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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21154
__________________________________________ 
CREE, INC.
(Exact name of registrant as specified in its charter)
North Carolina
 
56-1572719
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
4600 Silicon Drive
 
 
Durham
North Carolina
 
27703
(Address of principal executive offices)
 
(Zip Code)
(919) 407-5300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.00125 par value
 CREE
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of October 25, 2019, was 107,709,722.


Table of Contents

CREE, INC.
FORM 10-Q
For the Quarterly Period Ended September 29, 2019
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)

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CREE, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
September 29, 2019
 
June 30, 2019
(in millions of U.S. Dollars, except share data)
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$433.3

 

$500.5

Short-term investments
560.6

 
550.9

Total cash, cash equivalents and short-term investments
993.9

 
1,051.4

Accounts receivable, net
137.6

 
128.9

Inventories
182.9

 
187.4

Income taxes receivable

 
0.2

Prepaid expenses
22.8

 
23.3

Other current assets
15.6

 
19.7

Current assets held for sale
0.2

 
1.9

Total current assets
1,353.0

 
1,412.8

Property and equipment, net
656.5

 
625.2

Goodwill
530.0

 
530.0

Intangible assets, net
191.9

 
197.9

Other long-term investments
42.9

 
39.5

Deferred tax assets
5.1

 
5.6

Other assets
17.2

 
5.9

Total assets

$2,796.6

 

$2,816.9

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses

$174.5

 

$200.9

Income taxes payable
1.4

 
3.0

Accrued contract liabilities
43.2

 
45.8

Other current liabilities
23.6

 
18.5

Total current liabilities
242.7

 
268.2

Long-term liabilities:
 
 
 
Convertible notes, net
474.7

 
469.1

Deferred tax liabilities
1.5

 
2.0

Other long-term liabilities
52.1

 
36.4

Total long-term liabilities
528.3

 
507.5

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, par value $0.01; 3,000 shares authorized at September 29, 2019 and June 30, 2019; none issued and outstanding

 

Common stock, par value $0.00125; 200,000 shares authorized at September 29, 2019 and June 30, 2019; 107,697 and 106,570 shares issued and outstanding at September 29, 2019 and June 30, 2019, respectively
0.1

 
0.1

Additional paid-in-capital
2,895.8

 
2,874.1

Accumulated other comprehensive income
10.0

 
9.5

Accumulated deficit
(885.3
)
 
(847.5
)
Total shareholders’ equity
2,020.6

 
2,036.2

Non-controlling interest
5.0

 
5.0

Total equity
2,025.6

 
2,041.2

Total liabilities and shareholders’ equity

$2,796.6

 

$2,816.9

The accompanying notes are an integral part of the consolidated financial statements

4

Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three months ended
 
September 29, 2019
 
September 23, 2018
(in millions of U.S. Dollars, except share data)
 
 
 
Revenue, net

$242.8

 

$274.2

Cost of revenue, net
168.6

 
175.9

Gross profit
74.2

 
98.3

Operating expenses:
 
 
 
Research and development
43.7

 
36.3

Sales, general and administrative
57.6

 
43.9

Amortization or impairment of acquisition-related intangibles
3.6

 
3.9

Loss on disposal or impairment of other assets
1.0

 
0.4

Other operating expense
7.2

 
3.0

Operating (loss) income
(38.9
)
 
10.8

Non-operating (income) expense, net
(1.6
)
 
9.7

(Loss) income before income taxes
(37.3
)
 
1.1

Income tax expense
0.5

 
1.9

Net loss from continuing operations
(37.8
)
 
(0.8
)
Net loss from discontinued operations

 
(10.3
)
Net loss
(37.8
)
 
(11.1
)
Net income attributable to noncontrolling interest

 

Net loss attributable to controlling interest

($37.8
)
 

($11.1
)
 
 
 
 
Basic and diluted loss per share
 
 
 
Continuing operations attributable to controlling interest

($0.35
)
 

