10-Q
Table of Contents

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 September 27, 2015
or
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21154
CREE, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
  
56-1572719
(State or other jurisdiction of incorporation or
organization)
  
(I.R.S. Employer Identification No.)
 
 
 
4600 Silicon Drive
Durham, North Carolina
  
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 October 14, 2015, was 103,045,259.

Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended September 27, 2015
INDEX
 
Description
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
CREE, INC.
(UNAUDITED)
CONSOLIDATED BALANCE SHEETS
 
September 27,
2015
 
June 28,
2015
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$83,369

 

$139,710

Short-term investments
548,713

 
573,481

Total cash, cash equivalents and short-term investments
632,082

 
713,191

Accounts receivable, net
193,781

 
186,157

Income tax receivable
9,481

 
—

Inventories
289,089

 
280,576

Deferred income taxes
38,572

 
39,190

Prepaid expenses
26,284

 
29,932

Other current assets
55,383

 
54,851

Assets held for sale
6,871

 
4,353

Total current assets
1,251,543

 
1,308,250

Property and equipment, net
635,763

 
635,072

Goodwill
618,842

 
616,345

Intangible assets, net
330,777

 
317,154

Other long-term investments
34,611

 
57,595

Other assets
19,596

 
19,984

Total assets

$2,891,132

 

$2,954,400

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable, trade

$158,140

 

$163,128

Accrued salaries and wages
48,014

 
45,415

Income taxes payable
—

 
2,035

Other current liabilities
45,664

 
44,208

Total current liabilities
251,818

 
254,786

Long-term liabilities:

 

Long-term debt
207,000

 
200,000

Deferred income taxes
21,975

 
12,174

Other long-term liabilities
21,455

 
21,084

Total long-term liabilities
250,430

 
233,258

Commitments and contingencies (Note 12)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at September 27, 2015 and June 28, 2015; none issued and outstanding
—

 
—

Common stock, par value $0.00125; 200,000 shares authorized at September 27, 2015 and June 28, 2015; 103,044 and 105,507 shares issued and outstanding at September 27, 2015 and June 28, 2015, respectively
128

 
131

Additional paid-in-capital
2,300,875

 
2,285,554

Accumulated other comprehensive income, net of taxes
6,231

 
5,798

Retained earnings
81,650

 
174,873

Total shareholders’ equity
2,388,884

 
2,466,356

Total liabilities and shareholders’ equity

$2,891,132

 

$2,954,400

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

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Table of Contents

CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
(In thousands, except per share amounts)
Revenue, net

$425,489

 

$427,672

Cost of revenue, net
293,741

 
291,852

Gross profit
131,748

 
135,820

Operating expenses:
 
 
 
Research and development
43,540

 
46,725

Sales, general and administrative
75,263

 
69,692

Amortization or impairment of acquisition-related intangibles
7,062

 
6,499

Loss on disposal or impairment of long-lived assets
14,573

 
1,447

Total operating expenses
140,438

 
124,363

Operating (loss) income
(8,690
)
 
11,457

Non-operating (loss) income, net
(22,806
)
 
2,904

(Loss) income before income taxes
(31,496
)
 
14,361

Income tax (benefit) expense
(7,873
)
 
3,231

Net (loss) income

($23,623
)
 

$11,130

(Loss) earnings per share:
 
 
 
Basic

($0.23
)
 

$0.09

Diluted

($0.23
)
 

$0.09

Weighted average shares used in per share calculation:
 
 
 
Basic
103,473

 
119,605

Diluted
103,473

 
121,143

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

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Table of Contents

CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
(In thousands)
Net (loss) income

($23,623
)
 

$11,130

Other comprehensive (loss) income:
 
 
 
Currency translation loss
(359
)
 
(1,167
)
Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($490) and $339, respectively
792

 
(511
)
Other comprehensive income (loss)
433

 
(1,678
)
Comprehensive (loss) income

($23,190
)
 

$9,452

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


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Table of Contents

CREE, INC.
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net (loss) income

($23,623
)
 

$11,130

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,176

 
43,335

Stock-based compensation
15,074

 
16,759

Excess tax benefit from stock-based payment arrangements
(3
)
 
(1,448
)
Loss on disposal or impairment of long-lived assets
14,573

 
1,447

Amortization of premium/discount on investments
1,361

 
2,412

Loss on equity method investment
19,948

 
—

Foreign exchange loss on equity method investment
3,036

 
—

Deferred income taxes
1,040

 
—

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(6,406
)
 
(12,018
)
Inventories
(8,428
)
 
(25,674
)
Prepaid expenses and other assets
(1,502
)
 
(3,176
)
Accounts payable, trade
(472
)
 
(2,164
)
Accrued salaries and wages and other liabilities
(8,940
)
 
(17,319
)
Net cash provided by operating activities
46,834

 
13,284

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(49,883
)
 
(63,446
)
Purchases of patent and licensing rights
(4,314
)
 
(4,806
)
Proceeds from sale of property and equipment
3

 
43

Purchases of short-term investments
(121,628
)
 
(171,067
)
Proceeds from maturities of short-term investments
137,121

 
126,958

Proceeds from sale of short-term investments
8,643

 
4,667

Purchase of acquired business, net of cash acquired
(12,513
)
 
—

Net cash used in investing activities
(42,571
)
 
(107,651
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt borrowings
195,000

 
60,000

Payments on long-term debt borrowings
(188,000
)
 
(15,000
)
Net proceeds from issuance of common stock
2,801

 
12,109

Excess tax benefit from stock-based payment arrangements
3

 
1,448

Repurchases of common stock
(69,604
)
 
(54,325
)
Net cash (used in) provided by financing activities
(59,800
)
 
4,232

Effects of foreign exchange changes on cash and cash equivalents
(804
)
 
