WOLFSPEED, INC. 
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. Unless otherwise noted, the following information and discussion relates to our continuing operations.
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
•COVID-19 Pandemic. The global health crisis caused by COVID-19 and its resurgences has impacted and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, variants of COVID-19 continue to emerge. While vaccines have proven effective in preventing serious illnesses and hospitalizations, there is no assurance that such vaccines will remain effective against new variants or that the protection conferred by existing vaccines will not wane over time. Since its beginning in the early months of 2020, the COVID-19 pandemic has affected us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders on a timely basis, and the overall impact of the aforementioned items that could cause output challenges and increased costs. The full extent to which the COVID-19 pandemic may impact our results of operations or liquidity remains uncertain. Our operations have experienced, and likely will continue to experience, supply, labor, demand and output challenges. We continue to monitor the impact that the COVID-19 pandemic is having on our business, the semiconductor industry, and the economies in which we operate. •Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices. Our potential for growth depends significantly on the adoption of Silicon Carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, inflationary impacts, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers. Lately, we have seen demand increase across all our product lines, which we believe reflects the value that the industry places on a transition to Silicon Carbide materials and devices. Particularly, we have seen significantly higher demand for our power products as the world has continued to focus on and adopt higher efficiency energy solutions, including electrical vehicle (EV) and related technologies. We believe these trends could have a significant positive impact on revenues in future periods as we increase capacity to meet increased demand. •Supply Constraints. The semiconductor industry has experienced supply constraints for certain items. While we have successfully managed through challenges relating to obtaining certain necessary raw materials and production and processing equipment thus far, we expect the supply situation for these items to remain tight for at least the next few quarters. In addition, the ongoing military conflict betweenRussia andUkraine may further exacerbate supply constraints. The current high demand for our products has also led to supply constraints for our customers. We are working closely with our customer base to best match our supply to their demand. We have taken steps to provide continuity to our customers, to the extent possible, although we expect that constraints may continue to limit our shipments in the near term. •Governmental Trade and Regulatory Conditions. Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, geopolitical, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition or extension of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets. •Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to 28 -------------------------------------------------------------------------------- improve our ability to deliver a better overall experience for our customers. Market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power and RF markets we serve. •Technological Innovation and Advancement. Innovations and advancements in materials, power, and RF technologies continue to expand the potential commercial application for our products. 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. •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 2022 Overview
The following is a summary of our financial results for the year ended
•Our year-over-year revenue increased by
•Gross margin increased to 33.4% from 31.3%. Gross profit increased to
•Operating loss from continuing operations was$247.8 million in fiscal 2022 compared to$313.9 million in fiscal 2021. As discussed further below, operating loss from continuing operations for fiscal 2021 includes a$73.9 million expense related to the modification of our long-range plan regarding a building site inDurham, North Carolina .
•Diluted loss per share from continuing operations was
•Combined cash, cash equivalents and short-term investments increased to
•Convertible notes, net was
•Net cash used in operating activities of continuing operations was
•Purchases of property and equipment, net were$505.9 million (net of$139.0 million in reimbursements) in fiscal 2022 compared to$559.8 million (net of$10.7 million in reimbursements) in fiscal 2021.
•Design-ins were
Business Outlook We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet provides us the ability to invest in our business, as indicated by our new state-of-the-art, automated 200mm Silicon Carbide device fabrication facility inMarcy, New York , which started running qualification lots in the fourth quarter of fiscal 2022, and an expansion of our materials factory at ourU.S campus headquarters inDurham, North Carolina , both of which will increase our production capacity. In fiscal 2022, we incurred$70.0 million of start-up and pre-production costs related to the ramping of production at theMarcy, New York facility. In fiscal 2023, we expect approximately$100 million of start-up and underutilization costs primarily related to ramping of production at theMarcy, New York facility. The completion of the LED Business Divestiture onMarch 1, 2021 represented a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications. This transaction positioned us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to Silicon Carbide and further strengthened our financial position, which we plan to utilize in order to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications. We are focused on investing in our business to expand the scale, further develop the technologies, and accelerate the growth opportunities of Silicon Carbide materials, Silicon Carbide power devices and modules, and GaN and silicon RF devices. We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time. In addition, we are focused on improving the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex. Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition to our new Silicon Carbide device fabrication facility inMarcy, New York . 29 -------------------------------------------------------------------------------- We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the completion and build out of our new facility inNew York and additional production capacity inNorth Carolina . Even so, the short-term impacts from COVID-19 to our financial position, results of operations and cash flows remain uncertain. We continue to closely monitor the ongoing military conflict betweenRussia andUkraine to evaluate our potential exposure to this conflict. We do not have significant credit, supplier or customer concentrations inRussia ,Belarus orUkraine at this time. As a result, we do not currently expect any material impacts to our consolidated financial statements. However, we believe the full impact of the conflict remains uncertain and we continue to assess if ongoing developments, such as further sanctions or other increased involvement from countries where we operate and do business, may cause future material impacts to our consolidated financial statements.
Change in Estimate
As a result of the LED Business Divestiture and our continued investment in 200mm technology, we evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use. In the first quarter of fiscal 2022, we increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets. This change in estimate was applied prospectively effective for the first quarter of fiscal 2022, and resulted in a decrease in depreciation expense of$33.3 million for the fiscal year endedJune 26, 2022 . Approximately$10.4 million of the decrease in year-to-date depreciation expense resulted in a net reduction of inventory as ofJune 26, 2022 and the remaining$22.9 million resulted in an improvement in both loss before income taxes and net loss, of which$19.6 million related to an improvement in gross profit. This change in estimate resulted in an improvement in year-to-date basic and diluted loss per share of$0.19 per share.
Design-ins
Design-ins are customer commitments to purchase our product and are one of the
factors we use to forecast long-term demand and future revenue. To meet the
qualification of a design-in, the customer provides us with documentation (e.g.,
a letter of intent, statement of work or developmental contract) that can
include details such as the expected delivery timeline, estimated price,
necessary capacity and required support. A design-in, even with a formal
commitment, does not always convert to future revenue for a variety of reasons,
including, but not limited to, the customer delaying or abandoning the project,
capacity constraints, timeline challenges, and/or technology changes. Therefore
management uses the design-in amount as a guide to forecast future demand but it
should not be taken as an absolute indicator of future revenue.
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Table of Contents
Results of Operations
Selected consolidated statement of operations data for the years ended
Fiscal Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
(in millions of U.S. Dollars, except share
data) Amount % of Revenue Amount % of Revenue Amount % of Revenue
Revenue, net $746.2 100.0 % $525.6 100.0 % $470.7 100.0 %
Cost of revenue, net 496.9 66.6 % 361.0 68.7 % 312.2 66.3 %
Gross profit 249.3 33.4 % 164.6 31.3 % 158.5 33.7 %
Research and development 196.4 26.3 % 177.8 33.8 % 152.0 32.3 %
Sales, general and administrative 203.5 27.3 % 181.6 34.6 % 181.7 38.6 %
Amortization or impairment of
acquisition-related intangibles 13.6 1.8 % 14.5 2.8 % 14.5 3.1 %
Abandonment of long-lived assets - - % 73.9 14.1 % - - %
(Gain) loss on disposal or impairment of
other assets (0.3) - % 1.6 0.3 % 1.5 0.3 %
Other operating expense 83.9 11.2 % 29.1 5.5 % 32.9 7.0 %
Operating loss (247.8) (33.2) % (313.9) (59.7) % (224.1) (47.6) %
Non-operating expense (income), net 38.3 5.1 % 26.3 5.0 % (18.5) (3.9) %
Loss before income taxes (286.1) (38.3) % (340.2) (64.7) % (205.6) (43.7) %
Income tax expense (benefit) 9.0 1.2 % 1.1 0.2 % (8.0) (1.7) %
Net loss from continuing operations (295.1) (39.5) % (341.3) (64.9) % (197.6) (42.0) %
Net income (loss) from discontinued
operations 94.2 12.6 % (181.2) (34.5) % 7.0 1.5 %
Net loss (200.9) (26.9) % (522.5) (99.4) % (190.6) (40.5) %
Net income attributable to noncontrolling
interest - - % 1.4 0.3 % 1.1 0.2 %
Net loss attributable to controlling
interest ($200.9 ) (26.9) % ($523.9 ) (99.7) % ($191.7 ) (40.7) %
Basic and diluted loss per share
Continuing operations ($2.46 ) ($3.04 )
(
Net loss attributable to controlling interest ($1.67 ) ($4.66 ) ($1.78 ) 31
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Table of Contents
Revenue
Revenue was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S.
Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Revenue $746.2 $525.6 $470.7 $220.6 42 % $54.9 12 %
The increase in revenue for fiscal 2022 compared to fiscal 2021 was primarily
due to increased demand across all of our product lines, as well as increased
production capacity for our power and materials product lines to meet the strong
demand during the period.
The increase in revenue for fiscal 2021 compared to fiscal 2020 was primarily
due to increases in demand for power and RF devices and increases in production
capacity for our power devices.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S.
Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Gross profit $249.3 $164.6 $158.5 $84.7 51 % $6.1 4 %
Gross margin 33 % 31 % 34 %
The increase in gross profit for fiscal 2022 compared to fiscal 2021 was primarily due to increased revenues in the current period and lower manufacturing costs, including the impact of increasing the expected useful lives of certain machinery and equipment assets to more closely reflect the estimated economic lives of those assets. The increase in gross margin for fiscal 2022 compared to fiscal 2021 was primarily due to the same factors as the increase to gross profit, partly offset by product mix.
The increase in gross profit for fiscal 2021 compared to fiscal 2020 was primarily due to increased revenues in the current period. The decrease in gross margin for fiscal 2021 compared to fiscal 2020 was primarily due to an unfavorable product mix shift and higher factory costs as we continued to bring on additional capacity. 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. Research and development costs also include developing supporting technologies for expansion of our new Silicon Carbide device fabrication facility inMarcy, New York .
Research and development expenses were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S.
Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Research and
development $196.4 $177.8 $152.0 $18.6 10 % $25.8 17 %
Percent of revenue 26 % 34 % 32 %
The increases in research and development expenses were primarily due to our
continued investment in our Silicon Carbide and GaN technologies, including the
development of existing Silicon Carbide materials and fabrication technology for
next generation platforms and expansion of our power and RF product portfolio.
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.
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--------------------------------------------------------------------------------Sales, General and Administrative
Sales, general and administrative expenses are 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 consist 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.
Sales, general and administrative expenses were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Sales, general and
administrative $203.5 $181.6 $181.7 $21.9 12 % ($0.1 ) - %
Percent of revenue 27 % 35 % 39 %
The increase in sales, general and administrative expenses in fiscal 2022
compared to fiscal 2021 was primarily due to increased salaries and benefits
from increased headcount, including incentive based stock-based compensation, as
well as increased consulting, legal and travel costs, partially offset by a
decrease in costs related to transition services incurred in the first half of
fiscal 2021 in connection with the sale of our former Lighting Products business
unit.
Sales, general and administrative expenses stayed fairly steady in fiscal 2021
compared to fiscal 2020. Increased salaries and benefits, including incentive
based stock-based compensation and commissions, were partially offset by
decreased information technology costs and professional and legal fees.
Additionally, further offsetting decreases related to a decrease of travel costs
as a result of travel restrictions related to the COVID-19 pandemic and employee
relocation expenses.
Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we recognize various amortizable intangible
assets, including customer relationships, developed technology and non-compete
agreements.
Amortization of intangible assets related to our acquisitions was as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Customer relationships $6.1 $6.1 $6.1 $- - % $- - %
Developed technology 5.4 5.4 5.4 - - % - - %
Non-compete agreements 2.1 3.0 3.0 (0.9) (30) % - - %
Total $13.6 $14.5 $14.5 ($0.9 ) (6) % $- - %
Amortization of acquisition-related intangible assets decreased in fiscal 2022
compared to fiscal 2021 due to an intangible asset relating to non-compete
agreements reaching the end of its useful life during fiscal 2022. No other
significant acquisition-related intangible activity or impairments occurred in
the periods reported.
Abandonment of Long-Lived Assets
In the fourth quarter of fiscal 2021, we modified our long-range plan regarding a portion of ourDurham, North Carolina campus originally intended for expanding our LED production capacity that we had considered using to expand the manufacturing footprint for our Silicon Carbide materials product line. After we complete our current ongoing Silicon Carbide materials production capacity expansion inDurham , we plan on further expansion of our Silicon Carbide materials production capacity outside of theDurham campus. As a result, we decided we will no longer complete the construction of certain buildings on theDurham campus. Accordingly, an expense of$73.9 million was recorded based upon an updated valuation of the property in connection with the preparation of our financial statements for the fiscal year endedJune 27, 2021 . 33 --------------------------------------------------------------------------------
(Gain) loss on Disposal or Impairment of Other 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 long-lived assets and capitalized patent costs for possible impairment.
(Gain) loss on disposal or impairment of other assets were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
(Gain) loss on disposal or
impairment of other assets ($0.3 ) $1.6 $1.5 ($1.9 ) (119) % $0.1 7 %
(Gain) loss on disposal or impairment of other assets primarily relate to
proceeds from asset sales offset by write-offs of fixed asset projects, as well
as the write-offs of impaired or abandoned patents. Additionally, the gain on
disposal or impairment of other assets for the fiscal year ended June 26, 2022
includes a $0.7 million net gain related to consideration received from the
early payment of the unsecured promissory note issued by SGH at the closing of
the LED Business Divestiture (the Purchase Price Note), as discussed in Note 3,
"Discontinued Operations," in our consolidated financial statements included in
Item 8 of this Annual Report.
Other Operating Expense
Other operating expense was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Factory optimization restructuring $6.1 $7.6 $8.5 ($1.5 ) (20) % ($0.9 ) (11) %
Severance and other restructuring 1.2 3.4 0.6 (2.2) (65) % 2.8 467 %
Total restructuring costs 7.3 11.0 9.1 (3.7) (34) % 1.9 21 %
Project, transformation and transaction
costs 6.6 7.3 12.2 (0.7) (10) % (4.9) (40) %
Factory start-up costs 70.0 8.0 9.5 62.0 775 % (1.5) (16) %
Non-restructuring related executive
severance - 2.8 2.1 (2.8) (100) % 0.7 33 %
Other operating expense $83.9 $29.1 $32.9 $54.8 188 % ($3.8 ) (12) %
Factory optimization restructuring costs relate to facility consolidations as
well as disposals on certain long-lived assets. Severance and other
restructuring costs relate to corporate restructuring plans. See Note 18,
"Restructuring," in our consolidated financial statements included in Item 8 of
this Annual Report for additional information on our restructuring costs.
Project, transformation and transaction costs primarily relate to professional
services fees associated with completed and potential acquisitions and
divestitures, as well as internal transformation programs focused on optimizing
our administrative processes.
