WOLFSPEED, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
(Mark One)
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ý
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2013
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or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 0-21154
__________________________________________
CREE, INC.
(Exact name of registrant as specified in its charter)
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North Carolina
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56-1572719
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4600 Silicon Drive
Durham, North Carolina
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27703
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(Address of principal executive offices)
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(Zip Code)
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(919) 407-5300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.00125 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
ý
No
¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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ý
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Accelerated filer
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¨
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
ý
The aggregate market value of common stock held by non-affiliates of the registrant as of
December 28, 2012
, the last business day of the registrant’s most recently completed second fiscal quarter, was
$3,803,847,172
(based on the closing sale price of
$33.20
per share).
The number of shares of the registrant’s Common Stock,
$0.00125
par value per share, outstanding as of
August 22, 2013
was
120,105,701
.
__________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held
October 29, 2013
are incorporated by reference into Part III.
CREE, INC.
FORM 10-K
For the Fiscal Year Ended
June 30, 2013
INDEX
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Page
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Part I
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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Part II
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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Item 9B.
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Part III
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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PART IV
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Item 15.
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2
Forward-Looking Information
Information set forth in this Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made, and except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we disclaim any obligation to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Annual Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Item 1A of this Annual Report.
3
Item 1.
Business
Overview
Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
We develop and manufacture semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. In many cases, the properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs) and other materials used for electronic applications.
Our LED products consist of LED components, LED chips and SiC materials. As LED technology improves, we believe the potential market for LED lighting will continue to expand. Our success in selling LED products depends upon our ability to offer innovative products at competitive prices and our ability to enable our customers to develop and market LED based products that successfully compete and drive LED adoption against traditional lighting products.
Our lighting products consist of both LED and traditional lighting systems. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.
In addition, we develop, manufacture and sell power and RF devices. Our power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Our RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide.
The majority of our products are manufactured at our production facilities located in North Carolina, Wisconsin and China. We also use contract manufacturers for certain aspects of product fabrication, assembly and packaging. We operate research and development facilities in North Carolina, California, Wisconsin, India and China.
Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina. For further information about our consolidated revenues and earnings, please see our consolidated financial statements included in Item 8 of this Annual Report.
Reportable Segments
As of
June 30, 2013
, we have
three
reportable segments:
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LED Products
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•
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Lighting Products
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Power and RF Products
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Reportable segments are components of an entity that have separate financial data that the entity's Chief Operating Decision Maker (CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.
For financial results by reportable segment, please refer to Note 13, "Reportable Segments" in our consolidated financial statements included in Item 8 of this Annual Report.
Products by Reportable Segment
LED Products Segment
LED Products revenue was
$801.5 million
,
$756.9 million
and
$808.2 million
representing
58%
,
65%
and
82%
of revenue for the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively. LED Products gross profit was
$344.6 million
,
$290.6 million
and
$375.4 million
and gross margin was
43%
,
38%
, and
46%
for fiscal years
2013
,
2012
, and
2011
, respectively.
Our LED Products segment includes LED chips, LED components and SiC materials.
4
LED Chips
Our LED chip products include blue and green LED chips based on GaN and related materials. LED chips or die are solid state electronic components used in a number of applications and are currently available in a variety of brightness levels, wavelengths (colors) and sizes. We use our LED chips in the manufacturing of our LED components. Some of our customers use our blue and green LED chips in a variety of applications including video screens, gaming displays, function indicator lights and automotive backlights, headlamps, and directional indicators. Other customers combine our blue LED chips with phosphors to create white LEDs, which are used in various applications for indoor and outdoor illumination and backlighting, full-color display screens, liquid crystal display (LCD) backlighting, white keypads and the camera flash function.
LED Components
Our LED components include a range of packaged LED products, from our XLamp
®
LED components and LED modules for lighting applications to our high brightness LED components.
Our XLamp LED components and LED modules are lighting class packaged LED products designed to meet a broad range of market needs for lighting applications including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting. We also use our XLamp LED components in our own lighting products.
Our high brightness LED components consist of surface mount (SMD) and through-hole packaged LED products. Our SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage, general illumination, transportation, gaming and specialty lighting. Our through-hole packaged LED component products are available in a full range of colors primarily designed for the signage market and provide users with color and brightness consistency across a wide viewing area.
SiC Materials
Our SiC materials are targeted for customers who use them to manufacture products for RF, power switching, gemstone and other applications. Corporate, government and university customers also buy SiC materials for research and development directed at RF and high power devices. We sell our SiC materials products in bulk form, as a bare wafer and with SiC or GaN epitaxial films.
Lighting Products Segment
Lighting Products revenue was
$495.1 million
,
$334.7 million
, and
$81.8 million
, representing
36%
,
29%
, and
8%
of our revenues for the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively. Lighting Products gross profit was
$148.9 million
,
$103.4 million
and
$23.7 million
and gross margin was
30%
,
31%
, and
29%
for fiscal years
2013
,
2012
, and
2011
, respectively.
Our Lighting Products segment consists of both LED and traditional lighting systems. Our portfolio of lighting products is designed for use in settings such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, among other applications.
During fiscal 2012, we expanded into outdoor lighting through our acquisition of Ruud Lighting, Inc. (Ruud Lighting), a leader in outdoor LED lighting. Ruud Lighting added an extensive array of outdoor LED lighting products to our existing portfolio, including the BetaLED
®
and LEDway
®
brands. As part of this acquisition, we also obtained traditional lighting brands, including Ruud Lighting
®
Direct, E-conolight
®
, Kramer Lighting
®
, Beta/Kramer
®
and Beta Lighting
™
. Post acquisition, we have introduced LED lighting products to be sold through the E-conolight brand channel.
Power and RF Products Segment
Power and RF Products revenue was
$89.4 million
,
$73.0 million
, and
$97.6 million
, representing
6%
,
6%
, and
10%
of our revenues for the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively. Power and RF Products gross profit was
$48.1 million
,
$32.1 million
and
$49.8 million
and gross margin was
54%
,
44%
, and
51%
for fiscal years
2013
,
2012
, and
2011
, respectively.
Our Power and RF Products segment includes power devices and RF devices.
Power Devices
Our SiC-based power products include Schottky diodes, SiC metal semiconductor field-effect transistors (MOSFETs), and SiC power modules at various voltages. Our customers purchase our power products for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies and other applications. We are working to develop additional and improved SiC-based power device solutions to expand the potential uses and applications for our products.
5
RF Devices
Our RF products include a variety of GaN high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs), which are optimized for military, telecom and other commercial applications. We also provide foundry services for GaN HEMTs and MMICs. Our foundry service allows a customer to design its own custom RF circuits to be fabricated in our foundry, or have us design and fabricate custom products that meet their specific requirements.
Financial Information about Geographic Areas of Customers and Assets
We derive a significant portion of our revenue from product sales to international customers. For information concerning geographical areas of our customers and geographic information concerning our long-lived assets, please see Note 13, “Reportable Segments,” in our consolidated financial statements included in Item 8 of this Annual Report. International operations expose us to risks that are different from operating in the United States, including foreign currency translation and transaction risk, risk of changes in tax laws, application of import/export laws and regulations and other risks described further in Item 1A “Risk Factors” of this Annual Report.
Research and Development
We invest significant resources in research and development. Our research and development activity includes efforts to:
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increase the quality, performance and diameter of our substrate and epitaxial materials;
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continually improve our manufacturing processes;
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develop brighter, more efficient, and lower cost LED chip and component products;
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create new, and improve existing, LED components and LED lighting products; and
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develop higher power diodes/switches and higher power/higher linearity RF devices.
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When our customers participate in funding our research and development programs, we recognize the amount funded as a reduction of research and development expenses to the extent that our customers’ funding does not exceed our respective research and development costs. Research and development expenses were
$155.9 million
,
$143.4 million
and
$115.0 million
for the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively. For further information about these programs, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in our consolidated financial statements included in Item 8 of this Annual Report. For further information about our research and development, see “Research and Development” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Sales and Marketing
We continue to make significant investments to expand our global sales, marketing, technical applications support, and distribution capabilities to sell our lighting products and further enable new and existing customers to implement LED and power technology into their products. We also continue to make investments to promote and build market awareness of the Cree brand. Our growing sales, marketing and technical applications teams include personnel throughout North America, Asia, and Europe.
Cree Thermal, Electrical, Mechanical, Photometric, and Optical (TEMPO) Services provide a comprehensive suite of performance tests to assist our customers in developing high quality LED lighting products. We currently provide TEMPO Services out of our Cree Technology Centers located in North Carolina, California, and Shenzhen and Shanghai, China.
Customers
We have historically had a few key customers who represented more than 10% of our consolidated revenues. In fiscal 2013, revenues from Arrow Electronics, Inc. (Arrow), a distribution customer, accounted for
16%
of our total consolidated revenues. In fiscal 2012 and 2011, revenues from Arrow and World Peace Industrial Co., Ltd. (World Peace), also a distribution customer, exceeded 10% of our total consolidated revenue. In fiscal 2012, revenues from Arrow and World Peace represented
18%
and
10%
of our total consolidated revenues, respectively. In fiscal 2011, sales to Arrow and World Peace represented
20%
and
10%
of our total consolidated revenues, respectively. Arrow is a customer of our LED Products and Power and RF Products segments. World Peace is a customer of our LED Products segment. For further discussion regarding customer concentration, please see Note 14, “Concentrations of Risk,” in our consolidated financial statements included in Item 8 of this Annual Report. The loss of any large customer could have a material adverse effect on our business and results of operations.
6
Distribution
A substantial portion of our products are sold to distributors. Distributors stock inventory and sell our products to their own customer base, which may include: value added resellers, manufacturers who incorporate our products into their own manufactured goods, or ultimate end users of our products. We also utilize third-party sales representatives who generally do not maintain a product inventory; instead, their customers place orders directly with us or through distributors.
Seasonality
Our LED Products segment historically has experienced, and in the future may experience, seasonally lower sales during our fiscal third quarter due to the Chinese New Year holiday. Our Lighting Products segment historically has experienced, and in the future may experience, seasonally lower sales due to winter weather, impacting our fiscal second and third quarters. Our Power and RF Products segment is not generally subject to seasonality.
Our sales also vary based on other factors such as customer demand and government regulation.
If anticipated sales or shipments do not occur when expected, our results of operations for that quarter, and potentially for future quarters, may be adversely affected.
Backlog
Our backlog at
June 30, 2013
, the last day of our
2013
fiscal year, was approximately
$216.0 million
, compared with a backlog of approximately
$149.1 million
at
June 24, 2012
, the last day of our
2012
fiscal year. Because of the generally short cycle time between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which at times may be made without significant penalty), we do not believe that our backlog, as of any particular date, is necessarily indicative of actual net sales for any future period. Additionally, our
June 30, 2013
backlog figure contained
$39.0 million
of research contracts signed with the U.S. Government, for which approximately
$30.5 million
had not been appropriated as of the last day of fiscal
2013
. Our
June 24, 2012
backlog figure contained
$37.4 million
of research contracts signed with the U.S. Government, for which approximately
$27.6 million
was not appropriated as of the last day of fiscal
2012
. Our backlog could be adversely affected if the U.S. Government exercises its rights to terminate our government contracts or does not appropriate and allocate all of the funding contemplated by the contracts.
Sources of Raw Materials
We depend on a number of suppliers for certain raw materials, components and equipment used in our products, including certain key materials and equipment used in our crystal growth, wafering, polishing, epitaxial deposition, device fabrication, component and lighting assembly processes. We generally purchase these limited source items pursuant to purchase orders and have limited guaranteed supply arrangements with our suppliers. Our suppliers, located around the world, can be subject to many constraints limiting supply that are beyond our control. We believe our current supply of essential materials is sufficient to meet our needs. However, shortages have occurred from time to time and could occur again.
Competition by Reportable Segment
Our success depends on our ability to keep pace with the evolving technology standards of the industries we serve. These industries are characterized by rapid technological change, frequent introduction of new products, short product life cycles, changes in end user and customer requirements, and a competitive pricing environment. The evolving nature of these industries may render our existing or future products obsolete, noncompetitive or unmarketable. Any of these developments could have an adverse effect on our business, results of operations and financial condition.
LED Products Segment
Our LED Products segment's primary competitors are Nichia Corporation (Nichia), OSRAM Opto Semiconductors GmbH (OSRAM), Koninklijke Philips Electronics N.V. (Philips), and Samsung LED Company (Samsung).
7
LED Chips
The primary competition for our LED chip products comes from companies that manufacture and/or sell nitride-based LED chips. We consider Nichia to be a competitor because it sells LED chips to a select number of LED packaging companies and it sells packaged LEDs that most often compete directly with packaged LEDs made and sold by our chip customers. We believe, based on industry information, that Nichia currently has the largest market share for nitride-based LEDs.
There are many other LED chip producers who sell blue, green and white LED chip products, including OSRAM, Toyoda Gosei Co., Ltd., and Epistar Corporation. These competitors make products for a variety of applications in a range of performance levels that compete directly with our LED chip products.
Overall, we believe that performance, price and strength of intellectual property are the most significant factors to compete successfully in the nitride LED market. We believe our products are well positioned to meet the market performance requirements; however, there is significant pricing pressure from a number of competitors, including new companies based in China. We continually strive to improve our competitive position by developing brighter and higher performing LED chips while focusing on lowering costs.
LED Components
The market for lighting class LED components is concentrated primarily in indoor and outdoor commercial lighting; specialty lighting, including torch lamps (flashlights); color changing architectural lighting; signs and signals; and transportation. Nichia, OSRAM, Philips, and Samsung are the main competitors in these markets. These companies sell LED components that compete indirectly with our target customers for LED chips and compete directly with our XLamp LED components and LED modules. There are a large number of other companies, primarily based in Asia, that offer products designed to compete both directly and indirectly with our LED components in lighting and other applications. We are positioning our XLamp LED components and LED modules to compete in this market based on performance, price and usability.
Our high brightness LED components compete with a larger number of companies around the world in a variety of applications including signage, video, transportation, gaming and specialty lighting. We are positioning our high brightness LED components to compete in this market based on performance, price, availability and usability.
SiC Materials
We have continued to maintain our well-established leadership position in the sale of SiC bulk material, SiC wafer and SiC and GaN epitaxy products. We are seeing increased competition in this market.
Lighting Products Segment
Our Lighting Products segment currently faces competition from traditional lighting fixture companies, lamp manufacturers and from non-traditional companies focused on LED lighting systems including fixtures and lamps. Lighting companies such as Acuity Brands, Inc., the Cooper Lighting division of Eaton Corporation plc, General Electric Company, Hubbell Incorporated, Philips, and OSRAM are the main competitors in this market. Increasingly, however, other companies (i.e., start-ups) are beginning to emerge in the LED lighting markets in which we compete.
Our LED lighting products compete against traditional lighting products using incandescent, fluorescent, halogen, ceramic metal halide or other lighting technology. Our LED lighting products compete against traditional lighting products based upon superior energy savings, extended life, improved lighting quality and lower total cost of ownership. Also, our LED lighting products have a reduced impact on the environment as compared to fluorescent and compact fluorescent technologies that contain mercury.
We also compete with LED-based products from traditional and non-traditional lamp and fixture companies, some of which are customers for our LED chips and LED components. Our products compete on the basis of color quality and consistency, superior light output, reduced energy consumption, brand and lower total cost of ownership.
Power and RF Products Segment
Power Devices
Our SiC-based power devices compete with similar devices offered by Infineon Technologies AG, STMicroelectronics, Inc. and Rohm Co., Ltd. There are also a number of other companies developing SiC-based power devices. In addition, our products compete with existing silicon-based power devices offered by a variety of manufacturers.
8
RF Devices
Currently, Sumitomo Electric Device Innovations, Inc. is the main company offering products that compete directly with our GaN HEMT products, although several other companies such as RF Micro Devices, Inc. and Triquint Semiconductor, Inc. have products that compete with us as well. Our products also face competition from existing silicon and GaAs-based products.
Patents and Other Intellectual Property Rights
We believe it is important to protect our investment in technology by obtaining and enforcing intellectual property rights, including rights under patent, trademark, trade secret and copyright laws. We seek to protect inventions we consider significant by applying for patents in the United States and other countries when appropriate. We have also acquired, through license grants and assignments, rights to patents on inventions originally developed by others. As of
June 30, 2013
, we owned or were the exclusive licensee of
1,110
issued U.S. patents and approximately
1,980
foreign patents with various expiration dates extending up to
2038
. We do not consider our business to be materially dependent upon any one patent, and we believe our business will not be materially adversely affected by the expiration of any one patent. For proprietary technology that is not patented, we generally seek to protect the technology and related know-how and information as trade secrets by keeping confidential the information that we believe provides us with a competitive advantage. We attempt to create strong brands for our products and promote our products through trademarks that distinguish them in the market. We may license our customers to use our trademarks in connection with the sale of our products, and we monitor for the proper and authorized use of our marks.
Licensing activities and lawsuits to enforce intellectual property rights, particularly patent rights, are a common feature of the semiconductor, LED and lighting industries, and we attempt to ensure respect for our intellectual property rights through appropriate actions. The breadth of our intellectual property rights and the extent to which they can be successfully enforced vary across jurisdictions. We both make and receive inquiries regarding possible patent infringements and possible violations of other intellectual property rights in the normal course of business. Depending on the circumstances, we may seek to negotiate a license or other acceptable resolution. If we are unable to achieve a resolution by agreement, we may seek to enforce our rights or defend our position through litigation. Patent litigation in particular is expensive and the outcome is often uncertain. We believe that the strength of our portfolio of patent rights is important in helping us resolve or avoid such disputes with other companies in our industry.
Environmental Regulation
We are subject to a variety of federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes. Failure to comply with such provisions could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, and could have a material adverse effect on our business.
Working Capital
For a discussion of our working capital practices, see “Liquidity and Capital Resources” in Item 7 of this Annual Report.
Employees
As of
June 30, 2013
, we employed
6,120
regular full and part-time employees. We also employ individuals on a temporary full-time basis and use the services of contractors as necessary. Certain of our employees in various countries outside of the United States are subject to laws providing representation rights. We consider relations with our employees to be good.
Available Information
Our website address is www.cree.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, including Interactive Data Files, and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. These reports may be accessed from our website by following the links under “Investors,” then “SEC Filings.” The information found on our website is not part of this or any other report we file with or furnish to the SEC. We assume no obligation to update or revise any forward-looking statements in this Annual Report or in other reports filed with the SEC, whether as a result of new
9
information, future events or otherwise, unless we are required to do so by law. A copy of this Annual Report and our other reports is available without charge upon written request to Investor Relations, Cree, Inc., 4600 Silicon Drive, Durham, North Carolina 27703.
Described below are various risks and uncertainties that may affect our business. If any of the risks described below actually occurs, our business, financial condition or results of operations could be materially and adversely affected.
Our operating results are substantially dependent on the development and acceptance of new products.
Our future success may depend on our ability to develop new, higher performing and lower cost solutions for existing and new markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all of our projects will be successful. The successful development, introduction and acceptance of new products depends on a number of factors, including the following:
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achievement of technology breakthroughs required to make commercially viable devices;
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the accuracy of our predictions for market requirements beyond near term visibility;
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our ability to predict, influence, and/or react to evolving standards;
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acceptance of our new product designs;
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acceptance of new technology in certain markets;
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the availability of qualified research and development personnel;
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our timely completion of product designs and development;
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our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired specifications and at competitive costs;
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our ability to effectively transfer products and technology developed in one location to manufacturing facilities in other locations;
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our customers' ability to develop competitive products incorporating our products; and
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acceptance of our customers' products by the market.
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If any of these or other similar factors becomes problematic, we may not be able to develop and introduce these new products in a timely or cost-effective manner.
If we are unable to effectively develop, manage and expand our sales and distribution channels for our products, our operating results may suffer.
We have expanded into business channels that are different from those in which we have historically operated as we grow our business and sell more LED and lighting products. For example, in the third quarter of fiscal 2012, we consolidated the Cree and BetaLED lighting product lines sales agents for each major market in North America which resulted in a disruption in the project pipeline and lower than targeted sales for our indoor lighting products. Lighting sales agents have in the past and may in the future choose to drop our product lines from their portfolio to avoid losing access to our competitors' lighting products. If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the appropriate customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products or that we will be able to manufacture and deliver them in the timeline established by our customers.
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We sell a substantial portion of our products to distributors. We rely on distributors to develop and expand their customer base as well as anticipate demand from their customers. If they are not successful, our growth and profitability may be adversely impacted. Distributors must balance the need to have enough products in stock in order to meet their customers' needs against their internal target inventory levels and the risk of potential inventory obsolescence. The risks of inventory obsolescence are especially true with technological products. The distributors' internal target inventory levels vary depending on market cycles and a number of factors within each distributor over which we have very little, if any, control.
We typically recognize revenue on products sold to distributors when the item is shipped and title passes to the distributor (sell-in method). Certain distributors have limited rights to return inventory under stock rotation programs and have limited price protection rights for which we make estimates. We evaluate inventory levels in the distribution channel, current economic trends and other related factors in order to account for these factors in our judgments and estimates. As inventory levels and product return trends change, we may have to revise our estimates and incur additional costs, and our gross margins and operating results could be adversely impacted.
We face significant challenges managing our growth as the market adopts LEDs for general lighting.
Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown rapidly in recent years, adoption of LEDs for general lighting is relatively new, still limited and faces significant challenges before widespread adoption. In order to manage our growth and business strategy effectively in light of uncertainty related to the pace of adoption, we must continue to:
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maintain, expand and purchase adequate manufacturing facilities and equipment to meet customer demand;
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maintain a sufficient supply of raw materials to support our growth;
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expand research and development, sales and marketing, technical support, distribution capabilities and administrative functions;
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manage organizational complexity and communication;
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expand the skills and capabilities of our current management team;
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add experienced senior level managers; and
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attract and retain qualified employees.
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While we intend to focus on managing our costs and expenses, over the long term we expect to invest substantially to support our growth and may have additional unexpected costs. For example, in 2013, we expanded our facilities in Wisconsin and North Carolina. Such investments take time to become fully operational, and we may not be able to expand quickly enough to exploit targeted market opportunities. There are also inherent execution risks in starting up a new factory or expanding production capacity that could increase costs and reduce our operating results, including design and construction cost overruns, poor production process yields and reduced quality control during the start-up phase.
We are also increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build, implement, upgrade, integrate and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, business disruptions or loss of or damage to intellectual property through security breach.
In connection with our efforts to cost-effectively manage our growth, we have increasingly relied on contractors for production capacity, logistics support and certain administrative functions including hosting of certain information technology software applications. If these service providers do not perform effectively, we may not be able to achieve the expected cost savings and may incur additional costs to correct errors or fulfill customer demand. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies or the loss of or damage to intellectual property through security breach, or impact employee morale. Our operations may also be negatively impacted if any of these service providers do not have the financial capability to meet our growing needs.
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The markets in which we operate are highly competitive and have evolving technical requirements.
The markets for our products are highly competitive. In the LED market, we compete with companies that manufacture or sell LED chips and LED components. In the lighting market, we compete with companies that manufacture and sell traditional and LED lighting products, many of which have larger and more established sales channels. Competitors continue to offer new products with aggressive pricing and improved performance. Competitive pricing pressures may change and could accelerate the rate of decline of our average sales prices.
With the growth potential for LEDs, we may face increased competition in the future. If the investment in new capacity exceeds the growth in demand, the LED market is likely to become more competitive with additional pricing pressures. Additionally, new technologies could emerge or improvements could be made in existing technologies that may also reduce the demand for LEDs in certain markets. There are also new technologies, such as organic LEDs (OLEDs), which could potentially have the same impact on LED demand for backlighting, which could impact the overall LED market.
As competition increases, in order to continue to grow our business, we need to continue to develop new products that meet or exceed the needs of our customers. Therefore, our ability to continually produce more efficient, higher brightness and lower cost LEDs and lighting products that meet the evolving needs of our customers will be critical to our success. Competitors may also try to align with some of our strategic customers. This could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations or financial condition.
We rely on a number of key sole source and limited source suppliers, and are subject to high price volatility on certain commodity inputs, variations in parts quality, and raw material consistency and availability.
We depend on a number of sole source and limited source suppliers for certain raw materials, including rare earth elements, components, services and equipment used in manufacturing our products, including key materials and equipment used in critical stages of our manufacturing processes. Although alternative sources generally exist for these items, qualification of many of these alternative sources could take up to six months or longer. Where possible, we attempt to identify and qualify alternative sources for our sole and limited source suppliers.
We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements with such suppliers. Some of our sources can have variations in attributes and availability which can affect our ability to produce products in sufficient volume or quality. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. Additionally, general shortages in the marketplace of certain raw materials or key components may adversely impact our business. In the past, we have experienced decreases in our production yields when suppliers have varied from previously agreed upon specifications, which have also impacted our cost of sales.
Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. This risk may increase if an economic downturn negatively affects key suppliers or a significant number of our other suppliers. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us from meeting commercial demand for our products. If we were to lose key suppliers, if our key suppliers were unable to support our demand for any reason, or if we were unable to identify and qualify alternative suppliers, our manufacturing operations could be interrupted or hampered significantly.
We rely on arrangements with independent shipping companies for the delivery of our products from vendors and to customers in both the United States and abroad. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security.
In our fabrication process we consume a number of precious metals and other commodities, which are subject to high price volatility. Our operating margins could be significantly affected if we are not able to pass along price increases to our customers. In addition, production could be disrupted by the unavailability of the resources used in production such as water, silicon, electricity and gases. Future environmental regulations could restrict supply or increase the cost of certain of those materials.
We operate in an industry that is subject to significant fluctuation in supply and demand that affects our revenue and profitability.
The LED lighting industry is in the early stages of adoption and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. The industry has experienced significant fluctuations, often in connection with, or in anticipation of, product cycles and
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changes in general economic conditions. As the markets for our products mature, additional fluctuations may result from variability and consolidations within the industry's customer base. These fluctuations have been characterized by lower product demand, production overcapacity, higher inventory levels and increased pricing pressure. We have experienced these conditions in our business in the past and may experience such conditions in the future, which could have a material negative impact on our business, results of operations or financial condition.
In addition, as we diversify our product offerings and as pricing differences in the average selling prices among our product lines widen, a change in the mix of sales among our product lines may increase volatility in our revenue and gross margin from period to period.
As a result of our continued expansion into new markets, we may compete with existing customers who may reduce their orders.
Through acquisitions and organic growth, we continue to expand into new markets and new market segments. Many of our existing customers who purchase our LED products develop and manufacture products using those chips and components that are offered into the same lighting markets. As a result, some of our current customers perceive us as a competitor in these market segments. In response, our customers may reduce or discontinue their orders for our LED products. This reduction in or discontinuation of orders could occur faster than our sales growth in these new markets, which could adversely affect our business, results of operations or financial condition.
We depend on a limited number of customers, including distributors, for a substantial portion of our revenues, and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating results.
We receive a significant amount of our revenues from a limited number of customers, including distributors, one of which represented greater than 10% of our consolidated revenues in fiscal 2013. Most of our customer orders are made on a purchase order basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their purchasing behavior with little or no notice to us for various reasons, including: developing, or, in the case of our distributors, their customers developing, their own product solutions; choosing to purchase product from our competitors; incorrectly forecasting end market demand for their products; or experiencing a reduction in their market share in the markets for which they purchase our products. If our customers alter their purchasing behavior, if our customers' purchasing behavior does not match our expectations, or if we encounter any problems collecting amounts due from them, our financial condition and results of operations could be negatively impacted.
Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity.
As customer demand for our products changes, we must be able to ramp up or adjust our production capacity to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. If we are not able to increase our production capacity at our targeted rate, or if there are unforeseen costs associated with adjusting our capacity levels, we may not be able to achieve our financial targets.
Conversely, due to the proportionately high fixed cost nature of our business (such as facility expansion costs), if demand does not increase at the rate forecasted, we may not be able to scale our manufacturing expenses or overhead costs to correspond to the demand. This could result in lower margins and adversely impact our business and results of operations. Additionally, if product demand decreases or we fail to forecast demand accurately, we may be required to recognize impairments on our long-lived assets or recognize excess inventory write off charges. We have in the past and may in the future be required to recognize excess capacity charges, which would have a negative impact on our results of operations.
In addition, our efforts to improve quoted delivery lead-time performance may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results.
Global economic conditions could materially adversely impact demand for our products and services.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about global economic conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and accordingly, on our business, results of operations or financial condition.
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If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.
From time to time, we evaluate strategic opportunities available to us for product, technology or business transactions, such as business acquisitions or divestitures. If we choose to enter into such transactions, we face certain risks, such as the failure of an acquired business to meet our performance expectations, diversion of management attention, identification of additional liabilities relating to the acquired business, loss of existing customers of our current and acquired businesses due to concerns that new product lines may be in competition with the customers' existing product lines, and difficulty integrating an acquired business's operations, personnel and financial and operating systems into our current business.
We may not be able to adequately address these risks or any other problems that arise from our recent or future acquisitions or divestitures. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any such business transaction could adversely affect our business, results of operations or financial condition.
Our revenue is highly dependent on our customers' ability to produce, market and sell more integrated products.
Our revenue in our LED Products and Power and RF Products segments depends on getting our products designed into a larger number of our customers' products and in turn, our customers' ability to produce, market and sell their products. For example, we have current and prospective customers that create, or plan to create, lighting systems using our LED components. However, the traditional lighting industry is still developing technical expertise with LED-related designs, which may limit the success of our customers' products. Even if our customers are able to develop and produce LED lighting products and products that incorporate our Power and RF products, there can be no assurance that our customers will be successful in marketing and selling these products in the marketplace.
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance, use or other aspects of lighting could impact the demand for our products.
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance or other aspects of LED lighting may impact the demand for our products. Demand for our products may also be impacted by changes in government and/or industry policies, standards or regulations that discourage the use of certain traditional lighting technologies. These constraints may be eliminated or delayed by legislative action, which could have a negative impact on demand for our products.
If governments, their agencies or utilities reduce their demand for our products or discontinue or curtail their funding, our business may suffer.
Changes in governmental budget priorities could adversely affect our business and results of operations. U.S. and foreign government agencies have purchased products directly from us and products from our customers, and U.S. government agencies have historically funded a portion of our research and development activities. When the government changes budget priorities, such as in times of war or financial crisis, our research and development funding and our product sales to government entities are at risk. For example, demand and payment for our products and our customers' products may be affected by public sector budgetary cycles, funding authorizations, or utility rebates. Funding reductions or delays could negatively impact demand for our products. If government or utility funding is discontinued or significantly reduced, our business and results of operations could be adversely affected.
Variations in our production yields could impact our ability to reduce costs and could cause our margins to decline and our operating results to suffer.
All of our products are manufactured using technologies that are highly complex. The number of usable items, or yield, from our production processes may fluctuate as a result of many factors, including but not limited to the following:
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variability in our process repeatability and control;
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contamination of the manufacturing environment;
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equipment failure, power outages, information or other system failures or variations in the manufacturing process;
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lack of consistency and adequate quality and quantity of piece parts and other raw materials, and other bill of materials items;
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inventory shrinkage or human errors;
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defects in production processes (including system assembly) either within our facilities or at our suppliers; and
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any transitions or changes in our production process, planned or unplanned.
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In the past, we have experienced difficulties in achieving acceptable yields on certain products, which has adversely affected our operating results. We may experience similar problems in the future, and we cannot predict when they may occur or their severity.
In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in providing a more cost effective manufacturing process. If we are unable to make this transition in a timely or cost effective manner, our results could be negatively impacted.
In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost efficiencies from other production advances. Failure to achieve these planned improvements or advances could have a significant impact on our margins and operating results.
Catastrophic events may disrupt our business.
A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as an influenza outbreak within our workforce, or man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, particularly if a catastrophic event occurred at our primary manufacturing locations in the U.S. and China. This could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable as well, such as impacts to our customers, which could cause delays in new orders, delays in completing sales or even order cancellations.
If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.
The manufacture of our products involves highly complex processes. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.
We have experienced product quality, performance or reliability problems from time to time and defects or failures may occur in the future. If failures or defects occur, we may need to recall our products. These recalls could result in significant losses due to:
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costs associated with the removal, collection and destruction of the product recalled;
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payments made to replace recalled product;
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the write down or destruction of existing inventory subject to the recall;
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lost sales due to the unavailability of product for a period of time;
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delays, cancellations or rescheduling of orders for our products; or
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increased product returns.
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A significant product recall could also result in adverse publicity, damage to our reputation, and a loss of customer or consumer confidence in our products. We also may be the target of product liability lawsuits or regulatory proceedings by the Consumer Product Safety Commission (CPSC), and could suffer losses from a significant product liability judgment or adverse CPSC finding against us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard.
We provide warranty periods ranging from ninety days to ten years on our products. The standard warranty on nearly all of our new LED lighting products, which represent an increasing portion of our sales, is ten years. As a result, we may experience an increase in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
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Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.
As a result of acquisitions and organic growth, we have operations, manufacturing facilities and contract manufacturing arrangements in foreign countries that expose us to certain risks. For example, fluctuations in exchange rates may affect our revenues, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:
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protection of intellectual property and trade secrets;
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tariffs, customs and other barriers to importing/exporting materials and products in a cost effective and timely manner;
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timing and availability of export licenses;
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rising labor costs;
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disruptions in or inadequate infrastructure of the countries where we operate;
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difficulties in accounts receivable collections;
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difficulties in staffing and managing international operations;
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the burden of complying with foreign and international laws and treaties; and
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the burden of complying with and changes in international taxation policies.
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In some instances, we have been provided and may continue to receive incentives from foreign governments to encourage our investment in certain countries, regions, or areas outside of the United States. In particular, we have received and may continue to receive such incentives in connection with our operations in Asia, as Asian national and local governments seek to encourage the development of the technology industry. Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations. These same governments also may provide increased incentives to or require production processes that favor local companies, which could further negatively impact our business and results of operations.
Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.
Litigation could adversely affect our operating results and financial condition.
We are often involved in litigation, primarily patent litigation, as described in more detail in Note 12, "Commitments and Contingencies" to our consolidated financial statements included in Item 8 of this Annual Report. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially affect our results of operations and financial condition.
Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights. Any such litigation may require us to spend a substantial amount of time and money and could distract management from our day-to-day operations. Moreover, there is no assurance that we will be successful in any such litigation.
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Our business may be impaired by claims that we, or our customers, infringe the intellectual property rights of others.
Vigorous protection and pursuit of intellectual property rights characterize our industry. These traits have resulted in significant and often protracted and expensive litigation. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:
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pay substantial damages;
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indemnify our customers;
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stop the manufacture, use and sale of products found to be infringing;
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incur asset impairment charges;
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discontinue the use of processes found to be infringing;
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expend significant resources to develop non-infringing products or processes; or
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obtain a license to use third party technology.
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There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products. In addition, our customers may face infringement claims directed to the customer's products that incorporate our products, and an adverse result could impair the customer's demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under these indemnification obligations, we may be responsible for future payments to resolve infringement claims against them.
From time to time, we receive correspondence asserting that our products or processes are or may be infringing patents or other intellectual property rights of others. If we believe the assertions may have merit or in other appropriate circumstances, we may take steps to seek to obtain a license or to avoid the infringement. We cannot predict, however, whether a license will be available; that we would find the terms of any license offered acceptable; or that we would be able to develop an alternative solution. Failure to obtain a necessary license or develop an alternative solution could cause us to incur substantial liabilities and costs and to suspend the manufacture of affected products.
There are limitations on our ability to protect our intellectual property.
Our intellectual property position is based in part on patents owned by us and patents licensed to us. We intend to continue to file patent applications in the future, where appropriate, and to pursue such applications with U.S. and certain foreign patent authorities.
Our existing patents are subject to expiration and re-examination and we cannot be sure that additional patents will be issued on any new applications around the covered technology or that our existing or future patents will not be successfully contested by third parties. Also, since issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents, or patents issued to others and licensed to us, will provide significant commercial protection, especially as new competitors enter the market.
We periodically discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. The actions we take to establish and protect trademarks, patents, and other intellectual property rights may not be adequate to prevent imitation of our products by others, and therefore, may adversely affect our sales and our brand and result in the shift of customer preference away from our products. Further, the actions we take to establish and protect trademarks, patents and other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation or other action results in a determination favorable to us.
We also rely on trade secrets and other non-patented proprietary information relating to our product development and manufacturing activities. We try to protect this information through appropriate efforts to maintain its secrecy, including requiring employees and third parties to sign confidentiality agreements. We cannot be sure that these efforts will be successful or that the confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
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We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.
Goodwill and purchased intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the unamortized balance of our definite-lived intangible assets when indicators of potential impairment are present. Factors that may indicate that the carrying value of our goodwill or other intangible assets may not be recoverable include a decline in our stock price and market capitalization and slower growth rates in our industry. The recognition of a significant charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill or other intangible assets could adversely impact our results of operations.
We may be subject to confidential information theft or misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our systems. Additionally, outside parties may attempt to access our confidential information through other means, for example by fraudulently inducing our employees to disclose confidential information. We actively seek to prevent, detect and investigate any unauthorized access, which sometimes occurs. We might be unaware of any such access or unable to determine its magnitude and effects. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development could be reduced. Our business could be subject to significant disruption, and we could suffer monetary or other losses.
We are subject to risks related to international sales and purchases.
We expect that revenue from international sales will continue to represent a significant portion of our total revenue. As such, a significant slowdown or instability in relevant foreign economies, including economic instability in Europe, or lower investments in new infrastructure could have a negative impact on our sales. We also purchase a portion of the materials included in our products from overseas sources.
Our international sales and purchases are subject to numerous U.S. and foreign laws and regulations, including, without limitation, tariffs, trade barriers, regulations relating to import-export control, technology transfer restrictions, the International Traffic in Arms Regulation promulgated under the Arms Export Control Act, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. If we fail to comply with these laws and regulations, we could be liable for administrative, civil or criminal liabilities, and in the extreme case, we could be suspended or debarred from government contracts or have our export privileges suspended, which could have a material adverse effect on our business.
International sales and purchases are also subject to a variety of other risks, including risks arising from currency fluctuations, collection issues and taxes. Our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies in which we are billed.
We have entered and may in the future enter into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations.
Our business may be adversely affected by uncertainties in the global financial markets and our or our customers' or suppliers' ability to access the capital markets.
Global financial markets continue to reflect uncertainty about a sustained global economic recovery. Given these uncertainties, there could be future disruptions in the global economy, financial markets and consumer confidence. If economic conditions deteriorate unexpectedly, our business and results of operations could be materially and adversely affected. For example, our customers, including our distributors and their customers, may experience difficulty obtaining the working capital and other financing necessary to support historical or projected purchasing patterns, which could negatively affect our results of operations.
Although we believe we have adequate liquidity and capital resources to fund our operations internally, our inability to access the capital markets on favorable terms in the future, or at all, may adversely affect our financial performance. The inability to obtain adequate financing from debt or capital sources in the future could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn could potentially harm our performance.
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Changes in our effective tax rate may affect our results.
Our future effective tax rates may be affected by a number of factors including:
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the jurisdiction in which profits are determined to be earned and taxed;
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changes in government administrations, such as the Presidency and Congress of the U.S. as well as in the states and countries in which we operate;
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changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles;
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the resolution of issues arising from tax audits with various authorities;
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changes in the valuation of our deferred tax assets and liabilities;
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adjustments to estimated taxes upon finalization of various tax returns;
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increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;
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changes in available tax credits;
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the recognition and measurement of uncertain tax positions;
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the lack of sufficient excess tax benefits (credits) in our additional paid in capital pool in situations where our realized tax deductions for certain stock-based compensation awards (such as non-qualified stock options and restricted stock) are less than those originally anticipated; and
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the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes, or any changes in legislation that may result in these earnings being taxed within the U.S., regardless of our decision regarding repatriation of funds.
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Any significant increase or decrease in our future effective tax rates could impact net income for future periods. In addition, the determination of our income tax provision requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. To the extent our income tax liability materially differs from our income tax provisions due to factors, including the above, which were not anticipated at the time we estimated our tax provision, our net income or cash flows could be affected.
In order to compete, we must attract, motivate and retain key employees, and our failure to do so could harm our results of operations.
Hiring and retaining qualified executives, scientists, engineers, technical staff and sales personnel is critical to our business, and competition for experienced employees in our industry can be intense. As a global company, this issue is not limited to the United States, but includes our other locations such as Europe and China. For example, there is substantial competition in China for qualified and capable personnel, particularly experienced engineers and technical personnel, which may make it difficult for us to recruit and retain qualified employees. Also, within Huizhou, China, there are other large companies building manufacturing plants that will likely compete for qualified employees. If we are unable to staff sufficient and adequate personnel at our China facilities, we may experience lower revenues or increased manufacturing costs, which would adversely affect our results of operations.
To help attract, motivate and retain key employees, we use benefits such as stock-based compensation awards, which include non-qualified stock options and restricted stock. If the value of such equity awards does not appreciate, as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate employees could be weakened, which could harm our business and results of operations.
19
Failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of operations.
The manufacturing, assembling and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
|
•
|
regulatory penalties, fines, legal liabilities, and the forfeiture of certain tax benefits;
|
|
•
|
suspension of production;
|
|
•
|
alteration of our fabrication, assembly and test processes; and
|
|
•
|
curtailment of our operations or sales.
|
In addition, our failure to manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify our product designs or incur other expenses, such as permit costs, associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our manufacturing processes.
Our results could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies, including changes in the accounting standards to be applied.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results (see “Critical Accounting Policies and Estimates” in our Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K.) Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations or financial condition.
Likewise, our results may be impacted due to changes in the accounting standards to be applied, such as the increased use of fair value measurement standards and proposed changes in revenue recognition requirements.
New regulations related to conflict-free minerals may force us to incur additional expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC established new annual disclosure and reporting requirements for those companies who may use “conflict” minerals mined from the DRC and adjoining countries in their products. These new requirements required us to undertake due diligence efforts beginning in the 2013 calendar year, with initial disclosure requirements beginning in May 2014. These new requirements could affect the sourcing and availability of certain minerals used in the manufacture of our products. As a result, we may not be able to obtain the relevant minerals at competitive prices and there will likely be additional costs associated with complying with the new due diligence procedures as required by the SEC. In addition, as our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due diligence procedures that we implement, and we may incur additional costs as a result of changes to product, processes or sources of supply as a consequence of these new requirements.
We are exposed to fluctuations in the market value of our investment portfolio and in interest rates, and therefore, impairment of our investments or lower investment income could harm our earnings.
We are exposed to market value and inherent interest rate risk related to our investment portfolio. We have historically invested portions of our available cash in fixed interest rate securities such as high-grade corporate debt, commercial paper, government securities and other fixed interest rate investments. The primary objective of our investment policy is preservation of principal. However, our investments are generally not FDIC insured and may lose value and/or become illiquid regardless of their credit rating.
20
Our stock price may be volatile.
Historically, our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in our revenue, earnings and margins over the past few years, and variations between our actual financial results and the published expectations of analysts. For example, the closing price per share of our common stock on the NASDAQ Global Select Market ranged from a low of
$22.78
to a high of
$65.70
during fiscal
2013
. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.
Speculation and opinions in the press or investment community about our strategic position, financial condition, results of operations, or significant transactions can also cause changes in our stock price. In particular, speculation around our market opportunities for energy efficient lighting may have a dramatic effect on our stock price, especially as various government agencies announce their planned investments in energy efficient technology, including lighting.
Item 1B.
Unresolved Staff Comments
Not applicable.
21
Item 2.
Properties
The table below sets forth information with respect to our significant owned and leased facilities as of
June 30, 2013
. The sizes of the locations represent the approximate gross square footage of each site’s buildings.
|
|
Size (approximate square footage)
|
|||||||||||||||
|
Location
|
Segment Utilization
1
|
Total
|
Production
|
Facility
Services and
Warehousing
|
Administrative
Function
|
Housing /
Other
|
||||||||||
|
Owned Facilities
|
||||||||||||||||
|
Durham, NC
|
All
|
828,600
|
|
500,720
|
|
106,000
|
|
221,880
|
|
—
|
|
|||||
|
Research Triangle Park, NC
|
1,3
|
163,121
|
|
68,884
|
|
42,599
|
|
51,638
|
|
—
|
|
|||||
|
Racine, WI
|
2
|
802,845
|
|
160,000
|
|
418,000
|
|
224,845
|
|
—
|
|
|||||
|
Huizhou, China
|
1
|
806,312
|
|
351,345
|
|
82,019
|
|
41,763
|
|
331,185
|
|
|||||
|
Total owned
|
2,600,878
|
|
1,080,949
|
|
648,618
|
|
540,126
|
|
331,185
|
|
||||||
|
Leased Facilities
|
||||||||||||||||
|
Durham, NC
|
2
|
108,382
|
|
42,000
|
|
54,382
|
|
12,000
|
|
—
|
|
|||||
|
Morrisville, NC
|
2
|
27,050
|
|
—
|
|
—
|
|
27,050
|
|
—
|
|
|||||
|
Goleta, CA
|
All
|
25,623
|
|
—
|
|
1,882
|
|
23,741
|
|
—
|
|
|||||
|
Yorkville, WI
|
2
|
79,016
|
|
—
|
|
77,316
|
|
1,700
|
|
—
|
|
|||||
|
Florence, Italy
|
1,2
|
35,360
|
|
4,628
|
|
21,679
|
|
9,053
|
|
—
|
|
|||||
|
Hong Kong
|
All
|
36,090
|
|
—
|
|
—
|
|
29,955
|
|
6,135
|
|
|||||
|
Huizhou, China
|
1
|
402,184
|
|
260,014
|
|
—
|
|
—
|
|
142,170
|
|
|||||
|
Shanghai, China
|
1,3
|
14,897
|
|
—
|
|
—
|
|
14,897
|
|
—
|
|
|||||
|
Miscellaneous sales and support offices
|
All
|
49,828
|
|
—
|
|
9,976
|
|
37,255
|
|
2,597
|
|
|||||
|
Leased Land
|
||||||||||||||||
|
Huizhou, China
|
1
|
414,952
|
|
180,813
|
|
42,208
|
|
21,493
|
|
170,438
|
|
|||||
|
Total leased
|
1,193,382
|
|
487,455
|
|
207,443
|
|
177,144
|
|
321,340
|
|
||||||
|
Total
|
3,794,260
|
|
1,568,404
|
|
856,061
|
|
717,270
|
|
652,525
|
|
||||||
1
Segments listed in the "Segment Utilization" column above are identified as follows: 1) LED Products; 2) Lighting Products; 3) Power and RF Products.
In the United States, our corporate headquarters as well as our primary research and development and manufacturing operations are located at the Durham, North Carolina facilities that we own. These Durham facilities sit on approximately
141
acres of land that we own. Our power and RF products are primarily produced at our owned manufacturing facility located in Research Triangle Park, North Carolina. This facility sits on approximately
55
acres of land that we own. Domestically, our lighting products are primarily produced at our approximately
802,845
square foot owned facility in Racine, Wisconsin and an approximately
108,382
square foot leased facility in Durham, North Carolina.
We also own an approximately
806,312
square-foot facility in Huizhou, Guangdong Province, China. This building sits on land that is leased from the Chinese government through two leases. One lease for
327,440
square feet expires in
June 2057
. The other lease for
87,512
square feet expires in
November 2060
.
We maintain sales and support offices, through our subsidiaries, in leased office premises in North America, Asia, and Europe. In addition, we lease a facility in Goleta, California that is used for research and development and administrative functions.
Item 3.
Legal Proceedings
The information required by this item is set forth under Note 12, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report, and is incorporated herein by reference.
22
Not applicable.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Information
Our common stock is traded on the NASDAQ Global Select Market and is quoted under the symbol CREE. There were
394
holders of record of our common stock as of
August 22, 2013
. The following table sets forth, for the quarters indicated, the high and low closing sales prices as reported by NASDAQ.
|
|
Fiscal 2013
|
Fiscal 2012
|
|||||||||||||
|
|
High
|
Low
|
High
|
Low
|
|||||||||||
|
First Quarter
|
|
$29.01
|
|
|
$22.78
|
|
|
$37.11
|
|
|
$26.65
|
|
|||
|
Second Quarter
|
34.69
|
|
24.83
|
|
31.00
|
|
20.32
|
|
|||||||
|
Third Quarter
|
55.28
|
|
31.44
|
|
32.21
|
|
21.41
|
|
|||||||
|
Fourth Quarter
|
65.70
|
|
49.20
|
|
32.88
|
|
22.91
|
|
|||||||
We have never paid cash dividends on our common stock and do not anticipate that we will do so in the foreseeable future. There are no contractual restrictions in place that currently materially limit, or are likely in the future to materially limit us from paying dividends on our common stock, but applicable state law may limit the payment of dividends. Our present policy is to retain earnings, if any, to provide funds for the operation and expansion of our business.
23
Stock Performance Graph
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total return on our common stock with the cumulative total returns of The NASDAQ Composite Index and The NASDAQ Electronic Components Index for the five-year period commencing
June 29, 2008
. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
Comparison of Five-Year Cumulative Total Return*
Among Cree, Inc., The NASDAQ Composite Index
And The NASDAQ Electronic Components Index
|
*
|
Assumes (1) $100 invested on
June 29, 2008
in Cree, Inc. Common Stock, The NASDAQ Composite Index and The NASDAQ Electronic Components Index and (2) the immediate reinvestment of all dividends.
|
|
6/29/2008
|
6/28/2009
|
6/27/2010
|
6/26/2011
|
6/24/2012
|
6/30/2013
|
||||||||||||||||||
|
Cree, Inc.
|
|
$100.00
|
|
|
$126.35
|
|
|
$274.75
|
|
|
$143.41
|
|
|
$103.25
|
|
|
$269.55
|
|
|||||
|
NASDAQ Composite Index
|
100.00
|
|
80.21
|
|
97.94
|
|
118.07
|
|
130.20
|
|
155.76
|
|
|||||||||||
|
NASDAQ Electronic Components Index
|
100.00
|
|
75.83
|
|
93.47
|
|
92.97
|
|
95.83
|
|
113.29
|
|
|||||||||||
24
Sale of Unregistered Securities
There were
no
unregistered securities sold during fiscal
2013
.
The following table summarizes stock repurchase activity for the
fourth
quarter of fiscal
2013
(in thousands except price per share data):
|
Period
|
Total Number of Shares Purchased
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
3
|
||||||||||
|
Shares repurchased outside our Stock Repurchase Program in connection with our indemnification rights
1
|
||||||||||||||
|
April 1, 2013 to April 28, 2013
|
17
|
|
|
$40.85
|
|
—
|
|
|
$200,000
|
|
||||
|
April 29, 2013 to May 26, 2013
|
—
|
|
—
|
|
—
|
|
200,000
|
|
||||||
|
May 27, 2013 to June 30, 2013
|
8
|
|
40.85
|
|
—
|
|
200,000
|
|
||||||
|
Total
|
25
|
|
|
$40.85
|
|
—
|
|
|
$200,000
|
|
||||
|
Shares repurchased outside our Stock Repurchase Program to satisfy tax withholding obligations
2
|
||||||||||||||
|
April 1, 2013 to April 28, 2013
|
2
|
|
|
$54.71
|
|
—
|
|
|
$200,000
|
|
||||
|
April 29, 2013 to May 26, 2013
|
—
|
|
—
|
|
—
|
|
200,000
|
|
||||||
|
May 27, 2013 to June 30, 2013
|
—
|
|
—
|
|
—
|
|
200,000
|
|
||||||
|
Total
|
2
|
|
|
$54.71
|
|
—
|
|
|
$200,000
|
|
||||
(1)
Represents shares of our common stock returned to us in connection with the exercise of our indemnification rights under the stock purchase agreement pursuant to which we acquired Ruud Lighting. The shares were returned from escrow during the
fourth
quarter of fiscal
2013
. The average price per share represents the deemed value of the shares as specified in such stock purchase agreement.
(2)
Represents shares repurchased to satisfy tax withholding obligations that arose on the vesting of shares of restricted stock.
(3)
As announced on August 7, 2012, we were authorized to repurchase shares of our common stock having an aggregate purchase price not exceeding
$200 million
as authorized by our Board of Directors from
June 14, 2012
through
June 30, 2013
. We did
not
repurchase any shares during this time period. As announced on August 13, 2013, pursuant to an extension of our stock repurchase program authorized by our Board of Directors, we are authorized to repurchase shares of our common stock having an aggregate purchase price not exceeding
$200 million
for all repurchases from
June 20, 2013
through the expiration of the program on
June 29, 2014
.
Since the inception of our stock repurchase program in January 2001, we have repurchased
10.3 million
shares of our common stock at an average price of
$19.95
per share with an aggregate value of
$205.4 million
. The repurchase program can be implemented through open market or privately negotiated transactions at the discretion of our management.
25
Item 6.
Selected Financial Data
The consolidated statement of income data set forth below with respect to the fiscal years ended
June 30, 2013
,
June 24, 2012
, and
June 26, 2011
and the consolidated balance sheet data at
June 30, 2013
and
June 24, 2012
are derived from, and are qualified by reference to, the audited consolidated financial statements included in Item 8 of this Annual Report and should be read in conjunction with those financial statements and notes thereto. The consolidated statement of income data for the fiscal years ended
June 27, 2010
and
June 28, 2009
and the consolidated balance sheet data at
June 26, 2011
,
June 27, 2010
, and
June 28, 2009
are derived from audited consolidated financial statements not included herein. Certain fiscal
2012
, fiscal
2011
, fiscal
2010
, and fiscal
2009
amounts have been reclassified to conform to fiscal
2013
classifications. These reclassifications had no effect on previously reported income from operations or shareholders’ equity.