(389
)
Net decrease in cash and cash equivalents
(56,341
)
 
(90,524
)
Cash and cash equivalents:
 
 
 
Beginning of period
139,710

 
286,824

End of period

$83,369

 

$196,300

Supplemental disclosure of cash flow information:
 
 
 
Significant non-cash transactions:
 
 
 
Accrued property and equipment

$17,672

 

$17,400

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

6
Table of Contents

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 bandgap semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
The Company's lighting products primarily consist of LED lighting systems and bulbs. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
The Company's LED products consist of LED 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.
In addition, the Company develops, manufactures and sells power and RF devices based on wide bandgap semiconductor materials such as SiC and gallium nitride (GaN). As previously announced, the Company has filed a confidential registration statement for an initial public offering to take this business public under the name Wolfspeed, Inc. 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 products and 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:
•
Lighting Products
•
LED Products
•
Power and RF Products

For financial results by reportable segment, please refer to Note 13, "Reportable Segments."
Basis of Presentation
The consolidated balance sheet at September 27, 2015, the consolidated statements of (loss) income for the three months ended September 27, 2015 and September 28, 2014, the consolidated statements of comprehensive (loss) income for the three months ended September 27, 2015 and September 28, 2014, and the consolidated statements of cash flows for the three months ended September 27, 2015 and September 28, 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 present the consolidated financial position, results of operations and cash flows at September 27, 2015, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 28, 2015 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 28, 2015 (fiscal 2015). The results of operations for the three months

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ended September 27, 2015 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 26, 2016 (fiscal 2016).
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 2015 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2016 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09: Revenue from Contracts with Customers (Topic 606). The 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 30, 2019, using one of two retrospective application methods. The Company is currently analyzing the impact of this new accounting guidance.
Note 2 – Acquisition
On July 8, 2015, the Company closed on the acquisition of Arkansas Power Electronics International, Inc. (APEI), a global leader in power modules and power electronics applications, pursuant to a merger agreement with APEI and certain shareholders of APEI, whereby the Company acquired all of the outstanding share capital of APEI in exchange for a base purchase price of $13.8 million, subject to certain adjustments.  In addition, if certain goals are achieved over the next two years, additional cash payments totaling up to $4.6 million may be made to the former APEI shareholders.  In connection with this acquisition, APEI became a wholly owned subsidiary of the Company, renamed Cree Fayetteville, Inc. (Cree Fayetteville).  Cree Fayetteville will not be considered a significant subsidiary of the Company and its results from operations will be reported as part of the Company's Power and RF Products segment.

The total estimated purchase price for this acquisition is as follows (in thousands):
Cash consideration paid to shareholders

$13,797

Post-closing adjustments
181

Contingent consideration
4,625

Total purchase price

$18,603


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The purchase price for this acquisition has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):
Tangible assets:
 
Cash and cash equivalents

$1,284

Accounts receivable
1,006

Inventories
143

Property and equipment
1,023

Other assets
427

Total tangible assets
3,883

Intangible assets:
 
Patents
40

Customer relationships
4,500

Developed technology
11,403

In-process research and development
7,565

Non-compete agreements
231

Goodwill
2,497

Total intangible assets
26,236

Liabilities assumed:
 
Accounts payable
55

Accrued expenses and liabilities
2,056

Other long-term liabilities
9,405

Total liabilities assumed
11,516

Net assets acquired

$18,603

The identifiable intangible assets acquired as a result of the acquisition will be amortized over their respective estimated useful lives as follows (in thousands, except for years):

 
Asset Amount
 
Estimated Life in Years
Patents

$40

 
20
Customer relationships
4,500

 
4
Developed technology
11,403

 
10
In-process research and development1
7,565

 
-
Non-compete agreements
231

 
3
Total identifiable intangible assets

$23,739

 
 
(1) In-process research and development (IPR&D) is initially classified as indefinite-lived assets and tested for impairment at least annually or when indications of potential impairment exist. When an IPR&D project is complete, it is reclassified as an amortizable intangible asset and amortized over its estimated useful life.
Goodwill largely consists of expansion of product offerings of power modules and power electronics applications, manufacturing and other synergies of the combined companies, and the value of the assembled workforce.
The assets, liabilities, and operating results of APEI have been included in the Company's consolidated financial statements from the date of acquisition and are not significant to the Company as a whole.

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Note 3 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
 
September 27, 2015
 
June 28, 2015
Billed trade receivables

$252,191

 

$246,969

Unbilled contract receivables
1,662

 
2,223


253,853

 
249,192

Allowance for sales returns, discounts and other incentives
(54,430
)
 
(58,094
)
Allowance for bad debts
(5,642
)
 
(4,941
)
Accounts receivable, net

$193,781

 

$186,157

Inventories
The following table summarizes the components of inventories (in thousands):
 
September 27, 2015
 
June 28, 2015
Raw material

$80,759

 

$86,331

Work-in-progress
98,618

 
93,424

Finished goods
109,712

 
100,821

Inventories

$289,089

 

$280,576

Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
 
September 27, 2015
 
June 28, 2015
Accrued taxes

$15,002

 

$13,935

Accrued professional fees
10,529

 
10,180

Accrued warranty
12,669

 
13,006

Accrued other
7,464

 
7,087

Other current liabilities

$45,664

 

$44,208

Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
 
September 27, 2015
 
June 28, 2015
Currency translation gain

$4,627

 

$4,986

Net unrealized gain on available-for-sale securities
1,604

 
812

Accumulated other comprehensive income, net of taxes

$6,231

 

$5,798


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Non-Operating (Loss) Income, net
The following table summarizes the components of non-operating (loss) income, net (in thousands):
 
