unallocated costs include variable compensation costs for manufacturing employees consisting primarily of stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans, matching contributions under the Company's 401(k) plan, and acquisition related costs.



	Three Months Ended						Nine Months Ended
	March 31, 2013			March 25, 2012			March 31, 2013			March 25, 2012
	(In thousands)
Revenue
LED Products	$	195,561		$	180,944		$	584,070		$	571,884
Lighting Products	130,659			86,527			361,446			233,936
Power and RF Products	22,714			17,330			65,457			52,079
Total Revenue	$	348,934		$	284,801		$	1,010,973		$	857,899

Gross Profit
LED Products	$	85,728		$	70,257		$	245,381		$	218,319
Lighting Products	39,966			24,640			115,449			72,517
Power and RF Products	12,033			7,954			35,253			21,970
Total Segment Gross Profit	137,727			102,851			396,083			312,806
Unallocated Costs	(4,717		)	(3,438		)	(13,548		)	(10,247		)
Consolidated Gross Profit	$	133,010		$	99,413		$	382,535		$	302,559

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 except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "SEC"), we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in 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 24, 2012. 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 indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.

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

Our LED products consist of LED components, LED chips, and SiC materials. 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 offer innovative products and our ability to enable our customers to develop and market LED based products that successfully compete and drive LED adoption against traditional lighting products.

Our lighting products consist of both LED and traditional lighting systems. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.

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 for a given power level. Our RF devices are made from GaN and produce higher power densities as compared to silicon or gallium arsenide.

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 product fabrication, assembly and packaging. We operate research and development facilities in North Carolina, California, Wisconsin, India, and China.

Reportable Segments

We have three reportable segments:


•	LED Products


•	Lighting Products


•	Power and RF Products

Reportable segments are components of an entity that have separate financial data that the entity's Chief Operating Decision Maker (CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.

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, still limited, 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 LED and lighting industry is intense. Many companies have made significant investments in LED development and production equipment. Traditional lighting companies and new entrants are investing in LED based lighting products as LED adoption has gained momentum. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications to LED based solutions. To remain competitive, market participants must continuously increase product performance and reduce costs. To address these competitive pressures, we have invested in R&D activities to support new product development to deliver higher levels of performance and lower costs to differentiate our products in the market.


•	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 could 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, these regulations are affected by changing political priorities which can modify or limit the effectiveness of these new regulations.

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•

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

The following is a summary of our financial results for the nine months ended March 31, 2013:


•	Revenues increased to $1,011.0 million for the nine months ended March 31, 2013 from $857.9 million for the nine months ended March 25, 2012.


•	For the nine months ended March 31, 2013, gross margins improved to 37.8% from 35.3% for the nine months ended March 25, 2012.


•	Operating income was $65.6 million in the nine months ended March 31, 2013 compared to $30.6 million in the nine months ended March 25, 2012. Net income per diluted share for the nine months ended March 31, 2013, was $0.50 compared to $0.30 for the nine months ended March 25, 2012.


•	Inventory increased to $195.7 million at March 31, 2013 compared to $188.8 million at June 24, 2012.


•	Combined cash, cash equivalents and marketable investments increased to $937.1 million at March 31, 2013 compared to $744.5 million at June 24, 2012.

Business Outlook

We project that the markets for our products will remain highly competitive during fiscal 2013. We are focusing on the following key areas, among others, in response to this competitive environment:

•

Accelerate adoption of LED lighting. We continue to work to develop new LED lighting systems to increase the lumens per dollar, which brings LED lighting closer to price parity with conventional technology and reduces the payback time for the customer. We are focused on delivering best-in-class products for key lighting categories and expanding our sales channels to build the Cree brand and access more customers.


•	Grow LED component sales through product innovation. We are working to leverage our SC³ Technology™ next generation LED platform into a range of new LED component products that are targeted to deliver more lumens per dollar to the customer. We are also developing component and module products targeted to simplify our customers' product designs and reduce their time to market.

