Edgar Filing: CREE INC

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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 December 25, 2016

[ ] 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 January 20, 2017, was 97,404,938.

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CREE, INC.

FORM 10-Q

For the Quarterly Period Ended December 25, 2016

INDEX



Description		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Unaudited Consolidated Balance Sheets as of December 25, 2016 and June 26, 2016	3

	Unaudited Consolidated Statements of Income (Loss) for the three and six months ended December 25, 2016 and December 27, 2015	4

	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended December 25, 2016 and December 27, 2015	5

	Unaudited Consolidated Statements of Cash Flows for the six months ended December 25, 2016 and December 27, 2015	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	55

Item 4.	Mine Safety Disclosures	55

Item 5.	Other Information	55

Item 6.	Exhibits	56

SIGNATURE		57
EXHIBIT INDEX		58

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CREE, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS



	December 25, 2016			June 26, 2016
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents		$137,093			$166,154
Short-term investments	454,021			439,151
Total cash, cash equivalents and short-term investments	591,114			605,305
Accounts receivable, net	121,759			138,772
Income tax receivable	3,245			6,304
Inventories	281,677			281,671
Prepaid expenses	22,017			25,728
Other current assets	45,024			44,501
Current assets held for sale	434,859			54,426
Total current assets	1,499,695			1,156,707
Property and equipment, net	360,171			387,167
Goodwill	518,059			518,059
Intangible assets, net	246,246			259,400
Other long-term investments	34,315			40,179
Deferred income taxes	41,019			38,564
Long-term assets held for sale	—			356,735
Other assets	8,165			9,249
Total assets		$2,707,670			$2,766,060
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade		$109,306			$122,808
Accrued salaries and wages	41,955			40,128
Other current liabilities	42,107			45,101
Current liabilities held for sale	21,281			14,962
Total current liabilities	214,649			222,999
Long-term liabilities:
Long-term debt	170,000			160,000
Deferred income taxes	945			943
Long-term liabilities held for sale	—			1,850
Other long-term liabilities	22,057			12,444
Total long-term liabilities	193,002			175,237
Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at December 25, 2016 and June 26, 2016; none issued and outstanding	—			—
Common stock, par value $0.00125; 200,000 shares authorized at December 25, 2016 and June 26, 2016; 97,399 and 100,829 shares issued and outstanding at December 25, 2016 and June 26, 2016, respectively	121			125
Additional paid-in-capital	2,388,855			2,359,584
Accumulated other comprehensive income, net of taxes	3,299			8,728
Accumulated deficit	(92,256		)	(613		)
Total shareholders’ equity	2,300,019			2,367,824
Total liabilities and shareholders’ equity		$2,707,670			$2,766,060

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

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CREE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)



	Three Months Ended					Six Months Ended
	December 25, 2016			December 27, 2015		December 25, 2016			December 27, 2015
	(In thousands, except per share amounts)
Revenue, net		$346,962			$393,758		$668,291			$775,307
Cost of revenue, net	236,071			282,624		471,059			556,981
Gross profit	110,891			111,134		197,232			218,326
Operating expenses:
Research and development	28,070			31,563		56,601			64,294
Sales, general and administrative	67,671			67,877		129,042			138,049
Amortization or impairment of acquisition-related intangibles	5,937			6,468		12,203			12,937
Loss on disposal or impairment of long-lived assets	530			2,015		846			11,580
Total operating expenses	102,208			107,923		198,692			226,860
Operating income (loss)	8,683			3,211		(1,460		)	(8,534		)
Non-operating (expense) income, net	(4,754		)	8,016		(4,912		)	(14,787		)
Income (loss) from continuing operations before income taxes	3,929			11,227		(6,372		)	(23,321		)
Income tax expense (benefit)	5,036			1,815		(2,407		)	(6,997		)
(Loss) income from continuing operations	(1,107		)	9,412		(3,965		)	(16,324		)
Income from discontinued operations, net of tax	7,326			4,030		10,750			5,277
Net income (loss)		$6,219			$13,442		$6,785			($11,047	)
Earnings (loss) per share-basic
Continuing operations		($0.01	)		$0.09		($0.04	)		($0.16	)
Discontinued operations	0.07			0.04		0.11			0.05
Earnings (loss) per share-basic		$0.06			$0.13		$0.07			($0.11	)