Factory start-up costs are start-up costs incurred as part of our factory
optimization efforts to expand our production footprint to support expected
growth. Our factory optimization efforts began in fiscal 2019 and ended in
fiscal 2022. Additionally, we began incurring start-up costs related to the
opening of a new Silicon Carbide device fabrication facility in
The increase in other operating expense in fiscal 2022 compared to fiscal 2021 was primarily due to increased factory start-up costs as we continued our expansion of a new Silicon Carbide device fabrication facility inMarcy, New York , partially offset by a decrease in total restructuring costs and non-restructuring related executive severance. The decrease in other operating expense in fiscal 2021 compared to fiscal 2020 was primarily due to decreased project, transformation and transaction costs, partially offset by a slight increase in total restructuring costs. 34 --------------------------------------------------------------------------------
Non-Operating Expense (Income), net
Non-operating expense (income), net was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Gain on sale of investments, net ($0.3 ) ($0.4 ) ($1.5 ) $0.1 (25) % $1.1 73 %
Gain on equity investment - (8.3) (14.2) 8.3 100 % 5.9 42 %
Loss (gain) on debt extinguishment 24.8 - (11.0) 24.8 100 % 11.0 100 %
Gain on arbitration proceedings - - (7.9) - - % 7.9 100 %
Interest income (11.8) (10.1) (16.3) (1.7) (17) % 6.2 38 %
Interest expense 25.1 45.4 34.9 (20.3) (45) % 10.5 30 %
Other, net 0.5 (0.3) (2.5) 0.8 267 % 2.2 88 %
Non-operating expense (income), net $38.3 $26.3 ($18.5 ) $12.0 46 % $44.8 242 %
Gain on equity investment. The gain on equity investment for fiscal 2021 and
2020 relates to changes in fair value of our previously held ENNOSTAR Inc.
(ENNOSTAR) investment. In the fourth quarter of fiscal 2021, we liquidated our
common stock ownership interest in ENNOSTAR. We no longer hold any equity
interest in ENNOSTAR.
Loss (gain) on debt extinguishment. In the second quarter of fiscal 2022, all of
our then-outstanding 2023 Notes were converted into shares of our common stock,
which resulted in a loss on extinguishment of $24.8 million . Additionally, in
the fourth quarter of fiscal 2020, we recognized a gain on partial debt
extinguishment as a result of spending $144.3 million to repurchase $150.2
million of the principal amount held on our previously held 2023 Notes. See Note
10, "Long-term Debt," to our consolidated financial statements in Item 8 of this
Annual Report for additional information.
Gain on arbitration proceedings. The gain on arbitration proceedings primarily
relates to an award from an arbitration proceeding in the third quarter of
fiscal 2020 with a former vendor in which we were awarded damages for defective
inventory. Additionally, a small legal settlement was paid in the fourth quarter
of fiscal 2020.
Interest income. The increase in interest income in fiscal 2022 compared to
fiscal 2021 was primarily due to interest income received on our previously held
note receivable from SGH in connection with the LED Business Divestiture,
partially offset by decreased investment returns from our short-term investment
securities. The decrease in interest income in fiscal 2021 compared to fiscal
2020 was primarily due to significant reductions in investment returns on our
short-term investment securities.
Interest expense. The decrease in interest expense in fiscal 2022 compared to
fiscal 2021 was primarily due to capitalizing interest on the 2026 Notes in
connection with the building of our new Silicon Carbide device fabrication
facility in New York , which we began capitalizing in the fourth quarter of
fiscal 2021. The decrease in interest expense resulting from the extinguishment
of the 2023 Notes in the second quarter of fiscal 2022 was mostly offset by an
increase in interest expense from the sale of the 2028 Notes in the third
quarter of fiscal 2022. The increase in interest expense in fiscal 2021 compared
to fiscal 2020 was primarily due to the addition of the 2026 Notes on April 21,
2020 , partially offset by a partial extinguishment of our then-outstanding 2023
Notes.
Other, net. Other, net, primarily includes (i) foreign currency (gain) loss, net
resulting from remeasurement adjustments from our international subsidiaries,
(ii) net losses on the Wafer Supply Agreement entered into in fiscal 2021,
pursuant to which we supply CreeLED with certain Silicon Carbide materials and
fabrication services for up to four years, and (iii) a loss related to receiving
an early payment for the Purchase Price Note. See Note 2, "Discontinued
Operations," in our consolidated financial statements included in Item 8 of this
Annual Report for additional information on the Wafer Supply Agreement and the
loss on early payment of the Purchase Price Note.
35
--------------------------------------------------------------------------------Income Tax Expense (Benefit)
Income tax expense (benefit) and our effective tax rate was as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S.
Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Income tax expense
(benefit) $9.0 $1.1 ($8.0 ) 7.9 718 % 9.1 114 %
Effective tax rate (3) % - % 4 %
The change in the effective tax rate from 0% in fiscal 2021 to (3)% in fiscal
2022 was primarily due to $7.3 million of income tax expense recognized in the
second quarter of fiscal 2022 related to the restructuring of our Luxembourg
holding company. This restructuring is discussed further in Note 14, "Income
Taxes," to our consolidated financial statements included in Item 8 of this
Annual Report.
The change in the effective tax rate from 4% in fiscal 2020 to 0% in fiscal 2021
was primarily due to the increased tax benefit recorded in fiscal 2020 related
to net operating loss provisions of the Coronavirus Aid, Relief, and Economic
Security Act.
In general, the variation between our effective income tax rate and the current
U.S. statutory rate of 21.0% is primarily due to: (i) changes in our valuation
allowances against deferred tax assets, (ii) income derived from international
locations with differing tax rates than the U.S. , and (iii) tax credits
generated.
Net Loss from Discontinued Operations
As discussed above, we have classified the results of our former LED Products segment as discontinued operations in our consolidated statements of operations for all periods presented. We ceased recording depreciation and amortization of long-lived assets of the LED Business upon classification as discontinued operations inOctober 2020 . We recorded net income from discontinued operations of$94.2 million , net loss from discontinued operations of$181.2 million and net income from discontinued operations of$7.0 million in fiscal 2022, 2021 and 2020, respectively. Net income from discontinued operations in fiscal 2022 relates to the receipt of an unsecured promissory note from CreeLED as additional consideration to satisfy the earnout obligations pursuant to the Asset Purchase Agreement (the LED Purchase Agreement), datedOctober 18, 2020 , as amended. The additional consideration was based upon the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing. Net loss from discontinued operations in fiscal 2021 includes a$112.6 million goodwill impairment, a$19.5 million impairment to assets held for sale associated with the LED Business Divestiture and a$29.1 million loss on sale. Additionally, total costs to sell of$27.4 million were recognized throughout fiscal 2021 and fiscal 2020 and are included in net (loss) income from discontinued operations for those periods.
Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses and working capital requirements,
including the purchase of goods and services in the ordinary course of business
such as raw materials, supplies and capital equipment, as well as outlays for
research and development, strategic acquisitions and investments. Our principal
sources of liquidity are cash on hand, marketable securities and, as described
further below, availability under our line of credit.
Based on past performance and current expectations, we believe our current
working capital, availability under our line of credit 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. With the
strength of our working capital position, we believe that we have the ability to
continue to invest in expansion of our production capacity, further development
of our products and, when necessary or appropriate, make selective acquisitions
or other strategic investments to strengthen our product portfolio or secure key
intellectual properties.
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Table of Contents
Sources of Liquidity
The following table sets forth our cash, cash equivalents and short-term investments:
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 Change Cash and cash equivalents$449.5 $379.0 $70.5 Short-term investments 749.3 775.6 (26.3) Total cash, cash equivalents and short-term investments$1,198.8 $1,154.6 $44.2
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.
In the third quarter of fiscal 2021, we implemented an at-the-market program (the ATM program) in which we sold 4,222,511 shares of our common stock at a weighted average price of$118.41 per share for total gross proceeds of approximately$500.0 million and net proceeds of approximately$489.1 million , after$10.0 million in commissions to the managers of the program and$0.9 million in other offering costs.
In the fourth quarter of fiscal 2021, we liquidated our common stock ownership
interest in ENNOSTAR and received net proceeds of
In the second quarter of fiscal 2022, all outstanding 2023 Notes were
surrendered for conversion following our issuance on
In the third quarter of fiscal 2022, we issued and sold a total of$750.0 million aggregate principal amount of the 2028 Notes, as discussed in Note 10, "Long-term Debt," in our consolidated financial statements included in Item 8 of this Annual Report. The total net proceeds of the 2028 Notes was$732.3 million , of which we used$108.2 million to fund the cost of entering into capped call transactions, which are expected generally to reduce the potential dilution to our common stock upon any conversion of the 2028 Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of the converted 2028 Notes, as the case may be, upon conversion of the 2028 Notes. We expect to use the remainder of the net proceeds for general corporate purposes. In addition, during the third quarter of 2022, we received an early payment for the Purchase Price Note resulting in receipt of the principal amount of$125.0 million along with outstanding accrued and unpaid interest as of the payment date. We have a$125 million line of credit as discussed in Note 10, "Long-term Debt," in our consolidated financial statements included in Item 8 of this Annual Report, all of which was available for borrowing as ofJune 26, 2022 . The purpose of this credit facility is to provide short-term flexibility to optimize returns on our cash and investment portfolio while funding capital expenditures and other general business needs. OnJanuary 25, 2022 , we entered into an amendment to the credit agreement governing the line of credit that extends the maturity date by three years toJanuary 9, 2026 and adopted secured overnight financing rate (SOFR) interest rates as the benchmark interest rate under the credit agreement. As ofJune 26, 2022 , we had unrealized losses on our short-term investments of$23.0 million . All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position atJune 26, 2022 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or volatile market conditions related to the conflict inUkraine and the ongoing COVID-19 pandemic. We evaluate our short-term investments for expected credit losses. We believe we are able to and we intend to hold each of the investments held with an unrealized loss as ofJune 26, 2022 until the investments fully recover in market value. No allowance for credit losses was recorded as ofJune 26, 2022 . From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we have continued to make such evaluations. For example, inMarch 2021 we completed the LED Business Divestiture, which provided us with (i)$50 million in cash, subject to customary adjustments, (ii) a$125 million unsecured promissory note due inAugust 2023 (which amount plus accrued and unpaid interest was prepaid during the third quarter of 2022), and (iii) an earn-out payment of$101.8 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, which is payable in the form of an unsecured promissory note dueMarch 2025 . We may also access capital markets through the issuance of debt or equity, which we may use in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities or general corporate purposes. 37
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Expected Uses of Liquidity
For fiscal 2023, we target approximately$550 million of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities. We are exploring additional expansion options and will update targeted net capital investment if and when those capacity expansion options are announced. This target is highly dependent on the timing and overall progress on our new Silicon Carbide fabrication facility inNew York and is net of approximately$275 million of expected reimbursements from theState of New York Urban Development Corporation under the GDA during the fiscal year. We recently opened our new Silicon Carbide device fabrication facility inMarcy, New York , to expand capacity for production of our Silicon Carbide devices. We expect to invest approximately$2.0 billion , an increase from our previously expected$1.0 billion , in construction, equipment and other related costs for the new facility through fiscal 2024, of which approximately$500 million is expected to be reimbursed over time by theState of New York through a grant program administered by theState of New York Urban Development Corporation (doing business asEmpire State Development ). The increase is primarily due to capacity expansions now planned at the site as a result of increased projected demand. As ofJune 26, 2022 , we have spent approximately$750 million and received approximately$150 million in reimbursements. Given our current cash position, we believe we are positioned to adequately fund the remaining construction of the facility. In addition to ordinary operating expenses, our estimated future obligations consist of leases, debt, and interest on long-term debt. For a description of contractual obligations, including lease and debt obligations, see Note 5, "Leases," Note 10, "Long-term Debt," and Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report. Cash Flows
In summary, our cash flows were as follows (in millions of
Fiscal Years Ended Year-Over-Year Change
June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021
Cash used in operating activities ($154.2 ) ($125.5 ) ($29.0 ) ($28.7 ) ($96.5 )
Cash used in investing activities (391.0) (448.6) (486.9) 57.6 38.3
Cash provided by financing activities 615.9 504.1 464.3 111.8 39.8
Effect of foreign exchange changes (0.2) 0.2 (0.1) (0.4) 0.3
Net increase (decrease) in cash and cash
equivalents $70.5 ($69.8 ) ($51.7 ) $140.3 ($18.1 )
Cash Flows from Operating Activities
Net cash used in operating activities increased in fiscal 2022 compared to fiscal 2021 primarily due to decreased working capital as a result of inventory growth and increased receivables as a result of revenue growth.
Net cash used in operating activities increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in net loss during the period and decreased cash provided by operating activities of discontinued operations, as well as slightly decreased working capital.
Total cash flows from operating activities in fiscal 2021 and 2020 includes
Cash Flows from Investing Activities
Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment, and property and equipment related reimbursements.
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The decrease in net cash used in investing activities in fiscal 2022 compared to fiscal 2021 was primarily due to a$128.3 million increase in property and equipment related reimbursements from theState of New York Urban Development Corporation under a Grant Disbursement Agreement (the GDA) and a$81.3 million net increase in proceeds from the LED Business Divestiture. These increases in proceeds from investing activities were partially offset by a$74.4 million increase in purchases of property and equipment and a$12.5 million decrease in net proceeds from short-term investments. Additionally, we received$66.4 million in net proceeds from the liquidation of our ENNOSTAR equity investment in fiscal 2021. The decrease in net cash used in investing activities in fiscal 2021 compared to fiscal 2020 was primarily due to an increase in net proceeds from short-term investments of$247.8 million , net proceeds from the sale of the LED Business of$43.7 million , net proceeds from the liquidation of our ENNOSTAR equity investment of$66.4 million and$10.7 million of property related reimbursements under the GDA, partially offset by an increase in property and equipment purchases of$340.6 million .
For more details on the GDA, see Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.
Total cash used in investing activities in fiscal 2021 and 2020 includes$0.3 million and$12.4 million , respectively, of cash used in investing activities of discontinued operations.
Cash Flows from Financing Activities
Net cash provided by financing activities in fiscal 2022 primarily consisted of$732.3 million in net proceeds from issuing the 2028 Notes and$22.4 million of proceeds from the issuance of common stock, partially offset by$108.2 million in cash paid for the capped call transactions and$29.1 million in tax withholdings on vested equity awards. Net cash provided by financing activities in fiscal 2021 primarily consisted of net proceeds of$503.5 million from issuances of common stock in connection with the ATM program in the third quarter of fiscal 2021 and issuances of common stock pursuant to the exercise of employee stock options. Net cash provided by financing activities in fiscal 2020 primarily consisted of proceeds of$575.0 million from the issuance of the 2026 Notes and net proceeds of$59.5 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by payments on long-term debt of$145.1 million , the payment of$13.6 million in debt issuance costs from the issuance of the 2026 Notes and incentive-related refundable escrow deposits of$11.5 million relating to the construction of our new Silicon Carbide fabrication facility inNew York .
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 analysis performed on our financial positions atJune 26, 2022 andJune 27, 2021 . Actual results may differ materially.
Interest Rate Risk
We maintain an investment portfolio principally composed of money market funds, municipal bonds, corporate bonds,U.S. agency securities,U.S. treasury securities, commercial paper, certificates of deposit, and variable rate demand notes. In order to minimize risk, our cash management policy permits us to acquire investments rated "A" grade or better. As ofJune 26, 2022 andJune 27, 2021 , our cash equivalents and short-term investments had a fair value of$993.6 million and$979.8 million , respectively. If interest rates were to hypothetically increase by 100 basis points, the fair value of our short-term investments would decrease by$9.9 million atJune 26, 2022 and$9.8 million atJune 27, 2021 .
