What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-18 compared with 2020-08-19 · 184 added, 192 removed, 377 unchanged (50% of the section changed)

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Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Unless otherwise noted, the following information and discussion relates to the Company's continuing operations.

Unless otherwise noted, the following information and discussion relates to our continuing operations.

Industry Dynamics and Trends

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

• COVID-19 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.

• COVID-19 Pandemic.

While certain COVID-19 vaccines have been approved and are now generally available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume.

In light of the increasing percentage of vaccinated individuals, many previously implemented restrictions have gradually been lifted.

While the number of new cases is significantly below the levels witnessed at the height of the pandemic, there has been a recent uptick in the number of new cases.

Despite the availability of vaccines, COVID-19 continues to spread globally and to impact the locations where we do business.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets.

In order to combat the pandemic, significant business and travel restrictions and changes to behavior intended to reduce its spread were implemented.

The COVID-19 pandemic caused us to modify our business practices (including employee travel, employee work locations and cancellation of physical participation in meetings, events and conferences).

In light of the recent uptick in the number of new cases, the COVID-19 pandemic could continue to affect us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs.

The potential continued spread of COVID-19 and any of its variants could result in a number of additional adverse effects, including additional laws and regulations affecting our business, restoration and/or expansion of restrictions, fluctuations in foreign currency markets and the credit risks of our customers.

We continue to pay close attention to the evolving development of, and the disruption to business and economic activities caused by, the COVID-19 pandemic.

However, given the dynamic nature of the COVID-19 pandemic, it is not practicable to provide a reasonable estimate of its impact on our financial position, cash flows and operating results at the present.

• Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices .

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

Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of the respective markets.

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Competition in the industries we serve is intense.

Many companies have made significant investments in product development and production equipment.

Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power, RF and LED markets we serve.

Many companies have made significant investments in product development, production equipment and production facilities.

To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers.

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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.

Market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power and RF markets we serve.

• Technological Innovation and Advancement.

Innovations and advancements in materials, power, RF, and LED technologies continue to expand the potential commercial application for our products.

Innovations and advancements in materials, power, and RF technologies continue to expand the potential commercial application for our products.

However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.

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The following is a summary of our financial results for the year ended June 27, 2021:

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

• Our year-over-year revenue increased by $54.9 million to $525.6 million.

• Gross margin decreased to 31.3% from 33.7%.

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

Gross profit increased to $164.6 million from $158.5 million.

• Operating loss from continuing operations was $313.9 million in fiscal 2021 compared to $224.1 million in fiscal 2020.

• 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 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.

As discussed further below, operating loss from continuing operations for fiscal 2021 includes a $73.9 million expense related to the modification of our long-range plan regarding a building site in Durham, North Carolina.

• Diluted loss per share from continuing operations was $3.04 in fiscal 2021 compared to $1.83 in fiscal 2020.

• Combined cash, cash equivalents and short-term investments decreased to $1,154.6 million at June 27, 2021 from $1,239.7 million at June 28, 2020.

Net cash used in operating activities of continuing operations was $112.5 million in fiscal 2021 compared to net cash used in operating activities of continuing operations of $91.6 million in fiscal 2020.

• Purchases of property and equipment, net of $10.7 million in reimbursements, was $559.8 million in fiscal 2021 compared to $229.9 million in fiscal 2020.

Business Outlook

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.

We believe we are uniquely positioned as an innovator in the global semiconductor industry.

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

In September 2019, we announced our intention to build the new device 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.

Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020 and is expected to start production in fiscal 2022.

In fiscal 2022, we expect to incur an estimated $80.0 million of start-up and pre-production costs as we ramp production at the facility.

The completion of the LED Business Divestiture on March 1, 2021 represents a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications.

This transaction positions us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to silicon carbide and further strengthens our financial position, which we target to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications.

We are focused on investing in our business to expand the scale, further develop the technologies, and accelerate the growth opportunities of silicon carbide materials, silicon carbide power devices and modules, and GaN and silicon RF devices.

We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time.

In addition, we are focused on improving the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex.

Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth.

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 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.

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.

Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition to our new device fabrication facility in Marcy, New York.

In regards to COVID-19, 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.

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June 27, 2021 June 28, 2020 June 30, 2019

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

(in millions of U.S.

Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue

Revenue, net $525.6 100.0 % $470.7 100.0 % $538.2 100.0 %

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Amortization or impairment of acquisition-related intangibles 14.5 2.8 % 14.5 3.1 % 15.6 2.9 %

Abandonment of long-lived assets 73.9 14.1 % — 0.0 % — 0.0 %

Loss on disposal or impairment of other assets 1.6 0.3 % 1.5 0.3 % 5.0 0.9 %

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Operating loss (313.9) (59.7) % (224.1) (47.6) % (93.5) (17.4) %

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

Non-operating expense (income), net 26.3 5.0 % (18.5) (3.9) % 29.4 5.5 %

Loss before income taxes (340.2) (64.7) % (205.6) (43.7) % (122.9) (22.8) %

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Net loss from continuing operations (341.3) (64.9) % (197.6) (42.0) % (118.5) (22.0) %

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

Net (loss) income from discontinued operations (181.2) (34.5) % 7.0 1.5 % (256.6) (47.7) %

Net loss (522.5) (99.4) % (190.6) (40.5) % (375.1) (69.7) %

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Basic and diluted loss per share

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

Continuing operations ($3.04) ($1.83) ($1.14)

Net loss attributable to controlling interest ($4.66) ($1.78) ($3.62)

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Dollars) June 27, 2021 June 28, 2020 June 30, 2019 2020 to 2021 2019 to 2020

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 %

Total revenue $903.9 $1,080.0 $924.9 ($176.1) (16) % $155.1 17 %

Wolfspeed Segment Revenue

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

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.

Revenue $525.6 $470.7 $538.2 $54.9 12 % ($67.5) (13) %

The increase in revenue for fiscal 2021 compared to fiscal 2020 was primarily due to increases in demand for power and RF devices and increases in production capacity for our power devices.

The decrease in 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.

Gross Profit and Gross Margin

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Dollars) June 27, 2021 June 28, 2020 June 30, 2019 2020 to 2021 2019 to 2020

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

Wolfspeed gross margin 39 % 48 % 48 %

LED Products gross profit 91.1 150.0 157.9 (58.9) (39) % (7.9) (5) %

LED Products gross margin 21 % 28 % 26 %

Unallocated costs (1)

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

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

Consolidated gross profit $248.3 $391.0 $302.0 ($142.7) (36) % $89.0 29 %

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 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 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 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.

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 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.

Gross profit $164.6 $158.5 $243.7 $6.1 4 % ($85.2) (35) %

Gross margin 31 % 34 % 45 %

Gross Profit and Gross Margin

The increase in gross profit for fiscal 2021 compared to fiscal 2020 was primarily due to increased revenues in the current period.

The decrease in gross margin for fiscal 2021 compared to fiscal 2020 was primarily due to an unfavorable product mix shift and higher factory costs as we continue to bring on additional capacity.

The decrease in gross profit and gross margin for fiscal 2020 compared to fiscal 2019 was 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 Technologies Co., Ltd.

in the second quarter of fiscal 2020.

The decrease was further impacted by increased stock-based compensation and incremental manufacturing costs related to the COVID-19 pandemic.

Research and Development

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These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies.

Research and development costs also include developing supporting technologies for our planned expansion to a new silicon carbide device fabrication facility in Marcy, New York.

Research and development expenses were as follows:

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Percent of revenue 34 % 32 % 23 %

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.

The increases in research and development expenses 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 expansion of our power and RF product portfolio.

Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.

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Percent of revenue 35 % 39 % 31 %

Sales, general and administrative expenses stayed fairly steady in fiscal 2021 compared to fiscal 2020.

Increased salaries and benefits, including incentive based stock-based compensation and commissions, were partially offset by decreased information technology costs and professional and legal fees.

Additionally, further offsetting decreases related to a decrease of travel costs as a result of travel restrictions related to the COVID-19 pandemic and employee relocation expenses.

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

As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names.

As a result of our acquisitions, we recognize various amortizable intangible assets, including customer relationships, developed technology and non-compete agreements.

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

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Total $14.5 $14.5 $15.6 $— — % ($1.1) (7) %

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 stayed fairly consistent throughout fiscal 2021, 2020 and 2019 due to the absence of acquisition-related intangible activity between the periods, as well as no impairments.

The slight decrease in fiscal 2020 compared to fiscal 2019 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 842, "Leases", due to the value representing a favorable lease.

