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CREE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
[August 27, 2014]

CREE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Executive Summary The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, including a brief discussion of our business and products, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Annual Report. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview Cree, Inc. (Cree, we, our, or us) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. Our products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.

25 -------------------------------------------------------------------------------- Our LED products consist of LED components, LED chips, and silicon carbide (SiC) materials. Our success in selling LED products depends upon our ability to offer innovative products and to enable our customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.

Our lighting products primarily consist of LED lighting systems and bulbs. We design, manufacture and sell lighting fixtures and lamps for the commercial, industrial and consumer markets.

In addition, we develop, manufacture and sell power and RF devices. Our power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Our RF devices are made from gallium nitride (GaN) and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).

The majority of our products are manufactured at our production facilities located in North Carolina, Wisconsin, and China. We also use contract manufacturers for certain aspects of product fabrication, assembly and packaging. We operate research and development facilities in North Carolina, California, Wisconsin, India, and China (including Hong Kong).

Cree, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 8 of this Annual Report.

Reportable Segments Our three reportable segments are: • LED Products • Lighting Products • Power and RF Products Reportable segments are components of an entity that have separate financial data that the entity's Chief Operating Decision Maker (CODM) regularly reviews when allocating resources and assessing performance. Our CODM is the Chief Executive Officer.

Our CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in our segment revenue disclosure. As such, total segment revenue is equal to our consolidated revenue.

Our CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the Consolidated Statements of Income must be included to reconcile the consolidated gross profit to our consolidated income before income taxes.

For financial results by reportable segment, please refer to Note 13, "Reportable Segments," in our consolidated financial statements included in Item 8 of this Annual Report.

Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • Overall Demand for Products and Applications using LEDs. Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although the market for LED lighting has grown in recent years, adoption of LEDs for general lighting is relatively low and faces significant challenges before widespread adoption. Demand also fluctuates based on various market cycles, a continuously evolving LED industry supply chain and demand dynamics in the market. These uncertainties make demand difficult to forecast for us and our customers.

• Intense and Constantly Evolving Competitive Environment. Competition in the LED and lighting industry is intense. Many companies have made significant investments in LED development and production equipment.

Traditional lighting companies and new entrants are investing in LED-based lighting products as LED adoption has gained momentum.

Traditional lighting companies have taken steps to try and limit access to their sales channels, including lighting agents and distributors.

Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications to LED-based solutions. To remain competitive, market participants must continuously increase product performance and reduce costs. To address these competitive pressures, we have invested in research and development 26--------------------------------------------------------------------------------activities to support new product development and to deliver higher levels of performance and lower costs to differentiate our products in the market.

• Technological Innovation and Advancement. Innovations and advancements in LED, power and RF technologies continue to expand the potential commercial application for our products, particularly in the general illumination, power electronics and wireless markets. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.

• Regulatory Actions Concerning Energy Efficiency. Many countries have already instituted or have announced plans to institute government regulations and programs designed to encourage or mandate increased energy efficiency, in some cases even banning forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. Government agencies are also involved in setting standards for LED lighting, which can affect market acceptance and the availability of rebates from government agencies or third parties such as utilities. While this trend is generally positive, these regulations are affected by changing political priorities and evolving technical standards which can modify or limit the effectiveness of these new regulations.

• Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common.

Fiscal 2014 Overview The following is a summary of our financial results for the year ended June 29, 2014: • Our year-over-year revenue increased 19% to $1.6 billion.

• Gross margin remained consistent at 38%. Gross profit increased by $96 million to $619 million.

• Operating income was $134 million in fiscal 2014 compared to $96 million in fiscal 2013. Net income per diluted share was $1.01 in fiscal 2014 compared to $0.74 in fiscal 2013.

• Combined cash, cash equivalents and short-term investments increased to $1.2 billion at June 29, 2014 compared to $1.0 billion at June 30, 2013. Cash provided by operating activities was $319 million in fiscal 2014, compared to $285 million in fiscal 2013.

• Inventories increased to $285 million at June 29, 2014 compared to $197 million at June 30, 2013.

• We spent $179 million on purchases of property and equipment in fiscal 2014 compared to $77 million in fiscal 2013.

Business Outlook We project that the markets for our products will remain highly competitive during fiscal 2015. We anticipate focusing on the following key areas, among others, in response to this competitive environment: • Drive innovation to lower upfront customer cost and further improve payback. The LED lighting market has been enabled with tremendous innovation over the last decade with technology improvements in LEDs and LED lighting systems. We see many applications today where LED lighting offers a clear payback over conventional lighting products, whether it is for new construction or for lighting retrofits installed in existing buildings. We believe we can further accelerate adoption by continuing to innovate to lower the upfront cost and make the payback even more compelling. The approach also applies to our Power and RF product lines, where today our technology has tremendous technical benefits but a higher upfront cost. We are focused on developing the next generation devices that improve payback and expand the market for these products.

• Drive LED lighting growth and build the Cree brand. We target strong growth in both the LED fixture and LED bulb product lines, driven by the new products we released over the last year and continued innovation in the year ahead. We plan to continue to drive awareness of the Cree brand and LED lighting in both the consumer and commercial markets.

27--------------------------------------------------------------------------------• Expand our work with third party manufacturers to enable growth in LEDs and LED Lighting. We work with third party manufacturers for the production of LEDs and LED lighting systems. Our internal team is focused on the high-performance, high-power LED chips that differentiate Cree LEDs in the market, and we work with external LED manufacturers on mid-power sapphire LED chips. We also have LED lighting manufacturing partners which are focused on building some of the higher volume products, which gives us the flexibility to utilize our own factories to support the new product ramps and shorten the time to market for new technologies. We plan to expand production at both our manufacturing partners and our own factories to support our targeted growth, optimize our factory utilization and focus our capital spending on higher value products.

• Build financial momentum. We target generating incremental operating margin through revenue growth and incremental operating leverage across the business. We target revenue growth in all three product segments, with LED lighting being the biggest growth driver. While we plan to continue to invest in research and development, sales, marketing, general and administrative expenses to support our growth and other strategic initiatives, we target revenue to increase faster than operating expenses providing incremental operating margin growth for the year.

Results of Operations The following table sets forth certain consolidated statement of income data for the periods indicated (in thousands, except per share amounts and percentages): Fiscal Years Ended June 29, 2014 June 30, 2013 June 24, 2012 % of % of % of Dollars Revenue Dollars Revenue Dollars Revenue Revenue, net $1,647,641 100 % $1,385,982 100 % $1,164,658 100 % Cost of revenue, net 1,028,846 62 % 862,722 62 % 755,196 65 % Gross profit 618,795 38 % 523,260 38 % 409,462 35 % Research and development 181,382 11 % 155,889 11 % 143,357 12 % Sales, general and administrative 268,460 16 % 236,581 17 % 197,092 17 % Amortization or impairment of acquisition-related intangibles 31,988 2 % 30,823 2 % 26,274 2 % Loss on disposal or impairment of long-lived assets 2,690 0 % 3,473 0 % 3,481 0 % Operating income 134,275 8 % 96,494 7 % 39,258 3 % Non-operating income, net 13,295 1 % 11,063 1 % 8,389 1 % Income before income taxes 147,570 9 % 107,557 8 % 47,647 4 % Income tax expense 23,379 1 % 20,632 1 % 3,235 - % Net income $124,191 8 % $86,925 6 % $44,412 4 % Basic earnings per share $1.03 $0.75 $0.39 Diluted earnings per share $1.01 $0.74 $0.39 28-------------------------------------------------------------------------------- Table of Contents Revenue Revenue was comprised of the following (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, June 30, June 24, 2014 2013 2012 2013 to 2014 2012 to 2013 LED Products $833,684 $801,483 $756,924 $32,201 4 % $44,559 6 % Percent of revenue 51 % 58 % 65 % Lighting Products 706,425 495,089 334,704 211,336 43 % 160,385 48 % Percent of revenue 43 % 36 % 29 % Power and RF Products 107,532 89,410 73,030 18,122 20 % 16,380 22 % Percent of revenue 6 % 6 % 6 % Total revenue $1,647,641 $1,385,982 $1,164,658 $261,659 19 % $221,324 19 % Our consolidated revenue increased 19% to $1.6 billion in fiscal 2014 from $1.4 billion in fiscal 2013. This year-over-year increase was due to higher sales across all three of our reportable segments, but driven primarily by the 43% increase in Lighting Products. Lighting Products revenue increased due to an overall increase in the number of units sold, including new product introductions, partially offset by a reduction in the average selling prices, or ASP.

Our consolidated revenue increased 19% to $1.4 billion in fiscal 2013 from $1.2 billion in fiscal 2012. This year-over-year increase was due to higher sales across all three of our reportable segments, but driven primarily by the 48% increase in Lighting Products. Lighting Products revenue increased primarily due to an increase in sales of existing products, the sales of new and re-designed products introduced during the fiscal year, and the recognition of revenue from the Ruud Lighting acquisition for a full fiscal year.

LED Products Segment Revenue LED Products revenue represented the largest portion of our revenue with approximately 51%, 58%, and 65% of our total revenue for fiscal 2014, 2013, and 2012, respectively. LED Products revenue was $833.7 million, $801.5 million, and $756.9 million for fiscal 2014, 2013, and 2012, respectively.

LED Products revenue increased 4% to $833.7 million in fiscal 2014 from $801.5 million in fiscal 2013. This increase was the result of an overall increase in the number of units sold, primarily from our newer products, partially offset by a decline in selling prices. The ASP for LED Products decreased by 13% in fiscal 2014 compared to fiscal 2013, due primarily to market downward pricing pressure.

LED Products revenue increased 6% to $801.5 million in fiscal 2013 from $756.9 million in fiscal 2012. This increase was the result of an overall increase in the number of units sold, primarily for our newer products, partially offset by a decline in selling prices. LED Products overall ASP decreased by 8% in fiscal 2013 compared to fiscal 2012 due primarily to a higher mix of new lower priced products and competitive pricing pressures.

Lighting Products Segment Revenue Lighting Products revenue represented approximately 43%, 36%, and 29% of our total revenue for fiscal 2014, 2013 and 2012 respectively. Lighting Products revenue was $706.4 million, $495.1 million, and $334.7 million for fiscal 2014, 2013, and 2012 respectively.

Lighting Products revenue increased 43% to $706.4 million in fiscal 2014 from $495.1 million in fiscal 2013. This increase was the result of an overall increase in the number of units sold, partially offset by a reduction in selling prices. Lighting Products overall ASP decreased by 30% in fiscal 2014 compared to fiscal 2013 primarily due to a higher mix of new lower priced consumer lighting products.

Lighting Products revenue increased 48% to $495.1 million in fiscal 2013 from $334.7 million in fiscal 2012. This increase was the result of an overall increase in the number of units sold, including sales from new and re-designed products, as well as recognizing a full year of revenue in fiscal 2013 from the sale of Ruud Lighting products. Lighting Products overall ASP decreased by approximately 27% in fiscal 2013 compared to fiscal 2012 due to a change in product mix.

29-------------------------------------------------------------------------------- Table of Contents Power and RF Products Segment Revenue Power and RF Products revenue represented approximately 6%, 6%, and 6% of our total revenue for fiscal 2014, 2013, and 2012, respectively. Power and RF Products revenue was $107.5 million, $89.4 million, and $73.0 million for fiscal 2014, 2013, and 2012, respectively.

Power and RF Products revenue increased 20% to $107.5 million in fiscal 2014 from $89.4 million in fiscal 2013. This increase was primarily the result of higher RF product unit sales in fiscal 2014. The increased volume was partially offset by a reduction in selling prices. Power and RF Products overall ASP decreased by 12% in fiscal 2014 compared to fiscal 2013 primarily due to a higher mix of new lower priced Power and RF products.

Power and RF Products revenue increased 22% to $89.4 million in fiscal 2013 from $73.0 million in fiscal 2012. This increase was primarily the result of higher RF product unit sales in fiscal 2013. The overall ASP for Power and RF Products decreased by 9% in fiscal 2013 compared to fiscal 2012 primarily due to a higher mix of new lower priced Power and RF products.

Gross Profit and Gross Margin Gross profit and gross margin were as follows (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 LED Products gross profit $381,003 $344,649 $290,642 $36,354 11 % $54,007 19 % LED Products gross margin 46 % 43 % 38 % Lighting Products gross profit 197,304 148,947 103,396 48,357 32 % 45,551 44 % Lighting Products gross margin 28 % 30 % 31 % Power and RF Products gross profit 60,723 48,127 32,051 12,596 26 % 16,076 50 % Power and RF Products gross margin 56 % 54 % 44 % Unallocated costs (20,235 ) (18,463 ) (16,627 ) (1,772 ) 10 % (1,836 ) 11 % Consolidated gross profit $618,795 $523,260 $409,462 $95,535 18 % $113,798 28 % Consolidated gross margin 38 % 38 % 35 % Our consolidated gross profit increased 18% to $618.8 million in fiscal 2014 from $523.3 million in fiscal 2013. Our consolidated gross margin remained consistent at 38% for fiscal 2014 and fiscal 2013. The consolidated gross profit increase was driven by increased revenue volumes across all reporting segments.

The consolidated gross margin benefited from improvements in LED Products and Power and RF Products, primarily due to higher revenue, factory cost reductions, the introduction of new lower cost products, and higher factory utilization.

These improvements were offset by lower margins in Lighting Products, primarily due to changes in product mix.

Our consolidated gross profit increased 28% to $523.3 million in fiscal 2013 from $409.5 million in fiscal 2012. Our consolidated gross margin increased to 38% in fiscal 2013 from 35% in fiscal 2012. These consolidated gross profit and gross margin increases were due to the improvements in LED Products and Power and RF Products, primarily due to higher volume of units sold, factory cost reductions, the introduction of new lower cost products, and higher factory utilization.

LED Products Segment Gross Profit and Gross Margin Our LED Products gross profit was $381.0 million, $344.6 million, and $290.6 million for fiscal 2014, 2013, and 2012, respectively. LED Products gross margin was 46%, 43%, and 38% for fiscal 2014, 2013, and 2012, respectively.

LED Products gross profit increased 11% to $381.0 million in fiscal 2014 from $344.6 million in fiscal 2013, and LED Products gross margin increased to 46% in fiscal 2014 from 43% in fiscal 2013. LED Products gross profit and gross margin increased during fiscal 2014 due to higher revenue, factory cost reductions, the introduction of new lower cost products and higher factory utilization. These benefits more than offset the ASP decline in fiscal 2014 as compared to fiscal 2013.

