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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 March 31, 2019
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
logo042115a26.gif
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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.00125 par value
CREE
The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 such files).
Yes [ X ] No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]
 
Accelerated filer [    ]
Non-accelerated filer [    ]
 
Smaller reporting company [    ]
 
 
 
 
Emerging growth company [    ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No[ X]
The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of April 26, 2019, was 105,248,244.

Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2019
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.
 
 

2
Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements

3
Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
June 24,
2018
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$456,157

 

$118,924

Short-term investments
333,111

 
268,161

Total cash, cash equivalents and short-term investments
789,268

 
387,085

Accounts receivable, net
150,390

 
86,398

Income tax receivable
489

 
2,256

Inventories
172,793

 
151,636

Prepaid expenses
19,201

 
24,521

Other current assets
25,916

 
12,921

Current assets held for sale (Note 2)
340,782

 
225,544

Total current assets
1,498,839

 
890,361

Property and equipment, net
607,659

 
589,073

Goodwill
530,004

 
530,004

Intangible assets, net
203,016

 
215,815

Other long-term investments
44,122

 
57,501

Deferred income taxes
9,958

 
5,766

Other assets
5,559

 
11,604

Long-term assets held for sale (Note 2)
—

 
337,692

Total assets

$2,899,157

 

$2,637,816

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable, trade

$111,203

 

$105,354

Accrued salaries and wages
63,361

 
41,877

Income taxes payable
1,701

 
—

Accrued contract liabilities (Note 3)
47,328

 
—

Other current liabilities
20,472

 
19,280

Current liabilities held for sale (Note 2)
90,355

 
82,053

Total current liabilities
334,420

 
248,564

Long-term liabilities:

 

Long-term debt
—

 
292,000

Convertible notes, net
463,491

 
—

Deferred income taxes
5,878

 
3,148

Other long-term liabilities
29,453

 
518

Long-term liabilities held for sale (Note 2)
—

 
21,505

Total long-term liabilities
498,822

 
317,171

Commitments and contingencies (Note 13)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at March 31, 2019 and June 24, 2018; none issued and outstanding
—

 
—

Common stock, par value $0.00125; 200,000 shares authorized at March 31, 2019 and June 24, 2018; 104,515 issued and outstanding at March 31, 2019 and 101,488 shares issued and outstanding at June 24, 2018
131

 
127

Additional paid-in-capital
2,772,042

 
2,549,123

Accumulated other comprehensive income, net of taxes
2,554

 
596

Accumulated deficit
(713,780
)
 
(482,710
)
Total shareholders’ equity
2,060,947

 
2,067,136

Non-controlling interest
4,968

 
4,945

Total liabilities and equity

$2,899,157

 

$2,637,816

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

4
Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2019
 
March 25,
2018
 
March 31,
2019
 
March 25,
2018
 
(In thousands, except per share amounts)
Revenue, net

$274,050

 

$225,200

 

$828,729

 

$659,128

Cost of revenue, net
173,596

 
150,337

 
526,444

 
445,198

Gross profit
100,454

 
74,863

 
302,285

 
213,930

Operating expenses:
 
 
 
 
 
 

Research and development
40,722

 
31,144

 
117,235

 
95,184

Sales, general and administrative
61,626

 
46,631

 
157,937

 
128,743

Amortization or impairment of acquisition-related intangibles
3,906

 
1,516

 
11,717

 
3,224

Loss on disposal and impairment of other assets
5,286

 
1,112

 
5,708

 
6,940

Total operating expenses
111,540

 
80,403

 
292,597

 
234,091

Operating (loss) income
(11,086
)
 
(5,540
)
 
9,688

 
(20,161
)
Non-operating (expense) income, net
(8,440
)
 
(10,000
)
 
(23,695
)
 
14,942

Loss before income taxes
(19,526
)
 
(15,540
)
 
(14,007
)
 
(5,219
)
Income tax expense (benefit)
2,785

 
(5,377
)
 
9,252

 
(17,633
)
(Loss) Income from continuing operations
(22,311
)

(10,163
)

(23,259
)

12,414

Loss from discontinued operations, net of tax
(205,420
)

(230,370
)

(218,085
)

(259,067
)
Net loss
(227,731
)

(240,533
)

(241,344
)

(246,653
)
Net income attributable to non-controlling interest
121


44


23


59

Net loss attributable to controlling interest

($227,852
)


($240,577
)


($241,367
)


($246,712
)
 
 
 
 
 
 
 
 
(Loss) Earnings per share - basic
 
 
 
 
 
 
 
Continuing operations

($0.22
)


($0.10
)


($0.23
)


$0.13

Discontinued operations
(1.98
)

(2.30
)

(2.12
)

(2.62
)
Loss per share - basic

($2.20
)


($2.40
)


($2.35
)


($2.49
)
 
 
 
 
 