($0.01
)
Net loss attributable to controlling interest

($0.35
)
 

($0.11
)
 
 
 
 
Weighted average shares - basic and diluted (in thousands)
107,113

 
101,884

The accompanying notes are an integral part of the consolidated financial statements

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Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 
Three months ended
(in millions of U.S. Dollars)
September 29, 2019
 
September 23, 2018
Net loss

($37.8
)
 

($11.1
)
Other comprehensive loss:
 
 
 
Currency translation gain

 
0.3

Net unrealized gain (loss) on available-for-sale securities
0.5

 
(0.3
)
Comprehensive loss
(37.3
)
 
(11.1
)
Net income attributable to non-controlling interest

 

Comprehensive loss attributable to controlling interest

($37.3
)
 

($11.1
)
The accompanying notes are an integral part of the consolidated financial statements

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CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total Equity - Controlled Interest
 
Non-controlling Interest
 
Total Equity
(in millions of U.S Dollars, except share data)
Number
of Shares
 
Par Value
 
Balance at June 30, 2019
106,570

 

$0.1

 

$2,874.1

 

($847.5
)
 

$9.5

 

$2,036.2

 

$5.0

 

$2,041.2

Net loss

 

 

 
(37.8
)
 

 
(37.8
)
 

 
(37.8
)
Unrealized gain on available-for-sale securities

 

 

 

 
0.5

 
0.5

 

 
0.5

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(37.3
)
 

 
(37.3
)
Tax withholding on vested equity awards

 

 
(14.3
)
 

 

 
(14.3
)
 

 
(14.3
)
Stock-based compensation

 

 
17.4

 

 

 
17.4

 

 
17.4

Exercise of stock options and issuance of shares
1,127

 

 
18.6

 

 

 
18.6

 

 
18.6

Balance at September 29, 2019
107,697

 

$0.1

 

$2,895.8

 

($885.3
)
 

$10.0

 

$2,020.6

 

$5.0

 

$2,025.6

The accompanying notes are an integral part of the consolidated financial statements

7

Table of Contents

CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total Equity - Controlled Interest
 
Non-controlling Interest
 
Total Equity
(in millions of U.S. Dollars, except share data)
Number
of Shares
 
Par Value
 
Balance at June 24, 2018
101,488

 

$0.1

 

$2,549.1

 

($482.7
)
 

$0.6

 

$2,067.1

 

$5.0

 

$2,072.1

Net loss

 

 

 
(11.1
)
 

 
(11.1
)
 

 
(11.1
)
Currency translation gain

 

 

 

 
0.3

 
0.3

 

 
0.3

Unrealized loss on available-for-sale securities

 

 

 

 
(0.3
)
 
(0.3
)
 

 
(0.3
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
(11.1
)
 

 
(11.1
)
Tax withholding on vested equity awards

 

 
(10.8
)
 

 

 
(10.8
)
 

 
(10.8
)
Stock-based compensation

 

 
12.1

 

 

 
12.1

 

 
12.1

Exercise of stock options and issuance of shares
1,032

 

 
15.5

 

 

 
15.5

 

 
15.5

Convertible note issuance

 

 
110.6

 

 

 
110.6

 

 
110.6

Adoption of ASC 606

 

 

 
10.3

 

 
10.3

 

 
10.3

Balance at September 23, 2018
102,520

 

$0.1

 

$2,676.5

 

($483.5
)
 

$0.6

 

$2,193.7

 

$5.0

 

$2,198.7

The accompanying notes are an integral part of the consolidated financial statements

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Table of Contents


CREE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three months ended
(in millions of U.S. Dollars)
September 29, 2019
 
September 23, 2018
Operating activities:
 
 
 
Net loss from continuing operations

($37.8
)
 

($0.8
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
28.6

 
29.5

Amortization of debt issuance costs and discount
5.6

 
1.8

Stock-based compensation
16.9

 
10.0

Loss on disposal or impairment of long-lived assets
1.0

 
0.5

Amortization of premium/discount on investments

 
0.8

(Gain)/loss on equity investment
(3.5
)
 
