CREE, INC. - FORM 10-Q - October 17, 2018

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EX-32.1 - EXHIBIT 32.1 - CREE, INC.ex3211qfy2019.htm
EX-32.2 - EXHIBIT 32.2 - CREE, INC.ex3221qfy2019.htm
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EX-10.1 - EXHIBIT 10.1 - CREE, INC.ex1011qfy2019.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2018
or
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21154
logo042115a19.gif
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina
 
56-1572719
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4600 Silicon Drive
Durham, North Carolina
 
27703
(Address of principal executive offices)
 
(Zip Code)
(919) 407-5300
(Registrant’s telephone number, including area code)
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 [ X ] No [    ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [ X ] No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]
 
Accelerated filer [    ]
Non-accelerated filer [    ]
 
Smaller reporting company [    ]
 
 
 
 
Emerging growth company [    ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No[ X]
The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of October 12, 2018, was 102,559,333.


CREE, INC.
FORM 10-Q
For the Quarterly Period Ended September 23, 2018
INDEX
 
Description
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

2

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
CREE, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
September 23,
2018
 
June 24,
2018
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$336,317

 

$118,924

Short-term investments
329,223

 
268,161

Total cash, cash equivalents and short-term investments
665,540

 
387,085

Accounts receivable, net
207,565

 
153,875

Income tax receivable
2,837

 
2,434

Inventories
306,389

 
296,015

Prepaid expenses
26,674

 
28,310

Other current assets
20,793

 
20,191

Current assets held for sale
—

 
2,180

Total current assets
1,229,798

 
890,090

Property and equipment, net
668,299

 
661,319

Goodwill
620,330

 
620,330

Intangible assets, net
381,396

 
390,054

Other long-term investments
50,240

 
57,501

Deferred income taxes
5,713

 
6,451

Other assets
11,838

 
11,800

Total assets

$2,967,614

 

$2,637,545

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable, trade

$147,214

 

$151,307

Accrued salaries and wages
56,552

 
53,458

Income taxes payable
137

 
—

Accrued contract liabilities (Note 2)
51,250

 
—

Other current liabilities
38,443

 
43,528

Total current liabilities
293,596

 
248,293

Long-term liabilities:

 

Long-term debt
—

 
292,000

Convertible notes, net
452,590

 
—

Deferred income taxes
2,331

 
3,056

Other long-term liabilities
20,399

 
22,115

Total long-term liabilities
475,320

 
317,171

Commitments and contingencies (Note 12)

 

Shareholders’ equity:

 

Preferred stock, par value $0.01; 3,000 shares authorized at September 23, 2018 and June 24, 2018; none issued and outstanding
—

 
—

Common stock, par value $0.00125; 200,000 shares authorized at September 23, 2018 and June 24, 2018; 102,520 issued and outstanding at September 23, 2018 and 101,488 shares issued and outstanding at June 24, 2018
128

 
127

Additional paid-in-capital
2,676,506

 
2,549,123

Accumulated other comprehensive income, net of taxes
664

 
596

Accumulated deficit
(483,478
)
 
(482,710
)
Total shareholders’ equity
2,193,820

 
2,067,136

Non-controlling interest
4,878

 
4,945

Total liabilities and equity

$2,967,614

 

$2,637,545

The accompanying notes are an integral part of the consolidated financial statements.

3

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF LOSS
 
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(In thousands, except per share amounts)
Revenue, net

$408,267

 

$360,398

Cost of revenue, net
280,099

 
260,066

Gross profit
128,168

 
100,332

Operating expenses:
 
 
 
Research and development
45,965

 
41,859

Sales, general and administrative
72,690

 
62,964

Amortization or impairment of acquisition-related intangibles
8,495

 
6,792

Loss on disposal or impairment of long-lived assets
493

 
2,825

Total operating expenses
127,643

 
114,440

Operating income (loss)
525

 
(14,108
)
Non-operating expense, net
(9,505
)
 
(1,068
)
Loss before income taxes
(8,980
)
 
(15,176
)
Income tax expense
2,154

 
4,697

Net loss

($11,134
)
 

($19,873
)
Net loss attributable to non-controlling interest
(67
)
 
(16
)
Net loss attributable to controlling interest

($11,067
)
 

($19,857
)
Loss per share:
 
 
 
Basic

($0.11
)
 

($0.20
)
Diluted

($0.11
)
 

($0.20
)
Weighted average shares used in per share calculation:
 
 
 
Basic
101,884

 
97,811

Diluted
101,884

 
97,811

The accompanying notes are an integral part of the consolidated financial statements.

4

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(In thousands)
Net loss

($11,134
)
 

($19,873
)
Other comprehensive income:
 
 
 
Currency translation gain
343

 
1,642

Net unrealized loss on available-for-sale securities, net of tax benefit of $0 and $0, respectively
(275
)
 
(39
)
Other comprehensive income:
68

 
1,603

Comprehensive loss
(11,066
)
 
(18,270
)
Net loss attributable to non-controlling interest
(67
)
 
(16
)
Comprehensive loss attributable to controlling interest

($10,999
)
 

($18,254
)
The accompanying notes are an integral part of the consolidated financial statements.


