Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )
47
Consolidated Balance Sheets as of June 25, 2023 and June 26, 2022
49
Consolidated Statements of Operations for the years ended June 25, 2023, June 26, 2022 and June 27, 2021
50
Consolidated Statements of Comprehensive Loss for the years ended June 25, 2023, June 26, 2022 and June 27, 2021
51
Consolidated Statements of Cash Flows for the years ended June 25, 2023, June 26, 2022 and June 27, 2021
52
Consolidated Statements of Shareholders’ Equity for the years ended June 25, 2023, June 26, 2022 and June 27, 2021
53
Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Wolfspeed, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Wolfspeed, Inc. and its subsidiaries (the “Company”) as of June 25, 2023 and June 26, 2022, and the related consolidated statements of operations, comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended June 25, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 25, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 25, 2023 and June 26, 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 25, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 25, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principle
As discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible debt on June 27, 2022.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
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company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserves for Distributor Programs - Ship and Debit
As described in Note 2 to the consolidated financial statements, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within the Company’s standard commercial terms. Certain distributors are provided customer pricing arrangements under the Company’s “ship and debit” program. Distributor sales approximate a third of total net revenue of $921.9 million for the year ended June 25, 2023. Management makes estimates of changes in selling prices when the corresponding product ships. These estimates are calculated based upon historical experience, product shipment analysis, current economic conditions, on-hand inventory at the distributor, and customer contractual arrangements. Accordingly, estimates for these rights are recognized at the time of sale as a contract liability and a reduction of product revenue. The associated reserves for ship and debit program to distributors make up a significant portion of the accrued contract liabilities account balance of $43.0 million.
The principal considerations for our determination that performing procedures relating to ship and debit reserves for distributor programs is a critical audit matter are the high degree of auditor effort in performing procedures and evaluating management’s significant assumptions related to current economic conditions, historical experience and on-hand inventory at the distributor.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate of the reserves for the ship and debit program. These procedures also included, among others (i) testing management’s process for determining the estimate for ship and debit reserve, (ii) testing the completeness and accuracy of data inputs to the ship and debit reserve calculation, and (iii) evaluating the reasonableness of the significant assumptions used by management related to current economic conditions, historical experience and on-hand inventory at the distributor. Evaluating management’s significant assumptions related to current economic conditions, historical experience and on-hand inventory at the distributor involved evaluating whether the significant assumptions used by management were reasonable considering management’s historical claim experience and whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
August 23, 2023
We have served as the Company’s auditor since 2013.
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WOLFSPEED, INC.
CONSOLIDATED BALANCE SHEETS
June 25, 2023 June 26, 2022
in millions of U.S. Dollars, except share data in thousands
Assets
Current assets:
Cash and cash equivalents $ 1,757.0 $ 449.5
Short-term investments 1,197.9 749.3
Total cash, cash equivalents and short-term investments 2,954.9 1,198.8
Accounts receivable, net 154.8 150.2
Inventories 327.5 227.0
Income taxes receivable 0.8 1.3
Prepaid expenses 36.8 32.1
Other current assets 131.7 151.4
Current assets held for sale — 1.6
Total current assets 3,606.5 1,762.4
Property and equipment, net 2,191.4 1,481.1
Goodwill 359.2 359.2
Intangible assets, net 115.9 125.4
Long-term receivables 2.6 104.7
Deferred tax assets 1.2 1.0
Other assets 309.9 83.7
Total assets $ 6,586.7 $ 3,917.5
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 536.9 $ 307.7
Accrued contract liabilities 43.0 37.0
Income taxes payable 9.6 11.6
Finance lease liabilities 0.5 0.5
Other current liabilities 37.9 31.7
Total current liabilities 627.9 388.5
Long-term liabilities:
Long-term debt 1,149.5 —
Convertible notes, net 3,025.6 1,021.6
Deferred tax liabilities 3.9 3.2
Finance lease liabilities - long-term 9.2 9.6
Other long-term liabilities 148.7 55.3
Total long-term liabilities 4,336.9 1,089.7
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $ 0.01 ; 3,000 shares authorized at June 25, 2023 and June 26, 2022; none issued and outstanding
— —
Common stock, par value $ 0.00125 ; 200,000 shares authorized at June 25, 2023 and June 26, 2022; 124,794 and 123,795 shares issued and outstanding at June 25, 2023 and June 26, 2022, respectively
0.2 0.2
Additional paid-in-capital 3,711.0 4,228.4
Accumulated other comprehensive loss ( 25.1 ) ( 25.3 )
Accumulated deficit ( 2,064.2 ) ( 1,764.0 )
Total shareholders’ equity 1,621.9 2,439.3
Total liabilities and shareholders’ equity $ 6,586.7 $ 3,917.5
The accompanying notes are an integral part of the consolidated financial statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
in millions of U.S. Dollars, except share data
Revenue, net $ 921.9 $ 746.2 $ 525.6
Cost of revenue, net 642.4 496.9 361.0
Gross profit 279.5 249.3 164.6
Operating expenses:
Research and development 225.4 196.4 177.8
Sales, general and administrative 235.3 203.5 181.6
Factory start-up costs 160.2 70.0 8.0
Amortization or impairment of acquisition-related intangibles 10.9 13.6 14.5
Abandonment of long-lived assets — — 73.9
Loss (gain) on disposal or impairment of other assets 2.0 ( 0.3 ) 1.6
Other operating expense 26.3 13.9 21.1
Operating loss ( 380.6 ) ( 247.8 ) ( 313.9 )
Non-operating (income) expense, net ( 52.1 ) 38.3 26.3
Loss before income taxes ( 328.5 ) ( 286.1 ) ( 340.2 )
Income tax expense 1.4 9.0 1.1
Net loss from continuing operations ( 329.9 ) ( 295.1 ) ( 341.3 )
Net income (loss) from discontinued operations — 94.2 ( 181.2 )
Net loss ( 329.9 ) ( 200.9 ) ( 522.5 )
Net income from discontinued operations attributable to noncontrolling interest — — 1.4
Net loss attributable to controlling interest ($ 329.9 ) ($ 200.9 ) ($ 523.9 )
Basic and diluted loss per share
Continuing operations ($ 2.65 ) ($ 2.46 ) ($ 3.04 )
Net loss attributable to controlling interest ($ 2.65 ) ($ 1.67 ) ($ 4.66 )
Weighted average shares - basic and diluted (in thousands) 124,374 120,120 112,346
The accompanying notes are an integral part of the consolidated financial statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Fiscal Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
in millions of U.S. Dollars
Net loss ($ 329.9 ) ($ 200.9 ) ($ 522.5 )
Other comprehensive income (loss):
Reclassification of currency translation gain to loss on sale of discontinued operations — — ( 9.5 )
Net unrealized gain (loss) on available-for-sale securities 0.2 ( 28.0 ) ( 3.8 )
Comprehensive loss ( 329.7 ) ( 228.9 ) ( 535.8 )
Net income from discontinued operations attributable to noncontrolling interest — — 1.4
Comprehensive loss attributable to controlling interest ($ 329.7 ) ($ 228.9 ) ($ 537.2 )
The accompanying notes are an integral part of the consolidated financial statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
in millions of U.S. Dollars June 25, 2023 June 26, 2022 June 27, 2021
Operating activities:
Net loss ($ 329.9 ) ($ 200.9 ) ($ 522.5 )
Net income (loss) from discontinued operations — 94.2 ( 181.2 )
Net loss from continuing operations ( 329.9 ) ( 295.1 ) ( 341.3 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 164.0 129.8 120.9
Amortization of debt issuance costs and discount, net of non-cash capitalized interest 7.5 20.1 32.8
Loss on extinguishment of debt — 24.8 —
Stock-based compensation 81.9 60.9 53.2
Abandonment of long-lived assets — — 73.9
Loss on disposal or impairment of long-lived assets, including loss on disposal portion of factory optimization and start-up costs 3.8 1.0 5.0
Amortization of (premium) discount on investments, net ( 4.7 ) 6.1 6.9
Realized gain on sale of investments — ( 0.3 ) ( 0.4 )
Gain on equity investment — — ( 8.3 )
Foreign exchange gain on equity investment — — ( 2.2 )
Deferred income taxes 0.5 0.7 0.9
Changes in operating assets and liabilities:
Accounts receivable, net ( 4.6 ) ( 54.3 ) ( 23.5 )
Inventories ( 97.5 ) ( 68.8 ) ( 44.6 )
Prepaid expenses and other assets ( 18.5 ) ( 0.4 ) ( 20.0 )
Accounts payable, trade 30.0 29.2 21.7
Accrued salaries and wages and other liabilities ( 1.1 ) ( 10.5 ) 15.3
Accrued contract liabilities 26.0 2.6 ( 2.8 )
Net cash used in operating activities of continuing operations ( 142.6 ) ( 154.2 ) ( 112.5 )
Net cash used in operating activities of discontinued operations — — ( 13.0 )
Cash used in operating activities ( 142.6 ) ( 154.2 ) ( 125.5 )
Investing activities:
Purchases of property and equipment ( 955.8 ) ( 644.9 ) ( 570.5 )
Purchases of patent and licensing rights ( 6.5 ) ( 5.7 ) ( 5.9 )
Proceeds from sale of property and equipment, including insurance proceeds 1.7 3.1 2.3
Purchases of short-term investments ( 1,191.0 ) ( 475.0 ) ( 475.0 )
Proceeds from maturities of short-term investments 637.2 242.3 428.3
Proceeds from sale of short-term investments 110.1 225.2 51.7
Reimbursement of property and equipment purchases from long-term incentive agreement 155.5 139.0 10.7
Proceeds from sale of business resulting from the receipt of transaction related note receivable 101.8 125.0 43.7
Proceeds from sale of long-term investment — — 66.4
Net cash used in investing activities of continuing operations ( 1,147.0 ) ( 391.0 ) ( 448.3 )
Net cash used in investing activities of discontinued operations — — ( 0.3 )
Cash used in investing activities ( 1,147.0 ) ( 391.0 ) ( 448.6 )
Financing activities:
Proceeds from long-term debt borrowings 1,200.0 20.0 30.0
Proceeds from convertible notes 1,750.0 750.0 —
Payments of debt issuance costs ( 82.1 ) ( 17.7 ) —
Cash paid for capped call transactions ( 273.9 ) ( 108.2 ) —
Proceeds from issuance of common stock 23.8 22.4 539.7
Tax withholding on vested equity awards ( 19.2 ) ( 29.1 ) ( 36.2 )
Payments on long-term debt borrowings, including finance lease obligations ( 0.5 ) ( 20.5 ) ( 30.4 )
Incentive-related escrow refunds — — 1.5
Commitment fees on long-term incentive agreement ( 1.0 ) ( 1.0 ) ( 0.5 )
Cash provided by financing activities 2,597.1 615.9 504.1
Effects of foreign exchange changes on cash and cash equivalents — ( 0.2 ) 0.2
Net change in cash and cash equivalents 1,307.5 70.5 ( 69.8 )
Cash and cash equivalents, beginning of period 449.5 379.0 448.8
Cash and cash equivalents, end of period $ 1,757.0 $ 449.5 $ 379.0
The accompanying notes are an integral part of the consolidated financial statements
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WOLFSPEED, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Equity - Controlled Interest Non-controlling Interest from Discontinued Operations Total Equity
Number
of Shares
Par
Value
Share data in thousands, U.S. Dollar information in millions
Balance at June 28, 2020 109,230 $ 0.1 $ 3,106.2 ($ 1,039.2 ) $ 16.0 $ 2,083.1 $ 6.1 $ 2,089.2
Net (loss) income — — — ( 523.9 ) — ( 523.9 ) 1.4 ( 522.5 )
Reclassification of currency translation gain to loss on sale of discontinued operations — — — — ( 9.5 ) ( 9.5 ) — ( 9.5 )
Unrealized loss on available-for-sale securities — — — — ( 3.8 ) ( 3.8 ) — ( 3.8 )
Tax withholding on vested equity awards — — ( 36.2 ) — — ( 36.2 ) — ( 36.2 )
Stock-based compensation — — 67.1 — — 67.1 — 67.1
Exercise of stock options and issuance of shares 2,238 — 50.6 — — 50.6 — 50.6
Issuance of shares under the at-the-market offering program, net of issuance costs 4,223 — 489.1 — — 489.1 — 489.1
Reclassification of noncontrolling interest to loss on sale of discontinued operations — — — — — — ( 7.5 ) ( 7.5 )
Balance at June 27, 2021 115,691 $ 0.1 $ 3,676.8 ($ 1,563.1 ) $ 2.7 $ 2,116.5 $ — $ 2,116.5
Net loss — — — ( 200.9 ) — ( 200.9 ) — ( 200.9 )
Unrealized loss on available-for-sale securities — — — — ( 28.0 ) ( 28.0 ) — ( 28.0 )
Tax withholding on vested equity awards — — ( 29.1 ) — — ( 29.1 ) — ( 29.1 )
Stock-based compensation — — 62.8 — — 62.8 — 62.8
Exercise of stock options and issuance of shares 978 — 22.4 — — 22.4 — 22.4
Issuance of shares related to the extinguishment of convertible notes due September 1, 2023 7,126 0.1 416.1 — — 416.2 — 416.2
Issuance of convertible notes due February 15, 2028 — — 187.6 — — 187.6 — 187.6
Capped call transactions related to the issuance of convertible notes due February 15, 2028 — — ( 108.2 ) — — ( 108.2 ) — ( 108.2 )
Balance at June 26, 2022 123,795 $ 0.2 $ 4,228.4 ($ 1,764.0 ) ($ 25.3 ) $ 2,439.3 $ — $ 2,439.3
Net loss — — — ( 329.9 ) — ( 329.9 ) — ( 329.9 )
Unrealized gain on available-for-sale securities — — — — 0.2 0.2 — 0.2
Tax withholding on vested equity awards — — ( 19.2 ) — — ( 19.2 ) — ( 19.2 )
Stock-based compensation — — 84.9 — 84.9 — 84.9
Exercise of stock options and issuance of shares 999 — 23.8 — — 23.8 — 23.8
Adoption of ASU 2020-06 — — ( 333.0 ) 29.7 — ( 303.3 ) — ( 303.3 )
Capped call transactions related to the issuance of convertible notes due December 1, 2029 — — ( 273.9 ) — — ( 273.9 ) — ( 273.9 )
Balance at June 25, 2023 124,794 $ 0.2 $ 3,711.0 ($ 2,064.2 ) ($ 25.1 ) $ 1,621.9 $ — $ 1,621.9
The accompanying notes are an integral part of the consolidated financial statements.