Three Months Ended
 
September 27, 2015
 
September 28, 2014
Foreign currency loss, net

($4,294
)
 

($231
)
Gain on sale of investments, net
2

 
2

Loss on equity method investment
(19,948
)
 
—

Interest income, net
1,297

 
3,032

Other, net
137

 
101

Non-operating (loss) income, net

($22,806
)
 

$2,904

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 (Loss) Income
 
 
Three Months Ended
 
 
 
 
September 27, 2015
 
September 28, 2014
 
 
Net unrealized gain on available-for-sale securities, net of taxes
 

$2

 

$2

 
Non-operating (loss) income, net
 
 
2

 
2

 
(Loss) income before income taxes
 
 
1

 
—

 
Income tax (benefit) expense
 
 

$1

 

$2

 
Net (loss) income
Note 4 – Investments
Investments consist of municipal bonds, corporate bonds and non-U.S. certificates of deposit. All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's ownership interest in Lextar Electronics Corporation.

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The following tables summarize short-term investments (in thousands):
 
 
September 27, 2015
 
 
Amortized    
Cost
 
Gross Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Estimated Fair 
Value
Municipal bonds
 

$192,470

 

$1,650

 

($91
)
 

$194,029

Corporate bonds
 
158,116

 
1,174

 
(130
)
 
159,160

Non-U.S. certificates of deposit
 
195,524

 
—

 
—

 
195,524

Total short-term investments
 

$546,110

 

$2,824

 

($221
)
 

$548,713

 
 
 
 
 
 
 
 
 
 
 
June 28, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
Municipal bonds
 

$194,123

 

$988

 

($341
)
 

$194,770

Corporate bonds
 
152,831

 
832

 
(158
)
 
153,505

Non-U.S. certificates of deposit
 
225,206

 
—

 
—

 
225,206

Total short-term investments
 

$572,160

 

$1,820

 

($499
)
 

$573,481

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):
 
 
September 27, 2015
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$25,072

 

($91
)
 

$—

 

$—

 

$25,072

 

($91
)
Corporate bonds
 
47,248

 
(117
)
 
1,795

 
(13
)
 
49,043

 
(130
)
Total
 

$72,320

 

($208
)
 

$1,795

 

($13
)
 

$74,115

 

($221
)
Number of securities with an unrealized loss
 
 
 
36

 
 
 
1

 
 
 
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 28, 2015
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$53,204

 

($341
)
 

$—

 

$—

 

$53,204

 

($341
)
Corporate bonds
 
46,636

 
(143
)
 
1,812

 
(15
)
 
48,448

 
(158
)
Total
 

$99,840

 

($484
)
 

$1,812

 

($15
)
 

$101,652

 

($499
)
Number of securities with an unrealized loss
 
 
 
54

 
 
 
1

 
 
 
55

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 (loss) income, net in the Consolidated Statements of (Loss) 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 September 27, 2015 and June 28,

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2015.
The contractual maturities of short-term investments as of September 27, 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

$12,772

 

$146,232

 

$35,025

 

$—

 

$194,029

Corporate bonds
33,732

 
92,471

 
32,957

 
—

 
159,160

Non-U.S. certificates of deposit
195,524

 
—

 
—

 
—

 
195,524

Total short-term investments

$242,028

 

$238,703

 

$67,982

 

$—

 

$548,713

Note 5 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is 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 September 27, 2015, financial assets utilizing Level 1 inputs included money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, non-U.S. certificates of deposit, and common stock of non-U.S. corporations. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of September 27, 2015. There were no transfers between Level 1 and Level 2 during the three months ended September 27, 2015.

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The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
 
September 27, 2015
 
June 28, 2015
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. certificates of deposit

$—

 

$158

 

$—

 

$158

 

$—

 

$157

 

$—

 

$157

Money market funds
8,416

 
—

 
—

 
8,416

 
16,457

 
—

 
—

 
16,457

Total cash equivalents
8,416

 
158

 
—

 
8,574

 
16,457

 
157

 
—

 
16,614

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
—

 
194,029

 
—

 
194,029

 
—

 
194,770

 
—

 
194,770

Corporate bonds
—

 
159,160

 
—

 
159,160

 
—

 
153,505

 
—

 
153,505

Non-U.S. certificates of deposit
—

 
195,524

 
—

 
195,524

 
—

 
225,206

 
—

 
225,206

Total short-term investments
—

 
548,713

 
—

 
548,713

 
—

 
573,481

 
—

 
573,481

Other long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock of non-U.S. corporations
—

 
34,611

 
—

 
34,611

 
—

 
57,595

 
—

 
57,595

Total other long-term investments
—

 
34,611

 
—

 
34,611

 
—

 
57,595

 
—

 
57,595

Total assets

$8,416

 

$583,482

 

$—

 

$591,898

 

$16,457

 

$631,233

 

$—

 

$647,690

Note 6 – Intangible Assets
Intangible Assets, net
The following table presents the components of intangible assets, net (in thousands):
 
September 27, 2015
 
June 28, 2015
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships

$141,420

 

($73,670
)
 

$67,750

 

$136,920

 

($72,063
)
 

$64,857

Developed technology
174,163

 
(96,508
)
 
77,655

 
162,760

 
(91,562
)
 
71,198

Non-compete agreements
10,475

 
(8,467
)
 
2,008

 
10,244

 
(7,958
)
 
2,286

Trade names, finite-lived
520

 
(520
)
 
—

 
520

 
(520
)
 
—

Patent and licensing rights
148,217

 
(52,098
)
 
96,119

 
150,038

 
(50,905
)
 
99,133

Total intangible assets with finite lives
474,795

 
(231,263
)
 
243,532

 
460,482

 
(223,008
)
 
237,474

In-process research and development
7,565

 
 
 
7,565

 
—

 
 
 
—

Trade names, indefinite-lived
79,680

 
 
 
79,680

 
79,680

 
 
 
79,680

Total intangible assets

$562,040

 

($231,263
)
 

$330,777

 

$540,162

 

($223,008
)
 

$317,154

For the three months ended September 27, 2015, total amortization of finite-lived intangible assets was $9.6 million. For the three months ended September 28, 2014, total amortization of finite-lived intangible assets was $8.9 million.

