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 Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2017
   Tuesday, August 22, 2017 4:05:25 PM ET

Cree, Inc. (CREE ) today announced revenue of $359 million for its fourth quarter of fiscal 2017, ended June 25, 2017. This represents an 8% decrease compared to revenue of $388 million reported for the fourth quarter of fiscal 2016, and a 5% increase compared to the third quarter of fiscal 2017. GAAP net loss for the fourth quarter was $6 million, or $0.06 per diluted share, compared to GAAP net loss of $11 million, or $0.11 per diluted share, for the fourth quarter of fiscal 2016. On a non-GAAP basis, net income for the fourth quarter of fiscal 2017 was $4 million, or $0.04 per diluted share, compared to non-GAAP net income for the fourth quarter of fiscal 2016 of $19 million, or $0.19 per diluted share.

For fiscal year 2017, Cree reported revenue of $1.5 billion, which represents a 9% decrease compared to revenue of $1.6 billion for fiscal 2016. GAAP net loss was $98 million, or $1.00 per diluted share, compared to net loss of $22 million, or $0.21 per diluted share, for fiscal 2016. On a non-GAAP basis, net income for fiscal year 2017 was $50 million, or $0.50 per diluted share, compared to $88 million, or $0.86 per diluted share, for fiscal 2016.

"We made progress in Q4, with good results in each business and non-GAAP earnings per share that were in the middle of our target range," stated Chuck Swoboda, Cree Chairman and CEO. "We built a solid foundation for growth in all three businesses over the last year. In the near term, we will have some incremental spending to expand capacity and are excited about the opportunity for Cree to grow revenue and profits in the year ahead."

Business Outlook:

For its first quarter of fiscal 2018 ending September 24, 2017, Cree targets revenue in a range of $353 million to $367 million. GAAP net loss is targeted at $20 million to $25 million, or $0.20 to $0.25 per diluted share. Non-GAAP net income is targeted in a range of $2 million to $6 million, or $0.02 to $0.06 per diluted share. Targeted non-GAAP income excludes $18 million of pre-tax expenses related to stock-based compensation expense and the amortization of acquisition-related intangibles. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. Eastern time today to review the highlights of the fourth quarter and fiscal year 2017 results and the fiscal first quarter 2018 business outlook, including significant factors and assumptions underlying the targets noted above.

The conference call will be available to the public through a live audio web broadcast via the Internet. For webcast details, visit Cree’s website at investor.cree.com/events.cfm.

Supplemental financial information, including the non-GAAP reconciliation attached to this press release, is available on Cree’s website at investor.cree.com/results.cfm.

About Cree, Inc.

Cree is a leading innovator of lighting-class LEDs, lighting products and wide bandgap semiconductor products for power and radio frequency (RF) applications. Cree’s product families include LED lighting systems and bulbs, blue and green LED chips, high-brightness LEDs, lighting-class power LEDs, SiC materials, power devices and RF devices. Cree’s products are driving improvements in applications such as commercial and consumer general illumination, video screens, electronic signs and signals, motor drives, power supplies, EV charging, solar, traction, transportation, radar, communications, telecommunication, data link and broadband amplifiers.

For additional product and Company information, please refer to www.cree.com.

Non-GAAP Financial Measures:

This press release highlights the Company’s financial results on both a GAAP and a non-GAAP basis. The GAAP results include certain costs, charges and expenses which are excluded from non-GAAP results. By publishing the non-GAAP measures, management intends to provide investors with additional information to further analyze the Company’s performance, core results and underlying trends. Cree’s management evaluates results and makes operating decisions using both GAAP and non-GAAP measures included in this press release. Non-GAAP results are not prepared in accordance with GAAP and non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

Forward Looking Statements:

The schedules attached to this release are an integral part of the release. This press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. Actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our commercial Lighting results will suffer if new issues arise related to product quality of supplied components for this business; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our ability to lower costs; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity, including bringing on additional capacity on a timely basis to meet customer demand; the risk that longer manufacturing lead times may cause customers to fulfill their orders with a competitor’s products instead; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that our products fail to perform or fail to meet customer requirements or expectations, resulting in significant additional costs, including costs associated with warranty returns or the potential recall of our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor’s products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that our investments may experience periods of significant stock price volatility causing us to recognize fair value losses on our investment; the risk posed by managing an increasingly complex supply chain that has the ability to supply a sufficient number of raw materials, subsystems and finished products with the required specifications and quality; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved LED chips, LED components and LED lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for LED lighting products; risks associated with acquisitions, divestitures, joint ventures or investments generally; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the Securities and Exchange Commission (SEC), including our report on Form 10-K for the fiscal year ended June 26, 2016, and subsequent reports filed with the SEC. These forward-looking statements represent Cree’s judgment as of the date of this release. Except as required under the U.S. federal securities laws and the rules and regulations of the SEC, Cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise.