6.7

Foreign exchange loss on equity investment
0.1

 
0.6

Deferred income taxes

 
(2.3
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(8.8
)
 
(7.4
)
Inventories
5.0

 
(7.9
)
Prepaid expenses and other assets
7.9

 
1.1

Accounts payable, trade
(21.7
)
 
3.4

Accrued salaries and wages and other liabilities
(20.5
)
 
4.2

Accrued contract liabilities
7.2

 
0.9

Net cash (used in) provided by operating activities of continuing operations
(20.0
)
 
41.1

Net cash provided by operating activities of discontinued operations

 
3.7

Cash (used in) provided by operating activities
(20.0
)
 
44.8

Investing activities:
 
 
 
Purchases of property and equipment
(42.0
)
 
(31.0
)
Purchases of patent and licensing rights
(1.1
)
 
(2.4
)
Proceeds from sale of property and equipment

 
0.2

Purchases of short-term investments
(134.0
)
 
(145.8
)
Proceeds from maturities of short-term investments
93.0

 
58.3

Proceeds from sale of short-term investments
31.8

 
24.8

Net cash used in investing activities of continuing operations
(52.3
)
 
(95.9
)
Net cash used in investing activities of discontinued operations

 
(6.4
)
Cash used in investing activities
(52.3
)
 
(102.3
)
Financing activities:
 
 
 
Proceeds from long-term debt borrowings

 
95.0

Payments on long-term debt borrowings

 
(387.0
)
Proceeds from convertible notes

 
575.0

Payments of debt issuance costs

 
(12.9
)
Proceeds from issuance of common stock
18.6

 
15.5

Tax withholding on vested equity awards
(13.2
)
 
(10.8
)
Net cash provided by financing activities of continuing operations
5.4

 
274.8

Net cash provided by financing activities of discontinued operations

 

Cash provided by financing activities
5.4

 
274.8

Effects of foreign exchange changes on cash and cash equivalents
(0.3
)
 
0.1

Net change in cash and cash equivalents
(67.2
)
 
217.4

Cash and cash equivalents, beginning of period
500.5

 
118.9

Cash and cash equivalents, end of period

$433.3

 

$336.3

The accompanying notes are an integral part of the consolidated financial statements

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CREE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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Note 1Basis of Presentation and New Accounting Standards
Overview
Cree, Inc. (the Company) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials, products for power and radio-frequency (RF) applications and specialty lighting-class light emitting diode (LED) products. The Company's silicon carbide and gallium nitride materials and products are targeted for applications such as transportation, power supplies, inverters, wireless systems, and the Company's LEDs are targeted for indoor and outdoor lighting, electronic signs and signals and video displays.
The Company operates in two reportable segments:
Wolfspeed, which consists of silicon carbide and gallium nitride (GaN) materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon. 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.
LED Products, which consists of LED chips and LED components. The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.
Previously, the Company designed, manufactured and sold LED lighting fixtures and lamps for the commercial, industrial and consumer markets. The Company referred to these product lines as the Lighting Products business unit. As discussed in Note 2, “Discontinued Operations,” on May 13, 2019, the Company sold its Lighting Products business unit to IDEAL Industries, Inc. (IDEAL). Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to the Company's continuing operations.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, California, Arkansas and China. The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. The Company operates research and development facilities in North Carolina, Arizona, Arkansas, California and China (including Hong Kong).
Cree, Inc. is a North Carolina corporation established in 1987, and its headquarters are in Durham, North Carolina.
Basis of Presentation
The consolidated financial statements presented herein have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive loss, shareholders' equity and cash flows at September 29, 2019, and for all periods presented, have been made. All material intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 30, 2019 has been derived from the audited financial statements as of that date.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (fiscal 2019). The results of operations for the three months ended September 29, 2019 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 28, 2020 (fiscal 2020). Historical periods presented include reclassifications to reflect discontinued operations (see Note 2, "Discontinued Operations").
The preparation of consolidated financial statements in conformity with 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. Actual amounts could differ materially from those estimates.
The Company revised net cash provided by operating activities and net cash provided by financing activities for the three months ended September 23, 2018 to correct the presentation of tax withholding for stock option exercises. The Company increased net cash provided by operating activities by $10.8 million and decreased net cash provided by financing activities by the same amount. The Company will also revise the unaudited consolidated statements of cash flows for the year to date periods ended December 30, 2018 and March 31, 2019 in the unaudited interim consolidated financial statements to be filed in the Quarterly Reports on Form 10-Q for the corresponding periods in fiscal 2020 to correct the presentation of tax withholding for stock option exercises. The revisions will result in an increase to net cash provided by operating activities of $11.9 million and $12.4 million, and a decrease to net cash provided by financing activities by the same amounts for the year to date periods ended December 30, 2018