Selected Consolidated Financial Data
(Thousands, except per share data)
|
|
Years Ended
|
||||||||||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
June 27,
2010 |
June 28,
2009 |
||||||||||||||
|
Statement of Income Data
1,2
|
|||||||||||||||||||
|
Revenue, net
|
|
$1,385,982
|
|
|
$1,164,658
|
|
|
$987,615
|
|
|
$867,287
|
|
|
$567,255
|
|
||||
|
Operating income
|
96,494
|
|
39,258
|
|
168,706
|
|
197,778
|
|
30,590
|
|
|||||||||
|
Net income from continuing operations
|
86,925
|
|
44,412
|
|
146,500
|
|
152,290
|
|
30,650
|
|
|||||||||
|
Net income from continuing operations per share, basic
|
|
$0.75
|
|
|
$0.39
|
|
|
$1.35
|
|
|
$1.49
|
|
|
$0.35
|
|
||||
|
Net income from continuing operations per share, diluted
|
|
$0.74
|
|
|
$0.39
|
|
|
$1.33
|
|
|
$1.45
|
|
|
$0.34
|
|
||||
|
Weighted Average Shares Outstanding
|
|||||||||||||||||||
|
Basic
|
116,621
|
|
114,693
|
|
108,522
|
|
102,371
|
|
88,263
|
|
|||||||||
|
Diluted
|
117,979
|
|
115,225
|
|
110,035
|
|
104,698
|
|
89,081
|
|
|||||||||
|
|
Years Ended
|
||||||||||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
June 27,
2010 |
June 28,
2009 |
||||||||||||||
|
Balance Sheet Data
1,2
|
|||||||||||||||||||
|
Cash, cash equivalents and short-term investments
|
|
$1,023,915
|
|
|
$744,513
|
|
|
$1,085,797
|
|
|
$1,066,405
|
|
|
$447,210
|
|
||||
|
Working capital
|
1,308,355
|
|
1,015,104
|
|
1,316,579
|
|
1,235,072
|
|
500,755
|
|
|||||||||
|
Total assets
|
3,052,410
|
|
2,747,498
|
|
2,446,722
|
|
2,199,176
|
|
1,404,567
|
|
|||||||||
|
Long term obligations
|
38,347
|
|
38,304
|
|
44,842
|
|
51,037
|
|
51,138
|
|
|||||||||
|
Shareholders’ equity
|
2,806,652
|
|
2,560,017
|
|
2,261,564
|
|
2,028,048
|
|
1,224,748
|
|
|||||||||
1
Consolidated statement of income data and balance sheet data for fiscal year 2009 exclude Cree Microwave as it was accounted for as a discontinued operation.
2
Consolidated statement of income data and balance sheet data for fiscal year 2012 include Ruud Lighting from the date of its acquisition in the first quarter of fiscal 2012. See Note 3, "Acquisitions," in our consolidated financial statements included in Item 8 of this annual report for more information about the impact of the acquisition on our consolidated financial statements.
26
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Annual Report. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.
Overview
We are a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
We develop and manufacture semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. In many cases, the properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs) and other materials used for electronic applications.
Our LED products consist of LED components, LED chips, and SiC materials. As LED technology improves, we believe the potential market for LED lighting will continue to expand. Our success in selling LED products depends upon our ability to offer innovative products and our ability to enable our customers to develop and market LED based products that successfully compete and drive LED adoption against traditional lighting products.
Our lighting products consist of both LED and traditional lighting systems. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.
In addition, we develop, manufacture and sell power and RF devices. Our power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Our RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide.
The majority of our products are manufactured at our production facilities located in North Carolina, Wisconsin, and China. We also use contract manufacturers for certain aspects of product fabrication, assembly and packaging. We operate research and development facilities in North Carolina, California, Wisconsin, India, and China.
Cree, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenues and earnings, please see our consolidated financial statements included in Item 8 of this Annual Report.
Reportable Segments
As of
June 30, 2013
, we have
three
reportable segments:
|
•
|
LED Products
|
|
•
|
Lighting Products
|
|
•
|
Power and RF Products
|
Reportable segments are components of an entity that have separate financial data that the entity's Chief Operating Decision Maker (CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.
The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit to the Company's consolidated income before income taxes.
For financial results by reportable segment, please refer to Note 13, "Reportable Segments" in our consolidated financial statements included in Item 8 of this Annual Report.
27
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
|
•
|
Overall Demand for Products and Applications using LEDs
. Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown in recent years, adoption of LEDs for general lighting is relatively new, still limited, and faces significant challenges before widespread adoption. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain, and demand dynamics in the market. These uncertainties make demand difficult to forecast for us and our customers.
|
|
•
|
Intense and Constantly Evolving Competitive Environment.
Competition in the LED and lighting industry is intense. Many companies have made significant investments in LED development and production equipment. Traditional lighting companies and new entrants are investing in LED-based lighting products as LED adoption has gained momentum. Traditional lighting companies have taken steps to try and limit access to their sales channels, including lighting agents and distributors. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications to LED-based solutions. To remain competitive, market participants must continuously increase product performance and reduce costs. To address these competitive pressures, we have invested in R&D activities to support new product development to deliver higher levels of performance and lower costs to differentiate our products in the market.
|
|
•
|
Technological Innovation and Advancement.
Innovations and advancements in LED, power and RF technologies continue to expand the potential commercial application for our products particularly in the general illumination, power electronics and wireless markets. However, new technologies or standards could emerge, or improvements could be made in existing technologies, that could reduce or limit the demand for our products in certain markets.
|
|
•
|
Regulatory Actions Concerning Energy Efficiency.
Many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency, even in some cases banning forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. Government agencies are also involved in setting standards for LED lighting, which can affect market acceptance and the availability of rebates from government agencies or third parties such as utilities. While this trend is generally positive, these regulations are affected by changing political priorities and evolving technical standards which can modify or limit the effectiveness of these new regulations.
|
|
•
|
Intellectual Property Issues.
Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation commonly occurs.
|
Fiscal
2013
Overview
The following is a summary of our financial results for the year ended
June 30, 2013
:
|
•
|
Our year-over-year revenues increased
19%
to
$1.4 billion
.
|
|
•
|
Gross margin improved from
35%
in fiscal
2012
to
38%
in fiscal
2013
. Gross profit increased by
$113.8 million
to
$523.3 million
.
|
|
•
|
Operating income was
$96.5 million
in fiscal
2013
compared to
$39.3 million
in fiscal
2012
. Net income per diluted share was
$0.74
in fiscal 2013 compared to
$0.39
for fiscal
2012
.
|
|
•
|
Combined cash, cash equivalents and short-term investments increased to
$1.0 billion
at
June 30, 2013
compared to
$744.5 million
at
June 24, 2012
. Cash provided by operating activities was
$285.2 million
for fiscal 2013, compared to
$242.3 million
for fiscal 2012.
|
|
•
|
Inventory increased to
$197.0 million
at
June 30, 2013
compared to
$188.8 million
at
June 24, 2012
.
|
|
•
|
We spent
$77.5 million
on purchases of property and equipment in fiscal
2013
compared to
$95.0 million
in fiscal
2012
.
|
28
Business Outlook
We project that the markets for our products will remain highly competitive during fiscal
2014
. We anticipate focusing on the following key areas, among others, in response to this competitive environment:
|
•
|
Lead with innovation and drive to cost parity.
We continue to work on developing new LEDs, LED lighting systems, and Power and RF devices to deliver improved value that approaches cost parity with existing technology and solutions. We believe that as our technology approaches cost parity, the market for these products will expand significantly.
|
|
•
|
Build the Cree brand.
We are working to build the Cree brand in both the commercial and consumer lighting segments by expanding our product offerings and continuing to invest in marketing the value of the Cree LED bulb and LED lighting directly to the end user.
|
|
•
|
Focus on select market segments to drive LED adoption.
In addition to our broad sales strategies, we are focused on a number of market segments where we can upgrade existing lighting and drive LED adoption with a combination of new product offerings, short payback, expanded services and innovative channel approaches.
|
|
•
|
Translate product innovation into revenue and profit growth.
We target revenue growth from new products and increased LED adoption and profit growth from the combination of higher sales, lower cost products and operating expense leverage.
|
Results of Operations
The following table sets forth certain consolidated statement of income data for the periods indicated (in thousands, except per share amounts and percentages):
|
|
2013
|
2012
|
2011
|
|||||||||||||||||
|
Dollars
|
% of
Revenue |
Dollars
|
% of
Revenue |
Dollars
|
% of
Revenue |
|||||||||||||||
|
Revenue, net
|
|
$1,385,982
|
|
100
|
%
|
|
$1,164,658
|
|
100
|
%
|
|
$987,615
|
|
100
|
%
|
|||||
|
Cost of revenue, net
|
862,722
|
|
62
|
%
|
755,196
|
|
65
|
%
|
551,842
|
|
56
|
%
|
||||||||
|
Gross profit
|
523,260
|
|
38
|
%
|
409,462
|
|
35
|
%
|
435,773
|
|
44
|
%
|
||||||||
|
Research and development
|
155,889
|
|
11
|
%
|
143,357
|
|
12
|
%
|
115,035
|
|
12
|
%
|
||||||||
|
Sales, general and administrative
|
236,581
|
|
17
|
%
|
197,092
|
|
17
|
%
|
139,304
|
|
14
|
%
|
||||||||
|
Amortization of acquisition related intangibles
|
30,823
|
|
2
|
%
|
26,274
|
|
2
|
%
|
10,776
|
|
1
|
%
|
||||||||
|
Loss on disposal or impairment of long-lived assets
|
3,473
|
|
0
|
%
|
3,481
|
|
0
|
%
|
1,952
|
|
0
|
%
|
||||||||
|
Operating income
|
96,494
|
|
7
|
%
|
39,258
|
|
3
|
%
|
168,706
|
|
17
|
%
|
||||||||
|
Non-operating income, net
|
11,063
|
|
1
|
%
|
8,389
|
|
1
|
%
|
9,521
|
|
1
|
%
|
||||||||
|
Income before income taxes
|
107,557
|
|
8
|
%
|
47,647
|
|
4
|
%
|
178,227
|
|
18
|
%
|
||||||||
|
Income tax expense
|
20,632
|
|
1
|
%
|
3,235
|
|
0
|
%
|
31,727
|
|
3
|
%
|
||||||||
|
Net income
|
|
$86,925
|
|
6
|
%
|
|
$44,412
|
|
4
|
%
|
|
$146,500
|
|
15
|
%
|
|||||
|
Basic earnings per share
|
|
$0.75
|
|
|
$0.39
|
|
|
$1.35
|
|
|||||||||||
|
Diluted earnings per share
|
|
$0.74
|
|
|
$0.39
|
|
|
$1.33
|
|
|||||||||||
29
Revenues
Revenues for fiscal
2013
,
2012
and
2011
were comprised of the following (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
LED Products
|
|
$801,483
|
|
|
$756,924
|
|
|
$808,207
|
|
|
$44,559
|
|
6
|
%
|
|
($51,283
|
)
|
(6
|
)%
|
||||||
|
% of Revenue
|
58
|
%
|
65
|
%
|
82
|
%
|
|||||||||||||||||||
|
Lighting Products
|
495,089
|
|
334,704
|
|
81,784
|
|
160,385
|
|
48
|
%
|
252,920
|
|
309
|
%
|
|||||||||||
|
% of Revenue
|
36
|
%
|
29
|
%
|
8
|
%
|
|||||||||||||||||||
|
Power and RF Products
|
89,410
|
|
73,030
|
|
97,624
|
|
16,380
|
|
22
|
%
|
(24,594
|
)
|
(25
|
)%
|
|||||||||||
|
% of Revenue
|
6
|
%
|
6
|
%
|
10
|
%
|
|||||||||||||||||||
|
Total revenue
|
|
$1,385,982
|
|
|
$1,164,658
|
|
|
$987,615
|
|
|
$221,324
|
|
19
|
%
|
|
$177,043
|
|
18
|
%
|
||||||
Our consolidated revenue increased
19%
to
$1.4 billion
in fiscal
2013
from
$1.2 billion
in fiscal
2012
. This year-over-year increase was due to higher sales across all three of our reportable segments, but driven primarily by the Lighting Products segment. Lighting Products segment revenue increased primarily due to an increase in sales of existing products, the sales of new and re-designed products introduced during the fiscal year, and the recognition of revenues from the Ruud Lighting acquisition for a full fiscal year.
Our consolidated revenue increased
18%
to
$1.2 billion
in fiscal
2012
from
$987.6 million
in fiscal
2011
. This year-over-year increase was due to the
309%
increase in Lighting Products revenue from sales of products acquired from Ruud Lighting and an increase in the sales of our existing products. The increase in Lighting Products revenue offset the
6%
decrease in LED Products revenues year-over-year and the
25%
decrease in Power and RF Products revenue over the same period.
LED Products Segment Revenue
LED Products revenue represents the largest portion of our revenue with approximately
58%
,
65%
, and
82%
of our total revenues for fiscal
2013
,
2012
, and
2011
, respectively. LED Products revenue was
$801.5 million
,
$756.9 million
, and
$808.2 million
for fiscal
2013
,
2012
, and
2011
, respectively.
LED Products revenue increased approximately
6%
to
$801.5 million
in fiscal
2013
from
$756.9 million
in fiscal 2012. This increase was the result of an overall increase in the number of units sold, primarily from our newer products, partially offset by a decline in selling prices. The average selling prices, or ASP, for LED Products decreased by
8%
in fiscal
2013
compared to fiscal
2012
, due primarily to sales of new lower cost products and competitive pricing pressure.
LED Products revenue decreased approximately
6%
to
$756.9 million
in fiscal 2012 from $
808.2 million
in fiscal 2011. This decrease was primarily due to generally weaker demand and downward pricing pressure for our LED chips and components. LED Products overall ASP increased by
8%
in fiscal 2012 compared to fiscal 2011 due primarily to changes in product mix.
Lighting Products Segment Revenue
Lighting Products revenues represented approximately
36%
,
29%
, and
8%
of our total revenues for fiscal
2013
,
2012
and
2011
respectively. Lighting Products revenue was
$495.1 million
,
$334.7 million
, and
$81.8 million
for fiscal
2013
,
2012
, and
2011
respectively.
Lighting Products revenue increased
48%
to
$495.1 million
in fiscal
2013
as compared to
$334.7 million
in fiscal
2012
. This increase was the result of an overall increase in the number of units sold, including sales from new and re-designed products, as well as recognizing a full year of sales in fiscal
2013
for products acquired from Ruud Lighting. Lighting Products overall ASP decreased by
27%
in fiscal
2013
compared to fiscal
2012
due to a change in product mix.
Lighting Products revenue increased
309%
to
$334.7 million
in fiscal
2012
as compared to
$81.8 million
in fiscal
2011
. This increase was primarily due to sales of products acquired from Ruud Lighting and an increase in the sales of our existing products. Including the Ruud Lighting products acquired, which have a higher overall ASP than our existing products, the overall blended ASP for Lighting Products increased by approximately 34% in fiscal
2012
compared to fiscal
2011
.
30
Power and RF Products Segment Revenue
Power and RF Products revenue represented approximately
6%
,
6%
, and
10%
of our total revenues for fiscal
2013
,
2012
, and
2011
, respectively. Power and RF Products revenue was
$89.4 million
,
$73.0 million
, and
$97.6 million
for fiscal
2013
,
2012
, and
2011
, respectively.
Power and RF Products revenue increased approximately
22%
to
$89.4 million
in fiscal
2013
from
$73.0 million
in fiscal
2012
. This increase was primarily the result of higher RF product unit sales in fiscal
2013
. The overall ASP for Power and RF Products decreased by
9%
in fiscal 2013 compared to fiscal 2012 primarily due to the sale of new lower cost Power and RF products.
Power and RF Products revenue decreased approximately
25%
to
$73.0 million
in fiscal
2012
from
$97.6 million
in fiscal
2011
. This decrease was primarily due to a lower demand in the solar inverter market and the delay of RF orders related to military programs. Power and RF Products overall ASP decreased by
11%
in fiscal 2012 compared to fiscal 2011 due to change in product mix.
Unallocated Revenue
All of our revenue is allocated to our reportable segments. The Company's CODM does not review inter-segment revenue when evaluating performance and allocating resources to each segment, and inter-segment revenue is not included in the segment revenues presented above. As such, total segment revenue in the table above is equal to the Company's consolidated revenue.
Gross Profit and Gross Margin
Gross profit and gross margin for fiscal
2013
,
2012
and
2011
were as follows (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
LED Products gross profit
|
|
$344,649
|
|
|
$290,642
|
|
|
$375,424
|
|
|
$54,007
|
|
19
|
%
|
|
($84,782
|
)
|
(23
|
)%
|
||||||
|
LED Products gross margin
|
43
|
%
|
38
|
%
|
46
|
%
|
|||||||||||||||||||
|
Lighting Products gross profit
|
148,947
|
|
103,396
|
|
23,686
|
|
45,551
|
|
44
|
%
|
79,710
|
|
337
|
%
|
|||||||||||
|
Lighting Products gross margin
|
30
|
%
|
31
|
%
|
29
|
%
|
|||||||||||||||||||
|
Power and RF Products gross profit
|
48,127
|
|
32,051
|
|
49,828
|
|
16,076
|
|
50
|
%
|
(17,777
|
)
|
(36
|
)%
|
|||||||||||
|
Power and RF Products gross margin
|
54
|
%
|
44
|
%
|
51
|
%
|
|||||||||||||||||||
|
Unallocated costs
|
(18,463
|
)
|
(16,627
|
)
|
(13,165
|
)
|
|
(1,836
|
)
|
11
|
%
|
(3,462
|
)
|
26
|
%
|
||||||||||
|
Consolidated gross profit
|
|
$523,260
|
|
|
$409,462
|
|
|
$435,773
|
|
|
$113,798
|
|
28
|
%
|
|
($26,311
|
)
|
(6
|
)%
|
||||||
|
Consolidated gross margin
|
38
|
%
|
35
|
%
|
44
|
%
|
|||||||||||||||||||
Our consolidated gross profit increased
28%
to
$523.3 million
in fiscal
2013
from
$409.5 million
in fiscal
2012
. Our consolidated gross margin increased to
38%
in fiscal
2013
from
35%
in fiscal
2012
. These consolidated gross profit and gross margin increases were due to the improvements in our LED Products and our Power and RF Products business segments, primarily due to higher volume of units sold, factory cost reductions, the introduction of new lower cost products, and higher factory utilization.
Our consolidated gross profit decreased
6%
to
$409.5 million
in fiscal 2012 from
$435.8 million
in fiscal 2011. Our consolidated gross margin decreased to
35%
in fiscal 2012 from
44%
in fiscal 2011. These consolidated gross profit and gross margin decreases were due to the decrease in LED Products and Power and RF Products gross profit, offset by an increase in Lighting Products gross profit. The
23%
decrease in LED Products gross profit was due to a competitive pricing environment and lower factory utilization. The
36%
decrease in Power and RF Products gross profit was due to reduced solar demand that resulted in lower factory utilization. The
337%
increase in Lighting Products gross profit was due to increased sales volume due to the Ruud Lighting acquisition,
factory cost reductions and lower cost new product designs.
LED Products Segment Gross Profit and Gross Margin
Our LED Products gross profit was
$344.6 million
,
$290.6 million
, and
$375.4 million
for fiscal
2013
,
2012
, and
2011
, respectively. LED Products gross margin was
43%
,
38%
, and
46%
for fiscal
2013
,
2012
, and
2011
, respectively.
LED Products gross profit increased approximately
19%
to
$344.6 million
in fiscal 2013 from
$290.6 million
in fiscal 2012, and LED Products gross margin increased to
43%
in fiscal 2013 from
38%
in fiscal
2012
. LED Products gross profit and gross margin
31
increased during fiscal 2013 due to factory cost reductions, the introduction of new lower cost products and higher factory utilization. These benefits more than offset the ASP decline in fiscal 2013 as compared to fiscal 2012.
LED Products gross profit decreased approximately
23%
to
$290.6 million
in fiscal 2012 from
$375.4 million
in fiscal
2011
, and LED Products gross margin decreased to
38%
in fiscal
2012
from
46%
in fiscal
2011
. LED Products gross profit and gross margin fell during fiscal 2012 due to a competitive pricing environment for LED chips and components and lower factory utilization.
Lighting Products Segment Gross Profit and Gross Margin
Lighting Products gross profit was
$148.9 million
,
$103.4 million
, and
$23.7 million
for fiscal
2013
,
2012
, and
2011
, respectively. Lighting Products gross margin was
30%
,
31%
, and
29%
for fiscal
2013
,
2012
, and
2011
, respectively.
Lighting Products gross profit increased approximately
44%
to
$148.9 million
in fiscal
2013
from
$103.4 million
in fiscal
2012
, primarily due to an increase in the number of overall units sold. Lighting Products gross margin decreased to
30%
in fiscal 2013 from
31%
in fiscal 2012, primarily due to a change in product mix.
Lighting Products gross profit increased approximately
337%
to
$103.4 million
in fiscal 2012 from
$23.7 million
in fiscal 2011. Lighting Products gross margin increased to
31%
in fiscal
2012
from
29%
in fiscal 2011. Lighting Products gross profit and gross margin increased during fiscal 2012 due to
a combination of increased sales volumes due to the Ruud Lighting acquisition, factory cost reductions and lower cost new product designs.
Power and RF Products Segment Gross Profit and Gross Margin
Power and RF Products gross profit was
$48.1 million
,
$32.1 million
, and
$49.8 million
for fiscal
2013
,
2012
, and
2011
, respectively. Power and RF Products gross margin was
54%
,
44%
, and
51%
for fiscal
2013
,
2012
, and
2011
, respectively.
Power and RF Products gross profit increased approximately
50%
to
$48.1 million
in fiscal
2013
from
$32.1 million
in fiscal
2012
. Power and RF Products gross margin increased to
54%
in fiscal
2013
from
44%
in fiscal
2012
. These gross profit and gross margin increases were due primarily to factory cost reductions, increased factory utilization, and higher sales of new lower cost products. These benefits more than offset the ASP decline in fiscal
2013
as compared to fiscal
2012
.
Power and RF Products gross profit decreased approximately
36%
to
$32.1 million
in fiscal
2012
from
$49.8 million
in fiscal
2011
. Power and RF Products gross margin decreased to
44%
in fiscal
2012
from
51%
in fiscal
2011
. Power and RF Products gross profit and gross margin decreased during fiscal 2012 due to lower sales volumes, primarily from reduced solar demand, which resulted in lower factory utilization.
Unallocated Costs
Unallocated costs were
$18.5 million
,
$16.6 million
, and
$13.2 million
for fiscal
2013
,
2012
, and
2011
, respectively. These costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans, matching contributions under our 401(k) plan and acquisition related costs. These costs are not allocated to the reportable segments' gross profit because our CODM does not review them regularly when evaluating segment performance and allocating resources.
Unallocated costs increased by $1.9 million in fiscal 2013 as compared to fiscal 2012, primarily due to higher stock-based compensation and higher incentive compensation as a result of improved overall Company performance. Unallocated costs increased by
$3.5 million
in fiscal 2012 as compared to fiscal 2011, primarily due to increases in stock-based compensation driven by the increase in employees and recognition of certain inventory charges related to the Ruud Lighting acquisition. These increases were partially offset by the reduction in incentive compensation as a result of lower operating performance for fiscal 2012.
For further information on the allocation of costs to segment gross profit, refer to Note 13, "Reportable Segments," in our consolidated financial statements included in Item 8 of this Annual Report.
Research and Development
Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consist primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies.
32
The following sets forth our research and development expenses in dollars and as a percentage of revenues (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
Research and development
|
|
$155,889
|
|
|
$143,357
|
|
|
$115,035
|
|
|
$12,532
|
|
9
|
%
|
|
$28,322
|
|
25
|
%
|
||||||
|
Percent of revenue
|
11
|
%
|
12
|
%
|
12
|
%
|
|||||||||||||||||||
Research and development expenses in fiscal
2013
increased
9%
to
$155.9 million
from
$143.4 million
in fiscal
2012
. This increase was primarily due to increased spending on research and development activities focused on new higher performance and lower cost LED chips, LED components, LED lighting products and Power and RF products.
Research and development expenses increased
25%
in fiscal
2012
to
$143.4 million
compared to
$115.0 million
in fiscal
2011
. The increase was primarily due to increased spending to support the transition to 150mm wafer capabilities as well as continued research and development activities focused on new LED chips, LED components, LED lighting products and Power and RF products.
Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions, the timing of expenditures and the number and nature of our ongoing research and development activities. However, we anticipate that in general our research and development expenses will continue to increase over time to support future growth.
Sales, General and Administrative
Sales, general and administrative expenses are composed primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consist of 1) salaries and related compensation costs, 2) consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs), 3) marketing and advertising expenses, 4) facilities and insurance costs and 5) travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenues (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
Sales, general and administrative
|
|
$236,581
|
|
|
$197,092
|
|
|
$139,304
|
|
|
$39,489
|
|
20
|
%
|
|
$57,788
|
|
41
|
%
|
||||||
|
Percent of revenue
|
17
|
%
|
17
|
%
|
14
|
%
|
|||||||||||||||||||
Sales, general and administrative expenses in fiscal
2013
increased
20%
to
$236.6 million
from
$197.1 million
in fiscal
2012
. This increase was primarily due to an increase in spending on sales and marketing for lighting products, including commissions, trade shows and advertising, as we continue to expand our direct sales resources and channels and invest in building and promoting the Cree brand. Additionally, the increase included personnel additions during fiscal 2013 to support our growth.
Sales, general and administrative expenses in fiscal
2012
increased
41%
to
$197.1 million
from
$139.3 million
in fiscal
2011
. This increase was primarily due to an increase in spending on sales and marketing for lighting products as we continue to expand our direct sales resources and channels and invest in building and promoting the Cree brand. The increase was also due to incremental sales, general and administrative expenses from Ruud Lighting, the legal transaction costs associated with the Ruud Lighting acquisition and patent litigation expenses.
Amortization of Acquisition Related Intangibles
As a result of our acquisitions, we have recognized various intangible assets, including customer relationships and developed technologies. During fiscal 2012, we acquired Ruud Lighting, resulting in
$206.0 million
of amortizable intangible assets, principally composed of developed technology, customer relationships and trade names. In fiscal 2008, we acquired LED Lighting Fixtures, Inc. (LLF), resulting in an additional
$41.2 million
of amortizable intangible assets. These intangible assets are principally composed of developed technology that specifically relates to technologies underlying the development of LED lighting products for the general illumination market. During fiscal 2007, we acquired INTRINSIC Semiconductor Corporation and COTCO Luminant Device Limited (now Cree Hong Kong Limited) (COTCO), resulting in
$63.7 million
of amortizable intangible assets principally composed of customer relationships and developed technology.
33
Amortization of intangible assets related to our acquisitions is as follows (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
Ruud Lighting
|
|
$22,918
|
|
|
$17,473
|
|
|
$—
|
|
|
$5,445
|
|
31
|
%
|
|
$17,473
|
|
100
|
%
|
||||||
|
COTCO
|
4,162
|
|
5,058
|
|
6,932
|
|
(896
|
)
|
(18
|
)%
|
(1,874
|
)
|
(27
|
)%
|
|||||||||||
|
LLF
|
2,998
|
|
2,998
|
|
3,099
|
|
—
|
|
0
|
%
|
(101
|
)
|
(3
|
)%
|
|||||||||||
|
INTRINSIC
|
745
|
|
745
|
|
745
|
|
—
|
|
0
|
%
|
—
|
|
0
|
%
|
|||||||||||
|
Total
|
|
$30,823
|
|
|
$26,274
|
|
|
$10,776
|
|
|
$4,549
|
|
17
|
%
|
|
$15,498
|
|
144
|
%
|
||||||
Amortization of acquisition related intangibles increased in fiscal
2013
compared to fiscal
2012
, primarily due to the completion of in-process research and development projects in fiscal
2013
. For fiscal 2012 compared to fiscal 2011, amortization of acquisition related intangibles increased primarily due to the acquisition of Ruud Lighting during the first quarter of fiscal
2012
.
Loss on Disposal or Impairment of Long-Lived Assets
We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our equipment and capitalized patent costs for possible impairment. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||||
|
Loss on disposal or impairment of long-lived assets, net
|
|
$3,473
|
|
|
$3,481
|
|
|
$1,952
|
|
|
($8
|
)
|
0
|
%
|
|
$1,529
|
|
78
|
%
|
||||||
We recognized a net loss of
$3.5 million
,
$3.5 million
, and
$2.0 million
on the disposal of long-lived assets in fiscal years
2013
,
2012
, and
2011
respectively. These net losses were primarily the result of disposals of equipment due to changes in various manufacturing processes and the abandonment of certain patent assets as a result of technological obsolescence.