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WOLFSPEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Business
55
Note 2
Basis of Presentation and Summary of Significant Accounting Policies
55
Note 3
Discontinued Operations
63
Note 4
Revenue Recognition
65
Note 5
Leases
66
Note 6
Financial Statement Details
68
Note 7
Investments
72
Note 8
Fair Value of Financial Instruments
74
Note 9
Goodwill and Intangible Assets
75
Note 10
Long-term Debt
76
Note 11
Shareholders' Equity
82
Note 12
Loss Per Share
83
Note 13
Stock-Based Compensation
83
Note 14
Income Taxes
86
Note 15
Commitments and Contingencies
90
Note 16
Concentrations of Credit Risk
91
Note 17
Subsequent Events
92
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Note 1 – Business
Overview
Wolfspeed, Inc. (the Company) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications. The Company’s product families include silicon carbide and GaN materials, power devices and RF devices targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense. As discussed more fully below in Note 17, “Subsequent Events,” on August 22, 2023, the Company entered into a definitive agreement to sell certain assets and subsidiaries comprising its RF products lines.
The Company’s materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. The Company’s materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, California and Arkansas. The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. Additionally, the Company recently opened its silicon carbide device fabrication facility in New York. The Company operates research and development facilities in North Carolina, California, Arkansas, Arizona and New York.
Wolfspeed, Inc. is a North Carolina corporation established in 1987, and its headquarters are in Durham, North Carolina.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company’s fiscal year is a 52 or 53-week period ending on the last Sunday in the month of June. The Company’s 2023, 2022 and 2021 fiscal years were 52-week fiscal years. The Company's 2024 fiscal year will be a 53-week fiscal year. The next 53-week fiscal year will be for the Company's 2030 fiscal year.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or shareholders’ equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, valuation of inventories, tax related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Segment Information
The Company operates as a single reporting segment. Accordingly, the Chief Operating Decision Maker (CODM) allocates resources and assesses performance on a consolidated basis. The Company's identified CODM is the Chief Executive Officer.
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Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted cash accounts and highly liquid investments with an original maturity of three months or less when purchased. Cash and cash equivalents are stated at cost, which approximates fair value. The Company holds cash and cash equivalents at several major financial institutions, which often exceed insurance limits set by the Federal Deposit Insurance Corporation (FDIC). The Company has not historically experienced any losses due to such concentration of credit risk.
Accounts Receivable
For product revenue, the Company typically invoices its customers at the time of shipment for the sales order value of products shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers.
Allowance for Doubtful Accounts
Expected credit losses for the Company's receivables are evaluated on a collective (pool) basis and aggregated on the basis of similar risk characteristics. These aggregated risk pools are reassessed at each measurement date. A combination of factors is considered in determining the appropriate estimate of expected credit losses, including broad-based economic indicators as well as customers' financial strength, credit standing, payment history and any historical defaults.
Investments
Investments in certain securities may be classified into three categories:
• Held-to-Maturity – Debt securities that the entity has the positive intent and ability to hold to maturity, which are reported at amortized cost.
• Trading – Debt securities that are bought and held principally for the purpose of selling in the near term, which are reported at fair value, with unrealized gains and losses included in earnings.
• Available-for-Sale – Debt securities not classified as either held-to-maturity or trading securities, which are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity. However, as explained further below, the Company evaluates each individual security in an unrealized loss position for expected credit losses and if it is evaluated as having an expected credit loss, unrealized losses of that security are included in earnings.
The Company reassesses the appropriateness of the classification (i.e., held-to-maturity, trading or available-for-sale) of its investments at the end of each reporting period.
Available-for-sale debt securities in an unrealized loss position at each measurement date are individually evaluated for expected credit losses. The Company evaluates whether the unrealized loss is due to market factors or changes in the investment holdings' credit rating. An expected credit loss will be recorded when an investment in an unrealized loss position is determined to have lost value from a decreased credit rating. The Company does not record an allowance for credit losses on receivables related to accrued interest. For the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, no allowance for credit losses was recorded.
The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains and losses on the sale of investments are reported in non-operating (income) expense, net in the consolidated statements of operations. Unrealized gains and losses are included as a separate component of equity, net of tax, unless the Company determines there is an expected credit loss.
Investments in marketable securities with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
Fair Value of Financial Instruments
The Company performs recurring fair value measurements for its cash equivalents and short-term investments, as discussed further in Note 8, "Fair Value of Financial Instruments." In addition, cash, accounts and interest receivable, accounts payable and other liabilities approximate their fair values at June 25, 2023 and June 26, 2022 due to the short-term nature of these instruments.
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Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) method or an average cost method. The Company writes down its inventory balances for estimates of excess and obsolete amounts. These write-downs are recognized as a component of cost of revenue.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the assets’ estimated useful lives. Leasehold improvements are amortized over the lesser of the asset life or the term of the related lease. In general, the Company’s policy for useful lives is as follows:
Furniture and fixtures 5 years
Buildings and building improvements 5 to 40 years
Machinery and equipment 3 to 15 years
Vehicles 5 years
Computer hardware/software 3 to 5 years
Leasehold improvements Shorter of estimated useful life or lease term
Expenditures for repairs and maintenance are charged to expense as incurred. The costs for major renewals and improvements are capitalized and depreciated over their estimated useful lives. The cost and related accumulated depreciation of the assets are removed from the accounts upon disposition and any resulting gain or loss is reflected in operating income.
The Company considers a long-lived asset to be abandoned after the Company has ceased use of such asset and there is no longer intent to use or repurpose the asset in the future. Abandoned long-lived assets are recorded at their salvage value, if any.
Government Assistance Programs and Incentives
The Company receives, or expects to receive in the future, various types of government assistance, primarily in the form of grants, refundable tax credits, property tax reimbursements and sales tax exemptions. Government assistance is recognized when there is reasonable assurance that: (1) the Company will comply with the relevant conditions and (2) the assistance will be received. Government assistance related to reimbursing fixed asset purchases, such as reimbursement grants and refundable federal investment tax credits, 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.
Silicon Carbide Device Facility in Marcy, New York
The Company receives government grants from the State of New York Urban Development Corporation to partially or fully reimburse the Company for certain property, plant and equipment purchases in connection with its construction of a new silicon carbide device fabrication facility in Marcy, New York. To receive these grants, the Company must comply with a number of objectives outlined in the related grant disbursement agreement, as outlined in Note 15, "Commitments and Contingencies". Grant amounts already received are subject to clawback provisions if the Company does not satisfy the agreement's outlined objectives.
As of June 25, 2023, the Company has reduced property and equipment, net by $ 399.1 million as a result of expected and received reimbursements from the State of New York Urban Development Corporation, of which $ 305.2 million has been received in cash and an additional $ 93.9 million in receivables are recorded in other current assets and in other assets in the consolidated balance sheet. The Company started receiving cash reimbursements in the fourth quarter of fiscal 2021.
Manufacturing Facility in Siler City, North Carolina
In connection with the construction of a planned materials manufacturing facility in Siler City, North Carolina, the Company expects to receive a long-term incentive package from state, county and local governments, primarily in the form of property tax reimbursements and sales tax exemptions on purchased machinery and equipment. In order to receive property tax reimbursements, the Company is required to comply with investment and job targets. The facility is under construction and the Company anticipates beginning to recognize incentives starting in fiscal 2024.
U.S. CHIPS and Science Act of 2022 (the CHIPS Act)
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The Company expects to receive refundable federal investment tax credits and capital grants through the CHIPS Act in connection with ongoing expansion projects. As of June 25, 2023, the Company has reduced property and equipment, net by $ 167.4 million as a result of expected refundable tax credits in connection with the CHIPS Act.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenue, net in the consolidated statements of operations and are recognized as a period expense during the period in which they are incurred.
Goodwill and Intangible Assets
The Company recognizes the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recognized as goodwill. Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, estimating future cash flows from product revenue, developing appropriate discount rates, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
Goodwill
The Company recognizes goodwill as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment at least annually as of the first day of its fiscal fourth quarter, or when indications of potential impairment exist. The Company monitors for the existence of potential impairment indicators throughout the fiscal year.
The Company conducts impairment testing for goodwill at the reporting unit level. Reporting units may be operating segments as a whole, or an operation one level below an operating segment, referred to as a component. The Company has determined that it has one reporting unit, Wolfspeed.
The Company may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit’s carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit ’ s expected future cash flows; a sustained, significant decline in the Company ’ s stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates; as well as changes in management, key personnel, strategy and customers . If the Company's qualitative assessment indicates it is more likely than not that the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the Company performs a quantitative goodwill impairment test to determine if goodwill is impaired. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds the carrying value of the net assets associated with the reporting unit, goodwill is not considered impaired. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit's goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit. The Company derives a reporting unit ’ s fair value through a combination of the market approach (guideline transaction method and guideline public company method) and the income approach (a discounted cash flow analysis). The income approach utilizes a discount rate from a capital asset pricing model. The fair value is reconciled back to the Company ’ s consolidated market capitalization.
Finite-Lived Intangible Assets
U.S. GAAP requires that intangible assets, other than goodwill and indefinite-lived intangibles, must be amortized over their useful lives. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from 10 to 15 years.
Patent rights reflect costs incurred by the Company in applying for and maintaining patents owned by the Company and costs incurred in purchasing patents and related rights from third parties. Licensing rights reflect costs incurred by the Company in acquiring licenses under patents owned by others. The Company amortizes both on a straight-line basis over the expected useful life of the associated patent rights, which is generally the lesser of 20 years from the date of the patent application or the license period. Royalties payable under licenses for patents owned by others are generally expensed as incurred. The Company reviews its capitalized patent portfolio and recognizes impairment charges when circumstances warrant, such as when patents have been abandoned or are no longer being pursued.
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Long-Lived Assets
The Company reviews long-lived assets such as property and equipment for impairment based on changes in circumstances that indicate their carrying amounts may not be recoverable. In making these determinations, the Company uses certain assumptions, including but not limited to: (1) estimations of the fair market value of the assets and (2) estimations of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated salvage values.
Contingent Liabilities
The Company recognizes contingent liabilities when it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both these conditions if there is a reasonable possibility that a loss may have been incurred. See Note 15, “Commitments and Contingencies,” for a discussion of loss contingencies in connection with pending and threatened litigation. The costs of defending legal claims against the Company are expensed as incurred.
Revenue Recognition
Revenue is recognized when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. Substantially all of the Company's revenue is derived from product sales. Revenue is recognized at a point in time based on the Company’s evaluation of when the customer obtains control of the products, and all performance obligations under the terms of the contract are satisfied. If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred based on the contract and shipping terms, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied. Sales of products typically do not include more than one performance obligation.
A portion of the Company’s products are sold through distributors. Distributors stock inventory and sell the Company’s products to their own customer base, which may include: value added resellers; manufacturers who incorporate the Company’s products into their own manufactured goods; or ultimate end users of the Company’s products. The Company recognizes revenue upon shipment of its products to its distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model as opposed to a “sell-through” or “point-of-sale” model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.
Master supply or distributor agreements are in place with some of the Company's customers and contain terms and conditions including, but not limited to, payment, delivery, incentives and warranty. These agreements sometimes require minimum purchase commitments and/or involve potential penalties to the Company if a defined supply schedule is not met. If a master supply, distributor or other similar agreement is not in place with a customer, the Company considers a purchase order, which is governed by the Company’s standard terms and conditions, to be the contract governing the relationship with that customer.
Pricing terms are negotiated independently on a stand-alone basis. Revenue is measured based on the amount of net consideration to which the Company expects to be entitled to receive in exchange for products or services. Variable consideration is recognized as a reduction of net revenue with a corresponding reserve at the time of revenue recognition, and consists primarily of sales incentives, volume discounts, price concessions and return allowances. Variable consideration is estimated based on contractual terms, historical analysis of customer purchase volumes, or historical analysis using specific data for the type of consideration being assessed.