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and March 31, 2019, respectively. The Company concluded these errors were not material individually or in the aggregate to any of the periods impacted.
Certain prior period amounts related to the Lighting Products business unit in the accompanying statements of cash flows have been reclassified to conform to the current year presentation. These reclassifications pertain to the presentation of discontinued operations within operating, investing and financing activities. This reclassification did not impact cash provided by (used in) operating, investing, or financing activities.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842) (ASC 842), and ASU 2018-10: Codification Improvements to ASC 842, Leases. These ASUs require that a lessee recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term and requires enhanced disclosures about an entity’s leasing arrangements. The Company adopted this standard on July 1, 2019, under the modified retrospective transition approach with the cumulative effect of application recognized at the effective date, without adjustment to prior comparative periods. The Company elected to utilize the transition package of practical expedients that allows the Company to not reassess (1) whether any expired or existing contracts are leases, or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. Further, the Company elected the practical expedient to not separate lease and non-lease components for all leases and account for the combined lease and non-lease components as a single lease component. The Company also made an accounting policy election to exclude leases with an initial term of 12 months or less from the consolidated balance sheets.
The adoption of the new standard resulted in the recognition of $12.2 million of lease liabilities with corresponding right-of-use assets of $12.3 million as of July 1, 2019. As required, the right-of-use assets include the effect of reclassifying certain balances including deferred and prepaid rent, a portion of facilities-related restructuring accrual reserves, and a favorable lease intangible asset previously recognized in connection with an acquisition. The Company did not have a cumulative-effect adjustment to retained earnings as a result of the adoption of the new standard. The standard did not materially impact the Company's results from operations and had no impact on cash flows. See Note 4, "Leases," for additional disclosures, as required by the new standard.
The reported results as of and for the three months ended September 29, 2019 reflect the application of the new accounting guidance, while the reported results for prior periods have not been adjusted and continue to be reported in accordance with the Company's historical accounting under ASC 840, Leases.
Accounting Pronouncements Pending Adoption
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU introduces a new accounting model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. The Company will adopt this standard on June 29, 2020 and is currently evaluating the impact on its consolidated financial statements.
Note 2Discontinued Operations
On May 13, 2019, the Company completed the sale of (a) certain manufacturing facilities and equipment, inventory, intellectual property rights, contracts, and real estate of the Company used by the Company's Lighting Products business unit, which includes LED lighting fixtures, lamps and corporate lighting solutions for commercial, industrial and consumer applications, and (b) all of the issued and outstanding equity interests of E-conolight LLC (E-conolight), Cree Canada Corp. and Cree Europe S.r.l., each a wholly owned subsidiary of the Company (collectively, the Lighting Products business unit) to IDEAL, pursuant to the Purchase Agreement, dated March 14, 2019, as amended, between the Company and IDEAL (the Purchase Agreement). The Company retained certain liabilities associated with the Lighting Products business unit arising prior to the closing of the sale. The Lighting Products business unit represented the Lighting Products segment disclosed in the Company's historical financial statements.