Abandonment on Long-Lived Assets

In the fourth quarter of fiscal 2021, we modified our long-range plan regarding a portion of our Durham, North Carolina campus originally intended for expanding our LED production capacity that we had considered using to expand the manufacturing footprint for our silicon carbide materials product line.

After we complete our current ongoing silicon carbide materials production capacity expansion in Durham, we now plan on further expansion of our silicon carbide materials production capacity outside of the Durham campus.

As a result, we have decided we will no longer complete the construction of certain buildings on the Durham campus.

Accordingly, an expense of $73.9 million was recorded upon an updated valuation of the property in connection with the preparation of our financial statements for the period ended June 27, 2021.

Loss on Disposal or Impairment of Other Assets

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Loss on disposal or impairment of other assets $1.6 $1.5 $5.0 $0.1 7 % ($3.5) (70) %

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

Loss on disposal or impairment of other assets primarily relate to proceeds from asset sales offset by write-offs of fixed asset projects, as well as the write-offs of impaired or abandoned patents.

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:

Other operating expense was comprised of the following:

Fiscal Years Ended Year-Over-Year Change

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See Note 18, "Restructuring," in our consolidated financial statements included in Item 8 of this Annual Report for additional information on our restructuring costs.

Project, transformation and transaction costs primarily relate to professional services fees associated with completed and potential acquisitions and divestitures, as well as internal transformation programs focused on optimizing our administrative processes 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:

These efforts are focused on expanding our production footprint to support expected growth.

The decrease in other operating expense in fiscal 2021 compared to fiscal 2020 was primarily due to decreased project, transformation and transaction costs, partially offset by a slight increase in total restructuring costs.

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

Non-Operating Expense (Income), net

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

Fiscal Years Ended Year-Over-Year Change

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Foreign currency (gain) loss, net (1.3) (2.0) 1.3 0.7 35 % (3.3) (254) %

Loss on Wafer Supply Agreement 0.8 — — 0.8 100 % — — %

Other, net 0.2 (0.5) (0.3) 0.7 140 % (0.2) (67) %

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

Non-operating expense (income), net $26.3 ($18.5) $29.4 $44.8 242 % ($47.9) (163) %

(Gain) loss on equity investment.

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

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 and increasing to 19.90 TWD per share at June 28, 2020.

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.

The (gain) loss on equity investment relates to changes in fair value of our previously held ENNOSTAR Inc.

(ENNOSTAR) investment.

Our previously held ENNOSTAR equity investment was originally a 16% common stock ownership interest in Lextar Electronics Corporation (Lextar).

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

Effective January 6, 2021, we received 0.275 shares of common stock of the holding company named ENNOSTAR for each of our shares of Lextar, representing in the aggregate an approximate 3.3% common stock ownership interest in ENNOSTAR.

In the fourth quarter of fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR.

We no longer hold any equity interest in ENNOSTAR.

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.

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

Gain on arbitration proceedings .

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Interest income .

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

The decrease in interest income in fiscal 2021 compared to fiscal 2020 was primarily due to significant reductions in investment returns on our short-term investment securities.

The increase in interest income in fiscal 2020 compared to fiscal 2019 was primarily 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.

The increases in interest expense in both comparative periods was primarily due to the addition of our 2026 Notes, which were sold on April 21, 2020, partially offset by the partial repurchase of our 2023 Notes soon after the sale of the 2026 Notes.

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.

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

Loss on Wafer Supply Agreement .

In connection with the completed sale of the LED Products business unit to SMART in fiscal 2021, we entered into the Wafer Supply Agreement, pursuant to which we will supply CreeLED with certain silicon carbide materials and fabrication services for up to four years.

Income Tax Expense (Benefit)

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Effective tax rate — % 4 % 4 %

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 TCJA enacted on December 22, 2017.

The change in the effective tax rate from 4% in fiscal 2020 to 0% in fiscal 2021 was primarily due to the increased tax benefit recorded in fiscal 2020 related to net operating loss provisions of the Coronavirus Aid, Relief, and Economic Security Act.

There was no change in the effective tax rate from fiscal 2019 to fiscal 2020.

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

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(i) changes in our valuation allowances against deferred tax assets in the U.S.

and Luxembourg, (ii) income derived from international locations with lower tax rates than the U.S., and (iii) tax credits generated.

and Luxembourg, (ii) income derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated.