Additionally, as part of the completed LED Business Divestiture, we hold a
As ofJune 26, 2022 , we maintain a secured revolving line of credit under which we can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date ofJanuary 9, 2026 . As ofJune 26, 2022 andJune 27, 2021 , no balances were outstanding under the line of credit. 39
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Currency Rate and Price Risk
All of our operations have a functional currency of theU.S. Dollar. However, we operate internationally and have transactions denominated in foreign currencies, and therefore we are exposed to currency exchange rate risks. Fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.
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 ofJune 26, 2022 , we did not have any off-balance sheet arrangements, as defined in Item 303(b) of SEC Regulation S-K. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance withU.S. GAAP. In the application ofU.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, 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 and a description of recent accounting pronouncements are discussed in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to our consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting 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 estimates and the related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
For the year endedJune 26, 2022 , approximately a third 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. 40
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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 that particular part to the 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.
Inventories
Inventories are stated at the lower of cost or 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. In addition, our international sales and purchases are subject to numerousUnited States and foreign laws and regulations which may limit or restrict our sales and shipments to foreign customers. 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. 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 withU.S. GAAP, which could have an adverse effect on our operating results.
Deferred Tax Asset Valuation Allowances
In accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, "Income Taxes" (ASC 740), we evaluate all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a deferred tax asset is more likely than not to be realized. In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate if sufficient future taxable income of the right character will be generated to utilize the existing deferred tax assets by jurisdiction. This consideration includes a variety of factors such as 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 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%) of being sustained by
the taxing authorities based on the technical merits of the position.
In accordance with the provisions of ASC 740, we establish 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 such time that we determine the position has 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.
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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, existing deferred tax assets, 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 Employee Stock Purchase Plan (ESPP) awards. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using theMonte Carlo valuation model. 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. As ofJune 26, 2022 , we have$82.3 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.85 years. 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 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.
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. 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. For example, we recognized an impairment to assets held for sale associated with the LED Business Divestiture of$19.5 million during the second fiscal quarter of 2021.
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.
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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 ASC 350, "Intangibles -Goodwill and Other," 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 we operate as one operating and reportable segment. 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 determine the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. 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 market and income approaches require significant judgment, including estimation of future revenues, gross margins, and operating expenses, which are dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the reporting unit's performance relative to peer competitors, the estimation of the long-term revenue growth rate and discount rate from the capital asset pricing model and the determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge. The 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 the fair value, 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.
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.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 45
Consolidated Balance Sheets as of June 26, 2022 and June 27, 2021 47
Consolidated Statements of Operations for the years ended
48
Consolidated Statements of Comprehensive Loss for the years ended
June 27, 2021 and June 28, 2020 49
Consolidated Statements of Cash Flows for the years ended
50
Consolidated Statements of Shareholders' Equity for the years ended
June 27, 2021 and June 28, 2020 51
Notes to Consolidated Financial Statements 52
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets ofWolfspeed, Inc. and its subsidiaries (the "Company") as ofJune 26, 2022 andJune 27, 2021 , and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity and of cash flows for each of the three years in the period endedJune 26, 2022 , including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as ofJune 26, 2022 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofJune 26, 2022 andJune 27, 2021 , and the results of its operations and its cash flows for each of the three years in the period endedJune 26, 2022 in conformity with accounting principles generally accepted inthe United States of America . Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofJune 26, 2022 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for leases on
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
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
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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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserves for distributor programs - Ship and debit
As described in Note 2 to the consolidated financial statements, 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. Certain distributors may be provided customer pricing arrangements under the Company's "ship and debit" program. Distributor sales account for approximately a third of total net revenue of$746.2 million for the year endedJune 26, 2022 and the associated reserves for ship and debit program to distributors make up a portion of the accrued contract liabilities account balance of$35.9 million . Under the Company's ship and debit program, 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. The credits associated with this program are applied against the reserve the Company establishes upon initial shipment of product to the distributor. Upon shipment, management uses significant judgment in establishing reserves for ship and debit, which includes developing assumptions related to changes in selling prices. The principal considerations for our determination that performing procedures relating to ship and debit reserves for distributor programs is a critical audit matter are the significant judgment by management in estimating the reserves for ship and debit, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management's assumption related to changes in selling prices. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of ship and debit reserve. These procedures also included, among others, (1) testing management's process for determining the estimate for ship and debit reserve, (2) evaluating the appropriateness of management's methodology to calculate the ship and debit reserve, (3) evaluating the reasonableness of management's significant assumption related to changes in selling prices, which included the evaluation of management's ability to estimate the changes in selling prices in comparison to historical selling prices, (4) testing the completeness and accuracy of data inputs to the ship and debit reserve calculation, and (5) evaluating the reasonableness of management's prior period estimates for ship and debit reserve to actual credits granted during the current period by performing a retrospective comparison subsequent to year-end. /s/PricewaterhouseCoopers LLP Raleigh, North Carolina August 22, 2022
We have served as the Company's auditor since 2013.
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WOLFSPEED, INC.
CONSOLIDATED BALANCE SHEETS
June 26, 2022 June 27, 2021
in millions of U.S. Dollars, except share data in thousands
Assets
Current assets:
Cash and cash equivalents $449.5 $379.0
Short-term investments 749.3 775.6
Total cash, cash equivalents and short-term investments 1,198.8 1,154.6
Accounts receivable, net 150.2 95.9
Inventories 227.0 166.6
Income taxes receivable 1.3 6.4
Prepaid expenses 32.1 25.7
Other current assets 151.4 27.9
Current assets held for sale 1.6 1.6
Total current assets 1,762.4 1,478.7
Property and equipment, net 1,481.1 1,292.3
Goodwill 359.2 359.2
Intangible assets, net 125.4 140.5
Long-term receivables 104.7 138.4
Deferred tax assets 1.0 1.0
Other assets 83.7 35.5
Long-term assets of discontinued operations - 1.2
Total assets $3,917.5 $3,446.8
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $307.7 $381.1
Accrued contract liabilities 37.0 22.9
Income taxes payable 11.6 0.4
Finance lease liabilities 0.5 5.2
Other current liabilities 31.7 38.6
Current liabilities of discontinued operations - 0.6
Total current liabilities 388.5 448.8
Long-term liabilities:
Convertible notes, net 1,021.6 823.9
Deferred tax liabilities 3.2 2.5
Finance lease liabilities - long-term 9.6 10.0
Other long-term liabilities 55.3 44.5
Long-term liabilities of discontinued operations - 0.6
Total long-term liabilities 1,089.7 881.5
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $0.01 ; 3,000 shares authorized at June
26, 2022 and June 27, 2021; none issued and outstanding - -
Common stock, par value
0.2 0.1
Additional paid-in-capital 4,228.4 3,676.8
Accumulated other comprehensive (loss) income (25.3) 2.7
Accumulated deficit (1,764.0) (1,563.1)
Total shareholders' equity 2,439.3 2,116.5
Total liabilities and shareholders' equity $3,917.5 $3,446.8 The accompanying notes are an integral part of the consolidated financial
statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
in millions of U.S. Dollars, except share data
Revenue, net $746.2 $525.6 $470.7
Cost of revenue, net 496.9 361.0 312.2
Gross profit 249.3 164.6 158.5
Operating expenses:
Research and development 196.4 177.8 152.0
Sales, general and administrative 203.5 181.6 181.7
Amortization or impairment of acquisition-related intangibles 13.6
14.5 14.5
Abandonment of long-lived assets - 73.9 -
(Gain) loss on disposal or impairment of other assets (0.3) 1.6 1.5
Other operating expense 83.9 29.1 32.9
Operating loss (247.8) (313.9) (224.1)
Non-operating expense (income), net 38.3 26.3 (18.5)
Loss before income taxes (286.1) (340.2) (205.6)
Income tax expense (benefit) 9.0 1.1 (8.0)
Net loss from continuing operations (295.1) (341.3) (197.6)
Net income (loss) from discontinued operations 94.2 (181.2) 7.0
Net loss (200.9) (522.5) (190.6)
Net income from discontinued operations attributable to noncontrolling interest
- 1.4 1.1
Net loss attributable to controlling interest ($200.9 ) ($523.9 ) ($191.7 )
Basic and diluted loss per share
Continuing operations ($2.46 ) ($3.04 ) ($1.83 )
Net loss attributable to controlling interest ($1.67 ) ($4.66 ) ($1.78 )
Weighted average shares - basic and diluted (in thousands) 120,120
112,346 107,935
The accompanying notes are an integral part of the consolidated financial
statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Fiscal Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
in millions of U.S. Dollars
Net loss ($200.9 ) ($522.5 ) ($190.6 )
Other comprehensive income (loss):
Reclassification of currency translation gain to loss on sale of discontinued operations
- (9.5) -
Net unrealized (loss) gain on available-for-sale securities (28.0) (3.8) 6.5
Comprehensive loss (228.9) (535.8) (184.1)
Net income from discontinued operations attributable to noncontrolling interest
- 1.4 1.1
Comprehensive loss attributable to controlling interest ($228.9 ) ($537.2 ) ($185.2 )
The accompanying notes are an integral part of the consolidated financial
statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
in millions of U.S. Dollars June 26, 2022 June 27, 2021 June 28, 2020
Operating activities:
Net loss ($200.9 ) ($522.5 ) ($190.6 )
Net income (loss) from discontinued operations 94.2 (181.2) 7.0
Net loss from continuing operations (295.1) (341.3) (197.6)
Adjustments to reconcile net loss from continuing operations to cash used in operating activities: Depreciation and amortization
129.8 120.9 97.1
Amortization of debt issuance costs and discount, net of non-cash capitalized interest
20.1 32.8 26.2
Loss (gain) on extinguishment of debt 24.8 - (11.0)
Stock-based compensation 60.9 53.2 47.2
Abandonment of long-lived assets - 73.9 -
Loss on disposal or impairment of long-lived assets 1.0 5.0 4.5
Amortization of premium/discount on investments 6.1 6.9 1.7
Realized gain on sale of investments (0.3) (0.4) (1.5)
Gain on equity investment - (8.3) (14.2)
Foreign exchange gain on equity investment - (2.2) (2.2)
Deferred income taxes 0.7 0.9 (0.5)
Changes in operating assets and liabilities:
Accounts receivable, net (54.3) (23.5) (3.2)
Inventories (68.8) (44.6) (8.5)
Prepaid expenses and other assets (0.4) (20.0) (3.0)
Accounts payable, trade 29.2 21.7 (7.2)
Accrued salaries and wages and other liabilities (10.5) 15.3 (24.9)
Accrued contract liabilities 2.6 (2.8) 5.5
Net cash used in operating activities of continuing operations (154.2)
(112.5) (91.6)
Net cash (used in) provided by operating activities of discontinued operations
- (13.0) 62.6
Cash used in operating activities (154.2) (125.5) (29.0)
Investing activities:
Purchases of property and equipment (644.9) (570.5) (229.9)
Purchases of patent and licensing rights (5.7) (5.9) (4.4)
Proceeds from sale of property and equipment, including insurance proceeds
3.1 2.3 2.6
Purchases of short-term investments (475.0) (475.0) (821.4)
Proceeds from maturities of short-term investments 242.3 428.3 460.6
Proceeds from sale of short-term investments 225.2 51.7 118.0
Reimbursement of property and equipment purchases from long-term incentive agreement
139.0 10.7 -
Proceeds from sale of business, net, including receipt of note receivable
125.0 43.7 -
Proceeds from sale of long-term investment - 66.4 -
Net cash used in investing activities of continuing operations (391.0)
(448.3) (474.5)
Net cash used in investing activities of discontinued operations - (0.3) (12.4)
Cash used in investing activities (391.0) (448.6) (486.9)
Financing activities:
Proceeds from long-term debt borrowings 20.0 30.0 -
Payments on long-term debt borrowings, including finance lease obligations
(20.5) (30.4) (145.1)
Proceeds from issuance of common stock 22.4 539.7 76.4
Tax withholding on vested equity awards (29.1) (36.2) (16.9)
Proceeds from convertible notes 750.0 - 575.0
Payments of debt issuance costs (17.7) - (13.6)
Cash paid for capped call transactions (108.2) - -
Incentive-related escrow refunds/(deposits) - 1.5 (11.5)
Commitment fees on long-term incentive agreement (1.0) (0.5) -
Cash provided by financing activities 615.9 504.1 464.3
Effects of foreign exchange changes on cash and cash equivalents (0.2)
0.2 (0.1)
Net change in cash and cash equivalents 70.5 (69.8) (51.7)
Cash and cash equivalents, beginning of period 379.0 448.8 500.5
Cash and cash equivalents, end of period $449.5 $379.0 $448.8 The accompanying notes are an integral part of the consolidated financial
statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Non-controlling
Common Stock Interest from
Number Par Accumulated Other Total Equity - Discontinued
of Shares Value Additional Paid-in Capital Accumulated Deficit Comprehensive Income Controlled Interest Operations Total Equity
Share data in thousands,
106,570 $0.1 $2,874.1 ($847.5 ) $9.5 $2,036.2 $5.0 $2,041.2
Net (loss) income - - - (191.7) - (191.7) 1.1 (190.6)
Unrealized gain on available-for-sale
securities - - - - 6.5 6.5 - 6.5
Comprehensive (loss) income (185.2) 1.1 (184.1)
Tax withholding on vested equity awards - - (16.9) - - (16.9) - (16.9)
Stock-based compensation - - 54.9 - - 54.9 - 54.9
Exercise of stock options and issuance
of shares 2,660 - 76.4 - - 76.4 - 76.4
Issuance of convertible notes due May 1,
2026 - - 145.4 - - 145.4 - 145.4
Partial extinguishment of convertible
notes due September 1, 2023 - - (27.7) - - (27.7) - (27.7)
Balance at June 28, 2020 109,230 $0.1 $3,106.2 ($1,039.2 ) $16.0 $2,083.1 $6.1 $2,089.2
Net (loss) income - - - (523.9) - (523.9) 1.4 (522.5)
Reclassification of currency translation
gain to loss on sale of discontinued
operations - - - - (9.5) (9.5) - (9.5)
Unrealized loss on available-for-sale
securities - - - - (3.8) (3.8) - (3.8)
Comprehensive (loss) income (537.2) 1.4 (535.8)
Tax withholding on vested equity awards - - (36.2) - - (36.2) - (36.2)
Stock-based compensation - - 67.1 - - 67.1 - 67.1
Exercise of stock options and issuance
of shares 2,238 - 50.6 - - 50.6 - 50.6
Issuance of shares under the
at-the-market offering program, net of
issuance costs 4,223 - 489.1 - - 489.1 - 489.1
Reclassification of noncontrolling
interest to loss on sale of discontinued
operations - - - - - - (7.5) (7.5)
Balance at June 27, 2021 115,691 $0.1 $3,676.8 ($1,563.1 ) $2.7 $2,116.5 $- $2,116.5
Net loss - - - (200.9) - (200.9) - (200.9)
Unrealized loss on available-for-sale
securities - - - - (28.0) (28.0) - (28.0)
Comprehensive loss (228.9) - (228.9)
Tax withholding on vested equity awards - - (29.1) - - (29.1) - (29.1)
Stock-based compensation - - 62.8 - 62.8 - 62.8
Exercise of stock options and issuance
of shares 978 - 22.4 - - 22.4 - 22.4
Issuance of shares related to the
extinguishment of convertible notes due
September 1, 2023 7,126 0.1 416.1 - - 416.2 - 416.2
Issuance of convertible notes due
February 15, 2028 - - 187.6 - - 187.6 - 187.6
Capped call transactions related to the
issuance of convertible notes due
February 15, 2028 - - (108.2) - - (108.2) - (108.2)
Balance at June 26, 2022 123,795 $0.2 $4,228.4 ($1,764.0 ) ($25.3 ) $2,439.3 $- $2,439.3 The accompanying notes are an integral part of the consolidated financial
statements.