Some of the Company’s distributors are provided limited rights that allow them to return a portion of inventory (product exchange rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under the Company’s “ship and debit” program or other targeted sales incentives. These estimates are calculated based upon historical experience, product shipment analysis, current economic conditions, on-hand inventory at the distributor, and customer contractual arrangements. The Company believes that it can reasonably and reliably estimate the allowance for distributor credits at the time of sale. Accordingly, estimates for these rights are recognized at the time of sale as a contract liability and a reduction of product revenue.
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Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within the Company’s standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling the particular part to that customer. If the Company approves an allowance and the distributor resells the product to the target customer, the Company credits the distributor according to the allowance the Company approved. These credits are applied against the reserve that the Company establishes upon initial shipment of product to the distributor.
The Company also has inventory consignment agreements in which revenue is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that the Company stores at designated locations. Delivery and transfer of control occur at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, the Company retains control over the products’ disposition, including the right to pull back or relocate the products.
From time to time, the Company may enter into licensing arrangements related to its intellectual property. Revenue from licensing arrangements is recognized when earned and estimable. The timing of revenue recognition is dependent on the terms of each license agreement. Generally, the Company will recognize non-refundable upfront licensing fees related to patent licenses immediately upon receipt of the funds if the Company has no significant future obligations to perform under the arrangement. However, the Company will defer recognition for licensing fees when the Company has significant future performance requirements, the fee is not fixed (such as royalties earned as a percentage of future revenue), or the fees are otherwise contingent.
Leases
At lease inception, the Company determines an arrangement is a lease if the contract involves the use of a distinct identified asset, the lessor does not have substantive substitution rights and the lessee obtains control of the asset throughout the period by obtaining substantially all of the economic benefit of the asset and the right to direct the use of the asset. Depending on the terms, leases are classified as either operating or finance leases, if the Company is the lessee, or as operating, sales-type or direct financing leases, if the Company is the lessor. The Company does not have any sales-type or direct financing leases. Lease agreements frequently include other services such as maintenance, electricity, security, janitorial and reception services. The Company accounts for the lease and non-lease components in its arrangements as a single lease component.
Accounting for Leases as a Lessee
Right-of-use assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Assets and liabilities are recognized based on the present value of lease payments over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The exercise of the renewal option is at the Company's sole discretion and the Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities. The Company will remeasure its lease liability and adjust the related right-of-use asset upon the occurrence of the following: lease modifications not accounted for as a separate contract; a triggering event that changes the certainty of the lessee exercising an option to renew or terminate the lease, or purchase the underlying asset; a change to the amount probable of being owed by the Company under a residual value guarantee; or the resolution of a contingency upon which the variable lease payments are based such that those payments become fixed.
Because most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company would use the implicit rate when readily determinable. Operating lease expense is generally recognized on a straight-line basis over the lease term. Finance lease assets are generally amortized over the term of the lease. If the finance lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain it will exercise an option to purchase the underlying asset, the finance lease assets are amortized on a straight-line basis over the useful life of the asset. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on the Company’s consolidated statements of operations.
Operating leases with a lease term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases in lease payments based on changes in index rates, are not included in the right-of-use assets or liabilities. These variable lease payments are expensed as incurred.
Accounting for Leases as a Lessor
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Lease income is recognized on a straight-line basis over the lease term. Variable lease payments, if any, are recognized as income in the period received. The underlying asset in an operating lease is carried at depreciated cost and is included in property and equipment.
Advertising
The Company expenses the costs of producing advertisements at the time production occurs and expenses the cost of communicating the advertising in the period in which the advertising is used. Advertising costs are included in sales, general and administrative expenses in the consolidated statements of operations and amounted to approximately $ 11.5 million, $ 7.5 million, and $ 5.1 million for the years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
Retirement Savings Plan
The Company sponsors one employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code. All U.S. employees are eligible to participate under the 401(k) Plan on the first day of a new fiscal month after the date of hire. Under the 401(k) Plan, there is no fixed dollar amount of retirement benefits; rather, the Company matches a defined percentage of employee deferrals, and employees vest in these matching funds over time. Employees choose their investment elections from a list of available investment options. During the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, the Company contributed approximately $ 12.3 million, $ 10.3 million and $ 8.0 million to the 401(k) Plan, respectively. The Pension Benefit Guaranty Corporation does not insure the 401(k) Plan.
Research and Development
Research and development expenses consist primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development activities are expensed when incurred.
Earnings/Loss Per Share
Basic earnings/loss per share is computed by dividing net income/loss by the weighted average number of shares of common stock outstanding for the applicable period. Diluted earnings per share is determined in the same manner as basic earnings/loss per share except that the impacts from interest expense and dividends on net income/loss are removed and the number of shares is increased to assume exercise of potentially dilutive stock options, nonvested restricted stock, contingently issuable shares using the treasury stock method and the potential issuance of shares in connection with the Company's convertible notes, unless the effect of such increases would be anti-dilutive. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recognized in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.
The Company’s stock-based awards can be either service-based or performance-based. Performance-based conditions may be tied to future financial and/or operating performance of the Company, external based market metrics or internal performance metrics.
For service-based restricted stock units (RSUs) and performance-based RSUs (commonly referred to as PSUs) with internal metrics, the grant-date fair value is based upon the market price of the Company’s common stock on the date of the grant. For performance-based RSUs, the Company reassesses the probability of the achievement of the performance condition at each reporting period and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. This fair value is then amortized to compensation expense over the requisite service period or vesting term.
For performance-based awards with market conditions, the Company estimates the grant date fair value using the Monte Carlo valuation model and expenses the awards over the vesting period regardless of whether the market condition is ultimately satisfied.
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The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s Employee Stock Purchase Plan (ESPP) awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.
Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
See Note 13, "Stock-based Compensation," for more information about the Company's stock-based compensation plans.
Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, valuation allowances are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Taxes payable which are not based on income are accrued ratably over the period to which they apply. For example, payroll taxes are accrued each period end based upon the amount of payroll taxes that are owed as of that date; whereas taxes such as property taxes and franchise taxes are accrued over the fiscal year to which they apply if paid at the end of a period, or they are amortized ratably over the fiscal year if they are paid in advance.
Foreign Currency Translation
All of the Company's operations have a U.S. Dollar functional currency and therefore no foreign currency translation adjustments are recognized in other comprehensive loss in the consolidated statements of comprehensive loss. The Company and its subsidiaries transact business in currencies other than the U.S. Dollar and as such, the Company experiences varying amounts of foreign currency exchange gains and losses.
Joint Venture
Effective July 17, 2017, the Company entered into a Shareholders Agreement with San’an Optoelectronics Co., Ltd. (San’an) and Cree Venture LED Company Limited (Cree Venture LED) pursuant to which the Company and San’an funded their contributions to Cree Venture LED and agreed upon the management and operation of Cree Venture LED. The Company contributed $ 5.1 million of cash for a 51 % ownership interest and San’an contributed $ 4.9 million of cash for a 49 % ownership interest.
The Company's interest in Cree Venture LED was included in the LED Business Divestiture and its related activity is classified as discontinued operations.
Supplemental Cash Flow Information
Cash paid for interest was $ 29.5 million, $ 13.1 million, and $ 14.1 million for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
Cash paid (received) for taxes, net of refunds received, was $ 2.9 million, $( 4.4 ) million and $ 11.0 million for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
Recently Adopted Accounting Pronouncements
Convertible Debt Instruments
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity
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(Subtopic 815-40). This standard simplifies the accounting for convertible instruments by eliminating the cash conversion and the beneficial conversion accounting models. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity. The update requires an entity to use the if-converted method for all convertible instruments in the diluted earnings per share calculation.
The Company adopted this standard on June 27, 2022, the first day of its 2023 fiscal year, under the modified retrospective approach. The adoption resulted in (i) a reduction of additional paid in capital by $ 333.0 million for the recombination of the equity conversion component of the convertible notes outstanding, which was initially separated and recorded in equity, (ii) an increase in the cumulative convertible note carrying value of $ 277.9 million as a result of removing previously recorded debt discounts, (iii) a decrease in property, plant and equipment for previously capitalized non-cash interest of $ 25.4 million and (iv) a decrease to beginning accumulated deficit as of June 27, 2022 of $ 29.7 million to recognize the cumulative gain on adoption. The Company did not recognize a discrete tax impact related to the opening deferred tax balances as of June 27, 2022 due to a full U.S. valuation allowance.
Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance. This standard requires entities to provide annual disclosures regarding government assistance. More specifically, the amendments in the standard improve financial reporting by requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions; (2) the accounting for those transactions; and (3) the effect of those transactions on an entity's financial statements. The Company adopted this standard on June 27, 2022 under the prospective approach.
Recently Issued Accounting Pronouncements Pending Adoption
None.
Note 3 – Discontinued Operations
On March 1, 2021, the Company completed the sale of certain assets and subsidiaries comprising its former LED Products segment to SMART Global Holdings, Inc. (SGH) and its wholly owned subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART) (the LED Business Divestiture) pursuant to the terms of the Asset Purchase Agreement (the LED Purchase Agreement), dated October 18, 2020, as amended. Pursuant to the LED Purchase Agreement, (i) the Company completed the sale to SMART of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising the Company’s former LED Products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited (Cree Huizhou), a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of the Company, and (c) the Company’s ownership interest in Cree Venture LED, the Company’s joint venture with San’an Optoelectronics Co., Ltd. (collectively, the LED Business); and (ii) SMART assumed certain liabilities related to the LED Business. The Company retained certain assets used in and pre-closing liabilities associated with the former LED Products segment.
The purchase price for the LED Business consisted of (i) a payment of $ 50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to the Company by SGH in the amount of $ 125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment between $ 2.5 million and $ 125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, also payable in the form of a unsecured promissory note of SGH (the Earnout Note), and (iv) the assumption of certain liabilities. The Purchase Price Note had a maturity date of August 15, 2023, and as explained further below, was prepaid by SGH in full pursuant to its terms, along with outstanding accrued and unpaid interest as of the payment date, in the third quarter of fiscal 2022. The Earnout Note was issued by CreeLED in the fourth quarter of 2022, had a maturity date of March 27, 2025 and as explained further below, was prepaid by CreeLED in full pursuant to its terms, in connection with the forgiveness by the Company of outstanding accrued and unpaid interest as of the payment date, in the first quarter of fiscal 2023. In fiscal 2021, the Company recognized a loss on sale of the LED Business of $ 29.1 million. The cost of selling the LED Business was $ 27.4 million, which was recognized throughout fiscal 2020 and 2021.
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In connection with the closing of the LED Business Divestiture, the Company and CreeLED also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which assigned to CreeLED certain intellectual property owned by the Company and its affiliates and licensed to CreeLED certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement (LED TSA), (iii) a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which the Company will supply CreeLED with certain silicon carbide materials and fabrication services for up to four years , and (iv) a Real Estate License Agreement (LED RELA), which will allow CreeLED to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing.
In the third quarter of fiscal 2022, the Company received an early payment for the Purchase Price Note. The principal amount of $ 125.0 million was paid in full, along with outstanding accrued interest as of the payment date.
In the fourth quarter of fiscal 2022, the Company received the Earnout Note with a principal amount of $ 101.8 million. As a result, the Company recorded a net gain of $ 94.2 million within discontinued operations, net in the consolidated statements of operations for fiscal year ended June 26, 2022. The gain recorded is net of $ 3.9 million in taxes and $ 1.2 million in transaction fees. Additionally, the amount is less a previously recorded gain of $ 2.5 million, which was recorded in fiscal 2021 as part of the total loss on sale to account for the minimum amount of the Earnout Note. In the first quarter of fiscal 2023, the Company received an early payment for the Earnout Note for the full principal amount of $ 101.8 million and the Company agreed to forgo payment by CreeLED of the outstanding accrued interest as of the payment date.
In addition to the $ 94.2 million net gain from discontinued operations recognized in fiscal year ended June 26, 2022 as a result of receiving the Earnout Note, the following table presents the financial results of the LED Business as loss from discontinued operations, net of income taxes in the Company's consolidated statements of operations for the fiscal year ended June 27, 2021:
Fiscal Year Ended
(in millions of U.S. Dollars) June 27, 2021
Revenue, net $ 272.8
Cost of revenue, net 213.3
Gross profit 59.5
Operating expenses:
Research and development 22.3
Sales, general and administrative 29.4
Goodwill impairment 112.6
Impairment on assets held for sale 19.5
Gain on disposal or impairment of long-lived assets ( 1.6 )
Other operating expense 18.7
Operating loss ( 141.4 )
Non-operating income ( 0.3 )
Loss before income taxes and loss on sale ( 141.1 )
Loss on sale 29.1
Loss before income taxes ( 170.2 )
Income tax expense 11.0
Net loss ( 181.2 )
Net income attributable to noncontrolling interest 1.4
Net loss attributable to controlling interest ($ 182.6 )
As of September 27, 2020, the Company determined it would more likely than not sell all or a portion of the assets comprising the LED Products segment below carrying value. As a result, the Company recorded an impairment to goodwill of $ 105.7 million.
As of December 27, 2020, the Company recorded an additional impairment to goodwill of $ 6.9 million and an impairment to assets held for sale associated with the LED Business Divestiture of $ 19.5 million.
For the fiscal years ended June 26, 2022 and June 27, 2021, the Company recognized $ 3.9 million and $ 11.0 million, respectively, of income tax expense related to discontinued operations, which primarily related to the foreign operations of the
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LED Business. Income tax expense related to discontinued operations for the fiscal year ended June 26, 2022 and June 27, 2021 includes $ 2.4 million and $ 4.1 million, respectively, of income tax expense related to the sale of the issued and outstanding equity interests of Cree Huizhou in the third quarter of fiscal 2021.
The income tax impact of the U.S. operations of the LED Business for all periods presented were offset with a valuation allowance as described in Note 14, "Income Taxes."
For the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, the Company recognized $ 2.4 million, $ 3.6 million and $ 1.2 million in administrative fees related to the LED RELA, respectively, none of which is included in accounts receivable, net in the consolidated balance sheets as of June 25, 2023. Fees related to the LED RELA were recorded as lease income. See Note 5, "Leases" below for additional information.
For the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, the Company recognized $ 6.0 million, $ 9.2 million and $ 4.0 million in administrative fees related to the LED TSA, respectively, of which $ 0.2 million are included in accounts receivable, net in the consolidated balance sheets as of June 25, 2023. Fees related to the LED TSA were recorded as a reduction in expense within the line item in the consolidated statements of operations in which costs were incurred.
At the inception of the Wafer Supply Agreement, the Company recorded a supply agreement liability of $ 31.0 million, none of which was outstanding as of June 25, 2023.
The Company recognized a net loss of $ 13.6 million, $ 0.8 million and $ 0.8 million in non-operating expense, net for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively, related to the Wafer Supply Agreement. A receivable of $ 1.3 million was included in other assets in the consolidated balance sheets as of June 25, 2023.
Note 4 – Revenue Recognition
The Company follows a five-step approach for recognizing revenue, consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
Contract liabilities primarily include various rights of return and customer deposits, as well as a reserve on the Company's "ship and debit" program. Contract liabilities were $ 73.8 million and $ 47.8 million as of June 25, 2023 and June 26, 2022, respectively. The increase was primarily due to increased customer reserve deposits and ship and debit reserves. Contract liabilities are recorded within accrued contract liabilities and other long-term liabilities on the consolidated balance sheets.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Incidental contract costs that are not material in context of the delivery of products are expensed as incurred. Sales commissions are expensed when the amortization period is less than one year. Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s fulfillment costs as a manufacturer consist of inventory, fixed assets, and intangible assets, all of which are accounted for under the respective guidance for those asset types.
The Company’s accounts receivable balance represents the Company’s unconditional right to receive consideration from its customers with contracts. Payments are typically due within 30 days of the completion of the performance obligation and invoicing, and therefore do not contain significant financing components.
Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue, and shipping and handling costs are treated as fulfillment activities and are included in cost of revenue in the Company’s consolidated statements of operations.
For the fiscal years ended June 25, 2023 and June 26, 2022, the Company did no t recognize any material revenue that was included in contract liabilities at the start of each respective fiscal year.
Product Line Revenue
The Company sells products from within three product lines: Power Products, silicon carbide and GaN materials (Materials Products) and RF Products. Revenue from these three product lines is as follows:
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Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Power Products $ 408.9 $ 276.4 $ 132.8
Materials Products 349.3 295.5 241.6
RF Products 163.7 174.3 151.2
Total $ 921.9 $ 746.2 $ 525.6
Geographic Information
The Company conducts business in several geographic areas. Revenue is attributed to a particular geographic region based on the shipping address for the products. Disaggregated revenue from external customers by geographic area is as follows:
For the Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
(in millions of U.S. Dollars) Revenue % Revenue % Revenue %
Europe $ 291.5 31.6 % $ 260.4 34.9 % $ 188.9 35.9 %
Hong Kong 214.1 23.2 % 162.6 21.8 % 80.7 15.4 %
Asia Pacific (excluding China and Hong Kong) 194.3 21.1 % 128.9 17.3 % 114.7 21.8 %
United States 188.6 20.5 % 142.7 19.1 % 117.3 22.3 %
China 29.6 3.2 % 48.6 6.5 % 19.4 3.7 %
Other 3.8 0.4 % 3.0 0.4 % 4.6 0.9 %
Total $ 921.9 $ 746.2 $ 525.6
Note 5 – Leases
The Company primarily leases manufacturing and office spaces. The Company also has a number of bulk gas leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, as well as non-lease components incurred with respect to actual terms rather than contractually fixed amounts. For details on the Company's lease policies, see the significant accounting policy disclosures in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies."
The Company's finance lease obligations primarily relate to contract manufacturing space in Malaysia and a 49 -year ground lease on the Company's silicon carbide device fabrication facility in New York.
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Balance Sheet
Lease assets and liabilities and the corresponding balance sheet classifications are as follows (in millions of U.S. Dollars):
Operating Leases: June 25, 2023 June 26, 2022
Right-of-use asset (1)
$ 104.6 $ 48.5
Current lease liability (2)
7.9 4.6
Non-current lease liability (3)
117.2 43.6
Total operating lease liabilities 125.1 48.2
Finance Leases:
Finance lease assets (4)
$ 9.6 $ 10.3
Current portion of finance lease liabilities 0.5 0.5
Finance lease liabilities, less current portion 9.2 9.6
Total finance lease liabilities 9.7 10.1
(1) Within other assets on the consolidated balance sheets.
(2) Within other current liabilities on the consolidated balance sheets.
(3) Within other long-term liabilities on the consolidated balance sheets.
(4) Within property and equipment, net on the consolidated balance sheets.
Statement of Operations
Operating lease expense was $ 11.0 million, $ 8.1 million and $ 5.5 million in fiscal 2023, 2022 and 2021, respectively.
Short-term lease expense was immaterial in fiscal 2023, 2022 and 2021.
Finance lease amortization was $ 0.8 million, $ 1.2 million and $ 1.0 million, and interest expense was $ 0.3 million, $ 0.3 million and $ 0.3 million, in fiscal 2023, 2022 and 2021, respectively.
Cash Flows
Cash flow information consisted of the following (1) :
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Cash (used in) provided by operating activities:
Cash paid for operating leases ($ 6.7 ) ($ 8.1 ) ($ 5.7 )
Cash received for tenant allowance on operating leases 17.8 — —
Cash paid for interest portion of financing leases ( 0.3 ) ( 0.3 ) ( 0.3 )
Cash used in financing activities:
Cash paid for principal portion of finance leases ( 0.5 ) ( 0.5 ) ( 0.4 )
(1) See Note 6, "Financial Statement Details," for non-cash activities related to leases.
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Lease Liability Maturities
Maturities of operating and finance lease liabilities as of June 25, 2023 were as follows (in millions of U.S. Dollars):
Fiscal Year Ending Operating Leases Finance Leases Total
June 30, 2024 $ 12.0 $ 0.7 $ 12.7
June 29, 2025 12.1 0.7 12.8
June 28, 2026 17.1 0.7 17.8
June 27, 2027 13.1 0.4 13.5
June 26, 2028 12.2 0.2 12.4
Thereafter 104.3 14.0 118.3
Total lease payments 170.8 16.7 187.5
Future tenant improvement allowances ( 3.7 ) — ( 3.7 )
Imputed lease interest ( 42.0 ) ( 7.0 ) ( 49.0 )
Total lease liabilities $ 125.1 $ 9.7 $ 134.8
Supplemental Disclosures
Operating Leases Finance Leases
Weighted average remaining lease term (in months) (1)
153 473
Weighted average discount rate (2)
4.33 % 2.67 %
(1) Weighted average remaining lease term of finance leases without the 49 -year ground lease is 40 months.
(2) Weighted average discount rate of finance leases without the 49 -year ground lease is 3.50 %.
Lease Income
As mentioned in Note 3, "Discontinued Operations," on March 1, 2021 and in connection with the LED Business Divestiture, the Company entered into the LED RELA pursuant to which the Company leased to CreeLED approximately 58,000 square feet of the Company’s property and certain facilities in Durham, North Carolina for a total of $ 3.6 million per year. The lease term was 24 months and expired on February 26, 2023.
In addition, the Company leases space to a third party at one of its owned facilities.
The Company recognized lease income of $ 2.5 million, $ 3.6 million and $ 1.2 million for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
The Company did no t recognize any variable lease income for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021.
Note 6 – Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consisted of the following:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Billed trade receivables $ 152.1 $ 148.0
Unbilled contract receivables 2.3 2.7
Royalties 1.1 0.7
155.5 151.4
Allowance for bad debts ( 0.7 ) ( 1.2 )
Accounts receivable, net $ 154.8 $ 150.2
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Changes in the Company’s allowance for bad debts were as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Balance at beginning of period $ 1.2 $ 0.8 $ 0.7
Current period provision change ( 0.5 ) 0.4 0.1
Write-offs, net of recoveries — — —
Balance at end of period $ 0.7 $ 1.2 $ 0.8
Inventories
Inventories consisted of the following:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Raw material $ 101.8 $ 60.2
Work-in-progress 200.4 135.9
Finished goods 25.3 30.9
Inventories $ 327.5 $ 227.0
Other Current Assets
Other current assets consisted of the following:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Reimbursement receivable on long-term incentive agreement $ 91.3 $ 132.5
Accrued interest receivable 10.1 5.9
Short-term deposit on long-term incentive agreement 10.0 —
Insurance deposit 6.3 —
VAT receivables 4.8 0.2
Inventory related to the Wafer Supply Agreement 3.9 3.9
Other receivables 2.2 2.2
Receivable on the Wafer Supply Agreement 1.3 2.7
Other 1.8 4.0
Other current assets $ 131.7 $ 151.4
Property and Equipment, net
Property and equipment, net consisted of the following:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Machinery and equipment $ 1,333.4 $ 1,167.3
Land and buildings 966.4 407.4
Computer hardware/software 76.5 61.9
Furniture and fixtures 8.1 8.0
Leasehold improvements and other 14.5 11.0
Vehicles 0.6 0.6
Finance lease assets 9.6 10.3
Construction in progress 873.5 802.3
Property and equipment, gross 3,282.6 2,468.8
Accumulated depreciation ( 1,091.2 ) ( 987.7 )
Property and equipment, net $ 2,191.4 $ 1,481.1
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Depreciation of property and equipment totaled $ 148.1 million, $ 100.4 million and $ 100.5 million for the years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
During the years ended June 25, 2023, June 26, 2022 and June 27, 2021, the Company recognized approximately $ 3.7 million, $ 1.0 million and $ 4.3 million, respectively, as losses on disposals or impairments of property and equipment of which $ 1.8 million, $ 1.3 million, and $ 3.4 million are related to the Company's start-up and factory optimization activities and are reflected in other operating expense for the years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively. The remaining amount of these charges are reflected in loss on disposal or impairment of other assets in the consolidated statements of operations.
The majority of the Company's property and equipment, net is in the United States. As of June 25, 2023 and June 26, 2022, the Company held $ 66.5 million and $ 58.6 million, respectively, of property and equipment, net outside of the United States, primarily related to assets held at contract manufacturing space in Malaysia.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Accounts payable, trade $ 44.9 $ 57.8
Accrued salaries and wages 66.3 80.6
Accrued property and equipment 328.4 132.1
Accrued expenses 97.3 37.2
Accounts payable and accrued expenses $ 536.9 $ 307.7
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Other Operating Expense
The following table summarizes the components of other operating expense:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Project, transformation and transaction costs 22.9 6.6 7.3
Factory optimization restructuring costs (1)
— 6.1 7.6
Severance costs 3.4 1.2 6.2
Other operating expense $ 26.3 $ 13.9 $ 21.1
(1) Factory optimization restructuring costs relate to the Company's multi-year factory optimization restructuring plan, which was implemented in connection with the Company's expansion activities between fiscal 2019 and fiscal 2022. As part of the factory optimization restructuring plan, the Company incurred restructuring charges associated with the movement of equipment as well as disposals on certain long-lived assets. The factory optimization restructuring plan concluded in fiscal 2022.
Non-Operating Expense (Income), net
The following table summarizes the components of non-operating expense (income), net:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Interest income ($ 58.2 ) ($ 11.8 ) ($ 10.1 )
Interest expense, net of capitalized interest 42.6 25.1 45.4
Gain on arbitration proceedings (1)
( 50.3 ) — —
Loss on debt extinguishment (2)
— 24.8 —
Gain on equity investment — — ( 8.3 )
Loss on Wafer Supply Agreement 13.6 0.8 0.8
Gain on sale of investments, net — ( 0.3 ) ( 0.4 )
Other, net 0.2 ( 0.3 ) ( 1.1 )
Non-operating (income) expense, net ($ 52.1 ) $ 38.3 $ 26.3
(1) In the first quarter of fiscal 2023, the Company received an arbitration award in relation to a former customer failing to fulfill contractual obligations to purchase a certain amount of product over a period of time. In the second quarter of fiscal 2023, a final payment, net of legal fees, was received. The arbitration award is recognized as non-operating income, net of legal fees incurred.
