Discontinued Operations

9 Months Ended

Mar. 28, 2021

Discontinued Operations and Disposal Groups [Abstract]

On March 1, 2021, the Company completed the LED Business Divestiture pursuant to the terms of the previously reported Asset Purchase Agreement (the Purchase Agreement), dated October 18, 2020, as amended. Pursuant to the 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 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 Company Limited, 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 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 (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 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 the maturity date of the Purchase Price Note and Earnout Note. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note will mature on March 27, 2025. The Company recognized a loss on sale of the LED Business of $26.3 million. The cost of selling the LED Business was $27.4 million, which was recognized throughout fiscal 2020 and 2021.

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.

Because the LED Business Divestiture represented 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 as of June 28, 2020.

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		Nine months ended
(in millions of U.S. Dollars)	March 28, 2021	March 29, 2020	March 28, 2021	March 29, 2020
Revenue, net	$66.5	$101.7	$272.8	$336.0
Cost of revenue, net	50.3	81.5	213.3	267.8
Gross profit	16.2	20.2	59.5	68.2
Operating expenses:
Research and development	5.9	8.1	22.3	25.2
Sales, general and administrative	12.5	8.1	29.4	24.5
Goodwill impairment	—	—	112.6	—
Impairment on assets held for sale	—	—	19.5	—
(Gain) loss on disposal or impairment of long-lived assets	(0.6)	0.2	(1.6)	0.4
Other operating expense	6.2	5.6	18.7	9.6
Operating (loss) income	(7.8)	(1.8)	(141.4)	8.5
Non-operating income	(0.3)	(0.2)	(0.3)	(0.3)
(Loss) income before income taxes and loss on sale	(7.5)	(1.6)	(141.1)	8.8
Loss on sale	26.3	—	26.3	—
(Loss) income before income taxes	(33.8)	(1.6)	(167.4)	8.8
Income tax expense	7.8	2.1	11.4	7.1
Net (loss) income	(41.6)	(3.7)	(178.8)	1.7
Net income attributable to noncontrolling interest	0.8	0.2	1.4	0.5
Net (loss) income attributable to controlling interest	($42.4)	($3.9)	($180.2)	$1.2

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.

For the three and nine months ended March 28, 2021, the Company recognized $7.8 million and $11.4 million of income tax expense related to discontinued operations, respectively, which primarily related to the foreign operations of the LED Business. Income tax expense related to discontinued operations for the three and nine months ended March 28, 2021 includes $4.1 million 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.

For the three and nine months ended March 29, 2020, the Company recognized $2.1 million and $7.1 million of income tax expense related to discontinued operations, respectively, which primarily related to the foreign operations of the LED Business.

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 12, "Income Taxes."

For the three and nine months ended March 28, 2021, the Company recognized $0.3 million and $1.0 million in administrative fees related to the LED RELA and the LED TSA, respectively, all of which are included in accounts receivable, net in the consolidated balance sheets as of March 28, 2021. These fees 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, of which $27.9 million was outstanding as of March 28, 2021. The supply agreement liability is recognized in other current liabilities and other long-term liabilities on the consolidated balance sheets.

The Company recognized a net loss of $0.1 million in non-operating expense, net for the three and nine months ended March 28, 2021 related to the Wafer Supply Agreement. A receivable of $7.2 million was included in other assets in the consolidated balance sheets as of March 28, 2021.

The following table presents the assets and liabilities of the LED Business classified as discontinued operations as of June 28, 2020:


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

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

Property and equipment, net									60.3
Goodwill									180.3
Intangible assets, net									22.7
Deferred tax assets									5.1
Other assets									1.7

Long-term assets of discontinued operations									270.1

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

Other long-term liabilities									9.8
Long-term liabilities of discontinued operations									9.8