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The aggregate net proceeds from the sale of the Lighting Products business unit was $219.0 million in cash, which is subject to certain adjustments. Additionally, the Company is entitled to an earnout payment subject to the future performance of the Lighting Products business unit. In connection with the transaction, the Company and IDEAL entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which assigned to IDEAL certain intellectual property owned by the Company and licensed to IDEAL certain additional intellectual property owned by the Company; (ii) a Transition Services Agreement (the TSA), which is designed to ensure a smooth transition of the Lighting Products business unit to IDEAL; (iii) an LED Supply Agreement (the LED Supply Agreement), pursuant to which the Company will supply IDEAL with certain LED chip and component products for three years; and (iv) a Real Estate License Agreement, which will allow IDEAL to use certain premises owned by the Company to conduct certain operations of the Lighting Products business unit after closing. The Company recognized a loss on the sale of $66.2 million.
The Company has classified the results of the Lighting Products business unit as discontinued operations, the results of which for the three months ended September 23, 2018 are as follows:
 
Three months ended
(in millions of U.S. Dollars)
September 23, 2018
Revenue, net

$134.1

Cost of revenue, net
104.2

Gross profit
29.9

Operating expenses:
 
Research and development
9.7

Sales, general and administrative
23.8

Amortization or impairment of acquisition-related intangibles
4.6

Loss on disposal or impairment of long-lived assets
0.1

Other operating expense
1.9

Operating loss
(10.2
)
Non-operating income
(0.2
)
Loss before income taxes
(10.0
)
Income tax expense
0.3

Net loss

($10.3
)

The Company did not have any discontinued operations activity for the three months ended September 29, 2019.
The Company recognized $3.0 million in administrative fees for the three months ended September 29, 2019 relating to the TSA, of which $0.9 million are included in accounts receivable, net in the consolidated balance sheets as of September 29, 2019. These fees were recorded as a reduction of sales, general and administrative expense in the consolidated statements of operations.
The Company recognized $2.9 million in revenue for the three months ended September 29, 2019 related to the LED Supply Agreement. No amounts were included in accounts receivable, net in the consolidated balance sheets as of September 29, 2019 relating to the LED Supply Agreement. Additionally, the Company recorded a contract liability of $12.6 million relating to the LED Supply Agreement as of September 29, 2019. The contract liability is recognized in contract liabilities and other long term liabilities on the consolidated balance sheets.
Note 3Revenue Recognition
In accordance with ASC 606, the Company follows a five-step approach defined by the new standard 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 deferred revenue, price protection guarantees and the Company's liability under the LED Supply Agreement. Contract liabilities were $87.6 million as of September 29, 2019 and $80.4 million as of June 30, 2019, the date the Company adopted ASC 606. The increase was primarily due to increased customer deposits. Contract liabilities are recorded within accrued contract liabilities and other long-term liabilities on the balance sheet. Before the adoption of ASC 606, liabilities relating to various rights of return were recorded as a deduction to accounts receivable.

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Disaggregated revenue by geography is presented in Note 14, "Reportable Segments". For the three months ended September 29, 2019, the Company recognized revenue of $1.0 million that was included in contract liabilities as of June 30, 2019. The amount recognized primarily related to the recognition of contingent liabilities related to the LED Supply Agreement and deferred revenue. Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the three months ended September 29, 2019.
Note 4Leases
The Company primarily leases manufacturing, office and warehousing space. 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.
The Company does not have any finance lease arrangements.
Accounting Policy
At lease inception, the Company determines a contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In evaluating whether it has the right to control the use of an identified asset, the Company assesses whether they have the right to direct the use of the identified asset and to obtain substantially all of the economic benefit from the use of the identified asset.
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.
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 uses the implicit rate when readily determinable. Operating lease expense is generally recognized on a straight-line basis over the lease term.
The Company has agreements with lease and non-lease components, which are accounted for as a single lease component. Leases with a lease term of 12 months or less are not recorded on the balance sheet. 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.
Balance Sheet
Lease assets and liabilities as of September 29, 2019, and the corresponding balance sheet classifications, are as follows (in millions of U.S. Dollars):
Category
Balance Sheet Classification
Amount

