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Item 7. Management’s Discussion and Analysis

2020-08-19 compared with 2019-08-21 · 225 added, 193 removed, 344 unchanged (55% of the section changed)

7 unchanged sentences

There are a number of industry factors that affect our business which include, among others:

Overall Demand for Products and Applications using SiC power devices, GaN and Si RF devices, and LEDs .

Our potential for growth depends significantly on the adoption of SiC and GaN materials and device products in the power and RF markets, the continued use of Si devices in the RF telecommunications market, the continued adoption of LEDs and LED lighting, and our ability to win new designs for these applications.

• COVID-19 Outbreak.

COVID-19 has spread globally, including locations where we do business.

While the financial impact of COVID-19 on our results is difficult to measure, we believe it has had an unfavorable impact on our operating income.

The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread are uncertain as of the date of this Annual Report as this continues to evolve globally.

The potential effects of COVID-19 could impact 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 of customers and their related demand and/or purchases, the impact on our suppliers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs.

Additionally, COVID-19 could have a number of additional adverse effects, including additional laws and regulations affecting our business, fluctuations in foreign currency markets and the credit risks of our customers.

• Overall Demand for Products and Applications using silicon carbide power devices, GaN and silicon RF devices, and LEDs .

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, the continued adoption of LEDs and LED lighting, 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, as well as evolving competitive dynamics in each of the respective markets.

These uncertainties make demand difficult to forecast for us and our customers.

• Governmental Trade and Regulatory Conditions .

Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, 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.

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In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers.

Governmental Trade and Regulatory Conditions .

Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business.

Changes in trade policy such as the imposition of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets.

• Technological Innovation and Advancement.

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The following is a summary of our financial results for the year ended June 28, 2020:

Our year-over-year revenue increased by $ 155.1 million to $1.1 billion .

Gross margin increased to 36.2% from 32.7% .

Gross profit increased by $89.0 million to $391.0 million .

Operating loss from continuing operations was $15.9 million in fiscal 2019 compared to operating loss from continuing operations of $28.0 million in fiscal 2018 .

• Our year-over-year revenue decreased by $176.1 million to $903.9 million.

• Gross margin decreased to 27.5% from 36.2%.

Gross profit decreased to $248.3 million from $391.0 million.

• Operating loss from continuing operations was $209.4 million in fiscal 2020 compared to $15.9 million in fiscal 2019.

• Diluted loss per share from continuing operations attributable to controlling interest was $1.78 in fiscal 2020 compared to $0.56 in fiscal 2019.

• Combined cash, cash equivalents and short-term investments increased to $1,251.7 million at June 28, 2020 from $1,051.4 million at June 30, 2019.

Cash provided by operating activities was $202.3 million in fiscal 2019 compared to $173.5 million in fiscal 2018 .

Cash used in operating activities of continuing operations was $29.0 million in fiscal 2020 compared to cash provided by operating activities of continuing operations of $220.2 million in fiscal 2019.

• Purchases of property and equipment were $237.1 million in fiscal 2020 compared to $131.3 million in fiscal 2019.

Business Outlook

We are uniquely positioned as an innovator in both of our business segments.

The strength of our balance sheet and operating cash flow provides us the ability to invest in our businesses, as indicated by our planned construction of a state-of-the-art, automated 200mm capable SiC and GaN fabrication facility and a large materials factory to expand our SiC capacity which was announced in May 2019.

We believe we are uniquely positioned as an innovator in both of our business segments.

The strength of our balance sheet and ability to generate cash provides us the ability to invest in our businesses, as indicated by our planned construction of a state-of-the-art, automated 200mm capable silicon carbide fabrication facility and a large materials factory to expand our silicon carbide capacity, each of which was announced in May 2019.

In September 2019, we announced our intent to build the new fabrication facility in Marcy, New York to complement the factory expansion already underway at our U.S.

campus headquarters in Durham, North Carolina.

Construction on the new fabrication facility commenced in the fourth quarter of fiscal 2020.

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.

We are focused on the following priorities to support our goals of delivering higher revenue and shareholder returns over time:

Wolfspeed - invest in the business to expand the scale, further develop the technologies, and accelerate the growth opportunities of SiC materials, SiC power devices and modules, and GaN and Si RF devices.

• Wolfspeed - invest in the 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.

• LED Products - focus our efforts where our best-in-class technology and application-optimized solutions are differentiated and valued.

Improve the customer experience and service levels in all of our businesses.

In regards to COVID-19, our manufacturing facilities in the United States are currently operating as essential businesses.

We have instituted strict measures designed to balance employee safety with meeting the needs of business operations.

These measures include increased employee sick days, robust health screening, social distancing policies and cleaning protocols to ensure the safety of our employees and the protection of our customers, suppliers, and partners.

Our manufacturing facilities in China briefly closed mid-third quarter of fiscal 2020 and have remained open since that time.

We believe the strength of our balance sheet and our ability to continue operations allow us to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the construction of new facilities in New York and additional production capacity in North Carolina.

Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows are uncertain.

