Edgar Filing: CREE INC

10Q FORM 3Q FY2015

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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 29, 2015

[ ] 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 15, 2015, was 109,114,990.

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CREE, INC.

FORM 10-Q

For the Quarterly Period Ended March 29, 2015

INDEX



Description		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 29, 2015 (unaudited) and June 29, 2014	3

	Consolidated Statements of Income for the three and nine months ended March 29, 2015 (unaudited) and March 30, 2014 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended March 29, 2015 (unaudited) and March 30, 2014 (unaudited)	5

	Consolidated Statements of Cash Flows for the nine months ended March 29, 2015 (unaudited) and March 30, 2014 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	44

Item 6.	Exhibits	45

SIGNATURE		46
EXHIBIT INDEX		47

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CREE, INC.

CONSOLIDATED BALANCE SHEETS



	March 29, 2015		June 29, 2014
	(unaudited)
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents		$204,728		$286,824
Short-term investments	577,313		875,642
Total cash, cash equivalents and short-term investments	782,041		1,162,466
Accounts receivable, net	216,247		225,160
Income tax receivable	1,521		—
Inventories	299,360		284,780
Deferred income taxes	29,344		29,414
Prepaid expenses and other current assets	69,949		72,071
Total current assets	1,398,462		1,773,891
Property and equipment, net	654,248		605,713
Goodwill	616,345		616,345
Intangible assets, net	322,229		336,423
Other long-term investments	76,865		—
Other assets	11,703		11,997
Total assets		$3,079,852		$3,344,369
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade		$124,966		$202,294
Accrued salaries and wages	41,745		50,527
Income taxes payable	—		14,848
Other current liabilities	33,554		38,986
Total current liabilities	200,265		306,655
Long-term liabilities:
Long-term debt	150,000		—
Deferred income taxes	14,243		12,173
Other long-term liabilities	24,376		35,395
Total long-term liabilities	188,619		47,568
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at March 29, 2015 and June 29, 2014; none issued and outstanding	—		—
Common stock, par value $0.00125; 200,000 shares authorized at March 29, 2015 and June 29, 2014; 109,929 and 120,114 shares issued and outstanding at March 29, 2015 and June 29, 2014, respectively	136		149
Additional paid-in-capital	2,261,085		2,190,011
Accumulated other comprehensive income, net of taxes	7,308		11,405
Retained earnings	422,439		788,581
Total shareholders’ equity	2,690,968		2,990,146
Total liabilities and shareholders’ equity		$3,079,852		$3,344,369

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 29, 2015			March 30, 2014		March 29, 2015		March 30, 2014
	(In thousands, except per share amounts)
Revenue, net		$409,519			$405,259		$1,250,348		$1,211,351
Cost of revenue, net	284,111			255,265		852,341		754,822
Gross profit	125,408			149,994		398,007		456,529
Operating expenses:
Research and development	43,823			46,626		137,537		132,805
Sales, general and administrative	71,860			65,368		213,927		197,589
Amortization or impairment of acquisition-related intangibles	6,749			7,257		19,743		21,800
Loss on disposal or impairment of long-lived assets	1,459			364		3,641		1,781
Total operating expenses	123,891			119,615		374,848		353,975
Operating income	1,517			30,379		23,159		102,554
Non-operating (expense) income, net	(866		)	3,152		3,766		9,373
Income before income taxes	651			33,531		26,925		111,927
Income tax expense	—			5,367		2,993		17,585
Net income		$651			$28,164		$23,932		$94,342
Earnings per share:
Basic	$0.01				$0.23	$0.21			$0.78
Diluted	$0.01				$0.23	$0.21			$0.77
Weighted average shares used in per share calculation:
Basic	110,662			121,535		115,177		120,677
Diluted	111,590			123,695		116,304		123,140

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 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
	(In thousands)
Net income		$651			$28,164			$23,932			$94,342
Other comprehensive income:
Currency translation (loss)	(2,071		)	(163		)	(3,971		)	(28		)
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($741), ($126), $86 and ($1,191), respectively	1,186			191			(126		)	1,901
Other comprehensive (loss) income	(885		)	28			(4,097		)	1,873
Comprehensive (loss) income		($234	)		$28,192			$19,835			$96,215

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

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CREE, INC.