•

Leverage technology leadership in Power and RF to open new applications for these products. In the power product line, we are working with our customers to combine our SiC MOSFET and Schottky diodes technology to enable power modules for solar, uninterruptable power supplies (UPS) and motor control applications. In the RF product line, we are developing GaN based products to access new applications.


•	Translate product innovation into revenue and profit growth. We target incremental improvement from factory cost reductions, process improvements and lower cost new product designs.

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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 31, 2013				March 25, 2012					March 31, 2013				March 25, 2012
(in thousands, except per share amounts and percentages)	Dollars		% of Revenue		Dollars			% of Revenue		Dollars		% of Revenue		Dollars		% of Revenue
Revenue, net	$	348,934	100	%	$	284,801		100	%	$	1,010,973	100	%	$	857,899	100	%
Cost of revenue, net	215,924		62	%	185,388			65	%	628,438		62	%	555,340		65	%
Gross profit	133,010		38	%	99,413			35	%	382,535		38	%	302,559		35	%
Research and development	39,036		11	%	36,148			13	%	116,524		12	%	106,436		12	%
Sales, general and administrative	62,140		18	%	50,074			18	%	174,885		17	%	144,789		17	%
Amortization of acquisition-related intangibles	7,719		2	%	7,368			3	%	23,108		2	%	18,660		2	%
Loss on disposal or impairment of long-lived assets	863		—	%	816			—	%	2,385		—	%	2,088		—	%
Operating income	23,252		7	%	5,007			2	%	65,633		6	%	30,586		4	%
Other non-operating income (expense), net	494		—	%	324			—	%	2,622		—	%	1,187		—	%
Interest income, net	2,018		1	%	1,859			1	%	5,756		1	%	5,628		1	%
Income before income taxes	25,764		7	%	7,190			3	%	74,011		7	%	37,401		4	%
Income tax expense (benefit)	3,607		1	%	(2,299		)	(1	)%	15,328		2	%	3,015		—	%
Net income	22,157		6	%	9,489			3	%	58,683		6	%	34,386		4	%
Diluted earnings per share	$	0.19			$	0.08				$	0.50			$	0.30

Our fiscal 2013 results include a nominal benefit of an additional week included in the nine month period ended March 31, 2013, as compared to the nine month period ended March 25, 2012.

Revenues

Revenues for the three and nine months ended March 31, 2013 and March 25, 2012 were comprised of the following (in thousands, except percentages):



	Three Months Ended										Nine Months Ended
	March 31, 2013			March 25, 2012			Change				March 31, 2013			March 25, 2012			Change
LED Products	$	195,561		$	180,944		$	14,617	8	%	$	584,070		$	571,884		$	12,186	2	%
Percent of revenue	56		%	64		%					58		%	67		%
Lighting Products	130,659			86,527			44,132		51	%	361,446			233,936			127,510		55	%
Percent of revenue	37		%	30		%					36		%	27		%
Power and RF Products	22,714			17,330			5,384		31	%	65,457			52,079			13,378		26	%
Percent of revenue	7		%	6		%					6		%	6		%
Total revenue	$	348,934		$	284,801		$	64,133	23	%	$	1,010,973		$	857,899		$	153,074	18	%

Our consolidated revenue increased 23% to $348.9 million in the third quarter of fiscal 2013 from $284.8 million in the third quarter of fiscal 2012. This year-over-year increase is due to higher sales across all three of our reportable segments, but driven primarily by the Lighting Products segment. For the nine months ended March 31, 2013, our consolidated revenue increased 18% to $1,011.0 million from $857.9 million for the nine months ended March 25, 2012. This increase is due to increased

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sales of our existing products as discussed above, and recognition of revenues from the Ruud Lighting acquisition for a full first quarter of fiscal year 2013.