Non-Operating Income, net
The following table sets forth our non-operating income, net (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||||
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
|||||||||||||||||||||
|
Foreign currency gain, net
|
|
$735
|
|
|
$171
|
|
|
$572
|
|
|
$564
|
|
330
|
%
|
|
($401
|
)
|
(70
|
)%
|
||||||
|
Gain on sale of investments, net
|
111
|
|
994
|
|
1
|
|
(883
|
)
|
(89
|
)%
|
993
|
|
99,300
|
%
|
|||||||||||
|
Interest income, net
|
7,882
|
|
7,457
|
|
8,528
|
|
425
|
|
6
|
%
|
(1,071
|
)
|
(13
|
)%
|
|||||||||||
|
Other, net
|
2,335
|
|
(233
|
)
|
420
|
|
2,568
|
|
(1,102
|
)%
|
(653
|
)
|
(155
|
)%
|
|||||||||||
|
Total non-operating income, net
|
|
$11,063
|
|
|
$8,389
|
|
|
$9,521
|
|
|
$2,674
|
|
32
|
%
|
|
($1,132
|
)
|
(12
|
)%
|
||||||
We have no debt or active lines of credit and we are in a net interest income position. Our investments consist of corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. The primary objective of our investment policy is preservation of principal.
Foreign currency gain, net.
Foreign currency gain, net consists primarily of remeasurement adjustments resulting from consolidating our international subsidiaries.
Gain on sale of investments, net.
Gain on sale of investments, net was higher in fiscal
2012
as compared to fiscal 2011 and fiscal 2013, primarily due to gains realized on sales of investments liquidated in fiscal 2012 in order to fund our acquisition of Ruud Lighting.
34
Interest income, net.
Interest income was
$7.9 million
and
$7.5 million
in fiscal
2013
and fiscal
2012
, respectively. The increase in interest income in fiscal
2013
was due to having higher invested cash and investment balances partially offset by lower interest rates. Interest income decreased from
$8.5 million
in fiscal 2011 to
$7.5 million
in fiscal 2012 due to the cash outlay associated with the Ruud Lighting acquisition in the first quarter of fiscal 2012, which reduced our average cash and investment balances in fiscal year 2012 as compared to fiscal 2011.
Other, net.
Other, net increased in fiscal 2013 as compared to fiscal 2012, primarily due to a one-time payment received in the first quarter of fiscal 2013 in connection with the SemiLEDs patent litigation settlement.
Income Tax Expense
The following table sets forth our income tax expense in dollars and our effective tax rate (in thousands, except percentages):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
2012 to 2013
|
2011 to 2012
|
||||||||||||||||||
|
Income tax expense
|
|
$20,632
|
|
|
$3,235
|
|
|
$31,727
|
|
17,397
|
|
538
|
%
|
(28,492
|
)
|
(90
|
)%
|
||||||
|
Effective tax rate
|
19
|
%
|
7
|
%
|
18
|
%
|
|
|
|
|
|||||||||||||
We recognized income tax expense of
$20.6 million
in fiscal
2013
as compared to income tax expense of
$3.2 million
in fiscal
2012
. The increase in the effective tax rate from
7%
in fiscal
2012
to
19%
in fiscal
2013
was due to the decreased impact of tax credits relative to higher year-over-year pre-tax income, a higher percentage of our pre-tax income being derived from U.S. operations that are taxed at a higher tax rate than international locations and the inclusion of a tax benefit related to a prior year audit settlement in fiscal 2012. The decrease in the effective tax rate from
18%
in fiscal
2011
to
7%
in fiscal
2012
was due to the increased impact of net tax benefits related to prior year audit settlements, statute expirations, and tax credits relative to lower year-over-year pre-tax income. The research and development credit, which had previously expired on December 31, 2011, was reinstated as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2013. The benefit of this
$2.4 million
credit for the full year fiscal 2013 as well as the period December 31, 2011 through June 24, 2012 has been included in the fiscal year 2013. For further discussion of changes in our effective tax rate, please refer to Note 11, “Income Taxes,” in our consolidated financial statements included in Item 8 of this Annual Report.
The variation between our effective tax rate and the U.S. statutory rate of
35%
is primarily due to the consolidation of our foreign operations, which are generally subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on our periodic effective tax rate. In addition, our effective tax rate may be negatively impacted by the lack of sufficient excess tax benefits (credits) that accumulate in our equity as additional paid-in-capital (APIC) and referred to as the “APIC pool” of credits. In situations where our realized tax deductions for certain stock-based compensation awards, such as non-qualified stock options and restricted stock, are less than those originally anticipated, which accumulate in the APIC pool, U.S. GAAP requires that we recognize the difference as an increase to income tax expense.
Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable investments and cash generated from operations. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have no debt or active lines of credit and have minimal lease commitments.
On
August 17, 2011, we acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of
6.1 million
shares of our common stock and
$372.2 million
in cash, subject to certain post-closing adjustments. Following the acquisition, we recorded certain post-closing purchase price adjustments resulting in a
$2.3 million
reduction to the purchase price and a total purchase price of approximately
$666.0 million
. Prior to the completion of our acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC. Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction, we funded Ruud Lighting's re-acquisition of E-conolight and paid off Ruud Lighting's outstanding debt in the aggregate amount of approximately
$85.0 million
. The cash consideration and debt payoff were funded from cash on hand, which reduced our available cash to fund our operating expenses and working capital by approximately
$457.2 million
.
35
Based on past performance and current expectations, we believe our cash and cash equivalents, investments, cash generated from operations and our ability to access capital markets will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, contractual obligations, commitments and other liquidity requirements associated with our operations through at least the next 12 months.
From time to time, we evaluate strategic opportunities, including potential acquisitions, divestitures or investments in complementary businesses and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.
Contractual Obligations
At
June 30, 2013
, payments to be made pursuant to significant contractual obligations are as follows (in thousands):
|
|
Payments due by period
|
||||||||||||||||||
|
Total
|
Less than
One Year |
One to
Three Years |
Three to
Five Years |
More Than
Five Years |
|||||||||||||||
|
Operating lease obligations
|
|
$13,986
|
|
|
$3,878
|
|
|
$6,717
|
|
|
$3,217
|
|
|
$174
|
|
||||
|
Purchase obligations
|
175,767
|
|
170,718
|
|
3,357
|
|
1,689
|
|
3
|
|
|||||||||
|
Other long-term liabilities
1
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Total
|
|
$189,753
|
|
|
$174,596
|
|
|
$10,074
|
|
|
$4,906
|
|
|
$177
|
|
||||
1
Other long-term liabilities as of
June 30, 2013
include long-term tax contingencies, other tax liabilities and deferrals of
$10.2 million
and other long-term contingent liabilities (for example, warranties) of
$2.6 million
. These liabilities are not included in the table above as they will either not be settled in cash and/or the timing of any payments is uncertain.
Operating leases include rental amounts due on leases of certain office and manufacturing space under the terms of non-cancellable operating leases. These leases expire at various times through
May 2022
. All of the lease agreements provide for rental adjustments for increases in base rent, property taxes and general property maintenance that would be recognized as rent expense, if applicable.
Purchase obligations represent purchase commitments, including open purchase orders and contracts, and are generally related to the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment.
Financial Condition
The following table sets forth our cash, cash equivalents and investments (in thousands):
|
June 30,
2013 |
June 24,
2012 |
Change
|
|||||||||
|
Cash and cash equivalents
|
|
$190,069
|
|
|
$178,885
|
|
|
$11,184
|
|
||
|
Short-term investments
|
833,846
|
|
565,628
|
|
268,218
|
|
|||||
|
Total cash, cash equivalents, and short-term investments
|
|
$1,023,915
|
|
|
$744,513
|
|
|
$279,402
|
|
||
Our liquidity and capital resources depend on our cash flows from operations and our working capital. The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories, reduced by trade accounts payable, accrued salaries and wages, and other accrued expenses. Our working capital increased to
$1.3 billion
as of
June 30, 2013
from
$1.0 billion
at
June 24, 2012
, primarily due to
$285.2 million
cash provided by operating activities,
$96.2 million
cash provided by the net issuances of common stock from employee option exercises and stock plan purchases, partially offset by payments for patent and licensing rights and purchases of property and equipment of
$98.3 million
.
36
The following table presents the components of our cash conversion cycle:
|
Three Months Ended
|
||||||||
|
June 30,
2013 |
June 24,
2012 |
Change
|
||||||
|
Days of sales outstanding (a)
|
46
|
|
45
|
|
1
|
|
||
|
Days of supply in inventory (b)
|
76
|
|
85
|
|
(9
|
)
|
||
|
Days in accounts payable (c)
|
(47
|
)
|
(36
|
)
|
(11
|
)
|
||
|
Cash conversion cycle
|
75
|
|
94
|
|
(19
|
)
|
||
|
a)
|
Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables and the revenue for the quarter then ended. DSO is calculated by dividing ending accounts receivable, net of applicable allowances and reserves, by the average net revenue per day for the respective 90 day period.
|
|
b)
|
Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net sold for the quarter then ended. DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90 day period.
|
|
c)
|
Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. DPO is calculated by dividing ending accounts payable by the average cost of revenue, net per day for the respective 90 day period.
|
The decrease in the cash conversion cycle was primarily driven by a decrease in days of supply in inventory and an increase in days in accounts payable.
As of
June 30, 2013
, we had unrealized losses on our investments of
$3.1 million
. All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at
June 30, 2013
were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of
June 30, 2013
.
We believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months. We may use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock pursuant to repurchase programs authorized by our Board of Directors. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties, or expand our production capacity.
Cash Flows
In summary, our cash flows were as follows (in thousands):
|
|
Fiscal Years Ended
|
Year-Over-Year Change
|
|||||||||||||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
2012 to 2013
|
2011 to 2012
|
||||||||||||||
|
Cash provided by operating activities
|
|
$285,234
|
|
|
$242,280
|
|
|
$251,380
|
|
|
$42,954
|
|
|
($9,100
|
)
|
||||
|
Cash used in investing activities
|
(380,307
|
)
|
(448,141
|
)
|
(303,234
|
)
|
67,834
|
|
(144,907
|
)
|
|||||||||
|
Cash provided by (used in) financing activities
|
105,952
|
|
(6,692
|
)
|
44,546
|
|
112,644
|
|
(51,238
|
)
|
|||||||||
|
Effect of foreign exchange changes
|
305
|
|
840
|
|
475
|
|
(535
|
)
|
365
|
|
|||||||||
|
Net increase (decrease) in cash and cash equivalents
|
|
$11,184
|
|
|
($211,713
|
)
|
|
($6,833
|
)
|
|
$222,897
|
|
|
($204,880
|
)
|
||||
37
The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.
Cash Flows from Operating Activities
Net cash provided by operating activities increased to
$285.2 million
in fiscal
2013
from
$242.3 million
in fiscal
2012
. The increase was primarily due to the increase in our net income. Net cash provided by operating activities decreased slightly to
$242.3 million
in fiscal
2012
from
$251.4 million
in fiscal
2011
. The change was due primarily to lower net income partially offset by decreases in inventory, excluding inventory acquired.
Cash Flows from Investing Activities
Net cash used in investing activities was
$380.3 million
for fiscal
2013
compared to
$448.1 million
for fiscal
2012
. This year-over-year decrease in cash used in investing activities was primarily the result of a reduction in cash used in business combinations, partially offset by an increase in the net purchases of available-for-sale investments during fiscal 2013.
Net cash used in investing activities was
$448.1 million
for fiscal
2012
compared to
$303.2 million
for fiscal
2011
. This year-over-year increase was primarily the result of the
$454.6 million
in cash used to acquire Ruud Lighting in fiscal 2012, partially offset by a decrease in purchases of property and equipment and an increase in our proceeds from the sale and maturity of investments, some of which were liquidated to pay for the acquisition.
We continue to actively manage our capital spending. For fiscal
2014
, we target committing approximately
$120.0 million
of capital investment to support our strategic priorities.
Cash Flows from Financing Activities
Net cash provided by financing activities was
$106.0 million
in fiscal 2013 compared to net cash used by financing activities of
$6.7 million
in fiscal
2012
. Our financing activities primarily consisted of proceeds of
$107.6 million
and
$5.3 million
for fiscal 2013 and 2012, respectively, from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employees stock purchase plan, including the excess tax benefit on those exercises.
In fiscal
2012
, net cash used in financing activities was
$6.7 million
compared to net cash provided by financing activities of
$44.5 million
in fiscal
2011
. This change was primarily related to the repurchase of 0.5 million shares of common stock worth approximately $12.0 million during the
fourth
quarter of fiscal 2012, and a reduction in stock option exercises during fiscal 2012 as compared to fiscal 2011. There were
no
common stock repurchases during fiscal 2011.
As of
June 30, 2013
, pursuant to an extension of our stock repurchase program authorized by our Board of Directors, we are authorized to repurchase shares of our common stock having an aggregate purchase price not exceeding
$200 million
for all purchases from
June 20, 2013
through the expiration of the program on
June 29, 2014
. Since the inception of our stock repurchase program in 2001, we have repurchased approximately
10.3 million
shares of our common stock at an average price of
$19.95
per share with an aggregate value of
$205.4 million
.
At the discretion of our management, the repurchase program can be implemented through open market or privately negotiated transactions. We will determine the time and extent of repurchases based on our evaluation of market conditions and other factors.
Fair Value
Under accounting principles generally accepted in the United States (U.S. GAAP), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
|
•
|
Level 1 - Valuations based on quoted prices in active markets for identical instruments that we are able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
|
|
•
|
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
•
|
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
38
The financial assets for which we perform recurring fair value remeasurements are cash equivalents and short-term investments. The financial assets for which we may be required to perform non-recurring fair value remeasurements (e.g., an impairment of assets) are any investments in privately-held companies. As of
June 30, 2013
, financial assets utilizing Level 1 inputs included money market funds. Financial assets utilizing Level 2 inputs included corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. Level 2 assets are valued using a third-party pricing services consensus price which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. We do not have any significant financial assets requiring the use of Level 3 inputs. Please refer to Note 6, “Fair Value of Financial Instruments” to the consolidated financial statements included in Item 8 of this Annual Report for further information.
Financial and Market Risks
We are exposed to financial and market risks, including changes in interest rates, currency exchange rates and commodities risk. We have entered and may in the future enter into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations and financial performance. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions at
June 30, 2013
and
June 24, 2012
. Actual results may differ materially.
Interest Rates
We maintain an investment portfolio principally composed of high-grade corporate debt, commercial paper, government securities, and other investments at fixed interest rates that vary by security. In order to minimize risk, our cash management policy permits us to acquire investments rated “A” grade or better. The potential loss in fair value resulting from a hypothetical 10% decrease in quoted market price of our investments was approximately
$83.4 million
at
June 30, 2013
and
$56.6 million
at
June 24, 2012
.
Currency Exchange Rates
As we operate internationally and have transactions denominated in foreign currencies, including the Chinese Renminbi and Euro, among others, we are exposed to currency exchange rate risks. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Our primary exposures relate to the exchange rates between the U.S. Dollar and the Chinese Renminbi. The potential loss in fair value resulting from a hypothetical 10% increase in the value of the U.S. Dollar compared to the Chinese Renminbi was approximately
$3.1 million
at
June 30, 2013
and
$3.8 million
at
June 24, 2012
.
Commodities
We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes. General economic conditions, market specific changes or other factors outside of our control may affect the pricing of these commodities. We do not use financial instruments to hedge commodity prices.
Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of
June 30, 2013
, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
We have entered into operating leases primarily for certain of our U.S. and international facilities in the normal course of business. Future minimum lease payments under our operating leases as of
June 30, 2013
are detailed above in “Liquidity and Capital Resources” in the section entitled “Contractual Obligations.”
39
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In the application of U.S. GAAP, we are required to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.
We evaluate our estimates on an ongoing basis, including those related to revenue recognition, valuation of stock-based compensation, valuation of long-lived and intangible assets, tax related contingencies, valuation of inventories, product warranty obligations, other contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our significant accounting policies are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting policies and the related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
We recognize product revenue when the earnings process is complete, as evidenced by persuasive evidence of an arrangement (typically in the form of a purchase order) when the sales price is fixed or determinable, collection of revenue is reasonably assured, and title and risk of loss have passed to the customer.
For the year ended
June 30, 2013
,
57%
of our product sales were made to distributors. Distributors stock inventory and sell our products to their own customer base, which may include: value added resellers; manufacturers who incorporate our products into their own manufactured goods; or ultimate end users of our products. We recognize revenue upon shipment of our products to our distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model as opposed to a “sell-through” or “point-of-sale” model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.
Our distributors may be provided limited rights that allow them to return a portion of inventory (Product Exchange Rights or Stock Rotation Rights) and receive credits for changes in selling prices (Price Protection Rights) or customer pricing arrangements under our "ship and debit" program or other targeted sales incentives. When determining our net revenue, we make significant judgments and estimates corresponding with product shipments. We recognize a reserve for estimated future returns, changes in selling prices, and other targeted sales incentives when product ships. We also recognize an asset for the estimated value of product returns that we believe will be returned to inventory in the future and resold, and these estimates are based upon historical data, current economic trends, distributor inventory levels and other related factors. Our financial condition and operating results are dependent upon our ability to make reliable estimates. Actual results may vary and could have a significant impact on our operating results.
From time to time, we will issue a new price book for our products, and provide a credit to certain distributors for inventory quantities on hand if required by our agreement with the distributor. This practice is known as price protection. These credits are applied against the reserve that we establish upon initial shipment of product to the distributor.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within our standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part to that customer. If we approve an allowance and the distributor resells the product to the target customer, we credit the distributor according to the allowance we approved. These credits are applied against a reserve we establish upon initial shipment of product to the distributor.
In addition, we run sales incentive programs with certain distributors and resellers, such as product rebates and cooperative advertising campaigns. We recognize these incentives at the time they are offered to customers and record a credit to their account with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing expense depending on the type of sales incentive.
40
Warranties
Product warranties are estimated and recognized at the time we recognize revenue. The warranty periods range from
ninety
days to
ten
years. We estimate these warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. We evaluate our warranty reserves on a quarterly basis based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results.
Inventories
Inventories are stated at the lower of cost or market, with market not to exceed net realizable value. We write-down our inventory for estimated obsolescence equal to the difference between the cost of inventory and its estimated market value based upon an aging analysis of the inventory on hand, specifically known inventory-related risks (such as technological obsolescence), and assumptions about future demand. We also analyze sales levels by product type, including historical and estimated future customer demand for those products to determine if any additional reserves are appropriate. For example, we adjust for items that are considered obsolete based upon changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product. Any adjustment to our inventory as a result of an estimated obsolescence or net realizable condition is reflected as a component of our cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis. We recognized charges for write-downs in inventory of
$12.5 million
,
$14.7 million
and
$14.6 million
, for fiscal
2013
,
2012
and
2011
, respectively.
In order to determine what costs can be included in the valuation of inventory, we determine normal capacity for our manufacturing facilities based on historical patterns. If our estimates regarding customer demand are inaccurate, or market conditions or technology change in ways that are less favorable than those projected by management, we may be required to take excess capacity charges in accordance with U.S. GAAP, which could have an adverse effect on our operating results.
Deferred Tax Asset Valuation Allowances
In assessing the adequacy of a recognized valuation allowance, we consider all positive and negative evidence and a variety of factors including historical and projected future taxable income and prudent and feasible tax planning strategies. When we establish or increase a valuation allowance, our income tax expense increases in the period such determination is made. If we decrease a valuation allowance, our income tax expense decreases in the period such a determination is made.
Tax Contingencies
We are subject to periodic audits of our income tax returns by federal, state and local agencies. These audits typically include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740, “Income Taxes” (ASC 740), we regularly evaluate the exposures associated with our various tax filing positions. ASC 740 states that a tax benefit should not be recognized for financial statement purposes for an uncertain tax filing position where it is not more likely than not (likelihood of greater than 50%) for being sustained by the taxing authorities based on the technical merits of the position.
In accordance with the provisions of ASC 740, we have established unrecognized tax benefits (as a reduction to the deferred tax asset or as an increase to other liabilities) to reduce some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay
41
amounts in excess of what we have recognized our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
Accounting for Stock-Based Compensation
We account for awards of stock-based compensation under our employee stock-based compensation plans using the fair value method. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term. We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock option and ESPP awards. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.
Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in our financial statements. For restricted stock and stock unit awards, grant date fair value is based upon the market price of our common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.
We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Our determination of an estimated forfeiture rate is primarily based upon a review of historical experience but may also include consideration of other facts and circumstances we believe are indicative of future activity. The assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this recognition as compensation expense is adjusted to reflect instruments that actually vest.
If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, we may be required to adjust compensation expense, which could be material to our results of operations.
Recoverability of Long-Lived Assets
We evaluate long-lived assets such as property, equipment and definite lived intangible assets, such as patents, for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change in the way an asset is being used, or a significant change, delay or departure in our strategy for that asset. Our assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our assumptions, which, we believe, are consistent with the assumptions hypothetical marketplace participants use. Factors that we must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales volumes, prices, cost of capital, tax rates, and capital spending. These factors are often interdependent and therefore do not change in isolation. If impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets. If so, an impairment loss is measured and recognized.
After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.
Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to recognize additional impairment losses which could be material to our results of operations.
Goodwill
We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. We conduct impairment testing for goodwill at the reporting unit level. Reporting units, as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 350, "Intangibles - Goodwill and Other" (ASC 350), may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. We have determined that our reporting units are our
three
operating and reportable seg
ments.
42
We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit's carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit's expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate, unanticipated competition; and slower growth rates; as well as changes in management, key personnel, strategy, and/or customers. If our qualitative assessment reveals that goodwill impairment is more likely than not, we perform the two-step impairment test. Alternatively, we may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
During the first step of the goodwill impairment test, we compare the fair value of the reporting unit to its carrying value, including goodwill. We derive a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values are reconciled back to the Company's consolidated market capitalization.
If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step, we hypothetically value the reporting unit's tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Indefinite Lived Intangible Assets
We test indefinite lived intangible assets for impairment at least annually in the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year.
Our impairment test may begin with a qualitative test to determine whether it is more likely than not that an
indefinite lived intangible
asset's carrying value is greater than its fair value.
If our qualitative assessment reveals that asset impairment is more likely than not, we perform a quantitative impairment test by
comparing the fair value of the
indefinite lived intangible asset
to its carrying value.
Alternatively, we may bypass the qualitative test and initiate impairment testing with the quantitative impairment test.
Determining the fair value of indefinite-lived intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
If the fair value of the indefinite lived intangible asset exceeds its carrying value, we conclude that no indefinite lived intangible asset impairment has occurred. If the carrying value of the indefinite lived intangible asset exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite lived intangible asset.
Contingent Liabilities
We provide for contingent liabilities in accordance with U.S. GAAP, under which a loss contingency is charged to income when (1) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of the loss can be reasonably estimated.
Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is considered probable and the amount can be reasonably estimated, we reflect the estimated loss in our results of operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably estimable. Because of uncertainties related to these matters, accruals are based on the best information available at the time. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that may have been included in the accompanying consolidated financial statements. In determining the probability of an unfavorable outcome of a particular contingent liability and whether such liability is reasonably estimable, we consider the individual facts and circumstances related to the liability, opinions of legal counsel and recent legal rulings by the appropriate regulatory bodies, among other factors. As additional information becomes available, we reassesses the potential liability related to our pending and threatened claims and litigation and may revise our estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See also
43
a discussion of specific contingencies in Note 12, “Commitments and Contingencies,” to our consolidated financial statements in Item 8 of this Annual Report.
Recent Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements in Item 8 of this Annual Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Financial and Market Risks” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report.
44
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
|
|
Page
|
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cree, Inc.
We have audited the accompanying consolidated balance sheets of Cree, Inc. as of
June 30, 2013
and
June 24, 2012
, and the related consolidated statements of income, comprehensive income, cash flows, and shareholders' equity for each of the three years in the period ended
June 30, 2013
. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cree, Inc. at
June 30, 2013
and
June 24, 2012
, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
June 30, 2013
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cree, Inc.'s internal control over financial reporting as of June 30, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated
August 27, 2013
expressed an unqualified opinion thereon.
|
/s/ Ernst & Young LLP
|
|
|
Raleigh, North Carolina
|
|
|
August 27, 2013
|
|
46
CREE, INC.
|
June 30,
2013 |
June 24,
2012 |
||||||
|
|
(In thousands, except par value)
|
||||||
|
ASSETS
|
|||||||
|
Current assets:
|
|||||||
|
Cash and cash equivalents
|
|
$190,069
|
|
|
$178,885
|
|
|
|
Short-term investments
|
833,846
|
|
565,628
|
|
|||
|
Total cash, cash equivalents, and short-term investments
|
1,023,915
|
|
744,513
|
|
|||
|
Accounts receivable, net
|
192,507
|
|
152,258
|
|
|||
|
Inventories
|
197,001
|
|
188,849
|
|
|||
|
Deferred income taxes
|
26,125
|
|
21,744
|
|
|||
|
Prepaid expenses and other current assets
|
76,218
|
|
56,917
|
|
|||
|
Total current assets
|
1,515,766
|
|
1,164,281
|
|
|||
|
Property and equipment, net
|
542,833
|
|
582,461
|
|
|||
|
Intangible assets, net
|
357,525
|
|
376,075
|
|
|||
|
Goodwill
|
616,345
|
|
616,345
|
|
|||
|
Other assets
|
19,941
|
|
8,336
|
|
|||
|
Total assets
|
|
$3,052,410
|
|
|
$2,747,498
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current liabilities:
|
|
|
|||||
|
Accounts payable, trade
|
|
$121,441
|
|
|
$78,873
|
|
|
|
Accrued salaries and wages
|
41,407
|
|
29,837
|
|
|||
|
Income taxes payable
|
1,315
|
|
3,834
|
|
|||
|
Other current liabilities
|
43,248
|
|
36,633
|
|
|||
|
Total current liabilities
|
207,411
|
|
149,177
|
|
|||
|
Long-term liabilities:
|
|||||||
|
Deferred income taxes
|
25,504
|
|
15,609
|
|
|||
|
Other long-term liabilities
|
12,843
|
|
22,695
|
|
|||
|
Total long-term liabilities
|
38,347
|
|
38,304
|
|
|||
|
Commitments and contingencies (Note 12)
|
|
|
|||||
|
Shareholders’ equity:
|
|||||||
|
Preferred stock, par value $0.01; 3,000 shares authorized at June 30, 2013 and June 24, 2012; none issued and outstanding
|
—
|
|
—
|
|
|||
|
Common stock, par value $0.00125; 200,000 shares authorized at June 30, 2013 and June 24, 2012; 119,623 and 115,906 shares issued and outstanding at June 30, 2013 and June 24, 2012, respectively
|
148
|
|
144
|
|
|||
|
Additional paid-in-capital
|
2,025,764
|
|
1,861,502
|
|
|||
|
Accumulated other comprehensive income, net of taxes
|
8,244
|
|
11,133
|
|
|||
|
Retained earnings
|
772,496
|
|
687,238
|
|
|||
|
Total shareholders’ equity
|
2,806,652
|
|
2,560,017
|
|
|||
|
Total liabilities and shareholders’ equity
|
|
$3,052,410
|
|
|
$2,747,498
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
47
CREE, INC.