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WOLFSPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business 53
Note 2 Basis of Presentation and Summary of Significant Accounting Policies 54
Note 3 Discontinued Operations 62
Note 4 Revenue Recognition 64
Note 5 Leases 65
Note 6 Financial Statement Details 66
Note 7 Investments 70
Note 8 Fair Value of Financial Instruments 72
Note 9 Goodwill and Intangible Assets 73
Note 10 Long-term Debt 74
Note 11 Shareholders' Equity 78
Note 12 Loss Per Share 79
Note 13 Stock-Based Compensation 79
Note 14 Income Taxes 83
Note 15 Commitments and Contingencies 87
Note 16 Concentrations of Credit Risk 88
Note 17 Retirement Savings Plan 88
Note 18 Restructuring 88
Note 19 Subsequent Events 89
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Table of Contents Note 1 - Business OverviewWolfspeed, Inc. (the Company), formerly known asCree, Inc. , is an innovator of wide bandgap semiconductors, focused on Silicon Carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications. The Company's product families include Silicon Carbide and GaN materials, power devices and RF devices targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense. Previously, the Company designed, manufactured and sold specialty lighting-class light emitting diode (LED) products targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays. As discussed more fully below in Note 3, "Discontinued Operations," onMarch 1, 2021 , the Company completed the sale of certain assets and subsidiaries comprising its former LED Products segment (the LED Business Divestiture) to SMART Global Holdings, Inc. (SGH) and its wholly owned newly-created acquisition subsidiaryCreeLED, Inc. (CreeLED and collectively with SGH, SMART).
Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to the Company's continuing operations.
The Company's materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. The Company's materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
OnOctober 4, 2021 , the Company changed its corporate name fromCree, Inc. toWolfspeed, Inc. In addition, the Company transferred the listing of its common stock to theNew York Stock Exchange (NYSE) from The Nasdaq Global Select Market (Nasdaq). The Company ceased trading as a Nasdaq-listed company at the end of the day onOctober 1, 2021 and commenced trading as a NYSE-listed company at market open onOctober 4, 2021 under the new ticker symbol 'WOLF'. The majority of the Company's products are manufactured at its production facilities located inNorth Carolina ,California andArkansas . The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. Additionally, the Company recently opened its Silicon Carbide device fabrication facility inNew York . The Company operates research and development facilities inNorth Carolina ,California ,Arkansas ,Arizona andNew York .
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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.
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 2022, 2021 and 2020 fiscal years were 52-week fiscal years. The Company's 2023 fiscal year will be a 52-week fiscal year. The next 53-week fiscal year will be for the Company's 2024 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 loss or shareholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe 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, 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. Certain accounting matters that generally require consideration of forecasted financial information were assessed regarding impacts from the COVID-19 pandemic as ofJune 26, 2022 and through the date of this Annual Report using reasonably available information as of those dates. The accounting matters assessed included, but were not limited to, allowance for doubtful accounts, the carrying value of goodwill and other long-lived tangible and intangible assets, the potential impact to earnings of unrealized losses on investments and valuation allowances for deferred tax assets. While the assessments resulted in no material impacts to the consolidated financial statements as ofJune 26, 2022 andJune 27, 2021 and for the years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , the Company believes the full impact of the pandemic remains uncertain and will continue to assess if ongoing developments related to the pandemic may cause future material impacts to its consolidated financial statements.
Change in Estimate
As a result of the LED Business Divestiture and the Company's continued investment in 200mm technology, the Company evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use. In the first quarter of fiscal 2022, the Company increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets. This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of$33.3 million for the fiscal year endedJune 26, 2022 . Approximately$10.4 million of the decrease in year-to-date depreciation expense resulted in a net reduction of inventory as ofJune 26, 2022 and the remaining$22.9 million resulted in an improvement in both loss before income taxes and net loss, of which$19.6 million related to an improvement in gross profit. This change in estimate resulted in an improvement in year-to-date basic and diluted loss per share of$0.19 per share. Segment Information
The Company operates as a single reporting segment. Accordingly, the Chief Operating Decision Maker (CODM) allocates resources and assesses performance on a consolidated basis. The Company's identified CODM is the Chief Executive Officer.
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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 theFederal Deposit Insurance Corporation (FDIC). The Company has not historically experienced any losses due to such concentration of credit risk.
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.
Allowance for Doubtful Accounts
OnJune 29, 2020 , the first day of the 2021 fiscal year, the Company adoptedFinancial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) using the modified retrospective transition method, which replaced the incurred loss impairment methodology inU.S. GAAP with a methodology that reflects expected credit losses. Upon adoption, prior period balances were not adjusted and the Company determined no cumulative-effect adjustment to retained earnings as ofJune 29, 2020 was required. Under this new standard, expected credit losses for the Company's receivables are evaluated on a collective (pool) basis and aggregated on the basis of similar risk characteristics. These aggregated risk pools are reassessed at each measurement date. A combination of factors is considered in determining the appropriate estimate of expected credit losses, including broad-based economic indicators as well as customers' financial strength, credit standing, payment history and any historical defaults.
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 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 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. However, as explained further below, the Company evaluates each individual security in an unrealized loss position for expected credit losses and if it is evaluated as having an expected credit loss, unrealized losses of that security are included in earnings.
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.
Upon adoption of ASU 2016-13, available-for-sale debt securities in an unrealized loss position at each measurement date are individually evaluated for expected credit losses. The Company evaluates whether the unrealized loss is due to market factors or changes in the investment holdings' credit rating. An expected credit loss will be recorded when an investment in an unrealized loss position is determined to have lost value from a decreased credit rating. The Company does not record an allowance for credit losses on receivables related to accrued interest. For the fiscal years endedJune 26, 2022 andJune 27, 2021 , no allowance for credit losses was recorded. Before the adoption of ASU 2016-13, the Company evaluated investments that experienced a decline below its original cost to determine whether the decline is other-than-temporary. Among other things, the Company considered the duration and extent of the decline and the economic factors that influenced the capital markets. For the fiscal year endedJune 28, 2020 , 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 non-operating expense (income), net.
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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.
Fair Value of Financial Instruments
The Company performs recurring fair value measurements for its cash equivalents and short-term investments, as discussed further in Note 8, "Fair Value of Financial Instruments." In addition, cash, accounts and interest receivable, accounts payable and other liabilities approximate their fair values atJune 26, 2022 andJune 27, 2021 due to the short-term nature of these instruments.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) method or an average cost method. 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 not result in the restoration or increase in that newly established lower cost basis. If that inventory is subsequently sold, the sale is recorded at the actual selling price and the related cost of revenue is recorded at the new lower cost basis.
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 term of the related lease. In general, the Company's policy for useful lives is as follows: Furniture and fixtures 5 years Buildings and building improvements 5 to 40 years Machinery and equipment 3 to 15 years Vehicles 5 years Computer hardware/software 3 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. The Company considers a long-lived asset to be abandoned after the Company has ceased use of such asset and there is no longer intent to use or repurpose the asset in the future. Abandoned long-lived assets are recorded at their salvage value, if any.
Government Grant Disbursements
Government grant disbursements are recognized when there is reasonable assurance that: (1) the Company will comply with the relevant conditions and (2) the grant disbursement will be received. The Company receives grant disbursements from theState of New York Development Corporation relating to property, plant and equipment purchases in connection with its construction of a new Silicon Carbide device fabrication facility inMarcy, New York . Grant disbursements are recorded as a reduction to the related asset(s), which then reduces depreciation expense over the expected useful life of the asset on a straight-line basis. 56
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Shipping and Handling Costs
Shipping and handling costs are included in cost of revenue, net in the consolidated statements of operations and are recognized as a period expense during the period in which they are incurred.
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.
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 its 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 it has one reporting unit,Wolfspeed . 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 it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the Company performs a quantitative goodwill impairment test to determine if goodwill is impaired. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets associated with the reporting unit, goodwill is not considered impaired. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, 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. The Company derives a reporting unit's fair value through a combination of the market approach (guideline transaction method and guideline public company method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from a capital asset pricing model. The fair value is reconciled back to the Company's consolidated market capitalization.
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 seven to 15 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 generally 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. 57
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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 15, "Commitments and Contingencies," for a
discussion of loss contingencies in connection with pending and threatened
litigation. The costs of defending legal claims against the Company are expensed
as incurred.
Revenue Recognition
Revenue is recognized when control of a good or service promised in a contract
(i.e., performance obligation) is transferred to a customer. Control is obtained
when a customer has the ability to direct the use of and obtain substantially
all of the remaining benefits from that good or service. Substantially all of
the Company's revenue is derived from product sales. Revenue is recognized at a
point in time based on the Company's evaluation of when the customer obtains
control of the products, and all performance obligations under the terms of the
contract are satisfied. If customer acceptance clauses are present and it cannot
be objectively determined that control has been transferred based on the
contract and shipping terms, revenue is only recorded when customer acceptance
is received and all performance obligations have been satisfied. Sales of
products typically do not include more than one performance obligation.
A 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.
Master supply or distributor agreements are in place with many of the Company's
customers and contain terms and conditions including, but not limited to,
payment, delivery, incentives and warranty. These agreements sometimes require
minimum purchase commitments and/or involve potential penalties to the Company
if a defined supply schedule is not met. If a master supply, distributor or
other similar agreement is not in place with a customer, the Company considers a
purchase order, which is governed by the Company's standard terms and
conditions, to be the contract governing the relationship with that customer.
Pricing terms are negotiated independently on a stand-alone basis. Revenue is
measured based on the amount of net consideration to which the Company expects
to be entitled to receive in exchange for products or services. Variable
consideration is recognized as a reduction of net revenue with a corresponding
reserve at the time of revenue recognition, and consists primarily of sales
incentives, volume discounts, price concessions and return allowances. Variable
consideration is estimated based on contractual terms, historical analysis of
customer purchase volumes, or historical analysis using specific data for the
type of consideration being assessed.
Some 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 contract
liability and a reduction of product revenue.
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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. The Company also has inventory consignment agreements in which revenue is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that the Company stores at designated locations. Delivery and transfer of control occur at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, the Company retains control over the products' disposition, including the right to pull back or relocate the products. 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.
Leases
At lease inception, the Company determines an arrangement is a lease if the contract involves the use of a distinct identified asset, the lessor does not have substantive substitution rights and the lessee obtains control of the asset throughout the period by obtaining substantially all of the economic benefit of the asset and the right to direct the use of the asset. Depending on the terms, leases are classified as either operating or finance leases, if the Company is the lessee, or as operating, sales-type or direct financing leases, if the Company is the lessor. The Company does not have any sales-type or direct financing leases. Lease agreements frequently include other services such as maintenance, electricity, security, janitorial and reception services. The Company accounts for the lease and non-lease components in its arrangements as a single lease component. The Company adopted FASB Accounting Standards Codification 842 "Leases" (ASC 842) onJuly 1, 2019 under the modified retrospective transition approach with the cumulative effect of application recognized at the effective date, without adjustment to prior comparative periods. The Company did not have a cumulative-effect adjustment to retained earnings as a result of the adoption of the new standard.
Accounting for Leases as a Lessee
Right-of-use assets represent the Company's right to use an underlying asset
during the lease term and lease liabilities represent the Company's obligation
to make lease payments arising from the lease. Assets and liabilities are
recognized based on the present value of lease payments over the lease term.
Most leases include one or more options to renew, with renewal terms that can
extend the lease term from one to five years or more. The exercise of the
renewal option is at the Company's sole discretion and the Company considers
these options in determining the lease term used to establish its right-of-use
assets and lease liabilities. The Company will remeasure its lease liability and
adjust the related right-of-use asset upon the occurrence of the following:
lease modifications not accounted for as a separate contract; a triggering event
that changes the certainty of the lessee exercising an option to renew or
terminate the lease, or purchase the underlying asset; a change to the amount
probable of being owed by the Company under a residual value guarantee; or the
resolution of a contingency upon which the variable lease payments are based
such that those payments become fixed.
Because most of the Company's leases do not provide an implicit rate, the
Company uses its incremental borrowing rate based on the information available
at the lease commencement date in determining the present value of lease
payments. The Company would use the implicit rate when readily determinable.
Operating lease expense is generally recognized on a straight-line basis over
the lease term. Finance lease assets are generally amortized over the term of
the lease. If the finance lease transfers ownership of the underlying asset to
the Company or the Company is reasonably certain it will exercise an option to
purchase the underlying asset, the finance lease assets are amortized on a
straight-line basis over the useful life of the asset. Interest expense on the
finance lease liability is recognized using the effective interest rate method
and is presented within interest expense on the Company's consolidated
statements of operations.
Operating leases with a lease term of 12 months or less are not recorded on the
balance sheet. The Company recognizes lease expense for these leases on a
straight-line basis over the lease term. Variable lease payment amounts that
cannot be determined
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at the commencement of the lease, such as increases in lease payments based on changes in index rates, are not included in the right-of-use assets or liabilities. These variable lease payments are expensed as incurred.
Accounting for Leases as a Lessor
In accordance with FASB ASC 842, "Leases," lease income is recognized on a straight-line basis over the lease term. Variable lease payments, if any, are recognized as income in the period received. The underlying asset in an operating lease is carried at depreciated cost and is included in property and equipment. 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 operations and amounted to approximately$7.5 million ,$5.1 million , and$3.8 million for the years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , respectively.
Research and Development
Research and development expenses consist primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development activities are expensed when incurred.
Loss Per Share
Basic loss per share is computed by dividing net loss attributable to controlling interest by the weighted average number of shares of common stock outstanding for the applicable period. Diluted loss per share is determined in the same manner as basic loss 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.
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, valuation 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.
Foreign Currency Translation
The Company does not have operations with a functional currency other than the
Joint Venture
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EffectiveJuly 17, 2017 , the Company entered into a Shareholders Agreement with San'an Optoelectronics Co., Ltd. (San'an) andCree Venture LED Company Limited (Cree Venture LED) pursuant to which the Company and San'an funded their contributions to Cree Venture LED and agreed upon the management and operation of Cree Venture LED. The Company contributed$5.1 million of cash for a 51% ownership interest and San'an contributed$4.9 million of cash for a 49% ownership interest.