Results of Operations

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Fiscal Years Ended

June 30, 2019

June 24, 2018

June 25, 2017

(in millions of U.S Dollars, except share data)

June 28, 2020 June 30, 2019 June 24, 2018

(in millions of U.S Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue

Revenue, net $903.9 100.0 % $1,080.0 100.0 % $924.9 100.0 %

Cost of revenue, net 655.6 72.5 % 689.0 63.8 % 622.9 67.3 %

Gross profit 248.3 27.5 % 391.0 36.2 % 302.0 32.7 %

Research and development 184.2 20.4 % 157.9 14.6 % 127.3 13.8 %

2 unchanged sentences

Loss on disposal or impairment of other assets 1.4 0.2 % 4.7 0.4 % 8.4 0.9 %

Other operating expense (income)

Other operating expense 46.2 5.1 % 28.0 2.6 % 16.8 1.8 %

Operating loss (209.4) (23.2) % (15.9) (1.5) % (28.0) (3.0) %

Non-operating expense (income), net

Non-operating (income) expense, net (19.0) (2.1) % 29.3 2.7 % (10.4) (1.1) %

Loss before income taxes (190.4) (21.1) % (45.2) (4.2) % (17.6) (1.9) %

2 unchanged sentences

Net loss from discontinued operations — — % (317.2) (29.4) % (263.5) (28.5) %

Net loss (190.6) (21.1) % (375.1) (34.7) % (279.9) (30.3) %

Net income attributable to noncontrolling interest 1.1 0.1 % — — % 0.1 — %

Net loss attributable to controlling interest ($191.7) (21.2) % ($375.1) (34.7) % ($280.0) (30.3) %

Basic loss per share

Continuing operations attributable to controlling interest

Net loss attributable to controlling interest

Diluted loss per share

Basic and diluted loss per share

Continuing operations attributable to controlling interest ($1.78) ($0.56) ($0.17)

1 unchanged sentence

Revenue was comprised of the following:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Wolfspeed $470.7 $538.2 $328.6 ($67.5) (13) % $209.6 64 %

Percent of revenue 52 % 50 % 36 %

LED Products 433.2 541.8 596.3 (108.6) (20) % (54.5) (9) %

Percent of revenue 48 % 50 % 64 %

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Wolfspeed Segment Revenue

Wolfspeed revenue increased 64% to $538.2 million in fiscal 2019 from $328.6 million in fiscal 2018 .

This increase was primarily due to strong organic growth combined with revenue from the RF Power business acquisition, a 58% increase in overall average selling prices (ASP) and a 4% increase in the number of units sold.

The increase in ASP was due to a greater overall mix of higher priced wafer and device products.

Wolfspeed revenue increased 49% to $328.6 million in fiscal 2018 from $221.2 million in fiscal 2017 .

This increase was primarily the result of a 30% increase in units sold and a 21% increase in ASP, which was partially offset by a decrease in contract revenue.

The increase in units sold was the result of an increase in power products, substrate materials, and the new RF Power business sales.

The increase in ASP was primarily due to a greater mix of higher priced products in all product lines.

The decrease in Wolfspeed segment revenue for fiscal 2020 compared to fiscal 2019 was primarily due to the ongoing trade dispute between the United States and China, weakening demand in Asia, and customer demand limitations due to the COVID-19 outbreak.

The increase in Wolfspeed segment revenue for fiscal 2019 compared to fiscal 2018 was primarily due to strong organic growth combined with revenue from the RF Power business acquisition and increased revenues from products with high average selling prices.

LED Products Segment Revenue

LED Products revenue decreased 9% to $541.8 million in fiscal 2019 from $596.3 million in fiscal 2018 .

This decrease was primarily due to a 4% decrease in the number of units sold and a 6% decrease in ASP.

The decrease in revenue is a result of global market uncertainty with China in light of the United States and China tariff and trade dispute and current market dynamics, which was partially offset by an increase in license and royalty income.

LED Products revenue increased 8% to $596.3 million in fiscal 2018 from $550.3 million in fiscal 2017 .

The number of units sold increased 11% which was partially offset by 2% decrease in ASP.

The increase in the units sold was primarily the result of higher demand in component product sales for the following applications:

high power general lighting, video screen and specialty lighting applications.

The decrease in ASP was due to competitive pricing pressures, which was partially offset by favorable product mix.

The decrease in LED Products Segment revenue for fiscal 2020 compared to fiscal 2019 was primarily due to overall market softness in global LED demand as well as supply, labor and output challenges due to the COVID-19 outbreak.

The decrease in LED Products Segment revenue for fiscal 2019 compared to fiscal 2018 was primarily due to global market uncertainty with China in light of the United States and China tariff and trade dispute and current market dynamics, which was partially offset by an increase in license and royalty income.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Wolfspeed gross profit $184.6 $258.7 $158.5 ($74.1) (29) % $100.2 63 %

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Unallocated costs (1)

(27.4) (17.7) (9.0) (9.7) (55) % (8.7) (97) %

COGS acquisition related costs — — (5.4) — — % 5.4 (100) %

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Consolidated gross margin 27 % 36 % 33 %

(1) Unallocated costs for the fiscal year ended June 28, 2020 include $8.5 million in incremental manufacturing costs relating to COVID-19.

Wolfspeed Segment Gross Profit and Gross Margin

Wolfspeed gross profit increased 63% to $258.7 million in fiscal 2019 from $158.5 million in fiscal 2018 .

Wolfspeed gross margin remained flat at 48% .

Wolfspeed gross profit increased primarily due to higher revenues and Wolfspeed gross margin remained flat primarily due to changes in product mix.

Wolfspeed gross profit increased 53% to $158.5 million in fiscal 2018 from $103.5 million in fiscal 2017 .

Wolfspeed gross margin increased to 48% in fiscal 2018 from 47% in fiscal 2017 .

Wolfspeed gross profit increased primarily due to higher revenues, a more favorable product mix, higher factory utilization, and improved production yields.