(UNAUDITED)

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended
	March 29, 2015			March 30, 2014
	(In thousands)
Cash flows from operating activities:
Net income		$23,932			$94,342
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	130,393			120,219
Stock-based compensation	49,260			46,261
Excess tax benefit from stock-based payment arrangements	(1,656		)	(18,396		)
Impairment of acquisition-related intangibles	254			—
Loss on disposal or impairment of long-lived assets	3,641			1,781
Amortization of premium/discount on investments	4,809			7,674
Loss on equity method investment	2,991			—
Foreign exchange loss on equity method investment	710			—
Changes in operating assets and liabilities:
Accounts receivable, net	7,579			(29,829		)
Inventories	(15,101		)	(53,511		)
Prepaid expenses and other assets	800			13,008
Accounts payable, trade	(69,330		)	29,016
Accrued salaries and wages and other liabilities	(44,583		)	17,605
Net cash provided by operating activities	93,699			228,170
Cash flows from investing activities:
Purchases of property and equipment	(158,277		)	(119,614		)
Purchases of short-term investments	(254,883		)	(510,401		)
Proceeds from maturities of short-term investments	337,331			365,005
Proceeds from sale of property and equipment	122			117
Proceeds from sale of short-term investments	207,551			22,387
Purchases of patent and licensing rights	(14,550		)	(14,755		)
Purchase of other long-term investments	(80,566		)	—
Net cash provided by (used in) investing activities	36,728			(257,261		)
Cash flows from financing activities:
Proceeds from long-term debt borrowings	440,000			—
Payments on long-term debt borrowings	(290,000		)	—
Net proceeds from issuance of common stock	26,832			89,476
Excess tax benefit from stock-based payment arrangements	1,656			18,396
Repurchases of common stock	(390,088		)	(107		)
Net cash (used in) provided by financing activities	(211,600		)	107,765
Effects of foreign exchange changes on cash and cash equivalents	(923		)	95
Net (decrease) increase in cash and cash equivalents	(82,096		)	78,769
Cash and cash equivalents:
Beginning of period	286,824			190,069
End of period		$204,728			$268,838

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 New Accounting Standards

Overview

Cree, Inc. (the Company) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and wide band gap semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.

The Company's LED products consist of LED components, LED chips and silicon carbide (SiC) materials. The Company's success in selling LED products depends upon its ability to offer innovative products and to enable its customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.

The Company's lighting products primarily consist of LED lighting systems and bulbs. 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 based on wide band gap semiconductor materials such as SiC and gallium nitride (GaN). The Company's power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. The Company's RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).

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 (including Hong Kong).

Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.

The Company's three reportable segments are:


•	LED Products


•	Lighting Products


•	Power and RF Products

For financial results by reportable segment, please refer to Note 12, "Reportable Segments."

Basis of Presentation

The consolidated balance sheet at March 29, 2015, the consolidated statements of income for the three and nine months ended March 29, 2015 and March 30, 2014, the consolidated statements of comprehensive income for the three and nine months ended March 29, 2015 and March 30, 2014, and the consolidated statements of cash flows for the nine months ended March 29, 2015 and March 30, 2014 (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 fairly state the consolidated financial position, results of operations and cash flows at March 29, 2015, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 29, 2014 has been derived from the audited financial statements as of that date.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. 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 29, 2014 (fiscal 2014). The results of operations for the three and nine months ended March 29, 2015 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 28, 2015 (fiscal 2015).

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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, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.

Certain fiscal 2014 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2015 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity. The fiscal 2015 consolidated financial statements also include an immaterial adjustment to a previously capitalized patent amount.

New Accounting Standards

Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASU provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers. The effective date will be the first quarter of the Company's fiscal year ending June 24, 2018, using one of two retrospective application methods. The Company is currently analyzing the impact of this new accounting guidance.

Note 2 – Financial Statement Details

Accounts Receivable, net

The following table summarizes the components of accounts receivable, net (in thousands):



	March 29, 2015			June 29, 2014
Billed trade receivables		$255,145			$255,374
Unbilled contract receivables	2,103			1,557
	257,248			256,931
Allowance for sales returns, discounts and other incentives	(37,071		)	(29,010		)
Allowance for bad debts	(3,930		)	(2,761		)
Accounts receivable, net		$216,247			$225,160

Inventories

The following table summarizes the components of inventories (in thousands):



	March 29, 2015		June 29, 2014
Raw material		$86,586		$95,594
Work-in-progress	100,007		92,889
Finished goods	112,767		96,297
Inventories		$299,360		$284,780

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Other Current Liabilities

The following table summarizes the components of other current liabilities (in thousands):