(2) As discussed further in Note 10, "Long-term Debt," in the second quarter of fiscal 2022, all outstanding 2023 Notes (as defined below) were surrendered for conversion, resulting in the settlement of all outstanding 2023 Notes in shares, with fractional shares paid in cash.
Accumulated Other Comprehensive (Loss) Income, net of taxes
Accumulated other comprehensive (loss) income, net of taxes, consisted of $ 25.1 million of net unrealized losses on available-for-sale securities and $ 25.3 million of net unrealized gains on available-for-sale securities as of June 25, 2023 and June 26, 2022, respectively. Amounts for both periods include a $ 2.4 million loss related to tax on unrealized loss on available-for-sale securities.
Reclassifications Out of Accumulated Other Comprehensive Income
The Company reclassified a net loss of less than $ 0.1 million and a net gain of $ 0.3 million and $ 0.4 million on available for sale securities out of accumulated other comprehensive income for the fiscal years ended June 25, 2023, June 26, 2022, and June 27, 2021, respectively. Amounts were reclassified to non-operating expense (income), net on the consolidated statements of operations.
Additionally, in fiscal 2021, $ 9.5 million of currency translation gain related to the former LED Products segment was reclassified out of accumulated other comprehensive income and recognized in the consolidated statements of operations as part of the loss on sale of discontinued operations.
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Statements of Cash Flows - non-cash activities
Fiscal Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
Lease asset and liability additions $ 63.8 $ 39.0 $ 7.9
Lease asset and liability modifications, net 0.5 8.6 1.7
Transfer of finance lease liability to accounts payable and accrued expenses (1)
— — 4.2
Receivables for property, plant and equipment related insurance proceeds — — 1.9
Settlement of 2023 Notes in shares of common stock (2)
— 416.1 —
Decrease in property, plant and equipment from investment tax credit receivables 167.4 — —
Decrease in property, plant and equipment from long-term incentive related receivables 114.0 119.0 16.4
Accrued property and equipment as of the fiscal year end date 328.4 132.1 248.3
(1) In the first quarter of fiscal 2021, the Company executed the available bargain purchase option for certain finance leases relating to property and equipment, net, in order to purchase the assets.
(2) As discussed further in Note 10, "Long-term Debt," in the second quarter of fiscal 2022, all outstanding 0.875 % convertible senior notes due September 1, 2023 (the 2023 Notes) were surrendered for conversion, resulting in the settlement of all outstanding 2023 Notes in shares, with fractional shares paid in cash.
Note 7 – Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, commercial paper, certificates of deposit, and variable rate demand notes. All short-term investments are classified as available-for-sale. The Company did not have any long-term investments as of June 25, 2023 and June 26, 2022.
Short-term investments as of June 25, 2023 consist of the following:
June 25, 2023
(in millions of U.S. Dollars) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Credit Loss Allowance Estimated Fair Value
Corporate bonds $ 512.3 $ — ($ 16.7 ) $ — $ 495.6
U.S. treasury securities 261.8 — ( 1.4 ) — 260.4
Municipal bonds 179.7 — ( 4.4 ) — 175.3
Certificates of deposit 112.3 — — — 112.3
U.S. agency securities 77.0 — ( 0.2 ) — 76.8
Commercial paper 50.2 — — — 50.2
Variable rate demand notes 27.3 — — — 27.3
Total short-term investments $ 1,220.6 $ — ($ 22.7 ) $ — $ 1,197.9
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The following table presents the gross unrealized losses and estimated fair value of the Company’s short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position:
June 25, 2023
Less than 12 Months Greater than 12 Months Total
(in millions of U.S. Dollars) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Corporate bonds $ 151.5 ($ 0.5 ) $ 324.1 ($ 16.2 ) $ 475.6 ($ 16.7 )
U.S. treasury securities 229.3 ( 0.5 ) 31.1 ( 0.9 ) 260.4 ( 1.4 )
Municipal bonds 61.4 ( 0.4 ) 105.9 ( 4.0 ) 167.3 ( 4.4 )
U.S. agency securities 74.8 ( 0.2 ) 2.0 — 76.8 ( 0.2 )
Commercial Paper 3.9 — — — 3.9 —
Total $ 520.9 ($ 1.6 ) $ 463.1 ($ 21.1 ) $ 984.0 ($ 22.7 )
Number of securities with an unrealized loss 95 234 329
Short-term investments as of June 26, 2022 consist of the following:
June 26, 2022
(in millions of U.S. Dollars) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Credit Loss Allowance Estimated Fair Value
Corporate bonds 465.8 — ( 17.8 ) — 448.0
Municipal bonds 166.5 0.1 ( 4.4 ) — 162.2
Variable rate demand notes 69.4 — — — 69.4
U.S. treasury securities 66.5 — ( 0.7 ) — 65.8
U.S. agency securities 4.0 — ( 0.1 ) — 3.9
Total short-term investments 772.2 0.1 ( 23.0 ) — 749.3
The following table presents the gross unrealized losses and estimated fair value of the Company’s short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position:
June 26, 2022
Less than 12 Months Greater than 12 Months Total
(in millions of U.S. Dollars) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Corporate bonds $ 431.1 ($ 17.4 ) $ 8.3 ($ 0.4 ) $ 439.4 ($ 17.8 )
Municipal bonds 150.0 ( 4.4 ) 1.0 — 151.0 ( 4.4 )
U.S. treasury securities 65.8 ( 0.7 ) — — 65.8 ( 0.7 )
U.S. agency securities 3.9 ( 0.1 ) — — 3.9 ( 0.1 )
Total $ 650.8 ($ 22.6 ) $ 9.3 ($ 0.4 ) $ 660.1 ($ 23.0 )
Number of securities with an unrealized loss 346 5 351
Additionally, the Company held cash equivalent securities in unrealized loss positions as of June 25, 2023 and June 26, 2022. As of June 25, 2023, the Company held two cash equivalent securities in unrealized loss positions with an aggregate fair value of $ 18.5 million and an aggregate unrealized loss of less than $ 0.1 million. As of June 26, 2022, the Company held six cash equivalent securities in unrealized loss positions with an aggregate fair value of $ 69.0 million and an aggregate unrealized loss of less than $ 0.1 million. All cash equivalents in unrealized loss positions as of June 25, 2023 and June 26, 2022 have been in unrealized loss positions for less than 12 months.
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The Company does not include accrued interest in estimated fair values of short-term investments and does not record an allowance for credit losses on receivables related to accrued interest. Accrued interest receivable was $ 10.1 million and $ 5.9 million as of June 25, 2023 and June 26, 2022, respectively, and is recorded in other current assets on the consolidated balance sheets. When necessary, write-offs of noncollectable interest income are recorded as a reversal to interest income. There were no write-offs of noncollectable interest income for the years ended June 25, 2023 and June 26, 2022.
The Company evaluates its investments for expected credit losses. The Company believes it is able to and intends to hold each of the investments held with an unrealized loss as of June 25, 2023 until the investments fully recover in market value. No allowance for credit losses was recorded as of June 25, 2023 and June 26, 2022.
The contractual maturities of short-term investments at June 25, 2023 were as follows:
(in millions of U.S. Dollars) Within One Year After One, Within Five Years After Five, Within Ten Years After Ten Years Total
Corporate bonds $ 303.7 $ 191.9 $ — $ — $ 495.6
U.S. treasury securities 220.9 39.5 — — 260.4
Municipal bonds 91.5 81.4 — 2.4 175.3
Certificates of deposit 112.3 — — — 112.3
U.S. agency securities 66.8 10.0 — — 76.8
Commercial paper 50.2 — — — 50.2
Variable rate demand notes — — 9.7 17.6 27.3
Total short-term investments $ 845.4 $ 322.8 $ 9.7 $ 20.0 $ 1,197.9
Note 8 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
• Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Because valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
• Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments. As of June 25, 2023, financial assets utilizing Level 1 inputs included U.S. treasury securities and money market funds, and financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, U.S. agency securities, commercial paper and variable rate demand notes. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service’s consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of June 25, 2023. There were no transfers between Level 1 and Level 2 during the year ended June 25, 2023.
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Financial instruments carried at fair value were as follows:
June 25, 2023 June 26, 2022
(in millions of U.S. Dollars) Level 1 Level 2 Total Level 1 Level 2 Total
Assets:
Cash equivalents:
Money market funds $ 230.4 $ — $ 230.4 $ 115.9 $ — $ 115.9
U.S. treasury securities 20.7 — 20.7 69.0 — 69.0
Commercial paper — 7.0 7.0 — 59.4 59.4
Total cash equivalents 251.1 7.0 258.1 184.9 59.4 244.3
Short-term investments:
Corporate bonds — 495.6 495.6 — 448.0 448.0
U.S. treasury securities 260.4 — 260.4 65.8 — 65.8
Municipal bonds — 175.3 175.3 — 162.2 162.2
Certificates of deposit — 112.3 112.3 — — —
U.S. agency securities — 76.8 76.8 — 3.9 3.9
Commercial paper — 50.2 50.2 — — —
Variable rate demand notes — 27.3 27.3 — 69.4 69.4
Total short-term investments 260.4 937.5 1,197.9 65.8 683.5 749.3
Total assets $ 511.5 $ 944.5 $ 1,456.0 $ 250.7 $ 742.9 $ 993.6
Note 9 – Goodwill and Intangible Assets
Goodwill
There were no changes to goodwill during the fiscal year ended June 25, 2023.
As of the first day of its fourth quarter of fiscal 2023, the Company performed a qualitative impairment test on the goodwill balance and concluded there was no impairment.
Intangible Assets
Intangible assets, net included the following:
June 25, 2023 June 26, 2022
(in millions of U.S. Dollars) Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Intangible assets:
Customer relationships $ 96.8 ($ 37.4 ) $ 59.4 $ 96.8 ($ 31.2 ) $ 65.6
Developed technology 68.0 ( 38.3 ) 29.7 68.0 ( 33.6 ) 34.4
Non-compete agreements — — — 12.2 ( 12.2 ) —
Acquisition related intangible assets 164.8 ( 75.7 ) 89.1 177.0 ( 77.0 ) 100.0
Patent and licensing rights 65.0 ( 38.2 ) 26.8 65.5 ( 40.1 ) 25.4
Total intangible assets 229.8 ( 113.9 ) 115.9 242.5 ( 117.1 ) 125.4
Total amortization of acquisition-related intangibles assets was $ 10.9 million, $ 13.6 million and $ 14.5 million and total amortization of patents and licensing rights was $ 5.0 million, $ 5.4 million and $ 5.9 million for the years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively.
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The Company invested $ 6.5 million, $ 5.7 million and $ 5.9 million for the years ended June 25, 2023, June 26, 2022 and June 27, 2021, respectively, for patent and licensing rights. For the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, the Company recognized $ 0.1 million, $ 1.8 million and $ 0.7 million, respectively, in impairment charges related to its patent portfolio.
Total future amortization expense of intangible assets is estimated to be as follows:
(in millions of U.S. Dollars)
Fiscal Year Ending
Acquisition Related Intangibles Patents Total
June 30, 2024 $ 10.4 $ 4.4 $ 14.8
June 29, 2025 10.4 3.4 13.8
June 28, 2026 9.3 2.6 11.9
June 27, 2027 9.3 2.1 11.4
June 26, 2028 9.3 1.8 11.1
Thereafter 40.4 12.5 52.9
Total future amortization expense $ 89.1 $ 26.8 $ 115.9
Note 10 – Long-term Debt
Revolving Line of Credit
On June 23, 2023, the Company terminated its previously held $ 125.0 million secured revolving line of credit (the Credit Agreement) under which the Company was able to borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2026. The Company did not have any borrowings under the Credit Agreement during the fiscal year ended June 25, 2023. Under the agreement, the Company paid an unused line fee on available borrowings of 25 basis points.
2023 Convertible Notes
On August 24, 2018, the Company sold $ 500.0 million aggregate principal amount of 0.875 % convertible senior notes due September 1, 2023 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and an additional $ 75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (collectively, the 2023 Notes). The total net proceeds from the 2023 Notes offering was approximately $ 562.1 million. As discussed further below, the Company repurchased approximately $ 150.2 million aggregate principal amount of the 2023 Notes using a portion of net proceeds from the sale of an additional convertible note offering (the 2026 Notes, as defined and explained below) in April 2020.
On December 8, 2021 (the Redemption Notice Date), the Company issued a notice (the Redemption Notice) to holders of the 2023 Notes calling all outstanding 2023 Notes for redemption. The Redemption Notice designated December 23, 2021 as the redemption date (the Redemption Date). On the Redemption Date, the Redemption Price (as defined below) would have become due and payable on each of the 2023 Notes to be redeemed, and interest thereon would cease to accrue. However, any 2023 Notes called for redemption would not be redeemed if such note was converted before the Redemption Date. The Redemption Price for the 2023 Notes called for redemption was an amount in cash equal to the principal amount of such note plus accrued and unpaid interest on such note to, but excluding, the Redemption Date, which equated to a Redemption Price of $1,002.72222 per $1,000 principal amount of 2023 Notes (the Redemption Price).
As of the Redemption Notice Date, the conversion rate of the 2023 Notes was 16.6745 shares of the Company's common stock per $1,000 principal amount of such notes. However, in accordance with the Indenture, dated as of August 24, 2018, between the Company and U.S. Bank National Association, as trustee, which governed the terms of the 2023 Notes, the conversion rate for 2023 Notes that were converted after the Redemption Notice Date was increased to 16.7769 shares of the Company's common stock per $1,000 principal amount of such notes. Before the Redemption Date, all outstanding 2023 Notes were surrendered for conversion, resulting in the settlement of all outstanding 2023 Notes in approximately 7.1 million shares of the Company's common stock, with cash in lieu of any fractional shares. The fair value of shares issued upon conversion of all outstanding 2023 Notes was $ 788.0 million. The amount of cash paid for fractional shares was immaterial.
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2026 Convertible Notes
On April 21, 2020, the Company sold $ 500.0 million aggregate principal amount of 1.75 % convertible senior notes due May 1, 2026 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional $ 75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2026 Notes). The total net proceeds from the 2026 Notes offering was approximately $ 561.4 million.
The conversion rate will initially be 21.1346 shares of common stock per one thousand dollars in principal amount of 2026 Notes (equivalent to an initial conversion price of approximately $ 47.32 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2026 Notes in connection with such a corporate event, or who elects to convert any 2026 Notes called for redemption during the related redemption period in certain circumstances. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on a redemption date occurring on or after May 1, 2023 and on or before the 40 th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2026 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding November 3, 2025 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1.0 thousand principal amount of 2026 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2026 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after November 3, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2026 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
The Company used approximately $ 144.3 million of the net proceeds from the sale of the 2026 Notes in April 2020 to repurchase approximately $ 150.2 million aggregate principal amount of the 2023 Notes, including approximately $ 0.2 million of accrued interest on such notes, in privately negotiated transactions.
2028 Convertible Notes
On February 3, 2022, the Company sold $ 650.0 million aggregate principal amount of 0.25 % convertible senior notes due February 15, 2028 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional $ 100.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2028 Notes). The total net proceeds from the 2028 Notes offering was approximately $ 732.3 million.
The Company used approximately $ 108.2 million of the net proceeds from the 2028 Notes to fund the cost of entering into capped call transactions, as described below.
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The conversion rate will initially be 7.8602 shares of common stock per one thousand dollars in principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $ 127.22 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2028 Notes in connection with such a corporate event, or who elects to convert any 2028 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2028 Notes prior to February 18, 2025. The Company may redeem for cash all or any portion of the 2028 Notes, at its option, on a redemption date occurring on or after February 18, 2025 and on or before the 40 th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100 % of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2028 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their 2028 Notes at their option at any time prior to the close of business on the business day immediately preceding August 16, 2027 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1.0 thousand principal amount of 2028 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2028 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after August 16, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2028 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
Capped Call Transactions in relation to the 2028 Notes
On January 31, 2022, in connection with the pricing of the 2028 Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers or affiliates thereof (the 2028 Notes Capped Call Counterparties). In connection with the exercise by the initial purchasers of their option to purchase additional notes, the Company entered into additional privately negotiated capped call transactions (such transactions, collectively, the 2028 Notes Capped Call Transactions) with each of the 2028 Notes Capped Call Counterparties. The 2028 Notes Capped Call Transactions initially cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the 2028 Notes. The 2028 Capped Call Transactions are expected generally to reduce the potential dilutive effect on the common stock upon any conversion of 2028 Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap which initially is $ 212.04 per share, representing a premium of 125 % over the last reported sale price per share of the Company's common stock on January 31, 2022, subject to certain adjustments under the terms of the 2028 Notes Capped Call Transactions.
The 2028 Notes Capped Call Transactions are separate transactions entered into by the Company with each of the 2028 Notes Capped Call Counterparties, are not part of the terms of the 2028 Notes, and do not affect any holder’s rights under the 2028 Notes. Holders of the 2028 Notes do not have any rights with respect to the 2028 Notes Capped Call Transactions.
2029 Convertible Notes
On November 21, 2022, the Company sold $ 1,525.0 million aggregate principal amount of 1.875 % convertible senior notes due December 1, 2029 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional $ 225.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2029 Notes). The total net proceeds from the 2029 Notes offering was approximately $ 1,718.6 million.
The Company used approximately $ 273.9 million of the net proceeds from the 2029 Notes to fund the cost of entering into capped call transactions, as described below.
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The conversion rate will initially be 8.4118 shares of common stock per one thousand dollars in principal amount of 2029 Notes (equivalent to an initial conversion price of approximately $ 118.88 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2029 Notes in connection with such a corporate event, or who elects to convert any 2029 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2029 Notes prior to December 4, 2026. The Company may redeem for cash all or any portion of the 2029 Notes, at its option, on a redemption date occurring on or after December 4, 2026 and on or before the 40 th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100 % of the principal amount of the 2029 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2029 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2029 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their 2029 Notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2029 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended March 31, 2023 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1.0 thousand principal amount of 2029 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2029 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 1, 2029 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2029 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
Capped Call Transactions in relation to the 2029 Notes
On November 16, 2022, in connection with the pricing of the 2029 Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers or their affiliates and another financial institution (the 2029 Notes Capped Call Counterparties). In connection with the exercise by the initial purchasers of their option to purchase additional notes, the Company entered into additional privately negotiated capped call transactions (such transactions, collectively, the 2029 Notes Capped Call Transactions) with each of the 2029 Notes Capped Call Counterparties. The 2029 Notes Capped Call Transactions initially cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the 2029 Notes. The 2029 Notes Capped Call Transactions are expected generally to reduce the potential dilutive effect on the common stock upon any conversion of 2029 Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap which initially is $ 202.538 per share, representing a premium of 130 % over the last reported sale price per share of our common stock on November 16, 2022, subject to certain adjustments under the terms of the 2029 Notes Capped Call Transactions.
The 2029 Notes Capped Call Transactions are separate transactions entered into by the Company with each of the 2029 Notes Capped Call Counterparties, are not part of the terms of the 2029 Notes, and do not affect any holder’s rights under the 2029 Notes. Holders of the 2029 Notes do not have any rights with respect to the 2029 Notes Capped Call Transactions.
Accounting for the 2023 Notes, 2026 Notes, 2028 Notes and 2029 Notes
In accounting for the issuance of the 2023 Notes, 2026 Notes and 2028 Notes, the Company separated such notes into liability and equity components. The carrying amount of the equity component representing the conversion option was $ 110.6 million, $ 145.4 million and $ 187.6 million for the 2023 Notes, 2026 Notes and 2028 Notes, respectively. The amounts were determined by deducting the fair value of the liability component from the par value of each of the 2023 Notes, 2026 Notes and 2028 Notes. Due to the partial extinguishment of the 2023 Notes in connection with the issuance of the 2026 Notes, the equity component of the 2023 Notes was reduced by $ 27.7 million during the fourth quarter of fiscal 2020.
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As a result of the full conversion of all outstanding 2023 Notes, the Company remeasured the outstanding liability for the 2023 Notes using a market rate for debt without a conversion option (the Market Rate) as of the Redemption Notice Date. The Company performed a present value calculation using the Market Rate and determined the fair value of the debt as of the Redemption Notice Date was $ 416.1 million, $ 24.7 million higher than the carrying value of the 2023 Notes as of the Redemption Notice Date. As a result, the Company recorded a loss on extinguishment of $ 24.8 million, which included a $ 0.1 million loss on extinguishment expense related to third party fees. Additionally, the equity component of the 2023 Notes was reduced to zero .
Upon adoption of ASU 2020-06 on June 27, 2022, the first day of fiscal 2023, the unamortized discounts on the 2026 Notes and 2028 Notes were eliminated and the liability and equity components relating to the debt issuance costs for the 2026 Notes and 2028 Notes are now presented as a single liability. Debt issuance costs for the 2026 Notes and 2028 Notes will be amortized to interest expense over their respective terms at an effective annual interest rate of 2.2 % and 0.6 %, respectively.
Debt issuance costs in relation to the 2029 Notes were accounted for as a reduction of the principal balance and will be amortized to interest expense over the term of the 2029 Notes at an effective interest rate of 2.1 %.
The net carrying amount of the liability component of the Outstanding Convertible Notes is as follows:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Principal $ 3,075.0 $ 1,325.0
Unamortized discount and issuance costs ( 49.4 ) ( 303.4 )
Net carrying amount $ 3,025.6 $ 1,021.6
The net carrying amount of the equity component of the Outstanding Convertible Notes is as follows:
(in millions of U.S. Dollars) June 25, 2023 (1)
June 26, 2022
Discount related to value of conversion option $ — $ 341.1
Debt issuance costs — ( 8.1 )
Net carrying amount $ — $ 333.0
(1) As discussed above, the equity components of the 2026 Notes and 2028 Notes were eliminated upon adoption of ASU 2020-06 on June 27, 2022, the first day of fiscal 2023.
The last reported sale price of the Company's common stock was not greater than or equal to 130 % of the applicable conversion price for any of the Outstanding Convertible Notes for at least 20 trading days in the 30 consecutive trading days ended on June 30, 2023. As a result, none of the Outstanding Convertible Notes are convertible at the option of the holders through September 30, 2023.
2030 Senior Notes
On June 23, 2023 (the Issue Date), the Company sold $ 1,250 million aggregate principal amount of senior secured notes due 2030 (the 2030 Senior Notes). The total net proceeds from the 2030 Senior Notes was approximately $ 1,149.3 million. The total net proceeds are net of debt issuance costs and an original issue discount of $ 50.0 million.
The 2030 Senior Notes bear interest (i) during the first three years after the Issue Date at a rate of 9.875 % per annum, (ii) during the fourth year after the Issue Date at a rate of 10.875 % per annum, and (iii) at all times thereafter, 11.875 % per annum, and will mature on the earlier of (x) June 23, 2030 and (y) September 1, 2029, if more than $ 175.0 million in aggregate principal amount of the 2029 Notes remain outstanding on such date. Subject to the fulfillment of certain conditions precedent, the Company may, at its discretion, issue and sell additional 2030 Senior Notes in an amount not to exceed $ 750.0 million.
The Indenture related to the 2030 Senior Notes (the 2030 Senior Notes Indenture) requires the Company to make an offer to repurchase the 2030 Senior Notes with 100 % of the net cash proceeds of (x) certain core asset sales and casualty events and (y) certain non-core asset sales and casualty events, in either case in excess of $ 25.0 million since the Issue Date, subject to the ability to (so long as no default or event of default exists under the 2030 Senior Notes Indenture), reinvest the proceeds of such casualty events and asset sales (other than the proceeds of sales of certain core assets of the Company), at a price equal to the lesser of (i) 109.875 % of the principal amount of the 2030 Senior Notes being repurchased and (ii) if such disposition or casualty event occurred (x) during the fourth year after the Issue Date, 109.40625 % of the principal amount of such 2030 Senior Notes being repurchased, (y) during the fifth year after the Issue Date, 104.9375 % of the principal amount of such 2030 Senior Notes being repurchased and (z) during and after the sixth year after the Issue Date, 100 % of the principal amount of such 2030 Senior Notes being repurchased (this clause (ii), the Applicable Redemption Price). The Company is also required to offer to
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repurchase the 2030 Senior Notes upon a change in control, at a price equal to, (i) if the change of control occurs during the first three years after the Issue Date, a customary make-whole redemption price minus 3.00 % of the principal amount of Senior Notes being purchased and (ii) if such change of control occurs after the third anniversary of the Issue Date, the Applicable Redemption Price. The Company may prepay the 2030 Senior Notes at any time, subject to: (i) if the prepayment occurs prior to the third anniversary of the Issue Date, by paying a customary make-whole premium and (ii) if the prepayment occurs on or after the third anniversary of the Issue Date, by paying the Applicable Redemption Price. Further, the Company has the right, prior to the third anniversary of the Issue Date, to make an optional redemption of up to 35 % of the aggregate principal amount of the 2030 Senior Notes with the proceeds of qualified equity issuances, at a redemption price equal to 109.875 %.
The 2030 Senior Notes Indenture contains certain customary affirmative covenants, negative covenants and events of default, including a liquidity maintenance financial covenant requiring the Company to have an aggregate amount of unrestricted cash and cash equivalents maintained in accounts over which the trustee and collateral agent has been granted a perfected first lien security interest of at least $ 500.0 million as of the last day of any calendar month (the Liquidity Covenant). Upon the Company achieving 30 % utilization at its silicon carbide device fabrication facility in Marcy, New York and generating at least $ 240.0 million of revenue from the Company's Power product line, that are manufactured or produced on wafers that are fabricated at the Marcy, New York facility (the MVF Products), in each case over a six month period, the level of the Liquidity Covenant shall be permanently reduced to $ 325.0 million. Upon the Company’s achieving 50 % utilization at its Marcy, New York facility and generating at least $ 450.0 million of revenue from MVF Products, in each case over a six month period, the Liquidity Covenant will be permanently reduced to zero .