The Company's interest in Cree Venture LED was included in the LED Business Divestiture and its related activity is classified as discontinued operations.
Supplemental Cash Flow Information
Cash paid for interest was
Cash paid for taxes, net of refunds received, was$4.4 million ,$11.0 million and$3.6 million for the fiscal years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , respectively.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements Pending Adoption
Convertible Debt Instruments
InAugust 2020 , FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This standard simplifies the accounting for convertible instruments by eliminating the cash conversion and the beneficial conversion accounting models. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity. The update requires an entity to use the if-converted method for all convertible instruments in the diluted earnings per share calculation. An entity may use either a modified or full retrospective approach for adoption. The Company will adopt this standard onJune 27, 2022 , the first day of its 2023 fiscal year, under the modified retrospective approach. The adoption is expected to result in (i) a reduction of additional paid in capital by approximately$330 million for the recombination of the equity conversion component of the convertible notes outstanding, which was initially separated and recorded in equity, (ii) an increase in the cumulative convertible note carrying value of approximately$275 million as a result of removing previously recorded debt discounts, (iii) a decrease in property, plant and equipment for previously capitalized interest of approximately$25 million and (iv) a decrease to beginning accumulated deficit as ofJune 27, 2022 of approximately$30 million to recognize the cumulative gain on adoption. The Company does not expect to recognize a discrete tax impact related to the opening deferred tax balances as ofJune 27, 2022 due to a fullU.S valuation allowance.
Government Assistance
InNovember 2021 , FASB issued ASU 2021-10, Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance. This standard will require entities to provide annual disclosures regarding government assistance. More specifically, the amendments in the standard improve financial reporting by requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions; (2) the accounting for those transactions; and (3) the effect of those transactions on an entity's financial statements. An entity can apply the amendments prospectively or retrospectively. The Company will adopt this standard onJune 27, 2022 , as required. 61
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Note 3 - Discontinued Operations
OnMarch 1, 2021 , the Company completed the LED Business Divestiture pursuant to the terms of the Asset Purchase Agreement (the LED Purchase Agreement), datedOctober 18, 2020 , as amended. Pursuant to the LED Purchase Agreement, (i) the Company completed the sale to SMART of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising the Company's former LED Products segment, (b) all of the issued and outstanding equity interests ofCree Huizhou Solid State Lighting Company Limited (CreeHuizhou ), a limited liability company organized under the laws ofthe People's Republic of China and an indirect wholly owned subsidiary of the Company, and (c) the Company's ownership interest in Cree Venture LED., the Company's joint venture with San'an Optoelectronics Co., Ltd. (collectively, the LED Business); and (ii) SMART assumed certain liabilities related to the LED Business. The Company retained certain assets used in and pre-closing liabilities associated with the former LED Products segment. The purchase price for the LED Business consisted of (i) a payment of$50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to the Company by SGH in the amount of$125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment between$2.5 million and$125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing (the Earnout Period), also payable in the form of a unsecured promissory note of SGH (the Earnout Note), and (iv) the assumption of certain liabilities. The Purchase Price Note had a maturity date ofAugust 15, 2023 , and as explained further below, was prepaid by SGH in full pursuant to its terms, along with outstanding accrued and unpaid interest as of the payment date, in the third quarter of fiscal 2022. The Earnout Note was issued in the fourth quarter of 2022 and will mature onMarch 27, 2025 . The Earnout Note will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months. One bullet payment of principal and all accrued and unpaid interest will be payable on the maturity date of the Earnout Note. In fiscal 2021, the Company recognized a loss on sale of the LED Business of$29.1 million . The cost of selling the LED Business was$27.4 million , which was recognized throughout fiscal 2020 and 2021. In connection with the closing of the LED Business Divestiture, the Company and CreeLED also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which assigned to CreeLED certain intellectual property owned by the Company and its affiliates and licensed to CreeLED certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement (LED TSA), (iii) a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which the Company will supply CreeLED with certain Silicon Carbide materials and fabrication services for up to four years, and (iv) a Real Estate License Agreement (LED RELA), which will allow CreeLED to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing. In the third quarter of fiscal 2022, the Company received an early payment for the Purchase Price Note. The principal amount of$125.0 million was paid in full, along with outstanding accrued interest as of the payment date (the Early Payment). In conjunction with the Early Payment, the Company transferred naming rights and trademarks related toCree, Inc. and the CREE brand to SMART (the Trademark Transfer), resulting in a write-off of trademarks of$1.1 million and recorded within (gain) loss on disposal or impairment of other assets in the consolidated statements of operations. Because the Early Payment did not include additional consideration in exchange for the Trademark Transfer, the Company allocated consideration from the principal amount to the value of the trademarks transferred to SMART. The Company allocated$1.8 million of the Early Payment to the value of trademarks transferred to SMART, resulting in a gain recorded in (gain) loss on disposal or impairment of other assets in the consolidated statements of operations. The remaining unallocated portion of the Early Payment of$123.2 million was then applied to the note receivable balance of$124.4 million at the time of payment, resulting in a loss of$1.2 million recorded in non-operating expense, net on the consolidated statements of operations. The net impact to the consolidated statements of operations from the Early Payment was a loss of$0.5 million . In the fourth quarter of fiscal 2022, the Company received the Earnout Note with a principal amount of$101.8 million . As a result, the Company recorded a net gain of$94.2 million within discontinued operations, net in the consolidated statements of operations for fiscal year endedJune 26, 2022 . The gain recorded is net of$3.9 million in taxes and$1.2 million in transaction fees. Additionally, the amount is less a previously recorded gain of$2.5 million , which was recorded in fiscal 2021 as part of the total loss on sale to account for the minimum amount of the Earnout Note.
In addition to the
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discontinued operations, net of income taxes in the Company's consolidated
statements of operations for the fiscal years ended
Fiscal Years Ended
(in millions of U.S. Dollars) June 27, 2021 June 28, 2020
Revenue, net $272.8 $433.2
Cost of revenue, net 213.3 343.4
Gross profit 59.5 89.8
Operating expenses:
Research and development 22.3 32.2
Sales, general and administrative 29.4 29.7
Goodwill impairment 112.6 -
Impairment on assets held for sale 19.5 -
Gain on disposal or impairment of long-lived assets (1.6) (0.1)
Other operating expense 18.7 13.3
Operating (loss) income (141.4) 14.7
Non-operating income (0.3) (0.5)
(Loss) income before income taxes and loss on sale (141.1) 15.2
Loss on sale 29.1 -
(Loss) income before income taxes (170.2) 15.2
Income tax expense 11.0 8.2
Net (loss) income (181.2) 7.0
Net income attributable to noncontrolling interest 1.4 1.1
Net (loss) income attributable to controlling interest ($182.6 ) $5.9
As of September 27, 2020 , the Company determined it would more likely than not
sell all or a portion of the assets comprising the LED Products segment below
carrying value. As a result, the Company recorded an impairment to goodwill of
$105.7 million .
As of
For the fiscal years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , the Company recognized$3.9 million ,$11.0 million and$8.2 million , respectively, of income tax expense related to discontinued operations, which primarily related to the foreign operations of the LED Business. Income tax expense related to discontinued operations for the fiscal year endedJune 26, 2022 andJune 27, 2021 includes$2.4 million and$4.1 million , respectively, of income tax expense related to the sale of the issued and outstanding equity interests of Cree Huizhou in the third quarter of fiscal 2021.
The income tax impact of the
For the fiscal years endedJune 26, 2022 andJune 27, 2021 , the Company recognized$3.6 million and$1.2 million in administrative fees related to the LED RELA, respectively, of which$0.3 million are included in accounts receivable, net in the consolidated balance sheets as ofJune 26, 2022 . Fees related to the LED RELA were recorded as lease income. See Note 5, "Leases" below for additional information. For the fiscal years endedJune 26, 2022 andJune 27, 2021 , the Company recognized$9.2 million and$4.0 million in administrative fees related to the LED TSA, respectively, of which$0.6 million are included in accounts receivable, net in the consolidated balance sheets as ofJune 26, 2022 . Fees related to the LED TSA were recorded as a reduction in expense within the line item in the consolidated statements of operations in which costs were incurred. At the inception of the Wafer Supply Agreement, the Company recorded a supply agreement liability of$31.0 million , of which$6.4 million was outstanding as ofJune 26, 2022 . The supply agreement liability is recognized in other current liabilities on the consolidated balance sheets. 63
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The Company recognized a net loss of$0.8 million and$0.8 million in non-operating expense, net for the fiscal years endedJune 26, 2022 andJune 27, 2021 , respectively, related to the Wafer Supply Agreement. A receivable of$2.7 million was included in other assets in the consolidated balance sheets as ofJune 26, 2022 .
Note 4 - Revenue Recognition
The Company follows a five-step approach for recognizing revenue, consisting of the following: (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. Contract liabilities primarily include various rights of return and customer deposits, as well as a reserve on the Company's "ship and debit" program. Contract liabilities were$47.8 million and$45.2 million as ofJune 26, 2022 andJune 27, 2021 , respectively. The increase was primarily due to increased reserves on the Company's "ship and debit" program, partially offset by decreased customer deposits. Contract liabilities are recorded within accrued contract liabilities and other long-term liabilities on the consolidated balance sheets.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Incidental contract costs that are not material in context of the delivery of products are expensed as incurred. Sales commissions are expensed when the amortization period is less than one year. Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company's revenue recognition process. The majority of the Company's fulfillment costs as a manufacturer consist of inventory, fixed assets, and intangible assets, all of which are accounted for under the respective guidance for those asset types. The Company's accounts receivable balance represents the Company's unconditional right to receive consideration from its customers with contracts. Payments are typically due within 30 days of the completion of the performance obligation and invoicing, and therefore do not contain significant financing components. Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue, and shipping and handling costs are treated as fulfillment activities and are included in cost of revenue in the Company's consolidated statements of operations. For the fiscal years endedJune 26, 2022 andJune 27, 2021 , the Company did not recognize any material revenue that was included in contract liabilities at the start of each respective fiscal year.
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. Disaggregated revenue from external customers by geographic area is as
follows:
For the Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
(in millions of U.S. Dollars) Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
Europe $ 260.4 34.9 % $ 188.9 35.9 % $ 171.4 36.4 %
China 211.2 28.3 % 100.1 19.0 % 65.0 13.8 %
United States 142.7 19.1 % 117.3 22.3 % 106.5 22.6 %
Japan 30.5 4.1 % 42.5 8.1 % 52.1 11.1 %
South Korea 22.4 3.0 % 32.1 6.1 % 47.7 10.1 %
Other 79.0 10.6 % 44.7 8.6 % 28.0 6.0 %
Total $ 746.2 $ 525.6 $ 470.7
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Note 5 - Leases
The Company primarily leases manufacturing and office space. The Company also has a number of bulk gas leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, as well as non-lease components incurred with respect to actual terms rather than contractually fixed amounts. For details on the Company's lease policies, see the significant accounting policy disclosures in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies."
The Company's finance lease obligations primarily relate to contract
manufacturing space in
Balance Sheet
Lease assets and liabilities and the corresponding balance sheet classifications
are as follows (in millions of
Operating Leases: June 26, 2022 June 27, 2021 Right-of-use asset (1)$48.5 $12.1 Current lease liability (2) 4.6 4.5 Non-current lease liability (3) 43.6
7.5
Total operating lease liabilities 48.2 12.0 Finance Leases: Finance lease assets (4)$10.3 $15.5 Current portion of finance lease liabilities 0.5
5.2
Finance lease liabilities, less current portion 9.6
10.0
Total finance lease liabilities 10.1
15.2
(1) Within other assets on the consolidated balance sheets. (2) Within other current liabilities on the consolidated balance sheets. (3) Within other long-term liabilities on the consolidated balance sheets. (4) Within property and equipment, net on the consolidated balance sheets.
Statement of Operations
Operating lease expense was
Short-term lease expense was
Finance lease amortization was
Cash Flows
Cash flow information consisted of the following (1):
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Cash used in operating activities:
Cash paid for operating leases $8.1 $5.7 $5.5
Cash paid for interest portion of financing
leases 0.3 0.3 0.1
Cash used in financing activities:
Cash paid for principal portion of finance
leases 0.5 0.4 0.8
(1) See Note 6, "Financial Statement Details," for non-cash activities related to leases.
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Lease Liability Maturities
Maturities of operating and finance lease liabilities as of
Fiscal Year Ending Operating Leases Finance Leases Total June 25, 2023$5.5 $0.7 $6.2 June 30, 2024 7.3 0.7 8.0 June 29, 2025 7.9 0.7 8.6 June 28, 2026 7.8 0.7 8.5 June 27, 2027 6.8 0.4 7.2 Thereafter 53.8 14.2 68.0 Total lease payments 89.1 17.4 106.5 Future tenant improvement allowances (19.0) - (19.0) Imputed lease interest (21.9) (7.3) (29.2) Total lease liabilities$48.2 $10.1 $58.3 Supplemental Disclosures Operating Leases Finance Leases Weighted average remaining lease term (in months) (1) 134 562 Weighted average discount rate (2) 4.22 % 2.68 % (1) Weighted average remaining lease term of finance leases without the 49-year ground lease is 51 months. (2) Weighted average discount rate of finance leases without the 49-year ground lease is 3.33%. Lease Income As mentioned in Note 3, "Discontinued Operations," onMarch 1, 2021 and in connection with the LED Business Divestiture, the Company entered into the LED RELA pursuant to which the Company leases to CreeLED approximately 58,000 square feet of the Company's property and certain facilities inDurham, North Carolina for a total of$3.6 million per year. The lease term is 24 months and expires onFebruary 28, 2023 . Subject to certain provisions in the LED RELA, CreeLED may terminate its rights or a portion of its rights under the agreement at any time with sixty days written notice. A notice of thirty days is permitted under certain circumstances as defined in the agreement. The agreement does not contain any renewal provisions. The Company recognized lease income of$3.6 million and$1.2 million for the fiscal years endedJune 26, 2022 andJune 27, 2021 , respectively. The Company did not recognize any variable lease income for the fiscal year endedJune 28, 2020 .
Total future minimum rental income relating to the LED RELA is
Note 6 - Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consisted of the following:
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 Billed trade receivables$148.0 $95.6 Unbilled contract receivables 2.7 0.6 Royalties 0.7 0.5 151.4 96.7 Allowance for bad debts (1.2) (0.8) Accounts receivable, net$150.2 $95.9 66
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Changes in the Company's allowance for bad debts were as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Balance at beginning of period $0.8 $0.7 $0.2
Current period provision change 0.4 0.1 0.6
Write-offs, net of recoveries - - (0.1)
Balance at end of period $1.2 $0.8 $0.7
Inventories
Inventories consisted of the following:
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 Raw material$60.2 $43.3 Work-in-progress 135.9 109.5 Finished goods 30.9 13.8 Inventories$227.0 $166.6 Other Current Assets
Other current assets consisted of the following:
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 Reimbursement receivable on long-term incentive agreement$132.5 $4.6 Accrued interest receivable 5.9 5.5 Receivable on the Wafer Supply Agreement 2.7 7.0 Inventory related to the Wafer Supply Agreement 3.9 3.9 Deferred product costs 2.5 1.8 Other 3.9 5.1 Other current assets$151.4 $27.9
Property and Equipment, net
Property and equipment, net consisted of the following:
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 Machinery and equipment$1,167.3 $988.6 Land and buildings 407.4 383.9 Computer hardware/software 61.9 51.5 Furniture and fixtures 8.0 8.0 Leasehold improvements and other 11.0 9.6 Vehicles 0.6 0.7 Finance lease assets 10.3 15.5 Construction in progress 802.3 767.8 Property and equipment, gross 2,468.8 2,225.6 Accumulated depreciation (987.7) (933.3) Property and equipment, net$1,481.1 $1,292.3 Depreciation of property and equipment totaled$100.4 million ,$100.5 million and$76.7 million for the years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , respectively. 67
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During the years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , the Company recognized approximately$1.0 million ,$4.3 million and$3.3 million , respectively, as losses on disposals or impairments of property and equipment of which$1.3 million ,$3.4 million and$3.0 million are related to the Company's factory optimization plan and are reflected in other operating expense for the years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , respectively. The remaining amount of these charges are reflected in loss on disposal or impairment of other assets in the consolidated statements of operations. In the fourth quarter of fiscal 2021, the Company modified its long-range plan regarding a portion of itsDurham, North Carolina campus. As a result, the Company has decided it will no longer complete the construction of certain buildings on theDurham campus. The carrying value of the abandoned assets has been reduced to an estimated salvage value of approximately$20.0 million as ofJune 26, 2022 andJune 27, 2021 . The majority of the Company's property and equipment, net is inthe United States . As ofJune 26, 2022 andJune 27, 2021 , the Company held$58.6 million and$34.2 million of property and equipment, net outside ofthe United States , primarily related to assets held at contract manufacturing space inMalaysia .
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
(in millions of U.S. Dollars) June 26, 2022 June 27,
2021
Accounts payable, trade$57.8 $44.2 Accrued salaries and wages 80.6 69.5 Accrued property and equipment 132.1 248.3 Accrued expenses 30.7 17.4 Other 6.5 1.7 Accounts payable and accrued expenses$307.7 $381.1
Other Operating Expense
The following table summarizes the components of other operating expense:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Factory optimization restructuring $6.1 $7.6 $8.5
Severance and other restructuring 1.2 3.4 0.6
Total restructuring costs 7.3 11.0 9.1
Project, transformation and transaction costs 6.6 7.3 12.2
Factory start-up costs 70.0 8.0 9.5
Non-restructuring related executive severance - 2.8 2.1
Other operating expense $83.9 $29.1 $32.9 See Note 18, "Restructuring" for more details on the Company's restructuring costs.
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Non-Operating Expense (Income), net
The following table summarizes the components of non-operating expense (income),
net:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Gain on sale of investments, net ($0.3 ) ($0.4 ) ($1.5 )
Gain on equity investment - (8.3) (14.2)
Loss (gain) on debt extinguishment 24.8 - (11.0)
Gain on arbitration proceedings - - (7.9)
Interest income (11.8) (10.1) (16.3)
Interest expense 25.1 45.4 34.9
Other, net 0.5 (0.3) (2.5)
Non-operating expense (income), net $38.3 $26.3 ($18.5 )
Accumulated Other Comprehensive (Loss) Income, net of taxes
Accumulated other comprehensive (loss) income, net of taxes, consisted of$25.3 million of net unrealized losses on available-for-sale securities and$2.7 million of net unrealized gains on available-for-sale securities as ofJune 26, 2022 andJune 27, 2021 , respectively. Amounts for both periods include a$2.4 million loss related to tax on unrealized loss on available-for-sale securities.
Reclassifications Out of Accumulated Other Comprehensive Income
The Company reclassified a net gain of$0.3 million ,$0.4 million and$1.5 million on available for sale securities out of accumulated other comprehensive income for the fiscal years endedJune 26, 2022 ,June 27, 2021 , andJune 28, 2020 , respectively. For the fiscal year endedJune 28, 2020 , an additional net gain of$0.5 million was reclassified to net (loss) income from discontinued operations on the consolidated statements of operations. There was no tax impact on any reclassifications due to a full valuation allowance onU.S. operations. Amounts were reclassified to non-operating expense (income), net on the consolidated statements of operations. Additionally, in fiscal 2021,$9.5 million of currency translation gain related to the former LED Products segment was reclassified out of accumulated other comprehensive income and recognized in the consolidated statements of operations as part of the loss on sale of discontinued operations.
Statements of Cash Flows - non-cash activities
Fiscal Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
Lease asset and liability additions (1) $39.0 $7.9 $28.3
Lease asset and liability modifications, net 8.6 1.7 4.8
Transfer of finance lease liability to accounts
payable and accrued expenses (2) - 4.2 -
Receivables for property, plant and equipment related insurance proceeds
- 1.9 -
Settlement of 2023 Notes in shares of common stock (3) 416.1
- -
Decrease in property, plant and equipment from
long-term incentive related receivables 119.0 16.4 -
Accrued property and equipment as of the fiscal year end date
132.1 248.3 79.4
(1) $11.0 million of the lease asset and liability additions for the year ended
June 28, 2020 related to the increase of right-of-use assets and matching lease
liabilities as a result of adopting ASC 842.
(2) In the first quarter of fiscal 2021, the Company executed the available bargain purchase option for certain finance leases relating to property and equipment, net, in order to purchase the assets.
(3) As discussed further in Note 10, "Long-term Debt," in the second quarter of fiscal 2022, all outstanding 0.875% convertible senior notes dueSeptember 1, 2023 (the 2023 Notes) were surrendered for conversion, resulting in the settlement of all outstanding 2023 Notes in shares, with fractional shares paid in cash. 69
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Note 7 - Investments
Investments consist of municipal bonds, corporate bonds,U.S. agency securities,U.S. treasury securities, commercial paper, certificates of deposit, and variable rate demand notes. All short-term investments are classified as available-for-sale. The Company did not have any long-term investments as ofJune 26, 2022 andJune 27, 2021 .
Short-term investments as of
June 26, 2022
Gross Unrealized
(in millions of U.S. Dollars) Amortized Cost Gross Unrealized Gains Losses Estimated Fair Value
Municipal bonds $166.5 $0.1 ($4.4 ) $162.2
Corporate bonds 465.8 - (17.8) 448.0
U.S. agency securities 4.0 - (0.1) 3.9
U.S. treasury securities 66.5 - (0.7) 65.8
Variable rate demand notes 69.4 - - 69.4
Total short-term investments $772.2 $0.1 ($23.0 ) $749.3 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:
June 26, 2022
Less than 12 Months Greater than 12 Months Total
(in millions of U.S. Dollars) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Municipal bonds $150.0 ($4.4 ) $1.0 $- $151.0 ($4.4 )
Corporate bonds 431.1 (17.4) 8.3 (0.4) 439.4 (17.8)
U.S. agency securities 3.9 (0.1) - - 3.9 (0.1)
U.S. treasury securities 65.8 (0.7) - - 65.8 (0.7)
Total $650.8 ($22.6 ) $9.3 ($0.4 ) $660.1 ($23.0 )
Number of securities with an
unrealized loss 346 5 351
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Short-term investments as of
June 27, 2021
Gross Unrealized
(in millions of U.S. Dollars) Amortized Cost Gross Unrealized Gains Losses Estimated Fair Value
Municipal bonds 139.4 1.9 - 141.3
Corporate bonds 456.5 3.3 (0.3) 459.5
U.S. agency securities 15.8 - - 15.8
U.S. treasury securities 72.3 0.3 (0.1) 72.5
Certificates of deposit 16.5 - - 16.5
Commercial paper 50.0 - - 50.0
Variable rate demand notes 20.0 - - 20.0
Total short-term investments 770.5 5.5 (0.4) 775.6
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:
June 27, 2021
Less than 12 Months Greater than 12 Months Total
(in millions of U.S. Dollars) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Municipal bonds $13.4 $- $- $- $13.4 $-
Corporate bonds 133.8 (0.3) - - 133.8 (0.3)
U.S. agency securities 10.7 - - - 10.7 -
U.S. treasury securities 47.9 (0.1) - - 47.9 (0.1)
Certificates of deposit 0.7 - - - 0.7 -
Total $206.5 ($0.4 ) $- $- $206.5 ($0.4 )
Number of securities with an
unrealized loss 128 - 128
Additionally, the Company held cash equivalent securities in unrealized loss
positions as of June 26, 2022 and June 27, 2021 . As of June 26, 2022 , the
Company held six cash equivalent securities in unrealized loss positions with an
aggregate fair value of $69.0 million and an aggregate unrealized loss of less
than $0.1 million . As of June 27, 2021 , the Company held six cash equivalent
securities in unrealized loss positions with an aggregate fair value of $21.4
million and an aggregate unrealized loss of less than $0.1 million . All cash
equivalents in unrealized loss positions as of June 26, 2022 and June 27, 2021
have been in unrealized loss positions for less than 12 months.
The Company does not include accrued interest in estimated fair values of
short-term investments and does not record an allowance for credit losses on
receivables related to accrued interest. Accrued interest receivable was $5.9
million and $5.5 million as of June 26, 2022 and June 27, 2021 , respectively,
and is recorded in other current assets on the consolidated balance sheets. When
necessary, write-offs of noncollectable interest income are recorded as a
reversal to interest income. There were no write-offs of noncollectable interest
income for the years ended June 26, 2022 and June 27, 2021 .
The Company utilizes specific identification in computing realized gains and
losses on the sale of investments. Realized gains and losses are included in
non-operating expense (income), net in the consolidated statements of
operations. Unrealized gains and losses are included as a separate component of
equity, net of tax, unless the Company determines there is an expected credit
loss.
The Company evaluates its investments for expected credit losses. The Company
believes it is able to and intends to hold each of the investments held with an
unrealized loss as of June 26, 2022 until the investments fully recover in
market value. No allowance for credit losses was recorded as of June 26, 2022 .
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The contractual maturities of short-term investments atJune 26, 2022 were as follows: After One, After Five, (in millions of U.S. Dollars) Within One Year Within Five Years Within Ten Years After Ten Years Total Municipal bonds$40.3 $121.9 $- $-$162.2 Corporate bonds 116.2 331.8 - - 448.0 U.S. agency securities 2.0 1.9 - - 3.9 U.S. treasury securities 34.4 31.4 - - 65.8 Variable rate demand notes - - 14.7 54.7
69.4
Total short-term investments$192.9 $487.0 $14.7 $54.7 $749.3
Note 8 - Fair Value of Financial Instruments
UnderU.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 ofJune 26, 2022 , financial assets utilizing Level 1 inputs includedU.S. treasury securities and money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds,U.S. agency securities, commercial paper and variable rate demand notes. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service's consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as ofJune 26, 2022 . There were no transfers between Level 1 and Level 2 during the year endedJune 26, 2022 . 72
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Financial instruments carried at fair value were as follows:
June 26, 2022 June 27, 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 115.9 $ - $ - $ 115.9 $ 96.9 $ - $ - $ 96.9
Municipal bonds - - - - - 16.0 - 16.0
U.S. agency securities - - - - - 6.0 - 6.0
U.S. treasury securities 69.0 - - 69.0 - - - -
Commercial paper - 59.4 - 59.4 - 62.4 - 62.4
Variable rate demand notes - - - - - 22.9 - 22.9
Total cash equivalents 184.9 59.4 - 244.3 96.9 107.3 - 204.2
Short-term investments:
Municipal bonds - 162.2 - 162.2 - 141.3 - 141.3
Corporate bonds - 448.0 - 448.0 - 459.5 - 459.5
U.S. agency securities - 3.9 - 3.9 - 15.8 - 15.8
U.S. treasury securities 65.8 - - 65.8 72.5 - - 72.5
Certificates of deposit - - - - - 16.5 - 16.5
Commercial paper - - - - - 50.0 - 50.0
Variable rate demand notes - 69.4 - 69.4 - 20.0 - 20.0
Total short-term investments 65.8 683.5 - 749.3 72.5 703.1 - 775.6
Total assets $250.7 $742.9 $- $993.6 $169.4 $810.4 $- $979.8 Note 9 -
There were no changes to goodwill during the fiscal year ended
As of the first day of its fourth quarter of fiscal 2022, the Company performed
a qualitative impairment test on the goodwill balance and concluded there was no
impairment.
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Intangible Assets
Intangible assets, net included the following:
June 26, 2022 June 27, 2021
(in millions of U.S. Dollars) Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Intangible assets:
Customer relationships $96.8 ($31.2 ) $65.6 $96.8 ($25.1 ) $71.7
Developed technology 68.0 (33.6) 34.4 68.0 (28.2) 39.8
Non-compete agreements 12.2 (12.2) - 12.2 (10.1) 2.1
Acquisition related intangible
assets 177.0 (77.0) 100.0 177.0 (63.4) 113.6
Patent and licensing rights 65.5 (40.1) 25.4 67.1 (40.2) 26.9
Total intangible assets 242.5 (117.1) 125.4 244.1 (103.6) 140.5
Total amortization of acquisition-related intangibles assets was $13.6 million ,
$14.5 million and $14.5 million and total amortization of patents and licensing
rights was $5.4 million , $5.9 million and $5.9 million for the years ended
June 26, 2022 , June 27, 2021 and June 28, 2020 , respectively.
The Company invested $5.7 million , $5.9 million and $4.4 million for the years
ended June 26, 2022 , June 27, 2021 and June 28, 2020 , respectively, for patent
and licensing rights. For the fiscal years ended June 26, 2022 , June 27, 2021
and June 28, 2020 , the Company recognized $1.8 million , $0.7 million and $1.2
million , respectively, in impairment charges related to its patent portfolio.
Total future amortization expense of intangible assets is estimated to be as
follows:
(in millions of U.S. Dollars)
Acquisition Related
Fiscal Year Ending Intangibles Patents Total
June 25, 2023 $11.0 $4.5 $15.5
June 30, 2024 10.4 3.8 14.2
June 29, 2025 10.4 2.9 13.3
June 28, 2026 9.3 2.1 11.4
June 27, 2027 9.3 1.7 11.0
Thereafter 49.6 10.4 60.0
Total future amortization expense $100.0 $25.4 $125.4
Note 10 - Long-term Debt
Revolving Line of Credit
As of June 26, 2022 , the Company had a $125.0 million secured revolving line of
credit (the Credit Agreement) under which the Company can borrow, repay and
reborrow loans from time to time prior to its scheduled maturity date of
January 9, 2026 . The Credit Agreement requires the Company to maintain a ratio
of certain cash equivalents and marketable securities to outstanding loans and
letter of credit obligations greater than 1.25:1, with no other financial
covenants.
The Company classifies balances outstanding under the Credit Agreement as
long-term debt in the consolidated balance sheets. As of June 26, 2022 , the
Company had no outstanding borrowings under the Credit Agreement, $125.0 million
in available commitments under the Credit Agreement and $125.0 million available
for borrowing. For the fiscal year ended June 26, 2022 , the average interest
rate was 0.04%, related to a ten-day draw of $20.0 million on the line of credit
in the first quarter of fiscal 2022. As of June 26, 2022 , the unused line fee on
available borrowings is 25 basis points.
On January 25, 2022 , the Company entered into an amendment to the Credit
Agreement that extended the maturity date by three years to January 9, 2026 and
adopted secured overnight financing rate (SOFR) interest rates as the benchmark
interest rate.
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2023 Convertible Notes
OnAugust 24, 2018 , the Company sold$500.0 million aggregate principal amount of the 2023 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and an additional$75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters. The total net proceeds from the 2023 Notes offering was approximately$562.1 million . As discussed further below, the Company repurchased approximately$150.2 million aggregate principal amount of the 2023 Notes using a portion of net proceeds from the sale of the 2026 Notes (as defined and explained below) inApril 2020 . OnDecember 8, 2021 (the Redemption Notice Date), the Company issued a notice (the Redemption Notice) to holders of the 2023 Notes calling all outstanding 2023 Notes for redemption. The Redemption Notice designatedDecember 23, 2021 as the redemption date (the Redemption Date). On the Redemption Date, the Redemption Price (as defined below) would have become due and payable on each of the 2023 Notes to be redeemed, and interest thereon would cease to accrue. However, any 2023 Notes called for redemption would not be redeemed if such notes were converted before the Redemption Date. The Redemption Price for the 2023 Notes called for redemption was an amount in cash equal to the principal amount of such notes plus accrued and unpaid interest on such notes to, but excluding, the Redemption Date, which equated to a Redemption Price of$1,002.72222 per$1,000 principal amount of 2023 Notes (the Redemption Price). As of the Redemption Notice Date, the conversion rate of the 2023 Notes was 16.6745 shares of the Company's common stock per$1,000 principal amount of such notes. However, in accordance with the Indenture, dated as ofAugust 24, 2018 , between the Company andU.S. Bank National Association , as trustee, which governed the terms of the 2023 Notes, the conversion rate for 2023 Notes that were converted after the Redemption Notice Date was increased to 16.7769 shares of the Company's common stock per$1,000 principal amount of such notes. Before the Redemption Date, all outstanding 2023 Notes were surrendered for conversion, resulting in the settlement of all outstanding 2023 Notes in approximately 7.1 million shares of the Company's common stock, with cash in lieu of any fractional shares. The fair value of shares issued upon conversion of all outstanding 2023 Notes was$788.0 million . The amount of cash paid for fractional shares was immaterial.
2026 Convertible Notes
OnApril 21, 2020 , the Company sold$500.0 million aggregate principal amount of 1.75% convertible senior notes dueMay 1, 2026 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional$75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2026 Notes). The total net proceeds from the 2026 Notes offering was approximately$561.4 million . The conversion rate will initially be 21.1346 shares of common stock perone thousand dollars in principal amount of 2026 Notes (equivalent to an initial conversion price of approximately$47.32 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2026 Notes in connection with such a corporate event, or who elects to convert any 2026 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2026 Notes prior toMay 1, 2023 . The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on a redemption date occurring on or afterMay 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2026 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. 75
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Holders may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately precedingNovember 3, 2025 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter endedJune 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per$1.0 thousand principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2026 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or afterNovember 3, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2026 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
The Company used approximately
2028 Convertible Notes
OnFebruary 3, 2022 , the Company sold$650.0 million aggregate principal amount of 0.25% convertible senior notes dueFebruary 15, 2028 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional$100.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2028 Notes). The total net proceeds from the 2028 Notes offering was approximately$732.3 million . The Company used approximately$108.2 million of the net proceeds from the 2028 Notes to fund the cost of entering into capped call transactions, as described below. The conversion rate will initially be 7.8602 shares of common stock perone thousand dollars in principal amount of 2028 Notes (equivalent to an initial conversion price of approximately$127.22 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2028 Notes in connection with such a corporate event, or who elects to convert any 2028 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2028 Notes prior toFebruary 18, 2025 . The Company may redeem for cash all or any portion of the 2028 Notes, at its option, on a redemption date occurring on or afterFebruary 18, 2025 and on or before the 40th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100% of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2028 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Holders may convert their 2028 Notes at their option at any time prior to the close of business on the business day immediately precedingAugust 16, 2027 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter endingMarch 31, 2022 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per$1.0 thousand principal amount of 2028 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2028 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or afterAugust 16, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2028 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election. 76
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Capped Call Transactions
OnJanuary 31, 2022 , in connection with the pricing of the 2028 Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers or affiliates thereof (the Capped Call Counterparties). In connection with the exercise by the initial purchasers of their option to purchase additional notes, the Company entered into additional privately negotiated capped call transactions (such transactions, collectively, the Capped Call Transactions) with each of the Capped Call Counterparties. The Capped Call Transactions initially cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company's common stock that initially underlie the 2028 Notes. The Capped Call Transactions are expected generally to reduce the potential dilutive effect on the common stock upon any conversion of the 2028 Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap which initially is$212.04 per share, representing a premium of 125% over the last reported sale price per share of the Company's common stock onJanuary 31, 2022 , subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are separate transactions entered into by the Company with each of the Capped Call Counterparties, are not part of the terms of the 2028 Notes, and do not affect any holder's rights under the 2028 Notes. Holders of the 2028 Notes do not have any rights with respect to the Capped Call Transactions.
Accounting for 2023 Notes, 2026 Notes and 2028 Notes (collectively, the Notes)
In accounting for the issuance of the 2023 Notes, 2026 Notes and 2028 Notes, the Company separated the Notes into liability and equity components. The carrying amount of the equity component representing the conversion option was$110.6 million ,$145.4 million and$187.6 million for the 2023, 2026 and 2028 Notes, respectively. The amounts were determined by deducting the fair value of the liability component from the par value of each of the Notes. Due to the partial extinguishment of the 2023 Notes in connection with the issuance of the 2026 Notes, the equity component of the 2023 Notes was reduced by$27.7 million in the fourth quarter of fiscal 2020. As a result of the full conversion of all outstanding 2023 Notes, the Company remeasured the outstanding liability for the 2023 Notes using a market rate for debt without a conversion option (the Market Rate) as of the Redemption Notice Date. The Company performed a present value calculation using the Market Rate and determined the fair value of the debt as of the Redemption Notice Date was$416.1 million ,$24.7 million higher than the carrying value of the 2023 Notes as of the Redemption Notice Date. As a result, the Company recorded a loss on extinguishment of$24.8 million , which included a$0.1 million loss on extinguishment expense related to third party fees. Additionally, the equity component of the 2023 Notes was reduced to zero. The equity components of the 2026 and 2028 Notes are not remeasured as long as they continue to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the debt discount), along with related issuance fees, are amortized to interest expense over the term of the 2026 and 2028 Notes at an effective annual interest rate of 7.45% and 5.59%, respectively. The 2026 and 2028 Notes are equal in right of payment to any of the Company's unsecured indebtedness; senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2026 and 2028 Notes; effectively subordinated in right of payment of any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries.
The net carrying amount of the liability component of the Notes is as follows:
(in millions of U.S. Dollars) June 26, 2022 June 27,
2021
Principal$1,325.0 $999.8 Unamortized discount and issuance costs (303.4) (175.9) Net carrying amount$1,021.6 $823.9 77
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The net carrying amount of the equity component of the Notes is as follows:
(in millions of
June 26, 2022 June 27, 2021 Discount related to value of conversion option$341.1
Partial extinguishment of 2023 Notes - (27.7) Debt issuance costs (8.1) (6.3) Net carrying amount$333.0 $228.3
The interest expense, net recognized related to the Notes is as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Interest expense, net of capitalized
interest $2.6 $10.4 6.8
Amortization of discount and issuance costs,
net of capitalized interest 20.1 32.8 26.2
Total interest expense, net $22.7 $43.2 33.0
The Company capitalizes interest related to the Notes in connection with the
building of its new Silicon Carbide device fabrication facility in New York . For
the fiscal year ended June 26, 2022 , the Company capitalized $9.9 million of
interest expense and $23.2 million of amortization of discount and issuance
costs. For the fiscal year ended June 27, 2021 , the Company capitalized $3.3
million of interest expense and $7.3 million of amortization of discount and
issuance costs. No interest was capitalized for the fiscal year ended June 28,
2020 .
The last reported sale price of the Company's common stock was greater than or
equal to 130% of the applicable conversion price for the 2026 Notes for at least
20 trading days in the 30 consecutive trading days ended on June 30, 2022 . As a
result, the 2026 Notes are convertible at the option of the holders during the
calendar quarter ended September 30, 2022 .
As of
The estimated fair value of the Notes is
Note 11 - Shareholders' Equity
At
Number of
Shares
For exercise of outstanding common stock options 69
For vesting of outstanding stock units 1,894
For future equity awards under 2013 Long-Term Incentive Compensation Plan
5,009
For future issuance under the Non-Employee Director Stock Compensation and Deferral Program
44
For future issuance to employees under the 2020 Employee Stock Purchase Plan
5,531
For future issuance upon conversion of the 2026 Notes 16,102
For future issuance upon conversion of the 2028 Notes 7,958
Total common shares reserved 36,607
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Note 12 - Loss Per Share
The details of the computation of basic and diluted loss per share are as follows:
Fiscal Years Ended
(in millions of U.S. Dollars, except share data) June 26, 2022 June 27, 2021 June 28, 2020
Net loss from continuing operations $
(295.1)
Net income (loss) from discontinued operations 94.2 (181.2) 7.0
Net income from discontinued operations attributable to noncontrolling interest
- 1.4 1.1
Net income (loss) from discontinued operations attributable to controlling interest
94.2 (182.6) 5.9
Weighted average number of common shares - basic and diluted (in thousands)
120,120 112,346 107,935
(Loss) earnings per share - basic and diluted:
Continuing operations $
(2.46)
Diluted net loss per share is the same as basic net loss per share for the periods presented due to potentially dilutive items being anti-dilutive given the Company's net loss from continuing operations.
For the fiscal years endedJune 26, 2022 ,June 27, 2021 andJune 28, 2020 , 2.5 million, 3.4 million and 5.4 million, respectively, of dilutive shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.
Future earnings per share of the Company are also subject to dilution from conversion of its convertible notes under certain conditions as described in Note 10, "Long-term Debt."
Note 13 - Stock-Based Compensation
Overview of Employee Stock-Based Compensation Plans
The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. AtJune 26, 2022 , there were 15.9 million shares authorized for issuance under the plan and 5.0 million shares remaining for future grants. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. The Company's stock-based awards can be either service-based or performance-based. Performance-based conditions may be tied to future financial and/or operating performance of the Company, external based market metrics or internal performance metrics. The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. AtJune 26, 2022 , there were 6.0 million shares authorized for issuance under the ESPP, as amended, with 5.5 million shares remaining for future issuance. The ESPP limits employee contributions to 15% of each employee's compensation (as defined in the plan) and allows employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants may purchase the Company's common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period. 79
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Stock Option Awards
The following table summarizes option activity as of
Total Intrinsic
Weighted Average Value (in
Weighted Average Remaining Contractual millions of U.S.
Number of Shares Exercise Price Term Dollars)
Outstanding at June 27, 2021 142 $27.37
Granted - -
Exercised (73) 29.46
Forfeited or expired - -
Outstanding at June 26, 2022 69 25.12 0.96 $3.2
Vested and expected to vest at June
26, 2022 69 25.12 0.96 $3.2
Exercisable at June 26, 2022 69 25.12 0.96 $3.2
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 24, 2022 (the last trading day of fiscal 2022) of
$71.40 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 26, 2022 .
As of June 26, 2022 , there was no unrecognized compensation cost related to
nonvested stock options.
The following table summarizes information about stock options outstanding and
exercisable at
Options Outstanding Options Exercisable
Weighted Average
Remaining Contractual Weighted Average Weighted Average
Range of Exercise Price Number Life (Years) Exercise Price Number Exercise Price
$0.01 to $25.00 48 1.2 $24.32 48 $24.32
$25.01 to $35.00 21 0.5 26.92 21 26.92
Total 69 69
Total intrinsic value of options exercised for the fiscal years ended June 26,
2022 , June 27, 2021 and June 28, 2020 was $5.6 million , $30.8 million and $22.8
million , respectively.
Restricted Stock Units
A summary of nonvested restricted stock units (RSUs) outstanding as of June 26,
2022 and changes during the year then ended is as follows (shares in thousands):
Weighted Average
Number of RSUs Grant-Date Fair Value
Nonvested at June 27, 2021 2,168 $57.38
Granted 710 96.96
Vested (916) 49.12
Forfeited (68) 72.63
Nonvested at June 26, 2022 1,894 $75.67
The aggregate fair value of awards vested in fiscal years ended June 26, 2022 ,
June 27, 2021 and June 28, 2020 , based on the market price of the Company's
common stock on the vesting date, was $82.9 million , $110.6 million and $49.8
million , respectively.
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As ofJune 26, 2022 , there was$82.3 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.85 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 uses the Black-Scholes option-pricing model to estimate the fair value of the Company's 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, 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 service-based RSUs and performance-based RSUs with internal metrics, the grant-date fair value is based upon the market price of the Company's common stock on the date of the grant. For performance-based RSUs, 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. This fair value is then amortized to compensation expense over the requisite service period or vesting term. For performance-based awards with market conditions, the Company estimates the grant date fair value using theMonte Carlo valuation model and expenses the awards over the vesting period regardless of whether the market condition is ultimately satisfied. Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
Total stock-based compensation expense was classified in the consolidated statements of operations as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Cost of revenue, net $16.0 $14.4 $10.0
Research and development 9.9 8.7 8.0
Sales, general and administrative 35.0 30.1 30.8
Total stock-based compensation expense $60.9 $53.2 $48.8
Stock-based compensation expense may differ from the impact of stock-based compensation to additional paid in capital due to manufacturing related stock-based compensation capitalized within inventory.
The Black-Scholes andMonte Carlo option pricing models require the input of highly subjective assumptions. The assumptions listed below represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted above. The range of assumptions used to value stock issued under the ESPP were as follows: Fiscal Years Ended June 26, 2022 June 27, 2021 June 28, 2020 Risk-free interest rate 0.03 - 2.10% 0.03 - 0.17% 0.12 - 2.67% Expected life, in years 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 Volatility 60.6 - 69.4% 52.4 - 82.6% 34.5 - 82.6% Dividend yield - - - 81
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The range of assumptions used for issued performance units valued using the
Fiscal Years Ended
June 26, 2022 June 27, 2021 June 28, 2020
Risk-free interest rate 0.35% 0.11 - 1.66% 0.28 - 1.66%
Expected life, in years 3.0 3.0 3.0
Average volatility of peer companies 65.0% 48.9 - 60.5% 48.9 - 55.2%
Average correlation coefficient of peer companies 0.47 0.36 - 0.51 0.36 - 0.45
Dividend yield - - -
There was only one grant for performance-based awards with market conditions for the fiscal year ended June 26, 2022 and therefore no range is shown.
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
Expected Life
The expected life represents the period the 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 for the options and ESPP awards 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. For purposes of estimating volatility for use in theMonte Carlo model for the market-based awards, the Company utilizes historical volatilities of the Company and the members of the defined peer group.
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. The Company has not historically
issued dividends.
Correlation Coefficient
The correlation coefficients are calculated based upon the price data used to
calculate the historical volatilities and are used to model the way in which
each entity tends to move in relation to its peers.
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Note 14 - Income Taxes
The following were the components of loss before income taxes:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Domestic ($289.1) ($348.7) ($210.3)
Foreign 3.0 8.5 4.7
Loss before income taxes ($286.1) ($340.2) ($205.6)
The following were the components of income tax expense (benefit):
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Current:
Federal $0.3 $0.1 ($7.3)
Foreign 8.0 0.1 0.2
State 0.1 0.2 0.1
Total current 8.4 0.4 (7.0)
Deferred:
Federal 0.7 0.7 1.8
Foreign (0.1) - (2.8)
State - - -
Total deferred 0.6 0.7 (1.0)
Income tax expense (benefit) $9.0 $1.1 ($8.0)
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Actual income tax expense (benefit) differed from the amount computed by
applying each period's
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 % of Loss June 27, 2021 % of Loss June 28, 2020 % of Loss
Federal income tax provision at
statutory rate ($60.1) 21 % ($71.4) 21 % ($43.2) 21 %
(Decrease) increase in income tax
expense resulting from:
State tax provision, net of federal
benefit (2.5) 1 % (1.9) 1 % (1.9) 1 %
Tax exempt interest (0.2) - % (0.1) - % (0.5) - %
(Decrease) increase in tax reserve (0.2) - % - - % (0.3) - %
Research and development credits (5.4) 2 % (4.3) 1 % (3.3) 2 %
Foreign tax credit (0.3) - % (0.4) - % (0.3) - %
Increase (decrease) in valuation
allowance (51.6) 18 % 75.0 (22) % 50.3 (25) %
Extinguishment of convertible notes (4.5) 2 % - - % (6.0) 3 %
Stock-based compensation (3.3) 1 % (2.8) 1 % 2.1 (1) %
Statutory rate differences - - % 1.1 - % 1.2 (1) %
Foreign earnings taxed in U.S. 6.8 (2) % 2.7 (1) % 0.3 - %
Other foreign adjustments - - % (0.1) - % 0.3 - %
Net operating loss carryback - - % - - % (7.2) 4 %
Provision to return adjustments 0.3 - % (0.2) - % (1.3) 1 %
Impact of rate changes 0.5 - % 2.7 (1) % 0.8 - %
Expiration of state credits 0.1 - % 0.7 - % 0.9 - %
Corporate restructuring adjustment 129.1 (45) % - - % - - %
Other 0.3 - % 0.1 - % 0.1 - %
Income tax expense (benefit) $9.0 (3) % $1.1 - % ($8.0) 4 %
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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 millions of U.S. Dollars) June 26, 2022 June 27, 2021
Deferred tax assets:
Compensation $11.8 $10.4
Inventories 22.5 13.6
Sales return reserve and allowance for bad debts 5.0 2.3
Federal and state net operating loss carryforwards 321.0 360.6
Federal credits 48.2 42.1
State credits 1.2 1.2
48C investment tax credits 35.7 36.6
Investments 5.3 0.3
Stock-based compensation 7.2 6.1
Deferred revenue 18.9 26.3
Lease liabilities 12.6 6.2
Other 4.7 4.5
Total gross deferred assets 494.1 510.2
Less valuation allowance (339.2) (414.4)
Deferred tax assets, net 154.9 95.8
Deferred tax liabilities:
Property and equipment (75.1) (36.9)
Intangible assets (19.1) (16.6)
Investments - (1.1)
Prepaid taxes and other (0.6) (0.7)
Foreign earnings recapture (4.3) -
Taxes on unremitted foreign earnings (7.4) (1.5)
Lease assets (12.6) (6.1)
Convertible notes (38.0) (34.4)
Total gross deferred liability (157.1) (97.3)
Deferred tax liability, net ($2.2) ($1.5)
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The components giving rise to the net deferred tax assets (liabilities) have been included in the consolidated balance sheets as follows:
Balance at June 26, 2022
(in millions of U.S. Dollars) Assets Liabilities
U.S. federal income taxes $- ($3.2)
Foreign income taxes 1.0 -
Total $1.0 ($3.2)
Balance at June 27, 2021
(in millions of U.S. Dollars) Assets Liabilities
U.S. federal income taxes $- ($2.5)
Foreign income taxes 1.0 -
Total $1.0 ($2.5)
The Company weighs all available evidence, both positive and negative, to
estimate if sufficient future taxable income will be generated to utilize the
existing deferred tax assets by jurisdiction. The Company has concluded that it
is necessary to recognize a full valuation allowance against its U.S. deferred
tax assets as of June 26, 2022. As of June 27, 2021, the U.S. valuation
allowance was $292.6 million. For the fiscal year ended June 26, 2022, the
Company increased the U.S. valuation allowance by $46.6 million primarily due to
an increase in deferred tax assets related to the current year domestic loss and
tax credits generated offset by the current year increase in the domestic
deferred tax liability on property and equipment, net.
As of June 27, 2021, the Luxembourg valuation allowance was $121.8 million. As a
result of the LED Business Divestiture and the liquidation of the Company's
common stock ownership interest in ENNOSTAR, the Company began reviewing its
legal entity structure, including its Luxembourg holding company, during the
fourth quarter of fiscal 2021. In the second quarter of fiscal 2022, the Company
concluded its due diligence and commenced a plan to restructure its Luxembourg
holding company, resulting in the recognition of $7.3 million of income tax
expense. The $7.3 million of income tax expense represents the net effect of
$129.1 million of income tax expense generated from taxable income as a result
of the restructuring plan offset by a full release of the valuation allowance
against the Company's Luxembourg net operating loss deferred tax assets, which
totaled $121.8 million. As of June 26, 2022, the Company does not have a
valuation allowance against Luxembourg deferred tax assets.
As of June 26, 2022, the Company had approximately $2.4 million of foreign net
operating loss carryovers, of which less than $0.1 million are offset by a
valuation allowance. Of the Company's foreign net operating loss carryovers,
$2.4 million have no carry forward limitation. As of June 26, 2022, the Company
had approximately $1.5 billion of federal net operating loss carryovers and
$313.4 million of state net operating loss carryovers which are fully offset by
a valuation allowance. Additionally, the Company had $83.9 million of federal
and $1.2 million of state income tax credit carryforwards which are fully offset
by a valuation allowance. The federal and state net operating loss carryovers
will begin to expire in fiscal 2038 and fiscal 2023, respectively. The federal
and state income tax credit carryforwards will begin to expire in fiscal 2031
and fiscal 2023, respectively.
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 27, 2021, the Company's liability for unrecognized tax benefits was
$7.4 million. During the fiscal year ended June 26, 2022, the Company recognized
a $0.2 million decrease to the liability for unrecognized tax benefits due to
statute expiration. As a result, the total liability for unrecognized tax
benefits as of June 26, 2022 was $7.2 million. If any portion of this $7.2
million is recognized, the Company will then include that portion in the
computation of its effective tax rate. Although the ultimate timing of the
resolution and/or closure of audits is highly uncertain, the Company believes it
is reasonably possible that $0.4 million of gross unrecognized tax benefits will
change in the next 12 months as a result of statute requirements or settlement
with tax authorities.
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The following is a tabular reconciliation of the Company's change in uncertain
tax positions:
Fiscal Years Ended
(in millions of U.S. Dollars) June 26, 2022 June 27, 2021 June 28, 2020
Balance at beginning of period $7.4 $7.4 $8.2
Decrease related to current year change in law - - -
Increases related to prior year tax positions - - -
Decreases related to prior year tax positions - - -
Settlements with tax authorities - - (0.1)
Expiration of statute of limitations for assessment
of taxes (0.2) - (0.7)
Balance at end of period $7.2 $7.4 $7.4
The Company's policy is to include interest and penalties related to
unrecognized tax benefits within the income tax expense (benefit) line item in
the consolidated statements of operations. Interest and penalties relating to
unrecognized tax benefits recognized in the consolidated statements of
operations totaled less than $0.1 million for the fiscal years ended June 26,
2022, June 27, 2021, and June 28, 2020. The Company accrued less than $0.1
million for interest and penalties relating to unrecognized tax benefits in the
consolidated balance sheets as of June 26, 2022 and June 27, 2021.
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 2017. For U.S. state tax returns, the Company is
generally no longer subject to tax examinations for fiscal years prior to 2018.
For foreign purposes, the Company is generally no longer subject to examination
for tax periods prior to 2012. Certain carryforward tax attributes generated in
prior years remain subject to examination, adjustment and recapture.
The Company provides for income taxes on the earnings of foreign subsidiaries
unless the subsidiaries' earnings are considered indefinitely reinvested outside
the United States . As of June 26, 2022, the Company has approximately
$206.3 million of undistributed earnings for certain non-U.S. subsidiaries. The
Company has determined that $190.3 million of the $206.3 million of
undistributed foreign earnings are expected to be repatriated in the foreseeable
future. The Company expects to incur $7.4 million of foreign income taxes upon
repatriation of the $190.3 million foreign earnings. As of June 26, 2022, the
Company has not provided income taxes on the remaining undistributed foreign
earnings of $16.0 million as the Company continues to maintain its intention to
reinvest these earnings in foreign operations indefinitely. If, at a later date,
these earnings were repatriated to the United States , the Company would be
required to pay approximately $0.3 million in taxes on these amounts.
Note 15 - Commitments and Contingencies
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 monetary 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 operations, financial position and overall trends. The outcomes in these matters are not reasonably estimable.
Grant Disbursement Agreement (GDA) with the
The Company currently has a GDA with the State of New York Urban Development Corporation (doing business asEmpire State Development ). The GDA provides a potential total grant amount of $500.0 million to partially and fully reimburse the Company for certain property, plant and equipment costs related to the Company's construction of its Silicon Carbide device fabrication facility inMarcy, New York . 87
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The GDA was signed in the fourth quarter of fiscal 2020 and requires the Company to satisfy a number of objectives for the Company to receive reimbursements through the span of the 13-year agreement. These objectives include maintaining a certain level of local employment, investing a certain amount in locally administered research and development activities and the payment of an annual commitment fee for the first six years. Additionally, the Company has agreed, under a separate agreement (the SUNY Agreement), to sponsor the creation of two endowed faculty chairs and fund a scholarship program at SUNY Polytechnic Institute. As of June 26, 2022, the annual cost of satisfying the objectives of the GDA and the SUNY Agreement, excluding the direct and indirect costs associated with employment, varies from $2.7 million to $5.2 million per year through fiscal 2031. As of June 26, 2022, the Company has reduced property and equipment, net by $285.1 million as a result of GDA reimbursements, of which $149.7 million has been received in cash and an additional $132.5 million and $2.9 million are recorded as receivables in other current assets and other assets, respectively, in the consolidated balance sheets. The Company started receiving cash reimbursements in the fourth quarter of fiscal 2021.
Note 16 - Concentrations of Risk
Financial instruments, which may subject the Company to a concentration of risk, consist principally of short-term investments, cash equivalents, accounts receivable and long-term receivables. Short-term investments consist primarily of municipal bonds, corporate bonds,U.S. agency securities,U.S. treasury securities, commercial paper, certificates of deposit, and variable rate demand notes 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 theFDIC insurance limits.
The Company sells its products on account to manufacturers, distributors and others worldwide and generally requires no collateral.
For the fiscal year ended June 26, 2022, two customers represented 20% and 18% of revenue, respectively. For the fiscal year ended June 27, 2021, three customers represented 18%, 13% and 10% of revenue, respectively. For the fiscal year ended June 28, 2020, two customers represented 19% and 14% of revenue, respectively. No other customers individually accounted for more than 10% of revenue for the fiscal years ended June 26, 2022, June 27, 2021 and June 28, 2020. Three customers accounted for 18%, 16% and 14% of the accounts receivable balance as of June 26, 2022, respectively. Two customers accounted for 16% and 16% of the accounts receivable balance as of June 27, 2021, respectively. No other customers accounted for more than 10% of the accounts receivable balance as of June 26, 2022 and June 27, 2021.
Note 17 - Retirement Savings Plan
The Company sponsors one employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code. AllU.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 26, 2022, June 27, 2021 and June 28, 2020, the Company contributed approximately $10.3 million, $8.0 million and $7.7 million to the 401(k) Plan, respectively. ThePension Benefit Guaranty Corporation does not insure the 401(k) Plan.
Note 18 - Restructuring
The Company has approved various operational plans that include restructuring costs. All restructuring costs are recorded in other operating expense on the consolidated statement of operations.
Corporate Restructuring
In July 2019, the Company realigned its sales resources as part of the Company's
transition to a more focused semiconductor company. As a result, the Company
recorded $0.6 million in contract termination costs during the fiscal year ended
June 28, 2020. The plan has concluded and all expenses have been paid as of June
27, 2021.
In September 2020, the Company realigned certain resources to further focus on
areas vital to the Company's growth while driving efficiencies. As a result, the
Company recorded $2.8 million in severance-related costs for the fiscal year
ended June 27, 2021. The plan has concluded and all expenses have been paid as
of June 27, 2021.
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In February 2021, the Company realigned the structure of itsAsia sales presence. As a result, the Company recorded $0.6 million in severance related costs for the fiscal year ended June 27, 2021. The plan has concluded and all expenses have been paid as of June 27, 2021.
In January 2022, the Company commenced a plan to open a global IT shared
services hub in
Factory Optimization Restructuring
In May 2019, the Company started a significant, multi-year factory optimization plan anchored by a state-of-the-art, automated 200mm capable Silicon Carbide and GaN fabrication facility and a large materials factory at itsU.S. campus headquarters inDurham, North Carolina . As part of the plan, the Company has incurred restructuring charges associated with the movement of equipment as well as disposals on certain long-lived assets.
In September 2019, the Company announced its intent to build a new Silicon
Carbide device fabrication facility in
The factory optimization restructuring plan concluded in fiscal 2022. For the fiscal years ended June 26, 2022, June 27, 2021 and June 28, 2020, the Company expensed $4.8 million, $5.2 million and $9.0 million, respectively, of restructuring charges associated with the movement of equipment related to the factory optimization plan, of which $0.2 million was accrued for as of June 26, 2022. Additionally, the Company expensed $1.3 million and $3.4 million of restructuring charges associated with disposals of certain long-lived assets for the fiscal years ended June 26, 2022 and June 27, 2021, respectively. The Company incurred less expense in connection with the plan than previously projected due to strategic changes in the Company's capacity expansion plans at itsDurham and RTP facilities.
Note 19 - Subsequent Events
In July 2022, the Company received an arbitration award in relation to a former
customer failing to fulfill contractual obligations to purchase a certain amount
of product over a period of time. In August 2022, the Company received payment
for the arbitration award in the amount of $49.0 million, net of estimated
attorneys' fees and other costs, and will recognize a corresponding gain from
arbitration in the first quarter of fiscal 2023.
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