Cree(R) is a registered trademark and Wolfspeed(TM) is a trademark of Cree, Inc.

                                                                                                                                                                                                                                    
                                                                                                                                                                                                                               CREE, INC.
                                                                                                                                                                                                                CONDENSED CONSOLIDATED STATEMENTS OF LOSS
                                                                                                                                                                                                        (in thousands, except per share amounts and percentages)
                                                                                                                                                                                                                               (unaudited)
                                                                                                                                                                                                                                                                                                                  
                                                                                                                                                                                Three Months Ended                                                                                                                                                                                     Year Ended
                                                                                                           ------------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   June 25,                                                     June 26,                                                                                         June 25,                                                  June 26,
                                                                                                                                     2017                                                                                               2016                                                                                             2017                                                                                            2016
                                                                                                           ------------------------------------------------------                                             ------------------------------------------------------                                             -------------------------------------------------                                             ------------------------------------------------------
Revenue, net                                                                                                                  $        358,939                                                                                   $        388,413                                                                                   $ 1,473,000                                                                                   $      1,616,627
Cost of revenue, net                                                                                                260,938                                                      275,390                                               1,038,428                                                    1,129,553  
                                                                                                           -------------------- -------------- --------------------                                           -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           -------------------- -------------- --------------------
Gross profit                                                                                                                            98,001                                                                                            113,023                                                                                       434,572                                                                                            487,074
Gross margin percentage                                                                                                                   27.3 %                                                                                             29.1 %                                                                                        29.5 %                                                                                             30.1 %
                                                                                                                                                                                                                                                                                                                                                                                                                
Operating expenses:
   Research and development                                                                                                             39,257                                                                                             41,485                                                                                       158,549                                                                                            168,848
   Sales, general and administrative                                                                                                    64,039                                                                                             68,609                                                                                       277,175                                                                                            283,052
   Amortization or impairment of acquisition-related intangibles                                                                         6,792                                                                                              7,290                                                                                        27,499                                                                                             28,732
   Loss on disposal or impairment of long-lived assets                                                                                     980                                                                                                430                                                                                         2,521                                                                                             16,913
   Wolfspeed transaction termination fee                                                                     --                                               --                                                 (12,500 )                                                                --  
                                                                                                           -------------------- -------------- --------------------                                           -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           -------------------- -------------- --------------------
      Total operating expenses                                                                                                         111,068                                                                                            117,814                                                                                       453,244                                                                                            497,545
                                                                                                                                                                                                                                                                                                                                                                                                                
Operating loss                                                                                                                         (13,067 )                                                                                           (4,791 )                                                                                     (18,672 )                                                                                          (10,471 )
Operating loss percentage                                                                                                                 (3.6 )%                                                                                            (1.2 )%                                                                                       (1.3 )%                                                                                            (0.6 )%
                                                                                                                                                                                                                                                                                                                                                                                                                
Non-operating income (expense), net                                                                                   9,057                                                        1,040                                                  14,008                                                      (13,035 )
                                                                                                           -------------------- -------------- --------------------                                           -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           -------------------- -------------- --------------------
Loss from operations before income taxes                                                                                                (4,010 )                                                                                           (3,751 )                                                                                      (4,664 )                                                                                          (23,506 )
Income tax expense (benefit)                                                                                          1,880                                                        6,890                                                  93,454                                                       (1,970 )
                                                                                                           -------------------- -------------- --------------------                                           -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           -------------------- -------------- --------------------
Net loss                                                                                                            ($5,890 )                                                                      ($10,641 )                                                                 ($98,118 )                                                                      ($21,536 )
                                                                                                           ==================== ============== ====================                                           ==================== ============== ====================                                           ==================== ========= ====================                                           ==================== ============== ====================
                                                                                                                                                                                                                                                                                                                                                                                                                
Diluted loss per share                                                                                                                  ($0.06 )                                                                                           ($0.11 )                                                                                      ($1.00 )                                                                                           ($0.21 )
                                                                                                                                                                                                                                                                                                                                                                                                                