 
 
 
(Loss) Earnings per share - diluted
 
 
 
 
 
 
 
Continuing operations

($0.22
)


($0.10
)


($0.23
)


$0.12

Discontinued operations
(1.98
)

(2.30
)

(2.12
)

(2.57
)
Loss per share - diluted

($2.20
)


($2.40
)


($2.35
)


($2.45
)
 
 
 
 
 
 
 
 
Weighted average shares used in per share calculation:
 
 
 
 
 
 
 
Basic
103,659

 
100,140

 
102,807

 
99,046

Diluted
103,659

 
100,140

 
102,807

 
100,672

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

5
Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
March 31,
2019
 
March 25,
2018
 
March 31,
2019
 
March 25,
2018
 
(In thousands)
Net loss

($227,731
)
 

($240,533
)
 

($241,344
)
 

($246,653
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Currency translation (loss) gain
(250
)
 
788

 
(784
)
 
2,006

Net unrealized gain (loss) on available-for-sale securities, net of tax benefit of $0 and $0, respectively
1,948

 
(2,269
)
 
2,742

 
(5,969
)
Other comprehensive income (loss)
1,698

 
(1,481
)
 
1,958

 
(3,963
)
Comprehensive loss
(226,033
)
 
(242,014
)
 
(239,386
)
 
(250,616
)
Net income attributable to non-controlling interest
121

 
44

 
23

 
59

Comprehensive loss attributable to controlling interest

($226,154
)
 

($242,058
)
 

($239,409
)
 

($250,675
)
The accompanying notes are an integral part of the consolidated financial statements.


6
Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling Interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 24, 2018
101,488

 

$127

 

$2,549,123

 

($482,710
)
 

$596

 

$2,067,136

 

$4,945

 

$2,072,081

Net loss
—

 
—

 
—

 
(11,067
)
 
—

 
(11,067
)
 
(67
)
 
(11,134
)
Currency translation gain, net of tax benefit of $0
—

 
—

 
—

 
—

 
343

 
343

 
—

 
343

Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(275
)
 
(275
)
 
—

 
(275
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(10,999
)
 
(67
)
 
(11,066
)
Income tax expense from stock option exercises
—

 
—

 
(10,828
)
 
—

 
—

 
(10,828
)
 
—

 
(10,828
)
Stock-based compensation
—

 
—

 
12,117

 
—

 
—

 
12,117

 
—

 
12,117

Exercise of stock options and issuance of shares
1,032

 
1

 
15,503

 
—

 
—

 
15,504

 
—

 
15,504

Adoption of ASC 606
—

 
—

 
—

 
10,299

 
—

 
10,299

 
—

 
10,299

Convertible note issuance
—

 
—

 
110,591

 
—

 
—

 
110,591

 
—

 
110,591

Balance at September 23, 2018
102,520

 

$128

 

$2,676,506

 

($483,478
)
 

$664

 

$2,193,820

 

$4,878

 

$2,198,698

Net loss
—

 
—

 
—

 
(2,450
)
 
—

 
(2,450
)
 
(31
)
 
(2,481
)
Currency translation loss, net of tax benefit of $0
—

 
—

 
—

 
—

 
(877
)
 
(877
)
 
—

 
(877
)
Unrealized gain on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
1,069

 
1,069

 
—

 
1,069

Comprehensive loss
—

 
—

 
—

 
—

 
—

 
(2,258
)
 
(31
)
 
(2,289
)
Income tax benefit from stock option exercises
—

 
—

 
9,278

 
—

 
—

 
9,278

 
—

 
9,278

Stock-based compensation
—

 
—

 
13,635

 
—

 
—

 
13,635

 
—

 
13,635

Exercise of stock options and issuance of shares
553

 
1

 
4,182

 
—

 
—

 
4,183

 
—

 
4,183

Balance at December 30, 2018
103,073

 

$129

 

$2,703,601

 

($485,928
)
 

$856

 

$2,218,658

 

$4,847

 

$2,223,505

Net (loss) income
—

 
—

 
—

 
(227,852
)
 
—

 
(227,852
)
 
121

 
(227,731
)
Currency translation loss, net of tax benefit of $0
—

 
—

 
—

 
—

 
(250
)
 
(250
)
 
—

 
(250
)
Unrealized gain on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
1,948

 
1,948

 
—

 
1,948

Comprehensive (loss) income
—

 
—

 
—

 
—

 
—

 
(226,154
)
 
121

 
(226,033
)
Income tax expense from stock option exercises
—

 
—

 
(469
)
 
—

 
—

 
(469
)
 
—

 
(469
)
Stock-based compensation
—

 
—

 
15,647

 
—

 
—

 
15,647

 
—

 
15,647

Exercise of stock options and issuance of shares
1,442

 
2

 
53,263

 
—

 
—

 
53,265

 
—

 
53,265

Balance at March 31, 2019
104,515

 