	March 29, 2015		June 29, 2014
Accrued taxes		$12,829		$19,835
Accrued professional fees	8,319		5,373
Accrued warranty	7,224		5,842
Accrued other	5,182		7,936
Other current liabilities		$33,554		$38,986

Accumulated Other Comprehensive Income, net of taxes

The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):



	March 29, 2015		June 29, 2014
Currency translation gain		$4,578		$8,549
Net unrealized gain on available-for-sale securities	2,730		2,856
Accumulated other comprehensive income, net of taxes		$7,308		$11,405

Non-Operating (Expense) Income, net

The following table summarizes the components of non-operating (expense) income, net (in thousands):



	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
Foreign currency gain (loss), net		$776			($368	)		($1,820	)		$109
Gain on sale of investments, net	107			15			883			25
Loss on equity method investment	(3,670		)	—			(2,991		)	—
Interest income, net	1,823			3,415			7,441			8,562
Other, net	98			90			253			677
Non-operating (expense) income, net		($866	)		$3,152			$3,766			$9,373

Reclassifications Out of Accumulated Other Comprehensive Income, net of taxes

The following table summarizes the amounts reclassified out of accumulated other comprehensive income, net of taxes (in thousands):



Accumulated Other Comprehensive Income Component	Amount Reclassified Out of Accumulated Other Comprehensive Income								Affected Line Item in the Consolidated Statements of Income
	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
Net unrealized gain on available-for-sale securities, net of taxes		$107		$15		$883		$25	Non-operating (expense) income, net
	107		15		883		25		Income before income taxes
	—		2		98		4		Income tax expense
		$107		$13		$785		$21	Net income

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Note 3 – Investments

Investments consisted primarily of municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's approximately 13% common stock ownership interest in Lextar Electronics Corporation, which was completed in December 2014. This investment is accounted for under the equity method utilizing the fair value option.

The following tables summarize short-term investments (in thousands):



	March 29, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds		$188,994		$1,951		($71	)		$190,874
Corporate bonds	153,535		2,589		(33		)	156,091
U.S. agency securities	—		—		—			—
Non-U.S. certificates of deposit	230,348		—		—			230,348
Non-U.S. government securities	—		—		—			—
Total short-term investments		$572,877		$4,540		($104	)		$577,313

	June 29, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds		$291,869		$2,323		($12	)		$294,180
Corporate bonds	200,177		2,283		(114		)	202,346
U.S. agency securities	18,994		141		—			19,135
Non-U.S. certificates of deposit	352,928		—		—			352,928
Non-U.S. government securities	7,025		28		—			7,053
Total short-term investments		$870,993		$4,775		($126	)		$875,642

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



	March 29, 2015
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Municipal bonds		$31,776		($71	)		$—		$—			$31,776		($71	)
Corporate bonds	15,373		(33		)	—		—			15,373		(33		)
Total		$47,149		($104	)		$—		$—			$47,149		($104	)
Number of securities with an unrealized loss			29					—					29

	June 29, 2014
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Municipal bonds		$7,906		($8	)		$1,520		($4	)		$9,426		($12	)
Corporate bonds	15,696		(31		)	13,049		(83		)	28,745		(114		)
Total		$23,602		($39	)		$14,569		($87	)		$38,171		($126	)
Number of securities with an unrealized loss			13					7					20

The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses from the sale of investments are included in Non-operating (expense) income, net in the Consolidated Statements of Income and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.

The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be other-than-temporary on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its securities to be impaired as of March 29, 2015 and June 29, 2014.

The contractual maturities of short-term investments as of March 29, 2015 were as follows (in thousands):



	Within One Year		After One, Within Five Years		After Five, Within Ten Years		After Ten Years		Total
Municipal bonds		$14,400		$140,878		$35,596		$—		$190,874
Corporate bonds	24,706		99,571		31,814		—		156,091
Non-U.S. certificates of deposit	230,348		—		—		—		230,348
Total short-term investments		$269,454		$240,449		$67,410		$—		$577,313

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Note 4 – Fair Value of Financial Instruments

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:


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


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


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

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. As of March 29, 2015, financial assets utilizing Level 1 inputs included money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit, non-U.S. government securities and common stock of non-U.S. corporations. Level 2 assets are valued using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of March 29, 2015. There were no transfers between Level 1 and Level 2 during the nine months ended March 29, 2015.