As of June 25, 2023, the Company was in compliance with all covenants relating to the 2030 Senior Notes.
The 2030 Senior Notes are superior in right of payment to the Company's unsecured indebtedness to the extent of the collateral securing the 2030 Senior Notes. Beyond the value of the collateral securing the 2030 Notes, the 2026 Notes, 2028 Notes, 2029 Notes and 2030 Senior Notes (Corporate Debt Holdings) are equal in right of payment to any of the Company’s unsecured indebtedness; senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Corporate Debt Holdings; effectively subordinated in right of payment of any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
Debt issuance costs in relation to the 2030 Senior Notes were accounted for as a reduction of the principal balance and, along with the original issue discount, will be amortized over the term of the 2030 Senior Notes at an effective interest rate of 12.4 %.
The net carrying amount of the liability component of the 2030 Senior Notes is as follows:
(in millions of U.S. Dollars) June 25, 2023
Principal $ 1,250.0
Unamortized discount and issuance costs ( 100.5 )
Net carrying amount $ 1,149.5
Interest Expense for the Corporate Debt Holdings
The interest expense, net recognized related to the Corporate Debt Holdings is as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Interest expense, net of capitalized interest $ 32.3 $ 2.6 $ 10.4
Amortization of discount and issuance costs, net of capitalized interest 7.5 20.1 32.8
Total interest expense, net $ 39.8 $ 22.7 $ 43.2
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The Company capitalizes interest in connection with ongoing capacity expansions. For the fiscal year ended June 25, 2023, the Company capitalized $ 0.8 million of interest expense and $ 0.2 million of amortization of discount and issuance costs. For the fiscal year ended June 26, 2022, the Company capitalized $ 9.9 million of interest expense and $ 23.2 million of amortization of discount and issuance costs. For the fiscal year ended June 27, 2021, the Company capitalized $ 3.3 million of interest expense and $ 7.3 million of amortization of discount and issuance costs.
Fair Value of the Corporate Debt Holdings
The estimated fair value of Corporate Debt is $ 3.9 billion as of June 25, 2023, as determined by a Level 2 valuation.
Note 11 – Shareholders’ Equity
At June 25, 2023, the Company had reserved a total of approximately 55.4 million shares of its common stock for future issuance as follows (in thousands):
Number of
Shares
For exercise of outstanding common stock options 25
For vesting of outstanding stock units 2,340
For future equity awards under 2013 Long-Term Incentive Compensation Plan 4,022
For future issuance under the Non-Employee Director Stock Compensation and Deferral Program 43
For future issuance to employees under the 2020 Employee Stock Purchase Plan 5,065
For future issuance upon conversion of the 2026 Notes 16,102
For future issuance upon conversion of the 2028 Notes 7,958
For future issuance upon conversion of the 2029 Notes 19,873
Total common shares reserved 55,428
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Note 12 – Loss Per Share
The details of the computation of basic and diluted loss per share are as follows:
Fiscal Years Ended
(in millions of U.S. Dollars, except share data) June 25, 2023 June 26, 2022 June 27, 2021
Net loss from continuing operations $ ( 329.9 ) $ ( 295.1 ) $ ( 341.3 )
Net income (loss) from discontinued operations — 94.2 ( 181.2 )
Net income from discontinued operations attributable to noncontrolling interest — — 1.4
Net income (loss) from discontinued operations attributable to controlling interest — 94.2 ( 182.6 )
Weighted average number of common shares - basic and diluted (in thousands) 124,374 120,120 112,346
(Loss) earnings per share - basic and diluted:
Continuing operations $ ( 2.65 ) $ ( 2.46 ) $ ( 3.04 )
Discontinued operations attributable to controlling interest $ — $ 0.78 $ ( 1.63 )
Diluted net loss per share is the same as basic net loss per share for the periods presented due to potentially dilutive items being anti-dilutive given the Company's net loss from continuing operations.
For the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, 2.7 million, 2.5 million and 3.4 million, respectively, of dilutive shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.
Future earnings per share of the Company are also subject to dilution from conversion of its convertible notes under certain conditions as described in Note 10, “Long-term Debt.”
Note 13 – Stock-Based Compensation
Overview of Employee Stock-Based Compensation Plans
The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. At June 25, 2023, there were 15.9 million shares authorized for issuance under the plan and 4.0 million shares remaining for future grants. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards.
The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. At June 25, 2023, there were 6.0 million shares authorized for issuance under the ESPP, as amended, with 5.1 million shares remaining for future issuance. The ESPP limits employee contributions to 15 % of each employee’s compensation (as defined in the plan) and allows employees to purchase shares at a 15 % discount, subject to IRS limitations. The ESPP provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants may purchase the Company’s common stock through the ESPP at a 15 % discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.
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Stock Option Awards
The following table summarizes option activity as of June 25, 2023 and changes during the fiscal year then ended (shares in thousands):
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Total Intrinsic Value (in millions of U.S. Dollars)
Outstanding at June 26, 2022 69 $ 25.12
Granted — —
Exercised ( 42 ) 25.38
Forfeited or expired ( 2 ) 27.09
Outstanding at June 25, 2023 25 24.55 0.25 $ 0.6
Vested and expected to vest at June 25, 2023 25 24.55 0.25 $ 0.6
Exercisable at June 25, 2023 25 24.55 0.25 $ 0.6
The total intrinsic value in the table above represents the total pretax intrinsic value, which is the total difference between the closing price of the Company’s common stock on June 23, 2023 (the last trading day of fiscal 2023) of $ 49.45 and the exercise price for in-the-money options that would have been received by the holders if all instruments had been exercised on June 25, 2023. As of June 25, 2023, there was no unrecognized compensation cost related to nonvested stock options.
The following table summarizes information about stock options outstanding and exercisable at June 25, 2023 (shares in thousands):
Options Outstanding Options Exercisable
Range of Exercise Price Number Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Weighted Average Exercise Price
$ 0.01 to $ 25.00
22 0.2 $ 24.26 22 $ 24.26
$ 25.01 to $ 35.00
3 0.5 26.71 3 26.71
Total 25 25
Total intrinsic value of options exercised for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021 was $ 2.6 million, $ 5.6 million and $ 30.8 million, respectively.
Restricted Stock Units
A summary of nonvested restricted stock units (RSUs) outstanding as of June 25, 2023 and changes during the year then ended is as follows (shares in thousands):
Number of RSUs Weighted Average Grant-Date Fair Value
Nonvested at June 26, 2022 1,894 $ 75.67
Granted 1,411 86.62
Vested ( 714 ) 64.45
Forfeited ( 251 ) 78.82
Nonvested at June 25, 2023 2,340 $ 85.32
The aggregate fair value of awards vested in fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021, based on the market price of the Company's common stock on the vesting date, was $ 61.6 million, $ 82.9 million and $ 110.6 million, respectively.
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As of June 25, 2023, there was $ 119.1 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 2.19 years.
Stock-Based Compensation Valuation and Expense
Total stock-based compensation expense was classified in the consolidated statements of operations as follows:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Cost of revenue, net $ 21.5 $ 16.0 $ 14.4
Research and development 15.8 9.9 8.7
Sales, general and administrative 44.6 35.0 30.1
Total stock-based compensation expense $ 81.9 $ 60.9 $ 53.2
Stock-based compensation expense may differ from the impact of stock-based compensation to additional paid in capital due to manufacturing related stock-based compensation capitalized within inventory.
The Black-Scholes and Monte Carlo option pricing models require the input of highly subjective assumptions. The assumptions listed below represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted above.
The range of assumptions used to value stock issued under the ESPP were as follows:
Fiscal Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
Risk-free interest rate 4.57 - 5.06 %
0.03 - 2.10 %
0.03 - 0.17 %
Expected life, in years 0.5 - 1.0
0.5 - 1.0
0.5 - 1.0
Volatility 66.8 - 86.2 %
60.6 - 69.4 %
52.4 - 82.6 %
Dividend yield — — —
The range of assumptions used for performance-based awards with market conditions were as follows:
Fiscal Years Ended
June 25, 2023 June 26, 2022 June 27, 2021
Risk-free interest rate 2.80 %
0.35 %
0.11 - 1.66 %
Expected life, in years 3.0
3.0
3.0
Average volatility of peer companies 68.8 %
65.0 %
48.9 - 60.5 %
Average correlation coefficient of peer companies 0.48
0.47
0.36 - 0.51
Dividend yield — — —
Awards are valued using the Monte Carlo model. All performance-based awards with market conditions for the fiscal years ended June 25, 2023 and June 26, 2022 were issued on a single date each year and therefore no range is shown.
The following describes each of these assumptions and the Company’s methodology for determining each assumption:
Risk-Free Interest Rate
The Company estimates the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected life of the award.
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Expected Life
The expected life represents the period the awards are expected to be outstanding. In determining the appropriate expected life of its stock options, the Company segregates its grantees into categories based upon employee levels that are expected to be indicative of similar option-related behavior. The expected useful lives for each of these categories are then estimated giving consideration to (1) the weighted average vesting periods, (2) the contractual lives of the stock options, (3) the relationship between the exercise price and the fair market value of the Company’s common stock, (4) expected employee turnover, (5) the expected future volatility of the Company’s common stock, and (6) past and expected exercise behavior, among other factors.
Expected Volatility
The Company estimates expected volatility for the options and ESPP awards giving consideration to the expected life of the respective award, the Company’s current expected growth rate, implied volatility in traded options for its common stock, and the historical volatility of its common stock. For purposes of estimating volatility for use in the Monte Carlo model for the market-based awards, the Company utilizes historical volatilities of the Company and the members of the defined peer group.
Expected Dividend Yield
The Company estimates the expected dividend yield by giving consideration to its current dividend policies as well as those anticipated in the future considering the Company’s current plans and projections. The Company has not historically issued dividends.
Correlation Coefficient
The correlation coefficients are calculated based upon the price data used to calculate the historical volatilities and are used to model the way in which each entity tends to move in relation to its peers.
Note 14 – Income Taxes
The following were the components of loss before income taxes:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Domestic ($ 331.8 ) ($ 289.1 ) ($ 348.7 )
Foreign 3.3 3.0 8.5
Loss before income taxes ($ 328.5 ) ($ 286.1 ) ($ 340.2 )
The following were the components of income tax expense:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Current:
Federal $ 0.3 $ 0.3 $ 0.1
Foreign 0.5 8.0 0.1
State 0.1 0.1 0.2
Total current 0.9 8.4 0.4
Deferred:
Federal 0.7 0.7 0.7
Foreign ( 0.2 ) ( 0.1 ) —
State — — —
Total deferred 0.5 0.6 0.7
Income tax expense $ 1.4 $ 9.0 $ 1.1
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Actual income tax expense differed from the amount computed by applying each period's U.S. federal statutory tax rate to pre-tax earnings as a result of the following:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 % of Loss June 26, 2022 % of Loss June 27, 2021 % of Loss
Federal income tax provision at statutory rate ($ 69.0 ) 21 % ($ 60.1 ) 21 % ($ 71.4 ) 21 %
(Decrease) increase in income tax expense resulting from:
State tax provision, net of federal benefit ( 1.2 ) — % ( 2.5 ) 1 % ( 1.9 ) 1 %
Tax exempt interest ( 0.5 ) — % ( 0.2 ) — % ( 0.1 ) — %
(Decrease) increase in tax reserve ( 0.4 ) — % ( 0.2 ) — % — — %
Research and development credits ( 10.8 ) 3 % ( 5.4 ) 2 % ( 4.3 ) 1 %
Foreign tax credit — — % ( 0.3 ) — % ( 0.4 ) — %
Increase (decrease) in valuation allowance 79.7 ( 24 ) % ( 51.6 ) 18 % 75.0 ( 22 ) %
Extinguishment of convertible notes — — % ( 4.5 ) 2 % — — %
Stock-based compensation 3.0 ( 1 ) % ( 3.3 ) 1 % ( 2.8 ) 1 %
Statutory rate differences 0.1 — % — — % 1.1 — %
Foreign earnings taxed in U.S. ( 0.4 ) — % 6.8 ( 2 ) % 2.7 ( 1 ) %
Other foreign adjustments — — % — — % ( 0.1 ) — %
Provision to return adjustments 0.1 — % 0.3 — % ( 0.2 ) — %
Impact of rate changes — — % 0.5 — % 2.7 ( 1 ) %
Expiration of state credits 0.2 — % 0.1 — % 0.7 — %
Corporate restructuring adjustment — — % 129.1 ( 45 ) % — — %
Other 0.6 — % 0.3 — % 0.1 — %
Income tax expense $ 1.4 — % $ 9.0 ( 3 ) % $ 1.1 — %
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022
Deferred tax assets:
Compensation $ 7.7 $ 11.8
Inventories 39.3 22.5
Sales return reserve and allowance for bad debts 7.0 5.0
Federal and state net operating loss carryforwards 366.1 321.0
Federal income tax credits 59.0 48.2
State income tax credits 1.0 1.2
48C investment tax credits 35.7 35.7
Investments 5.2 5.3
Stock-based compensation 10.0 7.2
Deferred revenue 9.0 18.9
Lease liabilities 29.5 12.6
Capitalized research and development 57.1 —
Convertible notes 73.7 —
Other 6.9 4.7
Total gross deferred assets 707.2 494.1
Less valuation allowance ( 543.9 ) ( 339.2 )
Deferred tax assets, net 163.3 154.9
Deferred tax liabilities:
Property and equipment ( 107.1 ) ( 75.1 )
Intangible assets ( 22.7 ) ( 19.1 )
Prepaid taxes and other ( 0.5 ) ( 0.6 )
Foreign earnings recapture ( 4.3 ) ( 4.3 )
Taxes on unremitted foreign earnings ( 6.5 ) ( 7.4 )
Lease assets ( 24.9 ) ( 12.6 )
Convertible notes — ( 38.0 )
Total gross deferred liability ( 166.0 ) ( 157.1 )
Deferred tax liability, net ($ 2.7 ) ($ 2.2 )
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The components giving rise to the net deferred tax assets (liabilities) have been included in the consolidated balance sheets as follows:
Balance at June 25, 2023
(in millions of U.S. Dollars) Assets Liabilities
U.S. federal income taxes $ — ($ 3.9 )
Foreign income taxes 1.2 —
Total $ 1.2 ($ 3.9 )
Balance at June 26, 2022
(in millions of U.S. Dollars) Assets Liabilities
U.S. federal income taxes $ — ($ 3.2 )
Foreign income taxes 1.0 —
Total $ 1.0 ($ 3.2 )
The Company weighs all available evidence, both positive and negative, to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction. The Company has concluded that it is necessary to recognize a full valuation allowance against its U.S. deferred tax assets as of June 25, 2023. As of June 26, 2022, the U.S. valuation allowance was $ 339.2 million. For the fiscal year ended June 25, 2023, the Company increased the U.S. valuation allowance by $ 204.7 million due to a decrease in deferred tax liabilities related to convertible notes upon adoption of ASU 2020-06, increase in deferred tax assets related to the 2029 Notes Capped Call Transactions, and increases in deferred tax assets related to the current year domestic loss and domestic capitalized research and development.