Earnings (loss) per share-diluted
Continuing operations		($0.01	)		$0.09		($0.04	)		($0.16	)
Discontinued operations	0.07			0.04		0.11			0.05
Earnings (loss) per share-diluted		$0.06			$0.13		$0.07			($0.11	)

Weighted average shares used in per share calculation:
Basic	98,467			102,391		99,513			102,932
Diluted	98,467			102,521		99,513			102,932

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

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CREE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	Three Months Ended						Six Months Ended
	December 25, 2016			December 27, 2015			December 25, 2016			December 27, 2015
	(In thousands)
Net income (loss)		$6,219			$13,442			$6,785			($11,047	)
Other comprehensive loss:
Currency translation loss	(1,343		)	(430		)	(1,314		)	(789		)
Net unrealized (loss) gain on available-for-sale securities, net of tax benefit (expense) of $2,357 and $113, $2,556 and ($376), respectively	(3,795		)	(180		)	(4,115		)	612
Other comprehensive loss	(5,138		)	(610		)	(5,429		)	(177		)
Comprehensive income (loss)		$1,081			$12,832			$1,356			($11,224	)

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

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CREE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended
	December 25, 2016			December 27, 2015
	(In thousands)
Cash flows from operating activities:
Net income (loss)		$6,785			($11,047	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	62,574			81,746
Stock-based compensation	26,856			29,462
Excess tax benefit from stock-based payment arrangements	(1		)	(12		)
Loss on disposal or impairment of long-lived assets	845			16,587
Amortization of premium/discount on investments	2,749			2,747
Loss on equity investment	6,298			12,922
Foreign exchange (gain) loss on equity investment	(434		)	2,800
Deferred income taxes	44			60
Changes in operating assets and liabilities:
Accounts receivable, net	13,647			3,883
Inventories	1,290			379
Prepaid expenses and other assets	2,735			12,025
Accounts payable, trade	(13,836		)	(8,788		)
Accrued salaries and wages and other liabilities	10,164			(18,968		)
Net cash provided by operating activities	119,716			123,796
Cash flows from investing activities:
Purchases of property and equipment	(35,211		)	(81,804		)
Purchases of patent and licensing rights	(5,836		)	(7,628		)
Proceeds from sale of property and equipment	236			2,376
Purchases of short-term investments	(125,022		)	(169,197		)
Proceeds from maturities of short-term investments	93,312			194,406
Proceeds from sale of short-term investments	7,619			19,352
Purchase of acquired business, net of cash acquired	(2,775		)	(12,513		)
Net cash used in investing activities	(67,677		)	(55,008		)
Cash flows from financing activities:
Proceeds from long-term debt borrowings	245,000			368,000
Payments on long-term debt borrowings	(235,000		)	(363,000		)
Net proceeds from issuance of common stock	8,021			9,939
Excess tax benefit from stock-based payment arrangements	1			12
Repurchases of common stock	(98,431		)	(131,749		)
Net cash used in financing activities	(80,409		)	(116,798		)
Effects of foreign exchange changes on cash and cash equivalents	(691		)	(1,114		)
Net decrease in cash and cash equivalents	(29,061		)	(49,124		)
Cash and cash equivalents:
Beginning of period	166,154			139,710
End of period		$137,093			$90,586
Supplemental disclosure of cash flow information:
Significant non-cash transactions:
Accrued property and equipment		$8,240			$7,681

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

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CREE, INC.

NOTES TO UNAUDITED 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 and LED chips. The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens and other industrial applications.

In addition, the Company develops, manufactures and sells silicon carbide (SiC) materials, power devices and RF devices based on wide bandgap semiconductor materials such as SiC and gallium nitride (GaN). The Company's SiC materials products are sold to customers developing power and RF products as well as gemstones. These SiC materials products had previously been included within the LED Products segment. 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). Collectively, the Company refers to these product lines as the Wolfspeed business. As discussed more fully below in Note 2, “Discontinued Operations,” on July 13, 2016, the Company executed a definitive agreement to sell its Wolfspeed business to Infineon Technologies AG (Infineon). As a result, the Company has classified the results of the Wolfspeed business as discontinued operations in its consolidated statements of income (loss) for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the consolidated balance sheets. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to the Company's continuing operations.

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, Italy 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 two reportable segments are:


•	Lighting Products


•	LED Products

For financial results by reportable segment, please refer to Note 14, "Reportable Segments."