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



	March 29, 2015								June 29, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Non-U.S. certificates of deposit		$—		$15,000		$—		$15,000		$—		$—		$—		$—
Money market funds	16,805		—		—		16,805		40,031		—		—		40,031
Total cash equivalents	16,805		15,000		—		31,805		40,031		—		—		40,031
Short-term investments:
Municipal bonds	—		190,874		—		190,874		—		294,180		—		294,180
Corporate bonds	—		156,091		—		156,091		—		202,346		—		202,346
U.S. agency securities	—		—		—		—		—		19,135		—		19,135
Non-U.S. certificates of deposit	—		230,348		—		230,348		—		352,928		—		352,928
Non-U.S. government securities	—		—		—		—		—		7,053		—		7,053
Total short-term investments	—		577,313		—		577,313		—		875,642		—		875,642
Other long-term investments:
Common stock of non-U.S. corporations	—		76,865		—		76,865		—		—		—		—
Total other long-term investments	—		76,865		—		76,865		—		—		—		—
Total assets		$16,805		$669,178		$—		$685,983		$40,031		$875,642		$—		$915,673

Note 5 – Intangible Assets

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



	March 29, 2015							June 29, 2014
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Customer relationships		$136,920		($70,737	)		$66,183		$137,440		($66,970	)		$70,470
Developed technology	162,760		(86,902		)	75,858		162,760		(72,921		)	89,839
Non-compete agreements	10,244		(7,467		)	2,777		10,244		(5,997		)	4,247
Trade names, finite-lived	520		(520		)	—		520		(516		)	4
Patent and licensing rights	146,675		(48,944		)	97,731		134,607		(42,424		)	92,183
Total intangible assets with finite lives	457,119		(214,570		)	242,549		445,571		(188,828		)	256,743
Trade names, indefinite-lived	79,680					79,680		79,680					79,680
Total intangible assets		$536,799		($214,570	)		$322,229		$525,251		($188,828	)		$336,423

For the three and nine months ended March 29, 2015, total amortization of finite-lived intangible assets was $9.0 million and $27.0 million, respectively. For the three and nine months ended March 30, 2014, total amortization of finite-lived intangible assets was $9.5 million and $28.3 million, respectively.

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Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands):



Fiscal Year Ending
June 28, 2015 (remainder of fiscal 2015)		$8,808
June 26, 2016	35,057
June 25, 2017	33,036
June 24, 2018	31,842
June 30, 2019	19,308
Thereafter	114,498
Total future amortization expense		$242,549

Note 6 – Long-term Debt

On January 9, 2015, the Company entered into a new credit agreement (New Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo Bank) and other lenders party thereto for a $500 million secured revolving line of credit under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2020. Proceeds of the initial loans made under the New Credit Agreement were used to repay amounts outstanding under the Company's previous $150 million unsecured credit agreement with Wells Fargo Bank, entered into on August 12, 2014.

The Company classifies balances outstanding under its line of credit as Long-term debt in the Consolidated Balance Sheets. At March 29, 2015, the Company had $150 million outstanding under the New Credit Agreement and $350 million available for borrowing. For the three and nine months ended March 29, 2015, the average interest rate under these credit agreements was 0.96% and 0.92%, respectively. The average commitment fee percentage for these credit agreements was 0.09% for the three and nine months ended March 29, 2015. The Company was in compliance with all covenants in the New Credit Agreement at March 29, 2015.

Note 7 – Shareholders’ Equity

As of March 29, 2015, pursuant to an approval by the Board of Directors to increase the amount of the stock repurchase program, the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $550 million for all purchases from June 30, 2014 through the expiration of the program on June 28, 2015. During the nine months ended March 29, 2015, the Company repurchased 11.2 million shares of common stock for $390.1 million under the stock repurchase program.

Note 8 – Earnings Per Share

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



	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
Net income		$651		$28,164		$23,932		$94,342
Weighted average common shares	110,662		121,535		115,177		120,677
Basic earnings per share		$0.01		$0.23		$0.21		$0.78

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



	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
Net income		$651		$28,164		$23,932		$94,342
Weighted average common shares - basic	110,662		121,535		115,177		120,677
Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights	928		2,160		1,127		2,463
Weighted average common shares - diluted	111,590		123,695		116,304		123,140
Diluted earnings per share		$0.01		$0.23		$0.21		$0.77

Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the three and nine months ended March 29, 2015, there were 7.7 million and 6.8 million, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive. For the three and nine months ended March 30, 2014, there were 3.1 million and 2.4 million, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.

Note 9 – Stock-Based Compensation

Overview of Employee Stock-Based Compensation Plans

The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. The Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which stock options, restricted stock and restricted stock units are currently outstanding.

