115,940,496. Item 2. Item 3. Item 2. Item 3. Item 4. ASSETS Current assets: Cash and cash equivalents Short-term investments Total cash, cash equivalents, and short-term investments Accounts receivable, net Income tax receivable Inventories Deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Intangible assets, net Goodwill Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable, trade Accrued salaries and wages Income taxes payable Other current liabilities Total current liabilities Long-term liabilities: Deferred income taxes Other long-term liabilities Total long-term liabilities Commitments and contingencies (Note 11) Shareholders’ equity: Preferred stock, par value $0.01; 3,000 shares authorized at March 27, 2011 and June 27, 2010; none issued and outstanding Common stock, par value $0.00125; 200,000 shares authorized at March 27, 2011 and June 27, 2010; 109,445 and 108,002 shares issued and outstanding at March 27, 2011 and June 27, 2010, respectively Additional paid-in-capital Accumulated other comprehensive income, net of taxes Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity Revenue, net Cost of revenue, net Gross profit Operating expenses: Research and development Sales, general and administrative Amortization of acquisition related intangibles Loss on disposal or impairment of long-lived assets Total operating expenses Operating income Non-operating income: Other non-operating income, net Interest income, net Income from operations before income taxes Income tax expense Net income Earnings per share: Basic net income per share Diluted net income per share Shares used in per share calculation: Basic Diluted Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Excess tax benefit from share-based payment arrangements Loss on disposal or impairment of long-lived assets Provision for doubtful accounts Amortization of premium/discount on investments Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable, trade Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Payment of COTCO contingent consideration Payment of LLF contingent consideration Purchases of investments Proceeds from maturities of investments Proceeds from sale of property and equipment Proceeds from sale of available-for-sale investments Purchases of patent and licensing rights Net cash used in investing activities Cash flows from financing activities: Net proceeds from issuance of common stock Excess tax benefit from share-based payment arrangements Net cash provided by financing activities Effects of foreign exchange changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents: Beginning of period End of period China. Level 3. The Company adopted the new guidance in the third quarter of fiscal 2010, except for the disclosures related to purchases, sales, issuance and settlements, which 6.1 million shares of the Company's common stock and $372.2 million cash, subject to certain post-closing adjustments. Prior to the Company completing its acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC ("E-conolight"). Ruud Lighting previously sold its e-conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction with Ruud Lighting, the Company funded Ruud Lighting's re-acquisition of E-conolight and paid off Ruud Lighting's outstanding debt in the aggregate amount of approximately $85 million. The acquisition allows the Company to expand its product portfolio into outdoor LED lighting. Billed trade receivables Unbilled contract receivables Allowance for sales returns, and other incentives Allowance for bad debts Total accounts receivable, net Raw material Work-in-progress Finished goods Total inventories Municipal bonds Corporate bonds Certificates of deposit Municipal variable rate demand notes U.S. agency securities Non-U.S. government securities Total Municipal bonds Corporate bonds Municipal variable rate demand notes U.S. agency securities U.S. government securities Non-U.S. government securities Total Municipal bonds Corporate bonds Certificates of deposit Municipal variable rate demand notes U.S. agency securities Non-U.S. government securities Total 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 Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Assets: Cash equivalents Money market funds U.S. agency securities Total cash equivalents Short-term investments Municipal bonds Corporate bonds Certificates of deposit Municipal variable rate demand notes U.S. agency securities Non-U.S. government securities Total short-term investments Total assets Customer relationships Developed technology Patent and license rights Accumulated amortization Intangible assets, net Net income Other comprehensive income: Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $(46), $395, $566, and $(63), respectively Comprehensive income Basic: Net income Weighted average common shares Basic earnings per share Diluted: Net income Weighted average common shares - basic Dilutive effect of stock options, unvested shares and ESPP purchase rights Weighted average common shares - diluted Diluted earnings per share Outstanding at June 27, 2010 Granted Exercised Forfeited or expired Outstanding at March 27, 2011 Nonvested at June 27, 2010 Granted Vested Forfeited Nonvested at March 27, 2011 projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including 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 Cost of goods sold Research and development Sales, general and administrative Total operating expenses Total Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report. solar inverters. devices. Our power products are made from SiC and provide faster switching speeds than comparable silicon-based power devices. Our RF devices are made from SiC or GaN and produce higher power densities as compared to silicon or gallium arsenide devices. China. 2012 We acquired Ruud Lighting to accelerate the LED lighting revolution; (Dollars in Thousands, Except Per Share Amounts) Revenue, net Cost of revenue, net Gross profit Research and development Sales, general and administrative Amortization of acquisition related intangibles Loss on disposal or impairment of long-lived assets Operating income Other non-operating income, net Interest income, net Income before income taxes Income tax expense Net income Diluted earnings per share (Dollars in Thousands, Except Per Share Amounts) Revenue, net Cost of revenue, net Gross profit Research and development Sales, general and administrative Amortization of acquisition related intangibles Loss on disposal or impairment of long-lived assets Operating income Other non-operating income, net Interest income, net Income before income taxes Income tax expense Net income Diluted earnings per share LED products Percent of total revenues Power and RF products Percent of total revenues Total revenues portfolio. power supply markets. Total gross profit Total gross margin Research and development Percent of total revenues Sales, general and administrative Percent of total revenues and the transaction costs associated with the acquisition of Ruud Lighting. INTRINSIC COTCO LLF Total Loss on disposal or impairment of long- lived assets, net Other non-operating income, net Interest income, net The increase for the Income tax expense Effective tax rate Liquidity and Capital Resources Days of sales outstanding(a) Days of supply in inventory(b) Days in accounts payable(c) Cash conversion cycle and accounts payable, while only adding one month of sales and cost of sales. strategic investments to strengthen our product portfolio, secure key intellectual properties, or expand our production capacity. Cash provided by operating activities Cash used in investing activities Cash provided by financing activities Effects of foreign exchange changes Net increase in cash and cash equivalents income. the Ruud Lighting acquisition. option exercises. 10-K for the fiscal year ended 26, 2011 26, 2011 maintain, expand and purchase adequate manufacturing facilities and equipment to meet customer demand; maintain a sufficient supply of raw materials to support our growth; expand research and development, sales and marketing, technical support, distribution capabilities and administrative functions; expand the skills and capabilities of our current management team; add experienced senior level managers; and attract and retain qualified employees. applications and continues to limit our ability to forecast demand for those applications in the short term. achievement of technology breakthroughs required to make commercially viable devices; the accuracy of our predictions for market our ability to predict, influence, and/or react to evolving standards; acceptance of our new product designs; acceptance of new technology in certain markets; the availability of qualified research and development personnel; our timely completion of product designs and development; our ability to expand direct customer sales and influence key distribution customers to adopt our products; our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired specifications and at competitive costs for commercial sales; our ability to effectively transfer products and technology developed in one country to our manufacturing facilities in other countries; our acceptance of our If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items. costs associated with the removal, collection and destruction of the product recalled; payments made to replace recalled product; a rise in warranty expense and costs associated with customer support; the write down or destruction of existing inventory subject to the recall; lost sales due to the unavailability of product for a period of time; delays, cancellations or rescheduling of orders for our products; or increased product returns. business and results of operations. pay substantial damages; indemnify our customers; stop the manufacture, use and sale of products found to be infringing; incur asset impairment charges; discontinue the use of processes found to be infringing; expend significant resources to develop non-infringing products or processes; or obtain a license to use third party technology. inability to obtain adequate financing from debt or capital sources in the future could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn could potentially harm our performance. We are subject to risks related to international sales and purchases. countries with currencies that are increasing in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies in which we are billed. the jurisdiction in which profits are determined to be earned and taxed; changes in tax laws or interpretation of such tax laws and changes in generally accepted accounting principles; the resolution of issues arising from tax audits with various authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions; changes in available tax credits; the recognition and measurement of uncertain tax positions; the lack of sufficient excess tax benefits (credits) in our additional paid in capital (APIC) pool in situations where our realized tax deductions for certain stock-based compensation awards (such as non-qualified stock options and restricted stock) are less than those originally anticipated; and the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes, or any changes in legislation that may result in these earnings being taxed within the U.S., regardless of our decision regarding repatriation of funds. regulatory penalties, fines, legal liabilities, and the forfeiture of certain tax benefits; suspension of production; alteration of our fabrication, assembly and test processes; and curtailment of our operations or sales. impairment of our amortizable intangible assets or goodwill is determined to exist. This could adversely impact our results of operations. Exhibit No. Description /s/ John T. Kurtzweil Exhibit No. DescriptionMarch 27,September 25, 2011North Carolina 56-1572719 (I.R.S. Employer Identification No.) 27703 (Address of principal executive offices) (Zip Code) Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] No [No[ X]April 13,October 12, 2011, was 109,474,435.DescriptionPage No.PART I - FINANCIAL INFORMATION3Item 1.Page No. Item 1. 3 4 5 6 16 26Item 4. Item 4.Controls and Procedures26 27Item 1. Item 1A. Item 1.Legal Proceedings 27Item 1A.Risk Factors27 39 39 39Item 5. Item 6. Item 5.Other Information39 Item 6.Exhibits3940 March 27, 2011 (Unaudited) June 27, 2010 (Thousands, except par value) $ 410,413 $ 397,431 662,679 668,974 1,073,092 1,066,405 125,894 117,535 9,855 - 169,607 112,241 19,389 18,823 43,083 40,159 1,440,920 1,355,163 533,696 419,726 103,209 106,109 326,178 313,019 4,391 5,159 $ 2,408,394 $ 2,199,176 $ 74,889 $ 63,826 23,031 26,247 - 14,375 25,222 15,643 123,142 120,091 39,398 39,398 23,823 11,639 63,221 51,037 - - 136 135 1,575,660 1,507,435 11,236 12,171 634,999 508,307 2,222,031 2,028,048 $ 2,408,394 $ 2,199,176 September 25,