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
|
(In thousands, except per share data)
|
||||||||||
|
Revenue, net
|
|
$1,385,982
|
|
|
$1,164,658
|
|
|
$987,615
|
|
||
|
Cost of revenue, net
|
862,722
|
|
755,196
|
|
551,842
|
|
|||||
|
Gross profit
|
523,260
|
|
409,462
|
|
435,773
|
|
|||||
|
Operating expenses:
|
|||||||||||
|
Research and development
|
155,889
|
|
143,357
|
|
115,035
|
|
|||||
|
Sales, general and administrative
|
236,581
|
|
197,092
|
|
139,304
|
|
|||||
|
Amortization of acquisition-related intangibles
|
30,823
|
|
26,274
|
|
10,776
|
|
|||||
|
Loss on disposal or impairment of long-lived assets
|
3,473
|
|
3,481
|
|
1,952
|
|
|||||
|
Total operating expenses
|
426,766
|
|
370,204
|
|
267,067
|
|
|||||
|
Operating income
|
96,494
|
|
39,258
|
|
168,706
|
|
|||||
|
Non-operating income, net
|
11,063
|
|
8,389
|
|
9,521
|
|
|||||
|
Income before income taxes
|
107,557
|
|
47,647
|
|
178,227
|
|
|||||
|
Income tax expense
|
20,632
|
|
3,235
|
|
31,727
|
|
|||||
|
Net income
|
|
$86,925
|
|
|
$44,412
|
|
|
$146,500
|
|
||
|
Earnings per share:
|
|||||||||||
|
Basic
|
|
$0.75
|
|
|
$0.39
|
|
|
$1.35
|
|
||
|
Diluted
|
|
$0.74
|
|
|
$0.39
|
|
|
$1.33
|
|
||
|
Shares used in per share calculation:
|
|||||||||||
|
Basic
|
116,621
|
|
114,693
|
|
108,522
|
|
|||||
|
Diluted
|
117,979
|
|
115,225
|
|
110,035
|
|
|||||
The accompanying notes are an integral part of the consolidated financial statements.
48
CREE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
|
(In thousands)
|
||||||||||
|
Net income
|
|
$86,925
|
|
|
$44,412
|
|
|
$146,500
|
|
||
|
Other comprehensive income:
|
|||||||||||
|
Currency translation loss, net of tax benefit of $36, $126 and $0, respectively
|
(53
|
)
|
(209
|
)
|
—
|
|
|||||
|
Net unrealized (loss) gain on available-for-sale securities, net of tax benefit (expense) of $1,724, $1,059 and ($558), respectively
|
(2,836
|
)
|
(1,749
|
)
|
920
|
|
|||||
|
Other comprehensive (loss) income
|
(2,889
|
)
|
(1,958
|
)
|
920
|
|
|||||
|
Comprehensive income
|
|
$84,036
|
|
|
$42,454
|
|
|
$147,420
|
|
||
The accompanying notes are an integral part of the consolidated financial statements.
49
CREE, INC.
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
(In thousands)
|
|||||||||||
|
Cash flows from operating activities:
|
|
|
|
||||||||
|
Net income
|
|
$86,925
|
|
|
$44,412
|
|
|
$146,500
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|||||
|
Depreciation and amortization
|
153,301
|
|
142,709
|
|
108,605
|
|
|||||
|
Stock-based compensation
|
53,899
|
|
46,393
|
|
38,240
|
|
|||||
|
Excess tax benefit from share-based payment arrangements
|
(11,390
|
)
|
(277
|
)
|
(10,141
|
)
|
|||||
|
Loss on disposal or impairment of long-lived assets
|
3,473
|
|
3,481
|
|
1,952
|
|
|||||
|
Amortization of premium/discount on investments
|
9,503
|
|
8,330
|
|
15,696
|
|
|||||
|
Changes in operating assets and liabilities, net of effect of acquisition:
|
|
|
|
|
|
|
|||||
|
Accounts receivable
|
(40,430
|
)
|
(9,365
|
)
|
(963
|
)
|
|||||
|
Inventories
|
(8,406
|
)
|
26,904
|
|
(63,450
|
)
|
|||||
|
Prepaid expenses and other assets
|
(25,350
|
)
|
(7,356
|
)
|
(33,398
|
)
|
|||||
|
Accounts payable, trade
|
41,800
|
|
(10,105
|
)
|
18,442
|
|
|||||
|
Accrued salaries and wages and other liabilities
|
21,909
|
|
(2,846
|
)
|
29,897
|
|
|||||
|
Net cash provided by operating activities
|
285,234
|
|
242,280
|
|
251,380
|
|
|||||
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|||||
|
Purchases of property and equipment
|
(77,468
|
)
|
(95,015
|
)
|
(237,085
|
)
|
|||||
|
Payment of contingent consideration for acquired business
|
—
|
|
—
|
|
(13,159
|
)
|
|||||
|
Purchases of available-for-sale investments
|
(724,467
|
)
|
(345,457
|
)
|
(382,520
|
)
|
|||||
|
Proceeds from maturities of available-for-sale investments
|
392,878
|
|
186,425
|
|
252,603
|
|
|||||
|
Proceeds from sale of property and equipment
|
301
|
|
252
|
|
205
|
|
|||||
|
Proceeds from sale of available-for-sale investments
|
49,307
|
|
277,463
|
|
89,474
|
|
|||||
|
Purchase of acquired business, net of cash acquired
|
—
|
|
(454,605
|
)
|
—
|
|
|||||
|
Purchases of patent and licensing rights
|
(20,858
|
)
|
(17,204
|
)
|
(12,752
|
)
|
|||||
|
Net cash used in investing activities
|
(380,307
|
)
|
(448,141
|
)
|
(303,234
|
)
|
|||||
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|||||
|
Net proceeds from issuance of common stock
|
96,229
|
|
5,012
|
|
34,405
|
|
|||||
|
Excess tax benefit from share-based payment arrangements
|
11,390
|
|
277
|
|
10,141
|
|
|||||
|
Repurchases of common stock
|
(1,667
|
)
|
(11,981
|
)
|
—
|
|
|||||
|
Net cash provided by (used in) financing activities
|
105,952
|
|
(6,692
|
)
|
44,546
|
|
|||||
|
Effect of foreign exchange changes on cash and cash equivalents
|
305
|
|
840
|
|
475
|
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
11,184
|
|
(211,713
|
)
|
(6,833
|
)
|
|||||
|
Cash and cash equivalents:
|
|
|
|
||||||||
|
Beginning of period
|
178,885
|
|
390,598
|
|
397,431
|
|
|||||
|
End of period
|
|
$190,069
|
|
|
$178,885
|
|
|
$390,598
|
|
||
|
Supplemental disclosure of cash flow information:
|
|
|
|
||||||||
|
Cash paid for income taxes
|
|
$24,747
|
|
|
$17,984
|
|
|
$31,201
|
|
||
The accompanying notes are an integral part of the consolidated financial statements.
50
CREE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Common Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total
Shareholders’
Equity
|
|||||||||||||||||
|
|
Number
of Shares
|
Par Value
|
||||||||||||||||||||
|
|
(In thousands)
|
|||||||||||||||||||||
|
Balance at June 27, 2010
|
108,002
|
|
|
$135
|
|
|
$1,507,435
|
|
|
$508,307
|
|
|
$12,171
|
|
|
$2,028,048
|
|
|||||
|
Net income
|
—
|
|
—
|
|
—
|
|
146,500
|
|
—
|
|
146,500
|
|
||||||||||
|
Currency translation gain
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Unrealized gain on available-for-sale securities, net of tax expense of $558
|
—
|
|
—
|
|
—
|
|
—
|
|
920
|
|
920
|
|
||||||||||
|
Comprehensive income
|
147,420
|
|
||||||||||||||||||||
|
Income tax benefits from stock option exercises
|
—
|
|
—
|
|
7,865
|
|
—
|
|
—
|
|
7,865
|
|
||||||||||
|
Repurchased shares
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Stock-based compensation
|
—
|
|
—
|
|
39,061
|
|
—
|
|
—
|
|
39,061
|
|
||||||||||
|
Exercise of stock options and issuance of shares
|
1,605
|
|
1
|
|
39,169
|
|
—
|
|
—
|
|
39,170
|
|
||||||||||
|
Balance at June 26, 2011
|
109,607
|
|
|
$136
|
|
|
$1,593,530
|
|
|
$654,807
|
|
|
$13,091
|
|
|
$2,261,564
|
|
|||||
|
Net income
|
—
|
|
—
|
|
—
|
|
44,412
|
|
—
|
|
44,412
|
|
||||||||||
|
Currency translation loss, net of tax benefit of $126
|
—
|
|
—
|
|
—
|
|
—
|
|
(209
|
)
|
(209
|
)
|
||||||||||
|
Unrealized loss on available-for-sale securities, net of tax benefit of $1,059
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,749
|
)
|
(1,749
|
)
|
||||||||||
|
Comprehensive income
|
42,454
|
|
||||||||||||||||||||
|
Income tax benefits from stock option exercises
|
—
|
|
—
|
|
(354
|
)
|
—
|
|
—
|
|
(354
|
)
|
||||||||||
|
Repurchased shares
|
(521
|
)
|
—
|
|
(856
|
)
|
(11,981
|
)
|
—
|
|
(12,837
|
)
|
||||||||||
|
Stock-based compensation
|
—
|
|
—
|
|
45,784
|
|
—
|
|
—
|
|
45,784
|
|
||||||||||
|
Exercise of stock options and issuance of shares
|
6,820
|
|
8
|
|
223,398
|
|
—
|
|
—
|
|
223,406
|
|
||||||||||
|
Balance at June 24, 2012
|
115,906
|
|
|
$144
|
|
|
$1,861,502
|
|
|
$687,238
|
|
|
$11,133
|
|
|
$2,560,017
|
|
|||||
|
Net income
|
—
|
|
—
|
|
—
|
|
86,925
|
|
—
|
|
86,925
|
|
||||||||||
|
Currency translation loss, net of tax benefit of $36
|
—
|
|
—
|
|
—
|
|
—
|
|
(53
|
)
|
(53
|
)
|
||||||||||
|
Unrealized loss on available-for-sale securities, net of tax benefit of $1,724
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,836
|
)
|
(2,836
|
)
|
||||||||||
|
Comprehensive income
|
84,036
|
|
||||||||||||||||||||
|
Income tax benefits from stock option exercises
|
—
|
|
—
|
|
4,028
|
|
—
|
|
—
|
|
4,028
|
|
||||||||||
|
Repurchased shares
|
(41
|
)
|
—
|
|
—
|
|
(1,667
|
)
|
—
|
|
(1,667
|
)
|
||||||||||
|
Stock-based compensation
|
—
|
|
—
|
|
55,074
|
|
—
|
|
—
|
|
55,074
|
|
||||||||||
|
Exercise of stock options and issuance of shares
|
3,758
|
|
4
|
|
105,160
|
|
—
|
|
—
|
|
105,164
|
|
||||||||||
|
Balance at June 30, 2013
|
119,623
|
|
|
$148
|
|
|
$2,025,764
|
|
|
$772,496
|
|
|
$8,244
|
|
|
$2,806,652
|
|
|||||
The accompanying notes are an integral part of the consolidated financial statements.
51
CREE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cree, Inc. (the Company) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.
The Company develops and manufactures semiconductor materials and devices primarily based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. In many cases, the properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (GaAs) and other materials used for electronic applications.
The Company's LED products consist of LED components, LED chips, and SiC materials. As LED technology improves, the Company believes the potential market for LED lighting will continue to expand. The Company's success in selling LED products depends upon the ability to offer innovative products and its ability to enable its customers to develop and market LED-based products that successfully compete and drive LED adoption against traditional lighting products.
The Company's lighting products consist of both LED and traditional lighting systems. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
In addition, the Company develops, manufactures and sells power and RF devices. The Company's power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. The Company's RF devices are made from GaN and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, Wisconsin, and China. The Company also uses contract manufacturers for certain aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, California, Wisconsin, India, and China.
Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.
As of
June 30, 2013
, the Company has
three
reportable segments:
|
•
|
LED Products
|
|
•
|
Lighting Products
|
|
•
|
Power and RF Products
|
For financial results by reportable segment, please refer to Note 13, "Reportable Segments."
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is a
52
or
53
-week period ending on the last Sunday in the month of June. The Company’s
2013
fiscal year was a
53
-week fiscal year and the 2012 and 2011 fiscal years were 52-week fiscal years. The Company’s
2014
fiscal year will be a
52
-week fiscal year.
52
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, valuation of stock-based compensation, valuation of long-lived and intangible assets, tax related contingencies, valuation of inventories, product warranty obligations, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Segment Information
U.S. GAAP requires segmentation based on an entity’s internal organization and reporting of revenue and operating income based upon internal accounting methods commonly referred to as the “management approach.” Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined that it currently has
three
operating and reportable segments.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair value. The Company holds cash and cash equivalents at several major financial institutions, which often exceed insurance limits set by the Federal Deposit Insurance Corporation (FDIC). The Company has not historically experienced any losses due to such concentration of credit risk.
Investments
Investments in certain securities may be classified into three categories:
|
•
|
Held-to-Maturity – Debt securities that the entity has the positive intent and ability to hold to maturity, which are reported at amortized cost.
|
|
•
|
Trading Securities – Debt and equity securities that are bought and held principally for the purpose of selling in the near term, which are reported at fair value, with unrealized gains and losses included in earnings.
|
|
•
|
Available-for-Sale – Debt and equity securities not classified as either securities held-to-maturity or trading securities, which are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.
|
The Company reassesses the appropriateness of the classification (i.e. held-to-maturity, trading securities, or available-for-sale) of its investments at the end of each reporting period.
When the fair value of an investment declines below its original cost, the Company considers all available evidence to evaluate whether the decline is other-than-temporary. Among other things, the Company considers the duration and extent of the decline and economic factors influencing the capital markets. For the fiscal years ended
June 30, 2013
,
June 24, 2012
, and
June 26, 2011
, the Company had no other-than-temporary declines below the cost basis of its investments. The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses on investments are reported in other income and expense.
Investments in marketable securities with maturities beyond one year may be classified as short term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
53
Inventories
Inventories are stated at lower of cost or market, with cost determined on a first-in, first-out (FIFO) method or an average cost method. The Company writes down its inventory balances for estimates of excess and obsolete amounts. These write-downs are recognized as a component of cost of revenue. At the point of the write-down, a new lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established lower cost basis. The Company recognized charges for write-downs in inventory of
$12.5 million
,
$14.7 million
and
$14.6 million
, for fiscal
2013
,
2012
and
2011
, respectively.
Property and Equipment
Property and equipment are recognized at cost and depreciated on a straight-line basis over the assets’ estimated useful lives. Leasehold improvements are amortized over the lesser of the asset life or the life of the related lease. In general, the Company's policy for useful lives is as follows:
|
Manufacturing equipment
|
|
3 to 15 years
|
|
Buildings and building improvements
|
|
5 to 40 years
|
|
Furniture and office equipment
|
|
3 to 5 years
|
|
Aircraft and vehicles
|
5 to 20 years
|
|
|
Leasehold improvements
|
|
Shorter of estimated useful life or lease term
|
Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated useful lives. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition and any resulting gain or loss is reflected in operating income.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues and are recognized as a period expense during the period in which they are incurred.
Goodwill and Intangible Assets
The Company recognizes the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recognized as goodwill. Valuation of intangible assets and in-process research and development entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, conti
nuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
Goodwill
The Company recognizes goodwill as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment annually
as of the first day of the
fiscal fourth quarter, or when indications of potential impairment exist. The Company monitors the existence of potential impairment indicators throughout the fiscal year.
The Company conducts impairment testing for goodwill at the reporting unit level. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. The Company has determined that its reporting units are its
three
operating and reportable segments.
The Company may initiate goodwill impairment testing by considering qualitative factors to determine
whether it is more likely than not that a reporting unit's carrying value is greater than its fair value.
Such factors may include the following, among others: a significant decline in the reporting unit's expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates as well as
changes in management, key personnel, strategy, and/or customers
.
If the Company's qualitative assessment reveals that goodwill impairment is more likely than not, the Company performs the two-step goodwill impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.
54
During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company derives a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values are reconciled back to the Company's consolidated market capitalization.
If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step, the Company hypothetically values the reporting unit's tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Indefinite-Lived Intangible Assets
The Company's indefinite-lived intangible assets are comprised of trade names as a result of the Ruud Lighting acquisition. These are tested for impairment annually in the fiscal fourth quarter, or when events or changes in circumstances indicate potential impairment may exist. The Company monitors the existence of potential impairment indicators throughout the fiscal year.
The Company's impairment test may begin with a qualitative test to determine whether it is more likely than not that an
indefinite lived intangible
asset's carrying value is greater than its fair value.
If the Company's qualitative assessment reveals that asset impairment is more likely than not, the Company performs a quantitative impairment test by
comparing the fair value of the
indefinite lived intangible asset
to its carrying value. Alternatively, the Company may bypass the qualitative test and initiate impairment testing with the quantitative impairment test. Fair value reflects the price a market participant would be willing to pay in a potential sale of the asset. Determining the fair value
of indefinite-lived intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
If the fair value of the indefinite lived intangible asset exceeds its carrying value, then the Company concludes that no indefinite lived intangible asset impairment has occurred. If the carrying value of the indefinite lived intangible asset exceeds its fair value, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite lived intangible asset.
In-Process Research and Development
The Company acquired in-process research and development (IPR&D) as a result of the Ruud Lighting acquisition. The Company determines the fair value of IPR&D acquired in a business combination based on the present value of each project's projected cash flows using an income approach. IPR&D is initially capitalized and considered to be indefinite-lived assets subject to annual impairment reviews or more often upon the occurrence of certain events. If the fair value of the intangible assets is less than its carrying value, an impairment loss is recognized for the difference.
When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, the Company recognizes an impairment loss for the value of the related intangible asset in the period it is abandoned.
Other Intangible Assets
U.S. GAAP requires that intangible assets, other than goodwill and indefinite-lived intangibles, must be amortized over their useful lives. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from
one
to
twenty years
.
Patent rights reflect costs incurred by the Company in applying for and maintaining patents owned by the Company and costs incurred in purchasing patents and related rights from third parties. License rights reflect costs incurred by the Company in acquiring licenses under patents owned by others. The Company amortizes both on a straight-line basis over the expected useful life of the associated patent rights, which is generally the lesser of
20
years from the date of the patent application or the license period. Royalties payable under licenses for patents owned by others are expensed as incurred. The Company reviews its capitalized
55
patent portfolio and recognizes impairment charges when circumstances warrant, such as when patents have been abandoned or are no longer being pursued.
Impairment of Long-Lived Assets
The Company reviews long-lived assets such as property and equipment for impairment based on changes in circumstances that indicate their carrying amounts may not be recoverable. In making these determinations, the Company uses certain assumptions, including but not limited to: (1) estimations of the fair market value of the assets, and (2) estimations of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated salvage values.
Contingent Liabilities
The Company provides for contingent liabilities when (1) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements; and, (2) the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss may have been incurred. See Note 12, “Commitments and Contingencies,” for a discussion of loss contingencies in connection with pending and threatened litigation. The Company expenses as incurred the costs of defending legal claims against the Company.
Revenue Recognition
The Company recognizes product revenue when the earnings process is complete, as evidenced by persuasive evidence of an arrangement (typically in the form of a purchase order), when the sales price is fixed or determinable, collection of revenue is reasonably assured, and title and risk of loss have passed to the customer.
We recognize revenue upon shipment of our products to our distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model as opposed to a “sell-through” or “point-of-sale” model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.
The Company provides its customers with limited rights of return for non-conforming shipments and product warranty claims. The Company estimates an allowance for anticipated sales returns based upon an analysis of historical sales returns and other relevant data. The Company recognizes an allowance for non-confirming returns at the time of sale as a reduction of product revenue and as a reduction to the related accounts receivable balance. The Company recognizes a liability for product warranty claims at the time of sale as an increase to cost of revenue.
A substantial portion of the Company’s products are sold through distributors. Distributors stock inventory and sell the Company’s products to their own customer base, which may include: value added resellers; manufacturers who incorporate the Company’s products into their own manufactured goods; or ultimate end users of the Company’s products. The Company recognizes revenue under the same terms as described. Certain of the Company’s distributors are provided limited rights that allow them to return a portion of inventory (Product Exchange Rights or Stock Rotation Rights) and receive credits for changes in selling prices (Price Protection Rights) or customer pricing arrangements under the Company's "ship and debit" program or other targeted sales incentives. These estimates are calculated based upon historical experience, product shipment analysis, current economic conditions, on-hand inventory at the distributor, and customer contractual arrangements. The Company believes that it can reasonably and reliably estimate the allowance for distributor credits at the time of sale. Accordingly, estimates for these rights are recognized at the time of sale as a reduction of product revenue and as a reduction to the related accounts receivable balance.
From time to time, the Company will issue a new price book for its products, and provide a credit to certain distributors for inventory quantities on hand if required by the Company’s agreement with the distributor. This practice is known as price protection. These credits are applied against the reserve that the Company establishes upon initial shipment of product to the distributor.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within the Company’s standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part to that customer. If the Company approves an allowance and the distributor resells the product to the target customer, the Company credits the distributor according to the allowance the Company approved. These credits are applied against a reserve the Company establishes upon initial shipment of product to the distributor.
56
In addition, the Company runs sales incentive programs with certain distributors and resellers, such as product rebates and cooperative advertising campaigns. The Company recognizes these incentives at the time they are offered to customers and records a credit to their account with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing expense depending on the type of sales incentive.
From time to time, the Company may enter into licensing arrangements related to its intellectual property. Revenue from licensing arrangements is recognized when earned and estimable. The timing of revenue recognition is dependent on the terms of each license agreement. Generally, the Company will recognize non-refundable upfront license fees related to patent licenses immediately upon receipt of the funds if the Company has no significant future obligations to perform under the arrangement. However, the Company will defer recognition for licensing fees where the Company has significant future performance requirements, the fee is not fixed (such as royalties earned as a percentage of future sales), or the fees are otherwise contingent.
Accounts Receivable
For product sales, the Company typically invoices its customers at the time of shipment for the sales order value of products shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Company's historical experience.
Advertising
The Company expenses the costs of producing advertisements at the time production occurs and expenses the cost of communicating the advertising in the period in which the advertising is used. Advertising costs are included in Sales, general and administrative expenses and amounted to approximately
$18.2 million
,
$9.7 million
, and
$5.7 million
for the years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively.
Research and Development
Research and development activities are expensed when incurred. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as research and development expenses when incurred, and related funding as an offset of those expenses when funds are received.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the applicable period. Diluted earnings per share is determined in the same manner as basic earnings per share except that the number of shares is increased to assume exercise of potentially dilutive stock options, nonvested restricted stock and contingently issuable shares using the treasury stock method, unless the effect of such increases would be anti-dilutive. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recognized in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
Accounting for Stock-Based Compensation
The Company recognizes compensation expense for all share-based payments granted based on the fair value of the shares on the date of grant. Compensation expense is then recognized over the award’s vesting period.
57
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, available-for-sale securities, accounts and interest receivable, accounts payable and other liabilities approximate their fair values at
June 30, 2013
and
June 24, 2012
due to the short-term nature of these instruments.
Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Taxes payable which are not based on income are accrued ratably over the period to which they apply. For example, payroll taxes are accrued each period end based upon the amount of payroll taxes that are owed as of that date; whereas taxes such as property taxes and franchise taxes are accrued over the fiscal year to which they apply if paid at the end of a period, or they are amortized ratably over the fiscal year if they are paid in advance.
Excise Taxes
The Company presents sales taxes collected from customers and remitted to governmental authorities on a net basis (i.e. excluded from revenues and expenses).
Foreign Currency Translation
In the first quarter of fiscal 2012, the Company acquired
two
foreign subsidiaries as part of the Ruud Lighting acquisition that have a non-U.S. dollar functional currency. Accordingly, foreign currency translation adjustments have been recorded through other comprehensive loss in fiscal 2013 and fiscal 2012 for changes between the foreign subsidiaries' functional currency and the U.S. dollar. There were no translation adjustments recorded through other comprehensive income for the fiscal year 2011. In addition, historical foreign currency translation gains and losses incurred prior to fiscal 2010 will continue to exist in the Company’s equity account balance of Accumulated Other Comprehensive Income until such time that the subsidiaries are either sold or substantially liquidated.
Because the Company and its subsidiaries transact business in currencies other than the U.S. Dollar, the Company will continue to experience varying amounts of foreign currency exchange gains and losses for subsidiaries with U.S. dollar functional currency.
Recently Adopted Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance concerning the presentation of total comprehensive income and its components. Under this guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance also requires an entity to present on the face of the financial statements reclassification adjustments from other comprehensive income to net income. In December 2011, the FASB issued an accounting standards update that deferred the presentation requirement for other comprehensive income reclassifications on the face of the financial statements. This guidance, as amended, became effective for the Company beginning in the first quarter of fiscal 2013. The Company's adoption of the new accounting guidance did not have a significant impact on the consolidated financial statements.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which seeks to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. In particular, the ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income
58
if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (e.g., inventory) instead of directly to income or expense in the same reporting period.
The ASU applies to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply for all reporting periods presented, both annual and interim periods. For public entities, the ASU is effective prospectively for reporting periods beginning after December 15, 2012. This guidance became effective for the Company beginning in the third quarter of fiscal 2013. The Company's adoption of the new accounting guidance did not have a significant impact on the consolidated financial statements.
Acquisition of Ruud Lighting, Inc.
On
August 17, 2011
, the Company entered into a Stock Purchase Agreement with all of the shareholders of Ruud Lighting, Inc. (Ruud Lighting). Pursuant to the terms of the Stock Purchase Agreement and concurrently with the execution of the Stock Purchase Agreement, the Company acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of
6.1 million
shares of the Company's common stock valued at approximately
$211.0 million
and
$372.2 million
cash, subject to certain post-closing adjustments. Following the acquisition, the Company recorded certain post-closing purchase price adjustments resulting in a
$2.3 million
reduction to the purchase price and a total purchase price of approximately
$666.0 million
. The acquisition allowed the Company to expand its product portfolio into outdoor LED lighting.
Prior to the Company completing its acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC (E-conolight). Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction with Ruud Lighting, the Company funded Ruud Lighting's re-acquisition of E-conolight and repaid Ruud Lighting's outstanding debt in the aggregate amount of approximately
$85.0 million
.