The Company’s stock-based awards can be either service-based or performance-based. Performance-based conditions are generally tied to future financial and/or operating performance of the Company. The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.

The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. The ESPP limits employee contributions to 15% of each employee’s compensation (as defined in the plan) and allows employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants purchase the Company’s common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.

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Stock Option Awards

The following table summarizes stock option awards outstanding as of March 29, 2015 and changes during the nine months then ended (numbers of shares in thousands):



	Number of Shares		Weighted Average Exercise Price
Outstanding at June 29, 2014	8,922			$41.85
Granted	3,377			$44.73
Exercised	(683	)		$28.71
Forfeited or expired	(602	)		$48.30
Outstanding at March 29, 2015	11,014			$43.19

Restricted Stock Awards and Units

A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of March 29, 2015, and changes during the nine months then ended is as follows (numbers of awards and units in thousands):



	Number of RSAs/RSUs		Weighted Average Grant-Date Fair Value
Nonvested at June 29, 2014	860			$46.81
Granted	457			$44.66
Vested	(352	)		$46.28
Forfeited	(52	)		$47.25
Nonvested at March 29, 2015	913			$45.91

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s stock option and ESPP awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.

For RSAs and RSUs, the grant-date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

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



	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
Income Statement Classification:
Cost of revenue, net		$3,158		$3,129		$9,511		$8,357
Research and development	4,212		3,912		12,795		11,453
Sales, general and administrative	8,694		8,970		26,954		26,451
Total stock-based compensation expense		$16,064		$16,011		$49,260		$46,261

Note 10 – Income Taxes

The variation between the Company's effective income tax rate and the U.S. statutory rate of 35% is due to a percentage of the Company's projected income for the full year being derived from international locations with lower tax rates than the U.S. and the impact of tax credits available in the current year. A change in the mix of pretax income of the Company's various tax jurisdictions can have a material impact on the Company's periodic effective tax rate.

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

As of June 29, 2014, the Company's liability for unrecognized tax benefits was $18.4 million. During the nine months ended March 29, 2015, there was a $0.2 million decrease to the amount of unrecognized tax benefits following statute expirations. As a result, the total liability for unrecognized tax benefits as of March 29, 2015 was $18.2 million. If any portion of this $18.2 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 $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of 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 prior to 2012. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2011. For foreign purposes, the Company is generally no longer subject to tax examinations for tax periods 2004 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment.

Note 11 – Commitments and Contingencies

Warranties

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



Balance at June 29, 2014		$6,822
Warranties accrued in current period	6,658
Expenditures	(5,330		)
Balance at March 29, 2015		$8,150

Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from 90 days to 10 years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The warranty reserves, which are primarily related to Lighting Products, are evaluated quarterly based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates. As of March 29, 2015, $0.9 million of the Company's product warranty liabilities were classified as long-term.

Litigation

The Company is currently a party to various legal proceedings. While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or

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overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company’s business, results of operation, financial position and overall trends. The outcomes in these matters are not reasonably estimable.

Note 12 – Reportable Segments

The Company's operating and reportable segments are:


•	LED Products


•	Lighting Products


•	Power and RF Products

Reportable Segments Description

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

Financial Results by Reportable Segment

The table below 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 29, 2015 and March 30, 2014. The Company's CODM is the Chief Executive Officer. The Company used 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 transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in the segment revenue presented in the table below. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.

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

In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment's cost of revenue. The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment. The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated.

Unallocated costs in the table below consisted primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company’s 401(k) plan. These costs were not allocated to the reportable segments’ gross profit because the Company’s CODM does not review them regularly when evaluating segment performance and allocating resources.

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Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages):



	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
Revenue:
LED Products revenue		$154,384			$201,119			$479,851			$634,164
Lighting Products revenue	224,109			176,691			677,363			498,265
Power and RF Products revenue	31,026			27,449			93,134			78,922
Total revenue		$409,519			$405,259			$1,250,348			$1,211,351

Gross Profit and Gross Margin:
LED Products gross profit		$55,358			$91,634			$182,406			$290,931
LED Products gross margin	35.9		%	45.6		%	38.0		%	45.9		%
Lighting Products gross profit	58,315			48,487			178,608			136,731
Lighting Products gross margin	26.0		%	27.4		%	26.4		%	27.4		%
Power and RF Products gross profit	16,484			15,675			51,601			44,452
Power and RF Products gross margin	53.1		%	57.1		%	55.4		%	56.3		%
Total segment gross profit	130,157			155,796			412,615			472,114
Unallocated costs	(4,749		)	(5,802		)	(14,608		)	(15,585		)
Consolidated gross profit		$125,408			$149,994			$398,007			$456,529
Consolidated gross margin	30.6		%	37.0		%	31.8		%	37.7		%

Assets by Reportable Segment

Inventories are the only assets reviewed by the Company's CODM when evaluating segment performance and allocating resources to the segments. The CODM reviews all of the Company's assets other than inventories on a consolidated basis.