As a result of the LED Business Divestiture and the liquidation of our common stock ownership interest in ENNOSTAR, and as discussed further in Note 14, "Income Taxes," to our consolidated financial statements included in Item 8 of this Annual Report, we are reviewing our legal entity structure and performing the due diligence necessary to understand our ability and desire to restructure our Luxembourg holding company.

If we decide to restructure our Luxembourg holding company, which could happen as soon as the first quarter of fiscal 2022, it is reasonably possible that this action could generate taxable income of the right character to utilize all or a portion of our existing $121.8 million of deferred tax assets in Luxembourg.

This may result in the release of all or a portion of our valuation allowance on the Luxembourg holding company.

The release of this valuation allowance could result in the recognition of $121.8 million of net operating loss deferred tax assets and a decrease to income tax expense in the period the release is recorded.

There can be no assurance that we will make the decision to restructure our Luxembourg holding company or, if we do, that we will be able to recognize some or all of the net operating loss deferred tax assets in Luxembourg.

Net Loss from Discontinued Operations

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.

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

Dollars) June 27, 2021 June 28, 2020 June 30, 2019 2020 to 2021 2019 to 2020

Net loss from discontinued operations of the Lighting Products business unit $— $— ($317.2) $— — % $317.2 100 %

Net (loss) income from discontinued operations of the LED Products business (181.2) 7.0 60.6 (188.2) (1) (53.6) (88) %

Total ($181.2) $7.0 ($256.6) ($188.2) (1) $263.6 103 %

(1) Percentage not relevant for analysis.

As discussed above, we have classified the results of our former LED Products segment as discontinued operations in our consolidated statements of operations for all periods presented.

Net loss from discontinued operations for fiscal 2021 includes $112.6 million of goodwill impairment, an impairment to assets held for sale associated with the LED Business Divestiture of $19.5 million and a loss on sale of $29.1 million.

Additionally, total costs to sell of $27.4 million were recognized throughout fiscal 2021 and fiscal 2020 and are included in net loss from discontinued operations for those periods.

For fiscal 2019, net loss from discontinued operations also includes the operational results of our former Lighting Products business unit, and includes $90.3 million of goodwill impairment as well as a $66.2 million loss on the sale of the Lighting Products business unit.

Liquidity and Capital Resources

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments.

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

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.

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

We have a $125 million line of credit as discussed in Note 10, “Long-term Debt,” to 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.

On April 21, 2020, we issued and sold a total of $575.0 million aggregate principal amount of our 2026 Notes, as discussed in Note 10, “Long-term Debt,” to 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.

Additionally, in the third quarter of fiscal 2021, we filed a shelf registration statement on Form S-3 to register for possible future sale shares of our common stock.

We may offer an indeterminate amount of common stock in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued.

The registration statement became automatically effective upon filing with the SEC on February 11, 2021.

Using this shelf registration statement, we implemented an at-the-market program (the ATM Program) as described in Note 11, “Shareholders’ Equity,” to our consolidated financial statements included in Item 8 of this Annual Report.

The ATM Program was conducted pursuant to an equity distribution agreement (the Equity Distribution Agreement) with Wells Fargo Securities, LLC, BMO Capital Markets Corp., BofA Securities Inc., Canaccord Genuity LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

LLC, Morgan Stanley & Co.

LLC and Truist Securities, Inc.

(the Managers).

On February 19, 2021, we announced that we had sold approximately $500.0 million of common stock under the ATM Program.

As such, the ATM Program automatically terminated in accordance with the terms of the Equity Distribution Agreement.

In total, we sold and received payment for 4,222,511 shares of our common stock at a weighted average price of $118.41 per share for total gross proceeds of approximately $500.0 million and net proceeds of approximately $489.1 million, after $10.0 million in commissions to the Managers and $0.9 million in other offering costs.

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

In the fourth quarter of fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR and received net proceeds of $66.4 million.

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.

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

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.

For example, we recently completed the LED Business Divestiture, which provided us with (i) $50 million in upfront payments (ii) a $125 million unsecured promissory note due in August 2023, and (iii) the potential to receive an earn-out payment between $2.5 million and $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, also payable in the form of an unsecured promissory note due March 2025.

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

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

We expect to invest more than $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 in future fiscal years by the State of New York through a grant program administered by the State of New York Urban Development Corporation (doing business as Empire State Development).

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

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

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 industry, and the economies in which we operate.