LED Products gross profit increased 19% to $344.6 million in fiscal 2013 from $290.6 million in fiscal 2012, and LED Products gross margin increased to 43% in fiscal 2013 from 38% in fiscal 2012. LED Products gross profit and gross margin increased during fiscal 2013 due to factory cost reductions, the introduction of new lower cost products and higher factory utilization. These benefits more than offset the ASP decline in fiscal 2013 as compared to fiscal 2012.

30-------------------------------------------------------------------------------- Table of Contents Lighting Products Segment Gross Profit and Gross Margin Lighting Products gross profit was $197.3 million, $148.9 million, and $103.4 million for fiscal 2014, 2013, and 2012, respectively. Lighting Products gross margin was 28%, 30%, and 31% for fiscal 2014, 2013, and 2012, respectively.

Lighting Products gross profit increased 32% to $197.3 million in fiscal 2014 from $148.9 million in fiscal 2013, due to growth in LED lighting products sales. Lighting Products gross margin decreased to 28% in fiscal 2014 from 30% in fiscal 2013, primarily due to changes in product mix driven primarily by higher sales of consumer lighting products, which have lower gross margins.

Lighting Products gross profit increased 44% to $148.9 million in fiscal 2013 from $103.4 million in fiscal 2012, primarily due to an increase in the number of overall units sold. Lighting Products gross margin decreased to 30% in fiscal 2013 from 31% in fiscal 2012, primarily due to a change in product mix.

Power and RF Products Segment Gross Profit and Gross Margin Power and RF Products gross profit was $60.7 million, $48.1 million, and $32.1 million for fiscal 2014, 2013, and 2012, respectively. Power and RF Products gross margin was 56%, 54%, and 44% for fiscal 2014, 2013, and 2012, respectively.

Power and RF Products gross profit increased 26% to $60.7 million in fiscal 2014 from $48.1 million in fiscal 2013. Power and RF Products gross margin increased to 56% in fiscal 2014 from 54% in fiscal 2013. Power and RF Products gross profit and gross margin increases were due primarily to higher revenue, factory cost reductions, increased factory utilization, and introduction of new lower cost products. These benefits more than offset the ASP decline in fiscal 2014 as compared to fiscal 2013.

Power and RF Products gross profit increased 50% to $48.1 million in fiscal 2013 from $32.1 million in fiscal 2012. Power and RF Products gross margin increased to 54% in fiscal 2013 from 44% in fiscal 2012. Power and RF Products gross profit and gross margin increases were due primarily to factory cost reductions, increased factory utilization, and higher sales of new lower cost products.

These benefits more than offset the ASP decline in fiscal 2013 as compared to fiscal 2012.

Unallocated Costs Unallocated costs were $20.2 million, $18.5 million, and $16.6 million for fiscal 2014, 2013, and 2012, respectively. These costs consisted primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under our 401(k) plan. These costs were not allocated to the reportable segments' gross profit because our CODM does not review them regularly when evaluating segment performance and allocating resources.

Unallocated costs increased by $1.8 million in fiscal 2014 and by $1.9 million in fiscal 2013 as compared to fiscal 2013 and fiscal 2012, respectively, primarily attributable to higher incentive and stock-based compensation incurred as a result of improved business performance year over year.

For further information on the allocation of costs to segment gross profit, refer to Note 13, "Reportable Segments," in our consolidated financial statements included in Item 8 of this Annual Report.

Research and Development Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies.

The following sets forth our research and development expenses in dollars and as a percentage of revenue (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 Research and development $181,382 $155,889 $143,357 $25,493 16 % $12,532 9 % Percent of revenue 11 % 11 % 12 % Research and development expenses increased 16% in fiscal 2014 to $181.4 million compared to $155.9 million in fiscal 2013, which was a 9% increase from $143.4 million in fiscal 2012. In both fiscal 2014 and fiscal 2013, the increases were primarily 31 -------------------------------------------------------------------------------- due to increased spending on research and development activities focused on new higher performance and lower cost LED chips, LED components, LED lighting products and Power and RF products.

Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities. We anticipate that in general our research and development expenses will continue to increase over time to support future growth.

Sales, General and Administrative Sales, general and administrative expenses were comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consisted of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs and travel and other costs. The following table sets forth our sales, general and administrative expenses in dollars and as a percentage of revenue (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 Sales, general and administrative $268,460 $236,581 $197,092 $31,879 13 % $39,489 20 % Percent of revenue 16 % 17 % 17 % Sales, general and administrative expenses in fiscal 2014 increased 13% to $268.5 million from $236.6 million in fiscal 2013, which was a 20% increase from $197.1 million in fiscal 2012. In both fiscal 2014 and fiscal 2013, the increases were primarily due to increases in spending on sales and marketing for lighting products, including commissions, trade shows and advertising, as we continue to expand our direct sales resources and channels and invest in building and promoting the Cree brand. Additionally, the increases included personnel additions during fiscal 2014 and fiscal 2013 to support our growth.

Amortization or Impairment of Acquisition-Related Intangibles As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names. During fiscal 2012, we acquired Ruud Lighting, resulting in $206.0 million of amortizable intangible assets, principally composed of customer relationships, developed technology and trade names.

Amortization of intangible assets related to our acquisitions is as follows (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, June 30, June 24, 2014 2013 2012 2013 to 2014 2012 to 2013 Customer relationships $7,359 $8,509 $8,540 ($1,150 ) (14 )% ($31 ) 0 % Developed technology 19,446 20,331 16,081 (885 ) (4 )% 4,250 26 % Non-compete agreements 1,960 1,960 1,633 - 0 % 327 20 % Trade names, finite-lived 23 23 20 - 0 % 3 15 % Total $28,788 $30,823 $26,274 ($2,035 ) (7 )% $4,549 17 % Amortization of acquisition-related intangibles decreased in fiscal 2014 compared to fiscal 2013, primarily due to less amortization expense for customer relationships and developed technology in fiscal 2014. For fiscal 2013 compared to fiscal 2012, amortization of acquisition-related intangibles increased primarily due to the completion of in-process research and development projects in fiscal 2013.

In the fourth quarter of fiscal 2014, we performed a qualitative impairment assessment on each of our indefinite-lived trade names. We determined that, with the exception of the Ruud Lighting trade name, the fair value of each indefinite-lived trade name was more likely than not greater than its carrying value and therefore a quantitative impairment assessment was not required. With respect to the Ruud Lighting trade name, we determined that this trade name has a finite useful life and therefore performed a quantitative impairment assessment. As a result of the quantitative impairment assessment, we recognized a $3.2 million impairment of the Ruud Lighting trade name.

32 -------------------------------------------------------------------------------- Loss on Disposal or Impairment of Long-Lived Assets We operate a capital intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our equipment and capitalized patent costs for possible impairment. The following table sets forth our loss on disposal or impairment of long-lived assets (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 Loss on disposal or impairment of long-lived assets, net $2,690 $3,473 $3,481 ($783 ) (23 )% ($8 ) 0 % We recognized a net loss of $2.7 million, $3.5 million, and $3.5 million on the disposal of long-lived assets in fiscal years 2014, 2013, and 2012 respectively.

These net losses were primarily the result of disposals of equipment due to changes in various manufacturing processes and the abandonment of certain patent assets as a result of technological obsolescence.

Non-Operating Income, net The following table sets forth our non-operating income, net (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 Foreign currency gain, net $45 $735 $171 ($690 ) (94 )% $564 330 % Gain on sale of investments, net 68 111 994 (43 ) (39 )% (883 ) (89 )% Interest income, net 11,932 7,882 7,457 4,050 51 % 425 6 % Other, net 1,250 2,335 (233 ) (1,085 ) (46 )% 2,568 (1,102 )% Non-operating income, net $13,295 $11,063 $8,389 $2,232 20 % $2,674 32 % During fiscal 2014, 2013 and 2012, we had no debt and we were in a net interest income position. Our investments consisted of corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. The primary objective of our investment policy is preservation of principal.

Foreign currency gain, net. Foreign currency gain, net consisted primarily of remeasurement adjustments resulting from consolidating our international subsidiaries. The changes in foreign currency gain, net were primarily due to fluctuations in the exchange rate between the Chinese Yuan and the United States Dollar.

Gain on sale of investments, net. Gain on sale of investments, net was higher in fiscal 2012, primarily due to gains realized on sales of investments liquidated in fiscal 2012 in order to fund our acquisition of Ruud Lighting.

Interest income, net. Interest income was $11.9 million and $7.9 million in fiscal 2014 and fiscal 2013, respectively. The increase in interest income in fiscal 2014 was primarily due to earning higher investment yields and higher invested balances as compared to fiscal 2013. Interest income increased from $7.5 million in fiscal 2012 to $7.9 million in fiscal 2013 due to having higher invested cash and investment balances partially offset by lower interest rates.

Other, net. Other, net decreased in fiscal 2014 as compared to fiscal 2013, and increased in fiscal 2013 compared to fiscal 2012, primarily due to the one-time payment received in fiscal 2013 in connection with the SemiLEDs patent litigation settlement.

33 --------------------------------------------------------------------------------Income Tax Expense The following table sets forth our income tax expense in dollars and our effective tax rate (in thousands, except percentages): Fiscal Years Ended Year-Over-Year Change June 29, June 30, June 24, 2014 2013 2012 2013 to 2014 2012 to 2013 Income tax expense $23,379 $20,632 $3,235 2,747 13 % 17,397 538 % Effective tax rate 16 % 19 % 7 % We recognized income tax expense of $23.4 million in fiscal 2014 as compared to income tax expense of $20.6 million in fiscal 2013. The decrease in the effective tax rate from 19% in fiscal 2013 to 16% in fiscal 2014 was primarily due to the tax benefit related to the receipt of U.S. federal tax credits awarded on November 15, 2013 as part of Phase II of the American Recovery and Reinvestment Act of 2009 (Internal Revenue Code Section 48C). The increase in the effective tax rate from 7% in fiscal 2012 to 19% in fiscal 2013 was due to the decreased impact of tax credits relative to higher year-over-year pre-tax income, a higher percentage of our pre-tax income being derived from U.S.

operations that were taxed at a higher tax rate than international locations and the inclusion of a tax benefit related to a prior year audit settlement in fiscal 2012. For further discussion of changes in our effective tax rate, please refer to Note 11, "Income Taxes," in our consolidated financial statements included in Item 8 of this Annual Report.

The variation between our effective tax rate and the U.S. statutory rate of 35% was primarily due to the consolidation of our foreign operations, which are generally subject to income taxes at lower statutory rates. A change in the mix of pretax income from these various tax jurisdictions can have a significant impact on our periodic effective tax rate. In addition, our effective tax rate may be negatively impacted by the lack of sufficient excess tax benefits (credits) that accumulate in our equity as additional paid-in-capital (APIC) and referred to as the "APIC pool" of credits. In situations where our realized tax deductions for certain stock-based compensation awards, such as non-qualified stock options and restricted stock, are less than those originally anticipated, which accumulate in the APIC pool, accounting principles generally accepted in the United States (U.S. GAAP) requires that we recognize the difference as an increase to income tax expense.

Liquidity and Capital Resources Overview We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities and cash generated from operations. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have no debt or outstanding balances on our line of credit note and have minimal lease commitments. See Note 18, "Subsequent Event," to our consolidated financial statements in Item 8 of this Annual Report for a description of the credit agreement and line of credit note entered into on August 12, 2014 with Wells Fargo Bank, National Association.

Based on past performance and current expectations, we believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months. We may use a portion of our available cash and cash equivalents, or funds underlying our marketable securities, to repurchase shares of our common stock pursuant to repurchase programs authorized by our Board of Directors. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties or expand our production capacity.

From time to time, we evaluate strategic opportunities, including potential acquisitions, divestitures or investments in complementary businesses, and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.

34-------------------------------------------------------------------------------- Table of Contents Contractual Obligations At June 29, 2014, payments to be made pursuant to significant contractual obligations are as follows (in thousands): Payments Due by Period Less than One to Three to More Than Total One Year Three Years Five Years Five Years Operating lease obligations $14,150 $5,840 $6,442 $1,766 $102 Purchase obligations 245,226 236,143 6,925 905 1,253 Other long-term liabilities1 - - - - - Total contractual obligations $259,376 $241,983 $13,367 $2,671 $1,355 1 Other long-term liabilities as of June 29, 2014 included long-term tax contingencies and other tax liabilities of $20.5 million, deferred liabilities of $13.4 million and other long-term contingent liabilities (for example, warranties) of $1.5 million. These liabilities were not included in the table above as they will either not be settled in cash and/or the timing of any payments is uncertain.

Operating lease obligations include rental amounts due on leases of certain office and manufacturing space under the terms of non-cancelable operating leases. These leases expire at various times through May 2022. Most of the lease agreements provide for rental adjustments for increases in base rent, property taxes and general property maintenance that would be recognized as rent expense, if applicable.

Purchase obligations represent purchase commitments, including open purchase orders and contracts, and are generally related to the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment.

Financial Condition The following table sets forth our cash, cash equivalents and short-term investments (in thousands): June 29, June 30, 2014 2013 Change Cash and cash equivalents $286,824 $190,069 $96,755 Short-term investments 875,642 833,846 41,796 Total cash, cash equivalents and short-term investments $1,162,466 $1,023,915 $138,551 Our liquidity and capital resources depend on our cash flows from operations and our working capital. The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable.

The following table presents the components of our cash conversion cycle: Three Months Ended June 29, June 30, 2014 2013 Change Days of sales outstanding (a) 46 46 - Days of supply in inventory (b) 94 76 18 Days in accounts payable (c) (66 ) (47 ) (19 ) Cash conversion cycle 74 75 (1 ) a) Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts receivable, net of applicable allowances and reserves, by the average net revenue per day for the respective 90 day period.

35-------------------------------------------------------------------------------- Table of Contents b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90 day period.

c) Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. DPO is calculated by dividing ending accounts payable by the average cost of revenue, net per day for the respective 90 day period.

The decrease in the cash conversion cycle was primarily driven by an increase in days in accounts payable, partially offset by an increase in days of supply in inventory.

As of June 29, 2014, we had unrealized losses on our investments of $0.1 million. All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 29, 2014 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis in these securities. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of June 29, 2014.

Cash Flows In summary, our cash flows were as follows (in thousands): Fiscal Years Ended Year-Over-Year Change June 29, 2014 June 30, 2013 June 24, 2012 2013 to 2014 2012 to 2013 Cash provided by operating activities $319,308 $285,234 $242,280 $34,074 $42,954 Cash used in investing activities (242,265 ) (380,307 ) (448,141 ) 138,042 67,834 Cash provided by (used in) financing activities 19,542 105,952 (6,692 ) (86,410 ) 112,644 Effect of foreign exchange changes 170 305 840 (135 ) (535 ) Net increase (decrease) in cash and cash equivalents $96,755 $11,184 ($211,713 ) $85,571 $222,897 The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.