Unallocated inventories in the table below were not allocated to the reportable segments because the Company’s CODM does not review them when evaluating performance and allocating resources to each segment. Unallocated inventories consisted primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company’s 401(k) plan.

Inventories for each of the Company's segments were as follows (in thousands):



	March 29, 2015		June 29, 2014
LED Products	$	128,061	$	123,249
Lighting Products	155,294		148,757
Power and RF Products	11,306		8,019
Total segment inventories	294,661		280,025
Unallocated inventories	4,699		4,755
Consolidated inventories	$	299,360	$	284,780

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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.

Executive Summary

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 fiscal year ended June 29, 2014. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview

Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and wide band gap 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.

Our LED products consist of LED components, LED chips and silicon carbide (SiC) materials. Our success in selling LED products depends upon our ability to offer innovative products and to enable our customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.

Our lighting products primarily consist of LED 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 based on wide band gap semiconductor materials such as SiC and gallium nitride (GaN). Our power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Our RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).

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 (including Hong Kong).

Cree, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 1 of this Quarterly Report.

Reportable Segments

Our three reportable segments are:


•	LED Products


•	Lighting Products


•	Power and RF Products

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For further information about our reportable segments, please refer to Note 12, "Reportable Segments," in our consolidated financial statements included in Item 1 of this Quarterly Report.

Industry Dynamics and Trends

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

•

Overall Demand for Products and Applications using LEDs. 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 the market for LED lighting has grown in recent years, adoption of LEDs for general lighting is still relatively low and faces 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. Traditional lighting companies have taken steps to try and limit access to their sales channels, including lighting agents and distributors. 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 research and development activities to support new product development and 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, power and RF technologies continue to expand the potential commercial application for our products, particularly in the general illumination, power electronics and wireless markets. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.

•

Regulatory Standards Concerning Energy Efficiency. Government agencies are involved in setting standards for energy efficient lighting, which can affect market acceptance and the availability of rebates from government agencies or third parties such as utilities. While this trend is generally positive, these regulations are affected by changing political priorities and evolving technical standards which can modify 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 is common.

Overview of the Nine Months Ended March 29, 2015

The following is a summary of our financial results for the nine months ended March 29, 2015:


•	Revenue increased to $1.3 billion for the nine months ended March 29, 2015 from $1.2 billion for the nine months ended March 30, 2014.


•	Gross profit decreased to $398 million for the nine months ended March 29, 2015 from $457 million for the nine months ended March 30, 2014. Gross margin declined to 31.8% for the nine months ended March 29, 2015 from 37.7% for the nine months ended March 30, 2014.


•	Operating income decreased to $23 million for the nine months ended March 29, 2015 from $103 million for the nine months ended March 30, 2014. Net income per diluted share decreased to $0.21 for the nine months ended March 29, 2015 from $0.77 for the nine months ended March 30, 2014.

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•	Cash, cash equivalents and short-term investments, net of line of credit borrowings, decreased to $0.6 billion at March 29, 2015 compared to $1.2 billion at June 29, 2014. Cash provided by operating activities was $94 million for the nine months ended March 29, 2015 compared to $228 million for the nine months ended March 30, 2014.


•	Inventories increased to $299 million at March 29, 2015 compared to $285 million at June 29, 2014.


•	Purchases of property and equipment were $158 million for the nine months ended March 29, 2015 compared to $120 million for the nine months ended March 30, 2014.

Business Outlook

We project that the markets for our products will remain highly competitive during fiscal 2015. We anticipate focusing on the following key areas, among others, in response to this competitive environment:

•

Build financial momentum. We target generating incremental operating margin over time through revenue growth and incremental operating leverage across the business. In fiscal 2015, we target revenue growth in Lighting Products and Power and RF Products, while LED Products revenue is targeted to be lower for the fiscal year. We have developed a new LED technology platform that is targeted to drive new design wins for our market leading high power LED products in fiscal 2016. We currently target incremental operating leverage from higher revenues in our fourth quarter of fiscal 2015 and in fiscal 2016.

