Discontinued Operations

12 Months Ended

Jun. 26, 2022

Discontinued Operations and Disposal Groups [Abstract]

On March 1, 2021, the Company completed 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 (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 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 in the fourth quarter of 2022 and will mature on March 27, 2025. The Earnout Note will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months. One bullet payment of principal and all accrued and unpaid interest will be payable on the maturity date of the Earnout Note. 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.

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 (the Early Payment). In conjunction with the Early Payment, the Company transferred naming rights and trademarks related to Cree, Inc. and the CREE brand to SMART (the Trademark Transfer), resulting in a write-off of trademarks of $1.1 million and recorded within (gain) loss on disposal or impairment of other assets in the consolidated statements of operations.

Because the Early Payment did not include additional consideration in exchange for the Trademark Transfer, the Company allocated consideration from the principal amount to the value of the trademarks transferred to SMART. The Company allocated $1.8 million of the Early Payment to the value of trademarks transferred to SMART, resulting in a gain recorded in (gain) loss on disposal or impairment of other assets in the consolidated statements of operations. The remaining unallocated portion of the Early Payment of $123.2 million was then applied to the note receivable balance of $124.4 million at the time of payment, resulting in a loss of $1.2 million recorded in non-operating expense, net on the consolidated statements of operations. The net impact to the consolidated statements of operations from the Early Payment was a loss of $0.5 million.

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 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) income from

discontinued operations, net of income taxes in the Company's consolidated statements of operations for the fiscal years ended June 27, 2021 and June 28, 2020:


	Fiscal Years Ended
(in millions of U.S. Dollars)	June 27, 2021	June 28, 2020
Revenue, net	$272.8	$433.2
Cost of revenue, net	213.3	343.4
Gross profit	59.5	89.8
Operating expenses:
Research and development	22.3	32.2
Sales, general and administrative	29.4	29.7
Goodwill impairment	112.6	—
Impairment on assets held for sale	19.5	—
Gain on disposal or impairment of long-lived assets	(1.6)	(0.1)
Other operating expense	18.7	13.3
Operating (loss) income	(141.4)	14.7
Non-operating income	(0.3)	(0.5)
(Loss) income before income taxes and loss on sale	(141.1)	15.2
Loss on sale	29.1	—
(Loss) income before income taxes	(170.2)	15.2
Income tax expense	11.0	8.2
Net (loss) income	(181.2)	7.0
Net income attributable to noncontrolling interest	1.4	1.1
Net (loss) income attributable to controlling interest	($182.6)	$5.9

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, June 27, 2021 and June 28, 2020, the Company recognized $3.9 million, $11.0 million and $8.2 million, respectively, of income tax expense related to discontinued operations, which primarily related to the foreign operations of the 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 26, 2022 and June 27, 2021, the Company recognized $3.6 million and $1.2 million in administrative fees related to the LED RELA, respectively, of which $0.3 million are included in accounts receivable, net in the consolidated balance sheets as of June 26, 2022. 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 26, 2022 and June 27, 2021, the Company recognized $9.2 million and $4.0 million in administrative fees related to the LED TSA, respectively, of which $0.6 million are included in accounts receivable, net in the consolidated balance sheets as of June 26, 2022. 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, of which $6.4 million was outstanding as of June 26, 2022. The supply agreement liability is recognized in other current liabilities on the consolidated balance sheets.

The Company recognized a net loss of $0.8 million and $0.8 million in non-operating expense, net for the fiscal years ended June 26, 2022 and June 27, 2021, respectively, related to the Wafer Supply Agreement. A receivable of $2.7 million was included in other assets in the consolidated balance sheets as of June 26, 2022.