Discontinued Operations

6 Months Ended

Dec. 27, 2020

Discontinued Operations and Disposal Groups [Abstract]

On October 18, 2020, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with SMART with respect to the LED Business Divestiture. The transaction is targeted to close in the first calendar quarter of 2021, subject to customary closing conditions and governmental approvals.

Pursuant to the Purchase Agreement, the Company will sell to SMART, and SMART will (i) purchase from the Company, (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising the Company’s LED Products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, 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 Company Limited, the Company’s joint venture with San’an Optoelectronics Co., Ltd. (collectively, the LED Business); and (ii) assume certain liabilities related to the LED Business. The Company will retain certain assets used in and pre-closing liabilities associated with the LED Products segment.

The purchase price for the LED Business consists 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 of up to $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing (the Earnout Period), also payable in the form of a unsecured promissory note of SGH (the Earnout Note), and (iv) the assumption of certain liabilities. The Purchase Price Note and the Earnout Note, if earned, will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months and one bullet payment of principal and all accrued and unpaid interest will be payable on each note’s maturity date. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note, if issued, will mature on the third anniversary of the completion of the Earnout Period.

In connection with the closing of the LED Business Divestiture, the Company and SMART will also enter into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which will assign to SMART certain intellectual property owned by the Company and its affiliates and license to SMART certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement, which is designed to ensure a smooth transition of the LED Business to SMART, (iii) a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which the Company will supply SMART with certain silicon carbide materials and fabrication services for four years, and (iv) a Real Estate License Agreement, which will allow SMART to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing.

The completion of the LED Business Divestiture is subject to the satisfaction or waiver of a number of conditions set forth in the Purchase Agreement, including the receipt of governmental and regulatory consents and approvals and expiration of any mandatory waiting period related thereto, and other customary closing conditions. The Purchase Agreement provides for customary termination rights of the parties.

Because the LED Business Divestiture represents a strategic shift that will have a major effect on the Company’s operations and financial results, the Company has classified the results of the LED Business as discontinued operations in the Company’s consolidated statements of operations for all periods presented. The Company ceased recording depreciation and amortization of long-lived assets conveying in the Purchase Agreement upon classification as discontinued operations in October 2020. Additionally, the related assets and liabilities associated with discontinued operations are classified as held for sale in the consolidated balance sheets. The assets and liabilities held for sale as of December 27, 2020 are classified as current in the consolidated balance sheet as the Company expects the transaction to close and proceeds to be collected within one year.

The following table presents the financial results of the LED Business as (loss) income from discontinued operations, net of income taxes in the Company's consolidated statements of operations:


	Three months ended		Six months ended
(in millions of U.S. Dollars)	December 27, 2020	December 29, 2019	December 27, 2020	December 29, 2019
Revenue, net	$105.2	$119.2	$206.3	$234.3
Cost of revenue, net	80.4	92.9	163.0	186.3
Gross profit	24.8	26.3	43.3	48.0
Operating expenses:
Research and development	8.0	8.6	16.4	17.1
Sales, general and administrative	9.0	7.8	16.9	16.4
Goodwill impairment	6.9	—	112.6	—
Impairment on assets held for sale	19.5	—	19.5	—
(Gain) loss on disposal or impairment of long-lived assets	(0.5)	—	(1.0)	0.2
Other operating expense	7.7	2.9	12.5	4.0
Operating (loss) income	(25.8)	7.0	(133.6)	10.3
Non-operating income	(0.1)	(0.1)	—	(0.1)


(Loss) income before income taxes	(25.7)	7.1	(133.6)	10.4
Income tax expense	2.7	3.2	3.6	5.0
Net (loss) income	(28.4)	3.9	(137.2)	5.4
Net income attributable to noncontrolling interest	0.3	0.3	0.6	0.3
Net (loss) income attributable to controlling interest	($28.7)	$3.6	($137.8)	$5.1

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 pending LED Business Divestiture of $19.5 million.

The following table presents the assets and liabilities of the LED Business classified as discontinued operations:


(in millions of U.S. Dollars)	December 27, 2020	June 28, 2020
Assets
Short-term investments	$8.0	$12.0
Accounts receivable, net	48.1	41.6
Inventories	49.8	57.2

Prepaid expenses	0.4	0.1
Other current assets	4.7	5.1
Current assets of discontinued operations	111.0	116.0

Property and equipment, net	57.8	60.3
Goodwill	58.3	180.3
Intangible assets, net	22.7	22.7
Deferred tax assets	5.1	5.1
Other assets	1.9	1.7
Valuation allowance on held for sale assets	(19.5)	—
Long-term assets of discontinued operations (1)	126.3	270.1

Liabilities
Accounts payable and accrued expenses	34.2	31.0
Accrued contract liabilities	22.1	24.1
Income taxes payable	0.9	2.0
Other current liabilities	3.4	3.1
Current liabilities of discontinued operations	60.6	60.2

Other long-term liabilities	10.1	9.8
Long-term liabilities of discontinued operations (1)	10.1	9.8

(1) Long-term assets and liabilities of discontinued operations as of December 27, 2020 are classified as current on the consolidated balance sheet as the Company expects the transaction to close within twelve months of the balance sheet date.