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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 26, 2016 (remainder of fiscal 2016)

$28,201

June 25, 2017
35,613

June 24, 2018
34,401

June 30, 2019
21,738

June 28, 2020
16,645

Thereafter
106,934

Total future amortization expense

$243,532

Goodwill
Goodwill assigned to the Power and RF Products reporting unit increased by $2.5 million during the three months ended September 27, 2015 due to the acquisition of APEI, as discussed in Note 2, "Acquisition."
Note 7 – Long-term Debt
As of September 27, 2015, the Company had 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.
The Company classifies balances outstanding under its line of credit as long-term debt in the consolidated balance sheets. At September 27, 2015, the Company had $207 million outstanding under the line of credit and $293 million available for borrowing. For the three months ended September 27, 2015, the average interest rate was 0.99%. The average commitment fee percentage was 0.09% for the three months ended September 27, 2015. The Company was in compliance with all covenants in the line of credit at September 27, 2015.
Note 8 – Shareholders’ Equity
As of September 27, 2015, pursuant to an approval by the Board of Directors, the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $500 million for all purchases from June 29, 2015 through the expiration of the program on June 26, 2016. During the three months ended September 27, 2015, the Company repurchased 2.7 million shares of common stock for $69.6 million under the stock repurchase program.
Note 9 – (Loss) Earnings Per Share
The following table presents the computation of basic (loss) earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
Net (loss) income

($23,623
)
 

$11,130

Weighted average common shares
103,473

 
119,605

Basic (loss) earnings per share

($0.23
)
 

$0.09


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The following computation reconciles the differences between the basic and diluted (loss) earnings per share presentations (in thousands, except per share amounts): 
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
Net (loss) income

($23,623
)
 

$11,130

Weighted average common shares - basic
103,473

 
119,605

Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights
—

 
1,538

Weighted average common shares - diluted
103,473

 
121,143

Diluted (loss) earnings per share

($0.23
)
 

$0.09

Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the three months ended September 27, 2015, there were 11.6 million of potential common shares not included in the calculation of diluted (loss) earnings per share because their effect was anti-dilutive. For the three months ended September 28, 2014, there were 5.2 million of potential common shares not included in the calculation of diluted (loss) earnings per share because their effect was anti-dilutive.
Note 10 – 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 September 27, 2015 and changes during the three months then ended (numbers of shares in thousands): 
 
Number of Shares
 
Weighted Average Exercise Price
Outstanding at June 28, 2015
10,714

 

$43.10

Granted
1,778

 

$26.01

Exercised
(120
)
 

$22.86

Forfeited or expired
(347
)
 

$45.95

Outstanding at September 27, 2015
12,025

 

$40.70

Restricted Stock Awards and Units
A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of September 27, 2015, and changes during the three 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 28, 2015
926

 

$45.47

Granted
1,119

 

$26.06

Vested
(334
)
 

$45.03

Forfeited
(100
)
 

$44.99

Nonvested at September 27, 2015
1,611

 

$32.11

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
 
September 27,
2015
 
September 28,
2014
Income Statement Classification:
 
 
 
Cost of revenue, net

$3,029

 

$2,905

Research and development
3,532

 
4,471

Sales, general and administrative
8,513

 
9,383

Total stock-based compensation expense

$15,074

 

$16,759

Note 11 – 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 28, 2015, the Company's liability for unrecognized tax benefits was $17.8 million. During the three months ended September 27, 2015, the Company recognized a $0.6 million increase to the liability for unrecognized tax benefits due to uncertainty regarding intercompany transactions recently challenged by the Italian tax authority. As a result, the total liability for unrecognized tax benefits as of September 27, 2015 was $18.4 million. If any portion of this $18.4 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 $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 2005 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. The Company is currently under audit by the Italian Revenue Agency for the fiscal year ended June 30, 2013.
On September 18, 2015, North Carolina enacted a single sales apportionment factor that will be phased in over three years starting in fiscal 2017. The use of a single sales apportionment factor is expected to reduce the Company’s future taxable income in North Carolina. As a result, the Company concluded that it is likely that $2.3 million of its total $3.9 million of North Carolina income tax credits will expire unused. The Company recorded a $1.5 million valuation allowance against the related deferred tax asset, representing the $2.3 million expiring tax credits net of federal benefit, resulting in an additional $1.5 million of income tax expense during the three months ended September 27, 2015.

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Note 12 – Commitments and Contingencies
Warranties
The following table summarizes the changes in the Company's product warranty liabilities (in thousands):
Balance at June 28, 2015

$13,968

Warranties accrued in current period
2,672

Recall costs accrued in current period
583

Expenditures
(3,604
)
Balance at September 27, 2015

$13,619

Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from 90 days to 10 years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The Company accrues estimated costs related to product recalls based on a formal campaign soliciting repair or return of that product when they are deemed probable and reasonably estimable. The warranty reserves, which are primarily related to Lighting Products, are evaluated quarterly based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates. As of September 27, 2015, $0.9 million of the Company's product warranty liabilities were classified as long-term.
In June 2015, the Company issued a voluntary recall of its linear LED T8 replacement lamps due to the hazard of overheating and melting. The Company expects the majority of the costs of the recall to be recoverable from insurance proceeds resulting in an immaterial impact to the Company’s financial results.
Litigation
The Company is currently a party to various legal proceedings.  While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur.  An unfavorable ruling could include money damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways.  Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company’s business, results of operation, financial position and overall trends.  The outcomes in these matters are not reasonably estimable.
Note 13 – Reportable Segments