Cash Flows from Operating Activities Net cash provided by operating activities increased to $319.3 million in fiscal 2014 from $285.2 million in fiscal 2013. The increase was primarily due to an increase in net income. Net cash provided by operating activities increased to $285.2 million in fiscal 2013 from $242.3 million in fiscal 2012, primarily due to an increase in net income.

Cash Flows from Investing Activities Our investing activities primarily relate to transactions within our short-term investments, purchases of property and equipment and payments for patents and licensing rights. Net cash used in investing activities was $242.3 million for fiscal 2014 compared to $380.3 million for fiscal 2013. Our capital spending increased as we continued to make investments in manufacturing capacity to support our future growth. This increase was more than offset by lower net purchases of short-term investments during fiscal 2014.

Net cash used in investing activities was $380.3 million for fiscal 2013 compared to $448.1 million for fiscal 2012. This decrease was primarily the result of a reduction in cash used in business combinations, partially offset by an increase in the net purchases of short-term investments during fiscal 2013.

We continue to actively manage our capital spending. For fiscal 2015, we target committing approximately $200.0 million of capital investment to support our growth and strategic priorities.

36-------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities Net cash provided by financing activities was $19.5 million in fiscal 2014 compared to $106.0 million in fiscal 2013. Our financing activities for fiscal 2014 primarily consisted of proceeds of $119.2 million from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employees stock purchase plan, including the excess tax benefit on those exercises, mostly offset by the repurchase of common stock worth approximately $99.7 million.

In fiscal 2013, net cash provided by financing activities was $106.0 million compared to net cash used in financing activities of $6.7 million in fiscal 2012. Our financing activities in fiscal 2013 consisted primarily of $107.6 million from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employees stock purchase plan, including the excess tax benefit on those exercises. Our financing activities in fiscal 2012 primarily related to the repurchase of 0.5 million shares of common stock worth approximately $12.0 million during the fourth quarter of fiscal 2012, partially offset by $5.3 million from net issuances of common stock pursuant to the exercise of employee stock options and purchases under our employees stock purchase plan, including the excess tax benefit on those exercises.

Pursuant to an extension of our stock repurchase program authorized by our Board of Directors, we are authorized to repurchase shares of our common stock having an aggregate purchase price not exceeding $300 million for all purchases from June 20, 2013 through the expiration of the program on June 28, 2015. Since the inception of our stock repurchase program in 2001, we have repurchased approximately 12.4 million shares of our common stock at an average price of $24.57 per share with an aggregate value of $305.1 million.

At the discretion of our management, the repurchase program can be implemented through open market or privately negotiated transactions. We will determine the time and extent of repurchases based on our evaluation of market conditions and other factors.

Fair Value Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, we use various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows: • Level 1 - Valuations based on quoted prices in active markets for identical instruments that we are able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

• Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which we perform recurring fair value remeasurements are cash equivalents and short-term investments. As of June 29, 2014, financial assets utilizing Level 1 inputs included money market funds. Financial assets utilizing Level 2 inputs included corporate bonds, municipal bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities.

Level 2 assets are valued using a third-party pricing service's consensus price which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. We do not have any financial assets requiring the use of Level 3 inputs. Please refer to Note 6, "Fair Value of Financial Instruments," to the consolidated financial statements included in Item 8 of this Annual Report for further information.

Financial and Market Risks We are exposed to financial and market risks, including changes in interest rates, currency exchange rates and commodities risk. We have entered and may in the future enter into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations and financial performance. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions at June 29, 2014 and June 30, 2013. Actual results may differ materially.

37-------------------------------------------------------------------------------- Table of Contents Interest Rates We maintain an investment portfolio principally composed of money market funds, municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. In order to minimize risk, our cash management policy permits us to acquire investments rated "A" grade or better. As of June 29, 2014 our cash equivalents and short-term investments had a fair value of $915.7 million. If interest rates were to increase by 100 basis points, the fair value of our cash equivalents and short-term investments would decrease by $12.9 million. We do not believe that a 10% change in interest rates would have a significant impact on our financial position, results of operations or cash flows.

Currency Exchange Rates Because we operate internationally and have transactions denominated in foreign currencies, including the Chinese Yuan and Euro, among others, we are exposed to currency exchange rate risks. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Our primary exposures relate to the exchange rates between the U.S. Dollar and the Chinese Yuan. The potential loss in fair value resulting from a hypothetical 10% increase in the value of the U.S. Dollar compared to the Chinese Yuan was approximately $3.8 million at June 29, 2014.

Commodities We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes. General economic conditions, market specific changes or other factors outside of our control may affect the pricing of these commodities. We do not use financial instruments to hedge commodity prices.

Off-Balance Sheet Arrangements We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 29, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain of our U.S. and international facilities in the normal course of business. Future minimum lease payments under our operating leases as of June 29, 2014 are detailed above in "Liquidity and Capital Resources" in the section entitled "Contractual Obligations." Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP.

In the application of U.S. GAAP, we are required to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.

We evaluate our estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our significant accounting policies are discussed in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to the consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting policies and the related disclosures with the Audit Committee of our Board of Directors.

38-------------------------------------------------------------------------------- Table of Contents Revenue Recognition We recognize product revenue when the earnings process is complete, as evidenced by persuasive evidence of an arrangement (typically in the form of a purchase order), when the sales price is fixed or determinable, collection of revenue is reasonably assured, and title and risk of loss have passed to the customer.

For the year ended June 29, 2014, 53% of our revenue was from sales to distributors. Distributors stock inventory and sell our products to their own customer base, which may include: value added resellers; manufacturers who incorporate our products into their own manufactured goods; or ultimate end users of our products. We recognize revenue upon shipment of our products to our distributors. This arrangement is often referred to as a "sell-in" or "point-of-purchase" model as opposed to a "sell-through" or "point-of-sale" model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.

Our distributors may be provided limited rights that allow them to return a portion of inventory (product exchange rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under our "ship and debit" program or other targeted sales incentives. When determining our net revenue, we make significant judgments and estimates corresponding with product shipments. We recognize a reserve for estimated future returns, changes in selling prices, and other targeted sales incentives when product ships. We also recognize an asset for the estimated value of product returns that we believe will be returned to inventory in the future and resold, and these estimates are based upon historical data, current economic trends, distributor inventory levels and other related factors.

Our financial condition and operating results are dependent upon our ability to make reliable estimates. Actual results may vary and could have a significant impact on our operating results.

From time to time, we will issue a new price book for our products, and provide a credit to certain distributors for inventory quantities on hand if required by our agreement with the distributor. This practice is known as price protection.

These credits are applied against the reserve that we establish upon initial shipment of product to the distributor.

Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within our standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part to that customer. If we approve an allowance and the distributor resells the product to the target customer, we credit the distributor according to the allowance we approved. These credits are applied against a reserve we establish upon initial shipment of product to the distributor.

In addition, we run sales incentive programs with certain distributors and retailers, such as product rebates and cooperative advertising campaigns. We recognize these incentives at the time they are offered to customers and record a credit to their account with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing expense depending on the type of sales incentive.

Warranties Product warranties are estimated and recognized at the time we recognize revenue. The warranty periods range from 90 days to 10 years. We estimate these warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. We evaluate our warranty reserves on a quarterly basis based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results.

Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) method or an average cost method; and with market not to exceed net realizable value. We write-down our inventories for estimated obsolescence equal to the difference between the cost of the inventory and its estimated market value based upon an aging analysis of the inventory on hand, specifically known inventory-related risks (such as technological obsolescence), and assumptions about future demand. We also analyze sales levels by product type, including historical and estimated future customer demand for those products to determine if any additional reserves are appropriate. For example, we adjust for items that are considered obsolete based upon changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product. Any adjustment to our inventories as a result of an estimated obsolescence or net realizable condition is reflected as a component of our cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established lower-cost basis.

39-------------------------------------------------------------------------------- Table of Contents In order to determine what costs can be included in the valuation of inventories, we determine normal capacity for our manufacturing facilities based on historical patterns. If our estimates regarding customer demand are inaccurate, or market conditions or technology change in ways that are less favorable than those projected by management, we may be required to take excess capacity charges in accordance with U.S. GAAP, which could have an adverse effect on our operating results.

Deferred Tax Asset Valuation Allowances In assessing the adequacy of a recognized valuation allowance, we consider all positive and negative evidence and a variety of factors including historical and projected future taxable income and prudent and feasible tax planning strategies. When we establish or increase a valuation allowance, our income tax expense increases in the period such determination is made. If we decrease a valuation allowance, our income tax expense decreases in the period such a determination is made.

Tax Contingencies We are subject to periodic audits of our income tax returns by federal, state, local and foreign agencies. These audits typically include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740, "Income Taxes" (ASC 740), we regularly evaluate the exposures associated with our various tax filing positions. ASC 740 states that a tax benefit should not be recognized for financial statement purposes for an uncertain tax filing position where it is not more likely than not (likelihood of greater than 50%) for being sustained by the taxing authorities based on the technical merits of the position.

In accordance with the provisions of ASC 740, we have established unrecognized tax benefits (as a reduction to the deferred tax asset or as an increase to other liabilities) to reduce some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: the tax position is not "more likely than not" to be sustained; the tax position is "more likely than not" to be sustained, but for a lesser amount; or the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken.

For purposes of evaluating whether or not a tax position is uncertain, we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.

A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay amounts in excess of what we have recognized, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

Stock-Based Compensation We account for awards of stock-based compensation under our employee stock-based compensation plans using the fair value method. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term. We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock option and Employee Stock Purchase Plan (ESPP) awards. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.

Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in our financial statements. For restricted stock and stock unit awards, grant date fair value is based upon the market price of our common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Our determination of an estimated forfeiture rate is primarily based upon a review of historical experience but may also include consideration of other facts and circumstances we believe are indicative of future activity. The 40-------------------------------------------------------------------------------- Table of Contents assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this recognition as compensation expense is adjusted to reflect instruments that actually vest.

If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, we may be required to adjust compensation expense, which could be material to our results of operations.

Long-Lived Assets We evaluate long-lived assets such as property, equipment and finite-lived intangible assets, such as patents, for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change in the way an asset is being used, or a significant change, delay or departure in our strategy for that asset. Our assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our assumptions, which, we believe, are consistent with the assumptions hypothetical marketplace participants use.

Factors that we must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales volumes, prices, cost of capital, tax rates, and capital spending. These factors are often interdependent and therefore do not change in isolation. If impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets. If so, an impairment loss is measured and recognized.

After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.

Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value.

If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to recognize additional impairment losses which could be material to our results of operations.

Goodwill We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. We conduct impairment testing for goodwill at the reporting unit level. Reporting units, as defined by FASB Accounting Standards Codification Topic 350, "Intangibles - Goodwill and Other" (ASC 350), may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. We have determined that our reporting units are our three operating and reportable segments.

We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit's carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit's expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate, unanticipated competition; and slower growth rates; as well as changes in management, key personnel, strategy, and customers. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform the two-step impairment test. Alternatively, we may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.

During the first step of the goodwill impairment test, we compare the fair value of the reporting unit to its carrying value, including goodwill. We derive a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values are reconciled back to our consolidated market capitalization.

If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step, we hypothetically value the reporting unit's tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.

41-------------------------------------------------------------------------------- Table of Contents Indefinite-Lived Intangible Assets We test indefinite-lived intangible assets for impairment at least annually in the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. Our impairment test may begin with a qualitative test to determine whether it is more likely than not that an indefinite-lived intangible asset's carrying value is greater than its fair value. If our qualitative assessment indicates that asset impairment is more likely than not, we perform a quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset to its carrying value. Alternatively, we may bypass the qualitative test and initiate impairment testing with the quantitative impairment test.

Determining the fair value of indefinite-lived intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product revenue, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.

If the fair value of the indefinite-lived intangible asset exceeds its carrying value, we conclude that no impairment has occurred. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite-lived intangible asset.

Contingent Liabilities We provide for contingent liabilities in accordance with U.S. GAAP, under which a loss contingency is charged to income when (1) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of the loss can be reasonably estimated.

Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is considered probable and the amount can be reasonably estimated, we reflect the estimated loss in our results of operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably estimable. Because of uncertainties related to these matters, accruals are based on the best information available at the time. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that may have been included in the accompanying consolidated financial statements. In determining the probability of an unfavorable outcome of a particular contingent liability and whether such liability is reasonably estimable, we consider the individual facts and circumstances related to the liability, opinions of legal counsel and recent legal rulings by the appropriate regulatory bodies, among other factors. As additional information becomes available, we reassess the potential liability related to our pending and threatened claims and litigation and may revise our estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See also a discussion of specific contingencies in Note 12, "Commitments and Contingencies," to our consolidated financial statements in Item 8 of this Annual Report.

Recent Accounting Pronouncements See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated financial statements in Item 8 of this Annual Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk See the section entitled "Financial and Market Risks" included in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report.

42-------------------------------------------------------------------------------- Table of Contents Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firms 44 Consolidated Balance Sheets as of June 29, 2014 and June 30, 2013 46 Consolidated Statements of Income for the years ended June 29, 2014, June 30, 2013 and June 24, 2012 47 Consolidated Statements of Comprehensive Income for the years ended June 29, 2014, June 30, 2013 and June 24, 2012 48 Consolidated Statements of Cash Flows for the years ended June 29, 2014, June 30, 2013 and June 24, 2012 49 Consolidated Statements of Shareholders' Equity for the years ended June 29, 2014, June 30, 2013 and June 24, 2012 50 Notes to Consolidated Financial Statements 51 43-------------------------------------------------------------------------------- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Board of Directors and Shareholders of Cree, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of income, comprehensive income, cash flows and shareholders' equity present fairly, in all material respects, the financial position of Cree, Inc. and its subsidiaries at June 29, 2014, and the results of their operations and their cash flows for the year in the period ended June 29, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 29, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, appearing under Item 9A, Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP Raleigh, North Carolina August 26, 2014 44-------------------------------------------------------------------------------- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Cree, Inc.

We have audited the accompanying consolidated balance sheet of Cree, Inc. as of June 30, 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cree, Inc. at June 30, 2013, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2013, in conformity with U.S.

generally accepted accounting principles.