The amounts of revenue, operating loss and net loss of Ruud Lighting in the consolidated statements of income from and including August 17, 2011 to June 24, 2012 were as follows (in thousands, except per share data):
|
Since acquisition date to
|
|||
|
June 24,
2012 |
|||
|
Revenue
|
|
$204,353
|
|
|
Operating Loss
|
(1,985
|
)
|
|
|
Net Loss
|
(2,334
|
)
|
|
|
Basic net loss per share
|
|
($0.02
|
)
|
|
Diluted net loss per share
|
|
($0.02
|
)
|
The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the Ruud Lighting acquisition occurred at the beginning of the fiscal year ended June 26, 2011 (in thousands, except per share data).
|
For the Years Ended
|
|||||||
|
June 24,
2012 |
June 26,
2011 |
||||||
|
Revenue
|
|
$1,194,990
|
|
|
$1,184,765
|
|
|
|
Operating Income
|
37,551
|
|
154,765
|
|
|||
|
Net income
|
42,399
|
|
134,768
|
|
|||
|
Earnings per share, basic
|
|
$0.37
|
|
|
$1.18
|
|
|
|
Earnings per share, diluted
|
|
$0.37
|
|
|
$1.16
|
|
|
59
The total revenue for Ruud Lighting included in the pro forma table above was
$235.8 million
and
$211.2 million
for the years ended June 24, 2012 and June 26, 2011, respectively. These amounts have been calculated after applying the Company's accounting policies and adjusting the results of Ruud Lighting to give effect to events that are directly attributable to the Ruud Lighting acquisition, including the elimination of sales to Ruud Lighting prior to acquisition, additional depreciation and amortization that would have been charged assuming the fair value adjustments (primarily to property and equipment and intangible assets) had been applied at the beginning of the 2011 fiscal year, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the years ended June 24, 2012 and June 26, 2011 are one-time transaction costs attributable to the Ruud Lighting acquisition of
$3.1 million
and
$0.5 million
, respectively. These transaction costs were included in Sales, general and administrative expense in the consolidated statements of income. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the 2011 fiscal year, nor is it indicative of any future results. Ruud Lighting is included in the Lighting Products segment.
Acquisition of LED Lighting Fixtures, Inc.
On February 29, 2008 the Company acquired LED Lighting Fixtures, Inc. (LLF) through a wholly owned subsidiary that merged into Cree, Inc. on June 27, 2010. The Company acquired all of the outstanding share capital of LLF in exchange for total upfront consideration of
$80.8 million
, consisting of (1)
$16.5 million
in cash, (2) approximately
1.9 million
shares of the Company’s common stock valued at
$58.8 million
, and (3) the assumption of fully vested LLF employee stock options valued at
$4.5 million
. The Company incurred transaction costs of approximately
$1.0 million
consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Under the acquisition terms, additional consideration of up to
$26.4 million
would become payable to the former shareholders of LLF if defined product development targets and key employee retention measures were achieved over the
three
calendar years following the acquisition.
LLF met the conditions necessary for the earn-out payment for the calendar years ended December 31, 2008, 2009 and 2010. As a result, the Company made a cash payment in the amount of
$4.4 million
to the former shareholders of LLF in the third quarter of fiscal 2009, a cash payment in the amount of
$8.8 million
to the former shareholders of LLF in the third quarter of fiscal 2010, and a final cash payment in the amount of
$13.2 million
to the former shareholders of LLF in the third quarter of fiscal 2011. These incremental payments represent additional purchase price and resulted in an increase to goodwill in those fiscal years in which they were made. LLF is included in the Lighting Products segment.
60
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Billed trade receivables
|
|
$220,307
|
|
|
$173,145
|
|
|
|
Unbilled contract receivables
|
1,171
|
|
1,576
|
|
|||
|
221,478
|
|
174,721
|
|
||||
|
Allowance for sales returns, discounts and other incentives
|
(26,500
|
)
|
(20,681
|
)
|
|||
|
Allowance for bad debts
|
(2,471
|
)
|
(1,782
|
)
|
|||
|
Total accounts receivable, net
|
|
$192,507
|
|
|
$152,258
|
|
|
The following table summarizes the changes in the Company’s allowance for sales returns, discounts and other incentives (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Balance at beginning of period
|
|
$20,681
|
|
|
$19,615
|
|
|
$20,551
|
|
||
|
Current period claims
|
(84,983
|
)
|
(67,773
|
)
|
(50,399
|
)
|
|||||
|
Provision for sales returns, discounts and other incentives
|
90,802
|
|
68,839
|
|
49,463
|
|
|||||
|
Balance at end of period
|
|
$26,500
|
|
|
$20,681
|
|
|
$19,615
|
|
||
The following table summarizes the changes in the Company’s allowance for bad debts (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Balance at beginning of period
|
|
$1,782
|
|
|
$753
|
|
|
$1,947
|
|
||
|
Current year provision
|
801
|
|
1,029
|
|
(956
|
)
|
|||||
|
Write-offs, net of recoveries
|
(112
|
)
|
—
|
|
(238
|
)
|
|||||
|
Balance at end of period
|
|
$2,471
|
|
|
$1,782
|
|
|
$753
|
|
||
Inventories
The following table summarizes the components of inventories (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Raw material
|
|
$62,253
|
|
|
$57,618
|
|
|
|
Work-in-progress
|
68,146
|
|
74,241
|
|
|||
|
Finished goods
|
66,602
|
|
56,990
|
|
|||
|
Total inventories
|
|
$197,001
|
|
|
$188,849
|
|
|
61
Property and Equipment, net
The following table summarizes the components of property and equipment, net (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Furniture and fixtures
|
|
$11,268
|
|
|
$11,499
|
|
|
|
Land and buildings
|
333,761
|
|
289,163
|
|
|||
|
Machinery and equipment
|
924,076
|
|
856,733
|
|
|||
|
Aircraft and vehicles
|
16,250
|
|
15,912
|
|
|||
|
Computer hardware/software
|
32,405
|
|
29,510
|
|
|||
|
Leasehold improvements and other
|
18,566
|
|
19,082
|
|
|||
|
Construction in progress
|
54,447
|
|
108,986
|
|
|||
|
1,390,773
|
|
1,330,885
|
|
||||
|
Accumulated depreciation
|
(847,940
|
)
|
(748,424
|
)
|
|||
|
Property and equipment, net
|
|
$542,833
|
|
|
$582,461
|
|
|
Depreciation of property and equipment totaled
$115.5 million
,
$110.6 million
and
$93.1 million
for the years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively.
During the years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, the Company recognized approximately
$1.9 million
,
$2.6 million
and
$1.5 million
, respectively, as losses on disposals or impairments of property and equipment. These charges are reflected in Loss on Disposal or Impairment of Long Lived Assets in the accompanying Consolidated Statements of Income.
Other current liabilities
The following table summarizes the components of other current liabilities (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Accrued taxes
|
|
$21,436
|
|
|
$11,615
|
|
|
|
Accrued professional fees
|
4,493
|
|
7,412
|
|
|||
|
Accrued warranty
|
5,259
|
|
5,513
|
|
|||
|
Accrued other
|
12,060
|
|
12,093
|
|
|||
|
Total other current liabilities
|
|
$43,248
|
|
|
$36,633
|
|
|
Accumulated other comprehensive income, net of taxes
The following table summarizes the components of Accumulated other comprehensive income, net of taxes (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Currency translation gain
|
|
$8,492
|
|
|
$8,545
|
|
|
|
Net unrealized (loss) gain on available-for-sale securities
|
(248
|
)
|
2,588
|
|
|||
|
Total accumulated other comprehensive income, net of taxes
|
|
$8,244
|
|
|
$11,133
|
|
|
62
Non-operating income, net
The following table summarizes the components of non-operating income, net (in thousands):
|
Fiscal Years Ended
|
|||||||||||
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
|||||||||
|
Foreign currency gain, net
|
|
$735
|
|
|
$171
|
|
|
$572
|
|
||
|
Gain on sale of investments, net
|
111
|
|
994
|
|
1
|
|
|||||
|
Interest income, net
|
7,882
|
|
7,457
|
|
8,528
|
|
|||||
|
Other, net
|
2,335
|
|
(233
|
)
|
420
|
|
|||||
|
Total non-operating income, net
|
|
$11,063
|
|
|
$8,389
|
|
|
$9,521
|
|
||
Reclassifications Out of Accumulated Other Comprehensive Income
The following table summarizes the amounts reclassified out of accumulated other comprehensive income (in thousands):
|
Accumulated Other Comprehensive Income Component
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
Affected Line Item in the Statement of Income
|
||||||||||||
|
Fiscal Years Ended
|
||||||||||||||
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||||||
|
Net unrealized gain on available-for-sale securities, net of tax expense
|
||||||||||||||
|
|
$107
|
|
|
$994
|
|
|
$1
|
|
Non-operating income, net
|
|||||
|
107
|
|
994
|
|
1
|
|
Income before income taxes
|
||||||||
|
21
|
|
68
|
|
—
|
|
Income tax expense
|
||||||||
|
|
$86
|
|
|
$926
|
|
|
$1
|
|
Net income
|
|||||
Short-term investments consist of corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. All marketable investments are classified as available-for-sale.
The following table provides a summary of marketable investments as of
June 30, 2013
(in thousands):
|
|
June 30, 2013
|
||||||||||||||
|
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||
|
Municipal bonds
|
|
$250,206
|
|
|
$817
|
|
|
($1,314
|
)
|
|
$249,709
|
|
|||
|
Corporate bonds
|
192,147
|
|
1,678
|
|
(1,765
|
)
|
192,060
|
|
|||||||
|
U.S. agency securities
|
39,288
|
|
186
|
|
—
|
|
39,474
|
|
|||||||
|
Non-U.S. certificates of deposit
|
345,000
|
|
—
|
|
—
|
|
345,000
|
|
|||||||
|
Non-U.S. government securities
|
7,608
|
|
14
|
|
(19
|
)
|
7,603
|
|
|||||||
|
Total
|
|
$834,249
|
|
|
$2,695
|
|
|
($3,098
|
)
|
|
$833,846
|
|
|||
63
The following table presents the gross unrealized losses and estimated fair value of the Company’s investment securities, aggregated by investment type and the length of time that individual investment securities have been in a continuous unrealized loss position, as of
June 30, 2013
(in thousands):
|
|
June 30, 2013
|
||||||||||||||||||||||
|
|
Less than 12 Months
|
Greater than 12 Months
|
Total
|
||||||||||||||||||||
|
|
Fair Value
|
Unrealized
Loss
|
Fair Value
|
Unrealized
Loss
|
Fair Value
|
Unrealized
Loss
|
|||||||||||||||||
|
Municipal bonds
|
|
$126,926
|
|
|
($1,314
|
)
|
|
$—
|
|
|
$—
|
|
|
$126,926
|
|
|
($1,314
|
)
|
|||||
|
Corporate bonds
|
102,010
|
|
(1,765
|
)
|
—
|
|
—
|
|
102,010
|
|
(1,765
|
)
|
|||||||||||
|
U.S. agency securities
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Non-U.S. certificates of deposit
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Non-U.S. government securities
|
5,534
|
|
(19
|
)
|
—
|
|
—
|
|
5,534
|
|
(19
|
)
|
|||||||||||
|
Total
|
|
$234,470
|
|
|
($3,098
|
)
|
|
$—
|
|
|
$—
|
|
|
$234,470
|
|
|
($3,098
|
)
|
|||||
|
Number of securities with an unrealized loss
|
123
|
|
—
|
|
123
|
|
|||||||||||||||||
The following table provides a summary of marketable investments as of
June 24, 2012
(in thousands):
|
|
June 24, 2012
|
||||||||||||||
|
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||
|
Municipal bonds
|
|
$209,626
|
|
|
$2,036
|
|
|
($58
|
)
|
|
$211,604
|
|
|||
|
Corporate bonds
|
144,942
|
|
1,848
|
|
(123
|
)
|
146,667
|
|
|||||||
|
U.S. agency securities
|
68,156
|
|
450
|
|
(7
|
)
|
68,599
|
|
|||||||
|
Non-U.S. certificates of deposit
|
130,000
|
|
—
|
|
—
|
|
130,000
|
|
|||||||
|
Non-U.S. government securities
|
8,746
|
|
15
|
|
(3
|
)
|
8,758
|
|
|||||||
|
Total
|
|
$561,470
|
|
|
$4,349
|
|
|
($191
|
)
|
|
$565,628
|
|
|||
The following table presents the gross unrealized losses and estimated fair value of the Company’s investment securities, aggregated by investment type and the length of time that individual investment securities have been in a continuous unrealized loss position, as of
June 24, 2012
(in thousands):
|
|
June 24, 2012
|
||||||||||||||||||||||
|
|
Less than 12 Months
|
Greater than 12 Months
|
Total
|
||||||||||||||||||||
|
|
Fair Value
|
Unrealized
Loss
|
Fair Value
|
Unrealized
Loss
|
Fair Value
|
Unrealized
Loss
|
|||||||||||||||||
|
Municipal bonds
|
|
$30,102
|
|
|
($58
|
)
|
|
$—
|
|
|
$—
|
|
|
$30,102
|
|
|
($58
|
)
|
|||||
|
Corporate bonds
|
30,550
|
|
(123
|
)
|
—
|
|
—
|
|
30,550
|
|
(123
|
)
|
|||||||||||
|
U.S. agency securities
|
3,014
|
|
(7
|
)
|
—
|
|
—
|
|
3,014
|
|
(7
|
)
|
|||||||||||
|
Non-U.S. certificates of deposit
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Non-U.S. government securities
|
1,543
|
|
(3
|
)
|
—
|
|
—
|
|
1,543
|
|
(3
|
)
|
|||||||||||
|
Total
|
|
$65,209
|
|
|
($191
|
)
|
|
$—
|
|
|
$—
|
|
|
$65,209
|
|
|
($191
|
)
|
|||||
|
Number of securities with an unrealized loss
|
33
|
|
—
|
|
33
|
|
|||||||||||||||||
The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains from the sale of investments for the fiscal year ended
June 30, 2013
of approximately
$0.1 million
were included in “Non-operating income, net” and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.
The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be “other than temporary” on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of
64
time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considers declines in its securities to be temporary in nature, and does not consider its securities to be impaired as of
June 30, 2013
and
June 24, 2012
.
The contractual maturities of marketable investments at
June 30, 2013
were as follows (in thousands):
|
Within One
Year
|
After One,
Within Five
Years
|
After Five,
Within Ten
Years
|
After Ten
Years
|
Total
|
|||||||||||||||
|
Municipal bonds
|
|
$53,012
|
|
|
$196,697
|
|
|
$—
|
|
|
$—
|
|
|
$249,709
|
|
||||
|
Corporate bonds
|
26,042
|
|
166,018
|
|
—
|
|
—
|
|
192,060
|
|
|||||||||
|
U.S. agency securities
|
8,065
|
|
31,409
|
|
—
|
|
—
|
|
39,474
|
|
|||||||||
|
Non-U.S. certificates of deposit
|
345,000
|
|
—
|
|
—
|
|
—
|
|
345,000
|
|
|||||||||
|
Non-U.S. government securities
|
1,501
|
|
6,102
|
|
—
|
|
—
|
|
7,603
|
|
|||||||||
|
Total
|
|
$433,620
|
|
|
$400,226
|
|
|
$—
|
|
|
$—
|
|
|
$833,846
|
|
||||
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into
three
levels based on the reliability of inputs as follows:
|
•
|
Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
|
|
•
|
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
•
|
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments. As of
June 30, 2013
, financial assets utilizing Level 1 inputs included money market funds. Financial assets utilizing Level 2 inputs included corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. Level 2 assets are valued using a third-party pricing services consensus price which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company does not have any significant financial assets requiring the use of Level 3 inputs. There were no transfers between Level 1 and Level 2 during the year ended
June 30, 2013
.
65
The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
|
|
June 30, 2013
|
June 24, 2012
|
|||||||||||||||||||||||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||||||||||||
|
Assets:
|
|||||||||||||||||||||||||||||||
|
Cash equivalents
|
|||||||||||||||||||||||||||||||
|
Municipal bonds
|
|
$—
|
|
|
$2,009
|
|
|
$—
|
|
|
$2,009
|
|
|
$—
|
|
|
$3,000
|
|
|
$—
|
|
|
$3,000
|
|
|||||||
|
Money market funds
|
12,589
|
|
—
|
|
—
|
|
12,589
|
|
31,318
|
|
—
|
|
—
|
|
31,318
|
|
|||||||||||||||
|
Total cash equivalents
|
12,589
|
|
2,009
|
|
—
|
|
14,598
|
|
31,318
|
|
3,000
|
|
—
|
|
34,318
|
|
|||||||||||||||
|
Short-term investments
|
|||||||||||||||||||||||||||||||
|
Municipal bonds
|
—
|
|
249,709
|
|
—
|
|
249,709
|
|
—
|
|
211,604
|
|
—
|
|
211,604
|
|
|||||||||||||||
|
Corporate bonds
|
—
|
|
192,060
|
|
—
|
|
192,060
|
|
—
|
|
146,667
|
|
—
|
|
146,667
|
|
|||||||||||||||
|
U.S. agency securities
|
—
|
|
39,474
|
|
—
|
|
39,474
|
|
—
|
|
68,599
|
|
—
|
|
68,599
|
|
|||||||||||||||
|
Non-U.S. certificates of deposit
|
—
|
|
345,000
|
|
—
|
|
345,000
|
|
—
|
|
130,000
|
|
—
|
|
130,000
|
|
|||||||||||||||
|
Non-U.S. government securities
|
—
|
|
7,603
|
|
—
|
|
7,603
|
|
—
|
|
8,758
|
|
—
|
|
8,758
|
|
|||||||||||||||
|
Total short-term investments
|
—
|
|
833,846
|
|
—
|
|
833,846
|
|
—
|
|
565,628
|
|
—
|
|
565,628
|
|
|||||||||||||||
|
Total assets
|
|
$12,589
|
|
|
$835,855
|
|
|
$—
|
|
|
$848,444
|
|
|
$31,318
|
|
|
$568,628
|
|
|
$—
|
|
|
$599,946
|
|
|||||||
Intangible Assets
The following table reflects the components of intangible assets (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||||||||||||||||||
|
Gross
|
Accumulated Amortization
|
Net
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
|||||||||||||||
|
Intangible assets with finite lives:
|
|||||||||||||||||||||||
|
Customer relationships
|
|
$137,440
|
|
|
($59,611
|
)
|
|
$77,829
|
|
|
$137,440
|
|
|
($51,103
|
)
|
|
$86,337
|
|
|||||
|
Developed technology
|
162,760
|
|
(53,476
|
)
|
109,284
|
|
160,360
|
|
(33,141
|
)
|
127,219
|
|
|||||||||||
|
Non-compete agreements
|
10,244
|
|
(4,037
|
)
|
6,207
|
|
10,244
|
|
(2,077
|
)
|
8,167
|
|
|||||||||||
|
Trade names, finite-lived
|
520
|
|
(493
|
)
|
27
|
|
520
|
|
(469
|
)
|
51
|
|
|||||||||||
|
Patent and license rights
|
116,147
|
|
(34,849
|
)
|
81,298
|
|
97,812
|
|
(28,791
|
)
|
69,021
|
|
|||||||||||
|
Total intangible assets with finite lives
|
|
$427,111
|
|
|
($152,466
|
)
|
|
$274,645
|
|
|
$406,376
|
|
|
($115,581
|
)
|
|
$290,795
|
|
|||||
|
In-process research and development, indefinite-lived
|
—
|
|
—
|
|
2,400
|
|
2,400
|
|
|||||||||||||||
|
Trade names, indefinite-lived
|
82,880
|
|
82,880
|
|
82,880
|
|
82,880
|
|
|||||||||||||||
|
Total intangible assets
|
|
$509,991
|
|
|
($152,466
|
)
|
|
$357,525
|
|
|
$491,656
|
|
|
($115,581
|
)
|
|
$376,075
|
|
|||||
Total amortization of intangible assets was
$37.8 million
,
$32.1 million
and
$15.5 million
for the years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively.
The Company invested
$20.9 million
,
$17.2 million
and
$12.8 million
for the years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively for patent and license rights. For the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, the Company recognized
$1.6 million
,
$0.8 million
and
$0.5 million
, respectively, in impairment charges related to its patent portfolio.
66
Total future amortization expense of definite-lived intangible assets is estimated to be as follows (in thousands):
|
Fiscal Year Ending
|
|
||
|
June 29, 2014
|
|
$36,049
|
|
|
June 28, 2015
|
33,073
|
|
|
|
June 26, 2016
|
32,795
|
|
|
|
June 25, 2017
|
30,824
|
|
|
|
June 24, 2018
|
29,663
|
|
|
|
Thereafter
|
112,241
|
|
|
|
|
$274,645
|
|
|
Goodwill
The Company's reporting units for goodwill impairment testing include:
|
•
|
LED Products
|
|
•
|
Lighting Products
|
|
•
|
Power and RF Products
|
As of the first day of the fourth quarter of fiscal
2013
, the Company performed a step one quantitative goodwill impairment assessment on each reporting unit. For the step one impairment test, the Company derived each reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The Company utilized a discount rate from the capital asset pricing model for the discounted cash flow analysis. Once the reporting unit fair values were calculated, the Company reconciled the reporting units' relative fair values to the Company's market capitalization as of the testing date.
The Company then compared the carrying value of each reporting unit, inclusive of its assigned goodwill, to its fair value. The Company determined that the fair value of each reporting unit exceeded its carrying value, and as a result, step two of the goodwill impairment test was not necessary.
No
impairment losses were recognized with respect to goodwill. Goodwill by reporting unit as of
June 30, 2013
and
June 24, 2012
was as follows (in thousands):
|
LED Products
|
Lighting Products
|
Power and RF Products
|
Consolidated Total
|
|||||||||||
|
|
$245,857
|
|
|
$337,781
|
|
|
$32,707
|
|
|
$616,345
|
|
|||
In August 2011, in connection with the acquisition of Ruud Lighting, the Company issued
6.1 million
shares of common stock valued at approximately
$211.0 million
. The shares issued in connection with the acquisition are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to
25%
of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, (ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.
As of
June 30, 2013
, pursuant to an extension of the stock repurchase program authorized by the Board of Directors, the Company is authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding
$200 million
for all purchases from
June 20, 2013
through the expiration of the program on
June 29, 2014
. During the fiscal year ended
June 30, 2013
, there were
no
repurchases of common stock by the Company under the share repurchase program.
Since the inception of the predecessor stock repurchase program in January 2001, the Company has repurchased
10.3 million
shares of its common stock at an average price of
$19.95
per share with an aggregate value of
$205.4 million
. The repurchase program can be implemented through open market or privately negotiated transactions at the discretion of the Company’s management. The Company will continue to determine the time and extent of any repurchases based on its evaluation of market conditions and other factors.
On May 29, 2002, the Company’s Board of Directors adopted a shareholder rights plan, pursuant to which stock purchase rights were distributed to shareholders at a rate of
one
right with respect to each share of common stock held of record as of June 10, 2002. Subsequently issued shares of common stock also carry stock purchase rights under the plan. The rights plan is designed
67
to enhance the Board’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. Unless terminated by the Board, the rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and certain business combinations involving the Company. The shareholder rights plan includes a review mechanism requiring the independent members of the Company’s Board of Directors to review and evaluate the plan at least every three years to consider whether the maintenance of the plan continues to be in the best interests of the Company and its shareholders and to communicate their conclusion to the Board. The Board of Directors has delegated this responsibility to the Governance and Nominations Committee, which is composed of all independent directors of the Board. On April 24, 2012, the shareholder rights plan was amended and restated to, among other things, extend the expiration date from
June 10, 2012
to
September 30, 2018
, and to remove provisions in the rights plan stipulating that certain actions can be taken only with the concurrence of a majority of the members of the Board of Directors who are not affiliated with an acquiring person (more specifically, those who are “Continuing Directors,” as defined in the original rights plan adopted in 2002). On January 29, 2013, the shareholder rights plan was amended solely to change the expiration date from
September 30, 2018
to
April 24, 2017
.
At
June 30, 2013
, the Company had reserved a total of approximately
17.3 million
shares of its common stock and
0.2 million
shares of its Series A preferred stock for future issuance as follows (in thousands):
|
|
Number of
Shares
|
|
|
For exercise of outstanding common stock options
|
8,657
|
|
|
For vesting of outstanding stock units
|
113
|
|
|
For future equity awards under 2004 Long-Term Incentive Compensation Plan
|
7,785
|
|
|
For future issuance under the Non-Employee Director Stock Compensation and Deferral Program
|
100
|
|
|
For future issuance to employees under the 2005 Employee Stock Purchase Plan
|
654
|
|
|
Total common shares reserved
|
17,309
|
|
|
Series A preferred stock reserved for exercise of rights issued under shareholders’ rights plan
|
200
|
|
The following presents the computation of basic earnings per share (in thousands, except per share amounts):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Basic:
|
|
|
|
||||||||
|
Net income
|
|
$86,925
|
|
|
$44,412
|
|
|
$146,500
|
|
||
|
Weighted average common shares
|
116,621
|
|
114,693
|
|
108,522
|
|
|||||
|
Basic earnings per share
|
|
$0.75
|
|
|
$0.39
|
|
|
$1.35
|
|
||
The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share amounts):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Diluted:
|
|||||||||||
|
Net income
|
|
$86,925
|
|
|
$44,412
|
|
|
$146,500
|
|
||
|
Weighted average common shares - basic
|
116,621
|
|
114,693
|
|
108,522
|
|
|||||
|
Dilutive effect of stock options, nonvested shares and ESPP purchase rights
|
1,358
|
|
532
|
|
1,513
|
|
|||||
|
Weighted average common shares - diluted
|
117,979
|
|
115,225
|
|
110,035
|
|
|||||
|
Diluted earnings per share
|
|
$0.74
|
|
|
$0.39
|
|
|
$1.33
|
|
||
68
Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, there were
2.4 million
,
7.0 million
and
2.0 million
, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.
Overview of Employee Stock-Based Compensation Plans
The Company currently has
one
equity-based compensation plan, the 2004 Long-Term Incentive Compensation Plan, from which stock-based compensation awards can be granted to employees and directors. In addition, the Company has assumed plans that have been terminated as to future grants, but under which options are currently outstanding. The 2004 Long-Term Incentive Compensation Plan provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, and restricted stock units. As of
June 30, 2013
, there were
24.9 million
shares authorized for issuance under the plan and
7.8 million
shares remaining for future grants. Awards issued under the plan to date include non-qualified stock options, restricted stock, stock units and performance units. During fiscal 2013, the Company initiated grants of performance-based stock option and stock unit awards. The compensation expense for an award with a performance condition is based on the probable outcome of that performance condition. Compensation expense is recognized if the Company believes it is probable that the performance condition will be achieved and is adjusted for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.
The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. As of June 30, 2013, there were
2.5 million
shares authorized for issuance under the ESPP, as amended, with
0.7 million
shares remaining for future issuance. The ESPP limits employee contributions to
15%
of each employee’s compensation (as defined in the plan) and originally allowed employees to purchase shares at a
15%
discount to the fair market value of common stock on the purchase date
two
times per year. The ESPP was amended in the second quarter of fiscal 2012 to increase the six-month participation period to a twelve-month participation period, divided into two equal six-month purchase periods, and to provide for a look-back feature. At the end of each six-month period in April and October, employees participating in the plan purchase the Company's common stock through the ESPP at a
15%
discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan amendment also provides for an automatic reset feature to start participants on a new twelve-month participation period if the share value declines during the first six-month purchase period.
Stock Option Awards
The following table summarizes option activity as of
June 30, 2013
and changes during the fiscal year then ended (total and shares in thousands):
|
|
Number of
Shares
|
|
Weighted-Average
Exercise price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Total
Intrinsic Value
|
|||||
|
Outstanding at June 24, 2012
|
8,800
|
|
|
$36.71
|
|
|
|
|||||
|
Granted
|
3,468
|
|
29.25
|
|
|
|
||||||
|
Exercised
|
(3,096
|
)
|
31.18
|
|
|
|
||||||
|
Forfeited or expired
|
(515
|
)
|
37.07
|
|
|
|
||||||
|
Outstanding at June 30, 2013
|
8,657
|
|
|
$35.67
|
|
4.98
|
|
$244,779
|
|
|||
|
Vested and expected to vest at June 30, 2013
|
8,425
|
|
|
$35.82
|
|
4.95
|
|
$236,972
|
|
|||
|
Exercisable at June 30, 2013
|
2,939
|
|
|
$41.61
|
|
3.63
|
|
$66,182
|
|
|||
The total intrinsic value in the table above represents the total pretax intrinsic value, which is the total difference between the closing price of the Company’s common stock on
June 28, 2013
(the last trading day of fiscal
2013
) of
$63.83
and the exercise price for in-the-money options that would have been received by the holders if all instruments had been exercised on
June 30, 2013
. As of
June 30, 2013
, there was
$42.8 million
of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of
1.64
years.