•

Drive innovation to lower upfront customer cost and further improve payback. The LED lighting market has been enabled with tremendous innovation over the last decade with technology improvements in LEDs and LED lighting systems. We believe we can further accelerate LED lighting adoption by continuing to innovate in LEDs and LED lighting systems to lower the upfront cost and make the payback even more compelling. The approach also applies to our Power and RF product lines, where today our technology has tremendous technical benefits but a higher upfront cost. We are focused on developing the next generation devices that improve payback and expand the market for these products.


•	Drive LED lighting growth and build the Cree brand. We target growth in both the LED fixture and LED bulb product lines, driven by the new products we released over the last year and continued innovation in the year ahead. We plan to continue to drive awareness of the Cree brand and LED lighting in both the consumer and commercial markets.

•

Expand our work with third party manufacturers to enable growth in LEDs and LED Lighting. We work with third party manufacturers for the production of LEDs and LED lighting products. Our internal team is focused primarily on the high-performance, high-power LEDs that differentiate Cree in the market. We work with external manufacturers on mid-power LEDs. As demand increases for LED lighting and LEDs, we plan to expand production at both our manufacturing partners and our own factories over time to support our targeted growth, optimize our factory utilization and focus our capital spending on higher value products.

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Results of Operations

The following table sets forth certain consolidated statement of income data for the periods indicated (in thousands, except per share amounts and percentages):



	Three Months Ended									Nine Months Ended
	March 29, 2015					March 30, 2014				March 29, 2015				March 30, 2014
	Dollars			% of Revenue		Dollars		% of Revenue		Dollars		% of Revenue		Dollars		% of Revenue
Revenue, net		$409,519		100	%		$405,259	100	%		$1,250,348	100	%		$1,211,351	100	%
Cost of revenue, net	284,111			69	%	255,265		63	%	852,341		68	%	754,822		62	%
Gross profit	125,408			31	%	149,994		37	%	398,007		32	%	456,529		38	%
Research and development	43,823			11	%	46,626		12	%	137,537		11	%	132,805		11	%
Sales, general and administrative	71,860			18	%	65,368		16	%	213,927		17	%	197,589		16	%
Amortization or impairment of acquisition-related intangibles	6,749			2	%	7,257		2	%	19,743		2	%	21,800		2	%
Loss on disposal or impairment of long-lived assets	1,459			—	%	364		—	%	3,641		—	%	1,781		—	%
Operating income	1,517			—	%	30,379		7	%	23,159		2	%	102,554		8	%
Non-operating (expense) income, net	(866		)	—	%	3,152		1	%	3,766		—	%	9,373		1	%
Income before income taxes	651			—	%	33,531		8	%	26,925		2	%	111,927		9	%
Income tax expense	—			—	%	5,367		1	%	2,993		—	%	17,585		1	%
Net income		$651		—	%		$28,164	7	%		$23,932	2	%		$94,342	8	%
Basic earnings per share	$0.01						$0.23			$0.21					$0.78
Diluted earnings per share	$0.01						$0.23			$0.21					$0.77

Revenue

Revenue was comprised of the following (in thousands, except percentages):



	Three Months Ended											Nine Months Ended
	March 29, 2015			March 30, 2014			Change					March 29, 2015			March 30, 2014			Change
LED Products revenue		$154,384			$201,119			($46,735	)	(23	)%		$479,851			$634,164			($154,313	)	(24	)%
Percent of revenue	38		%	49		%						38		%	52		%
Lighting Products revenue	224,109			176,691			47,418			27	%	677,363			498,265			179,098			36	%
Percent of revenue	55		%	44		%						54		%	41		%
Power and RF Products revenue	31,026			27,449			3,577			13	%	93,134			78,922			14,212			18	%
Percent of revenue	7		%	7		%						8		%	7		%
Total revenue		$409,519			$405,259			$4,260		1	%		$1,250,348			$1,211,351			$38,997		3	%

Our consolidated revenue increased to $409.5 million for the three months ended March 29, 2015 from $405.3 million for the three months ended March 30, 2014. This increase was driven by the 27% increase in Lighting Products and the 13% increase in Power and RF Products revenue that was mostly offset by the 23% decrease in LED Products revenue. For the nine months ended March 29, 2015, our consolidated revenue increased 3% to $1.3 billion from $1.2 billion for the nine months ended March 30, 2014. This increase was driven by the 36% increase in Lighting Products revenue and the 18% increase in Power and RF Products revenue, partially offset by the 24% decrease in LED Products revenue.