/s/ Ernst & Young LLP Raleigh, North Carolina August 27, 2013 45-------------------------------------------------------------------------------- Table of Contents CREE, INC.

CONSOLIDATED BALANCE SHEETS June 29, June 30, 2014 2013 (In thousands, except par value) ASSETS Current assets: Cash and cash equivalents $286,824 $190,069 Short-term investments 875,642 833,846 Total cash, cash equivalents and short-term investments 1,162,466 1,023,915 Accounts receivable, net 225,160 192,507 Inventories 284,780 197,001 Deferred income taxes 29,414 26,125 Prepaid expenses and other current assets 72,071 76,218 Total current assets 1,773,891 1,515,766 Property and equipment, net 605,713 542,833 Goodwill 616,345 616,345 Intangible assets, net 336,423 357,525 Other assets 11,997 19,941 Total assets $3,344,369 $3,052,410 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $202,294 $121,441 Accrued salaries and wages 50,527 41,407 Income taxes payable 14,848 1,315 Other current liabilities 38,986 43,248 Total current liabilities 306,655 207,411 Long-term liabilities: Deferred income taxes 12,173 25,504 Other long-term liabilities 35,395 12,843 Total long-term liabilities 47,568 38,347 Commitments and contingencies (Note 12) Shareholders' equity: Preferred stock, par value $0.01; 3,000 shares authorized at June 29, 2014 and June 30, 2013; none issued and outstanding - - Common stock, par value $0.00125; 200,000 shares authorized at June 29, 2014 and June 30, 2013; 120,114 and 119,623 shares issued and outstanding at June 29, 2014 and June 30, 2013, respectively 149 148 Additional paid-in-capital 2,190,011 2,025,764 Accumulated other comprehensive income, net of taxes 11,405 8,244 Retained earnings 788,581 772,496 Total shareholders' equity 2,990,146 2,806,652 Total liabilities and shareholders' equity $3,344,369 $3,052,410 The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 (In thousands, except per share data) Revenue, net $1,647,641 $1,385,982 $1,164,658 Cost of revenue, net 1,028,846 862,722 755,196 Gross profit 618,795 523,260 409,462 Operating expenses: Research and development 181,382 155,889 143,357 Sales, general and administrative 268,460 236,581 197,092 Amortization or impairment of acquisition-related intangibles 31,988 30,823 26,274 Loss on disposal or impairment of long-lived assets 2,690 3,473 3,481 Total operating expenses 484,520 426,766 370,204 Operating income 134,275 96,494 39,258 Non-operating income, net 13,295 11,063 8,389 Income before income taxes 147,570 107,557 47,647 Income tax expense 23,379 20,632 3,235 Net income $124,191 $86,925 $44,412 Earnings per share: Basic $1.03 $0.75 $0.39 Diluted $1.01 $0.74 $0.39 Weighted average shares used in per share calculation: Basic 120,623 116,621 114,693 Diluted 122,914 117,979 115,225 The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 (In thousands) Net income $124,191 $86,925 $44,412 Other comprehensive income: Currency translation gain (loss), net of tax benefit of $0, $36 and $126, respectively 57 (53 ) (209 ) Net unrealized gain (loss) on available-for-sale securities, net of tax (expense) benefit of ($1,946), $1,724 and $1,059, respectively 3,104 (2,836 ) (1,749 ) Other comprehensive income (loss) 3,161 (2,889 ) (1,958 ) Comprehensive income $127,352 $84,036 $42,454 The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 (In thousands) Cash flows from operating activities: Net income $124,191 $86,925 $44,412 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 162,971 153,301 142,709 Stock-based compensation 61,686 53,899 46,393 Excess tax benefit from share-based payment arrangements (19,235 ) (11,390 ) (277 ) Impairment of acquisition-related intangibles 3,200 - - Loss on disposal or impairment of long-lived assets 2,690 3,473 3,481 Amortization of premium/discount on investments 10,158 9,503 8,330 Changes in operating assets and liabilities, net of effect of acquisition: Accounts receivable, net (32,651 ) (40,430 ) (9,365 ) Inventories (87,012 ) (8,406 ) 26,904 Prepaid expenses and other assets 10,635 (25,350 ) (7,356 ) Accounts payable, trade 66,297 41,800 (10,105 ) Accrued salaries and wages and other liabilities 16,378 21,909 (2,846 ) Net cash provided by operating activities 319,308 285,234 242,280 Cash flows from investing activities: Purchases of property and equipment (178,557 ) (77,468 ) (95,015 ) Purchases of short-term investments (625,820 ) (724,467 ) (345,457 ) Proceeds from maturities of short-term investments 493,288 392,878 186,425 Proceeds from sale of property and equipment 117 301 252 Proceeds from sale of short-term investments 88,890 49,307 277,463 Purchase of acquired business, net of cash acquired - - (454,605 ) Purchases of patent and licensing rights (20,183 ) (20,858 ) (17,204 ) Net cash used in investing activities (242,265 ) (380,307 ) (448,141 ) Cash flows from financing activities: Net proceeds from issuance of common stock 100,006 96,229 5,012 Excess tax benefit from share-based payment arrangements 19,235 11,390 277 Repurchases of common stock (99,699 ) (1,667 ) (11,981 ) Net cash provided by (used in) financing activities 19,542 105,952 (6,692 ) Effects of foreign exchange changes on cash and cash equivalents 170 305 840 Net increase (decrease) in cash and cash equivalents 96,755 11,184 (211,713 ) Cash and cash equivalents: Beginning of period 190,069 178,885 390,598 End of period $286,824 $190,069 $178,885 Supplemental disclosure of cash flow information: Cash paid for income taxes $10,292 $24,747 $17,984 Significant non-cash transactions: Accrued property and equipment $15,700 $3,945 $3,343 The accompanying notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Common Stock Additional Other Total Number Paid-in Retained Comprehensive Shareholders' of Shares Par Value Capital Earnings Income Equity (In thousands) Balance at June 26, 2011 109,607 $136 $1,593,530 $654,807 $13,091 $2,261,564 Net income - - - 44,412 - 44,412 Currency translation loss, net of tax benefit of $126 - - - - (209 ) (209 ) Unrealized loss on available-for-sale securities, net of tax benefit of $1,059 - - - - (1,749 ) (1,749 ) Comprehensive income 42,454 Income tax benefits from stock option exercises - - (354 ) - - (354 ) Repurchased shares (521 ) - (856 ) (11,981 ) - (12,837 ) Stock-based compensation - - 45,784 - - 45,784 Exercise of stock options and issuance of shares 6,820 8 223,398 - - 223,406 Balance at June 24, 2012 115,906 $144 $1,861,502 $687,238 $11,133 $2,560,017 Net income - - - 86,925 - 86,925 Currency translation loss, net of tax benefit of $36 - - - - (53 ) (53 ) Unrealized loss on available-for-sale securities, net of tax benefit of $1,724 - - - - (2,836 ) (2,836 ) Comprehensive income 84,036 Income tax benefits from stock option exercises - - 4,028 - - 4,028 Repurchased shares (41 ) - - (1,667 ) - (1,667 ) Stock-based compensation - - 55,074 - - 55,074 Exercise of stock options and issuance of shares 3,758 4 105,160 - - 105,164 Balance at June 30, 2013 119,623 $148 $2,025,764 $772,496 $8,244 $2,806,652 Net income - - - 124,191 - 124,191 Currency translation gain, net of tax benefit of $0 - - - - 57 57 Unrealized gain on available-for-sale securities, net of tax expense of $1,946 - - - - 3,104 3,104 Comprehensive income 127,352 Income tax benefits from stock option exercises - - 8,198 - - 8,198 Repurchased shares (2,259 ) (3 ) - (108,106 ) (108,109 ) Stock-based compensation - - 62,415 - - 62,415 Exercise of stock options and issuance of shares 2,750 4 93,634 - - 93,638 Balance at June 29, 2014 120,114 $149 $2,190,011 $788,581 $11,405 $2,990,146 The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Business Cree, Inc. (the Company) is a leading innovator of lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications. The Company's products are targeted for applications such as indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.

The Company's LED products consist of LED components, LED chips, and silicon carbide (SiC) materials. The Company's success in selling LED products depends upon its ability to offer innovative products and to enable its customers to develop and market LED-based products that successfully compete against other LED-based products and drive LED adoption against traditional lighting products.

The Company's lighting products primarily consist of LED lighting systems and bulbs. The Company designs, manufactures and sells lighting fixtures and lamps for the commercial, industrial and consumer markets.

In addition, the Company develops, manufactures and sells power and RF devices.

The Company's power products are made from SiC and provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. The Company's RF devices are made from gallium nitride (GaN) and provide improved efficiency, bandwidth and frequency of operation as compared to silicon or gallium arsenide (GaAs).

The majority of the Company's products are manufactured at its production facilities located in North Carolina, Wisconsin, and China. The Company also uses contract manufacturers for certain aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, California, Wisconsin, India and China (including Hong Kong).

Cree, Inc. is a North Carolina corporation established in 1987 and is headquartered in Durham, North Carolina.

The Company's three reportable segments are: • LED Products • Lighting Products • Power and RF Products For financial results by reportable segment, please refer to Note 13, "Reportable Segments." Note 2 - Basis of Presentation and Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year The Company's fiscal year is a 52 or 53-week period ending on the last Sunday in the month of June. The Company's 2014 and 2012 fiscal years were 52-week fiscal years and the 2013 fiscal year was a 53-week fiscal year. The Company's 2015 fiscal year will be a 52-week fiscal year.

Reclassifications Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation.

These reclassifications had no effect on previously reported net income or shareholders' equity.

51-------------------------------------------------------------------------------- Table of Contents Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.

GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Segment Information U.S. GAAP requires segmentation based on an entity's internal organization and reporting of revenue and operating income based upon internal accounting methods commonly referred to as the "management approach." Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company has determined that it currently has three operating and reportable segments.

Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Cash and cash equivalents are stated at cost, which approximates fair value. The Company holds cash and cash equivalents at several major financial institutions, which often exceed insurance limits set by the Federal Deposit Insurance Corporation (FDIC). The Company has not historically experienced any losses due to such concentration of credit risk.

Investments Investments in certain securities may be classified into three categories: • Held-to-Maturity - Debt securities that the entity has the positive intent and ability to hold to maturity, which are reported at amortized cost.

• Trading - Debt and equity securities that are bought and held principally for the purpose of selling in the near term, which are reported at fair value, with unrealized gains and losses included in earnings.

• Available-for-Sale - Debt and equity securities not classified as either held-to-maturity or trading securities, which are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders' equity.

The Company reassesses the appropriateness of the classification (i.e.

held-to-maturity, trading or available-for-sale) of its investments at the end of each reporting period.

When the fair value of an investment declines below its original cost, the Company considers all available evidence to evaluate whether the decline is other-than-temporary. Among other things, the Company considers the duration and extent of the decline and economic factors influencing the capital markets. For the fiscal years ended June 29, 2014, June 30, 2013, and June 24, 2012, the Company had no other-than-temporary declines below the cost basis of its investments. The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses on the sale of investments are reported in other income and expense.

Investments in marketable securities with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

Inventories Inventories are stated at lower of cost or market, with cost determined on a first-in, first-out (FIFO) method or an average cost method; and with market not to exceed net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. These write-downs are recognized as a component of cost of revenue. At the point of the write-down, a new lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do 52-------------------------------------------------------------------------------- Table of Contents not result in the restoration or increase in that newly established lower-cost basis. The Company recognized charges for write-downs in inventories of $5.2 million, $12.5 million and $14.7 million, for fiscal 2014, 2013 and 2012, respectively.

Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the assets' estimated useful lives. Leasehold improvements are amortized over the lesser of the asset life or the life of the related lease. In general, the Company's policy for useful lives is as follows: Machinery and equipment 3 to 15 years Buildings and building improvements 5 to 40 years Furniture and fixtures 3 to 5 years Aircraft and vehicles 5 to 20 years Leasehold improvements Shorter of estimated useful life or lease term Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated useful lives. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition and any resulting gain or loss is reflected in operating income.

Shipping and Handling Costs Shipping and handling costs are included in Cost of revenue, net in the Consolidated Statements of Income and are recognized as a period expense during the period in which they are incurred.

Goodwill and Intangible Assets The Company recognizes the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recognized as goodwill. Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, estimating future cash flows from product revenue, developing appropriate discount rates, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.

Goodwill The Company recognizes goodwill as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. The Company monitors for the existence of potential impairment indicators throughout the fiscal year.

The Company conducts impairment testing for goodwill at the reporting unit level. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. The Company has determined that its reporting units are its three operating and reportable segments.

The Company may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit's carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit's expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates; as well as changes in management, key personnel, strategy and customers. If the Company's qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs the two-step goodwill impairment test.

Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test.

During the first step of the goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company derives a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from the capital asset pricing model. If all reporting units are analyzed during the first step of the goodwill impairment test, their respective fair values are reconciled back to the Company's consolidated market capitalization.

53-------------------------------------------------------------------------------- Table of Contents If the fair value of a reporting unit exceeds its carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step, the Company hypothetically values the reporting unit's tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.

Indefinite-Lived Intangible Assets The Company's indefinite-lived intangible assets are tested for impairment at least annually in the fiscal fourth quarter or when indications of potential impairment exist. The Company monitors for the existence of potential impairment indicators throughout the fiscal year.

The Company's impairment test may begin with a qualitative test to determine whether it is more likely than not that an indefinite-lived intangible asset's carrying value is greater than its fair value. If the Company's qualitative assessment indicates that asset impairment is more likely than not, the Company performs a quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset to its carrying value. Alternatively, the Company may bypass the qualitative test and initiate impairment testing with the quantitative impairment test. Determining the fair value of indefinite-lived intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product revenue, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.

If the fair value of the indefinite-lived intangible asset exceeds its carrying value, then the Company concludes that no impairment has occurred. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite-lived intangible asset.

Finite-Lived Intangible Assets U.S. GAAP requires that intangible assets, other than goodwill and indefinite-lived intangibles, must be amortized over their useful lives. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from one to 20 years.

Patent rights reflect costs incurred by the Company in applying for and maintaining patents owned by the Company and costs incurred in purchasing patents and related rights from third parties. Licensing rights reflect costs incurred by the Company in acquiring licenses under patents owned by others. The Company amortizes both on a straight-line basis over the expected useful life of the associated patent rights, which is generally the lesser of 20 years from the date of the patent application or the license period. Royalties payable under licenses for patents owned by others are expensed as incurred. The Company reviews its capitalized patent portfolio and recognizes impairment charges when circumstances warrant, such as when patents have been abandoned or are no longer being pursued.