2011 June 26,
2011 (unaudited) (Thousands, except par value) ASSETS Current assets: Cash and cash equivalents $ 139,173 $ 390,598 Short-term investments 493,055 695,199 Total cash, cash equivalents, and short-term investments 632,228 1,085,797 Accounts receivable, net 165,694 118,469 Income tax receivable 1,655 6,796 Inventories 203,625 176,482 Deferred income taxes 18,615 17,857 Prepaid expenses and other current assets 58,855 51,494 Total current assets 1,080,672 1,456,895 Property and equipment, net 606,856 555,929 Intangible assets, net 390,501 102,860 Goodwill 613,843 326,178 Other assets 5,460 4,860 Total assets $ 2,697,332 $ 2,446,722 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable, trade $ 74,122 $ 76,593 Accrued salaries and wages 25,705 18,491 Income taxes payable 12,576 15,493 Other current liabilities 39,975 29,739 Total current liabilities 152,378 140,316 Long-term liabilities: Deferred income taxes 21,902 21,902 Other long-term liabilities 25,015 22,940 Total long-term liabilities 46,917 44,842 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred stock, par value $0.01; 3,000 shares authorized at September 25, 2011 and June 26, 2011; none issued and outstanding — — Common stock, par value $0.00125; 200,000 shares authorized at September 25, 2011 and June 26, 2011; 115,939 and 109,607 shares issued and outstanding at September 25, 2011 and June 26, 2011, respectively 144 136 Additional paid-in-capital 1,817,748 1,593,530 Accumulated other comprehensive income, net of taxes 12,519 13,091 Retained earnings 667,626 654,807 Total shareholders’ equity 2,498,037 2,261,564 Total liabilities and shareholders’ equity $ 2,697,332 $ 2,446,722 Three Months Ended Nine Months Ended March 27,
2011 March 28,
2010 March 27,
2011 March 28,
2010 (Thousands, except per share amounts) $ 219,168 $ 234,083 $ 744,588 $ 602,688 127,773 121,877 401,518 322,634 91,395 112,206 343,070 280,054 31,016 20,366 84,981 59,865 37,603 28,954 100,171 78,108 2,693 3,045 8,105 9,135 405 3,286 1,306 3,689 71,717 55,651 194,563 150,797 19,678 56,555 148,507 129,257 106 44 107 135 2,170 2,125 6,356 5,737 21,954 58,724 154,970 135,129 3,073 14,094 28,278 35,687 $ 18,881 $ 44,630 $ 126,692 $ 99,442 $ 0.17 $ 0.42 $ 1.17 $ 0.99 $ 0.17 $ 0.41 $ 1.15 $ 0.97 108,948 106,367 108,338 100,706 110,323 108,601 110,007 102,907 Three Months Ended September 25,
2011 September 26,
2010 (Thousands, except per share amounts) Revenue, net $ 268,980 $ 268,437 Cost of revenue, net 170,952 137,908 Gross profit 98,028 130,529 Operating expenses: Research and development 34,402 24,732 Sales, general and administrative 45,539 29,202 Amortization of acquisition related intangibles 3,925 2,706 Loss on disposal or impairment of long-lived assets 775 472 Total operating expenses 84,641 57,112 Operating income 13,387 73,417 Non-operating income: Other non-operating income (loss), net 974 (62 ) Interest income, net 1,969 2,016 Income from operations before income taxes 16,330 75,371 Income tax expense 3,511 17,335 Net income $ 12,819 $ 58,036 Earnings per share: Basic net income per share $ 0.11 $ 0.54 Diluted net income per share $ 0.11 $ 0.53 Shares used in per share calculation: Basic 111,866 107,701 Diluted 112,543 109,617 Nine Months Ended March 27,
2011 March 28,
2010 (Thousands) $ 126,692 $ 99,442 78,456 66,873 28,293 17,434 (10,152) (16,781) 1,306 3,689 (919) (153) 11,711 5,771 (7,623) (22,643) (56,788) (27,908) (12,012) (4,304) 18,047 21,515 9,911 12,696 186,922 155,631 (189,233) (127,838) - (57,050) (13,159) (8,773) (309,472) (581,531) 224,298 79,078 1 210 78,258 9,800 (8,821) (7,374) (218,128) (693,478) 33,616 577,838 10,152 16,781 43,768 594,619 420 30 12,982 56,802 397,431 290,154 $ 410,413 $ 346,956 Three Months Ended September 25,
2011 September 26,
2010 (Thousands) Cash flows from operating activities: Net income $ 12,819 $ 58,036 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 32,128 24,396 Stock-based compensation 11,440 8,004 Excess tax benefit from share-based payment arrangements (261 ) (2,974 ) Loss on disposal or impairment of long-lived assets 775 472 Amortization of premium/discount on investments 1,922 3,759 Changes in operating assets and liabilities: Accounts receivable (21,725 ) (5,378 ) Inventories 12,431 (13,527 ) Prepaid expenses and other assets 1,811 434 Accounts payable, trade (13,708 ) 15,186 Accrued salaries and wages and other liabilities 4,013 110 Net cash provided by operating activities 41,645 88,518 Cash flows from investing activities: Purchases of property and equipment (33,962 ) (61,649 ) Purchases of investments (80,874 ) (117,114 ) Proceeds from maturities of investments 42,590 67,571 Proceeds from sale of property and equipment 2 1 Proceeds from sale of available-for-sale investments 236,518 30,061 Purchase of Ruud Lighting, net of cash acquired (456,008 ) — Purchases of patent and licensing rights (4,159 ) (2,072 ) Net cash used in investing activities (295,893 ) (83,202 ) Cash flows from financing activities: Net proceeds from issuance of common stock 2,094 6,690 Excess tax benefit from share-based payment arrangements 261 2,974 Net cash provided by financing activities 2,355 9,664 Effects of foreign exchange changes on cash and cash equivalents 468 172 Net increase (decrease) in cash and cash equivalents (251,425 ) 15,152 Cash and cash equivalents: Beginning of period 390,598 397,431 End of period $ 139,173 $ 412,583 “Company”"Company") is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. The Company's products are driving improvements in applications such as general illumination, video displays, automotive, electronic signs and signals, power supplies and solar inverters.(“SiC”)(SiC), gallium nitride (“GaN”)(GaN) and related compounds. The physical and electronic properties of SiC and GaN offer technical advantages over traditional silicon, gallium arsenide (“GaAs”)(GaAs), sapphire and other materials used for certain electronic and opto-electronic applications.Company currently focuses its expertise in SiC and GaN on light emitting diode (“LED”) products. The Company also develops power and radio frequency (“RF”) products. The Company has products commercially available in each of these categories.The Company derives the largest portion of its revenue from the sales ofCompany's LED products. These products consist of LED components, LED chips, LED lighting products and SiC wafers. Also includedAs the Company develops and improves its LED technology and the market continues to focus on energy efficiency, the Company believes the potential market for LED lighting will continue to expand. The Company's success in selling LED products depends upon its ability to drive adoption and offer innovative products and solutions that enable its customers to succeed in the market. By driving adoption, the Company believes it can influence the growth of the market and open more opportunities for LEDs.revenues derived from government agencies to support the development ofmarketed under numerous brands, such as Cree LED lighting. Lighting®, Ruud Lighting®, BetaLED®, e-conolight® and Kramer Lighting®.generates revenue from sales ofdevelops, manufactures and sells power and RF products. These products, includesuch as power rectifiersand RF devices. The Company's power products are made from SiC whichand provide faster switching speeds than comparable silicon-based power devices, and also includedevices. The Company's RF devices are made from SiC or GaN which allow forand produce higher power densities as compared to silicon or gallium arsenide. Also included are revenues derived from government agencies to support the development of SiC- and GaN-based power and RF technology.Company’sCompany's products are manufactured at production facilities located in North Carolina, Wisconsin and China. The Company also uses contract manufacturers for certain aspects of its product fabrication.fabrication, packaging and assembly. The Company operates research and development facilities in North Carolina, California, Wisconsin and China (including Hong Kong).March 27,September 25, 2011 and the consolidated statements of income for the three and nine months ended March 27,September 25, 2011 and March 28,September 26, 2010, and the consolidated statements of cash flows for the ninethree months ended March 27,September 25, 2011 and March 28,September 26, 2010 (“consolidated financial statements”) have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows at March 27,September 25, 2011, and for all periods presented, have been made. The consolidated balance sheet at June 27, 201026, 2011 has been derived from the audited financial statements as of that date.27, 201026, 2011 (“fiscal 2010”2011”). The results of operations for the period ended March 27,September 25, 2011 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 26, 201124, 2012 (“fiscal 2011”2012”).20102011 amounts in the accompanying consolidated financial statements have been reclassified to conform to the20112012 presentation. These reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.Transfers of Financial AssetsJune 2009,January 2010, the Financial Accounting Standards Board (the “FASB”"FASB") issued new guidance concerning the transfer of financial assets. This guidance amends the criteria for a transfer of a financial asset to be accounted for as a sale, createsmore stringent conditions for reporting a transfer of a portion of a financial asset as a sale, changes the initial measurement of a transferor’s interest in transferred financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. This guidance became effective for the Company beginning in the first quarter of fiscal 2011. The Company’s adoption of the new accounting guidance did not have a significant impact on its consolidated financial statements.Determining the Primary Beneficiary of a Variable Interest EntityIn June 2009, the FASB issued new guidance concerning the determination of the primary beneficiary of a variable interest entity (“VIE”). This new guidance amends current U.S. GAAP by: requiring ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; amending the quantitative approach previously required for determining the primary beneficiary of a VIE; modifying the guidance used to determine whether an entity is a VIE; adding an additional reconsideration event (e.g., troubled debt restructurings) for determining whether an entity is a VIE; and requiring enhanced disclosures regarding an entity’s involvement with a VIE. This guidance became effective for the Company beginning in the first quarter of fiscal 2011. The Company’s adoption of the new accounting guidance did not have a significant impact on its consolidated financial statements.Interactive Data Filing with the SECOn January 30, 2009, the SEC released the final