5

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 24, 2018
101,488

 

$127

 

$2,549,123

 

($482,710
)
 

$596

 

$2,067,136

 

$4,945

 

$2,072,081

Net loss
—

 
—

 
—

 
(11,067
)
 
—

 
(11,067
)
 
(67
)
 
(11,134
)
Currency translation gain, net of tax benefit of $0
—

 
—

 
—

 
—

 
343

 
343

 
—

 
343

Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(275
)
 
(275
)
 
—

 
(275
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(10,999
)
 
(67
)
 
(11,066
)
Income tax expense from stock option exercises
—

 
—

 
(10,828
)
 
—

 
—

 
(10,828
)
 
—

 
(10,828
)
Stock-based compensation
—

 
—

 
12,117

 
—

 
—

 
12,117

 
—

 
12,117

Exercise of stock options and issuance of shares
1,032

 
1

 
15,491

 
—

 
—

 
15,492

 
—

 
15,492

Adoption of ASC 606
—

 
—

 
—

 
10,299

 
—

 
10,299

 
—

 
10,299

Convertible note issuance
—

 
—

 
110,603

 
—

 
—

 
110,603

 
—

 
110,603

Contributions from non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at September 23, 2018
102,520

 

$128

 

$2,676,506

 

($483,478
)
 

$664

 

$2,193,820

 

$4,878

 

$2,198,698


 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Non-controlling interest
 
Total Equity
 
Number
of Shares
 
Par Value
 
 
(In thousands)
 
 
 
 
Balance at June 25, 2017
97,674

 

$121

 

$2,419,517

 

($202,742
)
 

$5,909

 

$2,222,805

 
—

 

$2,222,805

Net loss
—

 
—

 
—

 
(19,857
)
 
—

 
(19,857
)
 
(16
)
 
(19,873
)
Currency translation gain, net of tax benefit of $0
—

 
—

 
—

 
—

 
1,642

 
1,642

 
—

 
1,642

Unrealized loss on available-for-sale securities, net of tax expense of $0
—

 
—

 
—

 
—

 
(39
)
 
(39
)
 
—

 
(39
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(18,254
)
 
(16
)
 
(18,270
)
Income tax expense from stock option exercises
—

 
—

 
(3,798
)
 
—

 
—

 
(3,798
)
 
—

 
(3,798
)
Stock-based compensation
—

 
—

 
10,226

 
—

 
—

 
10,226

 
—

 
10,226

Exercise of stock options and issuance of shares
371

 
—

 
118

 
—

 
—

 
118

 
—

 
118

Contributions from non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
4,900

 
4,900

Balance at September 24, 2017
98,045

 

$121

 

$2,426,063

 

($222,599
)
 

$7,512

 

$2,211,097

 

$4,884

 

$2,215,981




6

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss

($11,134
)
 

($19,873
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,812

 
37,400

Amortization of debt issuance costs and discount
1,786

 
—

Stock-based compensation
12,053

 
10,135

Loss on disposal or impairment of long-lived assets
494

 
2,824

Amortization of premium/discount on investments
787

 
1,310

Loss on equity investment
6,664

 
3,267

Foreign exchange loss (gain) on equity investment
597

 
(199
)
Deferred income taxes
(2
)
 
3,133

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(53,559
)
 
(5,996
)
Inventories
(10,144
)
 
6,960

Prepaid expenses and other assets
96

 
9,323

Accounts payable, trade
(3,703
)
 
6,442

Accrued salaries and wages and other liabilities
50,245

 
(603
)
Net cash provided by operating activities
33,992

 
54,123

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(36,589
)
 
(36,450
)
Purchases of patent and licensing rights
(3,153
)
 
(2,476
)
Proceeds from sale of property and equipment
230

 
327

Purchases of short-term investments
(145,843
)
 
(117,607
)
Proceeds from maturities of short-term investments
58,300

 
119,928

Proceeds from sale of short-term investments
24,790

 
1,974

Net cash used in investing activities
(102,265
)
 
(34,304
)
Cash flows from financing activities:
 
 
 
Proceeds from issuing shares to non-controlling interest
—

 
4,900

Payment of acquisition-related contingent consideration
—

 
(1,850
)
Proceeds from long-term debt borrowings
95,000

 
95,000

Payments on long-term debt borrowings
(387,000
)
 
(99,000
)
Proceeds from convertible notes
575,000

 
—

Payments of debt issuance costs
(12,938
)
 
—

Net proceeds from issuance of common stock
15,491

 
119

Net cash provided by (used in) financing activities
285,553

 
(831
)
Effects of foreign exchange changes on cash and cash equivalents
113

 
473

Net increase in cash and cash equivalents
217,393

 
19,461

Cash and cash equivalents:
 
 
 
Beginning of period
118,924

 
132,597

End of period

$336,317

 

$152,058

Supplemental disclosure of cash flow information:
 
 
 
Significant non-cash transactions:
 
 
 
Accrued property and equipment

$15,445

 

$18,909

The accompanying notes are an integral part of the consolidated financial statements.