Long-Lived Assets The Company reviews long-lived assets such as property and equipment for impairment based on changes in circumstances that indicate their carrying amounts may not be recoverable. In making these determinations, the Company uses certain assumptions, including but not limited to: (1) estimations of the fair market value of the assets and (2) estimations of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company's operations and estimated salvage values.

Contingent Liabilities The Company recognizes contingent liabilities when it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss may have been incurred. See Note 12, "Commitments and Contingencies," for a discussion of loss contingencies in 54-------------------------------------------------------------------------------- Table of Contents connection with pending and threatened litigation. The Company expenses as incurred the costs of defending legal claims against the Company.

Revenue Recognition The Company recognizes product revenue when the earnings process is complete, as evidenced by persuasive evidence of an arrangement (typically in the form of a purchase order), when the sales price is fixed or determinable, collection of revenue is reasonably assured, and title and risk of loss have passed to the customer.

The Company provides its customers with limited rights of return for non-conforming shipments and product warranty claims. The Company estimates an allowance for anticipated sales returns based upon an analysis of historical sales returns and other relevant data. The Company recognizes an allowance for non-conforming returns at the time of sale as a reduction of product revenue and as a reduction to the related accounts receivable balance. The Company recognizes a liability for product warranty claims at the time of sale as an increase to cost of revenue.

A substantial portion of the Company's products are sold through distributors.

Distributors stock inventory and sell the Company's products to their own customer base, which may include: value added resellers; manufacturers who incorporate the Company's products into their own manufactured goods; or ultimate end users of the Company's products. The Company recognizes revenue upon shipment of its products to its distributors. This arrangement is often referred to as a "sell-in" or "point-of-purchase" model as opposed to a "sell-through" or "point-of-sale" model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.

Certain of the Company's distributors are provided limited rights that allow them to return a portion of inventory (product exchange rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under the Company's "ship and debit" program or other targeted sales incentives. These estimates are calculated based upon historical experience, product shipment analysis, current economic conditions, on-hand inventory at the distributor, and customer contractual arrangements. The Company believes that it can reasonably and reliably estimate the allowance for distributor credits at the time of sale. Accordingly, estimates for these rights are recognized at the time of sale as a reduction of product revenue and as a reduction to the related accounts receivable balance.

From time to time, the Company will issue a new price book for its products, and provide a credit to certain distributors for inventory quantities on hand if required by the Company's agreement with the distributor. This practice is known as price protection. These credits are applied against the reserve that the Company establishes upon initial shipment of product to the distributor.

Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within the Company's standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part to that customer. If the Company approves an allowance and the distributor resells the product to the target customer, the Company credits the distributor according to the allowance the Company approved.

These credits are applied against the reserve that the Company establishes upon initial shipment of product to the distributor.

In addition, the Company runs sales incentive programs with certain distributors and retailers, such as product rebates and cooperative advertising campaigns.

The Company recognizes these incentives at the time they are offered to customers and records a credit to their account with an offsetting expense as either a reduction to revenue, increase to cost of revenue, or marketing expense depending on the type of sales incentive.

From time to time, the Company may enter into licensing arrangements related to its intellectual property. Revenue from licensing arrangements is recognized when earned and estimable. The timing of revenue recognition is dependent on the terms of each license agreement. Generally, the Company will recognize non-refundable upfront licensing fees related to patent licenses immediately upon receipt of the funds if the Company has no significant future obligations to perform under the arrangement. However, the Company will defer recognition for licensing fees where the Company has significant future performance requirements, the fee is not fixed (such as royalties earned as a percentage of future revenue), or the fees are otherwise contingent.

Accounts Receivable For product revenue, the Company typically invoices its customers at the time of shipment for the sales order value of products shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers.

55-------------------------------------------------------------------------------- Table of Contents Allowance for Doubtful Accounts The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer's ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Company's historical experience.

Advertising The Company expenses the costs of producing advertisements at the time production occurs and expenses the cost of communicating the advertising in the period in which the advertising is used. Advertising costs are included in Sales, general and administrative expenses in the Consolidated Statements of Income and amounted to approximately $26.6 million, $18.2 million, and $9.7 million for the years ended June 29, 2014, June 30, 2013 and June 24, 2012, respectively.

Research and Development Research and development activities are expensed when incurred. For contracts under which the Company anticipates that direct costs will exceed amounts to be funded over the life of the contract, costs are reported as Research and development expenses in the Consolidated Statements of Income when incurred, and related funding as an offset of those expenses when funds are received.

Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the applicable period.

Diluted earnings per share is determined in the same manner as basic earnings per share except that the number of shares is increased to assume exercise of potentially dilutive stock options, nonvested restricted stock and contingently issuable shares using the treasury stock method, unless the effect of such increases would be anti-dilutive. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recognized in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

Stock-Based Compensation The Company recognizes compensation expense for all share-based payments granted based on the fair value of the shares on the date of grant. Compensation expense is then recognized over the award's vesting period.

Fair Value of Financial Instruments Cash and cash equivalents, short-term investments, accounts and interest receivable, accounts payable and other liabilities approximate their fair values at June 29, 2014 and June 30, 2013 due to the short-term nature of these instruments.

Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Taxes payable which are not based on income are accrued ratably over the period to which they apply. For example, payroll taxes are accrued each period end based upon the amount of payroll taxes that are owed as of that date; whereas taxes such as property taxes and franchise taxes are accrued over the fiscal year to which they apply if paid at the end of a period, or they are amortized ratably over the fiscal year if they are paid in advance.

56-------------------------------------------------------------------------------- Table of Contents Excise Taxes The Company presents sales taxes collected from customers and remitted to governmental authorities on a net basis (i.e. excluded from revenue and expenses).

Foreign Currency Translation Foreign currency translation adjustments are recognized in Other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income for changes between the foreign subsidiaries' functional currency and the United States (U.S.) dollar. Foreign currency translation gains and losses are included in the Company's equity account balance of Accumulated other comprehensive income, net of taxes in the Consolidated Balance Sheets until such time that the subsidiaries are either sold or substantially liquidated.

Because the Company and its subsidiaries transact business in currencies other than the U.S. Dollar, the Company will continue to experience varying amounts of foreign currency exchange gains and losses for subsidiaries with U.S. dollar functional currency.

Recently Adopted Accounting Pronouncements Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. The ASU provides guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. The ASU generally provides that an entity's unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The ASU applies retrospectively to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company early adopted this guidance beginning with the first quarter of fiscal 2014. The Company's adoption of this guidance did not have a significant impact on its consolidated financial statements.

Recently Issued Accounting Pronouncements Revenue from Contracts with Customers In May 2014, the FASB issued ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASU provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early application is not permitted. The Company is currently analyzing the impact of this new accounting guidance.

Note 3 - Acquisitions On August 17, 2011, the Company entered into a Stock Purchase Agreement with all of the shareholders of Ruud Lighting, Inc. (Ruud Lighting). Pursuant to the terms of the Stock Purchase Agreement and concurrently with the execution of the Stock Purchase Agreement, the Company acquired all of the outstanding share capital of Ruud Lighting in exchange for consideration consisting of 6.1 million shares of the Company's common stock valued at approximately $211.0 million and $372.2 million cash, subject to certain post-closing adjustments. Following the acquisition, the Company recorded certain post-closing purchase price adjustments resulting in a $2.3 million reduction to the purchase price and a total purchase price of approximately $666.0 million. The acquisition allowed the Company to expand its product portfolio into outdoor LED lighting.

Prior to the Company completing its acquisition of Ruud Lighting, Ruud Lighting completed the re-acquisition of its e-conolight business by purchasing all of the membership interests of E-conolight LLC (E-conolight). Ruud Lighting previously sold its e- 57-------------------------------------------------------------------------------- Table of Contents conolight business in March 2010 and had been providing operational services to E-conolight since that date. In connection with the stock purchase transaction with Ruud Lighting, the Company funded Ruud Lighting's re-acquisition of E-conolight and repaid Ruud Lighting's outstanding debt in the aggregate amount of approximately $85.0 million.

The amounts of revenue, operating loss and net loss of Ruud Lighting in the Consolidated Statements of Income from and including August 17, 2011 to June 24, 2012 were as follows (in thousands, except per share data): Since acquisition date to June 24, 2012 Revenue $204,353 Operating loss (1,985 ) Net loss (2,334 ) Basic net loss per share ($0.02 ) Diluted net loss per share ($0.02 ) The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if the Ruud Lighting acquisition occurred at the beginning of the fiscal year ended June 24, 2012 (in thousands, except per share data).

Fiscal Year Ended June 24, 2012 Revenue $1,194,990 Operating income 37,551 Net income 42,399 Earnings per share, basic $0.37 Earnings per share, diluted $0.37 The total revenue for Ruud Lighting included in the pro forma table above was $235.8 million for the year ended June 24, 2012. This amount has been calculated after applying the Company's accounting policies and adjusting the results of Ruud Lighting to give effect to events that are directly attributable to the Ruud Lighting acquisition, including the elimination of revenue from Ruud Lighting prior to acquisition, additional depreciation and amortization that would have been charged assuming the fair value adjustments (primarily to property and equipment and intangible assets) had been applied at the beginning of the 2012 fiscal year, together with the consequential tax effects. Excluded from the pro forma net income and the earnings per share amounts for the year ended June 24, 2012 are one-time transaction costs attributable to the Ruud Lighting acquisition of $3.1 million. These transaction costs were included in Sales, general and administrative expense in the Consolidated Statements of Income. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the 2012 fiscal year, nor is it indicative of any future results. Ruud Lighting is included in the Lighting Products segment.

Note 4 - Financial Statement Details Accounts Receivable, net The following table summarizes the components of accounts receivable, net (in thousands): June 29, June 30, 2014 2013 Billed trade receivables $255,374 $220,307 Unbilled contract receivables 1,557 1,171 256,931 221,478 Allowance for sales returns, discounts and other incentives (29,010 ) (26,500 ) Allowance for bad debts (2,761 ) (2,471 ) Accounts receivable, net $225,160 $192,507 58-------------------------------------------------------------------------------- Table of Contents The following table summarizes the changes in the Company's allowance for sales returns, discounts and other incentives (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Balance at beginning of period $26,500 $20,681 $19,615 Current period claims (115,568 ) (84,983 ) (67,773 ) Provision for sales returns, discounts and other incentives 118,078 90,802 68,839 Balance at end of period $29,010 $26,500 $20,681 The following table summarizes the changes in the Company's allowance for bad debts (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012Balance at beginning of period $2,471 $1,782 $753 Current period provision 903 801 1,029 Write-offs, net of recoveries (613 ) (112 ) - Balance at end of period $2,761 $2,471 $1,782 Inventories The following table summarizes the components of inventories (in thousands): June 29, June 30, 2014 2013 Raw material $95,594 $62,253 Work-in-progress 92,889 68,146 Finished goods 96,297 66,602 Inventories $284,780 $197,001 Property and Equipment, net The following table summarizes the components of property and equipment, net (in thousands): June 29, June 30, 2014 2013 Furniture and fixtures $12,822 $11,268 Land and buildings 355,044 333,761 Machinery and equipment 1,046,878 924,076 Aircraft and vehicles 16,292 16,250 Computer hardware/software 35,446 32,405 Leasehold improvements and other 18,890 18,566 Construction in progress 85,068 54,447 1,570,440 1,390,773 Accumulated depreciation (964,727 ) (847,940 ) Property and equipment, net $605,713 $542,833 Depreciation of property and equipment totaled $125.3 million, $115.5 million and $110.6 million for the years ended June 29, 2014, June 30, 2013 and June 24, 2012, respectively.

59-------------------------------------------------------------------------------- Table of Contents During the years ended June 29, 2014, June 30, 2013 and June 24, 2012, the Company recognized approximately $1.3 million, $1.9 million and $2.6 million, respectively, as losses on disposals or impairments of property and equipment.

These charges are reflected in Loss on disposal or impairment of long-lived assets in the Consolidated Statements of Income.

Other Current Liabilities The following table summarizes the components of other current liabilities (in thousands): June 29, June 30, 2014 2013 Accrued taxes $19,835 $21,436 Accrued professional fees 5,373 4,493 Accrued warranty 5,842 5,259 Accrued other 7,936 12,060 Other current liabilities $38,986 $43,248 Accumulated Other Comprehensive Income, net of taxes The following table summarizes the components of accumulated other comprehensive income, net of taxes (in thousands): June 29, June 30, 2014 2013 Currency translation gain $8,549 $8,492Net unrealized gain (loss) on available-for-sale securities 2,856 (248 ) Accumulated other comprehensive income, net of taxes $11,405 $8,244 Non-Operating Income, net The following table summarizes the components of non-operating income, net (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Foreign currency gain, net $45 $735 $171 Gain on sale of investments, net 68 111 994 Interest income, net 11,932 7,882 7,457 Other, net 1,250 2,335 (233 ) Non-operating income, net $13,295 $11,063 $8,389 60-------------------------------------------------------------------------------- Table of Contents Reclassifications Out of Accumulated Other Comprehensive Income, net of taxes The following table summarizes the amounts reclassified out of accumulated other comprehensive income (in thousands): Accumulated Other Affected Line Item in Comprehensive Income Amount Reclassified from Accumulated Other the Consolidated Component Comprehensive Income Statements of Income Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Net unrealized gain on available-for-sale Non-operating income, securities, net of taxes $68 $107 $994 net Income before income 68 107 994 taxes 11 21 68 Income tax expense $57 $86 $926 Net income Note 5 - Investments Investments consist of municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities. All investments are short-term and classified as available-for-sale.