rules requiring all registered companies to use eXtensible Business Reporting Language (“XBRL”) when submitting financial statements to the SEC. The new rules initially require interactive data reporting only by domestic and foreign large accelerated filers (those that prepare their financial statements in accordance with U.S. GAAP and have a worldwide public common equity float above $5.0 billion) for their first quarterly period ending after June 15, 2009 and all periods thereafter. As the Company did not originally meet this large accelerated filer requirement on the initial measurement date due to its market capitalization at that time, this reporting requirement only became effective for the Company in the first quarter of fiscal 2011. The Company provided its first quarter and second quarter fiscal 2011 financial statements to the SEC using XBRL in compliance with the new SEC rules.Revenue Recognition with Multiple DeliverablesIn October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. This guidance became effective for the Company beginning in the first quarter of fiscal 2011. The Company’s adoption of the new accounting guidance did not have a significant impact on its consolidated financial statements.When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying AmountsIn December 2010, the FASB issued an accounting standards update modifying Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance became effective for the Company beginning in the third quarter of fiscal 2011. The Company’s adoption of the new guidance did not have a significant impact on its consolidated financial statements.Recently Issued Accounting PronouncementsFair Value DisclosuresIn January 2010, the FASB issued amended standards requiring additional fair value disclosures. The amended standards require disclosures of transfers in and out of Levels 1 and 2 of the fair value hierarchy, as well as requiring gross basis disclosures for purchases, sales, issuances and settlements within the Level 3 reconciliation. Additionally, the update clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 orwill bewas effective for the Company beginning in the first quarter of fiscal 2012. Because these new standards are related primarily to disclosures, their adoption has not had a significant impact on the Company's consolidated financial statements.the Company’sits consolidated financial statements.Disclosure of Supplementary Pro Forma Information for Business CombinationsIn December 2010,accounting standards update for business combinations. This standards update specifiesassessment of qualitative factors that if a public entity presents comparative financial statements,it is more likely than not that the unit's carrying value is greater than its fair value. When an entity's qualitative assessment reveals that goodwill impairment is more likely than not, the entity should disclose revenue and earnings ofmust perform the combined entity as thoughtwo-step goodwill impairment test. This guidance becomes effective for the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination includedCompany in the reported pro forma revenue and earnings.second quarter of fiscal 2012. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company’sCompany's adoption of the newthis guidance willis not expected to have a significant impact on its consolidated financial statements.Cash consideration paid to stockholders $ 372,235 211,040 Fair value of debt paid on behalf of stockholders 84,991 Total purchase price $ 668,266 Tangible assets: Cash and cash equivalents $ 3,081 Accounts receivable 25,698 Inventories 39,330 Property and equipment 45,946 Other assets 4,727 Total tangible assets $ 118,782 Intangible assets: Developed technology $ 96,300 Customer relationships 84,820 Trade names 82,950 In-process research & development 15,050 Non-compete agreements 9,800 Goodwill 287,431 Total intangible assets $ 576,351 Liabilities assumed: Accounts payable $ 12,943 Accrued expenses and liabilities 10,116 Warranty liabilities 2,600 Other long-term liabilities 1,208 Total liabilities assumed $ 26,867 Net assets acquired 668,266 Asset Amount Estimated Life in Years Developed technology $ 96,300 7 to 10 Customer relationships 84,820 7 to 20 Trade names (indefinite lived) 81,520 - Trade names (definite lived) 1,430 3 In-process research and development (1) 15,050 6 to 7 Non-compete agreements 9,800 5 Total identifiable assets $ 288,920 Amounts Revenue $ 22,343 Loss from operations (522 ) Net loss (664 ) Basic net loss per share $ (0.01 ) Diluted net loss per share $ (0.01 ) Three Months Ended September 25,
2011September 26,
2010Revenue $ 299,312 $ 310,296 Income from operations 8,788 68,146 Net income 8,853 53,602 Earnings per share, basic $ 0.08 $ 0.47 Earnings per share, diluted $ 0.08 $ 0.46 $80.8$80.8 million, consisting of (1) $16.5$16.5 million in cash, (2) approximately 1.9 million shares of the Company’s common stock valued at $58.8$58.8 million, and (3) the assumption of fully vested LLF employee stock options valued at $4.5 million.$4.5 million. The Company incurred transaction costs of approximately $1.0$1 million consisting primarily of professional fees incurred relating to attorneys, accountants and valuation advisors. Under the acquisition terms, additional consideration of up to $26.4$26.4 million would become payable to the former shareholders of LLF if defined product development targets and key employee retention measures were achieved over the three calendar years following the acquisition.2010.2010. As a result, the Company made a cash payment in the amount of $4.4$4.4 million to the former shareholders of LLF in the third quarter of fiscal 2009, a cash payment in the amount of $8.8$8.8 million to the former shareholders of LLF in the third quarter of fiscal 2010, and a final cash payment in the amount of $13.2$13.2 million to the former shareholders of LLF in the third quarter of fiscal 2011.2011. These incremental payments were treated as additional purchase price and resulted in an increase to goodwill in the Company’s consolidated financial statements.Acquisition of COTCO Luminant Device LimitedOn March 30, 2007, the Company acquired COTCO Luminant Device Limited, a Hong Kong company (now Cree Hong Kong Limited) (“COTCO”), from COTCO Holdings Limited, a Hong Kong company (now United Luminous International (Holdings) Limited) (“Holdings”). The Company acquired all of the outstanding share capital of COTCO in exchange for consideration consisting of approximately 7.6 million shares of the Company’s common stock and $77.3 million cash. Under the acquisition terms, additional consideration would become payable to Holdings or its designees in the event COTCO achieved specific EBITDA targets over the Company’s two full fiscal years following the acquisition. For fiscal 2008 results, the Company made a cash payment in the amount of $60.0 million in fiscal 2009. For fiscal 2009 results, the Company made a cash payment in the amount of $57.1 million in fiscal 2010. These incremental payments were treated as additional purchase price and resulted in an increase to goodwill in the Company’s consolidated financial statements.The assets, liabilities, and operating results of COTCO have been included in the Company’s consolidated financial statements from the date of acquisition and are reflected in all periods presented in the accompanying financial statements. March 27, 2011 June 27, 2010 $ 151,689 $ 138,642 2,202 1,391 153,891 140,033 (27,176) (20,551) (821) (1,947) $ 125,894 $ 117,535 September 25,
2011 June 26,
2011Billed trade receivables $ 183,705 $ 137,799 Unbilled contract receivables 1,485 1,038 185,190 138,837 Allowance for sales returns, discounts, and other incentives (17,964 ) (19,615 ) Allowance for bad debts (1,532 ) (753 ) Total accounts receivable, net $ 165,694 $ 118,469 March 27, 2011 June 27, 2010 $ 35,947 $ 24,858 71,399 57,180 62,261 30,203 $ 169,607 $ 112,241 September 25,
2011 June 26,
2011Raw material $ 56,057 $ 38,781 Work-in-progress 78,380 74,816 Finished goods 69,188 62,885 Total inventories $ 203,625 $ 176,482 Three Months Ended September 25,
2011 September 26,
2010LED products $ 196,778 $ 228,765 Percent of revenue 73 % 85 % Lighting products $ 51,673 $ 15,601 Percent of revenue 19 % 6 % Power and RF products $ 20,529 $ 24,071 Percent of revenue 8 % 9 % Total revenue $ 268,980 $ 268,437 March 27, 2011 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated Fair
Value $ 416,633 $ 2,973 $ (348) $ 419,258 165,505 1,220 (313) 166,412 10,004 - - 10,004 1,295 - - 1,295 55,200 462 (8) 55,654 10,053 3 - 10,056 $ 658,690 $ 4,658 $ (669) $ 662,679 June 27, 2010 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated Fair
Value $ 441,653 $ 3,502 $ (117) $ 445,038 120,991 1,478 (20) 122,449 15,685 - (1) 15,684 72,531 615 (32) 73,114 7,533 76 - 7,609 5,091 - (11) 5,080 $ 663,484 $ 5,671 $ (181) $ 668,974 September 25, 2011 Municipal bonds $ 216,321 $ 3,462 $ (1 ) $ 219,782 Corporate bonds 171,268 1,777 (572 ) 172,473 Certificates of deposit 43,003 4 (2 ) 43,005 Commercial paper 7,146 — — 7,146 U.S. agency securities 49,088 582 (36 ) 49,634 Non-U.S. government securities 1,016 — (1 ) 1,015 Total $ 487,842 $ 5,825 $ (612 ) $ 493,055 June 26, 2011 Municipal bonds $ 391,465 $ 3,943 $ (10 ) $ 395,398 Corporate bonds 207,241 2,312 (115 ) 209,438 Certificates of deposit 10,003 12 — 10,015 Municipal variable rate demand notes 295 — — 295 Commercial paper 4,999 — — 4,999 U.S. agency securities 67,244 807 (2 ) 68,049 Non-U.S. government securities 6,986 19 — 7,005 Total $ 688,233 $ 7,093 $ (127 ) $ 695,199 March 27,September 25, 2011 were as follows (in thousands): March 27, 2011 Within One
Year After One,
Within Five
Years After Five,
Within Ten
Years After Ten
Years Total $ 130,571 $ 288,687 $ - $ - $ 419,258 39,088 127,324 - - 166,412 - 10,004 - - 10,004 - - - 1,295 1,295 16,931 38,723 - - 55,654 10,056 - - - 10,056 $ 196,646 $ 464,738 $ - $ 1,295 $ 662,679 September 25, 2011 Total Municipal bonds $ 69,171 $ 150,611 $ — $ — $ 219,782 Corporate bonds 71,676 100,797 — — $ 172,473 Certificates of deposit 38,001 5,004 — — $ 43,005 Commercial paper 7,146 — — — $ 7,146 U.S. agency securities 10,343 39,291 — — $ 49,634 Non-U.S. government securities — 1,015 — — $ 1,015 Total $ 196,337 $ 296,718 $ — $ — $ 493,055 March 27,September 25, 2011, financial assets utilizing Level 1 inputs included money market funds.funds and investments traded on active securities exchanges. Financial assets utilizing Level 2 inputs included certificates of deposit, corporate bonds, municipal bonds certificates of deposit,and variable rate demand notes, non-U.S. government securities and U.S. agency securities. Level 2 assets are valued using a third-party pricing services consensus price which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company does not have any significant financial assets requiring the use of Level 3 inputs. There were no transfers between Level 1 and Level 2 during the ninethree months ended March 27, 2011.September 25, 2011. Financial Instruments Carried at Fair Value (in thousands)
as of March 27, 2011 Quoted Prices
in Active Markets
for
Identical Items