Shares used in diluted per share calculation                                                                                            97,548                                                                                            100,663                                                                                        98,487                                                                                            101,783
                                                                                                                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                       
                                                                                                                               CREE, INC.
                                                                                                                  CONDENSED CONSOLIDATED BALANCE SHEETS
                                                                                                                             (in thousands)
                                                                                                                                                                                                                     
                                                                                                                                            June 25,                                                                                      June 26,
                                                                                                                                              2017                                                                                          2016
                                                                                                                                                                                                                    -------------------------------------------------
                                                                                                                                           (unaudited)
                                                                                                                      ----------------------------------------------------                                          -------------------------------------------------
ASSETS
Current assets:
   Cash, cash equivalents, and short-term investments                                                                                    $   610,938                                                                                   $   605,305
   Accounts receivable, net                                                                                                                  148,392                                                                                       165,611
   Income tax receivable                                                                                                                       8,040                                                                                         6,304
   Inventories                                                                                                                               284,385                                                                                       303,542
   Prepaid expenses                                                                                                                           23,305                                                                                        26,810
   Other current assets                                                                                                                       23,390                                                                                        44,788
   Current assets held for sale                                                                                             2,180                                                   4,347  
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total current assets                                                                                                                 1,100,630                                                                                     1,156,707
Property and equipment, net                                                                                                                  581,263                                                                                       599,723
Goodwill                                                                                                                                     618,828                                                                                       618,828
Intangible assets, net                                                                                                                       274,315                                                                                       302,810
Other long-term investments                                                                                                                   50,366                                                                                        40,179
Deferred income taxes                                                                                                                         11,763                                                                                        38,564
Other assets                                                                                                               12,702                                                   9,249  
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total assets                                                                                                                       $ 2,649,867                                                                $ 2,766,060  
                                                                                                                      ==================== ========= ====================                                           ==================== ========= ====================
                                                                                                                                                                                                                     
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
   Accounts payable, trade                                                                                                               $   133,185                                                                                   $   132,286
   Accrued salaries and wages                                                                                                                 41,860                                                                                        44,642
   Other current liabilities                                                                                               36,978                                                  46,071  
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total current liabilities                                                                                                              212,023                                                                                       222,999
                                                                                                                                                                                                                     
Long-term liabilities:
   Long-term debt                                                                                                                            145,000                                                                                       160,000
   Deferred income taxes                                                                                                                      49,860                                                                                           943
   Other long-term liabilities                                                                                             20,179                                                  14,294  
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total long-term liabilities                                                                                                            215,039                                                                                       175,237
                                                                                                                                                                                                                     
Shareholders’ equity:
   Common stock                                                                                                                                  121                                                                                           125
   Additional paid-in-capital                                                                                                              2,419,517                                                                                     2,359,584
   Accumulated other comprehensive income, net of taxes                                                                                        5,909                                                                                         8,728
   Accumulated deficit                                                                                                   (202,742 )                                                                     (613 )
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total shareholders’ equity                                                             2,222,805                                               2,367,824  
                                                                                                                      -------------------- --------- --------------------                                           -------------------- --------- --------------------
      Total liabilities and shareholders’ equity                                                              $ 2,649,867                                                                $ 2,766,060  
                                                                                                                      ==================== ========= ====================                                           ==================== ========= ====================
                                                                                                                                                                                                                                                    
                                                                                                                                                                                                                                                 
                                                                                                                                                                                               CREE, INC.
                                                                                                                                                                                 FINANCIAL RESULTS BY OPERATING SEGMENT
                                                                                                                                                                                   (in thousands, except percentages)
                                                                                                                                                                                               (unaudited)
 
The following table reflects the results of the Company’s
reportable segments as reviewed by the Company’s Chief Executive
Officer, its Chief Operating Decision Maker or CODM, for the three
months and year ended June 25, 2017 and the three months and year
ended June 26, 2016. The CODM does not review inter-segment
transactions when evaluating segment performance and allocating
resources to each segment. As such, total segment revenue is equal
to the Company’s consolidated revenue.
                                                                                                                                                                                                                                                                                                                                                                     