LED Products Segment Revenue

LED Products revenue represents the largest portion of our revenue with approximately 56% and 64% of our total revenues for the third quarter of fiscal 2013 and fiscal 2012, respectively.

LED Products revenue increased approximately 8% to $195.6 million in the third quarter of fiscal 2013 from $180.9 million in the third quarter of fiscal 2012, and approximately 2% to $584.1 million for the nine months ended March 31, 2013 from $571.9 million for the nine months ended March 25, 2012.

Changes in revenue are the result of an overall increase in the number of units sold, primarily from our newer products partially offset by a decline in selling prices. The average selling prices for our LED products decreased in fiscal 2013 compared to fiscal 2012, due primarily to market downward pricing pressure and sales of new lower cost products.

Lighting Products Segment Revenue

Lighting Products revenue represents approximately 37% and 30% of our total revenues for the third quarter of fiscal 2013 and fiscal 2012, respectively.

Lighting Products revenue increased approximately 51% to $130.7 million in the third quarter of fiscal 2013 from $86.5 million in the third quarter of fiscal 2012, and approximately 55% to $361.4 million for the nine months ended March 31, 2013 from $233.9 million for the nine months ended March 25, 2012.

The quarterly and year-to-date changes were the result of an overall increase in the number of units sold. On a year-to-date basis, the increases were also the result of recognizing a full quarter of sales in the first quarter of fiscal 2013 for products acquired from Ruud Lighting. The increases were partially offset by a reduction in selling prices primarily due to market downward pricing pressure and sales of new lower cost products.

Power and RF Products Segment Revenue

Power and RF Products revenue represents approximately 7% and 6% of our total revenues for the third quarter of fiscal 2013 and fiscal 2012, respectively.

Power and RF Products revenue increased approximately 31% to $22.7 million in the third quarter of fiscal 2013 from $17.3 million in the third quarter of fiscal 2012, and approximately 26% to $65.5 million for the nine months ended March 31, 2013 from $52.1 million for the nine months ended March 25, 2012.

The increases in revenue are the result of higher sales of RF products in fiscal 2013 compared to fiscal 2012 when the Power and RF Products segment revenue was impacted by the delays for RF orders related to certain military programs and lower demand in the solar inverter market. The selling prices for our power and RF products decreased in fiscal 2013 compared to fiscal 2012 due to a change in product mix and reductions in product pricing.

Unallocated Revenue

All of our revenue is allocated to our reportable segments. Our CODM does not review inter-segment revenue when evaluating performance and allocating resources to each segment, and inter-segment revenue is not included in the segment revenues presented above. As such, total segment revenue in the table above is equal to our consolidated revenue.

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Gross Profit and Gross Margin

Gross profit and gross margin for the three and nine months ended March 31, 2013 and March 25, 2012 were comprised of the following (in thousands, except percentages):



	Three Months Ended											Nine Months Ended
	March 31, 2013			March 25, 2012			Change					March 31, 2013			March 25, 2012			Change
LED Products gross profit	$	85,728		$	70,257		$	15,471		22	%	$	245,381		$	218,319		$	27,062		12	%
LED Products gross margin	43.8		%	38.8		%						42.0		%	38.2		%
Lighting Products gross profit	39,966			24,640			15,326			62	%	115,449			72,517			42,932			59	%
Lighting Products gross margin	30.6		%	28.5		%						31.9		%	31.0		%
Power and RF Products gross profit	12,033			7,954			4,079			51	%	35,253			21,970			13,283			60	%
Power and RF Products gross margin	53.0		%	45.9		%						53.9		%	42.2		%
Unallocated costs	(4,717		)	(3,438		)	(1,279		)	37	%	(13,548		)	(10,247		)	(3,301		)	32	%
Consolidated gross profit	$	133,010		$	99,413		$	33,597		34	%	$	382,535		$	302,559		$	79,976		26	%
Consolidated gross margin	38.1		%	34.9		%