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Total $ 34,105 $ - $ - $ 34,105 - 2,435 - 2,435 34,105 2,435 - 36,540 - 419,258 - 419,258 - 166,412 - 166,412 - 10,004 - 10,004 - 1,295 - 1,295 - 55,654 - 55,654 - 10,056 - 10,056 - 662,679 - 662,679 $ 34,105 $ 665,114 $ - $ 699,219 Financial Instruments Carried at Fair Value as of June 26, 2011 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents Certificates of deposit $ — $ 20,000 $ — $ 20,000 $ — $ — $ — $ — Money market funds 3,643 — — 3,643 7,386 — — 7,386 Total cash equivalents 3,643 20,000 — 23,643 7,386 — — 7,386 Short-term investments Municipal bonds — 219,782 — 219,782 — 395,398 — 395,398 Corporate bonds — 172,473 — 172,473 — 209,438 — 209,438 Municipal variable rate demand notes — — — — — 295 — 295 Certificates of deposit — 43,005 — 43,005 — 10,015 — 10,015 Commercial paper — 7,146 — 7,146 — 4,999 — 4,999 U.S. agency securities — 49,634 — 49,634 — 68,049 — 68,049 Non-U.S. government securities — 1,015 — 1,015 — 7,005 — 7,005 Total short-term investments — 493,055 — 493,055 — 695,199 — 695,199 Total assets $ 3,643 $ 513,055 $ — $ 516,698 $ 7,386 $ 695,199 $ — $ 702,585 and losses from the sale of investments of approximately $1.0 million are included in “Other non-operating income, net” and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be “other-than-temporary.” March 27, 2011 June 27, 2010 $ 52,620 $ 52,620 51,860 51,860 80,271 71,762 $ 184,751 $ 176,242 (81,542) (70,133) $ 103,209 $ 106,109 September 25,
2011 June 26,
2011Customer relationships $ 137,440 $ 52,620 Developed technology 148,160 51,860 In-process research and development 15,050 — Non-compete agreements 9,800 — Patent and license rights 170,767 83,884 $ 481,217 $ 188,364 Accumulated amortization (90,716 ) (85,504 ) Intangible assets, net $ 390,501 $ 102,860 and nine months ended March 27,September 25, 2011 was $3.9 and $11.6 million, respectively.$5.3 million. For the three and nine months ended March 28,September 26, 2010, total amortization expense, including amortization of acquisition related intangibles, patents and license rights was $4.1 and $12.2$3.8 million respectively..Fiscal Year Ending June 24, 2012 $ 31,452 June 30, 2013 33,955 June 29, 2014 31,802 June 28, 2015 28,715 June 26, 2016 28,533 ninethree months ended March 27,September 25, 2011 due to the paymentacquisition of Ruud Lighting. Refer to “Note 2. Acquisitions” for the final $13.2 million earn-out payment related tocalculation of total goodwill recognized on the LLF acquisition that was considered additional purchase price and recorded as an increase to goodwill.purchase.September 2009,connection with the acquisition of Ruud Lighting, the Company issued 6.1 million shares of common stock valued at approximately $211.0 million. The shares are subject to certain transfer restrictions under the Stock Purchase Agreement that will generally lapse with respect to 25% of the shares held (i) at the completion of the consecutive six-month period following the date of the closing of the transaction; and, sold 12.65 million(ii) at the completion of each of the following three successive six-month periods, such that all restrictions will lapse by the second anniversary of the closing.with net proceeds of approximately $434.0 million.As of March 27,having an aggregate purchase price not exceeding there remained approximately 4.5 million shares through the expiration of the Company’s common stock approved for repurchase under a repurchase program, as authorized by the Board of Directors that extendsand extended through June 2011.24, 2012. During the ninethree months ended March 27,September 25, 2011, the Company did not repurchase any shares under the repurchase program. Three Months Ended Nine Months Ended March 27,
2011 March 28,
2010 March 27,
2011 March 28,
2010 $ 18,881 $ 44,630 $ 126,692 $ 99,442 77 (653) (935) 64 $ 18,958 $ 43,977 $ 125,757 $ 99,506 Three Months Ended September 25,
2011 September 26,
2010Net income $ 12,819 $ 58,036 Other comprehensive income: Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of $661 and $565 respectively (1,092 ) 933 Currency Translation Gain $ 520 $ — Comprehensive income $ 12,247 $ 58,969 amounts)data): Three Months Ended Nine Months Ended March 27,
2011 March 28,
2010 March 27,
2011 March 28,
2010 $ 18,881 $ 44,630 $ 126,692 $ 99,442 108,948 106,367 108,338 100,706 $ 0.17 $ 0.42 $ 1.17 $ 0.99 Three Months Ended September 25,
2011 September 26,
2010Basic: Net income $ 12,819 $ 58,036 Weighted average common shares 111,866 107,701 Basic earnings per share $ 0.11 $ 0.54 amounts)data): Three Months Ended Nine Months Ended March 27,
2011 March 28,
2010 March 27,
2011 March 28,
2010 $ 18,881 $ 44,630 $ 126,692 $ 99,442 108,948 106,367 108,338 100,706 1,375 2,234 1,669 2,201 110,323 108,601 110,007 102,907 $ 0.17 $ 0.41 $ 1.15 $ 0.97 Three Months Ended September 25,
2011 September 26,
2010Diluted: Net income $ 12,819 $ 58,036 Weighted average common shares - basic 111,866 107,701 Dilutive effect of stock options, unvested shares and ESPP purchase rights 677 1,916 Weighted average common shares - diluted 112,543 109,617 Diluted earnings per share $ 0.11 $ 0.53 and nine months ended March 27,September 25, 2011, there were 2.4 and 1.85.3 million shares respectively, not included in calculating diluted earnings per share because their effect was antidilutive. For the three and nine months ended March 28,September 26, 2010, there were 0.3 and 1.90.8 million shares respectively, not included in calculating diluted earnings per share because their effect was antidilutive.85% of15% less than the fair market value of the common stock at two designated times each year.March 27,September 25, 2011, and changes during the ninethree months then ended (shares in thousands): Number of
Shares Weighted-
Average
Exercise Price 5,638 $ 31.23 2,293 55.64 (1,211) 27.78 (194) 62.62 6,526 $ 39.51 Number of Shares Weighted-Average Exercise Price Outstanding at June 26, 2011 6,467 $ 39.56 Granted 2,809 30.98 Exercised (91 ) 24.18 Forfeited or expired (67 ) 46.45 Outstanding at September 25, 2011 9,118 $ 37.02 March 27,September 25, 2011, and changes during the ninethree months then ended, follows (shares in thousands): Number of
Shares/Units Weighted-
Average Grant-
Date Fair
Value 418 $ 28.68 234 54.91 (149) 28.38 - - 503 $ 41.01 Nonvested at June 26, 2011 509 $ 40.87 Granted 227 30.97 Vested (177 ) 38.29 Forfeited (6 ) 40.21 Nonvested at September 25, 2011 553 $ 37.64 Company’sCompany's stock option awards the Company currently uses the Black-Scholes option-pricing model. 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’sCompany'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 andCompany’sCompany's financial statements.Company’sCompany'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. Three Months Ended Nine Months Ended Income Statement Classification March 27,
2011 March 28,
2010 March 27,
2011 March 28,
2010 $ 1,440 $ 471 $ 3,924 $ 2,025 2,259 937 6,256 3,589 6,612 4,345 18,113 11,820 8,871 5,282 24,369 15,409 $ 10,311 $ 5,753 $ 28,293 $ 17,434 Three Months Ended Income Statement Classification September 25,
2011 September 26,
2010Cost of goods sold $ 1,714 $ 1,132 Research and development 2,428 1,815 Sales, general and administrative 7,298 5,057 Total operating expenses 9,726 6,872 Total $ 11,440 $ 8,004 ourits foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on the Company’s periodic effective tax rate.50%50 percent likely to be realized upon ultimate settlement.27, 2010,26, 2011, the Company had recorded $7.6$7.0 million of unrecognized tax benefits. During the ninethree months ended March 27,September 25, 2011, there were no changes to that amount of recognized tax benefits. As a result, the total amount of unrecognized tax benefits as of March 27,September 25, 2011 is $7.6 million.$7.0 million. If any portion of this $7.6$7.0 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 approximately $1.4$2.6 million of gross unrecognized tax benefits will change in the next 12 months.March 27,September 25, 2011, the Company had accrued $105$33 thousand of interest and penalties. The Company is currently underexamination with the Internal Revenue Service for fiscal year ended June 28, 2009. For foreign purposes, the Company is generally no longer subject to examination for tax periods 1999During the second quarter of fiscal 2011, the Hong KongCertain carryforward tax authorities commenced anattributes generated in prior years remain subject to examination of the Company’s corporate tax returns for fiscal years 2008 and 2009.adjustment. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2007. Certain federal and state carryforward tax attributes generated in prior years remain subject to examination and adjustment.2008. The Company was recently notified thatis currently under examination by the Japanese tax authority will begin an examination of the Company’s corporate tax returnsInternal Revenue Service for fiscal years 2009. The Company is also currently under inquiry by the Hong Kong Inland Revenue Department for fiscal 2008 2009 and 2010.fiscal 2009.Balance at June 26, 2011 $ 2,235 Acquisition warranties beginning balance 2,600 Costs accrued for new warranty contracts 82 Changes in estimates for pre-existing warranties (400 ) Expenditures (657 ) Balance at September 25, 2011 $ 3,860 Information regarding materialninety (90) days to ten years. The Company estimates these warranty liabilities as a percentage of revenue, based on historical knowledge of warranty costs and expected future warranty costs. If actual product failure rates materially differ from these estimates, revisions to the estimated warranty liability would be required. The Company evaluates its warranty reserve on a quarterly basis.is containedincluding those described in our Annual Report on Form 10-K for the year ended June 27, 2010,26, 2011, as updated below, and updates to that disclosure, including with respect to the additional proceedings discussed below, are contained in our Quarterly Reports on Form 10-Qnoted below. Unless otherwise indicated, the potential losses for the periods ended September 26, 2010 and December 26, 2010. The following is provided as an update to the Company’s legal proceedings as contained in those reports:The Fox Group, Inc. v. Cree, Inc.The Company reported in its most recent Annual Report on Form 10-K that a patent infringement action is pending against it in the U.S. District Court for the Eastern District of Virginia. The complaint, which was filed on June 29, 2010, alleges that the Company is infringing two U.S. patents by making, using, selling, and/or offering for sale silicon carbide substrates and products that use silicon carbide that practice the inventions claimed in the patents, and it requests a judgmentclaims against the Company for damages in an unspecified amount, an injunction against infringements, attorneys’ fees and costs. On August 30, 2010,these matters are not reasonably estimable. Company filed an answer and counterclaims in which it denies any infringement and asserts, among other defenses, that the patents are invalid and are unenforceable. The counterclaims seek a declaratory judgment that the Company has not infringed the patents and that the patents are invalid and unenforceable. The court has scheduled the trial for July 2011.Cree, Inc. v. SemiLEDs Corporation and Helios Crew Corp.The Company is the plaintiff in an action against defendants SemiLEDs Corporation and its subsidiary,subsidiaries, Helios Crew Corp. and SemiLEDs Optoelectronics Co., pendingLtd., commenced October 8, 2010 in the U.S. District Court for the District of Delaware. The action was commenced by the filing of a complaint on October 8, 2010. The complaintas amended seeks injunctive relief and damages and alleges that the defendants are infringing threesix U.S. patents owned by the Company. The three patents areCompany relating to light-emitting diodes: No. 7,737,459, entitled “High"High Output Group III Nitride Light Emitting Diodes,”Diodes"; No. 7,211,833, entitled “Light"Light Emitting Diodes Including Barrier Layers/Sublayers” andSublayers"; No. 7,611,915, entitled “Methods"Methods for Manufacturing Light Emitting Diodes Including Barrier Layers/Sublayers.” The suit seeks monetary damages and an injunction against future infringements. The defendants filed an answer and counterclaims in which they deny any infringement and assert, among other defenses, that the patents are invalid. The counterclaims seek a declaratory judgment that the defendants have not infringed the patents and that the patents are invalid. On March 16, 2011, the court allowed the Company to add claims for infringement of three additional U.S. patents owned by the Company:Sublayers"; No. 6,657,236, entitled “Enhanced"Enhanced Light Extraction in LEDSLEDs Through the Use of Internal and External Optical Elements”Elements"; No. 7,795,623, entitled “Light"Light Emitting Devices Having Current Reducing Structures and Methods of Forming Light Emitting Devices Having Current Reducing Structures”Structures"; and No. 7,557,380, entitled “Light"Light Emitting Devices Having a Reflective Bond Pad and Methods of Fabricating Light Emitting Devices Having Reflective Bond Pads.27, 2010.26, 2011. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.diodes (LEDs), LEDdiode (LED) products, lighting products and semiconductor solutionsproducts for wirelesspower and powerradio-frequency (RF) applications. Our solutionsproducts are driving improvements in applications such as general illumination, video displays, automotive, electronic signs and signals, variable-speed motorspower supplies and wireless systems.certain electronic and opto-electronic applications.We derive the largest portion of our revenue from the sales of our products. These products consist of LED components, LED chips, LED lighting products and SiC wafers. As we develop and improve our LED technology and the market focusescontinues to focus on energy efficiency, we believe the potential market for LED lighting applications will continue to expand. Our success in selling LED products depends upon our ability to drive adoption and offer innovative products and solutions that enable our customers to succeed in the market. By driving adoption we believe we can influence the directiongrowth of the market and open more opportunities for LEDs. Innovation is criticalmaintainaccelerate LED adoption and growexpand the market for our competitive position, especially as we face competition from various companiesLED components. Our lighting products are marketed under numerous brands, such as Nichia Corporation, OSRAM Semiconductor GmbHCree LED Lighting®, Ruud Lighting®, BetaLED®, e-conolight® and Philips LumiledsKramer Lighting Company, LLC, or other companies that may be targeting the LED lighting marketplace. Also included in LED product revenues are revenues derived from government agencies to support the development of LED lighting.®.generate revenue from sales ofdevelop, manufacture and sell power and RF products. Also included are revenues derived from government agencies to support the development of SiC- and GaN-basedproducts, such as power and RF technology.product fabrication.our products fabrication, packaging and assembly. We operate research and development facilities in North Carolina, California, Wisconsin and China (including Hong Kong).•Overall Demand for Products and Applications using LEDs. Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown rapidly in recent years, adoption of LEDs for general lighting is relatively new, still limited, and faces significant challenges before widespread adoption. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain, and demand dynamics in the market. These uncertainties make demand difficult to forecast for us and our distributors.•Intense and Constantly Evolving Competitive Environment. Competition in the industry is intense and new companies are entering the LED market. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share. To remain competitive, market participants must continuously increase product performance and reduce costs to offset lower average sales prices.•Technological Innovation and Advancement. Innovations and advancements in LED technology continue to expand the potential commercial application of LEDs particularly in the general illumination market. However, new technologies or standards could emerge, or improvements could be made in existing technologies, that reduce or limit the demand for LEDs in certain markets.•Regulatory Actions Concerning Energy Efficiency. Many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency, even in some cases banning forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs.•Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation commonly occurs.ThirdFirst Quarter Fiscal 2011March 27,September 25, 2011:decreased 6%increased slightly to $219.2 million;$269.0 million from $268.4 million, which includes approximately $20 million in net sales from our acquisition of Ruud Lighting;$19.7$13.4 million in the thirdfirst quarter of fiscal 20112012 compared to $56.6$73.4 million in the thirdfirst quarter of fiscal 2010.2011. Net income per diluted share was $0.17$0.11 compared to $0.41$0.53 for the thirdfirst quarter of fiscal 2010;2011;$169.6$203.6 million at March 27,September 25, 2011 compared to $112.2$176.5 million at June 27, 201026, 2011 due to lower demand than originally targeted;the acquisition of Ruud Lighting;$62.8$34.0 million on capital expenditures in the thirdfirst quarter of fiscal 20112012 compared to $66.0$61.6 million in the thirdfirst quarter of fiscal 2010 as we continue to expand our manufacturing capacity;2011; andincreaseddecreased to $1,073.1$632.2 million at March 27,September 25, 2011 compared to $1,066.4$1,085.8 million at June 27, 2010.26, 2011, primarily due to the acquisition of Ruud Lighting.2011.2012. We anticipate focusing on the following key areas among others, in response to this competitive environment:•Build on our leadership in LED lighting.We plan to continue to be a catalyst for LED lighting adoption by developing innovative products that lead the market and enable new applications, such as the recent announcement of our LBR-30™ LED lamp, which provides unrivaled color accuracy and efficiency aimed at replacing energy-wasting incandescent lamps commonly used in track lights, commercial lighting, and residential recessed downlights. We see such new product launches and demonstrations as an important part of our effort to fundamentally change perceptions about LED lighting.•Better enable our customers to develop high quality LED based lighting products. We want to enhance our customers’ ability to create and successfully release high quality LED based lighting products. To accomplish this objective, we plan to continue to develop higher performing LED components that increase the value proposition for LED lighting and reduce their initial cost. We also plan to offer more highly integrated products, like the XLamp® XM-L LEDs in neutral- and warm-white color temperatures, XLamp XM-L EasyWhite™ LEDs and our XLamp MT-G LEDs. Additionally, we plan to expand our sales, applications and customer support capabilities.•Expand and enhance our production capacity. We plan to invest in the capacity to drive scale and support our transition to 150mm wafer production. We are targeting to expand our production capacity at multiple points along the LED manufacturing process. In addition, we plan to increase research and development spending to support the transition to 150mm wafers and the development of new products.•Continue to invest in and grow our SiC power product line.Our quarterly growth in SiC Power sales has slowed primarily in the solar market. Longer term, we anticipate rising demand for energy efficient power switching technology and believe this product line is well positioned to grow over the next several years. We recently announced the availability of the world’s first commercially available 1200 Volt SiC MOSFET. We believe this SiC switching technology will help to expand the market opportunity for our products. Three Months Ended
March 27, 2011 Three Months Ended
March 28, 2010 Dollars % of Revenue Dollars % of Revenue $ 219,168 100% $ 234,083 100% 127,773 58% 121,877 52% 91,395 42% 112,206 48% 31,016 14% 20,366 9% 37,603 17% 28,954 12% 2,693 1% 3,045 1% 405 0% 3,286 1% 19,678 9% 56,555 24% 106 0% 44 0% 2,170 1% 2,125 1% 21,954 10% 58,724 25% 3,073 1% 14,094 6% 18,881 9% 44,630 19% $ 0.17 $ 0.41 Nine Months Ended
March 27, 2011 Nine Months Ended
March 28, 2010 Dollars % of Revenue Dollars % of Revenue $ 744,588 100% $ 602,688 100% 401,518 54% 322,634 54% 343,070 46% 280,054 46% 84,981 11% 59,865 10% 100,171 13% 78,108 13% 8,105 1% 9,135 2% 1,306 0% 3,689 1% 148,507 20% 129,257 21% 107 0% 135 0% 6,356 1% 5,737 1% 154,970 21% 135,129 22% 28,278 4% 35,687 6% 126,692 17% 99,442 16% $ 1.15 $ 0.97 Three Months Ended September 25,
2011 September 26,
2010(in thousands, except per share amounts and percentages) Dollars % of Revenue Dollars % of Revenue Revenue, net $ 268,980 100 % $ 268,437 100 % Cost of revenue, net 170,952 64 % 137,908 51 % Gross profit 98,028 36 % 130,529 49 % Research and development 34,402 13 % 24,732 9 % Sales, general and administrative 45,539 17 % 29,202 11 % Amortization of acquisition related intangibles 3,925 1 % 2,706 1 % Loss on disposal or impairment of long-lived assets 775 — % 472 — % Operating income 13,387 5 % 73,417 27 % Other non-operating income (loss), net 974 — % (62 ) — % Interest income, net 1,969 1 % 2,016 1 % Income from operations before income taxes 16,330 6 % 75,371 28 % Income tax expense 3,511 1 % 17,335 6 % Net income 12,819 5 % 58,036 22 % Diluted earnings per share $ 0.11 $ 0.53 and nine months ended March 27,September 25, 2011 and March 28,September 26, 2010 were comprised of the following (in thousands, except percentages): Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 194,268 $ 211,814 $ (17,546) -8% $ 668,333 $ 549,827 $ 118,506 22% 89% 91% 90% 91% 24,900 22,269 2,631 12% 76,255 52,861 23,394 44% 11% 9% 10% 9% $ 219,168 $ 234,083 $ (14,915) -6% $ 744,588 $ 602,688 $ 141,900 24% Three Months Ended September 25,
2011 September 26,
2010 Change LED products $ 196,778 $ 228,765 $ (31,987 ) (14 )% Percent of revenues 73 % 85 % Lighting products 51,673 15,601 36,072 231 % Percent of revenues 19 % 6 % Power and RF products 20,529 24,071 (3,542 ) (15 )% Percent of revenues 8 % 9 % Total revenues $ 268,980 $ 268,437 $ 543 — % We derive the largest portion of our revenue from the sale of our LED products which comprised approximately 89%73% and 91%85% of our total revenues for the thirdfirst quarter of fiscal 20112012 and fiscal 2010,2011, respectively. For the nine months ended March 27, 2011 and March 28, 2010, revenue from the sale of our LED products comprised approximately 90% and 91% of our total revenues, respectively.8%14% to $194.3$196.8 million in the thirdfirst quarter of fiscal 20112012 from $211.8$228.8 million in the thirdfirst quarter of fiscal 2010.2011. This decrease was driven by weaker than expected demand for LED components and LED chips and a more aggressive pricing environmentenvironment. Although, there was weaker demand for LED components and LED chips. Forchips, the nine months ended March 27, 2011, revenue from our LED products increased approximately 22% to $668.3 million from $549.8 million for the nine months ended March 28, 2010. Our year over year sales growth was primarily driven by increased sales of LED components. The blended average selling price (ASP) for our LED products increased by 69%21.8% in the thirdfirst quarter of fiscal 20112012 compared to the thirdfirst quarter of fiscal 2010.2011. This increase was primarily due to a higher product mix of LED components, which have a higher ASP.a shiftan increase in product mix to a higher proportion of revenues generated fromboth the sales of our LED componentsexisting products and LEDthe sales of Ruud Lighting outdoor products, which represent an addition to our existing indoor lighting products versus our LED chips. our power and RF products comprised approximately 11%8% and 9% of our total revenues for the thirdfirst quarter of fiscal 20112012 and fiscal 2010,2011, respectively. For the nine months ended March 27, 2011 and March 28, 2010, revenue from the sale of our power and RF products comprised approximately 10% and 9% of our total revenues, respectively.increaseddecreased approximately 12%15% to $24.9$20.5 million in the thirdfirst quarter of fiscal 20112012 from $22.3$24.1 million in the thirdfirst fiscal quarter of 2010. For the nine months ended March 27, 2011 revenue from our power and RF products increased approximately 44% to $76.3 million from $52.9 million for the nine months ended March 28, 2010.. The increasedecrease in our power and RF products revenue was primarily due to increased orders for SiC Schottky diodesa slow down in demand in the solar inverter and GaN monolithic microwave integrated circuits, or (MMICs). Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 91,395 $ 112,206 $ (20,811) -19% $ 343,070 $ 280,054 $ 63,016 23% 42% 48% 46% 46% Three Months Ended September 25,