                                                                                                                                                           Three Months Ended
                                                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               June 25, 2017                                              June 26, 2016                                                                                                                 Change
                                                                                         ---------------------------------------------------------                                          ----------------------------------------------------                                          --------------------------------------------------------------------------------------------------------------
Lighting Products revenue                                                                                   $        154,663                                                                                   $   198,418                                                                  ($43,755 )                                                                         (22 )%
   Lighting Products percent of revenue                                                                                   43 %                                                                                          51 %
LED Products revenue                                                                                                 143,445                                                                                       143,283                                                                       162                                                                -- %
   LED Products percent of revenue                                                                                        40 %                                                                                          37 %
Wolfspeed revenue                                                                                                     60,831                                                                                        46,712                                                                    14,119                                                                            30 %
   Wolfspeed percent of revenue                                                                        17 %                                                                       12 %                                                               
                                                                                         -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           --------------------------------
      Total revenue                                                                                         $        358,939                                                                $   388,413                                               ($29,474 )                                                                          (8 )%
                                                                                         ==================== ============== ====================                                           ==================== ========= ====================                                           ========== ====================
                                                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                               Year Ended
                                                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               June 25, 2017                                                                                    June 26, 2016                                                                                                                 Change
                                                                                         ---------------------------------------------------------                                          ----------------------------------------------------                                          --------------------------------------------------------------------------------------------------------------
Lighting Products revenue                                                                                   $        701,467                                                                                   $   889,133                                                                 ($187,666 )                                                                         (21 )%
   Lighting Products percent of revenue                                                                                   48 %                                                                                          55 %
LED Products revenue                                                                                                 550,302                                                                                       551,156                                                                      (854 )                                                              -- %
   LED Products percent of revenue                                                                                        37 %                                                                                          34 %
Wolfspeed revenue                                                                                                    221,231                                                                                       176,338                                                                    44,893                                                                            25 %
   Wolfspeed percent of revenue                                                                        15 %                                                                       11 %                                                               
                                                                                         -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           --------------------------------
      Total revenue                                                                                         $      1,473,000                                                                $ 1,616,627                                              ($143,627 )                                                                          (9 )%
                                                                                         ==================== ============== ====================                                           ==================== ========= ====================                                           ========== ====================
                                                                                                                                                                                                                                                                                                                                                                                    
                                                                                                                                                           Three Months Ended
                                                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               June 25, 2017                                                                                    June 26, 2016                                                                                                                 Change
                                                                                         ---------------------------------------------------------                                          ----------------------------------------------------                                          --------------------------------------------------------------------------------------------------------------
Lighting Products gross profit                                                                              $         36,803                                                                                   $    51,168                                                                  ($14,365 )                                                                         (28 )%
   Lighting Products gross margin                                                                                       23.8 %                                                                                        25.8 %
LED Products gross profit                                                                                             37,206                                                                                        46,170                                                                    (8,964 )                                                                         (19 )%
   LED Products gross margin                                                                                            25.9 %                                                                                        32.2 %
Wolfspeed gross profit                                                                                                27,698                                                                                        23,631                                                                     4,067                                                                            17 %
   Wolfspeed gross margin                                                                                               45.5 %                                                                                        50.6 %
Contract manufacturer dispute related expenses                                                                --                                                                                        (2,108 )                                                                   2,108
T8 product recall charges                                                                                     --                                                                                        (1,349 )                                                                   1,349
Unallocated costs                                                                                  (3,706 )                                                                   (4,489 )                                                                     783                                                         17 %
                                                                                         -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           ---------- --------------------
   Consolidated gross profit                                                                                $         98,001                                                                $   113,023                                               ($15,022 )                                                                         (13 )%
                                                                                         ==================== ============== ====================                                           ==================== ========= ====================                                           ========== ====================
   Consolidated gross margin                                                                                            27.3 %                                                                                        29.1 %
                                                                                                                                                                                                                                                                                                                                                                     
                                                                                                                                                               Year Ended
                                                                                         -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               June 25, 2017                                                                                    June 26, 2016                                                                                                                 Change
                                                                                         ---------------------------------------------------------                                          ----------------------------------------------------                                          --------------------------------------------------------------------------------------------------------------
Lighting Products gross profit                                                                              $        196,218                                                                                   $   241,699                                                                  ($45,481 )                                                                         (19 )%
   Lighting Products gross margin                                                                                       28.0 %                                                                                        27.2 %
LED Products gross profit                                                                                            151,675                                                                                       173,814                                                                   (22,139 )                                                                         (13 )%
   LED Products gross margin                                                                                            27.6 %                                                                                        31.5 %
Wolfspeed gross profit                                                                                               103,465                                                                                        94,622                                                                     8,843                                                                             9 %
   Wolfspeed gross margin                                                                                               46.8 %                                                                                        53.7 %
Contract manufacturer dispute related expenses                                                                --                                                                                        (2,108 )                                                                   2,108
T8 product recall charges                                                                                     --                                                                                        (1,349 )                                                                   1,349
Unallocated costs                                                                                 (16,786 )                                                                  (19,604 )                                                                   2,818                                                         14 %
                                                                                         -------------------- -------------- --------------------                                           -------------------- --------- --------------------                                           ---------- --------------------
   Consolidated gross profit                                                                                $        434,572                                                                $   487,074                                               ($52,502 )                                                                         (11 )%
                                                                                         ==================== ============== ====================                                           ==================== ========= ====================                                           ========== ====================
   Consolidated gross margin                                                                                            29.5 %                                                                                        30.1 %
                                                                                                                                                                                                                                                                                                                                                                     

Reportable Segments Description

The Company’s Lighting Products segment primarily consists of LED lighting systems and lamps. The Company’s LED Products segment includes LED chips and LED components. The Company’s Wolfspeed segment includes power devices, RF devices and SiC materials.

Financial Results by Reportable Segment

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 loss must be included to reconcile the consolidated gross profit presented in the preceding table to the Company’s consolidated income before taxes.

The Company allocates direct costs and indirect costs to each segment’s cost of revenue. The allocation methodology is based on a reasonable measure of utilization considering the specific facts and circumstances of the cost being allocated.

Certain costs are not allocated when evaluating segment performance. These unallocated costs consist 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.

Cree, Inc. Non-GAAP Measures of Financial Performance

To supplement the Company’s consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, Cree uses non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP gross margin, non-GAAP operating income, non-GAAP non-operating income, net, non-GAAP net income, non-GAAP earnings per diluted share and free cash flow.

Reconciliation to the nearest GAAP measure of all historical non-GAAP measures included in this press release can be found in the tables included with this press release. In this press release, Cree also presents its target for non-GAAP expenses, which are expenses less expenses in the various categories described below. Both our GAAP targets and non-GAAP targets do not include any estimated changes in the fair value of our Lextar investment.

Non-GAAP measures presented in this press release are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cree’s results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate Cree’s results of operations in conjunction with the corresponding GAAP measures.

Cree believes that these non-GAAP measures, when shown in conjunction with the corresponding GAAP measures, enhance investors’ and management’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value. In addition, because Cree has historically reported certain non-GAAP results to investors, the Company believes the inclusion of non-GAAP measures provides consistency in the Company’s financial reporting.

For its internal budgeting process, and as discussed further below, Cree’s management uses financial statements that do not include the items listed below and the income tax effects associated with the foregoing. Cree’s management also uses non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the Company’s financial results.

Cree excludes the following items from one or more of its non-GAAP measures when applicable:

Contract manufacturer dispute related expenses. In fiscal 2016, the Company recognized charges associated with a dispute with a former Lighting Products contract manufacturer, whom Cree ceased utilizing as of the end of 2014. Because these charges relate to amounts from prior fiscal years, Cree does not consider these charges to be reflective of ongoing operating results.

T8 product recall charges. In fiscal 2016, the Company recognized charges associated with the product recall of its Linear LED T8 Replacement Lamps and the associated discontinuance of this product line. Because these charges relate to the exit from a market segment, Cree does not consider these charges to reflective of ongoing operating results.

Stock-based compensation expense. This expense consists of expenses for stock options, restricted stock, performance stock awards and employee stock purchases through its ESPP. Cree excludes stock-based compensation expenses from its non-GAAP measures because they are non-cash expenses that Cree does not believe are reflective of ongoing operating results.

Amortization or impairment of acquisition-related intangibles. Cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. Cree excludes these items because they arise from Cree’s prior acquisitions and have no direct correlation to the ongoing operating results of Cree’s business.

LED business restructuring charges or gains. In June 2015, Cree’s board of directors approved a plan to restructure the LED business. The restructuring, which was completed during fiscal 2016, reduced excess capacity and overhead in order to improve the cost structure moving forward. The components of the restructuring included the planned sale or abandonment of certain manufacturing equipment, facility consolidation and the elimination of certain positions. Because these charges relate to assets which have been retired prior to the end of their estimated useful lives and severance costs for eliminated positions, Cree does not consider these charges to be reflective of ongoing operating results. Similarly, Cree does not consider realized gains on the sale of assets relating to the restructuring to be reflective of ongoing operating results.

Changes in the fair value of our Lextar investment. The Company’s common stock ownership investment in Lextar Electronics Corporation is accounted for utilizing the fair value option. As such, changes in fair value are recognized in income, including fluctuations due to the exchange rate between the New Taiwan Dollar and the United States Dollar. Cree excludes the impact of these gains or losses from its non-GAAP measures because they are non-cash impacts that Cree does not believe are reflective of ongoing operating results. Additionally, Cree excludes the impact of dividends received on its Lextar investment as Cree does not believe it is reflective of ongoing operating results.

Recognition of deferred IPO (Initial Public Offering) costs. In fiscal 2016, the Company recognized an expense for previously deferred IPO costs due to the delay in the anticipated timing of the planned initial public offering of Wolfspeed, as required by SEC guidance. Cree excludes the impact of this expense as Cree does not consider this charge to be reflective of ongoing operating results.

Transaction costs and termination fee associated with the terminated sale of the Wolfspeed business. The Company has incurred transaction costs in conjunction with the previously proposed sale of its Wolfspeed business to Infineon. In addition, as a result of the termination of the agreement to sell the Wolfspeed business, Infineon paid a termination fee to the Company. Because these costs were incurred, and the termination fee received, relative to a portion of the business which was previously reported as discontinued operations in fiscal 2017, Cree does not consider these amounts to be reflective of ongoing operating results.

Income tax effects of the foregoing non-GAAP items. This amount is used to present each of the amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income. Non-GAAP net income is presented using a non-GAAP tax rate. The Company’s non-GAAP tax rate represents a recalculation of the GAAP tax rate reflecting the exclusion of the non-GAAP items.

Cree expects to incur many of these same expenses, including income taxes associated with these expenses, in future periods. In addition to the non-GAAP measures discussed above, Cree also uses free cash flow as a measure of operating performance and liquidity. Free cash flow represents operating cash flows less net purchases of property and equipment and patent and licensing rights. Cree considers free cash flow to be an operating performance and a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, a portion of which can then be used to, among other things, invest in Cree’s business, make strategic acquisitions, strengthen the balance sheet and repurchase stock. A limitation of the utility of free cash flow as a measure of operating performance and liquidity is that it does not represent the residual cash flow available to the company for discretionary expenditures, as it excludes certain mandatory expenditures such as debt service.

                                                                                                                                                                                                                                      
                                                                                                                                                                                                                                CREE, INC.
                                                                                                                                                                                                                Reconciliation of GAAP to Non-GAAP Measures
                                                                                                                                                                                                         (in thousands, except per share amounts and percentages)
                                                                                                                                                                                                                                (unaudited)
                                                                                                                                                                                                                                                                                                                    
Non-GAAP Gross Margin
                                                                                                                                                                                    Three Months Ended                                                                                                                                                                                   Year Ended
                                                                                                                  -------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         June 25,                                                   June 26,                                                                                        June 25,                                                   June 26,
                                                                                                                                           2017                                                                                             2016                                                                                            2017                                                                                             2016
                                                                                                                  ---------------------------------------------------                                              --------------------------------------------------                                              ---------------------------------------------------                                              --------------------------------------------------
GAAP gross profit                                                                                                                $98,001                                                                                        $113,023                                                                                         $434,572                                                                                        $487,074
GAAP gross margin percentage                                                                                                        27.3 %                                                                                          29.1 %                                                                                           29.5 %                                                                                          30.1 %
   Adjustments:
      Contract manufacturer dispute related expenses                                                                      --                                                                                           2,108                                                                                   --                                                                                           2,108
      T8 product recall charges                                                                                           --                                                                                           1,349                                                                                   --                                                                                           1,349
      Stock-based compensation expense                                                                                             2,415                                                                        3,170                                                                        10,427                                                                       12,394  
                                                                                                                  -------------------------------------------------------                                          ------------------------------------------------------                                          -------------------------------------------------------                                          ------------------------------------------------------
Non-GAAP gross profit                                                                                                           $100,416                                                                     $119,650                                                                      $444,999                                                                     $502,925  
                                                                                                                  =======================================================                                          ======================================================                                          =======================================================                                          ======================================================
Non-GAAP gross margin percentage                                                                                                    28.0 %                                                                                          30.8 %                                                                                           30.2 %                                                                                          31.1 %
                                                                                                                                                                                                                                                                                                                                                                                                                                           
Non-GAAP Operating Income
                                                                                                                                                                                    Three Months Ended                                                                                                                                                                                   Year Ended
                                                                                                                  -------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         June 25,                                                                                         June 26,                                                                                        June 25,                                                                                         June 26,
                                                                                                                                           2017                                                                                             2016                                                                                            2017                                                                                             2016
                                                                                                                  ---------------------------------------------------                                              --------------------------------------------------                                              ---------------------------------------------------                                              --------------------------------------------------
GAAP operating loss                                                                                                     ($13,067 )                                                                                        ($4,791 )                                                                                      ($18,672 )                                                                                       ($10,471 )
GAAP operating income percentage                                                                                            (3.6 )%                                                                                          (1.2 )%                                                                                         (1.3 )%                                                                                          (0.6 )%
   Adjustments:
      Contract manufacturer dispute related expenses                                                              --                                                                                            2,108                                                                                  --                                                                                            2,108
      T8 product recall charges                                                                                   --                                                                                            1,349                                                                                  --                                                                                            1,349
      Stock-based compensation expense:
         Cost of revenue, net                                                                                              2,415                                                                                            3,170                                                                                          10,427                                                                                           12,394
         Research and development                                                                                          2,151                                                                                            3,289                                                                                          10,619                                                                                           13,842
         Sales, general and administrative                                                                                 4,741                                                                         7,952                                                                       26,679                                                                        32,492  
                                                                                                                  -------------- ----------------------------------------                                          -------------- ---------------------------------------                                          -------------- ----------------------------------------                                          -------------- ---------------------------------------
      Total stock-based compensation expense                                                                               9,307                                                                                           14,411                                                                                          47,725                                                                                           58,728
      Amortization or impairment of acquisition-related intangibles                                                        6,792                                                                                            7,290                                                                                          27,499                                                                                           28,732
      Costs associated with LED business restructuring                                                            --                                                                                              133                                                                                              15                                                                                           17,710
      Recognition of deferred IPO costs                                                                           --                                                                                   --                                                                                  --                                                                                            1,810
      Transaction costs related to the terminated sale of the Wolfspeed                                                      121                                                                                            1,041                                                                                          11,947                                                                                            1,745
      business
      Wolfspeed transaction termination fee                                                                       --                                                                --                                                                      (12,500 )                                                                                 --  
                                                                                                                  -------------- ----------------------------------------                                          -------------- ---------------------------------------                                          -------------- ----------------------------------------                                          -------------- ---------------------------------------
   Total adjustments to GAAP operating loss                                                                               16,220                                                                        26,332                                                                       74,686                                                                       112,182  
                                                                                                                  -------------- ----------------------------------------                                          -------------- ---------------------------------------                                          -------------- ----------------------------------------                                          -------------- ---------------------------------------
Non-GAAP operating income                                                                                                 $3,153                                                                       $21,541                                                                      $56,014                                                                      $101,711  
                                                                                                                  ============== ========================================                                          ============== =======================================                                          ============== ========================================                                          ============== =======================================
Non-GAAP operating income percentage                                                                                         0.9 %                                                                                            5.5 %                                                                                           3.8 %                                                                                            6.3 %
                                                                                                                                                                                                                                                                                                                                                                                                                                    
Non-GAAP Non-Operating Income, net
                                                                                                                                                                                    Three Months Ended                                                                                                                                                                                   Year Ended
                                                                                                                  -------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         June 25,                                                                                         June 26,                                                                                        June 25,                                                                                         June 26,
                                                                                                                                           2017                                                                                             2016                                                                                            2017                                                                                             2016
                                                                                                                  ---------------------------------------------------                                              --------------------------------------------------                                              ---------------------------------------------------                                              --------------------------------------------------
GAAP non-operating income (loss), net                                                                                                        $9,057                                                                                          $1,040                                                                                          $14,008                                                                                        ($13,035 )
   Adjustment:
      Net changes in the fair value of Lextar investment                                                                                     (7,607 )                                                                                           (59 )                                                                                        (10,203 )                                                                                        15,832  
                                                                                                                  ------------------------------------------------------                                           -----------------------------------------------------                                           ------------------------------------------------------                                           -----------------------------------------------------
Non-GAAP non-operating income, net                                                                                                           $1,450                                                                         $981                                                                        $3,805                                                                       $2,797  
                                                                                                                  ======================================================                                           =====================================================                                           ======================================================                                           =====================================================
                                                                                                                                                                                                                                                                                                                                                                                                                                                      
Non-GAAP Net Income
                                                                                                                                                                                    Three Months Ended                                                                                                                                                                                   Year Ended
                                                                                                                  -------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         June 25,                                                                                         June 26,                                                                                        June 25,                                                                                         June 26,
                                                                                                                                           2017                                                                                             2016                                                                                            2017                                                                                             2016
                                                                                                                  ---------------------------------------------------                                              --------------------------------------------------                                              ---------------------------------------------------                                              --------------------------------------------------
GAAP net loss                                                                                                                               ($5,890 )                                                                                      ($10,641 )                                                                                       ($98,118 )                                                                                      ($21,536 )
   Adjustments:
      Contract manufacturer dispute related expenses                                                                                 --                                                                                           2,108                                                                                   --                                                                                           2,108
      T8 product recall charges                                                                                                      --                                                                                           1,349                                                                                   --                                                                                           1,349
      Stock-based compensation expense                                                                                                        9,307                                                                                          14,411                                                                                           47,725                                                                                          58,728
      Amortization or impairment of acquisition-related intangibles                                                                           6,792                                                                                           7,290                                                                                           27,499                                                                                          28,732
      Costs associated with LED business restructuring                                                                               --                                                                                             133                                                                                               15                                                                                          17,710
      Recognition of deferred IPO costs                                                                                              --                                                                                  --                                                                                   --                                                                                           1,810
      Transaction costs related to the terminated sale of the Wolfspeed                                                                         121                                                                                           1,041                                                                                           11,947                                                                                           1,745
      business
      Wolfspeed transaction termination fee                                                                                          --                                                                                  --                                                                                          (12,500 )                                                                                --
      Net changes in the fair value of Lextar investment                                                                                     (7,607 )                                                                                           (59 )                                                                                        (10,203 )                                                                                        15,832  
                                                                                                                  ------------------------------------------------------                                           -----------------------------------------------------                                           ------------------------------------------------------                                           -----------------------------------------------------
Total adjustments to GAAP net loss before provision for income taxes                                                                          8,613                                                                                          26,273                                                                                           64,483                                                                                         128,014
Income tax effect *                                                                                                                           1,102                                                                        3,286                                                                        83,353                                                                      (18,937 )
                                                                                                                  ------------------------------------------------------                                           -----------------------------------------------------                                           ------------------------------------------------------                                           -----------------------------------------------------
Non-GAAP net income                                                                                                                          $3,825                                                                      $18,918                                                                       $49,718                                                                      $87,541  
                                                                                                                  ======================================================                                           =====================================================                                           ======================================================                                           =====================================================
                                                                                                                                                                                                                                                                                                                                                                                                                     
Income per share
   Non-GAAP diluted net income per share                                                                                                      $0.04                                                                                           $0.19                                                                                            $0.50                                                                                           $0.86
                                                                                                                                                                                                                                                                                                                                                                                                                     
Shares used in diluted net income per share calculation
   Non-GAAP shares used                                                                                                                      97,548                                                                                         100,663                                                                                           98,487                                                                                         101,783
                                                                                                                                                                                                                                                                                                                                                                                                                                                      
*Estimated income tax effect is based upon the Company’s overall
consolidated effective tax rate for the given period.
 
Free Cash Flow
                                                                                                                                                                                    Three Months Ended                                                                                                                                                                                   Year Ended
                                                                                                                  -------------------------------------------------------------------------------------------------------------------------------------------------------                                          -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         June 25,                                                                                         June 26,                                                                                        June 25,                                                                                         June 26,
                                                                                                                                           2017                                                                                             2016                                                                                            2017                                                                                             2016
                                                                                                                  ---------------------------------------------------                                              --------------------------------------------------                                              ---------------------------------------------------                                              --------------------------------------------------
Cash flow from operations                                                                                                                   $52,746                                                                                         $64,553                                                                                         $215,900                                                                                        $203,316
Less: PP&E spending                                                                                                                         (30,033 )                                                                                       (20,326 )                                                                                        (86,928 )                                                                                      (120,018 )
Less: Patents spending                                                                                                                       (3,529 )                                                                                        (3,409 )                                                                                        (12,405 )                                                                                       (14,443 )
                                                                                                                  ------------------------------------------------------                                           -----------------------------------------------------                                           ------------------------------------------------------                                           -----------------------------------------------------
   Total free cash flow                                                                                                                     $19,184                                                                      $40,818                                                                      $116,567                                                                      $68,855  
                                                                                                                  ======================================================                                           =====================================================                                           ======================================================                                           =====================================================
                                                                                                                                                                                                                                                                                                                                                                                                                                                      

http://cts.businesswire.com/ct/CT?id=bwnews&sty=20170822006118r1&sid=cmtx6&distro=nx&

View source version on businesswire.com: http://www.businesswire.com/news/home/20170822006118/en/

SOURCE: Cree, Inc.

Cree, Inc. 
Raiford Garrabrant, 919-407-7895 
Director, Investor Relations 
Fax: 919-407-5615 
investorrelations@cree.com


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