The following table summarizes short-term investments (in thousands): June 29, 2014 Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Municipal bonds $291,869 $2,323 ($12 ) $294,180 Corporate bonds 200,177 2,283 (114 ) 202,346 U.S. agency securities 18,994 141 - 19,135 Non-U.S. certificates of deposit 352,928 - - 352,928 Non-U.S. government securities 7,025 28 - 7,053 Total short-term investments $870,993 $4,775 ($126 ) $875,642 The following table presents the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities): June 29, 2014 Less than 12 Months Greater than 12 Months Total Unrealized Unrealized Unrealized Fair Value Loss Fair Value Loss Fair Value Loss Municipal bonds $7,906 ($8 ) $1,520 ($4 ) $9,426 ($12 ) Corporate bonds 15,696 (31 ) 13,049 (83 ) 28,745 (114 )U.S. agency securities - - - - - - Non-U.S. certificates of deposit - - - - - - Non-U.S. government securities - - - - - - Total $23,602 ($39 ) $14,569 ($87 ) $38,171 ($126 ) Number of securities with an unrealized loss 13 7 20 61-------------------------------------------------------------------------------- Table of Contents The following table summarizes short-term investments (in thousands): June 30, 2013 Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Municipal bonds $250,206 $817 ($1,314 ) $249,709 Corporate bonds 192,147 1,678 (1,765 ) 192,060 U.S. agency securities 39,288 186 - 39,474 Non-U.S. certificates of deposit 345,000 - - 345,000 Non-U.S. government securities 7,608 14 (19 ) 7,603 Total short-term investments $834,249 $2,695 ($3,098 ) $833,846 The following table presents the gross unrealized losses and estimated fair value of the Company's short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position (in thousands, except numbers of securities): June 30, 2013 Less than 12 Months Greater than 12 Months Total Unrealized Unrealized Unrealized Fair Value Loss Fair Value Loss Fair Value Loss Municipal bonds $126,926 ($1,314 ) $- $- $126,926 ($1,314 ) Corporate bonds 102,010 (1,765 ) - - 102,010 (1,765 ) U.S. agency securities - - - - - - Non-U.S. certificates of deposit - - - - - - Non-U.S. government securities 5,534 (19 ) - - 5,534 (19 ) Total $234,470 ($3,098 ) $- $- $234,470 ($3,098 ) Number of securities with an unrealized loss 123 - 123 The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains from the sale of investments for the fiscal year ended June 29, 2014 of $68 thousand were included in Non-operating income, net in the Consolidated Statements of Income and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.

The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be other-than-temporary on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated full recovery in market value.

Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its investments to be impaired as of June 29, 2014 and June 30, 2013.

The contractual maturities of short-term investments at June 29, 2014 were as follows (in thousands): After One, After Five, Within One Within Five Within Ten After Ten Year Years Years Years Total Municipal bonds $54,105 $213,308 $26,767 $- $294,180 Corporate bonds 18,992 154,351 29,003 - 202,346 U.S. agency securities 3,008 16,127 - - 19,135 Non-U.S. certificates of deposit 352,928 - - - 352,928 Non-U.S. government securities 4,032 3,021 - - 7,053 Total short-term investments $433,065 $386,807 $55,770 $- $875,642 62-------------------------------------------------------------------------------- Table of Contents Note 6 - Fair Value of Financial Instruments Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows: • Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

• Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments. As of June 29, 2014, financial assets utilizing Level 1 inputs included money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S.

government securities. Level 2 assets are valued using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of June 29, 2014. There were no transfers between Level 1 and Level 2 during the year ended June 29, 2014.

The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy (in thousands): June 29, 2014 June 30, 2013 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents Municipal bonds $ - $ - $ - $ - $ - $ 2,009 $ - $ 2,009 Money market funds 40,031 - - 40,031 12,589 - - 12,589 Total cash equivalents 40,031 - - 40,031 12,589 2,009 - 14,598 Short-term investments Municipal bonds - 294,180 - 294,180 - 249,709 - 249,709 Corporate bonds - 202,346 - 202,346 - 192,060 - 192,060 U.S. agency securities - 19,135 - 19,135 - 39,474 - 39,474 Non-U.S. certificates of deposit - 352,928 - 352,928 - 345,000 - 345,000 Non-U.S. government securities - 7,053 - 7,053 - 7,603 - 7,603 Total short-term investments - 875,642 - 875,642 - 833,846 - 833,846 Total assets $40,031 $875,642 $- $915,673 $12,589 $835,855 $- $848,444 Note 7 - Goodwill and Intangible Assets Goodwill The Company's reporting units for goodwill impairment testing are: • LED Products 63-------------------------------------------------------------------------------- Table of Contents • Lighting Products • Power and RF Products As of the first day of the fourth quarter of fiscal 2014, the Company performed a qualitative goodwill impairment assessment on each reporting unit. The Company determined that the fair value of each reporting unit was more likely than not greater than its carrying value, and therefore a quantitative goodwill impairment assessment was not required. Goodwill by reporting unit as of June 29, 2014 and June 30, 2013 was as follows (in thousands): LED Products Lighting Products Power and RF Products Consolidated Total $245,857 $337,781 $32,707 $616,345 Intangible Assets The following table presents the components of intangible assets, net (in thousands): June 29, 2014 June 30, 2013 Accumulated Accumulated Gross Amortization Net Gross Amortization Net Intangible assets with finite lives: Customer relationships $137,440 ($66,970 ) $70,470 $137,440 ($59,611 ) $77,829 Developed technology 162,760 (72,921 ) 89,839 162,760 (53,476 ) 109,284 Non-compete agreements 10,244 (5,997 ) 4,247 10,244 (4,037 ) 6,207 Trade names, finite-lived 520 (516 ) 4 520 (493 ) 27 Patent and licensing rights 134,607 (42,424 ) 92,183 116,147 (34,849 ) 81,298 Total intangible assets with finite lives 445,571 (188,828 ) 256,743 427,111 (152,466 ) 274,645 Trade names, indefinite-lived 79,680 79,680 82,880 82,880 Total intangible assets $525,251 ($188,828 ) $336,423 $509,991 ($152,466 ) $357,525 Total amortization of finite-lived intangible assets was $37.7 million, $37.8 million and $32.1 million for the years ended June 29, 2014, June 30, 2013 and June 24, 2012, respectively.

As of the first day of the fourth quarter of fiscal 2014, the Company performed a qualitative impairment assessment on each of the Company's indefinite-lived trade names. The Company determined that, with the exception of the Ruud Lighting trade name, the fair value of each indefinite-lived trade name was more likely than not greater than its carrying value and therefore a quantitative impairment assessment was not required. With respect to the Ruud Lighting trade name, the Company determined that this trade name has a finite useful life and therefore performed a quantitative impairment assessment. As a result of the quantitative impairment assessment, the Company recognized a $3.2 million impairment of the Ruud Lighting trade name.

The Company invested $20.2 million, $20.9 million and $17.2 million for the years ended June 29, 2014, June 30, 2013 and June 24, 2012, respectively, for patent and licensing rights. For the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012, the Company recognized $1.4 million, $1.6 million and $0.8 million, respectively, in impairment charges related to its patent portfolio.

Total future amortization expense of finite-lived intangible assets is estimated to be as follows (in thousands): Fiscal Year Ending June 28, 2015 $34,390 June 26, 2016 34,099 June 25, 2017 32,106 June 24, 2018 30,927 June 30, 2019 18,390 Thereafter 106,831Total future amortization expense $256,743 64-------------------------------------------------------------------------------- Table of Contents Note 8 - Shareholders' Equity In August 2011, in connection with the acquisition of Ruud Lighting, the Company issued 6.1 million shares of common stock valued at approximately $211.0 million. The shares issued in connection with the acquisition were subject to certain transfer restrictions under the Stock Purchase Agreement that lapsed with respect to 25% of the shares held at the completion of each of the following four successive six-month periods, such that all restrictions had lapsed by the second anniversary of the closing.

On May 6, 2014, the Board of Directors (the Board) approved an increase in the amount of the Company's stock repurchase program. Pursuant to the program, the Company is now authorized to repurchase shares of its common stock having an aggregate purchase price not exceeding $300 million for all purchases from June 20, 2013 through the new expiration of the program on June 28, 2015.

During the fourth quarter of fiscal 2014, the Company repurchased 2.1 million shares of its common stock under the program at an average price of $47.11 per share with an aggregate value of $99.6 million. After the repurchase, $200.4 million in aggregate purchase price value remained available under the Company's stock repurchase program. The repurchase program can be implemented through open market or privately negotiated transactions at the discretion of the Company's management. The Company will continue to determine the time and extent of any repurchases based on its evaluation of market conditions and other factors.

Since the inception of the predecessor stock repurchase program in January 2001, the Company has repurchased 12.4 million shares of its common stock at an average price of $24.57 per share with an aggregate value of $305.1 million.

On May 29, 2002, the Board adopted a shareholder rights plan, pursuant to which stock purchase rights were distributed to shareholders at a rate of one right with respect to each share of common stock held of record as of June 10, 2002.

Subsequently issued shares of common stock also carry stock purchase rights under the plan. The rights plan is designed to enhance the Board's ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. Unless terminated by the Board, the rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and certain business combinations involving the Company. The shareholder rights plan includes a review mechanism requiring the independent members of the Board to review and evaluate the plan at least every three years to consider whether the maintenance of the plan continues to be in the best interests of the Company and its shareholders and to communicate their conclusion to the Board. The Board has delegated this responsibility to the Governance and Nominations Committee, which is composed of all independent directors of the Board. On April 24, 2012, the shareholder rights plan was amended and restated to, among other things, extend the expiration date from June 10, 2012 to September 30, 2018, and to remove provisions in the rights plan stipulating that certain actions can be taken only with the concurrence of a majority of the members of the Board who are not affiliated with an acquiring person (more specifically, those who are "Continuing Directors," as defined in the original rights plan adopted in 2002). On January 29, 2013, the shareholder rights plan was amended solely to change the expiration date from September 30, 2018 to April 24, 2017.

At June 29, 2014, the Company had reserved a total of approximately 19.0 million shares of its common stock and 0.2 million shares of its Series A preferred stock for future issuance as follows (in thousands): Number of Shares For exercise of outstanding common stock options 8,922 For vesting of outstanding stock units 549 For future equity awards under 2013 Long-Term Incentive Compensation Plan 7,182 For future issuance under the Non-Employee Director Stock Compensation and Deferral Program 100 For future issuance to employees under the 2005 Employee Stock Purchase Plan 2,200 Total common shares reserved 18,953 Series A preferred stock reserved for exercise of rights issued under shareholder rights plan 200 65-------------------------------------------------------------------------------- Table of Contents Note 9 - Earnings Per Share The following presents the computation of basic earnings per share (in thousands, except per share amounts): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Basic: Net income $124,191 $86,925 $44,412Weighted average common shares 120,623 116,621 114,693 Basic earnings per share $1.03 $0.75 $0.39 The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share amounts): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Diluted: Net income $124,191 $86,925 $44,412 Weighted average common shares - basic 120,623 116,621 114,693 Dilutive effect of stock options, nonvested shares and Employee Stock Purchase Plan purchase rights 2,291 1,358 532 Weighted average common shares - diluted 122,914 117,979 115,225 Diluted earnings per share $1.01 $0.74 $0.39 Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012, there were 2.6 million, 2.4 million and 7.0 million, respectively, of potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.

Note 10 - Stock-Based Compensation Overview of Employee Stock-Based Compensation Plans Prior to the second quarter of fiscal 2014, the Company had one equity-based compensation plan, the 2004 Long-Term Incentive Compensation Plan (2004 LTIP), from which stock-based compensation awards could be granted to employees and directors. The Company's 2013 Long-Term Incentive Compensation Plan (2013 LTIP) became effective in the second quarter of fiscal 2014, and replaced the 2004 LTIP as the sole plan for providing stock-based compensation awards to employees and directors on January 1, 2014. The 2004 LTIP has been terminated as to future grants although outstanding awards under the 2004 LTIP will continue to be governed by that plan. In addition, the Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which options are currently outstanding.

Prior to fiscal 2013, the Company's stock-based awards had been service-based only. Beginning in fiscal 2013, the Company issued grants of awards that also contain performance-based conditions. Performance-based conditions are generally tied to future financial and/or operating performance of the Company.

The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.

The 2013 Long-Term Incentive Compensation Plan provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. As of June 29, 2014, there were 7.3 million shares authorized for issuance under the plan and 7.2 million shares remaining for 66-------------------------------------------------------------------------------- Table of Contents future grants. Awards issued under the plan to date include non-qualified stock options, restricted stock, restricted stock units, performance shares and performance units.

The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. As of June 29, 2014, there were 4.5 million shares authorized for issuance under the ESPP, as amended, with 2.2 million shares remaining for future issuance. The ESPP limits employee contributions to 15% of each employee's compensation (as defined in the plan) and originally allowed employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP was amended in the second quarter of fiscal 2012 to increase the six-month participation period to a twelve-month participation period, divided into two equal six-month purchase periods, and to provide for a look-back feature. At the end of each six-month period in April and October, employees participating in the plan purchase the Company's common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan amendment also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.

Stock Option Awards The following table summarizes option activity as of June 29, 2014 and changes during the fiscal year then ended (total and shares in thousands): Weighted Average Total Number of Weighted Average Remaining Intrinsic Shares Exercise price Contractual Term Value Outstanding at June 30, 2013 8,657 $35.67 Granted 3,012 55.14 Exercised (2,339 ) 36.08 Forfeited or expired (408 ) 42.00 Outstanding at June 29, 2014 8,922 $41.85 4.74 $89,311 Vested and expected to vest at June 29, 2014 8,709 $41.65 4.71 $88,445 Exercisable at June 29, 2014 3,311 $40.56 3.36 $36,759 The total intrinsic value in the table above represents the total pretax intrinsic value, which is the total difference between the closing price of the Company's common stock on June 27, 2014 (the last trading day of fiscal 2014) of $48.48 and the exercise price for in-the-money options that would have been received by the holders if all instruments had been exercised on June 29, 2014.

As of June 29, 2014, there was $54.0 million of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.56 years.

The following table summarizes information about stock options outstanding and exercisable at June 29, 2014 (shares in thousands): Options Outstanding Options Exercisable Weighted Average Remaining Weighted Weighted Contractual Average Average Range of Exercise Price Number Life (Years) Exercise Price Number Exercise Price $0.01 to $27.47 428 2.38 $23.53 325 $23.11 $27.48 to $27.77 2,188 5.16 27.77 497 27.77 $27.78 to $35.89 2,031 3.69 32.31 1,174 33.17 $35.90 to $54.26 232 4.80 48.10 131 48.42 $54.27 to $75.55 4,043 5.30 55.85 1,184 57.19 Total 8,922 4.74 $41.85 3,311 $40.56 67-------------------------------------------------------------------------------- Table of Contents Other information pertaining to the Company's stock option awards is as follows (in thousands, except per share data): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Weighted average grant date fair value per share of options $19.31 $12.05 $11.67 Total intrinsic value of options exercised $67,044 $62,145 $1,605 Restricted Stock Awards and Units A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of June 29, 2014 and changes during the year then ended is as follows (in thousands, except per share data): Number of Weighted Average RSAs/RSUs Grant-Date Fair Value Nonvested at June 30, 2013 647 $33.80 Granted 527 54.76 Vested (287 ) 32.44 Forfeited (27 ) 42.83 Nonvested at June 29, 2014 860 $46.81 As of June 29, 2014, there was $25.7 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 3.48 years.