LED Products Segment Revenue

LED Products revenue represented 38% and 49% of our total revenue for the three months ended March 29, 2015 and March 30, 2014, respectively.

LED Products revenue decreased 23% to $154.4 million for the three months ended March 29, 2015 from $201.1 million for the

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three months ended March 30, 2014 and 24% to $479.9 million for the nine months ended March 29, 2015 from $634.2 million for the nine months ended March 30, 2014. These decreases were the result of an overall decrease in the number of units sold and a reduction in average selling prices (ASP), due to increased global competition for LED products which impacted both our LED chip and LED component product lines. The overall number of units sold decreased 16% and 19%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014. Additionally, the reduction in ASP was 9% and 7%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014.

Lighting Products Segment Revenue

Lighting Products revenue represented approximately 55% and 44% of our total revenue for the three months ended March 29, 2015 and March 30, 2014, respectively.

Lighting Products revenue increased 27% to $224.1 million for the three months ended March 29, 2015 from $176.7 million for the three months ended March 30, 2014. Lighting Products revenue increased 36% to $677.4 million for the nine months ended March 29, 2015 from $498.3 million for the nine months ended March 30, 2014. These increases were the result of an overall increase in the number of units sold, partially offset by a reduction in ASP. The overall number of units sold increased 70% and 57%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014. The increase in the units sold was primarily driven by LED bulb products due to increased market adoption of LED lighting products. The reduction in ASP was 25% and 13%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014, primarily due to a higher mix of lower priced LED bulb products.

Power and RF Products Segment Revenue

Power and RF Products revenue represented approximately 7% and 7% of our total revenue for the three months ended March 29, 2015 and March 30, 2014, respectively.

Power and RF Products revenue increased 13% to $31.0 million for the three months ended March 29, 2015 from $27.4 million for the three months ended March 30, 2014 and 18% to $93.1 million for the nine months ended March 29, 2015 from $78.9 million for the nine months ended March 30, 2014. These increases were primarily the result of increased market adoption of wide band gap power and RF products that resulted in an overall increase in the number of units sold due to increased demand for SiC and GaN based devices. The number of units sold increased 17% and 26%, respectively, for the three and nine months ended March 29, 2015 compared to the three and nine months ended March 30, 2014.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows (in thousands, except percentages):



	Three Months Ended											Nine Months Ended
	March 29, 2015			March 30, 2014			Change					March 29, 2015			March 30, 2014			Change
LED Products gross profit		$55,358			$91,634			($36,276	)	(40	)%		$182,406			$290,931			($108,525	)	(37	)%
LED Products gross margin	35.9		%	45.6		%						38.0		%	45.9		%
Lighting Products gross profit	58,315			48,487			9,828			20	%	178,608			136,731			41,877			31	%
Lighting Products gross margin	26.0		%	27.4		%						26.4		%	27.4		%
Power and RF Products gross profit	16,484			15,675			809			5	%	51,601			44,452			7,149			16	%
Power and RF Products gross margin	53.1		%	57.1		%						55.4		%	56.3		%
Unallocated costs	(4,749		)	(5,802		)	1,053			(18	)%	(14,608		)	(15,585		)	977			(6	)%
Consolidated gross profit		$125,408			$149,994			($24,586	)	(16	)%		$398,007			$456,529			($58,522	)	(13	)%
Consolidated gross margin	30.6		%	37.0		%						31.8		%	37.7		%

Our consolidated gross profit decreased 16% to $125.4 million for the three months ended March 29, 2015 from $150.0 million for the three months ended March 30, 2014. Our consolidated gross margin decreased to 30.6% for the three months ended March 29, 2015 from 37.0% for the three months ended March 30, 2014. Our consolidated gross profit decreased 13% to $398.0 million for the nine months ended March 29, 2015 from $456.5 million for the nine months ended March 30, 2014. Our consolidated gross margin decreased to 31.8% for the nine months ended March 29, 2015 from 37.7% for the nine months ended March 30, 2014.

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LED Products Segment Gross Profit and Gross Margin

LED Products gross profit decreased 40% to $55.4 million for the three months ended March 29, 2015 from $91.6 million for the three months ended March 30, 2014 and decreased 37% to $182.4 million for the nine months ended March 29, 2015 from $290.9 million for the nine months ended March 30, 2014. LED Products gross margin decreased to 35.9% for the three months ended March 29, 2015 from 45.6% for the three months ended March 30, 2014 and decreased to 38.0% for the nine months ended March 29, 2015 from 45.9% for the nine months ended March 30, 2014