The Company's operating and reportable segments are:
•
Lighting Products
•
LED Products
•
Power and RF Products
Reportable Segments Description
The Company's Lighting Products segment primarily consists of LED lighting systems and bulbs. The Company's LED Products segment includes LED chips, LED components and SiC materials. 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 months ended September 27, 2015 and September 28, 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

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in the Consolidated Statements of (Loss) 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, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company’s 401(k) plan. These costs were not allocated to the reportable segments’ gross profit because the Company’s CODM does not review them regularly when evaluating segment performance and allocating resources.
Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages):
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
Revenue:
 
 
 
Lighting Products revenue

$248,031

 

$223,086

LED Products revenue
148,208

 
173,590

Power and RF Products revenue
29,250

 
30,996

Total revenue

$425,489

 

$427,672

 
 
 
 
Gross Profit and Gross Margin:
 
 
 
Lighting Products gross profit

$69,081

 

$55,592

Lighting Products gross margin
27.9
%
 
24.9
%
LED Products gross profit
52,659

 
67,624

LED Products gross margin
35.5
%
 
39.0
%
Power and RF Products gross profit
14,323

 
17,857

Power and RF Products gross margin
49.0
%
 
57.6
%
Total segment gross profit
136,063

 
141,073

Unallocated costs
(4,315
)
 
(5,253
)
Consolidated gross profit

$131,748

 

$135,820

Consolidated gross margin
31.0
%
 
31.8
%

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.

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Inventories for each of the Company's segments were as follows (in thousands):
 
September 27,
2015
 
June 28,
2015
Lighting Products

$157,715

 

$150,755

LED Products
113,537

 
114,203

Power and RF Products
12,693

 
11,536

Total segment inventories
283,945

 
276,494

Unallocated inventories
5,144

 
4,082

Consolidated inventories

$289,089

 

$280,576


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Note 14 - Costs Associated with LED Business Restructuring
In June 2015, the Company’s Board of Directors approved a plan to restructure the LED Products business. The restructuring is expected to reduce excess capacity and overhead in order to improve the cost structure moving forward. The primary components of the restructuring include the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions.
The following table summarizes the actual and planned charges incurred through September 27, 2015 (in thousands):
Capacity and Overhead Cost Reductions
Estimated charges
 
Amounts incurred during the three months ended September 27, 2015
 
Cumulative amounts incurred through September 27, 2015
 
Affected Line Item in the Consolidated Statements of (Loss) Income
Loss on disposal or impairment of long-lived assets

$57,720

 

$13,878

 

$56,010

 
Loss on disposal or impairment of long-lived assets
Severance expense
2,319

 
300

 
2,319

 
Sales, general and administrative expenses
Lease termination and facility consolidation costs
4,559

 
1,735

 
3,564

 
Sales, general and administrative expenses
Increase in channel inventory reserves
26,479

 
—

 
26,479

 
Revenue, net
Increase in inventory reserves
11,091

 
—

 
11,091

 
Cost of revenue, net
  Total restructuring charges

$102,168

 

$15,913

 

$99,463

 
 
The Company anticipates that the remaining restructuring charges will be recognized in the second quarter of fiscal 2016.
The following table presents the changes in the severance liability under the LED Products restructuring plan (in thousands):
Severance liability at June 30, 2014

$—

Severance expense
2,019

Severance payments
—

Severance liability at June 28, 2015

$2,019

Severance expense
300

Severance payments
(1,950
)
Severance liability at September 27, 2015

$369

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.


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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 28, 2015. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.
Overview
Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and wide bandgap semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
Our lighting products primarily consist of LED lighting systems and bulbs. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.
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.
In addition, we develop, manufacture and sell power and RF devices based on wide bandgap semiconductor materials such as SiC and gallium nitride (GaN). As previously announced, we have filed a confidential registration statement for an initial public offering to take this business public under the name Wolfspeed, Inc (Wolfspeed). 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 products and 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:
•
Lighting Products
•
LED Products
•
Power and RF Products
For further information about our reportable segments, please refer to Note 13, "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 in the relatively early stages. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain, and evolving competitive 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

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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 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 Three Months Ended September 27, 2015
The following is a summary of our financial results for the three months ended September 27, 2015:

•
Revenue decreased to $425 million for the three months ended September 27, 2015 from $428 million for the three months ended September 28, 2014.
•
Gross profit decreased to $132 million for the three months ended September 27, 2015 from $136 million for the three months ended September 28, 2014. Gross margin declined to 31% for the three months ended September 27, 2015 from 32% for the three months ended September 28, 2014.
•
Operating loss was $9 million for the three months ended September 27, 2015 compared to operating income of $11 million for the three months ended September 28, 2014. Net loss per diluted share was $0.23 for the three months ended September 27, 2015 compared to net income per diluted share of $0.09 for the three months ended September 28, 2014.
•
Cash, cash equivalents and short-term investments decreased to $0.6 billion at September 27, 2015 compared to $0.7 billion at June 28, 2015. Cash provided by operating activities was $47 million for the three months ended September 27, 2015 compared to $13 million for the three months ended September 28, 2014.
•
Inventories increased to $289 million at September 27, 2015 compared to $281 million at June 28, 2015.
•
Purchases of property and equipment were $50 million for the three months ended September 27, 2015 compared to $63 million for the three months ended September 28, 2014.
Business Outlook
We project that the markets for our products will expand, but remain highly competitive during fiscal 2016. We anticipate focusing on the following key areas, among others, to position the Company to take advantage of the growing market opportunities while responding to this competitive environment:

•
Build financial momentum. We target overall company revenue growth of approximately 10% in fiscal 2016 with operating margins increasing for the year. The key components are:
•
grow our commercial Lighting business and improve product margins;
•
stabilize our LED business;

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•
expand our Power and RF business; and
•
manage our operating expenses to improve operating leverage.
•
Innovate to continue to lead in each of our business segments. We have established ourselves as the innovation leader in Lighting, LEDs and wide bandgap Power and RF. We are focused on continuing to develop new products that deliver fundamentally more value to drive new customer demand and build our brand.