As of June 25, 2023, the Company had approximately $ 2.2 million of foreign net operating loss carryovers, of which less than $ 0.1 million are offset by a valuation allowance. Of the Company's foreign net operating loss carryovers, $ 2.1 million have no carry forward limitation. As of June 25, 2023, the Company had approximately $ 1.7 billion of federal net operating loss carryovers and $ 331.7 million of state net operating loss carryovers which are fully offset by a valuation allowance. Additionally, the Company had $ 97.6 million of federal and $ 1.0 million of state income tax credit carryforwards which are fully offset by a valuation allowance. The federal and state net operating loss carryovers will begin to expire in fiscal 2038 and fiscal 2024, respectively. The federal and state income tax credit carryforwards will begin to expire in fiscal 2031 and fiscal 2024, respectively.
U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.
As of June 26, 2022, the Company’s liability for unrecognized tax benefits was $ 7.2 million. During the fiscal year ended June 25, 2023, the Company recognized a $ 2.6 million increase to the liability for unrecognized tax benefits primarily due to an increase in generated research and development credits. As a result, the total liability for unrecognized tax benefits as of June 25, 2023 was $ 9.8 million. If any portion of this $ 9.8 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that $ 2.0 million of gross unrecognized tax benefits will change in the next 12 months as a result of statute requirements or settlement with tax authorities.
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The following is a tabular reconciliation of the Company’s change in uncertain tax positions:
Fiscal Years Ended
(in millions of U.S. Dollars) June 25, 2023 June 26, 2022 June 27, 2021
Balance at beginning of period $ 7.2 $ 7.4 $ 7.4
Increases related to prior year tax positions 1.7 — —
Decreases related to prior year tax positions — — —
Settlements with tax authorities ( 0.2 ) — —
Expiration of statute of limitations for assessment of taxes ( 0.1 ) ( 0.2 ) —
Increases related to current year positions 1.2 — —
Balance at end of period $ 9.8 $ 7.2 $ 7.4
The Company's policy is to include interest and penalties related to unrecognized tax benefits within the income tax expense (benefit) line item in the consolidated statements of operations. Interest and penalties relating to unrecognized tax benefits recognized in the consolidated statements of operations totaled less than $ 0.1 million for the fiscal years ended June 25, 2023, June 26, 2022, and June 27, 2021. The Company accrued less than $ 0.1 million for interest and penalties relating to unrecognized tax benefits in the consolidated balance sheets as of June 25, 2023 and June 26, 2022.
The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years prior to 2018. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2019. For foreign purposes, the Company is generally no longer subject to examination for tax periods prior to 2013. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture.
The Company provides for income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the United States. As of June 25, 2023, the Company has approximately $ 205.7 million of undistributed earnings for certain non-U.S. subsidiaries. The Company has determined that $ 187.7 million of the $ 205.7 million of undistributed foreign earnings are expected to be repatriated in the foreseeable future. The Company expects to incur $ 6.5 million of foreign income taxes upon repatriation of the $ 187.7 million foreign earnings. As of June 25, 2023, the Company has not provided income taxes on the remaining undistributed foreign earnings of $ 18.0 million as the Company continues to maintain its intention to reinvest these earnings in foreign operations indefinitely. If, at a later date, these earnings were repatriated to the United States, the Company would be required to pay approximately $ 0.3 million in taxes on these amounts.
Note 15 – Commitments and Contingencies
Litigation
The Company is currently a party to various legal proceedings, including the case described below. While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company’s business, results of operations, financial position and overall trends. The outcomes in these matters are not reasonably estimable.
In October 2021, The Trustees of Purdue University (Purdue) filed a complaint against the Company in the U.S. District Court for the Middle District of North Carolina, alleging infringement of U.S. Patent Nos. 7,498,633 (the '633 Patent), entitled "High-voltage power semiconductor device," and 8,035,112 (the '112 Patent), entitled "SIC power DMOSFET with self-aligned source contact." In the complaint, Purdue also alleges willful infringement, and seeks unspecified monetary damages and attorneys’ fees. In August 2022, Purdue voluntarily withdrew all allegations as to the '112 Patent after having disclaimed all rights to that patent. The Company denies Purdue’s remaining allegations and has developed numerous defenses, including non-infringement, multiple invalidity grounds, and unenforceability due to inequitable conduct before the U.S. Patent & Trademark Office. The litigation with Purdue is in the middle of fact discovery, and trial is currently scheduled to begin in August 2024. Due to the stage of the case, the Company is unable to estimate the possible range of loss, if any, at this time.
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Grant Disbursement Agreement (GDA) with the State of New York
The Company currently has a GDA with the State of New York Urban Development Corporation (doing business as Empire State Development). The GDA provides a potential total grant amount of $ 500.0 million to partially and fully reimburse the Company for certain property, plant and equipment costs related to the Company's construction of its silicon carbide device fabrication facility in Marcy, New York.
The GDA was signed in the fourth quarter of fiscal 2020 and requires the Company to satisfy a number of objectives for the Company to receive reimbursements through the span of the 13 -year agreement. These objectives include maintaining a certain level of local employment, investing a certain amount in locally administered research and development activities and the payment of an annual commitment fee for the first six years . Additionally, the Company has agreed, under a separate agreement (the SUNY Agreement), to sponsor the creation of two endowed faculty chairs and fund a scholarship program at SUNY Polytechnic Institute.
As of June 25, 2023, the annual cost of satisfying the objectives of the GDA and the SUNY Agreement, excluding the direct and indirect costs associated with employment, varies from $ 2.7 million to $ 5.2 million per year through fiscal 2031.
Supply Commitments
From time to time, the Company may enter into agreements with its suppliers which require the Company to commit to a minimum of product purchases or make capacity reservation deposits.
In the third quarter of fiscal 2023, the Company entered into an agreement with a supplier which requires a minimum commitment of product purchases on a take-or-pay basis of $ 200.0 million over the next five years . During the fiscal year ended June 25, 2023, the Company purchased $ 12.3 million of product under this agreement. As of June 25, 2023, minimum future product purchases for fiscal years 2024, 2025, 2026, 2027 and 2028 are $ 1.1 million, $ 26.8 million, $ 36.0 million, $ 50.1 million and $ 73.7 million, respectively.
In addition, the Company will pay quarterly capacity reservation deposits through the second quarter of fiscal 2026. The capacity reservation deposits will total $ 60.0 million and are refundable through credits on future product purchases. The Company paid $ 5.5 million in fiscal 2023 in connection with the agreement, which is recognized in prepaid expenses on the consolidated balance sheet.
Note 16 – Concentrations of Risk
Financial instruments, which may subject the Company to a concentration of risk, consist principally of short-term investments, cash equivalents, accounts receivable and long-term receivables. Short-term investments consist primarily of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, commercial paper, certificates of deposit, and variable rate demand notes at interest rates that vary by security. The Company’s cash equivalents consist primarily of money market funds. Certain bank deposits may at times be in excess of the FDIC insurance limits.
The Company sells its products on account to manufacturers, distributors and others worldwide and generally requires no collateral.
For the fiscal year ended June 25, 2023, two customers represented 18 % and 17 % of revenue, respectively. For the fiscal year ended June 26, 2022, two customers represented 20 % and 18 % of revenue, respectively. For the fiscal year ended June 27, 2021, three customers represented 18 %, 13 % and 10 % of revenue, respectively. No other customers individually accounted for more than 10% of revenue for the fiscal years ended June 25, 2023, June 26, 2022 and June 27, 2021.
Three customers accounted for 15 %, 14 % and 13 % of the accounts receivable balance as of June 25, 2023, respectively. Three customers accounted for 18 %, 16 % and 14 % of the accounts receivable balance as of June 26, 2022, respectively. No other customers accounted for more than 10% of the accounts receivable balance as of June 25, 2023 and June 26, 2022.
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Note 17 - Subsequent Events
2033 CRD Notes
In July 2023, the Company entered into an Unsecured Customer Refundable Deposit Agreement (the CRD Agreement) with a customer, pursuant to which the customer will provide the Company up to $ 2 billion in unsecured deposits. Under the CRD Agreement, the Company received an initial deposit of $ 1 billion with additional deposits of up to an additional $ 1 billion at the Company's request, subject to certain conditions during the 2024 calendar year. Unless previously terminated in accordance with its terms, the CRD Agreement will mature on July 5, 2033, and the amount of the deposits, together with accrued and unpaid interest, will be required to be repaid to the customer at such time.
The deposits under the CRD Agreement will bear interest, payable on a semi-annual basis, at a base rate of 6 % per annum, with the potential for an increased variable rate of either 10 % or 15 % in connection with any inability of the Company to satisfy supply targets under a ten-year wafer supply agreement with the same customer. The Company may voluntarily prepay the deposits, in whole or in part, at any time at a price equal to 106 % of the principal amount of the deposits prepaid. Upon the occurrence of a change of control, the customer may require the Company to prepay the deposits in whole at a variable prepayment price depending on the day of prepayment.
RF Business Divestiture
On August 22, 2023, the Company entered into a definitive agreement (the RF Purchase Agreement) to sell its radio frequency product line (RF Products) to MACOM Technology Solutions Holdings, Inc. (MACOM) for approximately $ 75 million in cash, subject to a customary purchase price adjustment, and 711,528 shares of MACOM common stock (the Shares), valued at $ 50 million based on the 30 trading day trailing average closing price for MACOM’s common stock through August 21, 2023 (the RF Business Divestiture). The Company expects to close the transaction by the end of calendar 2023.
In connection with the RF Business Divestiture, MACOM will assume control of Wolfspeed’s 100mm gallium nitride wafer fabrication facility in Research Triangle Park, North Carolina (the RTP Fab) approximately two years following the closing of the transaction (the Closing) to accommodate the Company’s relocation of certain production equipment (the RTP Fab Transfer). Prior to the RTP Fab Transfer, the Shares will be subject to restrictions on transfer. The Company will forfeit one-quarter of the Shares if the RTP Fab Transfer has not occurred by the fourth anniversary of the Closing.
The Company and MACOM will also enter into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which will assign to MACOM certain intellectual property owned by the Company and its affiliates and license to MACOM certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement (RF TSA), pursuant to which the Company will provide MACOM certain limited transition services following the Closing, (iii) a Master Supply Agreement, pursuant to which Wolfspeed will continue to operate the RTP Fab and supply MACOM with Epi-wafers and fabrication services between the date of the Closing and the date on which the RTP Fab Transfer is complete (RTP Fab Transfer Date), (iv) a Long-Term Epi Supply Agreement (LTA), pursuant to which MACOM will purchase from the Company Epi-wafers from the Closing until the fifth anniversary of the RTP Fab Transfer Date, (v) an Epi Research and Development Agreement, pursuant to which the Company will provide MACOM certain research and development activities and other technical manufacturing support services related to the RF Business during the period between the Closing and expiration of the LTA, (vi) a Real Estate License Agreement, which will allow MACOM to use certain portions of the RTP Fab to conduct the RF Business between the Closing and the RTP Fab Transfer Date, and (vii) a Lease Agreement, which will allow MACOM to lease the premises of the RTP Fab for a period of 15 years after the RTP Fab Transfer Date.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.