69
The following table summarizes information about stock options outstanding and exercisable at
June 30, 2013
(shares in thousands):
|
|
Options Outstanding
|
|
Options Exercisable
|
|||||||||||||
|
Range of Exercise Price
|
Number
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
Weighted Average Exercise Price
|
|
Number
|
|
Weighted Average Exercise Price
|
|||||||
|
$0.01 to $30.33
|
3,593
|
|
5.60
|
|
$27.01
|
|
496
|
|
|
$23.40
|
|
|||||
|
30.34 to 30.92
|
1,987
|
|
5.17
|
30.92
|
|
372
|
|
30.92
|
|
|||||||
|
30.93 to 35.89
|
1,028
|
|
3.60
|
34.98
|
|
858
|
|
35.43
|
|
|||||||
|
35.90 to 53.49
|
275
|
|
5.53
|
48.18
|
|
84
|
|
47.91
|
|
|||||||
|
53.50 to 75.55
|
1,774
|
|
4.23
|
57.01
|
|
1,129
|
|
57.38
|
|
|||||||
|
Total
|
8,657
|
|
4.98
|
|
$35.67
|
|
2,939
|
|
|
$41.61
|
|
|||||
Other information pertaining to the Company's stock option awards is as follows (in thousands, except per share data):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Weighted average grant date fair value per share of options
|
|
$12.05
|
|
|
$11.67
|
|
|
$22.83
|
|
||
|
Total intrinsic value of options exercised
|
|
$62,145
|
|
|
$1,605
|
|
|
$40,042
|
|
||
Restricted Stock Awards
A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding under the Company’s 2004 Long-Term Incentive Compensation Plan as of
June 30, 2013
and changes during the year then ended is as follows (in thousands, except per share data):
|
Number of
RSAs/RSUs
|
Weighted-Average
Grant-Date Fair Value
|
|||||
|
Nonvested at June 24, 2012
|
517
|
|
|
$37.41
|
|
|
|
Granted
|
358
|
|
28.77
|
|
||
|
Vested
|
(221
|
)
|
34.23
|
|
||
|
Forfeited
|
(7
|
)
|
29.86
|
|
||
|
Nonvested at June 30, 2013
|
647
|
|
|
$33.80
|
|
|
As of
June 30, 2013
, there was
$14.5 million
of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of
3.13
years.
Stock-Based Compensation Valuation and Expense
The Company accounts for its employee stock-based compensation plan using the fair value method. The fair value method requires the Company to estimate the grant date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.
The Company currently uses the Black-Scholes option-pricing model to estimate the fair value of the Company's stock option and ESPP awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.
70
For restricted stock and stock unit awards, the grant date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.
Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
Total stock-based compensation expense was as follows (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
Income Statement Classification:
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Cost of goods sold
|
|
$9,389
|
|
|
$7,713
|
|
|
$5,454
|
|
||
|
Research and development
|
13,429
|
|
10,378
|
|
8,388
|
|
|||||
|
Sales, general and administrative
|
31,081
|
|
28,302
|
|
24,398
|
|
|||||
|
Total
|
|
$53,899
|
|
|
$46,393
|
|
|
$38,240
|
|
||
The weighted average assumptions used to value stock option grants were as follows:
|
|
Fiscal Years Ended
|
|||||||
|
Stock Option Grants:
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
|||||
|
Risk-free interest rate
|
0.42
|
%
|
0.47
|
%
|
0.95
|
%
|
||
|
Expected life, in years
|
3.64
|
|
3.63
|
|
3.5
|
|
||
|
Expected volatility
|
56.8
|
%
|
51.7
|
%
|
56.7
|
%
|
||
|
Dividend yield
|
—
|
|
—
|
|
—
|
|
||
The following describes each of these assumptions and the Company’s methodology for determining each assumption:
Risk-Free Interest Rate
The Company estimates the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected life of the award.
Expected Life
The expected life represents the period that the stock option awards are expected to be outstanding. In determining the appropriate expected life of its stock options, the Company segregates its grantees into categories based upon employee levels that are expected to be indicative of similar option-related behavior. The expected useful lives for each of these categories are then estimated giving consideration to (1) the weighted average vesting periods, (2) the contractual lives of the stock options, (3) the relationship between the exercise price and the fair market value of the Company’s common stock, (4) expected employee turnover, (5) the expected future volatility of the Company’s common stock, and (6) past and expected exercise behavior, among other factors.
Expected Volatility
The Company estimates expected volatility giving consideration to the expected life of the respective award, the Company’s current expected growth rate, implied volatility in traded options for its common stock, and the historical volatility of its common stock.
Expected Dividend Yield
The Company estimates the expected dividend yield by giving consideration to its current dividend policies as well as those anticipated in the future considering the Company’s current plans and projections. The Company does not currently calculate a discount for any post-vesting restrictions to which its awards may be subject.
71
The following are the components of income before income taxes (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Domestic
|
|
$31,046
|
|
|
($5,360
|
)
|
|
$112,869
|
|
||
|
Foreign
|
76,511
|
|
53,007
|
|
65,358
|
|
|||||
|
Total
|
|
$107,557
|
|
|
$47,647
|
|
|
$178,227
|
|
||
The following are the components of income tax expense (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Current:
|
|
|
|
||||||||
|
Federal
|
|
$483
|
|
|
($4,031
|
)
|
|
$31,503
|
|
||
|
Foreign
|
18,127
|
|
13,125
|
|
13,796
|
|
|||||
|
State
|
1,777
|
|
566
|
|
2,736
|
|
|||||
|
Total Current
|
20,387
|
|
9,660
|
|
48,035
|
|
|||||
|
Deferred:
|
|
|
|
||||||||
|
Federal
|
2,226
|
|
(4,786
|
)
|
(4,232
|
)
|
|||||
|
Foreign
|
(177
|
)
|
(450
|
)
|
(11,601
|
)
|
|||||
|
State
|
(1,804
|
)
|
(1,189
|
)
|
(475
|
)
|
|||||
|
Total Deferred
|
245
|
|
(6,425
|
)
|
(16,308
|
)
|
|||||
|
Income tax expense
|
|
$20,632
|
|
|
$3,235
|
|
|
$31,727
|
|
||
Actual income tax expense differed from the amount computed by applying the U.S. federal tax rate of
35%
to pre-tax earnings as a result of the following (in thousands, except percentages):
|
|
Fiscal Years Ended
|
||||||||||||||||
|
|
June 30,
2013 |
% of Income
|
June 24,
2012 |
% of Income
|
June 26,
2011 |
% of Income
|
|||||||||||
|
Federal income tax provision at statutory rate
|
|
$37,645
|
|
35%
|
|
$16,676
|
|
35%
|
|
$62,378
|
|
35%
|
|||||
|
Increase (decrease) in income tax expense resulting from:
|
|
|
|
|
|
|
|||||||||||
|
State tax provision, net of federal benefit
|
1,146
|
|
1%
|
68
|
|
0%
|
2,665
|
|
1%
|
||||||||
|
State tax credits
|
(1,407
|
)
|
-1%
|
(1,028
|
)
|
-2%
|
(496
|
)
|
0%
|
||||||||
|
Tax exempt interest
|
(853
|
)
|
-1%
|
(1,064
|
)
|
-2%
|
(1,646
|
)
|
-1%
|
||||||||
|
48C investment tax credit
|
(5,252
|
)
|
-5%
|
(4,105
|
)
|
-9%
|
(4,023
|
)
|
-2%
|
||||||||
|
Decrease in tax reserve
|
(361
|
)
|
0%
|
(2,677
|
)
|
-6%
|
(2,175
|
)
|
-1%
|
||||||||
|
Research and development credits
|
(2,426
|
)
|
-2%
|
(694
|
)
|
-1%
|
(3,619
|
)
|
-2%
|
||||||||
|
Increase (decrease) in valuation allowance
|
(6
|
)
|
0%
|
(13
|
)
|
0%
|
183
|
|
0%
|
||||||||
|
Qualified production activities deduction
|
(866
|
)
|
-1%
|
(177
|
)
|
-1%
|
(2,714
|
)
|
-1%
|
||||||||
|
Stock-based compensation
|
1,206
|
|
1%
|
336
|
|
1%
|
308
|
|
0%
|
||||||||
|
Statutory rate differences
|
(10,184
|
)
|
-10%
|
(5,830
|
)
|
-12%
|
(16,117
|
)
|
-9%
|
||||||||
|
Effect of tax rate change
|
—
|
|
0%
|
—
|
|
0%
|
(2,998
|
)
|
-2%
|
||||||||
|
Other
|
1,990
|
|
2%
|
1,743
|
|
4%
|
(19
|
)
|
0%
|
||||||||
|
Income tax expense
|
|
$20,632
|
|
19%
|
|
$3,235
|
|
7%
|
|
$31,727
|
|
18%
|
|||||
72
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Deferred tax assets:
|
|||||||
|
Compensation
|
|
$3,868
|
|
|
$2,594
|
|
|
|
Inventory
|
16,050
|
|
13,051
|
|
|||
|
Sales return reserve and allowance for bad debts
|
4,483
|
|
2,710
|
|
|||
|
Warranty reserve
|
947
|
|
2,668
|
|
|||
|
Federal and state net operating loss carryforwards
|
617
|
|
2,353
|
|
|||
|
Federal credits
|
3,174
|
|
290
|
|
|||
|
State credits
|
4,215
|
|
3,982
|
|
|||
|
48C investment tax credits
|
7,216
|
|
15,905
|
|
|||
|
Investments
|
976
|
|
980
|
|
|||
|
Stock-based compensation
|
27,142
|
|
27,586
|
|
|||
|
Other
|
1,209
|
|
1,056
|
|
|||
|
Total gross deferred assets
|
69,897
|
|
73,175
|
|
|||
|
Less valuation allowance
|
(1,604
|
)
|
(1,611
|
)
|
|||
|
Deferred tax assets, net
|
68,293
|
|
71,564
|
|
|||
|
Deferred tax liabilities:
|
|||||||
|
Property and equipment
|
(27,484
|
)
|
(29,307
|
)
|
|||
|
Intangible assets
|
(37,921
|
)
|
(31,701
|
)
|
|||
|
Available-for-sale securities
|
154
|
|
(1,570
|
)
|
|||
|
Prepaid taxes and other
|
(997
|
)
|
(1,045
|
)
|
|||
|
Total gross deferred liability
|
(66,248
|
)
|
(63,623
|
)
|
|||
|
Deferred tax asset/(liability), net
|
|
$2,045
|
|
|
$7,941
|
|
|
The components giving rise to the net deferred tax assets (liabilities) have been included in the accompanying Consolidated Balance Sheet as follows (in thousands):
|
|
Balance at June 30, 2013
|
||||||||||||||
|
|
Asset
|
Liabilities
|
|||||||||||||
|
|
Current
|
Noncurrent
|
Current
|
Noncurrent
|
|||||||||||
|
U.S. federal income taxes
|
|
$15,707
|
|
|
$—
|
|
|
$—
|
|
|
($25,504
|
)
|
|||
|
Hong Kong and other income taxes
|
10,418
|
|
1,424
|
*
|
—
|
|
—
|
|
|||||||
|
|
|
$26,125
|
|
|
$1,424
|
|
|
$—
|
|
|
($25,504
|
)
|
|||
|
*
|
This amount is included in Other assets in the Consolidated Balance Sheets.
|
|
|
Balance at June 24, 2012
|
||||||||||||||
|
|
Asset
|
Liabilities
|
|||||||||||||
|
|
Current
|
Noncurrent
|
Current
|
Noncurrent
|
|||||||||||
|
U.S. federal income taxes
|
|
$13,461
|
|
|
$—
|
|
|
$—
|
|
|
($15,609
|
)
|
|||
|
Hong Kong and other income taxes
|
8,283
|
|
1,931
|
*
|
—
|
|
—
|
|
|||||||
|
|
|
$21,744
|
|
|
$1,931
|
|
|
$—
|
|
|
($15,609
|
)
|
|||
|
*
|
This amount is included in Other assets in the Consolidated Balance Sheets.
|
73
The research and development credit, which had previously expired on December 31, 2011, was reinstated as part of the American Taxpayer Relief Act of 2012 enacted on January 2, 2013. This legislation retroactively reinstated and extended the credit from the previous expiration date through December 31, 2013. The benefit of this credit for the full year fiscal 2013 as well as the period December 31, 2011 through June 24, 2012 has been included in the fiscal year 2013 tax expense representing a
$1.7 million
and
$0.7 million
benefit, respectively.
During fiscal 2010, the Company was notified by the Internal Revenue Service that it had been allocated
$39 million
of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 (Internal Revenue Section 48C). This
$39 million
allocation was based upon the Company projecting that it would put into service approximately
$130 million
of qualified equipment into its United States manufacturing locations over the next
three
years. As of
June 24, 2012
, the Company had successfully achieved the required milestones to realize the full
$39 million
tax benefit. This tax benefit (net of related basis adjustments) is being amortized into income over the useful life (
5
years) of the underlying equipment that was placed in service to generate these credits. Since fiscal 2010, the Company has recognized an income tax benefit of
$14.8 million
related to the credits generated to date, with
$5.3 million
of this amount recognized as a tax benefit for the year ended
June 30, 2013
.
As of
June 30, 2013
the Company has approximately
$12.8 million
of state net operating loss carryovers for which a full valuation allowance has been recognized. Furthermore, the Company has approximately
$0.8 million
of alternative minimum tax credits carryforwards and
$4.7 million
of 48C credit carryforwards that relate to excess stock option benefits which, if and when realized, will be recognized in additional paid in capital. Additionally, the Company has
$6.5 million
of state income tax credit carryforwards. The state net operating loss carryovers will begin to expire in fiscal 2015 and the state income tax credit carryforwards will begin to expire in fiscal 2016.
U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.
During fiscal
2013
, the Company recognized a net decrease in total unrecognized tax benefits of
$1.7 million
. As a result, the total amount of unrecognized tax benefits as of
June 30, 2013
is
$2.7 million
. Of the
$2.7 million
total unrecognized tax benefits,
$2.7 million
represents tax positions that, if recognized, would impact the effective tax rate. Although timing of the resolution and/or closure on audits is highly uncertain, the Company believes it is reasonably possible that approximately
$2.1 million
of gross unrecognized tax benefits will change in the next
12
months as a result of pending audit settlements or statute expirations.
The following is a tabular reconciliation of the Company’s change in uncertain tax positions (in thousands):
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Beginning Balance
|
|
$4,421
|
|
|
$6,987
|
|
|
$7,602
|
|
||
|
Increases related to prior year tax positions
|
546
|
|
—
|
|
741
|
|
|||||
|
Decreases related to prior year tax positions
|
—
|
|
(1,966
|
)
|
—
|
|
|||||
|
Expiration of statute of limitations for assessment of taxes
|
(2,235
|
)
|
(600
|
)
|
(1,356
|
)
|
|||||
|
Ending Balance
|
|
$2,732
|
|
|
$4,421
|
|
|
$6,987
|
|
||
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense line item in the Consolidated Statements of Income. Total interest and penalties accrued were as follows (in thousands):
|
June 30,
2013 |
June 24,
2012 |
||||||
|
Accrued interest and penalties
|
|
$154
|
|
|
$284
|
|
|
Total interest and penalties recognized were as follows (in thousands):
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
|||||||||
|
Recognized interest and penalties (benefit)
|
|
($130
|
)
|
|
($292
|
)
|
|
($330
|
)
|
||
The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to examinations for fiscal years ended June 29, 2009 and prior. For U.S. state tax returns the Company is generally no longer subject to tax examinations for fiscal years prior to 2010. For foreign purposes, the Company is no longer subject to examination for tax periods 2003 and prior. Certain carryforward tax attributes generated in prior years remain subject to
74
examination and adjustment. The Company is currently under inquiry by the Hong Kong Inland Revenue Department for the fiscal year ended June 29, 2008 (fiscal 2008) through the fiscal year ended June 27, 2010 (fiscal 2010). The Company is also currently under audit by the German Federal Central Tax Office for fiscal 2008 through fiscal 2010.
The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States. As of
June 30, 2013
, U.S. income taxes were not provided for on a cumulative total of approximately
$275.6 million
of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends to reinvest these earnings in these foreign operations indefinitely. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.
During the fiscal year ended
June 26, 2011
, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. This arrangement allows for
0%
tax for
10
years starting in the fiscal year ended
June 26, 2011
. For the fiscal year ended
June 30, 2013
, the Company did not meet the requirements for the tax holiday, and as such,
no
benefit has been recognized. In the fiscal years ended
June 24, 2012
and
June 26, 2011
the Company's net income increased by
$2.1 million
and
$1.8 million
(
$0.02
per basic share and
$0.02
per diluted share in each year), respectively, as a result of this arrangement.
Warranties
The following table summarizes the changes in the Company’s product warranty liabilities (in thousands):
|
|
Fiscal Years Ended
|
||||||||||
|
|
June 30,
2013 |
June 24,
2012 |
June 26,
2011 |
||||||||
|
Balance at beginning of period
|
|
$5,513
|
|
|
$2,235
|
|
|
$1,308
|
|
||
|
Acquisition related warranties
|
—
|
|
5,623
|
|
—
|
|
|||||
|
Warranties accrued in current period
|
1,533
|
|
1,055
|
|
1,573
|
|
|||||
|
Changes in estimates for pre-existing warranties
|
71
|
|
(878
|
)
|
(125
|
)
|
|||||
|
Expenditures
|
(946
|
)
|
(2,522
|
)
|
(521
|
)
|
|||||
|
Balance at end of period
|
|
$6,171
|
|
|
$5,513
|
|
|
$2,235
|
|
||
Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from
ninety
days to
ten
years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The warranty reserves, which are primarily related to Lighting products, are evaluated on a quarterly basis based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates. As of
June 30, 2013
,
$0.9 million
of Company’s product warranty liabilities were classified as long-term.
Lease Commitments
The Company primarily leases manufacturing, office, housing and warehousing space under the terms of non-cancelable operating leases. These leases expire at various times through
May 2022
. The Company recognizes net rent expense on a straight-line basis over the life of the lease. Rent expense associated with these operating leases totaled approximately
$4.8 million
,
$4.6 million
and
$3.0 million
for each of the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, respectively. Certain agreements require that the Company pay property taxes and general property maintenance in addition to the minimum rental payments.
75
Future minimum rental payments as of
June 30, 2013
(under leases currently in effect) are as follows, (in thousands):
|
Fiscal Years Ending
|
Minimum Rental
Amount
|
||
|
June 29, 2014
|
|
$3,878
|
|
|
June 28, 2015
|
3,637
|
|
|
|
June 26, 2016
|
3,080
|
|
|
|
June 25, 2017
|
2,468
|
|
|
|
June 24, 2018
|
749
|
|
|
|
Thereafter
|
174
|
|
|
|
Total
|
|
$13,986
|
|
Litigation
The Company is currently a party to various legal proceedings, including the proceedings noted in this section. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm the Company's financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in matters for which injunctive relief or other conduct remedies are sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company's business, results of operation, financial position, and overall trends. Except as may be otherwise indicated, the outcomes in these matters are not reasonably estimable.
Cooper Lighting Litigation
Ruud Lighting, Inc. filed a complaint for patent infringement against Cooper Lighting, LLC in the U.S. District Court for the Eastern District of Wisconsin on April 2, 2010. The complaint as amended seeks injunctive relief and damages for infringement of
two
U.S. patents owned by Ruud Lighting: No. 7,686,469, entitled "LED Lighting Fixture"; and No. 7,891,835, entitled “Light-Directed Apparatus with Protected Reflector-Shield and Lighting Fixture Utilizing Same.” On May 23, 2012, Ruud Lighting filed a second complaint for patent infringement against Cooper Lighting, LLC in the U.S. District Court for the Eastern District of Wisconsin. The complaint seeks injunctive relief and damages for infringement of a third U.S. patent owned by Ruud Lighting, No. 7,952,262, entitled “Modular LED Unit Incorporating Interconnected Heat Sinks Configured To Mount and Hold Adjacent LED Modules." In each of these actions Cooper Lighting has filed an answer and counterclaims in which it denies any infringement and seeks a declaratory judgment that the asserted claims of the patents are invalid. On February 19, 2013, the Company, as successor-in-interest to Ruud Lighting, Inc., filed a third complaint for patent infringement against Cooper Lighting in the U.S. District Court for the Eastern District of Wisconsin. The complaint seeks injunctive relief and damages for infringement of two U.S. patents owned by the Company, No. 8,282,239, entitled “Light-Directing Apparatus with Protected Reflector-Shield and Lighting Fixture Utilizing Same” and No. 8,070,306, entitled “LED Lighting Fixture.”
Cooper Lighting, LLC filed a complaint for patent infringement against the Company and Ruud Lighting, Inc. in the U.S. District Court for the Northern District of Georgia on September 7, 2012. The complaint seeks injunctive relief and damages for infringement of
one
U.S. patent owned by Cooper Lighting, LLC: No. 8,210,722, entitled "LED Device for Wide Beam Generation." The Company has filed an answer in which it denies any infringement and asserts that the patent is invalid as well as other defenses.
Illumination Management Solutions, Inc., a subsidiary of Cooper Lighting, LLC, filed a complaint for patent infringement against Ruud Lighting in the U.S. District Court for the Eastern District of Texas on June 7, 2010. The action was later transferred to the U.S. District Court for the Eastern District of Wisconsin. As amended in January 2012, the complaint alleged that Ruud Lighting is infringing
two
U.S. patents owned by Illumination Management Solutions, No. 7,674,018 and No. 7,993,036, each entitled "LED Device for Wide Beam Generation." It also alleged that Ruud Lighting and its then president, Alan Ruud, who served on the plaintiff's board of directors in 2006 and 2007 when Ruud Lighting was a shareholder of the plaintiff, conspired to misuse confidential information obtained from the plaintiff to file patent applications and to obtain patents assigned to Ruud Lighting. The complaint sought injunctive relief, damages and ownership of the patent applications and patents alleged to have been wrongfully filed and obtained. The court in October 2012 granted partial summary judgment in favor of Ruud Lighting, finding that most of the accused products did not infringe either of the asserted patents. The court in February 2013 entered final judgment in which the court 1) dismissed the claims relating to most of the accused products, finding that they did not infringe either of the asserted patents; 2) dismissed with prejudice and with the consent of the parties the claims with respect to the remaining accused products; 3) severed the conspiracy claim, which was subsequently voluntarily dismissed; and 4) dismissed the remaining claims
76
and counterclaims without prejudice. In March 2013, the plaintiffs filed a notice of appeal from this judgment to the U.S. Court of Appeals for the Federal Circuit.
Ruud Lighting is a defendant in an action commenced by Illumination Management Solutions in the U.S. District Court for the Central District of California on June 8, 2010 and later transferred to the U.S. District Court for the Eastern District of Wisconsin. As amended in January 2013, the complaint names as defendants Ruud Lighting and two of its employees, Alan Ruud and Christopher Ruud, and asserts that the defendants engaged in wrongful acts arising out of the relationship between the plaintiff and Ruud Lighting in 2006 and 2007 when Ruud Lighting was a shareholder of the plaintiff and Alan Ruud served on the plaintiff's board of directors. The complaint alleges that the defendants breached fiduciary duties and otherwise acted improperly by pursuing a plan to compete with the plaintiff and that the defendants misused information obtained from the plaintiff as fiduciaries and subject to a non-disclosure agreement. These allegedly wrongful acts included filing patent applications and obtaining patents assigned to Ruud Lighting on inventions claimed by the plaintiff. The complaint also alleges that Ruud Lighting: 1) marketed its LED products without reference to certain optical technology claimed by the plaintiff, thereby breaching a marketing agreement with the plaintiff and engaging in unfair competition and false advertising; and 2) breached the marketing agreement by failing to give the plaintiff a right of first refusal to integrate the plaintiff's optical technology into Ruud Lighting LED products. The complaint further alleges that the plaintiff is entitled to a correction of the inventors named in one or more patents to add a founder of the plaintiff as an inventor. The complaint seeks to recover damages, all profits and other gains realized by defendants as a result of the acts complained of, attorneys' fees, ownership of any interest in the patent applications and patents alleged to have been wrongfully filed and obtained, and correction of the named inventors on one or more patents.
Dynacraft Industries Litigation
On April 29, 2009, Dynacraft Industries Sdn Bhd commenced an action against the Company and Cree Malaysia Sdn Bhd, a subsidiary of the Company, in Malaysia in a filing with the High Court of Malaysia at Pulau Pinang (Penang). The statement of claim alleged that the Cree defendants breached an agreement to purchase from Dynacraft certain real property in Malaysia for a contract price of
38,000,000
Malaysia ringgit (approximately
$12.0 million
) and sought an award of damages in an unspecified amount. The Cree defendants filed defenses denying liability for damages. The case was tried before a judge and on November 28, 2012 and all claims against the Cree defendants were dismissed. Dynacraft has filed a notice of appeal.
The Fox Group Litigation
The Fox Group, Inc. filed a complaint for patent infringement against the Company in the U.S. District Court for the Eastern District of Virginia on June 29, 2010. The complaint, which sought injunctive relief and damages, asserted that the Company was infringing
two
U.S. patents relating to high quality silicon carbide material: No. 6,534,026, entitled "Low Defect Density Silicon Carbide" (the "'026 patent"); and No. 6,562,130, entitled "Low Defect Axially Grown Single Crystal Silicon Carbide" (the "'130 patent"). The district court granted summary judgment in favor of the Company in August 2011. The court determined that the Company did not infringe the '026 patent and that the claims of the '130 patent asserted against the Company are invalid. The Fox Group appealed the decision to the U.S. Court of Appeals for the Federal Circuit, which affirmed the judgment. The Fox Group's petition for a rehearing with the Federal Circuit was denied in February 2013 and the Fox Group filed a writ of certiorari with the U.S. Supreme Court in May 2013.
Schubert Litigation
E. Fred Schubert filed a complaint for patent infringement against the Company in the U.S. District Court for the District of Delaware on July 18, 2012. The complaint sought injunctive relief and damages for alleged infringement of U.S. patent No. 6,294,475, entitled “Crystallographic Wet Chemical Etching of III-Nitride Material." In May 2013, the parties entered into a settlement agreement pursuant to which the lawsuit was dismissed with prejudice without any admission of liability.
Lighting Science Group Litigation
Lighting Science Group Corporation filed a complaint for patent infringement against the Company in the U.S. District Court for the Middle District of Florida on April 10, 2013. The complaint seeks injunctive relief and damages for alleged infringement of U.S. patent No. 8.201,968, entitled “Low Profile Light." The Company has filed an answer and counterclaims in which it denies any infringement and seeks declaratory judgments that the asserted claims of the patent are invalid and not infringed.