•
Promote future growth in Power and RF. Our Wolfspeed business filed a confidential registration statement for an initial public offering intended in fiscal 2016 to raise capital to support the business's targeted future growth. We believe that such a transaction would allow Cree shareholders to better realize the full value of both businesses.
Results of Operations
The following table sets forth certain consolidated statement of (loss) income data for the periods indicated (in thousands, except per share amounts and percentages):
 
 
Three Months Ended
 
September 27,
2015
 
September 28,
2014
 
Dollars
 
% of Revenue
 
Dollars
 
% of Revenue
Revenue, net

$425,489

 
100
 %
 

$427,672

 
100
%
Cost of revenue, net
293,741

 
69
 %
 
291,852

 
68
%
Gross profit
131,748

 
31
 %
 
135,820

 
32
%
Research and development
43,540

 
10
 %
 
46,725

 
11
%
Sales, general and administrative
75,263

 
18
 %
 
69,692

 
16
%
Amortization or impairment of acquisition-related intangibles
7,062

 
2
 %
 
6,499

 
2
%
Loss on disposal or impairment of long-lived assets
14,573

 
3
 %
 
1,447

 
—
%
Operating (loss) income
(8,690
)
 
(2
)%
 
11,457

 
3
%
Non-operating (loss) income, net
(22,806
)
 
(5
)%
 
2,904

 
1
%
(Loss) income before income taxes
(31,496
)
 
(7
)%
 
14,361

 
3
%
Income tax (benefit) expense
(7,873
)
 
(2
)%
 
3,231

 
1
%
Net (loss) income

($23,623
)
 
(6
)%
 

$11,130

 
3
%
Basic (loss) earnings per share

($0.23
)
 
 
 

$0.09

 
 
Diluted (loss) earnings per share

($0.23
)
 
 
 

$0.09

 
 

LED Business Restructuring
In June 2015, our Board of Directors approved a plan to restructure the LED Products business. The restructuring is expected to reduce excess capacity and overhead in order to improve the cost structure moving forward. The primary components of the restructuring include the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions.

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The following table summarizes the actual and planned charges incurred through September 27, 2015 (in thousands):
Capacity and Overhead Cost Reductions
Estimated charges
 
Amounts incurred during the three months ended September 27, 2015
 
Cumulative amounts incurred through September 27, 2015
 
Affected Line Item in the Consolidated Statements of (Loss) Income
Loss on disposal or impairment of long-lived assets

$57,720

 

$13,878

 

$56,010

 
Loss on disposal or impairment of long-lived assets
Severance expense
2,319

 
300

 
2,319

 
Sales, general and administrative expenses
Lease termination and facility consolidation costs
4,559

 
1,735

 
3,564

 
Sales, general and administrative expenses
Increase in channel inventory reserves
26,479

 
—

 
26,479

 
Revenue, net
Increase in inventory reserves
11,091

 
—

 
11,091

 
Cost of revenue, net
  Total restructuring charges

$102,168

 

$15,913

 

$99,463

 
 

Revenue

Revenue was comprised of the following (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Lighting Products revenue

$248,031

 

$223,086

 

$24,945

 
11
 %
Percent of revenue
58
%
 
52
%
 
 
 
 
LED Products revenue
148,208

 
173,590

 
(25,382
)
 
(15
)%
Percent of revenue
35
%
 
41
%
 
 
 
 
Power and RF Products revenue
29,250

 
30,996

 
(1,746
)
 
(6
)%
Percent of revenue
7
%
 
7
%
 
 
 
 
Total revenue

$425,489

 

$427,672

 

($2,183
)
 
(1
)%
Our consolidated revenue decreased 1% to $425.5 million for the three months ended September 27, 2015 from $427.7 million for the three months ended September 28, 2014. This decrease was driven by the 15% decrease in LED Products revenue and the 6% decrease in Power and RF Products revenue that was mostly offset by the 11% increase in Lighting Products revenue.
Lighting Products Segment Revenue
Lighting Products revenue represented approximately 58% and 52% of our total revenue for the three months ended September 27, 2015 and September 28, 2014, respectively.
Lighting Products revenue increased 11% to $248.0 million for the three months ended September 27, 2015 from $223.1 million for the three months ended September 28, 2014. This increase was due to the growth of commercial lighting fixtures, which more than offset the decline in consumer bulb sales and which resulted in an overall increase in Average Selling Price (ASP). ASP increased 26% and total units sold decreased 12% for the three months ended September 27, 2015 compared to the three months ended September 28, 2014 primarily due to the higher commercial lighting fixture sales and lower unit sales of consumer bulb products.
LED Products Segment Revenue
LED Products revenue represented 35% and 41% of our total revenue for the three months ended September 27, 2015 and September 28, 2014, respectively.    
LED Products revenue decreased 15% to $148.2 million for the three months ended September 27, 2015 from $173.6 million for the three months ended September 28, 2014. This decrease was the result of a 27% reduction in ASP due primarily to increased