Stock-Based Compensation Valuation and Expense The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

The Company currently uses the Black-Scholes option-pricing model to estimate the fair value of the Company's stock option and ESPP awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company's financial statements.

For RSAs and RSUs, the grant-date fair value is based upon the market price of the Company's common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

68-------------------------------------------------------------------------------- Table of Contents Total stock-based compensation expense was as follows (in thousands): Fiscal Years Ended June 29, June 30, June 24, Income Statement Classification: 2014 2013 2012 Cost of revenue, net $11,353 $9,389 $7,713 Research and development 15,392 13,429 10,378 Sales, general and administrative 34,941 31,081 28,302 Total stock-based compensation expense $61,686 $53,899 $46,393 The weighted average assumptions used to value stock option grants were as follows: Fiscal Years Ended June 29, June 30, June 24,Stock Option Grants: 2014 2013 2012 Risk-free interest rate 1.16 % 0.42 % 0.47 % Expected life, in years 3.80 3.64 3.63 Expected volatility 44.5 % 56.8 % 51.7 % Dividend yield - - - The following describes each of these assumptions and the Company's methodology for determining each assumption: Risk-Free Interest Rate The Company estimates the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected life of the award.

Expected Life The expected life represents the period that the stock option awards are expected to be outstanding. In determining the appropriate expected life of its stock options, the Company segregates its grantees into categories based upon employee levels that are expected to be indicative of similar option-related behavior. The expected useful lives for each of these categories are then estimated giving consideration to (1) the weighted average vesting periods, (2) the contractual lives of the stock options, (3) the relationship between the exercise price and the fair market value of the Company's common stock, (4) expected employee turnover, (5) the expected future volatility of the Company's common stock, and (6) past and expected exercise behavior, among other factors.

Expected Volatility The Company estimates expected volatility giving consideration to the expected life of the respective award, the Company's current expected growth rate, implied volatility in traded options for its common stock, and the historical volatility of its common stock.

Expected Dividend Yield The Company estimates the expected dividend yield by giving consideration to its current dividend policies as well as those anticipated in the future considering the Company's current plans and projections.

Note 11 - Income Taxes The following were the components of income before income taxes (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Domestic $58,859 $31,046 ($5,360 ) Foreign 88,711 76,511 53,007Total income before income taxes $147,570 $107,557 $47,647 69-------------------------------------------------------------------------------- Table of Contents The following were the components of income tax expense (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Current: Federal $3,423 $483 ($4,031 ) Foreign 15,371 18,127 13,125 State 1,876 1,777 566 Total current 20,670 20,387 9,660 Deferred: Federal 229 2,226 (4,786 ) Foreign 3,003 (177 ) (450 ) State (523 ) (1,804 ) (1,189 ) Total deferred 2,709 245 (6,425 ) Income tax expense $23,379 $20,632 $3,235 Actual income tax expense differed from the amount computed by applying the U.S.

federal tax rate of 35% to pre-tax earnings as a result of the following (in thousands, except percentages): Fiscal Years Ended June 29, June 30, June 24, 2014 % of Income 2013 % of Income 2012 % of Income Federal income tax provision at statutory rate $51,645 35% $37,645 35% $16,676 35% Increase (decrease) in income tax expense resulting from: State tax provision, net of federal benefit 2,550 2% 1,146 1% 68 0% State tax credits (1,004 ) (1)% (1,407 ) (1)% (1,028 ) (2)% Tax exempt interest (815 ) 0% (853 ) (1)% (1,064 ) (2)% 48C investment tax credit (11,310 ) (8)% (5,252 ) (5)% (4,105 ) (9)% Increase (decrease) in tax reserve 15,411 10% (361 ) 0% (2,677 ) (6)% Change in tax depreciation methodology (18,475 ) (12)% - 0% - 0% Research and development credits (1,574 ) (1)% (2,426 ) (2)% (694 ) (1)% Decrease in valuation allowance (20 ) 0% (6 ) 0% (13 ) 0% Qualified production activities deduction (2,362 ) (1)% (866 ) (1)% (177 ) (1)% Stock-based compensation 2,024 1% 1,206 1% 336 1% Statutory rate differences (14,285 ) (10)% (10,184 ) (10)% (5,830 ) (12)% Other 1,594 1% 1,990 2% 1,743 4% Income tax expense $23,379 16% $20,632 19% $3,235 7% 70-------------------------------------------------------------------------------- Table of Contents The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands): June 29, June 30, 2014 2013 Deferred tax assets: Compensation $4,843 $3,868 Inventories 18,672 16,050Sales return reserve and allowance for bad debts 4,801 4,483 Warranty reserve 1,416 947 Federal and state net operating loss carryforwards 704 617 Federal credits 4,971 3,174 State credits 3,016 4,215 48C investment tax credits 22,731 7,216 Investments 958 976 Stock-based compensation 31,102 27,142 Deferred revenue 5,719 - Other 876 1,209 Total gross deferred assets 99,809 69,897 Less valuation allowance (1,571 ) (1,604 ) Deferred tax assets, net 98,238 68,293 Deferred tax liabilities: Property and equipment (25,660 ) (27,484 ) Intangible assets (52,462 ) (37,921 ) Investments (1,792 ) 154 Prepaid taxes and other (1,083 ) (997 ) Total gross deferred liability (80,997 ) (66,248 ) Deferred tax asset, net $17,241 $2,045 The components giving rise to the net deferred tax assets (liabilities) have been included in the Consolidated Balance Sheets as follows (in thousands): Balance at June 29, 2014 Assets Liabilities Current Noncurrent Current Noncurrent U.S. federal income taxes $17,324 $- $- ($10,948 ) Hong Kong and other income taxes 12,090 - - (1,225 ) Total net deferred tax assets/(liabilities) $29,414 $- $- ($12,173 ) Balance at June 30, 2013 Assets Liabilities Current Noncurrent Current Noncurrent U.S. federal income taxes $15,707 $- $- ($25,504 ) Hong Kong and other income taxes 10,418 1,424 * - - Total net deferred tax assets/(liabilities) $26,125 $1,424 $- ($25,504 ) * This amount is included in Other assets in the Consolidated Balance Sheets.

During the second quarter of fiscal 2014, the Company was notified by the Internal Revenue Service that it had been allocated up to $30 million of federal tax credits as part of the American Recovery and Reinvestment Act of 2009 - Phase II (Internal Revenue 71-------------------------------------------------------------------------------- Table of Contents Code Section 48C). This $30 million allocation is in addition to the $39 million previously allocated to the Company in the third quarter of fiscal 2010. The $30 million allocation was based upon the Company's plan to place into service approximately $100 million of qualified equipment at its U.S. manufacturing locations from fiscal 2013 through fiscal 2017. Property placed into service during fiscal 2013 generated $15 million of the potential $30 million Internal Revenue Code Section 48C credit. The remaining $15 million of Internal Revenue Code Section 48C credit was generated during the first three quarters of fiscal 2014. 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 into service to generate these credits. Since fiscal 2010, the Company has recognized an income tax benefit of $26.1 million related to the credits generated to date, with $11.3 million of this amount recognized as a tax benefit for the year ended June 29, 2014.

As of June 29, 2014 the Company had approximately $15.5 million of state net operating loss carryovers for which a full valuation allowance has been recognized. Additionally, the Company had $4.6 million of state income tax credit carryforwards. Both the state net operating loss carryovers and the state income tax credit carryforwards will begin to expire in fiscal 2017.

Furthermore, the Company had approximately $0.8 million of alternative minimum tax credit carryforwards, $9.6 million of 48C credit carryforwards, $2.1 million of research and development credit carryforwards and $1.8 million of state income tax credit carryforwards that relate to excess stock option benefits which, if and when realized, will be recognized in Additional paid-in-capital in the Consolidated Balance Sheets.

U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.

As of June 30, 2013 the Company's liability for unrecognized tax benefits was $2.7 million. The Company recognized a $18.0 million increase to the liability for unrecognized tax benefits due to uncertainty regarding a change in tax depreciation methodology adopted in the first quarter of fiscal 2014. In addition there was a $2.3 million decrease to the amount of unrecognized tax benefits following the settlement of prior year tax audits and statute expirations. As a result, the total liability for unrecognized tax benefits as of June 29, 2014 was $18.4 million. If any portion of this $18.4 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 $0.2 million of gross unrecognized tax benefits will change in the next 12 months as a result of pending audit settlements or statute requirements.

The following is a tabular reconciliation of the Company's change in uncertain tax positions (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Balance at beginning of period $2,732 $4,421 $6,987 Increases related to prior year tax positions 18,040 546 - Decreases related to prior year tax positions (741 ) - (1,966 ) Expiration of statute of limitations for assessment of taxes (1,642 ) (2,235 ) (600 ) Balance at end of period $18,389 $2,732 $4,421 The Company's policy is to include interest and penalties related to unrecognized tax benefits within the Income tax expense line item in the Consolidated Statements of Income. Total interest and penalties accrued were as follows (in thousands): June 29, June 30, 2014 2013 Accrued interest and penalties $104 $154 Total interest and penalties recognized were as follows (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012Recognized interest and penalties (benefit) ($51 ) ($130 ) ($292 ) The Company files U.S. federal, U.S. state and foreign tax returns. For U.S.

federal purposes, the Company is generally no longer subject to tax examinations for fiscal years prior to 2011. For U.S. state tax returns, the Company is generally no longer subject 72-------------------------------------------------------------------------------- Table of Contents to tax examinations for fiscal years prior to 2010. For foreign purposes, the Company is generally no longer subject to examination for tax periods 2004 and prior. Certain carryforward tax attributes generated in prior years remain subject to examination and adjustment. During the first quarter of fiscal 2014, the Company received a final assessment of $0.3 million from the Hong Kong Inland Revenue Department, representing closure of the audit for fiscal 2008 through fiscal 2010. The assessment was fully offset by a decrease to the amount of unrecognized tax benefits. During the third quarter of fiscal 2014, the Company settled its examination with the German Federal Central Tax Office for fiscal 2008 through fiscal 2010, resulting in an immaterial amount of additional tax expense.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the United States. As of June 29, 2014, U.S. income taxes were not provided for on a cumulative total of approximately $320.8 million of undistributed earnings for certain non-U.S. subsidiaries, as the Company currently intends to reinvest these earnings in these foreign operations indefinitely. If, at a later date, these earnings were repatriated to the U.S., the Company would be required to pay taxes on these amounts. Determination of the amount of any deferred tax liability on these undistributed earnings is not practicable.

During the fiscal year ended June 26, 2011, the Company was awarded a tax holiday in Malaysia with respect to its manufacturing and distribution operations. This arrangement allows for 0% tax for 10 years starting in the fiscal year ended June 26, 2011. For the fiscal years ended June 30, 2013 and June 29, 2014, the Company did not meet the requirements for the tax holiday, and as such, no benefit has been recognized. In the fiscal year ended June 24, 2012 the Company's net income increased by $2.1 million ($0.02 per basic share and $0.02 per diluted share), as a result of this arrangement.

Note 12 - Commitments and Contingencies Warranties The following table summarizes the changes in the Company's product warranty liabilities (in thousands): Fiscal Years Ended June 29, June 30, June 24, 2014 2013 2012 Balance at beginning of period $6,171 $5,513 $2,235 Acquisition-related warranties - - 5,623 Warranties accrued in current period 4,256 1,533 1,055 Changes in estimates for pre-existing warranties 907 71 (878 ) Expenditures (4,512 ) (946 ) (2,522 ) Balance at end of period $6,822 $6,171 $5,513 Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty periods range from 90 days to 10 years. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs. The warranty reserves, which are primarily related to Lighting Products, are evaluated on a quarterly basis based on various factors including historical warranty claims, assumptions about the frequency of warranty claims, and assumptions about the frequency of product failures derived from quality testing, field monitoring and the Company's reliability estimates. As of June 29, 2014, $1.0 million of the Company's product warranty liabilities were classified as long-term.

Lease Commitments The Company primarily leases manufacturing, office, housing and warehousing space under the terms of non-cancelable operating leases. These leases expire at various times through May 2022. The Company recognizes net rent expense on a straight-line basis over the life of the lease. Rent expense associated with these operating leases totaled approximately $5.8 million, $4.8 million and $4.6 million for each of the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012, respectively. Certain agreements require that the Company pay property taxes and general property maintenance in addition to the minimum rental payments.

73-------------------------------------------------------------------------------- Table of Contents Future minimum rental payments as of June 29, 2014 (under leases currently in effect) are as follows (in thousands): Minimum Rental Fiscal Years Ending Amount June 28, 2015 $5,840 June 26, 2016 3,711 June 25, 2017 2,731 June 24, 2018 1,344 June 30, 2019 422 Thereafter 102Total future minimum rental payments $14,150 Litigation The Company is currently a party to various legal proceedings. While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company's financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company's business, results of operation, financial position and overall trends. Unless otherwise indicated, the outcomes in these matters are not reasonably estimable.

Note 13 - Reportable Segments The Company's operating and reportable segments are: • LED Products • Lighting Products • Power and RF Products The Company's CODM reviews segment performance and allocates resources based upon segment revenue and segment gross profit.

Reportable Segments Description LED Products Segment The Company's LED Products segment includes LED chips, LED components, and SiC materials.

LED Chips LED chip products include blue and green LED chips based on GaN and related materials. LED chips or die are solid-state electronic components used in a number of applications and are currently available in a variety of brightness levels, wavelengths (color) and sizes. The Company uses LED chips internally in the manufacturing of its LED components. Customers use the blue and green LED chips in a variety of applications including video screens, gaming displays, function indicator lights, and automotive backlights, headlamps and directional indicators. Customers may also combine blue LED chips with phosphors to create white LEDs, which are used in various applications for indoor and outdoor illumination and backlighting, full-color display screens, liquid crystal displays (LCD) backlighting, white keypads and the camera flash function.

LED Components LED component products include a range of packaged LED products from the Company's XLamp® LED components and LED modules for lighting applications to the Company's high-brightness LED components.

74-------------------------------------------------------------------------------- Table of Contents The Company's XLamp LED components and LED modules are lighting class packaged LED products designed to meet a broad range of market needs for lighting applications including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting. The Company uses XLamp LED components in its own lighting products. The Company also sells XLamp LED components externally to customers and distributors for use in a variety of products, primarily for lighting applications.

The Company's high-brightness LED components consist of surface mount (SMD) and through-hole packaged LED products. The SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage, general illumination, transportation, gaming and specialty lighting markets. The Company's through-hole packaged LED component products are available in a full range of colors, primarily designed for the signage market, and provide users with color and brightness consistency across a wide viewing area.