2011 September 26,
2010 Change Total gross profit $ 98,028 $ 130,529 $ (32,501 ) (25 )% Gross margin 36 % 49 % thirdfirst quarter of fiscal 20112012 decreased approximately 19%25% to $91.4$98.0 million from $112.2$130.5 million in the thirdfirst quarter of fiscal 2010.2011. Additionally, for the thirdfirst quarter of fiscal 20112012 our gross margin decreased to 42%36% from 48%49% in the thirdfirst quarter of fiscal 2010.2011. Factors contributing to the decrease in gross profit and gross margin were lower revenues, a more aggressive pricing environment and lower factory utilization. For the nine months ended March 27, 2011, gross profit increased approximately 23% to $343.1 million from $280.1 million for the nine months ended March 28, 2010. The increase in gross profit is due to higher revenue. Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 31,016 $ 20,366 $ 10,650 52% $ 84,981 $ 59,865 $ 25,116 42% 14% 9% 11% 10% Three Months Ended September 25,
2011 September 26,
2010 Change Research and development $ 34,402 $ 24,732 $ 9,670 39 % Percent of revenues 13 % 9 % thirdfirst quarter of fiscal 20112012 increased 52%39% to $31.0$34.4 million from $20.4$24.7 million in the thirdfirst quarter of fiscal 2010. For the nine months ended March 27, 2011 research and development expenses increased 42% to $85.0 million from $59.9 million for the nine months ended March 28, 2010.. The increase was primarily due to increased spending to support the transition to 150mm wafer capabilities as well as continued research and development activities focused on new LED chips, LED components, LED lighting products, power products and power products.the incremental research and development expense incurred from the acquisition of Ruud Lighting. Our research and development expenses vary significantly from quarter to quarter based on a number of factors, Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 37,603 $ 28,954 $ 8,649 30% $ 100,171 $ 78,108 $ 22,063 28% 17% 12% 13% 13% Three Months Ended September 25,
2011 September 26,
2010 Change Sales, general and administrative $ 45,539 $ 29,202 $ 16,337 56 % Percent of revenues 17 % 11 % thirdfirst quarter of fiscal 20112012 increased 30%56% to $37.6$45.5 million from $29.0$29.2 million in the thirdfirst quarter of fiscal 2010. For the nine months ended March 27, 2011 sales, general and administrative expenses increased 28% to $100.2 million from $78.1 million for the nine months ended March 28, 2010.. The increase in the thirdfirst quarter of fiscal 2012 from fiscal 2011 and for the nine months ended March 27, 2011 is primarily due to an increase in spending on sales and marketing as we continue to expand our direct sales resources and channels and invest in building the Cree brand.brand and incremental sales, general and administrative expenses from our acquisition of Ruud Lighting. Additionally, costs increased due to higherincreased legal costs associated with patent litigation expenses. Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 186 $ 186 $ - 0% $ 558 $ 558 $ - 0% 1,733 2,073 (340) -16% 5,200 6,219 (1,019) -16% 774 786 (12) -2% 2,347 2,358 (11) 0% $ 2,693 $ 3,045 $ (352) -12% $ 8,105 $ 9,135 $ (1,030) -11% Three Months Ended September 25,
2011 September 26,
2010 Change INTRINSIC $ 186 $ 186 $ — — % COTCO 1,264 1,734 (470 ) (27 )% LLF 750 786 (36 ) (5 )% Ruud Lighting 1,725 — 1,725 — % Total $ 3,925 $ 2,706 $ 1,219 45 % Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 405 $ 3,286 $ (2,881) -88% $ 1,306 $ 3,689 $ (2,383) -65% Three Months Ended September 25,
2011 September 26,
2010 Change Loss on disposal or impairment of long-lived assets, net $ 775 $ 472 $ 303 64 % $0.4$0.8 million on the disposal of long-lived assets in the thirdfirst quarter of fiscal 20112012 compared to a net loss of $3.3$0.5 million in the thirdfirst quarter of fiscal 2010. For the nine months ended March 27, 2011 we recorded a net loss of $1.3 million compared to a net loss of $3.7 million for the nine months ended March 28, 2010.. The causes of the fiscal 20112012 and fiscal 20102011 net losses include the disposal of equipment due to manufacturing process changes and the impairment of certain capitalized patent costs. Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 106 $ 44 $ 62 141% $ 107 $ 135 $ (28) -21% $ 2,170 $ 2,125 $ 45 2% $ 6,356 $ 5,737 $ 619 11% Three Months Ended September 25,
2011 September 26,
2010 Change Other non-operating income (loss), net $ 974 $ (62 ) $ 1,036 (1,671 )% Interest income, net 1,969 2,016 (47 ) (2 )% Total $ 2,943 $ 1,954 $ 989 51 % Net interest income was $2.2 million compared to $2.1 million for the third quarter of fiscal 2011 and fiscal 2010, respectively. For the nine months ended March 27, 2011 net interest income was $6.4 million compared to $5.7 million for the nine months ended March 28, 2010. Year over year changes in interest income are due to a combination of fluctuations in interest rates on our cash and investments and differences between the periods in our average cash and investment balances. Three Months Ended Nine Months Ended March 27, 2011 March 28, 2010 Change March 27, 2011 March 28, 2010 Change $ 3,073 $ 14,094 $ (11,021) -78% $ 28,278 $ 35,687 $ (7,409) -21% 14.0% 24.0% 18.2% 26.4% Three Months Ended September 25, 2011 September 26, 2010 Change Income tax expense $ 3,511 $ 17,335 $ (13,824 ) (80 )% Effective Tax Rate 21.5 % 23.0 % 35 percent35% is primarily due to the consolidation of our foreign operations, which are subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a material impact on our periodic effective tax rate.$3.1$3.5 million for an effective tax rate of 14.0%21.5% in the thirdfirst quarter of fiscal 20112012 as compared to income tax expense of $14.1$17.3 million for an effective tax rate of 24.0%23.0% in the thirdfirst quarter of fiscal 2010. For the nine months ended March 27, 2011 we recorded income tax expense of $28.3 million for an effective tax rate of 18.2% compared to income tax expense of $35.7 million for an effective tax rate of 26.4% for the nine months ended March 28, 2010.. The decrease in our effective tax rate is primarily due to the following:An overalla higher percentage of income in lower tax jurisdictions outside the United States.On December 17, 2010, the U.S. government passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) which included a retroactive extension of the Research and Development tax credit. As a result of the changes in the applicable tax laws resulting from the act, we estimate a benefit of approximately $3.6 million. A portion of this, $2.1 million, was treated as a discrete event and recorded as a reduction to our income tax expense for the three months ended December 26, 2010.During the first quarter of fiscal 2011, we were awarded a tax holiday on our operations in Malaysia. In certain conditions this arrangement allows us a tax holiday for ten years starting in fiscal 2011.During fiscal 2010, we were notified by the Internal Revenue Service that we had been allocated $39 million of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 (Internal Revenue Code Section 48C). This $39 million allocation was based upon our projecting that we would put into service approximately $130 million of qualified equipment into our United States manufacturing locations over the following three years. We generated $10.8 million of 48C credits in fiscal 2010. We anticipate generating the remainder of the awarded 48C credits (approximately $28.2 million) during fiscal 2011. The tax benefit (net of related basis adjustments) will be amortized into income over the useful life (5 years) of the underlying equipment that was placed in service to generate these credits. In fiscal 2011, we anticipate approximately a $5.1 million income tax benefit related to these credits, of this amount, $3.8 million has been recorded in the first nine months of fiscal 2011.increaseddecreased to $1.3 billion$928.3 million as of March 27,September 25, 2011 from $1.2 billion$1,316.6 million at June 27, 2010,26, 2011, primarily due to positive cash flows from operations.used to fund our acquisition of Ruud Lighting in the first quarter of fiscal 2012. The following table presents the components of our cash conversion cycle for our thirdfirst quarter of fiscal 20112012 and fourth quarter of fiscal 2010: March 27, 2011 June 27, 2010 Change 52 40 12 30% 119 76 43 57% (53) (43) (10) 23% 118 73 45 62% September 25, 2011 June 26,
2011 Change 55 44 11 25 % 107 106 1 1 % (39) (46) 7 (15 )% Cash conversion cycle 123 104 19 18 % (a) Days of sales outstanding (DSO) calculates the average collection period of our accounts receivable. DSO is based on the ending net trade receivables and the most recent quarterly revenue for each period. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts and revenue reserves, by average net revenue for the current quarter (90 days). (b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on net ending inventory and the most recent quarterly cost of sales for each period. DSI is calculated by dividing net ending inventory by average cost of goods sold for the current quarter (90 days). (c) Days in accounts payable (“DPO”)(DPO) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold for the current quarter (90 days).an increase inour acquisition of Ruud Lighting, which increased accounts receivable, inventory on hand. The increase in inventory is primarily related to our building product in response to a higher demand forecast than our actual results.March 27,September 25, 2011, all of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 27,September 25, 2011 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below our cost basis, the financial condition of the entity in which the investment is made, and our ability and intent to hold the investment for a period of time that may be sufficient for anticipated recovery in market value. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of March 27, 2011.September 25, 2011.2011.2012. We have and may continue to use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other Nine Months Ended March 27, 2011 March 28, 2010 Change $ 186,922 $ 155,631 $ 31,291 20% (218,128) (693,478) 475,350 -69% 43,768 594,619 (550,851) -93% 420 30 390 1300% $ 12,982 $ 56,802 $ (43,820) -77% Three Months Ended September 25, 2011 September 26, 2010 Change Cash provided by operating activities $ 41,645 $ 88,518 $ (46,873 ) (53 )% Cash used in investing activities (295,893 ) (83,202 ) (212,691 ) 256 % Cash provided by financing activities 2,355 9,664 (7,309 ) (76 )% Effects of foreign exchange changes 468 172 296 172 % Net (decrease) increase in cash and cash equivalents $ (251,425 ) $ 15,152 $ (266,577 ) (1,759 )% $186.9$41.6 million in the first nine months quarter of fiscal 20112012 compared to $155.6$88.5 million for the first nine months quarter of fiscal 2010.2011. This increasedecrease was primarily driven by a year over year risedecline in our net income, offset in part by higher levels of inventory.