$131

 

$2,772,042

 

($713,780
)
 

$2,554

 

$2,060,947

 

$4,968

 

$2,065,915

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


7
Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling Interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 25, 2017
97,674

 

$121

 

$2,419,517

 

($202,742
)
 

$5,909

 

$2,222,805

 
—

 

$2,222,805

Net loss
—

 
—

 
—

 
(19,857
)
 
—

 
(19,857
)
 
(16
)
 
(19,873
)
Currency translation gain, net of tax benefit of $0
—

 
—

 
—

 
—

 
1,642

 
1,642

 
—

 
1,642

Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(39
)
 
(39
)
 
—

 
(39
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(18,254
)
 
(16
)
 
(18,270
)
Income tax expense from stock option exercises
—

 
—

 
(3,798
)
 
—

 
—

 
(3,798
)
 
—

 
(3,798
)
Stock-based compensation
—

 
—

 
10,226

 
—

 
—

 
10,226

 
—

 
10,226

Exercise of stock options and issuance of shares
371

 
—

 
118

 
—

 
—

 
118

 
—

 
118

Contributions from non-controlling interests
—

—

—

 
—

 
—

 
—

 
—

 
4,900

 
4,900

Balance at September 24, 2017
98,045

 

$121

 

$2,426,063

 

($222,599
)
 

$7,512

 

$2,211,097

 

$4,884

 

$2,215,981

Net income
—

 
—

 
—

 
13,721

 
 
 
13,721

 
31

 
13,752

Currency translation loss, net of tax benefit of $0
—

 
—

 
—

 
—

 
(424
)
 
(424
)
 
—

 
(424
)
Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(3,660
)
 
(3,660
)
 
—

 
(3,660
)
Comprehensive income
—

 
—

 
—

 
—

 
—

 
9,637

 
31

 
9,668

Income tax expense from stock option exercises
—

 
—

 
(849
)
 
—

 
—

 
(849
)
 
—

 
(849
)
Stock-based compensation
—

 
—

 
11,780

 
—

 
—

 
11,780

 
—

 
11,780

Exercise of stock options and issuance of shares
1,843

 
2

 
46,430

 
—

 
—

 
46,432

 
—

 
46,432

Balance at December 24, 2017
99,888

 

$123

 

$2,483,424

 

($208,878
)
 

$3,428

 

$2,278,097

 

$4,915

 

$2,283,012

Net (loss) income
—

 
—

 
—

 
(240,577
)
 
—

 
(240,577
)
 
44

 
(240,533
)
Currency translation gain, net of tax benefit of $0
—

 
—

 
—

 
—

 
788

 
788

 
—

 
788

Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(2,269
)
 
(2,269
)
 
—

 
(2,269
)
Comprehensive (loss) income
—

 
—

 
—

 
—

 
—

 
(242,058
)
 
44

 
(242,014
)
Income tax (expense) benefit from stock option exercises
—

 
—

 
(1,291
)
 
—

 
—

 
(1,291
)
 
—

 
(1,291
)
Stock-based compensation
—

 
—

 
11,471

 
—

 
—

 
11,471

 
—

 
11,471

Exercise of stock options and issuance of shares
599

 
1

 
15,692

 
—

 
—

 
15,693

 
—

 
15,693

Balance at March 25, 2018
100,487

 

$124

 

$2,509,296

 

($449,455
)
 

$1,947

 

$2,061,912

 

$4,959

 

$2,066,871


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


8
Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
March 31,
2019
 
March 25,
2018
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss

($241,344
)
 

($246,653
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
116,256

 
113,244

Amortization of debt issuance costs and discount
12,687

 
—

Stock-based compensation
40,497

 
33,319

Impairment charges
197,580

 
247,455

Loss on disposal or impairment of long-lived assets
2,842

 
8,803

Amortization of premium/discount on investments
2,113

 
3,943

Loss (gain) on equity investment
12,443

 
(7,510
)
Foreign exchange loss (gain) on equity investment
936

 
(2,543
)
Deferred income taxes
(1,655
)
 
(49,875
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(56,339
)
 
5,728

Inventories
(19,237
)
 
(4,640
)
Prepaid expenses and other assets
3,517

 
2,041

Accounts payable, trade
6,590

 
15,328

Accrued salaries and wages and other liabilities
110,083

 
6,783

Net cash provided by operating activities
186,969

 
125,423

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(106,522
)
 
(128,433
)
Purchases of patent and licensing rights
(9,148
)
 
(7,913
)
Proceeds from sale of property and equipment
286

 
538

Purchases of short-term investments
(251,676
)
 
(174,623
)
Proceeds from maturities of short-term investments
146,368

 
166,771

Proceeds from sale of short-term investments
28,185

 
176,981

Purchase of acquired business, net of cash acquired
—

 
(427,120
)
Net cash used in investing activities
(192,507
)
 
(393,799
)
Cash flows from financing activities:
 
 
 
Proceeds from issuing shares to non-controlling interest
—

 
4,900

Payment of acquisition-related contingent consideration
—

 
(1,850
)
Proceeds from long-term debt borrowings
95,000

 
555,000

Payments on long-term debt borrowings
(387,000
)
 
(384,000
)
Proceeds from convertible notes
575,000

 
—

Payments of debt issuance costs
(12,938
)
 
—

Net proceeds from issuance of common stock
72,948

 
62,240

Net cash provided by financing activities
343,010

 
236,290

Effects of foreign exchange changes on cash and cash equivalents
(239
)
 
715

Net increase (decrease) in cash and cash equivalents
337,233

 
(31,371
)
Cash and cash equivalents:
 
 
 
Beginning of period
118,924

 
132,597

End of period

$456,157

 

$101,226

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

$15,247

 

$19,275

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

9
Table of Contents

CREE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation and New Accounting Standards
Overview
Cree, Inc. (the Company) is an innovator of wide bandgap semiconductor products for power and radio-frequency (RF) applications and lighting-class light emitting diode (LED) products. The Company's products are targeted for applications such as transportation, power supplies, inverters, wireless systems, indoor and outdoor lighting, electronic signs and signals and video displays.
The Company's Wolfspeed segment's products consist of silicon carbide (SiC) and gallium nitride (GaN) materials, power devices and RF devices based on silicon (Si) and wide bandgap semiconductor materials. The Company's materials products and power devices are used in solar, electric vehicles, motor drives, power supplies and transportation applications. The Company's materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
The Company's LED Products segment's products consist of LED chips and LED components. The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.
In addition, the Company designs, manufactures and sells LED lighting fixtures and lamps for the commercial, industrial and consumer markets. The Company refers to these product lines as the Lighting Products business unit. As discussed in Note 2, “Discontinued Operations,” on March 14, 2019, the Company executed a definitive agreement to sell its Lighting Products business unit to IDEAL Industries, Inc (IDEAL). As a result, the Company has classified the results of the Lighting Products business unit, which previously was identified as the Lighting Products segment, as discontinued operations in its consolidated statements of (loss) income 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, California, Arkansas, 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, Arizona, Arkansas, California 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:
•
Wolfspeed
•
LED Products
For financial results by reportable segment, please refer to Note 14, "Reportable Segments."
Basis of Presentation
The consolidated financial statements presented herein 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 (loss) income, shareholders' equity and cash flows at March 31, 2019, and for all periods presented, have been made. All material intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 24, 2018 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 24, 2018 (fiscal 2018). The results of operations for the three and nine months ended March 31, 2019 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 30, 2019 (fiscal 2019). Historical periods presented include reclassifications to reflect discontinued operations (see Note 2).

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The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.
The Company has identified an error pertaining to the amounts presented as currency translation loss and unrealized gain on available-for-sale securities in the previously reported Consolidated Statements of Comprehensive Loss for the three and nine months ended March 25, 2018.  As a result, the Company has revised the amounts for the three and nine months ended March 25, 2018 to reflect a currency translation gain of $0.8 million and $2.0 million, and net unrealized loss on available-for-sale securities of $2.3 million and $6.0 million, net of tax benefit, respectively.  The Company concluded that these errors were not material individually or in the aggregate to any of the periods impacted.
Recently Issued Accounting Pronouncements Adopted
Nonemployee Stock Compensation
In June 2018, the FASB issued ASU 2018-07: Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The Company early adopted this standard in the second quarter of fiscal 2019. There was no material impact upon adoption of this standard.
Fair Value Measurement Disclosure
In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements required for fair value measurements. The Company early adopted this standard in the first quarter of fiscal 2019.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The Company early adopted this standard in the first quarter of fiscal 2019. There was no significant impact on the financial statements.
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 that 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 Company adopted this standard on June 25, 2018. The cumulative effect of this adjustment recorded to beginning retained earnings as of June 25, 2018 was $10.3 million, and the Company did not recognize a discrete tax impact related to the opening deferred tax balance as of June 25, 2018 due to the full U.S. valuation allowance. The Company recognized a loss of revenue of approximately $1.6 million for the nine months ended March 31, 2019, and expects the ongoing effect to be immaterial to the consolidated financial statements. See Note 3, "Revenue Recognition," for discussion of the impacted financial statement line items.
Goodwill Impairment Testing
In January 2017, the FASB issued ASU No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to continue to perform Step 1 of the goodwill impairment test. The Company early adopted this standard in the third quarter of fiscal 2018.
Recently Issued Accounting Pronouncements Pending Adoption