SiC Materials The Company's SiC materials are targeted for customers who use them to manufacture products for RF, power switching, gemstones and other applications.

Corporate, government and university customers also buy SiC materials for research and development directed at RF and high power devices. The Company sells its SiC materials in bulk form, as a bare wafer or with SiC and GaN epitaxial films.

Lighting Products Segment The Company's Lighting Products segment primarily consists of LED lighting systems and bulbs. The Company designs, manufactures and sells lighting systems for indoor and outdoor applications, with its primary focus on LED lighting systems for the commercial, industrial and consumer markets. Lighting products are sold to distributors, retailers and direct to customers. Our portfolio of lighting products is designed for use in settings such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, among other applications.

Power and RF Products Segment The Company's Power and RF Products segment includes power devices and RF devices.

Power Devices The Company's SiC-based power products include Schottky diodes, SiC metal semiconductor field-effect transistors (MOSFETs), and SiC power modules at various voltages. The Company's power products provide increased efficiency, faster switching speeds and reduced system size and weight over comparable silicon-based power devices. Power products are sold primarily to customers and distributors for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies and other applications.

RF Devices The Company's RF devices include a variety of GaN high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs), which are optimized for military, telecom and other commercial applications. The Company's RF devices are made from SiC and GaN and provide improved efficiency, bandwidths and frequency of operation as compared to silicon or GaAs. The Company also provides foundry services for GaN HEMTs and MMICs. The Company's foundry service allows a customer to design its own custom RF circuits to be fabricated in the Company's foundry, or have the Company design and fabricate custom products that meet the customer's specific requirements.

Financial Results by Reportable Segment The table below reflects the results of the Company's reportable segments as reviewed by the Company's CODM for fiscal 2014, 2013 and 2012. The Company used the same accounting policies to derive the segment results reported below as those used in the Company's consolidated financial statements.

75-------------------------------------------------------------------------------- Table of Contents The Company's CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in the segment revenue presented in the table below. As such, total segment revenue in the table below is equal to the Company's consolidated revenue.

The Company's CODM reviews gross profit as the lowest and only level of segment profit. As such, all items below gross profit in the Consolidated Statements of Income must be included to reconcile the consolidated gross profit presented in the table below to the Company's consolidated income before income taxes.

In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment's cost of revenue. The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment. The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated.

Unallocated costs in the table below consisted primarily of manufacturing employees' stock-based compensation, expenses for profit sharing and quarterly or annual incentive plans and matching contributions under the Company's 401(k) plan. These costs were not allocated to the reportable segments' gross profit because the Company's CODM does not review them regularly when evaluating segment performance and allocating resources.

Revenue, gross profit and gross margin for each of the Company's segments were as follows (in thousands, except percentages): Revenue Gross Profit and Gross Margin Year Ended Year Ended June 29, 2014 June 30, 2013 June 24, 2012 June 29, 2014 June 30, 2013 June 24, 2012 LED Products $833,684 $801,483 $756,924 $381,003 $344,649 $290,642 LED Products gross margin 46 % 43 % 38 % Lighting Products 706,425 495,089 334,704 197,304 148,947 103,396 Lighting Products gross margin 28 % 30 % 31 % Power and RF Products 107,532 89,410 73,030 60,723 48,127 32,051 Power and RF Products gross margin 56 % 54 % 44 %Total segment reporting $1,647,641 $1,385,982 $1,164,658 639,030 541,723 426,089 Unallocated costs (20,235 ) (18,463 ) (16,627 ) Consolidated gross profit $618,795 $523,260 $409,462 Consolidated gross margin 38 % 38 % 35 % Assets by Reportable Segment Inventories are the only assets reviewed by the Company's CODM when evaluating segment performance and allocating resources to the segments. The following table sets forth the Company's inventories by reportable segment for the fiscal years ended June 29, 2014 and June 30, 2013.

Unallocated inventories in the table below were not allocated to the reportable segments because the Company's CODM does not review them when evaluating performance and allocating resources to each segment. Unallocated inventories consisted primarily of manufacturing employees' stock-based compensation, profit sharing and quarterly or annual incentive compensation and matching contributions under the Company's 401(k) plan.

76-------------------------------------------------------------------------------- Table of Contents The Company does not allocate assets other than inventories to the reportable segments because the Company's CODM does not review them when assessing segment performance and allocating resources. The CODM reviews all of the Company's assets other than inventories on a consolidated basis. Inventories for each of the Company's segments were as follows (in thousands): June 29, 2014 June 30, 2013 LED Products $123,249 $99,835 Lighting Products 148,757 87,546 Power and RF Products 8,019 6,593 Total segment inventories 280,025 193,974 Unallocated inventories 4,755 3,027 Consolidated inventories $284,780 $197,001 Geographic Information The Company conducts business in several geographic areas. Revenue is attributed to a particular geographic region based on the shipping address for the products. The following table sets forth the percentage of revenue from external customers by geographic area: For the Years Ended June 29, 2014 June 30, 2013 June 24, 2012 United States 49 % 44 % 38 % China 27 % 28 % 32 % Europe 9 % 12 % 14 % South Korea 2 % 2 % 2 % Japan 6 % 7 % 8 % Malaysia 1 % 1 % 2 % Taiwan 1 % 2 % 1 % Other 5 % 4 % 3 % Total percentage of revenue 100 % 100 % 100 % The following table sets forth the Company's tangible long-lived assets by country (in thousands): June 29, June 30, 2014 2013 United States $449,359 $419,267 China 154,881 122,477 Other 1,473 1,089Total tangible long-lived assets $605,713 $542,833 Note 14 - Concentrations of Risk Financial instruments, which may subject the Company to a concentration of risk, consist principally of short-term investments, cash equivalents, and accounts receivable. Short-term investments consist primarily of municipal bonds, corporate bonds, U.S. agency securities, non-U.S. certificates of deposit and non-U.S. government securities at interest rates that vary by security. The Company's cash equivalents consist primarily of money market funds. Certain bank deposits may at times be in excess of the FDIC insurance limits.

The Company sells its products on account to manufacturers, distributors, retailers and others worldwide and generally requires no collateral.

Revenue from certain customers represented more than 10% of consolidated revenue. Revenue from Arrow Electronics, Inc. represented 13%, 16% and 18% of revenue for fiscal 2014, 2013, and 2012, respectively. Revenue from World Peace Industrial 77-------------------------------------------------------------------------------- Table of Contents Co., Ltd. represented 10% of revenue in fiscal 2012. Revenue from The Home Depot, Inc. represented 11% of revenue in fiscal 2014.

No customers individually accounted for more than 10% of the consolidated accounts receivable balance at June 29, 2014. Arrow Electronics, Inc. and World Peace Industrial Co., Ltd. represented 14% and 13% of consolidated accounts receivable, respectively, at June 30, 2013.

Arrow Electronics, Inc. is a customer of the LED Products and Power and RF Products segments. World Peace Industrial Co., Ltd. is a customer of the LED Products segment. The Home Depot, Inc. is a customer of the Lighting Products segment.

Note 15 - Retirement Savings Plan The Company sponsors one employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. All U.S.

employees are eligible to participate under the 401(k) Plan on the first day of a new fiscal month after the date of hire. Under the 401(k) Plan, there is no fixed dollar amount of retirement benefits; rather, the Company matches a defined percentage of employee deferrals, and employees vest in these matching funds over time. Employees choose their investment elections from a list of available investment options. During the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012, the Company contributed approximately $6.3 million, $6.2 million and $4.7 million to the 401(k) Plan, respectively. The Pension Benefit Guaranty Corporation does not insure the 401(k) Plan.

Note 16 - Related Party Transactions On August 17, 2011, in connection with the Company's acquisition of Ruud Lighting, two of the prior shareholders of Ruud Lighting, Alan Ruud and Christopher Ruud, executed offer letters for continued employment with Ruud Lighting. Also on August 17, 2011, subsequent to the Company's acquisition of Ruud Lighting and pursuant to an Aircraft Purchase and Sale Agreement and a Joint Ownership Agreement with Ruud Lighting, each of Alan Ruud (through LSA, LLC, a limited liability company of which Alan Ruud is the sole member (LSA)) and Christopher Ruud (through Light Speed Aviation, LLC, a limited liability company of which Christopher Ruud is the sole member (Light Speed)) acquired a 10% interest in an aircraft previously purchased by Ruud Lighting, resulting in the Company owning an 80% interest in the aircraft. Each of LSA and Light Speed acquired its ownership in the aircraft for a purchase price of approximately $0.9 million for a combined interest of 20% or $1.9 million which is included in Purchase of acquired business, net of cash acquired in the Consolidated Statements of Cash Flows as cash provided by investing activities. On June 25, 2014, the Company acquired the combined 20% interest in the aircraft from LSA and Light Speed for $1.5 million, resulting in the Company having 100% ownership of the aircraft.

Pursuant to the Joint Ownership Agreement, each of LSA and Light Speed was responsible for its share of flight crew, direct, fixed and other expenses attributable to the aircraft. During fiscal 2014, the Company billed LSA and Light Speed $234 thousand and $697 thousand, respectively. Of these billed amounts, the Company has been reimbursed by LSA and Light Speed for $225 thousand and $630 thousand, respectively, as of June 29, 2014. The Company had $9 thousand outstanding receivables from LSA and $86 thousand in outstanding receivables from Light Speed as of June 29, 2014. The Company also had unbilled receivables of $6 thousand and $46 thousand for LSA and Light Speed, respectively, as of June 29, 2014. During fiscal 2013, the Company billed LSA and Light Speed $311 thousand and $318 thousand, respectively. Of these billed amounts, the Company had been reimbursed by LSA and Light Speed for $311 thousand and $299 thousand, respectively, as of June 30, 2013. The Company had no outstanding receivables from LSA and $18 thousand in outstanding receivables from Light Speed as of June 30, 2013. The Company also had unbilled receivables of $186 thousand and $209 thousand for LSA and Light Speed, respectively, as of June 30, 2013.

In July 2010, Mark Swoboda was appointed Chief Executive Officer of Intematix Corporation (Intematix). Mark Swoboda is the brother of the Company's Chairman, Chief Executive Officer and President, Charles M. Swoboda. For a number of years the Company has purchased raw materials from Intematix pursuant to standard purchase orders in the ordinary course of business.

During fiscal 2014, the Company purchased $8.8 million of raw materials from Intematix, and the Company had $0.3 million outstanding payable to Intematix as of June 29, 2014. During fiscal 2013, the Company purchased $3.2 million of raw materials from Intematix, and the Company had $0.2 million outstanding payable to Intematix as of June 30, 2013.

78-------------------------------------------------------------------------------- Table of Contents Note 17 - Quarterly Results of Operations - Unaudited The following is a summary of the Company's consolidated quarterly results of operations for each of the fiscal years ended June 29, 2014 and June 30, 2013 (in thousands, except per share data): September 29, December 29, March 30, June 29, 2013 2013 2014 2014 Fiscal Year 2014 Revenue, net $391,006 $415,086 $405,259 $436,290 $1,647,641 Cost of revenue, net 240,249 259,308 255,265 274,024 1,028,846 Gross profit 150,757 155,778 149,994 162,266 618,795 Net income 30,497 35,681 28,164 29,849 124,191 Earnings per share: Basic $0.26 $0.30 $0.23 $0.24 $1.03 Diluted $0.25 $0.29 $0.23 $0.24 $1.01 September 23, December 30, March 31, June 30, 2012 2012 2013 2013 Fiscal Year 2013 Revenue, net $315,753 $346,286 $348,934 $375,009 $1,385,982 Cost of revenue, net 199,704 212,810 215,924 234,284 862,722 Gross profit 116,049 133,476 133,010 140,725 523,260 Net income 16,123 20,403 22,157 28,242 86,925 Earnings per share: Basic $0.14 $0.18 $0.19 $0.24 $0.75 Diluted $0.14 $0.18 $0.19 $0.23 $0.74 Note 18 - Subsequent Events Credit Agreement with Wells Fargo Bank, National Association On August 12, 2014, the Company entered into a credit agreement and a line of credit note (collectively, Credit Agreement) with Wells Fargo Bank, National Association, as lender.

The Credit Agreement provides for a $150 million unsecured revolving line of credit, under which the Company may borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of August 12, 2017 (Maturity Date).

Proceeds of loans made under the Credit Agreement may be used for working capital, capital expenditures, acquisitions and other general corporate purposes. The Company may prepay the loans under the Credit Agreement in whole or in part at any time without premium or penalty, subject to customary breakage costs. The Company's existing and future material domestic subsidiaries are required to guarantee its obligations under the Credit Agreement.

The loans bear interest, at the Company's option, at either a daily one month London Interbank Offered Rate (LIBOR) rate or a LIBOR rate, each as determined in accordance with the Credit Agreement, and in each case plus a spread of 0.70% to 1.45% (depending on a ratio of funded debt to Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) as determined in accordance with the Credit Agreement). Principal, together with all accrued and unpaid interest, is due and payable on the Maturity Date. The default rate under the Credit Agreement is an additional 4% per annum over the otherwise applicable rate.

The Company is also obligated to pay a quarterly fee, payable in arrears, based on the daily unused amount of the line of credit at a rate of 0.08% to 0.18%, with such rate determined based on the ratio described above.

The Credit Agreement contains customary affirmative and negative covenants, including the required compliance with financial covenants described below, as well as customary events of default. The Credit Agreement requires the Company to maintain a ratio of consolidated funded indebtedness to EBITDA equal to or less than 3.00 to 1.00, and a ratio of consolidated EBITDA to interest expense greater than or equal to 3.00 to 1.00, in each case determined in accordance with the Credit Agreement.

79-------------------------------------------------------------------------------- Table of Contents Agreements with Lextar Electronics Corporation On August 26, 2014, the Company and Lextar Electronics Corporation (Lextar) entered into an agreement whereby the Company will make an investment in Lextar and the companies will enter into a supply agreement for sapphire-based LED chips. As part of the agreement, the Company will invest approximately $83 million to purchase 83 million Lextar shares at a price of NT$30 per share.

Lextar and the Company will also enter into a long-term LED chip supply agreement, as well as a royalty-bearing license agreement for certain Cree LED chip and component intellectual property. Upon closing of the investment, the Company will own approximately 13% of Lextar.

The agreement has been approved by the boards of directors of both companies, and is targeted to close in the second quarter of fiscal 2015, subject to the approval of Lextar's shareholders and the Taiwan Investment Committee, and other customary closing conditions.

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