To the extent the COVID-19 virus and its variants continue to spread, we believe our future results of operations, including the results for fiscal 2022, could be materially impacted by the COVID-19 pandemic, but at this time we do not expect the impact from the COVID-19 pandemic 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.

The ultimate extent to which the COVID-19 pandemic will impact our business depends on future developments, which include the effectiveness and utilization of vaccines for COVID-19 and its variants.

New information may emerge concerning the severity of COVID-19 and its variants, and additional actions may be taken in order to contain or limit their spread.

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.

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(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.

(3) Other long-term liabilities as of June 27, 2021 also includes customer deposits of $22.2 million, long-term tax contingencies and other tax liabilities of $3.3 million, and a Wafer Supply Agreement liability of $9.4 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.

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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.

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

The leases for our Wolfspeed manufacturing space in Malaysia expire in November 2026 and the 49-year ground lease in New York expires in April 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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Total cash, cash equivalents and short-term investments $1,154.6 $1,239.7 ($85.1)

Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital.

The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable.

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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.

DSI is calculated by dividing ending inventory (excluding inventory related to the Wafer Supply Agreement entered into in connection with the LED Business Divestiture) by average cost of revenue, net per day for the respective 90-day period.

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

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

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

The decrease in the cash conversion cycle was primarily driven by 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.

Due to the significant amount of capital expenditures associated with our future silicon carbide device fabrication facility in New York, we exclude accounts payable related to capital expenditures in connection with the facility.

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages and accounts payable balances related to our future silicon carbide device fabrication facility in New York) 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 increased inventory balances as we expand production globally and build a raw materials buffer to ensure continuity of supply during the pandemic.

Further contributing to the increase was a decrease in accounts payable (excluding amounts related to capital expenditures for our future silicon carbide device fabrication facility in Marcy, New York) while our cost of revenue for the quarter increased.

As of June 27, 2021, we had unrealized losses on our short-term investments of $0.4 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 27, 2021 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 pandemic.

We evaluate our short-term investments for expected credit losses.

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of June 27, 2021 until the investments fully recover in market value.

No allowance for credit losses was recorded as of June 27, 2021.

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

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

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

Net (decrease) increase in cash and cash equivalents ($69.8) ($51.7) $381.6 ($18.1) ($433.3)

Cash Flows from Operating Activities

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.

Net cash used in operating activities increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in net loss during the period and decreased cash provided by operating activities of discontinued operations, as well as slightly decreased working capital.

Net cash from 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.

Total cash flows from operating activities in fiscal 2021, 2020 and 2019 includes ($13.0) million, $62.6 million and $105.1 million of cash (used in) provided by operating activities of discontinued operations.

Cash Flows from Investing Activities

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.

Fiscal 2019 included $293.4 million of net purchases of short term investments as compared to a source of cash in fiscal 2018 of $200.5 million from the sale and maturity from short term investments.

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.

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).

The decrease in net cash used in investing activities in fiscal 2021 compared to fiscal 2020 was primarily due to an increase in property and equipment purchases of $340.6 million partially offset by an increase in net proceeds from short-term investments of $247.8 million, net proceeds from the sale of the LED Business of $43.7 million, net proceeds from the liquidation of our ENNOSTAR equity investment of $66.4 million and $10.7 million of property related reimbursements from the State of New York Urban Development Corporation under a Grant Disbursement Agreement (GDA).

For more details on the GDA, see Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.

Excluding the proceeds from the sale, cash used in investing activities stayed relatively flat with an increase in property and equipment purchases of $105.2 million offset by a decrease in net purchases of short term investments of $50.6 million.

Total cash used in investing activities in fiscal 2021, 2020 and 2019 includes $0.3 million, $12.4 million and $25.0 million of cash used in investing activities of discontinued operations.

For fiscal 2022, we target approximately $475.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support 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 approximately $300.0 million of expected reimbursements from the State of New York Urban Development Corporation under the GDA.

Cash Flows from Financing Activities

Net cash provided by financing activities in fiscal 2021 primarily consisted of net proceeds of $503.5 million from issuances of common stock pursuant to the exercise of employee stock options and issuances of common stock in connection with the ATM Program.

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.

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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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If interest rates were to hypothetically increase by 100 basis points, the fair value of our short-term investments would decrease by $9.8 million at June 27, 2021 and $10.9 million at June 28, 2020.

Additionally, as part of the completed LED Business Divestiture, we hold a $125 million unsecured promissory note due in August 2023.

The promissory note bears interest at the London Interbank Offered Rate (LIBOR) plus 3%.

Due to relatively low LIBOR rates as of June 27, 2021, combined with the 3% minimum interest rate of the note, a hypothetical decrease in interest rates would result in an immaterial impact to interest income as of June 27, 2021.

As of June 27, 2021, 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.

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

As of June 27, 2021 and June 28, 2020, 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 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% 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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We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our significant accounting policies are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to the consolidated financial statements included in Item 8 of this Annual Report.

Our significant accounting policies are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report.

We believe that the following are our most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments.

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The majority of our revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.

We adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606 "Revenue from Contracts with Customers" (ASC 606) on June 25, 2018 using the modified retrospective approach.

Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" and Note 4, "Revenue Recognition" for additional information related to the adoption of ASC 606.

We provide our customers with limited rights of return for non-conforming shipments and product warranty claims.

We provide our customers with limited rights of return for non-conforming shipments.

We estimate an allowance for anticipated sales returns based upon an analysis of historical sales returns and other relevant data.

We recognize an allowance for non-conforming returns at the time of sale as a reduction of product revenue.

We recognize a liability for product warranty claims at the time of sale as an increase to cost of revenue.

We adopted FASB ASC 606 "Revenue from Contracts with Customers" (ASC 606) on June 25, 2018 using the modified retrospective approach.

Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" and Note 4, "Revenue Recognition" for additional information related to the adoption of ASC 606.

For the year ended June 27, 2021, 26% of our revenue was from sales to distributors.

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Actual results may vary and could have a significant impact on our operating results.

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

This practice is known as price protection.

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

Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within our standard commercial terms.

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

In addition, we run sales incentive programs with certain distributors, such as product rebates.

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.

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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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For example, we adjust for items that are considered obsolete based upon changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product.

In addition, our international sales and purchases are subject to numerous United States and foreign laws and regulations which may limit or restrict our sales and shipments to foreign customers.

Any adjustment to our inventories as a result of an estimated obsolescence or net realizable condition is reflected as a component of our cost of revenue.

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Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock option and Employee Stock Purchase Plan (ESPP) awards.

We currently use the Black-Scholes option-pricing model to estimate the fair value of our Employee Stock Purchase Plan (ESPP) awards.

The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model.

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This fair value is then amortized to compensation expense over the requisite service period or vesting term.

As of June 27, 2021, we have $73.4 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.88 years.

We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

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The assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this recognition as compensation expense is adjusted to reflect instruments that actually vest.

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

Long-Lived Assets

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If so, an impairment loss is measured and recognized.

After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established.

Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.

Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets.

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

For example, we recognized an impairment to assets held for sale associated with the LED Business Divestiture of $19.5 million during the second fiscal quarter of 2021.

After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established.

Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.

Government Grant Disbursements

Government grant disbursements are recognized when there is reasonable assurance that:

(1) we will comply with the relevant conditions and (2) the grant disbursement will be received.

We receive grant disbursements from the State of New York Development Corporation relating to property, plant and equipment purchases in connection with our construction of a new silicon carbide device fabrication facility in Marcy, New York.

Grant disbursements are recorded as a reduction to the related asset(s), which then reduces depreciation expense over the expected useful life of the asset on a straight-line basis.

We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist.

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Reporting units, as defined by FASB ASC 350, “Intangibles - Goodwill and Other”, may be operating segments as a whole or an operation one level below an operating segment, referred to as a component.

We have determined that our reporting units are our two operating and reportable seg ments.

We have determined that we operate as one operating and reportable seg ment.

We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit’s carrying value is greater than its fair value.

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We derive a reporting unit ’ s fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis).

The income approach utilizes a discount rate from the capital asset pricing model.

If all reporting units are analyzed during the goodwill impairment test, their respective fair values are reconciled back to our consolidated market capitalization.

The market and income approaches require significant judgment, including estimation of future revenues, gross margins, and operating expenses, which are dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the reporting unit’s performance relative to peer competitors, the estimation of the long-term revenue growth rate and discount rate from the capital asset pricing model and the determination of our weighted average cost of capital.

Changes in these estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge.

The fair values are reconciled back to our consolidated market capitalization.

If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred.

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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