Basis of Presentation

The consolidated balance sheet at December 25, 2016, the consolidated statements of income (loss) for the three and six months ended December 25, 2016 and December 27, 2015, the consolidated statements of comprehensive income (loss) for the three and six months ended December 25, 2016 and December 27, 2015, and the consolidated statements of cash flows for the six months ended December 25, 2016 and December 27, 2015 (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, comprehensive income and cash flows at December 25, 2016, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 26, 2016 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

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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 26, 2016 (fiscal 2016). The results of operations for the three and six months ended December 25, 2016 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 25, 2017 (fiscal 2017).

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 2016 amounts in the accompanying consolidated financial statements have been reclassified to conform to the fiscal 2017 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.

Revision of Prior Period Financial Statements

During the third quarter of fiscal 2016, the Company identified errors in its previously reported financial statements in which amortization expense was understated as certain patents were being amortized over a life longer than the life of the underlying patent right.

The Company assessed the materiality of these errors on prior periods’ financial statements in accordance with the United States Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in the Accounting Standards Codification (ASC) 250, Presentation of Financial Statements, and concluded that they were not material individually or in the aggregate to any prior annual or interim periods. However, through the second quarter of fiscal 2016 the aggregate amount of the prior period errors of $6.8 million before income taxes would have been material to the Company's interim Consolidated Statements of Income (Loss) for the third quarter of fiscal 2016. Consequently, in accordance with ASC 250, the Company corrected these errors, and other immaterial errors, for all prior periods presented by revising the consolidated financial statements and other financial information included herein.

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The following table summarizes the effects of the revision on the consolidated statements of income (loss) (in thousands):



	Three Months Ended December 27, 2015							Six Months Ended December 27, 2015
	As Reported		Revision Adjustments			As Revised		As Reported			Revision Adjustments			As Revised
Cost of revenue, net		$281,992		$632			$282,624		$555,248			$1,733			$556,981
Gross profit	111,766		(632		)	111,134		220,059			(1,733		)	218,326
Operating income (loss)	3,843		(632		)	3,211		(6,801		)	(1,733		)	(8,534		)
Income (loss) from continuing operations before income taxes	11,859		(632		)	11,227		(21,588		)	(1,733		)	(23,321		)
Income tax expense (benefit)	1,985		(170		)	1,815		(6,543		)	(454		)	(6,997		)
(Loss) income from continuing operations	9,874		(462		)	9,412		(15,045		)	(1,279		)	(16,324		)
Income (loss) from discontinued operations, net of tax	4,084		(54		)	4,030		5,380			(103		)	5,277
Net income (loss)		$13,958		($516	)		$13,442		($9,665	)		($1,382	)		($11,047	)
Earnings (loss) per share-basic
Continuing operations		$0.10		($0.01	)		$0.09		($0.14	)		($0.02	)		($0.16	)
Discontinued operations	0.04		—			0.04		0.05			—			0.05
Earnings (loss) per share-basic		$0.14		($0.01	)		$0.13		($0.09	)		($0.02	)		($0.11	)

Earnings (loss) per share-diluted
Continuing operations		$0.10		($0.01	)		$0.09		($0.14	)		($0.02	)		($0.16	)
Discontinued operations	0.04		—			0.04		0.05			—			0.05
Earnings (loss) per share-diluted		$0.14		($0.01	)		$0.13		($0.09	)		($0.02	)		($0.11	)

The revision had no net impact on the Company’s net cash provided by operating activities.

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 FASB has subsequently issued multiple ASUs which amend and clarify the guidance in 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 pronouncement.

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Leases

In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842). The ASU requires that a lessee recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For income statement purposes, leases are still required to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The effective date will be the first quarter of the Company's fiscal year ending June 28, 2020, using a modified retrospective approach. The Company is currently analyzing the impact of this new pronouncement.

Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09: Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU simplifies the current stock compensation guidance for tax consequences. The ASU requires an entity to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in its income statement. The ASU also eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable. For cash flows statement purposes, excess tax benefits should be classified as an operating activity and cash payments made to taxing authorities on the employee’s behalf for withheld shares should be classified as financing activity. The ASU is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently analyzing the impact of this new pronouncement.

Note 2 – Discontinued Operations

On July 13, 2016, the Company executed an Asset Purchase Agreement (the APA) with Infineon. The transaction, which was approved by both the Company’s Board of Directors and Infineon’s Supervisory Board, is currently pending customary closing conditions and governmental approvals. The Company targets closing the transaction within its third quarter of fiscal year 2017.

Pursuant to the APA, the Company will sell to Infineon, and Infineon will (i) purchase from the Company (a) the assets comprising the Company’s power and RF product lines (formerly the Company's Power and RF Products segment), including manufacturing facilities and equipment, inventory, intellectual property rights, contracts, real estate, and the outstanding equity interests of Cree Fayetteville, Inc, one of the Company’s wholly-owned subsidiaries, and (b) certain related portions of the Company’s SiC materials and gemstones business previously included within the LED Products segment and (ii) assume certain liabilities related to the Wolfspeed business. The Company will retain certain liabilities associated with the Wolfspeed business arising prior to the closing of the transaction. Infineon is expected to hire most of the Company’s approximately 594 Wolfspeed employees either at the closing of the transaction or following a transition period.

The purchase price for the Wolfspeed business will be $850 million in cash, which is subject to certain adjustments. In connection with the transaction, the Company and Infineon will also enter into certain ancillary and related agreements, including (i) an intellectual property assignment and license agreement, which will assign to Infineon certain intellectual property owned by the Company and license to Infineon certain additional intellectual property owned by the Company, (ii) a transition services agreement, which is designed to ensure a smooth transition of the Wolfspeed business to Infineon, and (iii) a wafer supply agreement, pursuant to which the Company will supply Infineon with SiC wafers and SiC boules for a transitional period of time.

The APA contains customary representations, warranties and covenants, including covenants to cooperate in seeking regulatory approvals, as well as the Company’s agreement to not compete with the Wolfspeed business for five years following the closing of the transaction and to indemnify Infineon for certain damages that Infineon may suffer following the closing of the transaction.

Infineon's obligation to purchase the Wolfspeed business is subject to the satisfaction or waiver of a number of conditions set forth in the APA, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain similar non-U.S. regulations, the approval of the Committee on Foreign Investment in the United States and other customary closing conditions. The APA provides for customary termination rights of the parties and also provides that in the event the APA is terminated for certain specified regulatory-related circumstances, Infineon may be required to pay the Company a termination fee ranging from $12.5 million to $42.5 million.

The Company has classified the results of the Wolfspeed business as discontinued operations in the Company’s consolidated statements of income (loss) for all periods presented. The Company ceased recording depreciation and amortization of long-lived assets of the Wolfspeed business upon classification as discontinued operations in July 2016. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the consolidated balance sheets. The assets

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and liabilities held for sale as of December 25, 2016 are classified as current in the consolidated balance sheet as the Company expects the transaction to close within one year.

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The following table presents the financial results of the Wolfspeed business as income from discontinued operations, net of income taxes in the Company's consolidated statements of income (loss) (in thousands):



	Three Months Ended				Six Months Ended
	December 25, 2016		December 27, 2015		December 25, 2016		December 27, 2015
Revenue, net		$54,363		$42,048		$104,265		$85,987
Cost of revenue, net	24,688		18,723		51,002		39,271
Gross profit	29,675		23,325		53,263		46,716
Total operating expenses	18,854		17,812		37,509		39,325
Income from discontinued operations before income taxes	10,821		5,513		15,754		7,391
Income tax expense	3,495		1,483		5,004		2,114
Income from discontinued operations, net of income taxes		$7,326		$4,030		$10,750		$5,277

The following table presents the assets and liabilities related to the Wolfspeed business held for sale (in thousands):



	December 25, 2016		June 26, 2016
Assets Held For Sale
Accounts receivable, net		$30,020		$26,839
Prepaid and other Current Assets	2,130		1,369
Inventories	19,435		21,871
Property and equipment, net	235,319		214,936
Intangible assets, net	45,273		43,409
Goodwill	100,769		100,769
Total Assets Held for Sale*		$432,946		$409,193

Liabilities Held for Sale
Accounts payable		$12,813		$9,477
Accrued salaries and wages	5,473		4,514
Other accrued liabilities	2,995		971
Other long term liabilities	—		1,850
Total Liabilities Held for Sale*		$21,281		$16,812

*Amounts in the June 26, 2016 column are classified as current and long-term in the consolidated balance sheet.

The following table presents the cash flow of the Wolfspeed business (in thousands):



	Six Months Ended
	December 25, 2016		December 27, 2015
Net cash provided by discontinued operating activities		$17,314		$21,146
Net cash used in discontinued investing activities	22,699		68,221

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Note 3 – 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 subsequent two years, additional cash payments totaling up to $4.6 million may be made to the former APEI shareholders. Payments totaling $2.8 million were made to the former APEI shareholders in July 2016 based on achievement of the first year goals. The Company expects that the second year goals will also be achieved. In connection with this acquisition, APEI became a wholly owned subsidiary of the Company, renamed Cree Fayetteville, Inc. (Cree Fayetteville). Cree Fayetteville is not considered a significant subsidiary of the Company and its results from operations were reported as part of the Company's former Power and RF Products segment prior to the classification of the Wolfspeed business as discontinued operations and is discussed more fully in Note 2, "Discontinued Operations."

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



Cash consideration paid to shareholders		$13,797
Post-closing adjustments	181
Contingent consideration	4,625
Total purchase price		$18,603

The purchase price for this acquisition has been 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	935
Other assets	270
Total tangible assets	3,638
Intangible assets:
Patents	40
Customer relationships	4,500
Developed technology	11,403
In-process research and development	7,565
Non-compete agreements	231
Goodwill	2,483
Total intangible assets	26,222
Liabilities assumed:
Accounts payable	55
Accrued expenses and liabilities	1,911
Other long-term liabilities	9,291
Total liabilities assumed	11,257
Net assets acquired		$18,603

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Prior to the classification of the Wolfspeed business as discontinued operations, the identifiable intangible assets acquired as a result of the acquisition were being 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		7
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. The IPR&D was completed in January 2016.

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.

Note 4 – Financial Statement Details

Accounts Receivable, net

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



	December 25, 2016			June 26, 2016
Billed trade receivables		$173,645			$188,672
Unbilled contract receivables	182			59
	173,827			188,731
Allowance for sales returns, discounts and other incentives	(46,235		)	(44,543		)
Allowance for bad debts	(5,833		)	(5,416		)
Accounts receivable, net		$121,759			$138,772

Inventories

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



	December 25, 2016		June 26, 2016
Raw material		$69,219		$79,957
Work-in-progress	80,635		84,459
Finished goods	131,823		117,255
Inventories		$281,677		$281,671

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Other Current Liabilities

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



	December 25, 2016		June 26, 2016
Accrued taxes		$12,033		$12,023
Accrued professional fees	9,569		7,959
Accrued warranty	15,045		20,102
Accrued other	5,460		5,017
Other current liabilities		$42,107		$45,101

Accumulated Other Comprehensive Income, net of taxes

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



	December 25, 2016			June 26, 2016
Currency translation gain		$3,310			$4,624
Net unrealized (loss) gain on available-for-sale securities	(11		)	4,104
Accumulated other comprehensive income, net of taxes		$3,299			$8,728

Non-Operating Expense, net

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



	Three Months Ended						Six Months Ended
	December 25, 2016			December 27, 2015			December 25, 2016			December 27, 2015
Foreign currency loss, net		($1,856	)		($385	)		($495	)		($4,679	)
Gain on sale of investments, net	—			14			12			16
(Loss) gain on equity investment	(3,796		)	7,026			(6,283		)	(12,922		)
Interest income, net	900			1,220			1,787			2,517
Other, net	(2		)	141			67			281
Non-operating (expense) income, net		($4,754	)		$8,016			($4,912	)		($14,787	)

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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 (Loss)
	Three Months Ended				Six Months Ended
	December 25, 2016		December 27, 2015		December 25, 2016		December 27, 2015
Net unrealized gain on available-for-sale securities, net of taxes		$—		$14		$12		$16	Non-operating (expense) income, net
	—		14		12		16		Income (loss) from continuing operations before income taxes
	—		2		5		5		Income tax expense (benefit)
		$—		$12		$7		$11	(Loss) income from continuing operations

Note 5 – Investments

Investments consist of municipal bonds, corporate bonds, commercial paper and 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.

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



	December 25, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds		$186,214		$583		($767	)		$186,030
Corporate bonds	165,016		874		(813		)	165,077
Non-U.S. certificates of deposit	89,901		—		—			89,901
U.S. certificates of deposit	9,150		—		—			9,150
Commercial paper	3,863		—		—			3,863
Total short-term investments		$454,144		$1,457		($1,580	)		$454,021

	June 26, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Municipal bonds		$186,893		$3,562		($15	)		$190,440
Corporate bonds	165,766		3,074		(73		)	168,767
Non-U.S. certificates of deposit	73,127		—		—			73,127
U.S. certificates of deposit	3,500		—		—			3,500
Commercial paper	3,317		—		—			3,317
Total short-term investments		$432,603		$6,636		($88	)		$439,151

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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):



	December 25, 2016
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Municipal bonds		$106,408		($767	)		$—		$—			$106,408		($767	)
Corporate bonds	80,976		(808		)	2,495		(5		)	83,471		(813		)
Total		$187,384		($1,575	)		$2,495		($5	)		$189,879		($1,580	)
Number of securities with an unrealized loss			131					1					132

	June 26, 2016
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Municipal bonds		$2,936		($9	)		$3,535		($6	)		$6,471		($15	)
Corporate bonds	27,578		(73		)	—		—			27,578		(73		)
Total		$30,514		($82	)		$3,535		($6	)		$34,049		($88	)
Number of securities with an unrealized loss			22					3					25

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 (loss) 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 December 25, 2016 and June 26, 2016.

The contractual maturities of short-term investments as of December 25, 2016 were as follows (in thousands):



	Within One Year		After One, Within Five Years		After Five, Within Ten Years		After Ten Years		Total
Municipal bonds		$44,551		$112,725		$28,755		$—		$186,031
Corporate bonds	32,559		96,042		36,476		—		165,077
Non-U.S. certificates of deposit	89,901		—		—		—		89,901
U.S. certificates of deposit	6,150		3,000		—		—		9,150
Commercial paper	3,862		—		—		—		3,862
Total short-term investments		$177,023		$211,767		$65,231		$—		$454,021

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Note 6 – 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 December 25, 2016, financial assets utilizing Level 1 inputs included money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, 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 December 25, 2016. There were no transfers between Level 1 and Level 2 during the six months ended December 25, 2016.

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



	December 25, 2016								June 26, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
U.S. agency securities		$—		$—		$—		$—		$—		$—		$—		$—
Non-U.S. certificates of deposit	—		—		—		—		—		137		—		137
Money market funds	466		—		—		466		576		—		—		576
Total cash equivalents	466		—		—		466		576		137		—		713
Short-term investments:
Municipal bonds	—		186,030		—		186,030		—		190,440		—		190,440
Corporate bonds	—		165,077		—		165,077		—		168,767		—		168,767
U.S. certificates of deposit	—		9,150		—		9,150		—		3,500		—		3,500
Commercial paper	—		3,862		—		3,862		—		3,317		—		3,317
Non-U.S. certificates of deposit	—		89,901		—		89,901		—		73,127		—		73,127
Total short-term investments	—		454,020		—		454,020		—		439,151		—		439,151
Other long-term investments:
Common stock of non-U.S. corporations	—		34,315		—		34,315		—		40,179		—		40,179
Total other long-term investments	—		34,315		—		34,315		—		40,179		—		40,179
Total assets		$466		$488,335		$—		$488,801		$576		$479,467		$—		$480,043

Note 7– Intangible Assets

Intangible Assets, net

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



	December 25, 2016							June 26, 2016
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Customer relationships		$136,920		($79,869	)		$57,051		$136,920		($77,313	)		$59,607
Developed technology	162,760		(119,525		)	43,235		162,760		(110,204		)	52,556
Non-compete agreements	10,244		(10,244		)	—		10,244		(9,917		)	327
Trade names, finite-lived	520		(520		)	—		520		(520		)	—
Patent and licensing rights	107,656		(41,376		)	66,280		105,035		(37,805		)	67,230
Total intangible assets with finite lives	418,100		(251,534		)	166,566		415,479		(235,759		)	179,720
Trade names, indefinite-lived	79,680		—			79,680		79,680		—			79,680
Total intangible assets		$497,780		($251,534	)		$246,246		$495,159		($235,759	)		$259,400

For the three and six months ended December 25, 2016, total amortization of finite-lived intangible assets was $8.5 million and $16.6 million, respectively. For the three and six months ended December 27, 2015, total amortization of finite-lived intangible assets was $8.4 million and $17.0 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 25, 2017 (remainder of fiscal 2017)		$16,103
June 24, 2018	31,466
June 30, 2019	18,826
June 28, 2020	14,809
June 27, 2021	13,556
Thereafter	71,806
Total future amortization expense		$166,566

Note 8 – Long-term Debt

As of December 25, 2016, 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 December 25, 2016, the Company had $170 million outstanding under the line of credit and $330 million available for borrowing. For the three and six months ended December 25, 2016, the average interest rate was 1.41% for each period. For the three and six months ended December 25, 2016 the average commitment fee percentage was 0.09%. The Company was in compliance with all covenants in the line of credit at December 25, 2016.

Note 9 – Shareholders’ Equity

As of December 25, 2016, 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 $300 million for all purchases from August 24, 2016 through the expiration of the program on June 25, 2017. During the six months ended December 25, 2016, the Company repurchased 4.2 million shares of common stock for $98.5 million under the stock repurchase program.

Note 10– Earnings (Loss) Per Share

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



	Three Months Ended					Six Months Ended
	December 25, 2016			December 27, 2015		December 25, 2016			December 27, 2015
(Loss) income from continuing operations		($1,107	)		$9,412		($3,965	)		($16,324	)
Income from discontinued operations, net of tax	7,326			4,030		10,750			5,277
Net income (loss)		$6,219			$13,442	$	6,785		$	(11,047	)
Weighted average common shares	98,467			102,391		99,513			102,932
Basic (loss) income per share from continuing operations		($0.01	)		$0.09		($0.04	)		($0.16	)
Basic earnings per share from discontinued operations	0.07			0.04			$0.11		0.05
Earnings (loss) per share-basic		$0.06			$0.13		$0.07			($0.11	)

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



	Three Months Ended					Six Months Ended
	December 25, 2016			December 27, 2015		December 25, 2016			December 27, 2015
(Loss) income from continuing operations		($1,107	)		$9,412		($3,965	)		($16,324	)
Income from discontinued operations, net of tax	7,326			4,030		10,750			5,277
Net income (loss)		$6,219			$13,442		$6,785			($11,047	)
Weighted average common shares - basic	98,467			102,391		99,513			102,932
Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights	—			130		—			—
Weighted average common shares - diluted	98,467			102,521		99,513			102,932
Diluted (loss) earnings per share from continuing operations		($0.01	)		$0.09		($0.04	)		($0.16	)
Diluted earnings per share from discontinued operations	0.07			0.04		0.11			0.05
Earnings (loss) per share-diluted		$0.06			$0.13		$0.07			($0.11	)

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 and six months ended December 25, 2016, there were 12.1 million and 11.7 million, respectively, of potential common shares not included in the calculation of diluted earnings (loss) per share because their effect was anti-dilutive. For the three and six months ended December 27, 2015, there were 12.2 million and 11.5 million, respectively, of potential common shares not included in the calculation of diluted earnings (loss) per share because their effect was anti-dilutive.

Note 11 – 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 December 25, 2016 and changes during the six months then ended (numbers of shares in thousands):



	Number of Shares		Weighted Average Exercise Price
Outstanding at June 26, 2016	11,247			$40.42
Granted	1,705			$24.42
Exercised	(39	)		$25.88
Forfeited or expired	(1,162	)		$37.24
Outstanding at December 25, 2016	11,751			$38.46

Restricted Stock Awards and Units

A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of December 25, 2016, and changes during the six 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 26, 2016	1,631		31.66
Granted	1,282			$24.04
Vested	(554	)		$34.23
Forfeited	(96	)		$29.94
Nonvested at December 25, 2016	2,263			$26.79

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				Six Months Ended
	December 25, 2016		December 27, 2015		December 25, 2016		December 27, 2015
Income Statement Classification:
Cost of revenue, net		$2,564		$2,714		$5,343		$5,335
Research and development	1,907		2,428		4,513		5,192
Sales, general and administrative	6,184		7,140		13,819		14,988
Income from discontinued operations, net of tax	1,551		2,108		3,181		3,947
Total stock-based compensation expense		$12,206		$14,390		$26,856		$29,462

Note 12 – Income Taxes

The variation between the Company's effective income tax rate and the U.S. statutory rate of 35% is due to the impact of the Company’s pre-tax income or loss relative to favorable tax rate impacts associated predominantly with the Company’s: (i) projected income for the full year derived from international locations with lower tax rates than the U.S. and (ii) projected tax credits generated. Tax credits and other deductions have the impact of increasing the tax rate above the statutory rate of 35% in periods in which the Company reports pre-tax losses as they provide a benefit that is recoverable in future periods.

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 26, 2016, the Company's liability for unrecognized tax benefits was $17.7 million. During the six months ended December 25, 2016, the Company did not record any material movement in its unrecognized tax benefits. As a result, the total liability for unrecognized tax benefits as of December 25, 2016 was $17.7 million. If any portion of this $17.7 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 $4.3 million of gross unrecognized tax benefits will change in the next 12 months as a result of audit closures and 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 2013. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2012. For foreign purposes, the Company is generally no longer subject to tax examinations for tax periods 2006 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture. On January 20, 2017, the Company settled an ongoing audit by the Italian Revenue Agency for the fiscal year ended June 30, 2013. The Company will release the associated unrecognized tax benefit in the third quarter of fiscal 2017, with a resulting immaterial impact on tax expense.

During the fourth quarter of fiscal 2016, the Company concluded it is likely that sufficient future taxable income needed to fully utilize net operating loss carryovers in Luxembourg will not be generated due to additional losses on the Company’s equity investment held there. As a result, the Company recorded a $9.5 million valuation allowance against the related deferred tax asset, representing the $32.4 million net operating loss carryover net of tax. During the six months ended December 25, 2016, the Company recorded an additional $2.8 million valuation allowance against the loss carryover deferred tax asset as a result of the $9.7 million year-to-date loss in Luxembourg.

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Note 13 – Commitments and Contingencies

Warranties

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



Balance at June 26, 2016		$21,426
Warranties accrued in current period	19,896
Expenditures	(13,032		)
Balance at December 25, 2016		$28,290

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 December 25, 2016, $13.2 million of the Company's product warranty liabilities were classified as long-term.

The Company has voluntarily recalled 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 14 – Reportable Segments

The Company's operating and reportable segments are:


•	Lighting Products


•	LED Products

As discussed more fully in Note 2, “Discontinued Operations,” on July 13, 2016, the Company executed a definitive agreement to sell the Wolfspeed business to Infineon. As a result, the Company has classified the results of the Wolfspeed business as discontinued operations in its consolidated statements of income (loss) for all periods presented. For comparative purposes, the prior segment results have been recast to conform to the current segment presentation.

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 and LED components.

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 six months ended December 25, 2016 and December 27, 2015. 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.

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The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of income (loss) must be included to reconcile the consolidated gross profit presented in the table below to the Company's consolidated loss from continuing operations 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						Six Months Ended
	December 25, 2016			December 27, 2015			December 25, 2016			December 27, 2015
Revenue:
Lighting Products revenue		$208,924			$254,970			$392,760			$503,001
LED Products revenue	138,038			138,788			275,531			272,306
Total revenue		$346,962			$393,758			$668,291			$775,307

Gross Profit and Gross Margin:
Lighting Products gross profit		$74,770			$72,642			$124,060			$141,723
Lighting Products gross margin	35.8		%	28.5		%	31.6		%	28.2		%
LED Products gross profit	40,314			42,931			82,084			84,800
LED Products gross margin	29.2		%	30.9		%	29.8		%	31.1		%
Total segment gross profit	115,084			115,573			206,144			226,523
Unallocated costs	(4,193		)	(4,439		)	(8,912		)	(8,197		)
Consolidated gross profit		$110,891			$111,134			$197,232			$218,326
Consolidated gross margin	32.0		%	28.2		%	29.5		%	28.2		%

The total revenue and Lighting Products segment revenue and gross profit for the three months ended December 25, 2016 include a benefit from the confidential Feit Electric Company Inc. license agreement which provided a patent license issuance fee to the Company. The gross profit benefit within the quarter was partially offset by additional lighting reserves related primarily to third party supplied drivers for commercial lighting products that were identified as defective within the fiscal second quarter. Excluding the impact of the license agreement, the Company’s total revenue would have been approximately in the middle of the Company’s revenue targets for the quarter, which were $310 million to $330 million.

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):



	December 25, 2016		June 26, 2016
Lighting Products		$170,326		$172,261
LED Products	107,522		104,544
Total segment inventories	277,848		276,805
Unallocated inventories	3,829		4,866
Consolidated inventories		$281,677		$281,671

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Note 15 - 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 reduced 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 restructuring activity ended in the second quarter of fiscal 2016.

The Company incurred a total of $102.4 million, of which $4.9 million related to discontinued operations, pursuant to this restructuring plan. See Note 18, "Costs Associated with LED Business Restructuring" in Part II, Item 8 of the Company's Annual Report on Form 10K for the fiscal year ended June 26, 2016 for additional information. The following table summarizes the actual charges incurred for the three months and six months ended December 27, 2015 (in thousands):



Capacity and Overhead Cost Reductions