7

CREE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation and New Accounting Standards
Overview
Cree, Inc. (the Company) is an innovator of wide bandgap semiconductor products for power and radio-frequency (RF) applications, lighting-class light emitting diode (LED) products, and lighting products. The Company's products are targeted for applications such as transportation, power supplies, inverters, wireless systems, indoor and outdoor lighting, electronic signs and signals, and video displays.
The Company's Wolfspeed segment's products consists of silicon carbide (SiC) and gallium nitride (GaN) materials, power devices and RF devices based on silicon (Si) and wide bandgap semiconductor materials. The Company's materials products and power devices are used in solar, electric vehicles, motor drives, power supplies and transportation applications. The Company's materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
The Company's LED Products segment's products consist of LED chips and LED components. The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.
The Company's Lighting Products segment's products primarily consist of LED lighting systems and lamps. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, Wisconsin, Arkansas, California and China. The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, Arizona, Arkansas, California, Wisconsin, India, Italy and China (including Hong Kong).
Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.
The Company's three reportable segments are:
•
Wolfspeed
•
LED Products
•
Lighting Products
For financial results by reportable segment, please refer to Note 13, "Reportable Segments."
Basis of Presentation
The consolidated financial statements presented herein have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive loss and cash flows at September 23, 2018, and for all periods presented, have been made. All intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 24, 2018 has been derived from the audited financial statements as of that date.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2018 (fiscal 2018). The results of operations for the three months ended September 23, 2018 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 30, 2019 (fiscal 2019).
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.

8

Recently Issued Accounting Pronouncements Adopted
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09: Revenue from Contracts with Customers (Topic 606). The FASB has subsequently issued multiple ASUs which amend and clarify the guidance in Topic 606. The ASU establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASU provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers. The Company adopted this standard on June 25, 2018. The cumulative effect of this adjustment recorded to beginning retained earnings as of June 25, 2018 was $10.3 million, and the Company did not recognize a discrete tax impact related to the opening deferred tax balance as of June 25, 2018 due to the full U.S. valuation allowance. The Company recognized a loss of revenue of approximately $1.6 million for the three months ended September 23, 2018 and expects the ongoing effect to be immaterial to the consolidated financial statements. See Note 2, "Revenue Recognition," for discussion of the impacted financial statement line items.
Goodwill Impairment Testing
In January 2017, the FASB issued ASU No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to continue to perform Step 1 of the goodwill impairment test. The Company early adopted this standard in the third quarter of fiscal year ending June 24, 2018.
Fair Value Measurement Disclosure
In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements required for fair value measurements. The Company early adopted this standard in the first quarter of fiscal 2019.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The Company early adopted this standard in the first quarter of fiscal 2019. There was no significant impact on the financial statements.
Recently Issued Accounting Pronouncements Pending Adoption
Leases
In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842) and ASU 2018-10: Codification Improvements to Topic 842, Leases. The FASB has subsequently issued multiple ASUs which amend and clarify the guidance in Topic 842. These ASUs requires that a lessee recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For income statement purposes, leases are still required to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The effective date will be the first quarter of the Company's fiscal year ending June 28, 2020, using the modified retrospective method. The Company is currently analyzing the impact of this new pronouncement.
Note 2 – Revenue Recognition
Effective June 25, 2018, the Company adopted ASC Topic 606: “Revenue from Contracts with Customers," and all related accounting standard updates, using the modified retrospective method applied to contracts not completed as of June 25, 2018. Results for all reporting periods subsequent to adoption are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic revenue recognition policy under ASC Topic 605: “Revenue Recognition."

9

The Company follows a five-step approach defined by the new standard for recognizing revenue, consisting of (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
Master supply or distributor agreements are in place with the majority of the Company's customers and contain terms and conditions including, but not limited to payment, delivery, incentives, and warranty. These agreements typically do not require minimum purchase commitments. In the case an agreement is not present, the Company considers a purchase order, which is governed by the Company’s standard terms and conditions, to be a contract.
Substantially all of the Company's revenue, 98% and 96% in fiscal 2018 and 2017, respectively, is derived from product sales. Revenue is recognized at a point in time based on the Company’s evaluation of when the customer obtains control of the products, and all performance obligations under the terms of the contract are satisfied. If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred based on the contract and shipping terms, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied. Sales of products typically do not include more than one performance obligation.
Pricing terms are negotiated independently on a stand-alone basis. Revenue is measured based on the amount of net consideration the Company expects to be entitled to in exchange for products or services. Variable consideration is recognized as a reduction of net revenue with a corresponding reserve at the time of revenue recognition, and consists primarily of sales incentives or rebates, price concessions, and return allowances. Variable consideration is estimated based on contractual terms, historical analysis of customer purchase volumes, or historical analysis using specific data for the type of consideration being assessed. The Company offers product warranties and establishes liabilities for estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liability estimates are included in cost of sales in the Company’s Consolidated Statements of Loss, and further detail is presented in Note 12, "Commitments and Contingencies."
Contract liabilities primarily include deferred revenue, price protection guarantees, and various rights of return. These items were previously presented as a reduction of accounts receivable on the consolidated balance sheet. The adjustments do not impact net cash used in operating activities; however, they do impact the changes in operating assets and liabilities for the related accounts within the disclosure of operating activities on the statement of cash flows.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Incidental contract costs that are not material in context of the delivery of products are expensed as incurred. Sales commissions are expensed when the amortization period is less than one year. Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s fulfillment costs as a manufacturer consist of inventory, fixed assets, and intangible assets, all of which are accounted for under the respective guidance for those asset types.
The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are due within twelve months of completion of the performance obligation and invoicing, and therefore do not contain significant financing components.
Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue, and shipping and handling costs are treated as fulfillment activities and included in cost of sales in the Company’s Consolidated Statements of Loss.
Opening Balance Adjustments
The following table summarizes the impacts of adopting the new revenue standard on the Company's unaudited consolidated balance sheet (in thousands):

10

 
Balance as of June 24, 2018
 
Adjustments
 
Opening Balance as of June 25, 2018
Assets:
 
 
 
 
 
Accounts Receivable

$153,875

 

$51,823

 

$205,698

Liabilities:
 
 
 
 
 
Accrued Contract Liabilities
—

 
(51,143
)
 
(51,143
)
Other Current Liabilities
(43,528
)
 
2,535

 
(40,993
)
Other Long-Term Liabilities
(22,115
)
 
2,535

 
(19,580
)
Stockholders' Equity:
 
 
 
 
 
Accumulated Deficit
(482,710
)
 
10,299

 
(472,411
)
Revenue Disaggregation
The following table presents disaggregated revenue by geography (in thousands):
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
United States

$184,130

 

$168,553

China
101,110

 
90,497

Europe
76,189

 
48,270

Other
46,838

 
53,078

Total Revenue

$408,267

 

$360,398

Note 3 – Acquisition
Infineon Technologies AG Radio Frequency Power Business
On March 6, 2018, the Company acquired certain assets of the Infineon Technologies AG (Infineon) Radio Frequency Power Business (RF Power), pursuant to an asset purchase agreement with Infineon in exchange for a base purchase price of $429 million, subject to certain adjustments. As part of the agreement, the Company paid $427 million of cash on the purchase date and agreed to purchase certain additional non-U.S. property and equipment related to the RF Power business from Infineon for approximately $2 million, which was completed during the fourth quarter of fiscal 2018. The acquisition allows the Company to expand its product portfolio into the wireless market.
The acquisition of the RF Power business from Infineon was accounted for as a business combination. The assets, liabilities, and operating results of the RF Power business have been included in the Company's consolidated financial statements from the date of acquisition. Additionally, the RF Power business's results from operations are reported as part of the Company's Wolfspeed segment. The results of the RF Power business are reflected in the Company's consolidated statements of loss for the three months ended September 23, 2018.
The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in thousands):

11

Assets:
 
Inventories

$22,500

Property and equipment
11,722

Other assets
433

Intangible assets
149,000

Goodwill
248,957

Total Assets
432,612

Liabilities assumed:

Accounts payable
(39
)
Accrued expenses and liabilities
(3,411
)
Total liabilities assumed
(3,450
)
Net assets acquired

$429,162

The amortization periods for intangible assets acquired are as follows (in thousands, except for years):
 
Asset Amount
 
Estimated Life in Years
Lease agreement

$1,000

 
10
Customer relationships
92,000

 
15
Developed technology
44,000

 
14
Non-compete agreements
12,000

 
4
Total identifiable intangible assets

$149,000

 
 
The weighted average amortization periods for intangibles was 13.8 years. Goodwill largely consists of manufacturing and other synergies of the combined companies, and the value of the assembled workforce. For tax purposes, in accordance with IRC Section 197, $245 million of goodwill will be amortized over 15 years.
The Company incurred total transaction costs related to the acquisition of approximately $0.12 million which were expensed in the first quarter of fiscal 2019 in accordance with U.S. GAAP.
Supplemental Pro Forma Financial Information
The following unaudited pro forma consolidated financial information reflects the results of operations of the Company as if the RF Power transaction had occurred at the beginning of the fiscal year prior to the fiscal year of acquisition, after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):
 
Three Months Ended
 
 
 
September 24, 2017
 
Revenue
 
$384,687
 
Net loss
 
(23,565
)
 
Earnings per share, basic
 
$
(0.24
)
 
Earnings per share, diluted
 
$
(0.24
)
 
These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the RF Power business to give effect to events and transactions that are directly attributable to the RF Power business transactions, including the elimination of sales by the Company to the RF Power business 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 2017 fiscal year, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the three months ended September 24, 2017 are one-time acquisition costs and foreign currency gains attributable to the RF Power business of $0.12 million. 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 2017 fiscal year, nor is it indicative of any future results.

12

Arkansas Power Electronics International, Inc.
On July 8, 2015, the Company closed on the acquisition of Arkansas Power Electronics International, Inc. (APEI), a global leader in power modules and power electronics applications, pursuant to a merger agreement with APEI and certain shareholders of APEI, whereby the Company acquired all of the outstanding share capital of APEI in exchange for a base purchase price of $13.8 million, subject to certain adjustments. In addition, if certain goals were achieved over the subsequent two years, additional cash payments totaling up to $4.6 million were to be made to the former APEI shareholders. Payments totaling $2.8 million were made to the former APEI shareholders in July 2016 based on achievement of the first-year goals. The final payment of $1.9 million was made in July 2017 based on achievement of the second-year goals. In connection with this acquisition, APEI became a wholly owned subsidiary of the Company, renamed Cree Fayetteville, Inc. (Cree Fayetteville). Cree Fayetteville is not considered a significant subsidiary of the Company and its results from operations are reported as part of the Company's Wolfspeed segment.
Note 4 – Financial Statement Details
Accounts Receivable, net
The following table summarizes the components of accounts receivable, net (in thousands):
 
September 23, 2018
 
June 24, 2018
Billed trade receivables

$207,224

 

$215,077

Unbilled contract receivables
4,693

 
966


211,917

 
216,043

Allowance for sales returns, discounts and other incentives
—

 
(56,800
)
Allowance for bad debts
(4,352
)
 
(5,368
)
Accounts receivable, net

$207,565

 

$153,875

Inventories
The following table summarizes the components of inventories (in thousands):
 
September 23, 2018
 
June 24, 2018
Raw material

$96,761

 

$95,890

Work-in-progress
101,035

 
104,300

Finished goods
108,593

 
95,825

Inventories

$306,389

 

$296,015

Other Current Liabilities
The following table summarizes the components of other current liabilities (in thousands):
 
September 23, 2018
 
June 24, 2018
Accrued taxes

$8,804

 

$8,053

Accrued professional fees
9,059

 
4,911

Accrued warranty
14,977

 
15,752

Accrued other
5,603

 
14,812

Other current liabilities

$38,443

 

$43,528


13

Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands):
 
September 23, 2018
 
June 24, 2018
Currency translation gain

$5,419

 

$5,075

Net unrealized loss on available-for-sale securities
(4,755
)
 
(4,479
)
Accumulated other comprehensive income, net of taxes

$664

 

$596

Non-Operating Expense, net
The following table summarizes the components of non-operating expense, net (in thousands):
 
Three Months Ended
 
September 23, 2018
 
September 24, 2017
Foreign currency (loss) gain, net

($597
)
 

$767

Gain on sale of investments, net
—

 
45

Loss on equity investment, net
(6,645
)
 
(3,267
)
Interest (expense) income, net
(2,361
)
 
1,151

Other, net
98

 
236

Non-operating expense, net

($9,505
)
 

($1,068
)
The change in loss on equity investment, net is due to the decrease in the Lextar Electronics Corporation (Lextar) stock price.
Reclassifications Out of Accumulated Other Comprehensive Income, net of taxes
The following table summarizes the amounts reclassified out of accumulated other comprehensive income, net of taxes (in thousands):
Accumulated Other Comprehensive Income Component
 
Amount Reclassified Out of Accumulated Other Comprehensive Loss
 
Affected Line Item in the Consolidated Statements of Loss
 
 
Three Months Ended
 
 
 
 
September 23, 2018
 
September 24, 2017
 
 
Net unrealized gain on available-for-sale securities, net of taxes
 

$—

 

$45

 
Non-operating expense, net
Less income tax effect
 
—

 
—

 
Income tax expense
Total reclassifications
 

$—

 

$45

 

Note 5 – Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, variable rate demand notes, commercial paper and certificates of deposit. All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's ownership interest in Lextar.

14

The following tables summarize short-term investments (in thousands):
 
 
September 23, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$104,136

 

$2

 

($1,222
)
 

$102,916

Corporate bonds
 
146,526

 
35

 
(1,159
)
 
145,402

U.S. agency securities
 
4,667

 
—

 
(10
)
 
4,657

U.S. treasury securities
 
44,294

 
—

 
(60
)
 
44,234

Non-U.S. certificates of deposit
 
29,136

 
—

 
—

 
29,136

U.S. certificates of deposit
 
500

 
—

 
—

 
500

Variable rate demand note
 
400

 
—

 
—

 
400

Commercial paper
 
1,978

 
—

 
—

 
1,978

Total short-term investments
 

$331,637

 

$37

 

($2,451
)
 

$329,223

 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$110,198

 

$17

 

($939
)
 

$109,276

Corporate bonds
 
77,871

 
36

 
(1,150
)
 
76,757

U.S. agency securities
 
3,922

 
—

 
(38
)
 
3,884

U.S. treasury securities
 
—

 
—

 
—

 
—

Non-U.S. certificates of deposit
 
77,744

 
—

 
—

 
77,744

U.S. certificates of deposit
 
500

 
—

 
—

 
500

Variable rate demand note
 
—

 
—

 
—

 
—

Commercial paper
 
—

 
—

 
—

 
—

Total short-term investments
 

$270,235

 

$53

 

($2,127
)
 

$268,161


15

The following tables present the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities):
 
 
September 23, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$84,371

 

($838
)
 

$15,303

 

($384
)
 

$99,674

 

($1,222
)
Corporate bonds
 
106,340

 
(804
)
 
12,584

 
(355
)
 
118,924

 
(1,159
)
U.S. agency securities
 
6,156

 
(10
)
 
—

 
—

 
6,156

 
(10
)
U.S. treasury securities
 
44,234

 
(60
)
 
—

 
—

 
44,234

 
(60
)
Total
 

$241,101

 

($1,712
)
 

$27,887

 

($739
)
 

$268,988

 

($2,451
)
Number of securities with an unrealized loss
 
 
 
231

 
 
 
27
 
 
 
258

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 24, 2018
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$97,470

 

($861
)
 

$3,642

 

($78
)
 

$101,112

 

($939
)
Corporate bonds
 
61,453

 
(1,088
)
 
1,486

 
(62
)
 
62,939

 
(1,150
)
U.S. agency securities
 
3,884

 
(38
)
 
—

 
—

 
3,884

 
(38
)
U.S. treasury securities
 
—

 
—

 
—

 
—

 
—

 
—

Total
 

$162,807

 

($1,987
)
 

$5,128

 

($140
)
 

$167,935

 

($2,127
)
Number of securities with an unrealized loss
 
 
 
151

 
 
 
6

 
 
 
157

The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses from the sale of investments are included in non-operating expense, net in the consolidated statements of loss 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 time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its securities to be impaired as of September 23, 2018 and June 24, 2018.
The contractual maturities of short-term investments as of September 23, 2018 were as follows (in thousands):
 
 
Within One Year
 
After One, Within Five Years
 
After Five, Within Ten Years
 
After Ten
Years
 
Total
Municipal bonds

$23,117

 

$79,799

 

$—

 

$—

 

$102,916

Corporate bonds
61,168

 
84,234

 
—

 
—

 
145,402

U.S. agency securities
3,963

 
694

 
—

 
—

 
4,657

U.S. treasury securities
40,351

 
3,883

 
—

 
—

 
44,234

Non-U.S. certificates of deposit
28,385

 
751

 
—

 
—

 
29,136

U.S. certificates of deposit
500

 
—

 
—

 
—

 
500

Variable rate demand note
—

 
—

 
—

 
400

 
400

Commercial paper
1,978

 
—

 
—

 
—

 
1,978

Total short-term investments

$159,462

 

$169,361

 

$—

 

$400

 

$329,223


16

Note 6 – Fair Value of Financial Instruments
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, short-term investments and long-term investments. As of September 23, 2018, financial assets utilizing Level 1 inputs included money market funds and U.S. treasury securities, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, certificates of deposit, commercial paper, variable rate demand notes and common stock of non-U.S. corporations. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service's 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 did not have any financial assets requiring the use of Level 3 inputs as of September 23, 2018.

17

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands):
 
September 23, 2018
 
June 24, 2018
 
 Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds

$—

 

$2,499

 

$—

 

$2,499

 

$—

 

$—

 

$—

 

$—

U.S. agency securities
—

 
1,500

 
—

 
1,500

 
—

 
—

 
—

 
—

Non-U.S. certificates of deposit
—

 
136,853

 
—

 
136,853

 
—

 
75,499

 
—

 
75,499

Commercial Paper
—

 
2,000

 
—

 
2,000

 
—

 
275

 
—

 
275

Money market funds
10,157

 
—

 
—

 
10,157

 
1,992

 
—

 
—

 
1,992

Total cash equivalents
10,157

 
142,852

 
—

 
153,009

 
1,992

 
75,774

 
—

 
77,766

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
—

 
102,916

 
—

 
102,916

 
—

 
109,276

 
—

 
109,276

Corporate bonds
—

 
145,402

 
—

 
145,402

 
—

 
76,757

 
—

 
76,757

U.S. agency securities
—

 
4,657

 
—

 
4,657

 
3,884

 
—

 
—

 
3,884

U.S. treasury securities
44,234

 
—

 
—

 
44,234

 
—

 
—

 
—

 
—

U.S. certificates of deposit
—

 
500

 
—

 
500

 
—

 
500

 
—

 
500

Variable rate demand note
—

 
400

 
—

 
400

 
—

 
—

 
—

 
—

Commercial paper
—

 
1,978

 
—

 
1,978

 
—

 
—

 
—

 
—

Non-U.S. certificates of deposit
—

 
29,136

 
—

 
29,136

 
—

 
77,744

 
—

 
77,744

Total short-term investments
44,234

 
284,989

 
—

 
329,223

 
3,884

 
264,277

 
—

 
268,161

Other long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock of non-U.S. corporations
—

 
50,240

 
—

 
50,240

 
—

 
57,501

 
—

 
57,501

Total other long-term investments
—

 
50,240

 
—

 
50,240

 
—

 
57,501

 
—

 
57,501

Total assets

$54,391

 

$478,081

 

$—

 

$532,472

 

$5,876

 

$397,552

 

$—

 

$403,428

Note 7– Intangible Assets
Intangible Assets, net
The following table presents the components of intangible assets, net (in thousands):

18

 
September 23, 2018
 
June 24, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships

$233,420

 

($95,862
)
 

$137,558

 

$233,420

 

($92,770
)
 

$140,650

Developed technology
226,728

 
(159,145
)
 
67,583

 
226,728

 
(154,467
)
 
72,261

Non-compete agreements
22,475

 
(12,136
)
 
10,339

 
22,475

 
(11,386
)
 
11,089

Trade names, finite-lived
520

 
(520
)
 
—

 
520

 
(520
)
 
—

Patent and licensing rights
159,650

 
(73,414
)
 
86,236

 
159,297

 
(72,923
)
 
86,374

Total intangible assets with finite lives
642,793

 
(341,077
)
 
301,716

 
642,440

 
(332,066
)
 
310,374

Trade names, indefinite-lived
79,680

 
—

 
79,680

 
79,680

 
—

 
79,680

Total intangible assets

$722,473

 

($341,077
)
 

$381,396

 

$722,120

 

($332,066
)
 

$390,054

For the three months ended September 23, 2018, total amortization of finite-lived intangible assets was $11.7 million. For the three months ended September 24, 2017, total amortization of finite-lived intangible assets was $9.9 million.
Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands):
Fiscal Year Ending
 
June 30, 2019 (remainder of fiscal 2019)

$27,158

June 28, 2020
32,978

June 27, 2021
31,507

June 26, 2022
28,323

June 25, 2023
23,061

Thereafter
158,689

Total future amortization expense

$301,716

Goodwill by reportable segment as September 23, 2018 was as follows (in thousands):
 
Wolfspeed
 
LED Products
 
Lighting Products
 
Consolidated Total
Balance at September 23, 2018

$349,726

 

$180,278

 

$90,326

 

$620,330

Note 8 – Long-term Debt
Revolving Line of Credit
As of September 23, 2018, the Company had a $500 million secured revolving line of credit under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2022.
The Company classifies balances outstanding under its line of credit as long-term debt in the consolidated balance sheets. At September 23, 2018, the Company had $0 outstanding under the line of credit, $500 million in available commitments under the revolving line of credit and $112 million available for borrowing under the revolving line of credit in compliance with applicable financial covenants. For the three months ended September 23, 2018, the average interest rate was 3.31%. For the three months ended September 23, 2018 the average commitment fee percentage was 0.06%. The Company was in compliance with all covenants under the revolving line of credit at September 23, 2018.
Convertible Notes
On August 24, 2018, the Company sold $500.0 million aggregate principal amount of 0.875% convertible senior notes due September 1, 2023 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and an additional $75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the Notes). The total net proceeds from the debt offering was approximately $562 million.

19

The conversion rate will initially be 16.67 shares of common stock per $1.0 thousand principal amount of Notes (equivalent to an initial conversion price of approximately $59.97 per share of common stock). The conversion rate will be subject to adjustment for some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event, or who elects to convert any Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the Notes prior to September 1, 2021. The Company may redeem for cash all or any portion of the Notes, at its option, on a redemption date occurring on or after September 1, 2021 and on or before the 40th scheduled trading day immediately before the maturity date, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption The redemption price will be 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes relating to the Company's common stock, holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2023 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1.0 thousand principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election.
In accounting for the issuance of the convertible senior notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $110.6 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), along with related issuance fees are amortized to interest expense over the term of the 2023 Notes at an effective interest rate of 0.49%.
The net carrying amount of the liability component of the Notes is as follows (in thousands):
 
 
September 23, 2018
 
June 24, 2018
Principal
 

$575,000

 

$—

Unamortized discount and issuance costs
 
(122,410
)
 
—

Net carrying amount
 

$452,590

 

$—

The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
 
September 23, 2018
 
June 24, 2018
Discount related to value of conversion option
 

$113,271

 

$—

Debt issuance costs
 
(2,680
)
 
—

Net carrying amount
 

$110,591

 

$—

The following table sets forth the interest expense recognized related to the Notes (in thousands):

20

 
 
September 23, 2018
 
September 24, 2017
Interest expense
 

$419

 

$—

Amortization of discount and issuance costs
 
1,786

 
—

Total interest expense
 

$2,205

 

$—


Note 9 – Loss Per Share
The following table presents the computation of basic loss per share (in thousands, except per share amounts):
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Net loss

($11,067
)
 

($19,857
)
Weighted average common shares
101,884

 
97,811

Basic loss per share

($0.11
)
 

($0.20
)
The following computation reconciles the differences between the basic and diluted loss per share presentations (in thousands, except per share amounts): 
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Net loss

($11,067
)
 

($19,857
)
Weighted average common shares - basic
101,884

 
97,811

Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights
—

 
—

Weighted average common shares - diluted
101,884

 
97,811

Diluted loss per share

($0.11
)
 

($0.20
)
Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the three months ended September 23, 2018, there were 2 million of potential common shares not included in the calculation of diluted loss per share because their effect was anti-dilutive. For the three months ended September 24, 2017, there were 10.1 million of potential common shares not included in the calculation of diluted loss per share because their effect was anti-dilutive.
Note 10 – Stock-Based Compensation
Overview of Employee Stock-Based Compensation Plans
The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. The Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which stock options, restricted stock and restricted stock units are currently outstanding.
The Company’s stock-based awards can be either service-based or performance-based.  Performance-based conditions are generally tied to future financial and/or operating performance of the Company. The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense

21

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. The ESPP limits employee contributions to 15% of each employee’s compensation (as defined in the plan) and allows 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 provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants 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 also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.
Stock Option Awards
The following table summarizes stock option awards outstanding as of September 23, 2018 and changes during the three months then ended (numbers of shares in thousands): 
 
Number of Shares
 
Weighted Average Exercise Price
Outstanding at June 24, 2018
6,287

 

$39.58

Granted
—

 

$—

Exercised
(473
)
 

$32.21

Forfeited or expired
(115
)
 

$48.23

Outstanding at September 23, 2018
5,699

 

$40.02

Restricted Stock Awards and Units
A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of September 23, 2018, and changes during the three months then ended is as follows (numbers of awards and units in thousands): 
 
Number of
  RSAs/RSUs  
 
Weighted Average 
Grant-Date Fair Value
Nonvested at June 24, 2018
3,689

 

$27.53

Granted
1,230

 

$48.18

Vested
(781
)
 

$26.28

Forfeited
(104
)
 

$28.21

Nonvested at September 23, 2018
4,034

 

$34.07

Stock-Based Compensation Valuation and Expense
The Company accounts for its employee stock-based compensation plans 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 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.
For RSAs and RSUs, 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.

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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):
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Income Statement Classification:
 
 
 
Cost of revenue, net

$1,872

 

$1,775

Research and development
2,133

 
2,457

Sales, general and administrative
8,048

 
5,903

Total stock-based compensation expense

$12,053

 

$10,135

Note 11 – Income Taxes
In general, the variation between the Company's effective income tax rate and the U.S. statutory rate of 21% is primarily due to: (i) changes in the Company’s valuation allowances against deferred tax assets in the U.S. and Luxembourg, (ii) projected income for the full year derived from international locations with lower tax rates than the U.S. and (iii) projected tax credits generated.
In December 2017, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act of 2017 (Tax Legislation), which was enacted on December 22, 2017. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Legislation enactment date for companies to complete the accounting under ASC Topic 740-Income Taxes. The Company has recorded the income tax effects of the Tax Legislation. The Company considers the following recorded effects to be complete; its re-measurement of deferred taxes, the impact on the realizability of the U.S. deferred tax assets, and withholding and other taxes on future repatriation of cash. The Company considers all other recorded effects to be provisional. These provisional tax effects may differ during the measurement period, possibly materially, due to further refinement of the calculations, changes in interpretations and assumptions made, and additional guidance that may be issued by the Department of the U.S. Treasury, the Internal Revenue Service, and other regulatory and standard setting bodies. The Company will complete its analysis within fiscal 2019 consistent with the guidance provided in SAB 118, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. No such adjustments were included in income tax expense for the three months ended September 23, 2018.
The Company assesses all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction. The Company has concluded that it is necessary to recognize a full valuation allowance against its U.S. and Luxembourg deferred tax assets. As of June 24, 2018, the U.S. valuation allowance was $122.2 million. During the three months ended September 23, 2018, the Company decreased the U.S. valuation allowance by $26.1 million due to the deferred tax impact of the Notes issuance. As of June 24, 2018, the Luxembourg valuation allowance was $5.2 million. During the three months ended September 23, 2018, the Company increased this valuation allowance by $2.4 million due to year-to-date loss in Luxembourg.
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 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.
As of June 24, 2018, the Company's liability for unrecognized tax benefits was $8.7 million. During the three months ended September 23, 2018, the Company did not record any material movement in its unrecognized tax benefits. As a result, the total liability for unrecognized tax benefits as of September 23, 2018 was $8.7 million. If any portion of this $8.7 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that $0.8 million of gross unrecognized tax benefits will change in the next 12 months as a result of statute requirements.
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 tax examinations for fiscal years prior to 2015. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2014. For foreign purposes, the Company is generally no longer subject to examination
for tax periods prior to 2008. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture.
Note 12 – Commitments and Contingencies
Warranties
The following table summarizes the changes in the Company's product warranty liabilities (in thousands):
Balance at June 24, 2018

$34,640

Warranties accrued in current period
3,147

Expenditures
(3,100
)
Balance at September 23, 2018

$34,687

Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from 90 days to 10 years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The Company accrues estimated costs related to product recalls based on a formal campaign soliciting repair or return of that product when they are deemed probable and reasonably estimable. The warranty reserves, which are primarily related to Lighting Products, are evaluated quarterly 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 September 23, 2018, $19.7 million of the Company's product warranty liabilities were classified as long-term.
The Company has voluntarily recalled its linear LED T8 replacement lamps due to the hazard of overheating and melting. The Company expects the majority of the costs of the recall to be recoverable from insurance proceeds resulting in an immaterial impact to the Company’s financial results.
Litigation
The Company is currently a party to various legal proceedings.  While management presently believes that the ultimate outcome of such 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 may be 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.  The outcomes in these matters are not reasonably estimable.
Note 13 – Reportable Segments

The Company's operating and reportable segments are:
•
Wolfspeed
•
LED Products
•
Lighting Products
Reportable Segments Description
The Company's Wolfspeed segment includes power devices, RF devices, and SiC materials. The Company's LED Products segment includes LED chips and LED components. The Company's Lighting Products segment primarily consists of LED lighting systems and lamps.
Financial Results by Reportable Segment
The table below reflects the results of the Company's reportable segments as reviewed by the Chief Operating Decision Maker (CODM) for the three months ended September 23, 2018. The Company's CODM is the Chief Executive Officer. The Company used 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 transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in the segment revenue presented in the table below. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.

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The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the consolidated statements of loss must be included to reconcile the consolidated gross profit presented in the table below to the Company's consolidated loss 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.
Unallocated costs in the table below consisted primarily of manufacturing employees’ stock-based compensation, expenses for profit sharing, quarterly or annual incentive plans and matching contributions under the Company’s 401(k) plan. These costs were not allocated to the reportable segments’ gross profit because the Company’s CODM does not review them regularly when evaluating segment performance and allocating resources.
The cost of goods sold (COGS) acquisition related cost adjustment includes RF Power acquisition costs impacting cost of revenue for fiscal 2019. These costs were not allocated to the reportable segments' gross profit for fiscal 2019 because they represent an adjustment which does not provide comparability to the corresponding prior period and therefore were not reviewed by the Company's CODM when evaluating segment performance and allocating resources.
Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages):
 
Three Months Ended
 
September 23,
2018
 
September 24,
2017
Revenue:
 
 
 
Wolfspeed revenue

$127,375

 

$66,154

LED Products revenue
146,802

 
144,520

Lighting Products revenue
134,090

 
149,724

Total revenue

$408,267