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Cree Reports Financial Results for the Fourth Quarter and Fiscal Year 2014

Companies mentioned in this article: Cree, Inc.

DURHAM, N.C. -- (BUSINESS WIRE) -- Cree, Inc. (Nasdaq: CREE), a market leader in LED lighting, today announced revenue of $436 million for its fourth quarter of fiscal 2014, ended June 29, 2014. This represents a 16% increase compared to revenue of $375 million reported for the fourth quarter of fiscal 2013, and an 8% increase compared to the third quarter of fiscal 2014. GAAP net income for the fourth quarter was $30 million, or $0.24 per diluted share, an increase of 6% year-over-year compared to GAAP net income of $28 million, or $0.23 per diluted share, for the fourth quarter of fiscal 2013. On a non-GAAP basis, net income for the fourth quarter of fiscal 2014 was $51 million, or $0.42 per diluted share, an increase of 12% year-over-year compared to non-GAAP net income for the fourth quarter of fiscal 2013 of $46 million, or $0.38 per diluted share.

For fiscal year 2014, Cree reported revenue of $1.65 billion, which represents a 19% increase compared to revenue of $1.39 billion for fiscal 2013. GAAP net income was $124 million, or $1.01 per diluted share, an increase of 43% compared to $87 million, or $0.74 per diluted share, for fiscal 2013. On a non-GAAP basis, net income for fiscal year 2014 was $203 million, or $1.65 per diluted share, an increase of 31% compared to $155 million, or $1.32 per diluted share, for fiscal 2013. Cree generated $319 million of operating cash flow and $121 million of free cash flow during fiscal 2014.

"Fiscal 2014 was another great year, as we achieved record revenue and grew our non-GAAP net income by over 30%," stated Chuck Swoboda, Cree Chairman and CEO. "The strength of our operating model gives us the flexibility to make investments to support our goal to grow the business and increase operating margin. Our new product pipeline, brand momentum and strong balance sheet put us in a great position to enable our long-term customer goal of 100% upgrade to LED lighting."

Q4 2014 Financial Metrics

(in thousands, except per share amounts and percentages)

     
 
Fourth Quarter
2014     2013   Change
(unaudited) (unaudited)
Revenue, net $ 436,290 $ 375,009 $ 61,281 16 %
GAAP
Gross margin 37.2 % 37.5 %
Operating margin 7.3 % 8.2 %
Net income $ 29,849 $ 28,242 $ 1,607 6 %
Earnings per diluted share $ 0.24 $ 0.23 $ 0.01 4 %
Non-GAAP
Gross margin 37.9 % 38.2 %
Operating margin 13.1 % 13.7 %
Net income $ 51,286 $ 45,645 $ 5,641 12 %
Earnings per diluted share $ 0.42 $ 0.38 $ 0.04 11 %
  • Gross margin increased 20 basis points from Q3 of fiscal 2014 to 37.2% on a GAAP basis, and increased 10 basis points to 37.9% on a non-GAAP basis.
  • Cash and investments decreased by $61 million from Q3 of fiscal 2014 to $1.2 billion.
  • Accounts receivable, net increased by $3 million from Q3 of fiscal 2014 to $225 million, with days sales outstanding of 46.
  • Inventory increased by $34 million from Q3 of fiscal 2014 to $285 million and represents 94 days of inventory.

Recent Business Highlights:

  • Introduced the Cree® LED T8 Series, the first linear fluorescent replacement to deliver on the promise of LED technology with the industry’s best light quality, 30% energy savings and near-universal driver compatibility;
  • Launched the Cree OSQ Area LED luminaire, which delivers industry-leading performance, a low-profile design and a quick payback of two years*;
  • Introduced the Cree XLamp® XP-L LED, the first commercially available single-die LED to achieve breakthrough efficacy of up to 200 lumens per watt (LPW) at 350mA;
  • Announced that San Luis Obispo, Calif. replaced more than 2,000 outdated high-pressure sodium (HPS) street lights with Cree XSP Series LED street lights, delivering superior light quality while saving on maintenance costs and reducing the city’s annual energy consumption by more than 65%;
  • Announced that Walgreen Co. selected energy-efficient LED lighting by Cree for its Goodyear, Ariz. location. The store now features Cree LED troffers, linear luminaires and downlights, delivering superior illumination while saving the retailer thousands in annual energy and maintenance costs;
  • Teamed with Musco Lighting to transform the San Francisco - Oakland Bay Bridge. The 1,600 Musco fixtures leverage more than 51,500 Cree® XLamp XM-L LEDs to light the entire East Span at an estimated energy savings of 50% and a lifetime of 15 years, more than seven times longer than previously deployed lighting technologies.

*Payback compared to 400W Metal Halide area luminaire and based on usage of 12 hours per-day and the national average of $0.11 per kWh electric costs.

Business Outlook:

For its first quarter of fiscal 2015 ending September 28, 2014, Cree targets revenue in a range of $440 million to $465 million, with GAAP gross margin targeted to be 36.9%+/- and non-GAAP gross margin targeted to be 37.5%+/-. Our GAAP gross margin targets include stock-based compensation expense of approximately $3 million, while our non-GAAP targets do not. Operating expenses are targeted to be similar sequentially on a non-GAAP basis and $2 million lower on a GAAP basis. The tax rate is targeted at 21.5% for the first quarter of fiscal 2015. GAAP net income is targeted at $30 million to $37 million, or $0.25 to $0.30 per diluted share. Non-GAAP net income is targeted in a range of $48 million to $55 million, or $0.40 to $0.45 per diluted share. The GAAP and non-GAAP net income per diluted share targets are based on an estimated 122 million diluted weighted average shares. Targeted non-GAAP earnings exclude expenses related to the amortization of acquired intangibles and stock-based compensation expense of $0.15 per diluted share.

Quarterly Conference Call:

Cree will host a conference call at 5:00 p.m. Eastern time today to review the highlights of the fourth quarter and fiscal year 2014 results and the fiscal first quarter 2015 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 30, 2013, 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, and OSQ is a trademark of Cree, Inc.

 

CREE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts and percentages)

(unaudited)

 
Three Months Ended Year Ended
June 29,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
Revenue, net $ 436,290 $ 375,009 $ 1,647,641 $ 1,385,982
Cost of revenue, net 274,024   234,284   1,028,846   862,722  
Gross profit 162,266 140,725 618,795 523,260
Gross margin percentage 37.2 % 37.5 % 37.6 % 37.8 %
 
Operating expenses:
Research and development 48,577 39,365 181,382 155,889
Sales, general and administrative 70,871 61,696 268,460 236,581
Amortization or impairment of acquisition-related intangibles 10,188 7,715 31,988 30,823
Loss on disposal or impairment of long-lived assets 909   1,088   2,690   3,473  
Total operating expenses 130,545 109,864 484,520 426,766
 
Operating income 31,721 30,861 134,275 96,494
Operating income percentage 7.3 % 8.2 % 8.1 % 7.0 %
 
Non-operating income, net 3,922   2,685   13,295   11,063  
Income from operations before income taxes 35,643 33,546 147,570 107,557
Income tax expense 5,794   5,304   23,379   20,632  
Net income $ 29,849   $ 28,242   $ 124,191   $ 86,925  
 
Diluted earnings per share $ 0.24 $ 0.23 $ 1.01 $ 0.74
 
Shares used in diluted per share calculation 122,043 121,081 122,914 117,979

CREE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

   
June 29,
2014
June 30,
2013
(unaudited)
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments $ 1,162,466 $ 1,023,915
Accounts receivable, net 225,160 192,507
Inventories 284,780 197,001
Deferred income taxes 29,414 26,125
Prepaid expenses and other current assets 72,071   76,218
Total current assets 1,773,891 1,515,766
Property and equipment, net 605,713 542,833
Goodwill 616,345 616,345
Intangible assets, net 336,423 357,525
Other assets 11,997   19,941
Total assets $ 3,344,369   $ 3,052,410
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade $ 202,294 $ 121,441
Accrued salaries and wages 50,527 41,407
Income taxes payable 14,848 1,315
Other current liabilities 38,986   43,248
Total current liabilities 306,655 207,411
 
Long-term liabilities:
Deferred income taxes 12,173 25,504
Other long-term liabilities 35,395   12,843
Total long-term liabilities 47,568 38,347
 
Shareholders’ equity:
Common stock 149 148
Additional paid-in-capital 2,190,011 2,025,764
Accumulated other comprehensive income, net of taxes 11,405 8,244
Retained earnings 788,581   772,496
Total shareholders’ equity 2,990,146   2,806,652
Total liabilities and shareholders’ equity $ 3,344,369   $ 3,052,410

CREE, INC.
FINANCIAL RESULTS BY OPERATING SEGMENT
(in thousands, except percentages)
(unaudited)

The following table reflects the results of the Company's reportable segments as reviewed by the Company's Chief Executive Officer, its Chief Operating Decision Maker or CODM, for the three months and year ended June 29, 2014 and the three months and year ended June 30, 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.

  Three Months Ended    
June 29, 2014   June 30, 2013 Change
LED Products revenue $ 199,520 $ 217,413 $ (17,893 ) (8 )%
LED Products percent of revenue 46 % 58 %
Lighting Products revenue 208,160 133,643 74,517 56 %
Lighting Products percent of revenue 48 % 36 %
Power and RF Products revenue 28,610 23,953 4,657 19 %
Power and RF Products percent of revenue 6 % 6 %    
Total revenue $ 436,290   $ 375,009   $ 61,281   16 %
  Year Ended      
June 29, 2014   June 30, 2013 Change
LED Products revenue $ 833,684 $ 801,483 $ 32,201 4 %
LED Products percent of revenue 51 % 58 %
Lighting Products revenue 706,425 495,089 211,336 43 %
Lighting Products percent of revenue 43 % 36 %
Power and RF Products revenue 107,532 89,410 18,122 20 %
Power and RF Products percent of revenue 6 % 6 %    
Total revenue $ 1,647,641   $ 1,385,982   $ 261,659   19 %
          Three Months Ended    
June 29, 2014   June 30, 2013 Change
LED Products gross profit $ 90,072 $ 99,268 $ (9,196 ) (9 )%
LED Products gross margin 45.1 % 45.7 %
Lighting Products gross profit 60,573 33,498 27,075 81 %
Lighting Products gross margin 29.1 % 25.1 %
Power and RF Products gross profit 16,271 12,874 3,397 26 %

Power and RF Products gross margin

56.9 % 53.7 %
Unallocated costs (4,650 ) (4,915 ) 265   (5 )%
Consolidated gross profit $ 162,266   $ 140,725   $ 21,541   15 %
Consolidated gross margin 37.2 % 37.5 %
          Year Ended    
June 29, 2014   June 30, 2013 Change
LED Products gross profit $ 381,003 $ 344,649 $ 36,354 11 %
LED Products gross margin 45.7 % 43.0 %
Lighting Products gross profit 197,304 148,947 48,357 32 %
Lighting Products gross margin 27.9 % 30.1 %
Power and RF Products gross profit 60,723 48,127 12,596 26 %
Power and RF Products gross margin 56.5 % 53.8 %
Unallocated costs (20,235 ) (18,463 ) (1,772 ) 10 %
Consolidated gross profit $ 618,795   $ 523,260   $ 95,535   18 %
Consolidated gross margin 37.6 % 37.8 %

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 expenses related to manufacturing employees, such as 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.

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 acquired intangibles, acquisition finished goods inventory step-up, acquisition inventory write-off, and acquisition costs.

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 or amortization or impairment of acquired intangible assets, and the income taxes associated with the foregoing, and also do not include acquisition finished goods inventory step-up, acquisition inventory write-off, and acquisition costs. 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 acquired intangible assets. Cree incurs amortization or impairments of acquired intangible assets 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.

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 and amortization of acquired intangible assets 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

                     
Three Months Ended Year Ended
June 29,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
GAAP gross profit $ 162,266 $ 140,725 $ 618,795 $ 523,260
GAAP gross margin percentage 37.2 % 37.5 % 37.6 % 37.8 %
Adjustments:
Stock-based compensation expense 2,996   2,514   11,353   9,389  
Non-GAAP gross profit $ 165,262   $ 143,239   $ 630,148   $ 532,649  
Non-GAAP gross margin percentage 37.9 % 38.2 % 38.2 % 38.4 %

Non-GAAP Operating Income

   
Three Months Ended Year Ended
June 29,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
GAAP operating income $ 31,721 $ 30,861 $ 134,275 $ 96,494
GAAP operating income percentage 7.3 % 8.2 % 8.1 % 7.0 %
Adjustments:
Stock-based compensation expense:
Cost of revenue, net 2,996 2,514 11,353 9,389
Research and development 3,939 2,985 15,392 13,429
Sales, general and administrative 8,489   7,456   34,941   31,081  
Total stock-based compensation expense 15,424 12,955 61,686 53,899
Amortization or impairment of acquisition-related intangibles 10,188   7,715   31,988   30,823  
Total adjustments to GAAP operating income 25,612   20,670   93,674   84,722  
Non-GAAP operating income $ 57,333   $ 51,531   $ 227,949   $ 181,216  
Non-GAAP operating income percentage 13.1 % 13.7 % 13.8 % 13.1 %

Non-GAAP Net Income

   
Three Months Ended Year Ended
June 29,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
GAAP net income $ 29,849 $ 28,242 $ 124,191 $ 86,925
Adjustments:
Stock-based compensation expense 15,424 12,955 61,686 53,899
Amortization or impairment of acquisition-related intangibles 10,188 7,715 31,988 30,823
Total adjustments to GAAP net income before provision for income taxes 25,612 20,670 93,674 84,722
Income tax effect * (4,175 ) (3,267 ) (14,800 ) (16,266 )
Non-GAAP net income $ 51,286   $ 45,645   $ 203,065   $ 155,381  
 
Earnings per share
Non-GAAP diluted net income per share $ 0.42 $ 0.38 $ 1.65 $ 1.32
 
Shares used in diluted net income per share calculation
Non-GAAP shares used 122,043 121,081 122,914 117,979

*Estimated income tax effect is based upon the Company's overall consolidated effective tax rate for the given period.

Free Cash Flow

       
Three Months Ended Year Ended
June 29,
2014
  June 30,
2013
June 29,
2014
  June 30,
2013
Cash flow from operations $ 91,138 $ 61,164 $ 319,308 $ 285,234
Less: PP&E spending (58,943 ) (22,062 ) (178,557 ) (77,468 )
Less: Patents spending (5,428 ) (5,064 ) (20,183 ) (20,858 )
Total free cash flow $ 26,767   $ 34,038   $ 120,568   $ 186,908  


Copyright © Business Wire 2014
Contact:

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