Wolfspeed gross margin increased primarily due to changes in product mix and improved production yields.

Wolfspeed gross profit and gross margin for fiscal 2020 compared to fiscal 2019 decreased primarily due to changes in customer and product mix, higher costs driven by factory and technology transitions, underutilization at some of our facilities and higher inventory reserves related to product manufactured for Huawei in the second quarter of fiscal 2020.

Wolfspeed gross margin for fiscal 2019 compared to fiscal 2018 remained relatively flat primarily due to changes in product mix.

Wolfspeed gross profit increased for fiscal 2019 compared to fiscal 2018 primarily due to higher revenues.

LED Products Segment Gross Profit and Gross Margin

LED Products gross profit decreased 5% to $150.0 million in fiscal 2019 from $157.9 million in fiscal 2018 .

LED Products gross margin increased to 28% in fiscal 2019 from 26% in fiscal 2018 .

LED Products gross profit decreased due to lower revenue and tariff costs.

LED Products gross margin increased due to more favorable product mix, higher license and royalty revenue, and better factory costs for the first half of the year, partially offset by tariff costs.

LED Products gross profit increased 4% to $157.9 million in fiscal 2018 from $151.7 million in fiscal 2017 .

LED Products gross margin decreased to 26% in fiscal 2018 from 28% in fiscal 2017 .

LED Products gross profit increased due to higher component sales while gross margin decreased due to lower pricing resulting from competitive pricing pressures and a less favorable mix of LED products sold.

LED Products gross profit and gross margin decreased for fiscal 2020 compared to fiscal 2019 primarily due to the impacts of lower revenue and higher chip costs due to lower utilization.

LED Products gross profit decreased in fiscal 2019 compared to fiscal 2018 due to lower revenue and tariff costs.

LED Products gross margin increased in fiscal 2019 compared to fiscal 2018 due to more favorable product mix, higher license and royalty revenue, and better factory costs for the first half of the year, partially offset by tariff costs.

Unallocated Costs

Unallocated costs were $17.7 million , $9.0 million and $11.2 million for fiscal 2019 , 2018 and 2017 , respectively.

These costs consisted primarily of manufacturing employees’ stock-based compensation, expenses relating to annual incentive plans and matching contributions under our 401(k) plan.

Unallocated costs primarily consist of manufacturing employees' stock-based compensation, expenses for annual incentive plans, and matching contributions under our 401(k) plan.

These costs were not allocated to the reportable segments' gross profit because our CODM does not review them regularly when evaluating segment performance and allocating resources.

Unallocated costs increased by $8.7 million in fiscal 2019 compared to fiscal 2018 , primarily due to higher profit sharing which resulted from improved company performance and increased stock-based compensation incurred as a result of our higher average share price.

Unallocated costs decreased by $2.2 million in fiscal 2018 compared to fiscal 2017 , primarily due to lower stock-based compensation.

For fiscal 2020, unallocated costs also include incremental costs relating to operating our manufacturing operations during the COVID-19 pandemic.

The majority of these incremental costs comprise additional labor costs paid to our manufacturing employees, increased cleaning costs, cleaning supplies and protective equipment, and the costs of implementing preventative safety measures, including increased wellness checks.

Unallocated costs increased in fiscal 2020 compared to fiscal 2019 primarily due to incremental costs relating to operating our manufacturing operations during the COVID-19 pandemic and increased stock-based compensation, offset by decreased annual incentive expense.

Unallocated costs increased in fiscal 2019 compared to fiscal 2018, primarily due to higher annual incentive expenses which resulted from improved company performance and increased stock-based compensation incurred as a result of our higher average share price.

COGS Acquisition Related Costs Adjustment

The cost of goods sold (COGS) acquisition related costs adjustment was $5.4 million for fiscal 2018 .

The COGS acquisition related costs adjustment includes inventory fair value amortization of the fair value increase to inventory recognized at the date of the RF Power acquisition and other RF Power acquisition costs impacting cost of revenue for fiscal 2018.

These costs were not allocated to the reportable segments’ gross profit for fiscal 2018 because they represent an adjustment which does not provide comparability

to the corresponding prior and subsequent period and therefore were not reviewed by our CODM when evaluating segment performance and allocating resources.

The COGS acquisition related cost adjustment includes inventory fair value amortization of the fair value increase to inventory recognized at the date of acquisition, and other RF Power acquisition costs, impacting cost of revenue for fiscal 2018.

These costs were not allocated to the reportable segments’ gross profit for fiscal 2018 because they represent an adjustment which does not provide comparability to the corresponding prior period and therefore were not reviewed by our CODM when evaluating segment performance and allocating resources.

Research and Development

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Research and development expenses were as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Research and development $184.2 $157.9 $127.3 $26.3 17 % $30.6 24 %

Percent of revenue 20 % 15 % 14 %

The increase in research and development expenses for fiscal 2019 compared to fiscal 2018 was primarily due to the inclusion of the acquired RF Power business research and development spend for a full year.

The increase in research and development expenses for fiscal 2018 compared to fiscal 2017 was primarily due to an increase in Wolfspeed research and development to accelerate 150mm substrate development, next generation power and RF device research and development and the inclusion of the acquired RF Power business research and development spend for the last four months of fiscal 2018.

The increases in research and development expenses for all periods presented are 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 continuing to expand 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.

Sales, General and Administrative

Sales, general and administrative expenses were comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consisted of salaries and related compensation costs;

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 consists 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);

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Sales, general and administrative expenses were as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Sales, general and administrative $211.4 $200.7 $170.3 $10.7 5 % $30.4 18 %

Percent of revenue 23 % 19 % 18 %

The increase in sales, general and administrative expenses in fiscal 2019 compared to fiscal 2018 was primarily due to an increase in stock-based compensation and profit sharing.

The increase in sales, general and administrative expenses in fiscal 2018 compared to fiscal 2017 was primarily due to the additional costs assumed in running the business and operations acquired in the RF Power acquisition, which closed in March 2018, and the additional non-recurring costs associated with completing and integrating the RF Power acquisition, partially offset by the decrease in Wolfspeed transaction expenses associated with the terminated sale to Infineon in fiscal 2017.

The increase in sales, general and administrative expenses in fiscal 2020 compared to fiscal 2019 was primarily due to increases in salaries and benefits, stock-based compensation and professional service fees related to transition services from the sale of the Lighting Products business unit, offset by decreases in legal fees, sales commissions and travel costs.

The increase in sales, general and administrative expenses in fiscal 2019 compared to fiscal 2018 was primarily due to an increase in stock-based compensation and annual incentives.

Amortization or Impairment of Acquisition-Related Intangibles

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Amortization of intangible assets related to our acquisitions was as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Customer relationships $6.1 $7.3 $3.0 ($1.2) (16) % $4.3 143 %

1 unchanged sentence

Non-compete agreements 3.0 2.9 1.0 0.1 3 % 1.9 190 %

Total $14.5 $15.6 $7.2 ($1.1) (7) % $8.4 117 %

Amortization of acquisition-related intangibles stayed fairly consistent in fiscal 2020 compared to fiscal 2019 due to the absence of significant intangible-related activity between the periods.

The slight decrease was due to certain intangible assets relating to customer relationships reaching the end of their amortization period in fiscal 2019 and the reclassification of $0.9 million of developed technology, net to a right-of-use asset in accordance with our adoption of ASC 842, Leases, due to the value representing a favorable lease.

Amortization of acquisition-related intangibles increased in fiscal 2019 compared to fiscal 2018 due to the inclusion of a full year of the RF Power business intangible asset amortization.

Amortization of acquisition-related intangibles increased in fiscal 2018 compared to fiscal 2017 due to the acquisition of the RF Power business that was purchased during the third quarter of fiscal 2018.

Loss on Disposal or Impairment of Other Assets

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Loss on disposal or impairment of other assets were as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Loss on disposal or impairment of other assets $1.4 $4.7 $8.4 ($3.3) (70) % ($3.7) (44) %

The decrease in loss in fiscal 2019 compared to fiscal 2018 was primarily due to the higher than usual loss recognized in fiscal 2018 as a result of a fair value market write-down for a sold aircraft in fiscal 2018.

The increase in loss in fiscal 2018 compared to fiscal 2017 was primarily due to the closure of certain manufacturing facilities and a fair value market write-down for a sold aircraft.

Other Operating Expense (Income)

Other operating expense (income) was as follows:

Fiscal Years Ended

Year-Over-Year Change

The loss in fiscal 2020 primarily relates to write-offs of impaired or abandoned patents as well as the impairment of certain leasehold improvements.

The loss in fiscal 2019 primarily relates to an impairment of other assets in conjunction with our disposal of the Lighting Products business unit.

The loss in fiscal 2018 primarily relates to a fair value market write-down for a sold aircraft.

Other Operating Expense

Other operating expense was as follows:

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Factory optimization restructuring $8.5 $4.1 $— $4.4 107 % $4.1 100 %

1 unchanged sentence

Total restructuring costs 9.1 8.3 3.8 0.8 10 % 4.5 118 %

Project and transaction costs

Executive severance

Project, transformation and transaction costs 25.5 16.9 8.5 8.6 51 % 8.4 99 %

Factory optimization start-up costs 9.5 1.5 — 8.0 533 % 1.5 100 %

Gain from termination of Wolfspeed transaction, net

Other operating expense (income)

* Percentage change not meaningful

The increase in other operating expense in fiscal 2019 compared to fiscal 2018 was primarily due to expenses for a new factory optimization plan implemented in May 2019, costs relating to restructuring our geographical sales team to realign our skills and experience needed to execute on our business objectives and transaction costs relating to the sale of our Lighting Products business unit.

Other operating income in fiscal 2017 relates to a termination fee of $12.5 million in cash in March 2017 as a result the termination of an agreement to sell the Wolfspeed business to Infineon, offset by transaction costs related to the terminated agreement, and various executive severance payments.

Non-Operating Expense (Income), net

Non-operating expense (income), net was comprised of the following:

Fiscal Years Ended

Year-Over-Year Change

Non-restructuring related executive severance 2.1 1.3 4.5 0.8 62 % (3.2) (71) %

Other operating expense $46.2 $28.0 $16.8 $18.2 65 % $11.2 67 %

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 20, "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 and upgrading our ERP system to support our expected future growth.

Factory optimization start-up costs are additional start-up costs as part of our factory optimization efforts, which began in the fourth quarter of fiscal 2019.

These efforts are focused on expanding our production footprint to support expected growth in the Wolfspeed segment.

The increase in other operating expense in fiscal 2020 compared to fiscal 2019 was primarily due to increased project, transformation and transaction costs and a full year of factory optimization restructuring and start-up costs in fiscal 2020, offset by a decrease in severance and other restructuring.

The increase in other operating expense in fiscal 2019 compared to fiscal 2018 was primarily due to the addition of factory optimization restructuring and start-up costs, costs relating to restructuring our geographical sales team to realign our skills and experience needed to execute on our business objectives and transaction costs relating to the sale of our Lighting Products business unit.

Non-Operating (Income) Expense, net

Non-operating (income) expense, net was comprised of the following:

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Loss (gain) on sale of investments, net

Loss (gain) on equity investment

Interest expense (income), net

Foreign currency loss (gain), net

Non-operating expense (income), net

Loss (gain) on equity investment .

We had a loss on equity investment in fiscal 2019 due to the decrease in the fair value of our Lextar investment.

We had a gain on equity investment in fiscal 2018 and fiscal 2017 due to the increase in the fair value of our Lextar investment.

Lextar’s stock is publicly traded on the Taiwan Stock Exchange and its share price increased from 18.40 New Taiwanese Dollars (TWD) per share at June 25, 2017 to 21.00 TWD per share at June 24, 2018 before decreasing to 14.75 TWD per share at June 30, 2019.

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

(Gain) loss on sale of investments, net ($2.0) $0.1 $0.1 ($2.1) (2,100) % $— — %

(Gain) loss on equity investment (14.2) 16.2 (7.1) (30.4) (188) % 23.3 328 %

Gain on partial debt extinguishment (11.0) — — (11.0) 100 % — — %

Gain on arbitration proceedings (7.9) — — (7.9) 100 % — — %

Interest income (16.4) (14.0) (9.1) (2.4) (17) % (4.9) (54) %

Interest expense 34.9 26.0 7.3 8.9 34 % 18.7 256 %

Foreign currency (gain) loss, net (1.9) 1.3 (1.8) (3.2) (246) % 3.1 172 %

Other, net (0.5) (0.3) 0.2 (0.2) (67) % (0.5) (250) %

Non-operating (income) expense, net ($19.0) $29.3 ($10.4) ($48.3) (165) % $39.7 382 %

(Gain) loss on equity investment.

The (gain) loss on equity investment is due to changes in the fair value of our Lextar investment, respectively.

This volatile stock price trend may continue in the future given the risks inherent in Lextar’s business and trends affecting the Taiwan and global equity markets.

We have a 16% common stock ownership interest in Lextar and utilize the fair value option in accounting for the ownership interest.

In June 2020, Lextar announced a plan to restructure under a holding company with EPISTAR Corporation (EPISTAR) via a share swap.

As approved by the shareholders of Lextar and EPISTAR at the meetings held on August 7, 2020, we will receive 0.275 shares of common stock of the holding company, to be named ENNOSTAR Inc.

(ENNOSTAR), for each share for Lextar common stock once the share swap is effected (currently scheduled for October 20, 2020), representing in the aggregate an approximately 3.3% common stock ownership interest in ENNOSTAR.

The shares of ENNOSTAR will be listed on the Taiwan Stock Exchange.

Any future stock price changes will be recorded as further gains or losses on equity investment based on the increase or decrease, respectively, in the fair value of the investment during the applicable fiscal period.

Further losses could have a material adverse effect on our results of operations.

Interest expense (income), net .

Interest expense, net in fiscal 2019 was primarily due to the accretion of the equity portion and interest expense related to the Notes issued during the first quarter of fiscal 2019.

Interest income, net decreased in fiscal 2018 compared to fiscal 2017 primarily due to lower invested balances and higher interest expense due to overall higher borrowings associated with our line of credit, partially offset by higher investment yields.

Foreign currency loss (gain), net .

Foreign currency loss (gain), net primarily consists of remeasurement adjustments resulting from our Lextar investment and from our international subsidiaries.

Gain on partial debt extinguishment .

The gain on partial debt extinguishment relates to a gain recognized as a result of using $144.3 million towards repurchasing $150.2 million of the principal amount held on the 2023 Notes.

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 increases in interest income in both comparative periods are due to higher balances on our short-term investments.

Interest expense .

Interest expense in fiscal 2020 and fiscal 2019 reflect increased interest expense related to the Notes.

The increase in fiscal 2020 compared to fiscal 2019 is primarily due to the addition of the 2026 Notes at the end of fiscal 2020, which were sold on April 21, 2020.

Foreign currency (gain) loss, net.

Foreign currency (gain) loss, net, primarily consists of remeasurement adjustments resulting from our Lextar investment and from our international subsidiaries.

Income Tax Expense (Benefit)

Income tax expense (benefit) and our effective tax rate was as follows:

Fiscal Years Ended

Year-Over-Year Change

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

June 30, 2019

June 24, 2018

June 25, 2017

Dollars) June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Income tax expense (benefit) $0.2 $12.7 ($1.2) (12.5) (98) % 13.9 1,158 %

Effective tax rate — % (28) % 7 %

We recognized income tax expense of $12.7 million in fiscal 2019 as compared to an income tax benefit of $1.2 million in fiscal 2018 .

The increase in the effective tax rate from (28)% in fiscal 2019 to 0% in fiscal 2020 was primarily due to the tax benefit related to net operating loss provisions of the CARES Act and a decrease in foreign tax expense due to lower income derived from foreign jurisdictions, where there is not a full valuation allowance, as a result of COVID-19.

The decrease in the effective tax rate from 7% in fiscal 2018 to (28)% in fiscal 2019 was primarily due to the tax benefit of remeasuring our U.S.

deferred taxes as a result of the Tax Legislation enacted on December 22, 2017.

The increase in the effective tax rate from (1,141)% in fiscal 2017 to 7% in fiscal 2018 was primarily attributable to the tax expense on the establishment of a valuation allowance against our U.S.

deferred tax assets during the fiscal 2017.

deferred taxes as a result of the TCJA enacted on December 22, 2017.

In general, the variation between our effective income tax rate and the current U.S.

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Net Loss from Discontinued Operations

We recorded a net loss from discontinued operations of $317.2 million , $263.5 million and $10.0 million in fiscal 2019, 2018 and 2017, respectively.

We recorded a net loss from discontinued operations of $317.2 million and $263.5 million in fiscal 2019 and 2018, respectively.

The net loss from discontinued operations in each period relates to operational results of the discontinued operations of the Lighting Products business unit, with the addition of a $66.2 million loss on the sale of the Lighting Products business unit included in the net loss from discontinued operations for fiscal 2019.

The net loss from discontinued operations for fiscal 2019 and 2018 includes $90.3 million and $247.5 million of goodwill impairment, respectively.

We did not have any discontinued operations related activity in fiscal 2020.

Liquidity and Capital Resources

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Our principal sources of liquidity are cash on hand, marketable securities, cash generated from operations and availability under our line of credit.

Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs.

We have a $500.0 million line of credit as discussed in Note 11 , “Long-term Debt,” in our consolidated financial statements included in Item 8 of this Annual Report.

The purpose of this facility is to provide short term flexibility to optimize returns on our cash and investment portfolio while funding share repurchases, capital expenditures and other general business needs.

Based on past performance and current expectations, we believe our current working capital, availability under our line of credit, proceeds from our Note offering completed in August 2018 (see Note 11, "Long-term Debt," in our consolidated financial statements included in Item 8 of this Annual Report) 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 our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties or expand our production capacity.

From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we anticipate continuing to make such evaluations.

We have a $125 million line of credit as discussed as discussed in Note 11, “Long-term Debt,” in our consolidated financial statements included in Item 8 of this Annual Report.

The purpose of this 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.

Additionally, on April 21, 2020, we issued and sold a total of $575.0 million aggregate principal amount of 2026 Notes, as discussed in Note 11, “Long-term Debt,” in our consolidated financial statements included in Item 8 of this Annual Report.

The total net proceeds of the 2026 Notes was $561.4 million, of which we used $144.3 million to repurchase $150.2 million aggregate principal amount of our 2023 Notes.

We expect to use the remainder of the net proceeds for general corporate purposes.

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 further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties and/or expand our production capacity.

We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.

We are currently building a new silicon carbide fabrication facility in Marcy, New York, to expand capacity for our silicon carbide device business.

We expect to invest approximately $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 by the State of New

York through a grant program administered by Empire State Development.

Given our current cash position, we believe we are in a good position to adequately fund the construction of the facility.

The full extent to which COVID-19 may impact our results of operations or liquidity is uncertain.

Currently, the local governments in the locations in which we operate have designated our Company as an essential business, but our operations have, 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 and LED industries, and the economies in which we operate.

We anticipate our future results of operations, including the results for fiscal 2021, will be materially impacted by COVID-19, but at this time we do not expect the impact from the COVID-19 outbreak will have a material effect on our liquidity or financial position.

However, given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, and, if the outbreak continues on its current trajectory, such impacts could grow and become material to our liquidity or financial position.

To the extent our suppliers continue to be materially and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from us, which in turn could materially interrupt our business operations.

Contractual Obligations

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(in millions of U.S.

Dollars) Total Less than

One Year One to

Three Years Three to

Five Years More Than

Operating lease obligations 13.9 5.5 6.4 1.6 0.4

Finance lease obligations 15.0 2.6 1.6 0.9 9.9

Purchase obligations 451.6 451.1 0.5 — —

Long-term debt (1)

999.8 — — 424.8 575.0

Interest payments on long-term debt (2)

70.5 13.8 27.6 20.7 8.4

Other long-term liabilities (3)

1.9 — 1.9 — —

Total contractual obligations $1,552.7 $473.0 $38.0 $448.0 $593.7

(1) Long-term debt represents the principal due on the Notes, but does not include interest expense.

(2) Interest payments on long-term debt are based on the interest rate at June 30, 2019 .

(3) Other long-term liabilities as of June 30, 2019 includes customer deposits of $27.3 million, long-term tax contingencies and other tax liabilities of $3.4 million , LED supply agreements of $7.3 million and other long-term contingent liabilities (for example, extended warranty) of $0.4 million .

(2) Interest payments on long-term debt represent semi-annual interest payments on the Notes.

(3) Other long-term liabilities as of June 28, 2020 also includes customer deposits of $33.7 million, long-term tax contingencies and other tax liabilities of $2.4 million, LED supply agreements of $8.3 million and extended warranty liability of $0.4 million.

These liabilities were not included in the table above as they will either not be settled in cash and/or the timing of payments is uncertain.

Operating lease obligations include rental amounts due on leases of certain office and manufacturing space under the terms of non-cancelable operating leases.

These leases expire at various times through May 2024 .

Most of the lease agreements provide for rental adjustments for increases in base rent, property taxes and general property maintenance that would be recognized as rent expense, if applicable.

These leases expire at various times through December 2027.

Finance lease obligations primarily include Wolfspeed manufacturing space in Malaysia and a 49-year ground lease on a future silicon carbide fabrication facility in New York.

The leases for our Wolfspeed manufacturing space in Malaysia expire in February 2027 and the 49-year ground lease in New York expires in March 2069.

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

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(in millions of U.S.

June 30, 2019

June 24, 2018

Dollars) June 28, 2020 June 30, 2019 Change

Cash and cash equivalents $448.8 $500.5 ($51.7)

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Three Months Ended

June 30, 2019

June 24, 2018

June 28, 2020 June 30, 2019 Change

Days of sales outstanding (a) 37 34 3

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Cash conversion cycle 38 66 (28)

Days of sales outstanding (DSO) measures the average collection period of our receivables.

a) Days of sales outstanding (DSO) measures the average collection period of our receivables.

DSO is based on the ending net trade receivables less receivable related accrued contract liabilities and the revenue, net for the quarter then ended.

DSO is calculated by dividing ending accounts receivable, less receivable related accrued contract liabilities, by the average net revenue per day for the respective 90-day period.

Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product.

b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product.

DSI is based on ending inventory and cost of revenue, net for the quarter then ended.

DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90-day period.

Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment.

c) Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment.

DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended.

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages) by the average cost of revenue, net per day for the respective 90-day period.

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

The increase in days of supply in inventory was caused by matching timing of supply and demand for Wolfspeed in the short term, increased inventories of product intended for Huawei following their addition to the Entity List and higher ending inventory in LED Products.

As of June 30, 2019 , we had unrealized losses on our investments of $0.1 million .

All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 30, 2019 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes.

The decrease in the cash conversion cycle was primarily driven by increased accounts payable balances relating to investment at our future silicon carbide fabrication facility in New York.

As of June 28, 2020, we had unrealized losses on our investments of less than $0.1 million.

All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 28, 2020 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or negative market conditions surrounding the COVID-19 outbreak.

We intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, and we currently expect to receive the full principal or recover our cost basis in these securities.

The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of June 28, 2020.

The following cash flow information and discussion includes the cash flows from our former Lighting Business unit through May 13, 2019, the date we completed the sale.

In summary, our cash flows were as follows (in millions of U.S.

Fiscal Years Ended

Year-Over-Year Change

June 30, 2019

June 24, 2018

June 25, 2017

Cash provided by operating activities

Fiscal Years Ended Year-Over-Year Change

June 28, 2020 June 30, 2019 June 24, 2018 2019 to 2020 2018 to 2019

Cash (used in) provided by operating activities ($29.0) $202.3 $173.5 ($231.3) $28.8

Cash used in investing activities (486.9) (227.1) (423.9) (259.8) 196.8

Cash provided by (used in) financing activities

Cash provided by financing activities 464.3 406.5 236.5 57.8 170.0

Effect of foreign exchange changes (0.1) (0.1) 0.2 — (0.3)

Net increase (decrease) in cash and cash equivalents ($51.7) $381.6 ($13.7) ($433.3) $395.3

The following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities.

Cash Flows from Operating Activities

Net cash provided by operating activities increased to $202.3 million in fiscal 2019 from $173.5 million in fiscal 2018 primarily due to generating higher cash from earnings and improved working capital.

Net cash provided by operating activities decreased to $173.5 million in fiscal 2018 from $220.5 million in fiscal 2017, primarily due to a higher net loss in fiscal 2018 and lower cash generated from working capital in fiscal 2018 as compared to fiscal 2017.

Net cash (used in) provided by operating activities decreased in fiscal 2020 compared to fiscal 2019 primarily due to cash used from our increased operating loss and a larger annual incentive payment in the first quarter of fiscal 2020 compared to the previous year.

Annual incentive payments are made in the first quarter of the subsequent fiscal year.

Net cash provided by operating activities increased in fiscal 2019 compared to fiscal 2018 primarily due to generating higher cash from earnings and improved working capital.

Total cash provided by operating activities in fiscal 2019 and 2018 includes ($17.9) million and $61.0 million of cash (used in) provided by operating activities of discontinued operations.

Cash Flows from Investing Activities

Our investing activities primarily relate to transactions within our short-term investments, purchases of property and equipment, payments for patents and licensing rights and the acquisition and sales of businesses.

Net cash used in investing activities was $227.1 million in fiscal 2019 compared to $423.9 million in fiscal 2018 .

Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment and payments for patents and licensing rights.

The increase in net cash used in investing activities in fiscal 2020 compared to fiscal 2019 was primarily due to the net proceeds from the sale of the Lighting Products business unit of $219.0 million received in fiscal 2019.

Excluding the proceeds from the sale, cash used in investing activities stayed relatively flat with an increase in purchases of property, equipment and patent rights of $106.7 million offset by a decrease in net purchases of short term investments of $48.2 million.

The decrease in net cash used in investing activities in fiscal 2019 compared to fiscal 2018 is primarily due to $429.2 million of net expenditures to acquire the Infineon RF Power business in fiscal 2018.

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Other investing activities during fiscal 2019 compared to fiscal 2018 include a decrease in the purchase of property, equipment and patent rights of $42.8 million offset by net proceeds from the sale of the Lighting Products business unit of $219.0 million.

Net cash used in investing activities was $423.9 million in fiscal 2018 compared to $145.2 million in fiscal 2017.

The increase is primarily due to purchases of property, equipment and patent rights, which increased by $96.5 million in fiscal 2018 compared to fiscal 2017, and net proceeds from the sale short-term investments, which increased $247.8 million in fiscal 2018 compared to fiscal 2017 to help contribute to the $429.2 million in cash used in the Infineon RF Power acquisition.

For fiscal 2020 , we target approximately $198.0 million of capital investment, which is primarily related to capacity and infrastructure projects to support our Wolfspeed segment longer-term growth and strategic priorities.

Total cash used in investing activities in fiscal 2019 and 2018 includes $15.4 million and $17.9 million of cash used in investing activities of discontinued operations.

For fiscal 2021, we target approximately $400.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support our Wolfspeed segment longer-term growth and strategic priorities.

This target is highly dependent on the timing and overall progress on the construction of our new silicon carbide fabrication facility in New York and is net of expected reimbursements from the State of New York Urban Development Corporation under a Grant Disbursement Agreement (GDA).

For more details on the GDA, see Note 16, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.

Cash Flows from Financing Activities

Net cash provided by financing activities was $406.5 million in fiscal 2019 compared to $236.5 million in fiscal 2018 .

Our financing activities for fiscal 2019 primarily consisted of proceeds of $575.0 million from the issuance of the Notes and net proceeds of $136.4 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by the net repayment on our line of credit of $292.0 million and the payment of debt issuance costs of $12.9 million from the issuance of the Notes.

In fiscal 2018, net cash provided by financing activities was $236.5 million compared to net cash used in financing activities of $108.7 million in fiscal 2017.

Our financing activities in 2018 primarily consisted of a net draw on our line of credit of $147.0 million to help fund the Infineon RF Power acquisition, $86.4 million in net proceeds from issuance of common stock pursuant to the exercise of employee stock options and proceeds of $4.9 million from San'an's capital contribution to Cree Venture LED, slightly offset by payment of acquisition-related contingent consideration of $1.8 million in connection with our acquisition of Arkansas Power Electronics International, Inc., which was completed in fiscal 2016.

Our financing activities in fiscal 2017 primarily consisted of repurchases of common stock of $104.0 million, net payments on long-term borrowings of $15.0 million on our line of credit and $13.1 million in net proceeds from issuance 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 future silicon carbide fabrication facility in New York.

The escrow deposits will be returned to us upon successful completion of defined objectives relating to New York state funded incentives.

Net cash provided by financing activities in fiscal 2019 primarily consisted of $575.0 million in proceeds from the issuance of the 2023 Notes and net proceeds of $136.4 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by the net repayment on our line of credit of $292.0 million and the payment of debt issuance costs of $12.9 million from the issuance of the 2023 Notes.

Net cash provided by financing activities in fiscal 2018 primarily consisted of a net draw on our line of credit of $147.0 million to help fund the Infineon RF Power acquisition, $86.4 million in net proceeds from issuance of common stock pursuant to the exercise of employee stock options and proceeds of $4.9 million from San'an's capital contribution to Cree Venture LED, slightly offset by payment of acquisition-related contingent consideration of $1.8 million in connection with our acquisition of Arkansas Power Electronics International, Inc., which was completed in fiscal 2016.

Financial and Market Risks

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As of June 28, 2020, 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 of January 9, 2023.

At June 30, 2019 and June 24, 2018 , we had $0.0 million and $292.0 million outstanding, respectively, under the line of credit.

If interest rates were to increase by 100 basis points, the annual interest incurred under our line of credit would increase by $0.0 million at June 30, 2019 and $2.9 million at June 24, 2018 .

As of and during the fiscal years ending June 28, 2020 and June 30, 2019, no balances were outstanding under the line of credit.

Currency Rate and Price Risk

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As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.

Our primary exposure relates to the exchange rate between the USD and the TWD as our Lextar investment is held in TWD.

Our primary exposure relates to the exchange rate between the United States Dollar (USD) and the TWD as our Lextar investment is held in TWD.

Additionally, our investment relates to owning shares that are publicly traded on the Taiwan Stock Exchange and subject to price risks from market trading.

The value of our Lextar investment was $55.9 million and $39.5 million as of June 28, 2020 and June 30, 2019, respectively.

A hypothetical 10% increase in the value of the USD compared to the TWD or a hypothetical 10% increase in quoted market values on our investment would each individually result in potential gains of approximately $4.0 million for the year ended June 30, 2019 and $5.8 million for the year ended June 24, 2018 .

A hypothetical 10% decrease in the value of the USD compared to the TWD or a hypothetical 10% decrease in quoted market values on our investment would each individually result in potential losses of approximately $5.6 million and $4.0 million for the years ended June 28, 2020 and June 30, 2019, respectively.

We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes.

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As of June 28, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain of our U.S.

and international facilities in the normal course of business.

Future minimum lease payments under our operating leases as of June 30, 2019 are detailed above in “Liquidity and Capital Resources” in the section entitled “Contractual Obligations.”

Critical Accounting Policies and Estimates

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

We also have inventory consignment agreements in which revenue is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store 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, we retain control over the products’ disposition, including the right to pull back or relocate the products.

From time to time, we may enter into licensing arrangements related to our 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, we will recognize non-refundable upfront licensing fees related to patent licenses immediately upon receipt of the funds if we have no significant future obligations to perform under the arrangement.

However, we will defer recognition for licensing fees where we have 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 (new for fiscal 2020 due to ASC 842 Adoption)

At lease inception, we determine that 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 we obtain 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.

Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our 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 our sole discretion and we consider these options in determining the lease term used to establish our right-of-use assets and lease liabilities.

We will remeasure our 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 us 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 our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.

We 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 amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term.

Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on our consolidated statements of operations.

We have agreements with lease and non-lease components, which are accounted for as a single lease component.

Leases with a lease term of 12 months or less are not recorded on the balance sheet.

We recognize lease expense for these leases on a straight-line basis over the lease term.

Variable lease payment amounts that cannot be determined 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.

Inventories are stated at the lower of cost or net realizable value.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis