Cree reports financial results for the second quarter of fiscal year
2015
Durham, n.c.--(business wire)--cree, inc. (nasdaq: cree), a market leader in led lighting, today announced revenue of $413.2 million for its second quarter of fiscal 2015, ended december 28, 2014, which is similar to revenue of $415.1 million reported for the second quarter of fiscal 2014. gaap net income for the second quarter was $12.2 million, or $0.10 per diluted share, a decrease of 66% year-over-year compared to gaap net income of $35.7 million, or $0.29 per diluted share, for the second quarter of fiscal 2014. on a non-gaap basis, net income for the second quarter of fiscal 2015 was $37.9 million, or $0.33 per diluted share, a decrease of 33% year-over-year compared to non-gaap net income for the second quarter of fiscal 2014 of $56.8 million, or $0.46 per diluted share. the second quarter of fiscal 2015 gaap and non-gaap earnings benefited from the retroactive reinstatement of the u.s. r&d tax credit at the end of december. excluding the r&d tax credit benefit, our gaap and non-gaap earnings per diluted share for the second quarter of fiscal 2015 would have been $0.08 and $0.25, respectively. “we made solid progress in q2 with operating margin higher than targeted due to an improvement in gross margins in our lighting business,” stated chuck swoboda, cree chairman and ceo. “the market for led lighting is still in the early stages, our new product pipeline is strong, sales momentum is building and our brand is growing in the market. as evidenced by our significant share repurchases in q2, we believe we are on the right track to continue to grow the company and increase profits over the next several years.” q2 2015 financial metrics (in thousands, except per share amounts and percentages) gross margin increased 130 basis points from q1 of fiscal 2015 to 33.1% on a gaap basis, and increased 150 basis points to 33.9% on a non-gaap basis. cash and investments decreased by $274.9 million from q1 of fiscal 2015 to $829.9 million. accounts receivable, net decreased by $18.0 million from q1 of fiscal 2015 to $219.0 million, with days sales outstanding of 48. inventory increased by $21.8 million from q1 of fiscal 2015 to $332.5 million and represents 108 days of inventory. recent business highlights: redefined high-power leds for lighting with the new sc5 technologytm platform, which doubles light output to radically lower system cost. we released the cree® xlamp® xhp50 and xhp70 leds, which are the first extreme high power leds based on this platform; introduced the new cree® led bulb, delivering superior light performance while looking just like an incandescent light bulb at an even more affordable price; acted to protect cree’s intellectual property by filing lawsuits at the u.s. international trade commission and the u.s. district court for the western district of wisconsin against feit electric company, inc. and its asian supplier, unity opto technology co., ltd.; the board of directors authorized an increase in the amount of the company’s stock repurchase program. pursuant to the program, the company is now authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $550 million for all purchases in fiscal 2015.the company spent $266 million to repurchase 8.1 million shares of its common stock during the second quarter of fiscal 2015; the company closed on its previously announced investment in lextar and acquired approximately a 13% common stock ownership interest for $80.5 million during december 2014. business outlook: for its third quarter of fiscal 2015 ending march 29, 2015, cree targets revenue in a range of $395 million to $415 million with gaap gross margin targeted to be 32.6%+/- and non-gaap gross margin targeted to be 33.5%+/-. our gaap gross margin targets include stock-based compensation expense of approximately $3.4 million, while our non-gaap targets do not. operating expenses are targeted to be similar to fiscal q2. the tax rate is targeted at 17.0%+/- for the third quarter of fiscal 2015. gaap net income is targeted at $3 million to $8 million, or $0.03 to $0.07 per diluted share. non-gaap net income is targeted in a range of $23 million to $28 million, or $0.21 to $0.25 per diluted share. the gaap and non-gaap net income per diluted share targets are based on an estimated 112.4 million diluted weighted average shares. targeted non-gaap earnings exclude expenses related to the amortization of acquired intangibles, changes in the fair value of our lextar investment, stock-based compensation expense and asset retirement charges of $0.18 per diluted share. quarterly conference call: cree will host a conference call at 5:00 p.m. est today to review the highlights of the fiscal 2015 second quarter results and the fiscal 2015 third quarter business outlook, including significant factors and assumptions underlying the targets noted above. the conference call will be available to the public through a live audio web broadcast via the internet. for webcast details, visit cree's website at investor.cree.com/events.cfm. supplemental financial information, including the non-gaap reconciliation attached to this press release, is available on cree's website at investor.cree.com/results.cfm. about cree, inc. cree is leading the led lighting revolution and making energy-wasting traditional lighting technologies obsolete through the use of energy-efficient, mercury-free led lighting. cree is a market-leading innovator of lighting-class leds, lighting products and semiconductor products for power and radio frequency (rf) applications. cree's product families include led lighting systems and bulbs, blue and green led chips, high-brightness leds, lighting-class power leds, power-switching devices and rf devices. cree's products are driving improvements in applications such as general illumination, electronic signs and signals, power supplies and inverters. for additional product and company information, please refer to www.cree.com. non-gaap financial measures: this press release highlights the company's financial results on both a gaap and a non-gaap basis. the gaap results include certain costs, charges and expenses which are excluded from non-gaap results. by publishing the non-gaap measures, management intends to provide investors with additional information to further analyze the company's performance, core results and underlying trends. cree's management evaluates results and makes operating decisions using both gaap and non-gaap measures included in this press release. non-gaap results are not prepared in accordance with gaap and non-gaap information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with gaap. investors and potential investors are encouraged to review the reconciliation of non-gaap financial measures to their most directly comparable gaap measures attached to this press release. forward looking statements: the schedules attached to this release are an integral part of the release. this press release contains forward-looking statements involving risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those indicated in the forward-looking statements. actual results, including with respect to our targets and prospects, could differ materially due to a number of factors, including the risk that we may not obtain sufficient orders to achieve our targeted revenues; price competition in key markets; the risk that we or our channel partners are not able to develop and expand customer bases and accurately anticipate demand from end customers, which can result in increased inventory and reduced orders as we experience wide fluctuations in supply and demand; the risk that our results will suffer if we are unable to balance fluctuations in customer demand and capacity; product mix; risks associated with the ramp-up of production of our new products, and our entry into new business channels different from those in which we have historically operated; the risk that we may experience production difficulties that preclude us from shipping sufficient quantities to meet customer orders or that result in higher production costs and lower margins; our ability to lower costs; the risk that customers do not maintain their favorable perception of our brand and products, resulting in lower demand for our products; the risk that retail customers may alter promotional pricing, increase promotion of a competitor's products over our products or reduce their inventory levels, all of which could negatively affect product demand; the risk that we have an increasingly complex supply chain and its ability to scale to enable maintaining a sufficient supply of raw materials; ongoing uncertainty in global economic conditions, infrastructure development or customer demand that could negatively affect product demand, collectability of receivables and other related matters as consumers and businesses may defer purchases or payments, or default on payments; the risk we may be required to record a significant charge to earnings if our goodwill or amortizable assets become impaired; our ability to complete development and commercialization of products under development, such as our pipeline of improved led chips, led components and led lighting products; risks resulting from the concentration of our business among few customers, including the risk that customers may reduce or cancel orders or fail to honor purchase commitments; risks related to our multi-year warranty periods for led lighting products; risks associated with acquisitions, divestitures or investments; the rapid development of new technology and competing products that may impair demand or render our products obsolete; the potential lack of customer acceptance for our products; risks associated with ongoing litigation; and other factors discussed in our filings with the securities and exchange commission (sec), including our report on form 10-k for the fiscal year ended june 29, 2014, and subsequent reports filed with the sec. these forward-looking statements represent cree's judgment as of the date of this release. except as required under the u.s. federal securities laws and the rules and regulations of the sec, cree disclaims any intent or obligation to update any forward-looking statements after the date of this release, whether as a result of new information, future events, developments, changes in assumptions or otherwise. cree®, the cree logo, and xlamp® are registered trademarks of cree, inc. and sc5 technologytm is a trademark of cree, inc. cree, inc. condensed consolidated statements of income (in thousands, except per share amounts and percentages) (unaudited) cree, inc. condensed consolidated balance sheets (in thousands) cree, inc.financial results by operating segment(in thousands, except percentages)(unaudited) the following table reflects the results of the company's reportable segments as reviewed by the company's chief executive officer, its chief operating decision maker or codm, for the three months ended december 28, 2014 and the three months ended december 29, 2013. the codm does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment. as such, total segment revenue is equal to the company's consolidated revenue. percent of revenue reportable segments description the company's led products segment includes led components, led chips, and silicon carbide materials. the company's lighting products segment primarily consists of led lighting systems and bulbs. the company's power and rf products segment includes power devices and rf devices. financial results by reportable segment the company's codm reviews gross profit as the lowest and only level of segment profit. as such, all items below gross profit in the consolidated statements of income must be included to reconcile the consolidated gross profit presented in the preceding table to the company's consolidated income before taxes. the company allocates direct costs and indirect costs to each segment's cost of revenue. the allocation methodology is based on a reasonable measure of utilization considering the specific facts and circumstances of the cost being allocated. certain costs are not allocated when evaluating segment performance. these unallocated costs consist primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the company's 401(k) plan. cree, inc.non-gaap measures of financial performance to supplement the company's consolidated financial statements presented in accordance with generally accepted accounting principles, or gaap, cree uses non-gaap measures of certain components of financial performance. these non-gaap measures include non-gaap net income, non-gaap earnings per diluted share, non-gaap gross margin, non-gaap operating income and free cash flow. reconciliation to the nearest gaap measure of all historical non-gaap measures included in this press release can be found in the tables included with this press release. in this press release, cree also presents its target for non-gaap expenses, which is expenses less stock-based compensation expense, charges for amortization or impairment of acquisition-related intangibles and asset retirement charges. non-gaap measures presented in this press release are not in accordance with or an alternative to measures prepared in accordance with gaap and may be different from non-gaap measures used by other companies. in addition, these non-gaap measures are not based on any comprehensive set of accounting rules or principles. non-gaap measures have limitations in that they do not reflect all of the amounts associated with cree's results of operations as determined in accordance with gaap. these non-gaap measures should only be used to evaluate cree's results of operations in conjunction with the corresponding gaap measures. cree believes that these non-gaap measures, when shown in conjunction with the corresponding gaap measures, enhance investors' and management's overall understanding of the company's current financial performance and the company's prospects for the future, including cash flows available to pursue opportunities to enhance shareholder value. in addition, because cree has historically reported certain non-gaap results to investors, the company believes the inclusion of non-gaap measures provides consistency in the company's financial reporting. for its internal budgeting process, and as discussed further below, cree's management uses financial statements that do not include stock-based compensation expense, amortization or impairment of acquisition-related intangibles, asset retirement charges, or changes in the fair value of equity method investments, and the income taxes associated with the foregoing. cree's management also uses non-gaap measures, in addition to the corresponding gaap measures, in reviewing the company's financial results. as described above, cree excludes the following items from one or more of its non-gaap measures when applicable: stock-based compensation expense. this expense consists of expenses for stock options, restricted stock and employee stock purchases through its espp. cree excludes stock-based compensation expenses from its non-gaap measures because they are non-cash expenses that cree does not believe are reflective of ongoing operating results. amortization or impairment of acquisition-related intangibles. cree incurs amortization or impairment of acquisition-related intangibles in connection with acquisitions. cree excludes these items because they arise from cree's prior acquisitions and have no direct correlation to the ongoing operating results of cree's business. asset retirement charges. in conjunction with cree's plans to expand its manufacturing facilities, cree has recognized charges for the impact of the decision to abandon or retire certain property and equipment prior to the end of their estimated useful lives. because these charges relate to assets which have been or will be retired prior to the end of their estimated useful lives, cree does not consider these charges to be reflective of ongoing operating results. changes in the fair value of equity method investments. the company completed its common stock ownership investment in lextar electronics corporation in the second quarter of fiscal 2015. the investment is accounted for under the equity method utilizing the fair value option. as such, changes in fair value are recognized in income, including fluctuations due to the exchange rate between the new taiwan dollar and the united states dollar. cree excludes the impact of these gains or losses from its non-gaap measures because they are non-cash impacts that cree does not believe are reflective of ongoing operating results. income tax effects of the foregoing non-gaap items. this amount is used to present each of the amounts described above on an after-tax basis consistent with the presentation of non-gaap net income. cree expects to incur stock-based compensation expense, amortization or impairment of acquisition-related intangibles, asset retirement charges and changes in the fair value of equity method investments in future periods, including income taxes associated with all of the foregoing. in addition to the non-gaap measures discussed above, cree also uses free cash flow as a measure of operating performance. free cash flow represents operating cash flows less net purchases of property and equipment and patent and licensing rights. cree considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property and equipment, which can then be used to, among other things, invest in cree's business, make strategic acquisitions, strengthen the balance sheet and repurchase stock. a limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period. cree, inc. reconciliation of gaap to non-gaap measures (in thousands, except per share amounts and percentages) (unaudited) non-gaap gross margin non-gaap operating income amortization or impairment of acquisition-related intangibles non-gaap non-operating income, net changes in the fair value of equity method investments non-gaap net income total adjustments to gaap net income before provision for income taxes income tax effect* *estimated income tax effect is based upon the company's overall consolidated effective tax rate for the given period. earnings diluted per share, excluding impact of r&d tax benefit non-gaap earnings per diluted share, excluding impact of r&d tax credit benefit free cash flow