77
The Company's operating and reportable segments are:
|
•
|
LED Products
|
|
•
|
Lighting Products
|
|
•
|
Power and RF Products
|
The Company's CODM reviews segment performance and allocates resources based upon segment revenues and segment gross profit.
Reportable Segments Description
LED Products Segment
The Company's LED Products segment includes LED chips, LED components, and SiC materials.
LED Chips
LED Chip products include blue and green LED chips based on GaN and related materials. LED chips or die are solid-state electronic components used in a number of applications and are currently available in a variety of brightness levels, wavelengths (color) and sizes. The Company uses LED chips internally in the manufacturing of LED components. LED Chips are also sold externally to customers for use in a variety of applications including video screens, gaming displays, function indicator lights, and automotive backlights, headlamps and directional indicators.
LED Components
LED component products include a range of packaged LED products from the Company's XLamp
®
LED components and LED modules for lighting applications to the Company's high-brightness LED components.
The Company's XLamp LED components are lighting class packaged LED products designed to meet a broad range of market needs for lighting applications including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting. The LED Components segment produces XLamp LED components for use by the Company's LED lighting segment. The LED Components segment also sells XLamp LED components externally to manufacturing customers and manufacturing distributors for use in a variety of lighting applications.
The Company's high brightness LED components consist of surface mount (SMD) and through-hole packaged LED products. The SMD LED component products are available in a full range of colors designed to meet a broad range of market needs. These products are sold to manufacturing customers and distributors in the video, signage, general illumination, automotive, gaming and specialty lighting markets.
SiC Materials
The Company's SiC materials are targeted for customers who use them to manufacture products for RF, power switching, gemstones and other applications. Corporate, government and university customers also buy SiC materials for research and development directed at RF and high power devices. The Company generally sells its SiC materials in bulk form, as a bare wafer or with SiC and GaN epitaxial films.
Lighting Products Segment
The Company's Lighting Products segment consists of both LED and traditional lighting systems. The Company designs, manufactures and sells lighting systems for indoor and outdoor applications, with its primary focus on LED lighting systems for the commercial, industrial and consumer markets. Lighting products are primarily sold to distributors who serve the indoor and outdoor lighting consumer and business-to-business markets.
78
Power and RF Products Segment
The Company's Power and RF Products segment includes power devices and RF devices.
Power Devices
The Company's power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Power products are sold primarily to government contractors and distributors.
RF Devices
The Company's RF devices are made from SiC or GaN and provide improved efficiency, bandwidths and frequency of operation as compared to silicon or gallium arsenide. RF devices are sold primarily to government contractors and distributors.
Financial Results by Reportable Segment
The table below reflects the results of the Company's reportable segments as reviewed by the Company's CODM for fiscal
2013
,
2012
and
2011
. The Company uses substantially the same accounting policies to derive the segment results reported below as those used in the Company's consolidated financial statements.
The Company's CODM does not review inter-segment revenue when evaluating segment performance and allocating resources to each segment. Thus, inter-segment revenue is not included in the segment revenues presented in the table below. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.
The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit presented in the table below to the Company's consolidated income before income taxes.
In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment's cost of revenue. The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment. The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated. Inventory is normally transferred between the Company's reportable segments at cost. However, due to the vertically-integrated nature of the Company's business and the fixed cost nature of the Company's manufacturing operations, the Company will apportion lower of cost or market write-downs on products among the segments involved in producing the products. The lower of cost or market write-down is apportioned based on each segment's proportional production cost and is reported as an increase to each segment's cost of revenue. The Company's CODM evaluates segment performance and resource allocation after apportionment of any lower of cost or market write-downs. For the year ended
June 30, 2013
, the Company allocated
$3.1 million
for a lower of cost or market write-down from the Lighting Products segment to the LED Products segment.
Unallocated costs in the table below are not reviewed by the Company's CODM when evaluating segment performance and allocating resources to each segment. These unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans, matching contributions under the Company's 401(k) plan and acquisition related costs.
79
Revenues, gross profit and gross margin for each of our segments are as follows (in thousands, except percentages):
|
Revenues
|
Gross Profit and Gross Margin
|
||||||||||||||||||||||
|
Year Ended
|
Year Ended
|
||||||||||||||||||||||
|
June 30,
2013 |
June 24, 2012
|
June 26, 2011
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
||||||||||||||||||
|
LED Products
|
|
$801,483
|
|
|
$756,924
|
|
|
$808,207
|
|
|
$344,649
|
|
|
$290,642
|
|
|
$375,424
|
|
|||||
|
LED Products gross margin
|
43
|
%
|
38
|
%
|
46
|
%
|
|||||||||||||||||
|
Lighting Products
|
495,089
|
|
334,704
|
|
81,784
|
|
148,947
|
|
103,396
|
|
23,686
|
|
|||||||||||
|
Lighting Products gross margin
|
30
|
%
|
31
|
%
|
29
|
%
|
|||||||||||||||||
|
Power and RF Products
|
89,410
|
|
73,030
|
|
97,624
|
|
48,127
|
|
32,051
|
|
49,828
|
|
|||||||||||
|
Power and RF Products gross margin
|
54
|
%
|
44
|
%
|
51
|
%
|
|||||||||||||||||
|
Total segment reporting
|
|
$1,385,982
|
|
|
$1,164,658
|
|
|
$987,615
|
|
541,723
|
|
426,089
|
|
448,938
|
|
||||||||
|
Unallocated costs
|
(18,463
|
)
|
(16,627
|
)
|
(13,165
|
)
|
|||||||||||||||||
|
Consolidated gross profit
|
|
$523,260
|
|
|
$409,462
|
|
|
$435,773
|
|
||||||||||||||
|
Consolidated gross margin
|
38
|
%
|
35
|
%
|
44
|
%
|
|||||||||||||||||
Assets by Reportable Segment
Inventory is the only asset reviewed by the Company's CODM when evaluating segment performance and allocating resources to the segments. The following table sets forth the Company's inventory by reportable segment for the fiscal years ended
June 30, 2013
and
June 24, 2012
.
Unallocated inventory in the table below is not allocated to the reportable segments because the Company's CODM does not review it when evaluating performance and allocating resources to each segment. Unallocated inventory consists primarily of manufacturing employees' stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company's 401(k) plan.
The Company does not allocate assets other than inventory to the reportable segments because the Company's CODM does not review them when assessing segment performance and allocating resources. The CODM reviews all of the Company's assets other than inventory on a consolidated basis. Inventory, net for each of our segments is as follows (in thousands):
|
Inventory, Net
|
|||||||
|
Year Ended
|
|||||||
|
June 30, 2013
|
June 24, 2012
|
||||||
|
LED Products
|
|
$99,835
|
|
|
$109,262
|
|
|
|
Lighting Products
|
87,546
|
|
69,330
|
|
|||
|
Power and RF Products
|
6,593
|
|
6,100
|
|
|||
|
Total segment reporting
|
193,974
|
|
184,692
|
|
|||
|
Unallocated inventory
|
3,027
|
|
4,157
|
|
|||
|
Consolidated inventory, net
|
|
$197,001
|
|
|
$188,849
|
|
|
80
Geographic Information
The Company conducts business in several geographic areas. Revenues are attributed to a particular geographic region based on the billing address for the products. The following table sets forth the percentage of revenues from external customers by geographic area for fiscal
2013
,
2012
and
2011
:
|
|
For the Years Ended
|
|||||||
|
|
June 30, 2013
|
June 24, 2012
|
June 26, 2011
|
|||||
|
United States
|
44
|
%
|
38
|
%
|
24
|
%
|
||
|
China
|
28
|
%
|
32
|
%
|
36
|
%
|
||
|
Europe
|
12
|
%
|
14
|
%
|
14
|
%
|
||
|
South Korea
|
2
|
%
|
2
|
%
|
4
|
%
|
||
|
Japan
|
7
|
%
|
8
|
%
|
7
|
%
|
||
|
Malaysia
|
1
|
%
|
2
|
%
|
2
|
%
|
||
|
Taiwan
|
2
|
%
|
1
|
%
|
5
|
%
|
||
|
Other
|
4
|
%
|
3
|
%
|
8
|
%
|
||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
||
The following table sets forth the Company’s net property and equipment by country for the fiscal years ended
June 30, 2013
and
June 24, 2012
(in thousands):
|
|
June 30,
2013 |
June 24,
2012 |
|||||
|
United States
|
|
$419,267
|
|
|
$452,249
|
|
|
|
China
|
122,477
|
|
125,868
|
|
|||
|
Other
|
1,089
|
|
4,344
|
|
|||
|
Total
|
|
$542,833
|
|
|
$582,461
|
|
|
Financial instruments, which may subject the Company to a concentration of risk, consist principally of short-term investments, cash equivalents, and accounts receivable. Short-term investments consist primarily of corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities at interest rates that vary by security. The Company’s cash equivalents consist primarily of money market funds. Certain bank deposits may at times be in excess of the FDIC insurance limits.
The Company sells its products on account to manufacturers, distributors and others worldwide and generally requires no collateral. When title has transferred and the earnings process is complete, the Company recognizes revenue and related accounts receivable.
The following customers individually accounted for more than
10%
of the consolidated accounts receivable balance as of the following fiscal year-ends:
|
June 30,
2013 |
June 24,
2012 |
||||
|
Arrow Electronics, Inc.
|
14
|
%
|
14
|
%
|
|
|
World Peace Industrial Co., Ltd.
|
13
|
%
|
14
|
%
|
|
Sales to certain customers represented more than
10%
of consolidated revenue. Sales to Arrow Electronics, Inc. represented
16%
,
18%
and
20%
of revenues for fiscal 2013, 2012, and 2011, respectively. Sales to World Peace Industrial Co., Ltd. represented
10%
of revenues in both fiscal 2012 and 2011.
Arrow Electronics, Inc. is a customer of the LED Products and Power and RF Products segments. World Peace Industrial Co., Ltd. is a customer of the LED Products segment.
81
The Company sponsors
one
employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. All U.S. employees are eligible to participate under the 401(k) Plan on the first day of a new fiscal month after the date of hire. Under the 401(k) Plan, there is no fixed dollar amount of retirement benefits; rather, the Company matches a defined percentage of employee deferrals, and employees vest in these matching funds over time. Employees choose their investment elections from a list of available investment options. During the fiscal years ended
June 30, 2013
,
June 24, 2012
and
June 26, 2011
, the Company contributed approximately
$6.2 million
,
$4.7 million
and
$3.9 million
to the 401(k) Plan, respectively. The Pension Benefit Guaranty Corporation does not insure the 401(k) Plan.
On
August 17, 2011
, in connection with the Company's acquisition of Ruud Lighting,
two
of the prior shareholders of Ruud Lighting, Alan Ruud and Christopher Ruud, executed offer letters for continued employment with Ruud Lighting. Also on
August 17, 2011
, subsequent to the Company's acquisition of Ruud Lighting and pursuant to an Aircraft Purchase and Sale Agreement and a Joint Ownership Agreement with Ruud Lighting, each of Alan Ruud (through LSA, LLC, a limited liability company of which Mr. Ruud is the sole member (LSA)) and Christopher Ruud (through Light Speed Aviation, LLC, a limited liability company of which Christopher Ruud is the sole member (Light Speed)) acquired a
10%
interest in an aircraft previously purchased by Ruud Lighting, resulting in Ruud Lighting owning an
80%
interest in the aircraft. Each of LSA and Light Speed acquired its ownership in the aircraft for a purchase price of approximately
$0.9 million
for a combined interest of
20%
or
$1.9 million
which is included in the Consolidated Statements of Cash Flows as cash provided by investing activities, under the caption "Purchase of acquired business, net of cash acquired."
Pursuant to the Joint Ownership Agreement, each of LSA and Light Speed is responsible for its share of flight crew, direct, fixed and other expenses attributable to the aircraft. During fiscal
2013
, the Company billed LSA and Light Speed
$311 thousand
and
$318 thousand
, respectively. Of these billed amounts, the Company has been reimbursed by LSA and Light Speed for
$311 thousand
and
$299 thousand
, respectively, as of
June 30, 2013
. The Company had
no
outstanding receivables from LSA and
$18 thousand
in outstanding receivables from Light Speed as of
June 30, 2013
. The Company also had unbilled receivables of
$186 thousand
and
$209 thousand
for LSA and Light Speed, respectively, as of
June 30, 2013
. During fiscal
2012
, the Company billed LSA and Light Speed
$230 thousand
and
$181 thousand
, respectively. Of these billed amounts, the Company had been reimbursed by LSA and Light Speed for
$230 thousand
and
$181 thousand
, respectively, as of
June 24, 2012
.
In July 2010, Mark Swoboda was appointed Chief Executive Officer of Intematix Corporation (Intematix). Mark Swoboda is the brother of the Company’s Chairman, Chief Executive Officer and President, Charles M. Swoboda. For a number of years the Company has purchased raw materials from Intematix pursuant to standard purchase orders in the ordinary course of business.
During fiscal
2013
, the Company purchased
$3.2 million
of raw materials from Intematix, and the Company had
$0.2 million
outstanding payable to Intematix as of
June 30, 2013
. During fiscal
2012
, the Company purchased
$1.9 million
of raw materials from Intematix, and the Company had
$0.4 million
outstanding payable to Intematix as of
June 24, 2012
.
82
The following is a summary of the Company’s consolidated quarterly results of operations for each of the fiscal years ended
June 30, 2013
and
June 24, 2012
(in thousands, except per share data):
|
September 23,
2012 |
December 30,
2012 |
March 31,
2013 |
June 30,
2013 |
Fiscal Year 2013
|
|||||||||||||||
|
Revenue, net
|
|
$315,753
|
|
|
$346,286
|
|
|
$348,934
|
|
|
$375,009
|
|
|
$1,385,982
|
|
||||
|
Cost of revenue, net
|
199,704
|
|
212,810
|
|
215,924
|
|
234,284
|
|
862,722
|
|
|||||||||
|
Gross profit
|
116,049
|
|
133,476
|
|
133,010
|
|
140,725
|
|
523,260
|
|
|||||||||
|
Net income
|
16,123
|
|
20,403
|
|
22,157
|
|
28,242
|
|
86,925
|
|
|||||||||
|
Earnings per share:
|
|||||||||||||||||||
|
Basic
|
|
$0.14
|
|
|
$0.18
|
|
|
$0.19
|
|
|
$0.24
|
|
|
$0.75
|
|
||||
|
Diluted
|
|
$0.14
|
|
|
$0.18
|
|
|
$0.19
|
|
|
$0.23
|
|
|
$0.74
|
|
||||
|
|
September 25,
2011 |
December 25,
2011 |
March 25,
2012 |
June 24,
2012 |
Fiscal Year 2012
|
||||||||||||||
|
Revenue, net
|
|
$268,980
|
|
|
$304,118
|
|
|
$284,801
|
|
|
$306,759
|
|
|
$1,164,658
|
|
||||
|
Cost of revenue, net
|
170,952
|
|
199,000
|
|
185,388
|
|
199,856
|
|
755,196
|
|
|||||||||
|
Gross profit
|
98,028
|
|
105,118
|
|
99,413
|
|
106,903
|
|
409,462
|
|
|||||||||
|
Net income
|
12,819
|
|
12,078
|
|
9,489
|
|
10,026
|
|
44,412
|
|
|||||||||
|
Earnings per share:
|
|||||||||||||||||||
|
Basic
|
|
$0.11
|
|
|
$0.10
|
|
|
$0.08
|
|
|
$0.09
|
|
|
$0.39
|
|
||||
|
Diluted
|
|
$0.11
|
|
|
$0.10
|
|
|
$0.08
|
|
|
$0.09
|
|
|
$0.39
|
|
||||
None.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-K, our disclosure controls and procedures are effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes to Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the fourth quarter of fiscal
2013
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In the course of our ongoing preparations for making management’s report on internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, from time to time we have identified areas in need of improvement and have taken remedial actions to strengthen the affected controls as appropriate. We make these and other changes to enhance the effectiveness of our internal controls over financial reporting, which do not have a material effect on our overall internal control.
83
We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Our internal control over financial reporting includes those policies and procedures that:
|
(i)
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
(ii)
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
(iii)
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
In making the assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework
(1992 framework). Based on that assessment and those criteria, management has concluded that our internal control over financial reporting was effective as of
June 30, 2013
.
The effectiveness of our internal control over financial reporting as of
June 30, 2013
has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which is included in this Annual Report.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cree, Inc.
We have audited Cree Inc.'s internal control over financial reporting as of
June 30, 2013
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Cree, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cree, Inc. maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2013
, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cree, Inc. as of
June 30, 2013
and
June 24, 2012
, and the related consolidated statements of income, comprehensive income, cash flows, and shareholders' equity for each of the three years in the period ended
June 30, 2013
of Cree, Inc. and our report dated
August 27, 2013
expressed an unqualified opinion thereon.
|
/s/ Ernst & Young LLP
|
|
|
Raleigh, North Carolina
|
|
|
August 27, 2013
|
|
Item 9B.
Other Information
Not applicable.
85
Certain information called for in Items 10, 11,12, 13 and 14 is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the SEC within 120 days after the end of fiscal
2013
.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
86
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) and (2) The financial statements and reports of independent registered public accounting firm are filed as part of this Annual Report (see “Index to Consolidated Financial Statements” at Item 8). The financial statement schedules are not included in this item as they are either not applicable or are included as part of the consolidated financial statements.
(a)(3) The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K:
|
EXHIBIT NO.
|
DESCRIPTION
|
|
|
2.1
|
Stock Purchase Agreement, dated as of August 17, 2011 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated August 17, 2011, as filed with the Securities and Exchange Commission on August 17, 2011)
|
|
|
3.1
|
Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on August 19, 2002)
|
|
|
3.2
|
Bylaws, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated October 25, 2010, as filed with the Securities and Exchange Commission on October 29, 2010)
|
|
|
4.1
|
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on August 19, 2002)
|
|
|
4.2
|
Amended and Restated Rights Agreement, dated April 24, 2012, between Cree, Inc. and American Stock Transfer & Trust Company, LLC (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated April 24, 2012, as filed with the Securities and Exchange Commission on April 26, 2012)
|
|
|
4.3
|
Amendment No. 1 to Amended and Restated Rights Agreement, dated as of January 29, 2013 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated January 29, 2013, as filed with the Securities and Exchange Commission on January 31, 2013)
|
|
|
10.1*
|
2004 Long-Term Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated October 23, 2012, as filed with the Securities and Exchange Commission on October 25, 2012)
|
|
|
10.2*
|
Addendum to Form of Master Stock Option Award Agreement Terms and Conditions for Grants of Nonqualified Stock Options to Non-Employee Directors (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2009, as filed with the Securities and Exchange Commission on October 21, 2009)
|
|
|
10.3*
|
Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.4*
|
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2006, as filed with the Securities and Exchange Commission on November 2, 2006)
|
|
|
10.5*
|
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
|
|
|
10.6*
|
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.7*
|
Form of Master Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2006, as filed with the Securities and Exchange Commission on November 2, 2006)
|
|
87
|
10.8*
|
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.9*
|
Management Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated August 13, 2012, as filed with the Securities and Exchange Commission on August 17, 2012)
|
|
|
10.10*
|
Schedule of Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2011, as filed with the Securities and Exchange Commission on October 20, 2011)
|
|
|
10.11*
|
Non-Employee Director Stock Compensation and Deferral Program (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2009, as filed with the Securities and Exchange Commission on October 21, 2009)
|
|
|
10.12*
|
Amendment One to Non-Employee Director Stock Compensation and Deferral Program (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
|
|
|
10.13*
|
Notice of Grant to Charles M. Swoboda, dated August 13, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated August 13, 2012, as filed with the Securities and Exchange Commission on August 17, 2012)
|
|
|
10.14*
|
Notice of Grant to Charles M. Swoboda, dated November 28, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 2012, as filed with the Securities and Exchange Commission on January 23, 2013)
|
|
|
10.15*
|
Master Performance Unit Award Agreement, dated August 18, 2008, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)
|
|
|
10.16*
|
Cree, Inc. Severance Plan for Section 16 Officers (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)
|
|
|
10.17*
|
Change in Control Agreement for Chief Executive Officer, effective December 17, 2012, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated December 17, 2012, as filed with the Securities and Exchange Commission on December 20, 2012)
|
|
|
10.18*
|
Form of Cree, Inc. Change in Control Agreement for Section 16 Officers other than the Chief Executive Officer (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated December 17, 2012, as filed with the Securities and Exchange Commission on December 20, 2012)
|
|
|
10.19*
|
Form of Cree, Inc. Indemnification Agreement for Directors and Officers (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated October 25, 2010, as filed with the Securities and Exchange Commission on October 29, 2010)
|
|
|
10.20*
|
Offer Letter Agreement executed August 16, 2011 between Cree, Inc. and Alan J. Ruud (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2011, as filed with the Securities and Exchange Commission on October 20, 2011)
|
|
|
21.1
|
Subsidiaries of the Company
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
|
|
31.1
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
88
|
101
|
The following materials from Cree, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; (v) Consolidated Statements of Shareholders' Equity; and (vi) Notes to Consolidated Financial Statements
|
|
|
*
|
Management contract or compensatory plan
|
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CREE, INC.
|
|
|
Date:
|
August 27, 2013
|
|
By:
|
/s/ C
HARLES
M. S
WOBODA
|
|
Charles M. Swoboda
|
|
|
Chairman, Chief Executive Officer and President
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature
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Title
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Date
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||
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/s/ C
HARLES
M. S
WOBODA
|
Chairman, Chief Executive Officer and President
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August 27, 2013
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||
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Charles M. Swoboda
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||||
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/s/ M
ICHAEL
E. M
C
D
EVITT
|
Executive Vice President and Chief Financial Officer
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August 27, 2013
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||
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Michael E. McDevitt
|
||||
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/s/ C
LYDE
R. H
OSEIN
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Director
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August 27, 2013
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||
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Clyde R. Hosein
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||||
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/s/ R
OBERT
A. I
NGRAM
|
Director
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August 27, 2013
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||
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Robert A. Ingram
|
||||
|
/s/ F
RANCO
P
LASTINA
|
Director
|
August 27, 2013
|
||
|
Franco Plastina
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||||
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/s/ A
LAN
J. R
UUD
|
Director
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August 27, 2013
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||
|
Alan J. Ruud
|
||||
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/s/ R
OBERT
L. T
ILLMAN
|
Director
|
August 27, 2013
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||
|
Robert L. Tillman
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||||
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/s/ H
ARVEY
A. W
AGNER
|
Director
|
August 27, 2013
|
||
|
Harvey A. Wagner
|
||||
|
/s/ T
HOMAS
H. W
ERNER
|
Director
|
August 27, 2013
|
||
|
Thomas H. Werner
|
||||
90
EXHIBIT INDEX
|
EXHIBIT NO.
|
DESCRIPTION
|
|
|
2.1
|
Stock Purchase Agreement, dated as of August 17, 2011 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated August 17, 2011, as filed with the Securities and Exchange Commission on August 17, 2011)
|
|
|
3.1
|
Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on August 19, 2002)
|
|
|
3.2
|
Bylaws, as amended and restated (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated October 25, 2010, as filed with the Securities and Exchange Commission on October 29, 2010)
|
|
|
4.1
|
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on August 19, 2002)
|
|
|
4.2
|
Amended and Restated Rights Agreement, dated April 24, 2012, between Cree, Inc. and American Stock Transfer & Trust Company, LLC (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated April 24, 2012, as filed with the Securities and Exchange Commission on April 26, 2012)
|
|
|
4.3
|
Amendment No. 1 to Amended and Restated Rights Agreement, dated as of January 29, 2013 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated January 29, 2013, as filed with the Securities and Exchange Commission on January 31, 2013)
|
|
|
10.1*
|
2004 Long-Term Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated October 23, 2012, as filed with the Securities and Exchange Commission on October 25, 2012)
|
|
|
10.2*
|
Addendum to Form of Master Stock Option Award Agreement Terms and Conditions for Grants of Nonqualified Stock Options to Non-Employee Directors (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2009, as filed with the Securities and Exchange Commission on October 21, 2009)
|
|
|
10.3*
|
Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.4*
|
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2006, as filed with the Securities and Exchange Commission on November 2, 2006)
|
|
|
10.5*
|
Form of Master Stock Option Award Agreement for Grants of Nonqualified Stock Options (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
|
|
|
10.6*
|
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.7*
|
Form of Master Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 24, 2006, as filed with the Securities and Exchange Commission on November 2, 2006)
|
|
|
10.8*
|
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 23, 2012, as filed with the Securities and Exchange Commission on October 17, 2012)
|
|
|
10.9*
|
Management Incentive Compensation Plan, as amended and restated (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated August 13, 2012, as filed with the Securities and Exchange Commission on August 17, 2012)
|
|
|
10.10*
|
Schedule of Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2011, as filed with the Securities and Exchange Commission on October 20, 2011)
|
|
91
|
10.11*
|
Non-Employee Director Stock Compensation and Deferral Program (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2009, as filed with the Securities and Exchange Commission on October 21, 2009)
|
|
|
10.12*
|
Amendment One to Non-Employee Director Stock Compensation and Deferral Program (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2010, as filed with the Securities and Exchange Commission on January 19, 2011)
|
|
|
10.13*
|
Notice of Grant to Charles M. Swoboda, dated August 13, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated August 13, 2012, as filed with the Securities and Exchange Commission on August 17, 2012)
|
|
|
10.14*
|
Notice of Grant to Charles M. Swoboda, dated November 28, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 2012, as filed with the Securities and Exchange Commission on January 23, 2013)
|
|
|
10.15*
|
Master Performance Unit Award Agreement, dated August 18, 2008, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)
|
|
|
10.16*
|
Cree, Inc. Severance Plan for Section 16 Officers (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K, dated August 18, 2008, as filed with the Securities and Exchange Commission on August 22, 2008)
|
|
|
10.17*
|
Change in Control Agreement for Chief Executive Officer, effective December 17, 2012, between Cree, Inc. and Charles M. Swoboda (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated December 17, 2012, as filed with the Securities and Exchange Commission on December 20, 2012)
|
|
|
10.18*
|
Form of Cree, Inc. Change in Control Agreement for Section 16 Officers other than the Chief Executive Officer (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated December 17, 2012, as filed with the Securities and Exchange Commission on December 20, 2012)
|
|
|
10.19*
|
Form of Cree, Inc. Indemnification Agreement for Directors and Officers (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated October 25, 2010, as filed with the Securities and Exchange Commission on October 29, 2010)
|
|
|
10.20*
|
Offer Letter Agreement executed August 16, 2011 between Cree, Inc. and Alan J. Ruud (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2011, as filed with the Securities and Exchange Commission on October 20, 2011)
|
|
|
21.1
|
Subsidiaries of the Company
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
|
|
31.1
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101
|
The following materials from Cree, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; (v) Consolidated Statements of Shareholders' Equity; and (vi) Notes to Consolidated Financial Statements
|
|
|
*
|
Management contract or compensatory plan
|
92
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 BusinessNote 2 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 3 - AcquisitionsNote 4 Financial Statement DetailsNote 5 InvestmentsNote 6 Fair Value Of Financial InstrumentsNote 7 Intangible Assets and GoodwillNote 8 Shareholders EquityNote 9 Earnings Per ShareNote 10 Stock-based CompensationNote 11 Income TaxesNote 12 Commitments and ContingenciesNote 13 - Reportable SegmentsNote 14 Concentrations Of RiskNote 15 Retirement Savings PlanNote 16 Related Party TransactionsNote 17 Quarterly Results Of Operations - UnauditedItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules