What changed in this filing

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Item 1. Business

2021-08-18 compared with 2020-08-19 · 113 added, 92 removed, 80 unchanged (72% of the section changed)

(Cree, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials, devices for power and radio-frequency (RF) applications and specialty lighting-class light emitting diode (LED) products.

Our silicon carbide and gallium nitride (GaN) materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

The Company's LEDs are targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays.

We operate in two reportable segments:

• Wolfspeed , which consists of silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon.

Our materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications.

Our materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.

• LED Products , which consists of LED chips and LED components.

Our LED products enable our customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.

(Cree, we, our, or us) 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.

Our silicon carbide and GaN materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

During and prior to fiscal 2021, we 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.

On March 1, 2021, we completed the sale of certain assets and subsidiaries comprising our former LED Products segment (the LED Business) to SMART Global Holdings, Inc.

(SGH) and its wholly owned newly-created acquisition subsidiary CreeLED, Inc.

(CreeLED and collectively with SGH, SMART) for up to $300 million, including fixed upfront and deferred payments and contingent consideration (the LED Business Divestiture).

We retained certain assets used in and pre-closing liabilities associated with the LED Products segment.

In addition, we previously designed, manufactured and sold LED lighting fixtures and lamps for the commercial, industrial and consumer markets.

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On May 13, 2019, we sold our Lighting Products business unit to IDEAL Industries, Inc.

(IDEAL) and have classified this business unit as discontinued operations in our consolidated financial statements.

The Lighting Products business unit represented the Lighting Products segment disclosed in our historical financial statements.

The majority of our products are manufactured at our production facilities located in North Carolina, California, Arkansas and China.

As a result, we have classified the results and cash flows of our former LED Products segment and our former Lighting Products business unit as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for all periods presented.

Additionally, the related assets and liabilities associated with the discontinued operations of the former LED Products segment are classified as held for sale as of June 28, 2020 in the consolidated balance sheets.

Unless otherwise noted, discussions within this Annual Report relate to our continuing operations.

Our continuing operations consist of our Wolfspeed business, which includes silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon.

Our materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications.

Our materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.

In January 2021, we announced plans to change our corporate name from Cree, Inc.

to Wolfspeed, Inc.

in the later part of this calendar year.

The majority of our products are manufactured at our production facilities located in North Carolina, California and Arkansas.

We also use contract manufacturers for certain products and aspects of product fabrication, assembly and packaging.

Additionally, we are in the process of building a silicon carbide fabrication facility in New York.

We operate research and development facilities in North Carolina, Arizona, Arkansas, New York, California and China (including Hong Kong).

We maintain captive lines at some of our contract manufacturers.

Additionally, we are in the process of building a silicon carbide device fabrication facility in New York.

We operate research and development facilities in North Carolina, California, Arkansas, Arizona and New York.

is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina.

For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 8 of this Annual Report.

Products by Reportable Segment

Our Wolfspeed segment includes silicon carbide and GaN materials, power devices and RF devices.

Silicon Carbide and GaN Materials

Our silicon carbide materials products consist of silicon carbide bare wafers, epitaxial wafers, and GaN epitaxial on silicon carbide wafers.

Our silicon carbide materials products consist of silicon carbide bare wafers, epitaxial wafers, and GaN epitaxial layers on silicon carbide wafers.

Our silicon carbide materials are targeted for customers who use them to manufacture products for RF, power and other applications.

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We also provide custom die manufacturing for GaN HEMTs and MMICs that allow a customer to design its own custom RF circuits to be fabricated by us, or have us design and fabricate products that meet their specific requirements.

During fiscal 2018, we expanded our RF product offerings through the acquisition of certain assets of Infineon Technologies AG's (Infineon) Radio Frequency Power Business (RF Power) as discussed in Note 6, "Acquisition", in our consolidated financial statements included in Item 8 of this Annual Report.

Our LED Products segment includes LED chips and LED components.

Our LED chip products include blue and green LED chips based on GaN and related materials.

LED chips or die are solid state electronic components used in a number of applications and are currently available in a variety of brightness levels, wavelengths (colors) and sizes.

We use our LED chips in the manufacturing of our LED components.

Customers use our blue and green LED chips in a variety of applications including video screens, gaming displays and function indicator lights.

Customers may also combine our blue LED chips with phosphors to create white LEDs, which are used in various applications for indoor and outdoor illumination and backlighting, full-color display screens, liquid crystal display (LCD) backlighting, white keypads, automotive backlights, headlamps and directional indicators.

LED Components

Our LED components include a range of packaged LED products, from our XLamp ® and J Series ® LED components and LED modules for lighting applications to our high-brightness LED components.

Our XLamp LED components and LED modules are designed to meet a broad range of market needs for lighting applications including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting.

In fiscal 2018, Cree formed a joint venture, Cree Venture LED Company Limited (Cree Venture LED), with San'an Optoelectronics Co., Ltd.

(San'an) to sell LED components for indoor and outdoor general illumination applications where customers are more price sensitive.

Cree sells the products from Cree Venture LED under the J Series brand.

Our high-brightness LED components consist of surface mount device (SMD) and through-hole packaged LED products.

Our SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage, general illumination, transportation, gaming and specialty lighting.

Our through-hole packaged LED component products are available in a full range of colors primarily designed for the signage market and provide users with color and brightness consistency across a wide viewing area.

For further information about our reportable segments, please refer to Note 17, “Reportable Segments,” in our consolidated financial statements included in Item 8 of this Annual Report.

Research and Development

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Our research and development activity includes efforts to:

• develop existing silicon carbide materials and fabrication technology for a 200mm platform;

• develop higher power diodes/switches and higher power/linearity RF devices;

• develop silicon carbide materials and fabrication technology for a 200mm platform;

• develop higher performance power diodes, switches and packages, and higher power/linearity RF devices;

• increase the quality, performance and diameter of our substrate and epitaxial materials;

• develop brighter, more efficient and lower cost LED chip and component products;

• continually improve our manufacturing processes.

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Sales and Marketing

We have continued to make investments to expand our sales, marketing and technical applications support, as well as distribution capabilities to further enable new and existing customers to implement our silicon carbide and GaN materials, power, RF, and LED technology into their products.

We also have continued to make investments to promote and build market awareness of the Cree and Wolfspeed brands.

We have continued to make investments to expand our sales, marketing and technical applications support, as well as distribution capabilities to further enable new and existing customers to design and implement our silicon carbide and GaN materials, power, and RF technology into their products.

We also have continued to make investments to promote and build market awareness of our Wolfspeed brand.

Our sales, marketing and technical applications teams include personnel throughout North America, Asia and Europe.

We have historically had one key customer who represented more than 10% of our consolidated revenue.

Arrow Electronics, Inc.

(Arrow) has accounted for 15%, 19% and 21% of our total consolidated revenue in fiscal 2020, 2019 and 2018, respectively.

Arrow is a customer of both our Wolfspeed and LED Products segments.

We have a small number of customers who represent more than 10% of our consolidated revenue.

ST Microelectronics, Inc.

(ST Microelectronics) accounted for 18%, 19% and 11% of our total consolidated revenue from continuing operations in fiscal 2021, 2020 and 2019, respectively.

Sumitomo Corporation (Sumitomo) accounted for 10%, 14% and 14% of our total consolidated revenue from continuing operations in fiscal 2021, 2020 and 2019, respectively.

Additionally, Arrow Electronics, Inc.

accounted for 13% and 14% of our total consolidated revenue from continuing operations in fiscal 2021 and 2019, respectively.

For further discussion regarding customer concentration, please see Note 16, “Concentrations of Risk,” in our consolidated financial statements included in Item 8 of this Annual Report.

The loss of any large customer could have a material adverse effect on our business and results of operations.

A substantial portion of our products are sold to distributors.

A portion of our products are sold to distributors.

Distributors stock inventory and sell our products to their own customer base, which may include:

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instead, their customers place orders directly with us or through distributors.

Similar to other global semiconductor component suppliers, both our Wolfspeed and LED Products segments have historically experienced, and in the future may experience, seasonally lower sales during our fiscal third quarter due to the Chinese New Year holiday.

Our backlog at June 27, 2021 was approximately $763.9 million, compared with a backlog of approximately $602.7 million at June 28, 2020.

Because of the generally short cycle time between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which at times may be made without significant penalty), we do not believe that our backlog, as of any particular date, is necessarily indicative of actual net revenue for any future period.

Because of changes in a number of factors, including manufacturing lead times and customer order patterns, we do not believe that our backlog, as of any particular date, is necessarily indicative of actual net revenue for any future period.

Significant amounts of our backlog relate to agreements that extend past one year.

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Our June 28, 2020 backlog contained $18.3 million of research contracts signed with the U.S.

Government, for which approximately $2.8 million was not appropriated as of the last day of fiscal 2019.

Government, all of which were appropriated as of the last day of fiscal 2020.

Our backlog could be adversely affected if the U.S.

Government exercises its rights to terminate our government contracts or does not appropriate and allocate all of the funding contemplated by the contracts.

Government exercises its rights to terminate our government contracts.

Manufacturing

We manufacture silicon carbide substrates, silicon carbide MOSFETs, Schottky diodes and power modules as well as GaN on silicon carbide RF devices and LDMOS power transistors.

We utilize manufacturing facilities located in the United States in combination with assembly and test subcontractors throughout Asia.

Manufacturing assets are managed together through one centralized organization to ensure we leverage scale in asset utilization, purchasing volumes, and overhead costs across the business.

Silicon carbide substrate manufacturing occurs in our highly complex materials factory and involves production of a bare wafer substrate with or without epitaxy.

Our front-end processes occur in manufacturing facilities called "wafer fabs".

These processes involve several hundred manufacturing steps required for imprinting silicon carbide wafers with the precise circuitry required for semiconductor devices to function.

Back-end processes include the assembly, test and packaging of semiconductors to make them suitable for use and sale.

Yields in our manufacturing process can vary and are dependent upon multiple factors including product complexity and performance requirements as well as the maturity of the process.

In order to maximize both yield and quality, we maintain in-line process monitoring and testing.

Our substrate and wafer fab manufacturing facilities are certified to ISO 9001, IATF 16949 (automotive), and ISO 14001 (environmental).

ISO 9001 is the international standard that specifies requirements for a quality management system and focuses on the ability to consistently provide products and services that meet customer requirements.

IATF 16949 is the highest international quality standard for the automotive industry.

ISO 14001 is an internationally agreed upon standard for an environmental management system.

Sources of Raw Materials

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However, shortages have occurred from time to time and could occur again.

We are currently experiencing isolated issues with our suppliers related to the novel strain of coronavirus (COVID-19) outbreak.

Most of these issues have related to local government policies that have affected the ability of employees of our suppliers to work.

Additionally, the decrease in commercial airline flights has decreased airline freight capacity, which has affected the timeliness of some deliveries and increased our freight cost.

We have been successful in managing through these issues and we believe our operations are currently not materially impacted by our ability to source raw materials.

Competition by Reportable Segment

Our success depends on our ability to keep pace with the evolving technology standards of the industries we serve.

These industries are characterized by rapid technological change, frequent introduction of new products, short product life cycles, changes in end user and customer requirements, and a competitive pricing environment.

The evolving nature of these industries may render our existing or future products obsolete, noncompetitive or unmarketable.

Any of these developments could have an adverse effect on our business, results of operations and financial condition.

Wolfspeed Segment

We are currently experiencing isolated issues with our suppliers related to the COVID-19 pandemic.

Most of these issues have related to extensions of lead times or work force restrictions imposed at a regional level.

We closely monitor deliveries with suppliers to help us have the opportunity to decrease or eliminate any future delays.

For raw materials used in semiconductor production, the global semiconductor shortage has put pressure on the ability to obtain some raw materials.

We have focused on forecasting demand further out in time in order to secure raw materials that may have extended lead times.

Additionally, we are continuing to experience impacts with logistics, including backed up ports and cargo shipment and airline shipment delays.

We are closely following logistical impacts as they happen and are working closely with suppliers to prepare shipping arrangements in advance of departure dates to ensure we secure logistics slots.

We have been successful in managing through these issues and we believe our operations are currently not materially impacted by our ability to source raw materials, components and equipment used in manufacturing our products.

Silicon Carbide and GaN Materials

We have continued to maintain a well-established leadership position in the sale of silicon carbide wafer and silicon carbide and GaN epitaxy products.

As market adoption of the technology grows with rapidly expanding power and RF device designs, we have experienced increased competition from companies such as II-VI Advanced Materials, SiCrystal, IQE and Showa Denko.

We believe our leading technology and leveraged production scale position us to reliably supply production volumes to the device manufacturers in the market.

Power Devices

Our silicon carbide based power devices compete with silicon carbide power semiconductor solutions offered by Infineon, Mitsubishi Electric Corporation (Mitsubishi), ON Semiconductor, Rohm Co.

Ltd., and STMicroelectronics, Inc.

Our silicon carbide based power devices compete with silicon carbide power semiconductor solutions offered by Infineon Technologies AG, Mitsubishi Electric Corporation (Mitsubishi), ON Semiconductor Corporation, Rohm Co.

Ltd., and ST Microelectronics.

Our silicon carbide products also compete with silicon semiconductor devices offered by a variety of manufacturers.

Our power products compete in the power semiconductor market on the basis of performance, reliability and overall system price.

Our RF devices compete with Ampleon, M/A-COM Technology Solutions Inc., Bowei, Mitsubishi, NXP Semiconductor, RFHIC, Qorvo, Inc.

and Sumitomo Electric Device Innovations, Inc., which all offer competing RF products and solutions.

Our RF devices compete with Ampleon Netherlands B.V., M/A-COM Technology Solutions Inc., BOWEI Integrated Circuits Co., Ltd., Mitsubishi, NXP Semiconductor N.V., RFHIC, Qorvo, Inc.

and Sumitomo, which all offer competing RF products and solutions.

Our products also compete with a variety of companies offering silicon and GaAs-based products.

Our products compete in the RF semiconductor market on the basis of reliability, performance, design predictability and overall system price.

LED Products Segment

Our LED Products segment’s primary competitors are Nichia Corporation (Nichia), OSRAM Opto Semiconductors GmbH (OSRAM), Samsung LED Company (Samsung), Seoul Semiconductor (SSC), Lumileds Holdings B.V.

(Lumileds) and Nationstar.

The primary competition for our LED chip products comes from companies that manufacture and/or sell nitride-based LED chips.

We consider Nichia to be a competitor because it sells LED chips to a select number of LED packaging companies and it sells packaged LEDs that most often compete directly with packaged LEDs made and sold by our chip customers.

We believe, based on industry information, that Nichia currently has the largest market share for nitride-based LEDs.

There are many other LED chip producers who sell blue and green LED chip products, including OSRAM, EPISTAR Corporation (EPISTAR) and San'an.

These competitors make products for a variety of applications in a range of performance levels that compete directly with our LED products.

Overall, we believe that performance, price and strength of intellectual property are the most significant factors to compete successfully in the nitride LED market.

We believe our products are well positioned to meet the market performance requirements;

however, there is significant pricing pressure from a number of competitors, including new companies based in China.

We strive to improve our competitive position by developing brighter and higher performing LED chips while focusing on lowering costs.

LED Components

The market for lighting class LED components is concentrated primarily in indoor and outdoor commercial lighting;

specialty lighting, including torch lamps (flashlights);

color changing architectural lighting;

signs and signals;

and transportation.

Nichia, OSRAM, Lumileds, SSC and Samsung are the main competitors in these markets.

These companies sell LED components that compete indirectly with our target customers for LED chips and compete directly with our LED components and LED modules.

There are a large number of other companies, primarily based in Asia, that offer products designed to compete both directly and indirectly with our LED components in lighting and other applications.

We are positioning our LED components and LED modules to compete in this market based on performance, reliability, price and usability.

Our high-brightness LED components compete against primarily Asia-based companies, including Mulinsen Co.

Ltd., Nationstar, and Nichia, in a variety of applications including signage, video, transportation, gaming and specialty lighting.

We have positioned our high-brightness LED components to compete in this market based on performance, reliability, availability and binning support.

Patents and Other Intellectual Property Rights

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As of June 27, 2021, we owned or were the exclusive licensee of 674 issued U.S.

patents and approximately 2,425 foreign patents with various expiration dates extending up to 2044.

patents and approximately 1,425 foreign patents with various expiration dates extending up to 2045, with certain patents expiring in the near term.

We do not consider our business to be materially dependent upon any one patent, and we believe our business will not be materially adversely affected by the expiration of any one patent.

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We attempt to create strong brands for our products and promote our products through trademarks that distinguish them in the market.

We may license our customers to use our trademarks in connection with the sale of our products, and we monitor for the proper and authorized use of our trademarks.

Licensing activities and lawsuits to enforce intellectual property rights, particularly patent rights, are a common aspect of the semiconductor and LED industries, and we attempt to ensure respect for our intellectual property rights through appropriate actions.

We may license to our customers use of our trademarks in connection with the sale of our products, and we monitor for the proper and authorized use of our trademarks.

Licensing activities and lawsuits to enforce intellectual property rights, particularly patent rights, are a common aspect of the semiconductor industry, and we attempt to ensure respect for our intellectual property rights through appropriate actions.

The breadth of our intellectual property rights and the extent to which they can be successfully enforced varies across jurisdictions.

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We believe that the strength of our portfolio of patent rights is important in helping us resolve or avoid such disputes with other companies in our industry.

Environmental Regulation

We are subject to a variety of federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.

Governmental Regulation

We are subject to a variety of federal, state, local and foreign provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.

These include statutory and regulatory provisions under which we are responsible for the management of hazardous materials we use and the disposition of hazardous wastes resulting from our manufacturing processes.

Failure to comply with such provisions could result in fines and other liabilities to the government or third parties, injunctions requiring us to suspend or curtail operations or other remedies, and could have a material adverse effect on our business.

Increasing public attention has been focused on the environmental impact of semiconductor manufacturing operations.

We, along with the rest of the semiconductor industry, are subject to variable interpretations and governmental priorities concerning environmental laws and regulations.

We endorse and adhere to Environment, Health and Safety (EH&S) standards for all our sites.

It is our EH&S goal to design and develop products safely, that realize energy efficiency, minimize environmental impacts, and have sustainable life cycles.

In this manner, we are striving to continuously improve our EH&S performance and reduce the overall impacts of our manufacturing processes.

To further ensure that we can implement such standards, we are dedicated to:

• providing a safe and healthy work environment for our employees;

• complying with regulatory and other requirements;

• using natural resources, energy, and materials efficiently;

• substituting sustainable resources in place of non-renewable resources;

• reusing or recycling materials wherever technically possible and economically reasonable;

• minimizing waste and disposing of waste safely and responsibly;

• sourcing raw material responsibly;

• implementing specific measures to prevent and minimize hazards to humans;

and the environment including pollution prevention;

• consulting with and encouraging the participation of workers and workers’ representatives, as applicable.

Our EH&S management systems in our manufacturing facilities in Durham and Research Triangle Park, North Carolina and Morgan Hill, California are certified to ISO 14001:2015 for environmental management.

The benefits of implementing an environmental management system include improved environmental risk management, cost savings, meeting external stakeholder expectations, ensuring compliance with environmental laws, and decreasing our environmental footprint through discovering new possibilities for energy, water and waste usage reductions.

We are also subject to import-export controls, tariffs and other trade-related regulations and restrictions in countries in which we have operations or otherwise do business.

These controls, tariffs, regulations, and restrictions (including those related to, or affected by, United States-China relations, as discussed below in Item 1A of this Report) may have a material impact on our business, including our ability to sell products and to manufacture or source components.

Working Capital

For a discussion of our working capital practices, see “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Human Capital

As of June 27, 2021, we employed 3,466 regular full and part-time employees.

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Certain employees in various countries outside of the United States are subject to laws providing representation rights.

Employee Retention and Development

We believe that our future success largely depends upon our continued ability to identify, attract, motivate and retain qualified personnel.

Core to our ability to attract and retain talent is our high-performance culture, which is based on our three central values of 1) integrity and respect, 2) ownership and accountability, and 3) ingenuity and passion.

We are committed to creating and sustaining a culture where all employees are engaged and can contribute to their full potential.

We aim to provide our employees with competitive compensation, as well as opportunities for equity ownership and developmental programs that enable continued learning and growth.

We endeavor to utilize recruiting practices that yield qualified and dedicated employees who are driven to achieve our vision.

We are committed to offering an environment in which employees are ensured equal job opportunities and have a chance for advancement.

We also have initiatives in place to reduce our global employee turnover rates, which are monitored and reviewed quarterly.

Our goal is to ensure employees can find development and career growth without having to leave Cree.

Compensation and Benefits

We are focused on offering competitive compensation and comprehensive benefit packages designed to promote the physical and emotional well-being and financial health of our employees.

Our total compensation package includes base pay, bonuses, stock-based compensation, employee stock purchase plans, employee referral bonuses, adoption assistance and a family care program.

Health and Safety

The safety, health, and overall well-being of our employees and contractors is integrated into the way we do business.

We aim to provide a safe and healthy work environment through various measures, including accountability for health and safety performance with line management, setting acceptable levels of risk based on government regulation or industry best practice, and evaluating health and safety incidents to prevent recurrence, among other programs.

In response to the COVID-19 pandemic, we implemented safety protocols and new procedures to protect our employees, customers and suppliers.

In line with guidance from the World Health Organization, local health authorities and other governmental authorities, we have implemented numerous preventative hygiene and safety measures at our facilities.

As the pandemic continues, the health and well-being of our workforce remains a top priority while we work to ensure productivity for those employees working from home.

When we begin a transition to return to the office, we are planning to offer a 'work where it works' arrangement that allows employees to continue to have the option of working remotely.

Diversity and Inclusion

We believe diversity, equity, and inclusion drives better business results and makes all of us better employees and people.

We are striving to build an environment where inclusivity is real and active, rather than theoretical and static.

We celebrate our employees’ differences and authenticity, and understand that diverse ideas, perspectives, thinking styles, and backgrounds produce higher quality decisions, enabling us to solve problems other companies consider to be impossible.

Our efforts to foster a diverse and inclusive workplace include Employee Resources Groups (“ERGs”), a Diversity, Equity and Inclusion leadership team that partners with our Human Resources department and various scholarship programs in our surrounding communities.

We believe these initiatives help contribute to the development of future leaders, increased employee engagement and expanded market reach.

Available Information

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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 1. Business