$218.1$295.9 million for the first nine months quarter of fiscal 20112012 compared to $693.5$83.2 million for the first nine months quarter of fiscal 2010.2011. This year over year decreaseincrease to cash used in investing activities was primarily the result of an overall net decrease in short term investment purchase activity andthe payment of contingent consideration related tocash for our COTCO acquisition. This decreaseacquisition of Ruud Lighting in the first quarter of fiscal 2012, which was partially offset by an increase in our current year capital expendituresproceeds from the sale and maturity of investments, which were liquidated to pay for property, plant and equipment to expand our global production capacity.$200$150 to $210$160 million in fiscal 20112012 for capital expenditures.$43.8$2.4 million for the first nine months quarter of fiscal 20112012 compared to $594.6$9.7 million for the first nine months quarter of fiscal 2010.2011. This year over year decreasechange was primarily due to the issuance of shares related to our sale of 12.65 million shares of our common stock in a follow-on public offering during fiscal 2010, with net proceeds of approximately $434.0 million.March 27,September 25, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.27, 2010,26, 2011, in the section entitled “Contractual Obligations” for the future minimum lease payments due under our operating leases as of June 27, 2010.27, 2010.“Basis"Basis of Presentation and Changes in Significant Accounting Policies,”" to our unaudited financial statements in Part I, Item 1 of this Quarterly Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.27, 2010.26, 2011.thirdfirst quarter of fiscal 20112012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. any material changes to and supersede the description of the risk factors affecting our business previously disclosed in “Part I, Item IA. Risk Factors” of our Annual Report on Form 10-K and any subsequent periodic reports. If any of the risks described below actually occurs, our business, financial condition or results of operations could be materially and adversely affected.565,000-square-foot565,000-square-foot facility in Huizhou, Guangdong Province, China to support LED chip and LED component production in 2009, and announced our intentionwe are targeting to expand LED wafer production at our facility in North Carolina. However, such investments take time to become fully operational, and we may not be able to expand quickly enough to exploit targeted market opportunities. There are also inherent execution risks in starting up a new factory or expanding production capacity that could increase costs and reduce our operating results, including design and construction cost overruns, poor production process yields and reduced quality control during the start-up phase.Aare sold throughto distributors. We rely on distributors to develop and expand their customer base as well as anticipate demand from their customers. If they are not successful, our growth and profitability may be adversely impacted. We typically recognize revenue on product sold to distributors when the item is shipped and title passes to the distributor (sell-in method). Distributors must balance the need to have enough products in stock in order to meet their customers’customers' needs against their internal target inventory levels and the risk of potential inventory obsolescence. The distributors’risks of inventory obsolescence are especially true with technological products. The distributors' internal target inventory levels vary depending on market cycles and a number of factors within each distributor over which we have very little, if any control. The risks of inventory obsolescence are especially true with technological products. In addition, certaincomponents as well as thosecomponents. In the lighting market we compete with companies that manufacture and sell traditional and LED lighting products. Competitors continue to offer new LED products with aggressive pricing and improved performance. Competitive pricing pressures are constantly changingmay change and maycould accelerate the rate of decline of our average sales prices.For example, Samsung and many other companies have enteredIf the investment in new capacity exceeds the growth in demand, the LED market.market is likely to become more competitive with additional pricing pressures. Additionally, new technologies could emerge or improvements could be made in existing technologies that may also reduce the demand for LEDs in certain markets.customers. For example, in fiscal 2010, two distribution customers, Arrow Electronics, Inc. and World Peace Industrial Co. Ltd., individually accounted for more than 10%including distributors. Most of our net revenue, for a combined total of 30% of our total net revenue. Sales to these and most of our other large customerscustomer orders are made on a purchase order basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their past purchasing behavior with little or no notice to us for various reasons, including: developing, or, in the case of our distributors, their customers developing, their own product solutions; choosing to purchase product from our competitors; incorrectly forecasting end market demand for their products; or experiencing a reduction in their market share in the markets for which they purchase our products. If our customers alter their past (or expected) purchasing behavior, or if we encounter any problems collecting amounts due from them, our financial condition and results ofwereare unable to balance customer demand and capacity.565,000-square-foot565,000-square-foot facility in Huizhou, Guangdong Province, China to support LED chip and LED component production in 2009 and we recently announced our intentioncontinue to expand LED wafer production at our facility in North Carolina. If we are not able to increase our production capacity at our targeted rate, or if there are unforeseen costs associated with adjusting our capacity levels, we may not be able to achieve our financial targets.demand, whichdemand. This could also result in lower margins and adversely impact our business and results of operations. Therefore,Additionally, if product demand decreases or we fail to forecast demand accurately, we may be required to record impairments on our long-lived assets including facilitiesor record excess inventory write off charges. We have in the past and equipment as well as intangible assets, and we couldmay in the future be required to record excess capacity charges, all of which would have a negative impact on our results of operations. Also, excess inventory may result in us recording inventory write-off charges.In these new markets, someMany of our existing customers who purchase our LED chips and LED components develop and manufacture products using those chips and components that are offered into the same markets. As a result, our current customers may now perceive us as a competitor.competitor in these new markets. In response, our customers may reduce or discontinue their orders for our products. This reduction in or discontinuation of orders could occur faster than our sales growth in these new markets, which could adversely affect our business, results of operations or financial condition.customers’customers' ability to produce, market and sell more integrated products using our LED products.Because our customers generally integrate our LED products into the products that they produce, market and sell, our LED products designed into a larger number of our customers’customers' products and in turn, our customers’customers' ability to produce, market and sell their LED products. For example, we have current and prospective customers that create, or plan to create, lighting systems using our LED components. However, the traditional lighting industry is still developing technical expertise with LED related designs, which may limit the success of our customers’customers' products. Even if our customers are able to develop and produce LED lighting products, there can be no assurance that our customers will be successful in marketing and selling these products in the marketplace.customers’customers' ability to procure efficient phosphors, develop high quality and highly efficient white LED components and gain access to the necessary intellectual property rights. Even if our customers are able to develop competitive white LED components using our blue LED chips, there can be no assurance that our customers will be successful in the marketplace.short-term demand for those lighting applications.especially in the case ofparticularly if a catastrophic event occurred at our single site for SiC wafer and LED fabrication. A catastrophic event, such as the Japan earthquake in March 2011, could result in the disruption to our supply chain or to any of our critical business or information technology systems.manufacturing. This could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable as well, such as impacts to our customers and their supply chain, which could cause delays in new orders, delays in completing sales or even order cancellations.requirements;customers’customers' ability to develop competitive products incorporating our products; andcustomers’customers' products by the market.If we fail to evaluate and execute strategic opportunities successfully, our business may suffer.From time to time, we evaluate strategic opportunities available to us for product, technology or business transactions, such as business acquisitions or divestitures. For example, in March 2007 we acquired COTCO and in February 2008 we acquired LLF. If we choose to enter into such transactions, we face certain risks, such as the failure of an acquired business to meet our performance expectations, diversion of management attention, retention of existing customers of our current and acquired businesses due to concerns that new product lines may be in competition with the customers of existing product lines, and difficulty integrating an acquired business’s operations, personnel and financial and operating systems into our current business.We may not be able to adequately address these risks or any other problems that arise from our recent or future acquisitions or divestitures. Any failure to successfully evaluate strategic opportunities and address risks or other problems that arise related to any such business transaction could adversely affect our business, results of operations or financial condition.Variations in our production yields could impact our ability to reduce costs and could cause our margins to decline and our operating results to suffer.All of our products are manufactured using technologies that are highly complex. The number of usable items, or yield, from our production processes may fluctuate as a result of many factors, including but not limited to the following:variability in our process repeatability and control;contamination of the manufacturing environment;equipment failure, power outages, system failures or variations in the manufacturing process;lack of consistency and adequate quality and quantity of piece parts and other raw materials, and other bill of materials items;production yield loss, inventory shrinkage or human errors;defects in production processes (including system assembly) either within our facilities or at our contractors; andany transitions or changes in our production process, planned or unplanned.In the past, we have experienced difficulties in achieving acceptable yields on certain products, which has adversely affected our operating results. We may experience similar problems in the future, and we cannot predict when they may occur or their severity.In addition, our ability to convert volume manufacturing to larger diameter substrates can be an important factor in allowing for a more cost effective manufacturing process. If we are unable to make this transition in a timely or cost effective manner, our results could be negatively impacted.In some instances, we may offer products for future delivery at prices based on planned yield improvements or increased cost efficiencies from other production advances. Failure to achieve these planned improvements or advances could significantly affect our margins and operating results.stock priceoperations in foreign countries expose us to certain risks inherent in doing business internationally, which may be volatile.Historically,adversely affect our common stock has experienced substantial price volatility, particularly as a result of significant fluctuations in our revenue, earnings and margins over the past few years and variations between our actual financial results and the published expectations of analysts. For example, the closing price per share of our common stock on the NASDAQ Global Select Market ranged from a low of $12.57 in fiscal 2009 to a high of $83.38 in fiscal 2010. If our future operating results or margins are below the expectations of stock market analysts or our investors, our stock price will likely decline.Speculation in the press or investment community about our strategic position, financial condition,business, results of operations or significant transactions canfinancial condition.causesubject to other types of risks, including the following:stock price.investment in certain countries, regions, or areas outside of the United States. In particular, speculation aroundwe have received and may continue to receive such incentives in connection with our market opportunities for energy efficient lightingoperations in Asia, as Asian national and local governments seek to encourage the development of the technology industry. Government incentives may haveinclude tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations. These same governments also may provide increased incentives to or require production processes that favor local companies, which could further negatively impact our business and results of operations.dramaticrisk of general economic disruption in affected countries, which could also result in an adverse effect on our stock price, especially as various government agencies announce their planned investments in energy efficient technology, including lighting.13,11, “Commitments and Contingencies,” to our consolidated financial statements included in Item 1 of this Quarterly Report and as described in more detail in Note 13, "Commitments and Contingencies" to our consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 27, 2010 and updated in this Form 10-Q.26, 2011. Defending against existing and potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful, or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially affect our results of operations and financial condition.customer’scustomer's products that incorporate our products, and an adverse result could impair the customer’scustomer's demand for our products. We have also promised certain of our customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under these indemnification obligations, we may be responsible for future payments to resolve infringement claims against them.customers’customers' or suppliers’,suppliers' ability to access the capital markets.orincluding our distributors and their customers, may continue to experience difficulty obtaining the financing necessary to support historical or projected purchasing patterns, which could negatively affect our results of operations.Our operations in foreign countries, including China and other Asian countries, expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.As a result of acquisitions and organic growth, we have operations, manufacturing facilities and contract manufacturing arrangements in foreign countries that expose us to certain risks. For example, fluctuations in exchange rates may affect our revenues, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:protection of intellectual property and trade secrets;tariffs, customs and other barriers to importing/exporting materials and products in a cost effective and timely manner;timing and availability of export licenses;rising labor costs;disruptions in or inadequate infrastructure of the foreign countries where we operate;difficulties in accounts receivable collections;difficulties in staffing and managing international operations;the burden of complying with foreign and international laws and treaties; andthe burden of complying with and changes in international taxation policies.In some instances, we have been provided and may continue to receive competing incentives from foreign governments to encourage our investment in certain countries, regions, or areas outside of the United States. In particular, we have received and may continue to receive such incentives in connection with our operations in China, as the Chinese national and local governments seek to encourage the development of the technology industry in China. Government incentives may include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to us due to our foreign operations. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any reduction or elimination of incentives currently provided to our operations could adversely affect our business and results of operations. These same governments also may provide increased incentives to or require production processes that favor local companies, which could further negatively impact our business and results of operations.Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.2010,2011, approximately 81%76% of our revenue was derived from sales to non-U.S. customers, with approximately 40%36% of revenue from sales to customers in China (including Hong Kong).China. As such, a significant slowdown in these foreign economies or lower investments in new infrastructure could have a negative impact on our sales. We also purchase a portion of the materials included in our products from overseas sources. could be suspended, which could have a material adverse effect on our business. such as Federal Express and United Parcel Service, for the delivery of our products from vendors and to customers in both the United States and abroad. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security.the jurisdiction in which profits are determined to be earned and taxed;China (including Hong Kong).China. For example, there is substantial competition in China for qualified and capable personnel, particularly experienced engineers and technical personnel, which may make it difficult for us to recruit and retain qualified employees. Also, within Huizhou, China, there are other large companies buildingWe may be subject to intellectual property theft or misuse, which could harm our business and results of operations.We may face attempts by others to gain unauthorized access through the Internet to our information technology systems. These attempts might be the result of industrial or other espionage, or actions by hackers seeking to harm us. We actively seek to prevent, detect and investigate any security incidents, but in some cases we might be unaware of an incident or its magnitude and effects. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development, product development, and marketing could be reduced. Our business could be subject to significant disruption, and we could suffer monetary or other losses.If the U.S. government or its agencies discontinue or curtail their funding, our business may suffer.Changes in U.S. federal budget priorities could adversely affect our business and results of operations. Historically, government agencies have funded a significant portion of our research and development activities. In addition, government agencies have purchased products directly from us and products from our customers for which we supply components. When the government changes budget priorities, such as in times of war or financial crisis, our research and development funding and our product sales are at risk. If U.S. government funding is discontinued or significantly reduced, our business and results of operations could be adversely affected.wouldcould likely result in increased costs for our U.S. operations, such as increased control and remediation requirements, additional monitoring, recordkeeping and reporting costs.Our results of operations could vary as a result of the methods, estimates and judgments that we use in applying our accounting policies, including changes in the accounting regulations to be applied.The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 27, 2010). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.Likewise, our results of operations may be impacted due to changes in the accounting rules to be applied, such as the increased use of fair value measurement rules and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards. and investments in equity interests for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets or goodwill may not be recoverable include a decline in stock price and market capitalization and slower growth rates in our industry. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which anythe preservation of principal. However, our investments are generally not FDIC insured and may lose value and/or become illiquid regardless of their rating.Not applicable.Item 3.Defaults Upon Senior SecuritiesItem 4.(Removed and Reserved)Item 5.Other InformationItem 6.Exhibits 2.1 Stock Purchase Agreement, dated as of August 17, 2011 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated August 17, 2011, as filed with the Securities and Exchange Commission on August 17, 2011) 10.1 Management Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.2 Notice of Grant to Charles M. Swoboda, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.3 Notice of Grant to John T. Kurtzweil, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.4 Notice of Grant to Stephen D. Kelley, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.5 Offer Letter Agreement executed August 16, 2011 between Cree, Inc. and Alan J. Ruud 10.6 Schedule of Compensation for Non-Employee Directors 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 March 27,September 25, 2011 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements*Statements(a)*(a) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. CREE, INC April 20,October 19, 2011 John T. Kurtzweil Executive Vice President, Chief Financial Officer and Treasurer (Authorized Officer and Principal Financial and Chief Accounting Officer) EXHIBIT INDEX 2.1 Stock Purchase Agreement, dated as of August 17, 2011 (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated August 17, 2011, as filed with the Securities and Exchange Commission on August 17, 2011) 10.1 Management Incentive Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.2 Notice of Grant to Charles M. Swoboda, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.3 Notice of Grant to John T. Kurtzweil, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.4 Notice of Grant to Stephen D. Kelley, dated August 15, 2011 (incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, dated August 15, 2011, as filed with the Securities and Exchange Commission on August 19, 2011) 10.5 Offer Letter Agreement executed August 16, 2011 between Cree, Inc. and Alan J. Ruud 10.6 Schedule of Compensation for Non-Employee Directors 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 Statements*Statements(a)*(a) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. 41