Manufacturers

Cree 3Q Revenues Down 7 Percent

DURHAM, N.C. — Cree, Inc. announced financial results for its third quarter of fiscal 2017, ended March 26, 2017, which results include the Company’s Wolfspeed segment being reported as part of the Company’s continuing operations. While the sale of Wolfspeed to Infineon Technologies AG (“Infineon”) was targeted to close during the quarter, the agreement was formally terminated on March 6, 2017 because the Committee on Foreign Investment in the United States (CFIUS) determined that the transaction could not be approved due to national security concerns. As a result, the Company’s third fiscal quarter financial results included two items that would not have occurred if the Wolfspeed sale had closed. First, the Company was required to record an income tax expense charge of $86 million in the quarter to establish a valuation allowance on its US deferred tax assets and other deferred charges. In addition, the Company recorded an additional $12 million in expenses, net of tax, primarily associated with the resumption and catch-up of depreciation and amortization on Wolfspeed’s long lived assets, which was partially offset by the Infineon termination fee. Wolfspeed depreciation and amortization of its long lived assets had been suspended while the assets had been held for sale pending the closing of the Wolfspeed transaction.

Revenue for the third quarter of fiscal 2017 was $342 million, which represents a 7% decrease compared to revenue of $367 million for the third quarter of fiscal 2016 and a 15% decrease compared to the second quarter of fiscal 2017. GAAP net loss for the third quarter of fiscal 2017 was $99 million, or $1.02 per diluted share. This compares to GAAP net income of $152 thousand, or $0.00 per diluted share, for the third quarter of fiscal 2016. On a non-GAAP basis, net income for the third quarter of fiscal 2017 was $749 thousand, or $0.01 per diluted share, compared to non-GAAP net income for the third quarter of fiscal 2016 of $17 million, or $0.17 per diluted share. Excluding the two items mentioned above, which were not factored into the financial targets provided on January 24, 2017 based on the Company’s belief at that time that the Wolfspeed sale would be consummated, non-GAAP net income would have been $11 million, or $0.11 per diluted share, which is within the target range provided on January 24.

“Q3 non-GAAP results were within our target range,” stated Chuck Swoboda, Cree Chairman and CEO. “Our Wolfspeed and LED Products businesses performed at or above their targets for the quarter, while Lighting Products came in a little below plan due to softer market conditions and the lingering effects of the third party product driver issue that we mentioned in Q2. We believe the factors that impacted our lighting business are temporary and we target improvement in all three businesses in Q4.”

Reconciliation of Results to Previously Announced Targets

The following table illustrates how the results for the third quarter of fiscal 2017, when adjusted for the items relating to the termination of the Wolfspeed transaction discussed above, compare to the targets announced when the Company believed the Wolfspeed transaction would be consummated during the quarter (in thousands, except per share amounts).

      Three Months Ended

March 26, 2017,

As Reported

   

Wolfspeed

Transaction

Termination

Adjustments

   

March 26, 2017,

As Adjusted

   

March 26, 2017

Guidance Targets

GAAP:
Revenue $ 341,505 $ $ 341,505 $340 million to $370 million
Net loss ($99,013 ) $ 98,392 ($621 ) ($1 million) to $3 million
Diluted loss per share ($1.02 ) $ 1.01 ($0.01 ) ($0.01) to $0.03
 
Shares used in diluted per share calculation 97,346 97,346 97,346
 
Non-GAAP:
Revenue $ 341,505 $ $ 341,505 $340 million to $370 million
Net income $ 749 $ 10,344 $ 11,093 $10 million to $18 million
Diluted earnings per share $ 0.01 $ 0.10 $ 0.11 $0.10 to $0.18
 
Shares used in diluted per share calculation 97,346 97,346 97,346
 

For additional information and reconciliations with respect to these amounts, please see the reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures attached to this press release.

The $98.4 million GAAP Wolfspeed transaction termination adjustments above represent (a) the establishment of the tax valuation allowance of $85.5 million, plus (b) the resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets of $17.7 million, minus (c) the Wolfspeed transaction termination fee of $12.5 million and plus (d) transaction costs related to the Wolfspeed transaction termination of $4.3 million, plus (3) the income tax effect of items (b), (c) and (d) of $3.4 million.

The $10.3 million non-GAAP Wolfspeed transaction termination adjustments above represent the resumption and catch-up of depreciation and amortization of Wolfspeed long-lived assets of $15.2 million, net of the income tax effect of $4.9 million. The GAAP depreciation and amortization adjustment is $2.5 million greater because it includes the amortization of Wolfspeed acquired intangibles where the non-GAAP adjustment does not.

Announcement of Joint Venture:

Cree also announced that it is forming a joint venture, to be called Cree Venture LED Company Ltd., with San’an Optoelectronics Company Inc. (Xiamen, China) to produce and deliver to market high performing, mid-power lighting class LEDs in an exclusive arrangement to serve the expanding markets of North and South America, Europe and Japan.

Business Outlook:

For its fourth quarter of fiscal 2017 ending June 25, 2017, Cree targets revenue in a range of $340 million to $360 million. GAAP net loss is targeted at a $16 million loss to $22 million loss, or a $0.16 to $0.23 loss per diluted share. Non-GAAP net income is targeted in a range of $2 million to $7 million, or $0.02 to $0.07 per diluted share. Targeted non-GAAP income excludes $23 million, net of tax, of expenses related to stock-based compensation expense and the amortization or impairment of acquisition-related intangibles. Our fourth quarter GAAP and non-GAAP targets include $3 million+/- of expenses related to non-recurring costs from our Lighting Products business right-sizing initiatives and joint venture start-up costs. The GAAP and non-GAAP targets do not include any estimated change in the fair value of Cree’s Lextar investment.

 

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