Right-of-use asset
Other assets

$11.4

Current lease liability
Other current liabilities
5.3

Non-current lease liability
Other long-term liabilities
6.0


Statement of Operations
Operating lease expense was $1.4 million for three months ended September 29, 2019. Short-term lease expense, variable lease expense and lease income were immaterial for the three months ended September 29, 2019.
Cash Flows
Cash flow information consisted of the following:

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Three months ended
(in millions of U.S. Dollars)
September 29, 2019
Cash used in operating activities:
 
Cash paid for operating leases

$1.5

Non-cash operating activities:
 
Lease additions due to adoption of ASC 842
12.2

Lease modifications, net
0.5


Lease Liability Maturities
Maturities of lease liabilities as of September 29, 2019 were as follows:
Fiscal Years Ending
(in millions of U.S. Dollars)
June 28, 2020 (remainder of fiscal 2020)

$4.7

June 27, 2021
3.6

June 26, 2022
2.4

June 25, 2023
1.0

June 30, 2024
0.2

Thereafter

Total lease payments
11.9

Imputed lease interest
(0.6
)
Total lease liabilities

$11.3


As of September 29, 2019, the weighted average remaining lease term was 31 months and the weighted average discount rate was 3.79%.
As previously disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2019 and under the previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on its operating leases as of June 30, 2019, were as follows:
Fiscal Years Ending
(in millions of U.S. Dollars)
June 28, 2020

$4.1

June 27, 2021
2.3

June 26, 2022
1.2

June 25, 2023
0.7

June 30, 2024

Thereafter

Total future minimum rental payments

$8.3


Note 5Financial Statement Details
Accounts Receivable, net

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Table of Contents

Accounts receivable, net consisted of the following:
(in millions of U.S. Dollars)
September 29, 2019
 
June 30, 2019
Billed trade receivables

$135.1

 

$125.8

Unbilled contract receivables
0.7

 
0.7

Royalties
2.2

 
2.8

 
138.0

 
129.3

Allowance for bad debts
(0.4
)
 
(0.4
)
Accounts receivable, net

$137.6

 

$128.9


Inventories
Inventories consisted of the following:
(in millions of U.S. Dollars)
September 29, 2019
 
June 30, 2019
Raw material

$41.8

 

$42.4

Work-in-progress
95.3

 
101.1

Finished goods
45.8

 
43.9

Inventories

$182.9

 

$187.4


Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
(in millions of U.S. Dollars)
September 29, 2019
 
June 30, 2019
Accounts payable, trade

$84.5

 

$90.7

Accrued salaries and wages
53.9

 
70.9

Accrued expenses
29.9

 
34.0

Other
6.2

 
5.3

Accounts payable and accrued expenses

$174.5

 

$200.9


Other Operating Expense
Other operating expense consisted of the following:
 
Three months ended
(in millions of U.S. Dollars)
September 29, 2019
 
September 23, 2018
Factory optimization restructuring

$1.2

 

$

Severance and other restructuring
0.8

 
2.6

Total restructuring costs
2.0

 
2.6

Project, transformation and transaction costs
2.6

 
0.4

Factory optimization start-up costs
1.4

 

Non-restructuring related executive severance
1.2

 

Other operating expense

$7.2

 

$3.0



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Table of Contents

Accumulated Other Comprehensive Income, net of taxes
Accumulated other comprehensive income, net of taxes, consisted of the following:
(in millions of U.S. Dollars)
September 29, 2019
 
June 30, 2019
Currency translation gain

$9.5

 

$9.5

Net unrealized gain on available-for-sale securities
0.5

 

Accumulated other comprehensive income, net of taxes

$10.0

 