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Leases
In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842) and ASU 2018-10: Codification Improvements to Topic 842, Leases. The FASB has subsequently issued multiple ASUs, which amend and clarify the guidance in Topic 842. These ASUs require 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 the modified retrospective method. The Company is currently analyzing the impact of this new pronouncement.
Note 2 – Discontinued Operations
On March 14, 2019, the Company entered into a Purchase Agreement (the Purchase Agreement) with IDEAL. The transaction, is targeted to close by the end of Cree's fiscal year 2019, subject to customary closing conditions and governmental approvals.
Pursuant to the Purchase Agreement, the Company will sell to IDEAL, and IDEAL will purchase from the Company, certain manufacturing facilities and equipment, inventory, intellectual property rights, contracts, and real estate of the Company comprising the Company’s Lighting Products business unit, which includes the LED lighting fixtures, lamps and corporate lighting solutions business for commercial, industrial and consumer applications, and all of the issued and outstanding equity interests of E-conolight LLC (E-conolight), Cree Canada Corp. and Cree Europe S.r.l. (collectively the Lighting Products business), IDEAL will also assume certain liabilities related to the Lighting Products business. The Lighting Products business represented all of the Lighting Products segment disclosed in our historical financial statements.
The aggregate consideration paid for the Lighting Products business will consist of $225 million in cash, which is subject to certain adjustments, and an earnout payment subject to the future performance of the Lighting Products business. In connection with the transaction, the Company and IDEAL will also enter into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which will assign to IDEAL certain intellectual property owned by the Company and license to IDEAL certain additional intellectual property owned by the Company; (ii) a Transition Services Agreement, which is designed to ensure a smooth transition of the Lighting Products business to IDEAL; (iii) an LED Supply Agreement, pursuant to which the Company will supply IDEAL with certain LED chip and component products for three years; and, (iv) a Real Estate License Agreement, which will allow IDEAL to use certain premises owned by the Company to conduct the Lighting Products business after closing.
The Company has classified the results of the Lighting Products business as discontinued operations in the Company’s consolidated statements of (loss) income for all periods presented. The Company ceased recording depreciation and amortization of long-lived assets of the Lighting Products business upon classification as discontinued operations in March 2019. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the consolidated balance sheets. The assets and liabilities held for sale as of March 31, 2019 are classified as current in the consolidated balance sheet as the Company expects the transaction to close and proceeds to be collected within one year.
The following table presents the financial results of the Lighting Products business unit as loss from discontinued operations, net of income taxes in the Company's consolidated statements of (loss) income (in thousands):


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Three Months Ended
 
Nine Months Ended
 
March 31, 2019
 
March 25, 2018
 
March 31, 2019
 
March 25, 2018
Revenue, net

$109,386

 

$130,759

 

$376,008

 

$425,100

Cost of revenue, net
82,490

 
106,564

 
287,553

 
347,037

Gross profit
26,896

 
24,195

 
88,455

 
78,063

Total operating expenses
231,937

 
286,717

 
306,350

 
366,375

Non-operating income
197

 
348

 
497

 
1,068

Loss from discontinued operations before income taxes
(204,844
)
 
(262,174
)
 
(217,398
)
 
(287,244
)
Income tax expense (benefit)
576

 
(31,804
)
 
687

 
(28,177
)
Loss from discontinued operations, net of income taxes

($205,420
)
 

($230,370
)
 

($218,085
)
 

($259,067
)

Additionally, the Company recorded a $197.6 million impairment charge on assets held for sale, which includes goodwill of $90 million, for the three and nine months ended March 31, 2019 and a $247.5 million goodwill impairment charge for the three and nine months ended March 25, 2018.

The following table presents the assets and liabilities related to the Lighting Products business unit held for sale (in thousands):
 
March 31, 2019
 
June 24, 2018
Assets Held for Sale
 
 
 
Accounts receivable, net

$59,929

 

$67,477

Prepaid and other current assets
7,264

 
11,059

Income tax receivable
494

 
449

Inventories
143,104

 
144,379

Property and equipment, net
71,226

 
72,246

Deferred tax assets
538

 
685

Intangible assets, net
133,358

 
174,239

Goodwill
—

 
90,326

Other long term assets
203

 
196

Valuation allowance on disposal group
(75,334
)

—

Total Assets Held for Sale*

$340,782

 

$561,056

 
 
 
 
Liabilities Held for Sale
 
 
 
Accounts payable

$34,201

 

$45,953

Accrued salaries and wages
18,661

 
11,581

Other accrued liabilities
21,122

 
24,248

Income tax payable
—

 
271

Other long term liabilities
16,371

 
21,505

Total Liabilities Held for Sale*

$90,355

 

$103,558


*Amounts in the June 24, 2018 column are classified as current and long-term in the consolidated balance sheet.

The following table presents the cash flow of the Lighting Products business unit (in thousands):


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Nine Months Ended
 
March 31, 2019
 
March 25, 2018
Net cash provided by discontinued operating activities

$9,294



$49,047

Net cash used in discontinued investing activities
(15,356
)

(12,577
)

Note 3 – Revenue Recognition
Effective June 25, 2018, the Company adopted ASC Topic 606: “Revenue from Contracts with Customers," and all related accounting standard updates, using the modified retrospective method applied to contracts not completed as of June 25, 2018. Results for all reporting periods subsequent to adoption are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic revenue recognition policy under ASC Topic 605: “Revenue Recognition."
The Company follows a five-step approach defined by the new standard for recognizing revenue, consisting of (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.
Master supply or distributor agreements are in place with the majority of the Company's customers and contain terms and conditions including, but not limited to payment, delivery, incentives and warranty. These agreements typically do not require minimum purchase commitments. In the case an agreement is not present, the Company considers a purchase order, which is governed by the Company’s standard terms and conditions, to be a contract.
Substantially all of the Company's revenue is derived from product sales. Revenue is recognized at a point in time based on the Company’s evaluation of when the customer obtains control of the products, and all performance obligations under the terms of the contract are satisfied. If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred based on the contract and shipping terms, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied. Sales of products typically do not include more than one performance obligation.
Pricing terms are negotiated independently on a stand-alone basis. Revenue is measured based on the amount of net consideration the Company expects to be entitled to in exchange for products or services. Variable consideration is recognized as a reduction of net revenue with a corresponding reserve at the time of revenue recognition, and consists primarily of sales incentives or rebates, price concessions and return allowances. Variable consideration is estimated based on contractual terms, historical analysis of customer purchase volumes, or historical analysis using specific data for the type of consideration being assessed. The Company offers product warranties and establishes liabilities for estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liability estimates are included in cost of revenue in the Company’s Consolidated Statements of (Loss) Income, and further detail is presented in Note 13, "Commitments and Contingencies."
Contract liabilities primarily include deferred revenue, price protection guarantees, customer deposits and various rights of return. Contract liabilities were $74.6 million and $47.1 million for the periods ended March 31, 2019 and June 24, 2018, respectively, and are recorded within accrued contract liabilities and other long-term liabilities on the balance sheet. These items were previously presented as a reduction of accounts receivable on the consolidated balance sheet. The adjustments do not impact net cash used in operating activities; however, they do impact the changes in operating assets and liabilities for the related accounts within the disclosure of operating activities on the statement of cash flows
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Incidental contract costs that are not material in context of the delivery of products are expensed as incurred. Sales commissions are expensed when the amortization period is less than one year. Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s fulfillment costs as a manufacturer consist of inventory, fixed assets, and intangible assets, all of which are accounted for under the respective guidance for those asset types.

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Table of Contents

The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are due within 12 months of completion of the performance obligation and invoicing, and therefore do not contain significant financing components.
Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue, and shipping and handling costs are treated as fulfillment activities and are included in cost of revenue in the Company’s Consolidated Statements of (Loss) Income.
Opening Balance Adjustments
The following table summarizes the impacts of adopting the new revenue standard on the Company's unaudited consolidated balance sheet (in thousands):
 
Balance as of June 24, 2018
 
Adjustments
 
Opening Balance as of June 25, 2018
Assets:
 
 
 
 
 
Accounts Receivable

$86,398

 

$43,355

 

$129,753

Liabilities:
 
 
 
 
 
Accrued Contract Liabilities
—

 
(42,675
)
 
(42,675
)
Stockholders' Equity:
 
 
 
 
 
Accumulated Deficit
(482,710
)
 
10,299

 
(472,411
)
Revenue Disaggregation
The following table presents disaggregated revenue by geography (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
March 31, 2019
 
March 25, 2018
 
March 31, 2019
 
March 25, 2018
United States

$67,643

 

$53,796

 

$194,463

 

$161,446

China
83,448

 
86,700

 
289,957

 
279,017

Europe
63,238

 
46,788

 
197,168

 
112,656

Other
59,721

 
37,916

 
147,141

 
106,009

Total Revenue

$274,050

 

$225,200

 

$828,729

 

$659,128

Note 4 – Acquisition
Infineon Technologies AG Radio Frequency Power Business
On March 6, 2018, the Company acquired certain assets of the Infineon Technologies AG (Infineon) Radio Frequency Power Business (RF Power), pursuant to an asset purchase agreement with Infineon in exchange for a base purchase price of $429 million, subject to certain adjustments. As part of the agreement, the Company paid $427 million of cash on the purchase date and agreed to purchase certain additional non-U.S. property and equipment related to the RF Power business from Infineon for approximately $2 million, which was completed during the fourth quarter of fiscal 2018. The acquisition allows the Company to expand its product portfolio into the wireless market.
The acquisition of the RF Power business from Infineon was accounted for as a business combination. The assets, liabilities and operating results of the RF Power business have been included in the Company's consolidated financial statements from the date of acquisition. Additionally, the RF Power business's results from operations are reported as part of the Company's Wolfspeed segment. The results of the RF Power business are reflected in the Company's Consolidated Statements of (Loss) Income for the three and nine months ended March 31, 2019.
The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):

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Table of Contents

Assets:
 
Inventories

$22,500

Property and equipment
11,722

Other assets
433

Intangible assets
149,000

Goodwill
248,957

Total Assets
432,612

Liabilities assumed:

Accounts payable
(39
)
Accrued expenses and liabilities
(3,411
)
Total liabilities assumed
(3,450
)
Net assets acquired

$429,162

The amortization periods for intangible assets acquired are as follows (in thousands, except for years):
 
Asset Amount
 
Estimated Life in Years
Lease agreement

$1,000

 
10
Customer relationships
92,000

 
15
Developed technology
44,000

 
14
Non-compete agreements
12,000

 
4
Total identifiable intangible assets

$149,000

 
 
The weighted average amortization periods for intangibles was 13.8 years. Goodwill largely consists of manufacturing and other synergies of the combined companies, and the value of the assembled workforce. For tax purposes, in accordance with Internal Revenue Code Section 197, $245 million of goodwill will be amortized over 15 years.
The Company incurred approximately $3.8 million of total transaction costs related to the acquisition, of which approximately $0.1 million were recognized in the first and second quarters of fiscal 2019 in accordance with U.S. GAAP.
Supplemental Pro Forma Financial Information
The following unaudited pro forma consolidated financial information reflects the results of continuing operations of the Company as if the RF Power transaction had occurred at the beginning of the fiscal year prior to the fiscal year of acquisition, after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
 
March 25, 2018
 
March 25, 2018
Revenue
 
$240,180
 
$724,547
Net (loss) income
 
(14,485
)
 
3,802

(Loss) earnings per share, basic
 

($0.14
)
 

$0.04

(Loss) earnings per share, diluted
 

($0.14
)
 

$0.04

These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the RF Power business to give effect to events and transactions that are directly attributable to the RF Power business transactions, including the elimination of sales by the Company to the RF Power business prior to acquisition, additional depreciation and amortization that would have been charged assuming the fair value adjustments primarily to property and equipment and intangible assets had been applied at the beginning of fiscal 2017, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the three months and nine months ended March 25, 2018 are one-time acquisition costs and foreign currency gains attributable to the RF Power business of $0.1 million. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal 2017, nor is it indicative of any future results.

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Arkansas Power Electronics International, Inc.
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 were achieved over the subsequent two years, additional cash payments totaling up to $4.6 million were to be made to the former APEI shareholders. Payments totaling $2.7 million were made to the former APEI shareholders in July 2016 based on achievement of the first-year goals. The final payment of $1.9 million was made in July 2017 based on achievement of the second-year goals. 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 are reported as part of the Company's Wolfspeed segment.
Note 5 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
 
March 31, 2019
 
June 24, 2018
Billed trade receivables

$146,883

 

$128,858

Unbilled contract receivables
4,023

 
966


150,906

 
129,824

Allowance for sales returns, discounts and other incentives
—

 
(42,675
)
Allowance for bad debts
(516
)
 
(751
)
Accounts receivable, net

$150,390

 

$86,398

Inventories
The following table summarizes the components of inventories (in thousands):
 
March 31, 2019
 
June 24, 2018
Raw material

$37,580

 

$35,092

Work-in-progress
95,882

 
86,193

Finished goods
39,331

 
30,351

Inventories

$172,793

 

$151,636

Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
 
March 31, 2019
 
June 24, 2018
Accrued taxes

$4,943

 

$6,414

Accrued professional fees
12,419

 
4,901

Accrued warranty
1,241

 
1,399

Accrued other
1,869

 
6,566

Other current liabilities

$20,472

 

$19,280


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Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
 
March 31, 2019
 
June 24, 2018
Currency translation gain

$4,292

 

$5,075

Net unrealized loss on available-for-sale securities
(1,738
)
 
(4,479
)
Accumulated other comprehensive income, net of taxes

$2,554

 

$596

Non-Operating (Expense) Income, net
The following table summarizes the components of non-operating (expense) income, net (in thousands):
 
Three Months Ended
Nine Months Ended
 
March 31, 2019
 
March 25, 2018
March 31, 2019
 
March 25, 2018
Foreign currency (loss) gain, net

($613
)
 

$3,530


($1,107
)
 

$4,386

Loss on sale of investments, net
(25
)
 
(133
)
(132
)
 
(85
)
(Loss) gain on equity investment, net
(3,898
)
 
(13,968
)
(12,457
)
 
7,510

Interest (expense) income, net
(3,731
)
 
739

(9,763
)
 
3,354

Other, net
(173
)
 
(168
)
(236
)
 
(223
)
Non-operating (expense) income, net

($8,440
)
 

($10,000
)

($23,695
)
 

$14,942

The change in (loss) gain on equity investment, net is due to the decrease in the Lextar Electronics Corporation (Lextar) stock price.
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 Loss
 
Affected Line Item in the Consolidated Statements of (Loss) Income
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 31, 2019
 
March 25, 2018
 
March 31, 2019
 
March 25, 2018
 
 
Net unrealized loss on available-for-sale securities, net of taxes
 

($25
)
 

($133
)
 

($132
)
 

($85
)
 
Non-operating (expense) income, net
Less income tax effect
 
—

 
—

 
—

 
—

 
Income tax expense (benefit)
Total reclassifications
 

($25
)
 

($133
)
 

($132
)
 

($85
)
 

Note 6 – Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, variable rate demand notes, 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.

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The following tables summarize short-term investments (in thousands):
 
 
March 31, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$96,029

 

$170

 

($297
)
 

$95,902

Corporate bonds
 
151,244

 
337

 
(274
)
 
151,307

U.S. agency securities
 
4,689

 
1

 
(1
)
 
4,689

U.S. Treasury securities
 
28,972

 
7

 
(18
)
 
28,961

Non-U.S. certificates of deposit
 
50,277

 
782

 
—

 
51,059

U.S. certificates of deposit
 
—

 
—

 
—

 
—

Commercial paper
 
1,193

 
—

 
—

 
1,193

Total short-term investments
 

$332,404

 

$1,297

 

($590
)
 

$333,111

 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$110,198

 

$17

 

($939
)
 

$109,276

Corporate bonds
 
77,871

 
36

 
(1,150
)
 
76,757

U.S. agency securities
 
3,922

 
—

 
(38
)
 
3,884

U.S. Treasury securities
 
—

 
—

 
—

 
—

Non-U.S. certificates of deposit
 
77,744

 
—

 
—

 
77,744

U.S. certificates of deposit
 
500

 
—

 
—

 
500

Commercial paper
 
—

 
—

 
—

 
—

Total short-term investments
 

$270,235

 

$53

 

($2,127
)
 

$268,161



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The following tables present the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities):
 
 
March 31, 2019
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$2,406

 

$—

 

$68,677

 

($297
)
 

$71,083

 

($297
)
Corporate bonds
 
31,144

 
(17
)
 
32,930

 
(257
)
 
64,074

 
(274
)
U.S. agency securities
 
5,788

 
(1
)
 
—

 
—

 
5,788

 
(1
)
U.S. Treasury securities
 
10,110

 
(2
)
 
3,907

 
(16
)
 
14,017

 
(18
)
Total
 

$49,448

 

($20
)
 

$105,514

 

($570
)
 

$154,962

 

($590
)
Number of securities with an unrealized loss
 
 
 
54

 
 
 
85
 
 
 
139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$97,470

 

($861
)
 

$3,642

 

($78
)
 

$101,112

 

($939
)
Corporate bonds
 
61,453

 
(1,088
)
 
1,486

 
(62
)
 
62,939

 
(1,150
)
U.S. agency securities
 
3,884

 
(38
)
 
—

 
—

 
3,884

 
(38
)
U.S. Treasury securities
 
—

 
—

 
—

 
—

 
—

 
—

Total
 

$162,807

 

($1,987
)
 

$5,128

 

($140
)
 

$167,935

 

($2,127
)
Number of securities with an unrealized loss
 
 
 
151

 
 
 
6

 
 
 
157

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 (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 March 31, 2019 or June 24, 2018.
The contractual maturities of short-term investments as of March 31, 2019 were as follows (in thousands):
 
 
Within One Year
 
After One, Within Five Years
 
After Five, Within Ten Years
 
After Ten
Years
 
Total
Municipal bonds

$37,749

 

$58,153

 

$—

 

$—

 

$95,902

Corporate bonds
61,245

 
90,062

 
—

 
—

 
151,307

U.S. agency securities
3,988

 
701

 
—

 
—

 
4,689

U.S. Treasury securities
28,961

 
—

 
—

 
—

 
28,961

Non-U.S. certificates of deposit
51,059

 
—

 
—

 
—

 
51,059

Commercial paper
1,193

 
—

 
—

 
—

 
1,193

Total short-term investments

$184,195

 

$148,916

 

$—

 

$—

 

$333,111


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Table of Contents

Note 7 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
•
Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
•
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments. As of March 31, 2019, financial assets utilizing Level 1 inputs included money market funds and U.S. treasury securities, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, certificates of deposit, commercial paper, variable rate demand notes 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 March 31, 2019.

21
Table of Contents

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
 
March 31, 2019
 
June 24, 2018
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
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