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global competition for LED products which impacted our LED product lines, partially offset by a 13% increase in the number of units sold.
Power and RF Products Segment Revenue
Power and RF Products revenue represented approximately 7% of our total revenue for both the three months ended September 27, 2015 and September 28, 2014.
Power and RF Products revenue decreased 6% to $29.3 million for the three months ended September 27, 2015 from $31.0 million for the three months ended September 28, 2014. This decrease was primarily the result of a decrease in the number of RF units sold, partially offset by an increase in ASP. The number of units sold decreased 34% for the three months ended September 27, 2015 compared to the three months ended September 28, 2014. The increase in ASP was 31% for the three months ended September 27, 2015 compared to the three months ended September 28, 2014 due to a higher mix of higher value Power and RF products.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Lighting Products gross profit

$69,081

 

$55,592

 

$13,489

 
24
 %
Lighting Products gross margin
27.9
%
 
24.9
%
 
 
 
 
LED Products gross profit
52,659

 
67,624

 
(14,965
)
 
(22
)%
LED Products gross margin
35.5
%
 
39.0
%
 
 
 
 
Power and RF Products gross profit
14,323

 
17,857

 
(3,534
)
 
(20
)%
Power and RF Products gross margin
49.0
%
 
57.6
%
 
 
 
 
Unallocated costs
(4,315
)
 
(5,253
)
 
938

 
(18
)%
          Consolidated gross profit

$131,748

 

$135,820

 

($4,072
)
 
(3
)%
          Consolidated gross margin
31.0
%
 
31.8
%
 
 
 
 
Our consolidated gross profit decreased 3% to $131.7 million for the three months ended September 27, 2015 from $135.8 million for the three months ended September 28, 2014. Our consolidated gross margin decreased to 31.0% for the three months ended September 27, 2015 from 31.8% for the three months ended September 28, 2014.
Lighting Products Segment Gross Profit and Gross Margin
Lighting Products gross profit increased 24% to $69.1 million for the three months ended September 27, 2015 from $55.6 million for the three months ended September 28, 2014. Lighting Products gross margin increased to 27.9% for the three months ended September 27, 2015 from 24.9% for the three months ended September 28, 2014. Lighting Products gross profit increased for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 due to higher commercial lighting fixture sales as discussed above. Lighting Products gross margin increased for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 due to factory cost reductions and the higher mix of commercial lighting fixture sales.

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LED Products Segment Gross Profit and Gross Margin
LED Products gross profit decreased 22% to $52.7 million for the three months ended September 27, 2015 from $67.6 million for the three months ended September 28, 2014. LED Products gross margin decreased to 35.5% for the three months ended September 27, 2015 from 39.0% for the three months ended September 28, 2014. LED Products gross profit and gross margin decreased primarily due to lower pricing resulting from the increased global competition for LED products for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014.
Power and RF Products Segment Gross Profit and Gross Margin
Power and RF Products gross profit decreased 20% to $14.3 million for the three months ended September 27, 2015 from $17.9 million for the three months ended September 28, 2014. Power and RF Products gross margin decreased to 49.0% for the three months ended September 27, 2015 from 57.6% for the three months ended September 28, 2014. Power and RF Products gross profit and gross margin decreased for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 due to changes in product mix.
Unallocated Costs
Unallocated costs were $4.3 million and $5.3 million for the three months ended September 27, 2015 and September 28, 2014, respectively. These costs consisted primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under our 401(k) plan. These costs were not allocated to the reportable segments' gross profit because our CODM does not review them regularly when evaluating segment performance and allocating resources. The decrease for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 was primarily attributable to lower incentive compensation.
Research and Development
Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies.
The following table sets forth our research and development expenses in dollars and as a percentage of revenue (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Research and development

$43,540

 

$46,725

 

($3,185
)
 
(7
)%
Percent of revenue
10
%
 
11
%
 
 
 
 
Research and development expenses for the three months ended September 27, 2015 decreased 7% to $43.5 million from $46.7 million for the three months ended September 28, 2014. This decrease was primarily due to cost management and the nature of current research and development projects. Our research and development expenses vary significantly from quarter to quarter based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.

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Sales, General and Administrative
Sales, general and administrative expenses were comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consisted of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenue (in thousands, except percentages):  
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Sales, general and administrative

$75,263

 

$69,692

 

$5,571

 
8
%
Percent of revenue
18
%
 
16
%
 
 
 
 
Sales, general and administrative expenses for the three months ended September 27, 2015 increased 8% to $75.3 million from $69.7 million for the three months ended September 28, 2014. The increase was primarily due to an increase in spending on legal fees related to recent cases we have filed in connection with enforcing our patent rights and facilities consolidation costs pursuant to our restructuring plan discussed above.
Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names. Amortization of intangible assets related to our acquisitions was as follows (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Customer relationships

$1,607

 

$1,345

 

$262

 
19
 %
Developed technology
4,946

 
4,660

 
286

 
6
 %
Non-compete agreements
509

 
490

 
19

 
4
 %
Trade names, finite-lived
—

 
4

 
(4
)
 
(100
)%
Total amortization

$7,062

 

$6,499

 

$563

 
9
 %
Amortization of acquisition-related intangibles increased for the three months ended September 27, 2015 compared to the three months ended September 28, 2014 due to the amortization of intangibles related to the Arkansas Power Electronics International, Inc. (APEI) acquisition in July 2015 as discussed in Note 2, “Acquisition,” in our consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Loss on Disposal or Impairment of Long-Lived Assets
We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our equipment and capitalized patent costs for possible impairment.
The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands, except percentages): 
 
Three Months Ended
 
 
 
 
 
September 27,
2015
 
September 28,
2014
 
Change
Loss on disposal or impairment of long-lived assets

$14,573

 

$1,447

 

$13,126

 
907
%
We recognized a net loss of $14.6 million and $1.4 million on the disposal of long-lived assets for the three months ended September 27, 2015 and September 28, 2014, respectively. The increase was primarily due to the planned sale or abandonment of certain long-lived assets to reduce excess manufacturing capacity pursuant to our restructuring plan discussed above.

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Non-Operating (Loss) Income, net
The following table sets forth our non-operating (loss) income, net (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
Gain on sale of investments, net

$2

 

$2

 

$—

 
—
 %
Loss on equity method investment
(19,948
)
 
—

 
(19,948
)
 
—

Foreign currency loss, net
(4,294
)
 
(231
)
 
(4,063
)
 
1,759
 %
Interest income, net
1,297

 
3,032

 
(1,735
)
 
(57
)%
Other, net
137

 
101

 
36

 
36
 %
Non-operating (loss) income, net

($22,806
)
 

$2,904

 

($25,710
)
 
(885
)%

Gain on sale of investments, net. Gain on sale of investments, net was $2 thousand for both the three months ended September 27, 2015 and the three months ended September 28, 2014.
Loss on equity method investment. Loss on equity method investment was $19.9 million for the three months ended September 27, 2015 due to the decrease in the fair value of our Lextar Electronics Corporation (Lextar) investment. Lextar’s stock is publicly traded on the Taiwan Stock Exchange and its share price declined from 21.55 New Taiwan Dollar (TWD) at June 28, 2015 to 13.90 TWD at September 27, 2015. This downward stock price trend may continue in the future given the risks inherent in Lextar’s business and trends affecting the Taiwan and global equity markets. Any future stock price declines will be recorded as further losses on equity method investment based on the decrease in the fair value of the investment during the applicable fiscal period, which could have a material adverse effect on our results of operations.
Foreign currency loss, net. Foreign currency loss, net consisted primarily of remeasurement adjustments resulting from our investment in Lextar and consolidating our international subsidiaries. The foreign currency loss for the three months ended September 27, 2015 was primarily due to fluctuation in the exchange rate between the TWD and the United States Dollar related to our Lextar investment. The foreign currency loss for the three months ended September 28, 2014 was primarily due to fluctuations in the exchange rate between the Euro and the United States Dollar.
Interest income, net. Interest income, net was $1.3 million for the three months ended September 27, 2015 compared to $3.0 million for the three months ended September 28, 2014. The decrease in interest income, net for the three months ended September 27, 2015 was primarily due to lower invested balances and higher interest expense associated with our line of credit as compared to the three months ended September 28, 2014.
Other, net. Other, net was $0.1 million for both the three months ended September 27, 2015 and September 28, 2014.
Income Tax (Benefit) Expense
The following table sets forth our income tax (benefit) expense in dollars and our effective tax rate (in thousands, except percentages): 
 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
Income tax (benefit) expense

($7,873
)
 

$3,231

 

($11,104
)
 
(344
)%
Effective tax rate
25.0
%
 
22.5
%
 
 
 
 

The variation between our effective income tax rate and the U.S. statutory rate of 35 percent is due to a percentage of our 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 our various tax jurisdictions can have a material impact on our periodic effective tax rate.
We recognized income tax benefit of $7.9 million for an effective tax rate of 25% for the three months ended September 27, 2015 as compared to income tax expense of $3.2 million for an effective tax rate of 22.5% for the three months ended September 28,

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2014. The increase in our effective tax rate for the three months ended September 27, 2015 was primarily due to an increased percentage of fiscal 2016's target income being earned in higher tax jurisdictions.
Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities, cash generated from operations and availability under our line of credit. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have a $500 million line of credit as discussed in Note 7, “Long-term Debt,” in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The purpose of this facility is to provide short term flexibility to optimize returns on our cash and investment portfolio while funding share repurchases, capital expenditures and other general business needs.
Based on past performance and current expectations, we believe our current working capital, availability under our line of credit and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months. We may use a portion of our available cash and cash equivalents, line of credit or funds underlying our marketable securities to repurchase shares of our common stock pursuant to repurchase programs authorized by our Board of Directors. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties or expand our production capacity.
From time to time, we evaluate strategic opportunities, including potential acquisitions, divestitures or investments in complementary businesses, and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities. In May 2015, we announced that Wolfspeed filed a confidential registration statement for an initial public offering. An initial public offering would raise capital to invest directly in the Power and RF Products business to support targeted future growth. Additionally, on July 8, 2015, Cree closed on the acquisition of APEI as discussed in Note 2, “Acquisition,” in our consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Liquidity
Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital. The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable.
The following table presents the components of our cash conversion cycle:
 
Three Months Ended
 
 
 
September 27,
2015
 
June 28,
2015
 
Change
Days of sales outstanding(a)
41
 
44
 
(3
)
Days of supply in inventory(b)
89
 
83
 
6

Days in accounts payable(c)
(48)
 
(48)
 
—

Cash conversion cycle
82
 
79
 
3

a)
Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts receivable, net of applicable allowances and reserves, by the average net revenue per day for the respective 90 day period.
b)
Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90 day period.
c)
Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. DPO

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is calculated by dividing ending accounts payable by the average cost of revenue, net per day for the respective 90 day period.
The increase in the cash conversion cycle was primarily driven by an increase in the days supply in inventory, partially offset by a decrease in days of sales outstanding during the three months ended September 27, 2015.
As of September 27, 2015, we had unrealized losses on our investments of $0.2 million. All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 27, 2015 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of September 27, 2015.
Cash Flows
In summary, our cash flows were as follows (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
Net cash provided by operating activities

$46,834

 

$13,284

 

$33,550

 
253
 %
Net cash used in investing activities
(42,571
)
 
(107,651
)
 
65,080

 
(60
)%
Net cash (used in) provided by financing activities
(59,800
)