$9.5


Reclassifications Out of Accumulated Other Comprehensive Income
The Company reclassified less than $0.1 million out of accumulated other comprehensive income for the three months ended September 29, 2019. Amounts were reclassified to non-operating (income) expense, net on the consolidated statements of operations. No amounts were reclassified out of accumulated other comprehensive income for the three months ended September 23, 2018.
Non-Operating (Income) Expense, net
The following table summarizes the components of non-operating (income) expense, net:
 
Three months ended
(in millions of U.S. Dollars)
September 29, 2019
 
September 23, 2018
Foreign currency loss, net

$0.1

 

$0.6

(Gain) loss on equity investment, net
(3.5
)
 
6.7

Interest expense, net
1.9

 
2.4

Other, net
(0.1
)
 

Non-operating (income) expense, net

($1.6
)
 

$9.7


The change in (gain) loss on equity investment, net is due to the increase in the Lextar Electronics Corporation (Lextar) stock price.
Statements of Cash Flows - non-cash activities
 
Three months ended
Non-cash operating activities
September 29, 2019
 
September 23, 2018
Increase of right-of-use assets and lease liabilities(1)

$12.2

 

$

Lease asset and liability modifications, net
0.5

 

(1) Amount represents the increase in right-of-use assets and matching lease liabilities as a result of adopting ASC 842. See Note 4, "Leases", for further information.
Accrued property and equipment as of September 29, 2019 and September 23, 2018 was $8.8 million and $15.4 million, respectively.
Note 6Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. Treasury securities, variable rate demand notes, commercial paper and certificates of deposit. All short-term investments are classified as available-for-sale. Other long-term investments consist of the Company's ownership interest in Lextar.

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Table of Contents

Short-term investments as of September 29, 2019 and June 30, 2019 consisted of the following:
 
 
September 29, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$62.4

 

$0.3

 

($0.1
)
 

$62.6

Corporate bonds
 
275.8

 
1.3

 

 
277.1

U.S. agency securities
 
22.5

 

 

 
22.5

U.S. treasury securities
 
104.5

 
0.1

 

 
104.6

Non-U.S. certificates of deposit
 
61.1

 

 

 
61.1

U.S. certificates of deposit
 
20.5

 

 

 
20.5

Commercial paper
 
12.2

 

 

 
12.2

Total short-term investments
 

$559.0

 

$1.7

 

($0.1
)
 

$560.6

 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Municipal bonds
 

$78.2

 

$0.4

 

($0.1
)
 

$78.5

Corporate bonds
 
256.0

 
1.0

 

 
257.0

U.S. agency securities
 
25.6

 

 

 
25.6

U.S. treasury securities
 
92.4

 
0.1

 

 
92.5

Non-U.S. certificates of deposit
 
49.1

 
1.1

 

 
50.2

U.S. certificates of deposit
 
22.4

 

 

 
22.4

Variable rate demand note
 
16.9

 

 

 
16.9

Commercial paper
 
7.8

 

 

 
7.8

Total short-term investments
 

$548.4

 

$2.6

 

($0.1
)
 

$550.9




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Table of Contents

The following tables present 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: 
 
 
September 29, 2019
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$23.4

 

($0.1
)
 

$3.7

 

$

 

$27.1

 

($0.1
)
Corporate bonds
 
42.7

 

 
2.4

 

 
45.1

 

U.S. agency securities
 
10.0

 

 

 

 
10.0

 

U.S. treasury securities
 
9.5

 

 
3.9

 

 
13.4

 

Total
 

$85.6

 

($0.1
)
 

$10.0

 

$

 

$95.6

 

($0.1
)
Number of securities with an unrealized loss
 
 
 
74

 
 
 
10

 
 
 
84

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
Less than 12 Months
 
Greater than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Municipal bonds
 

$4.3

 

$

 

$29.8

 

($0.1
)
 

$34.1

 

($0.1
)
Corporate bonds
 
41.8

 

 
14.7

 

 
56.5

 

U.S. agency securities
 
7.7

 

 

 

 
7.7

 

U.S. treasury securities
 
2.0

 

 
3.9

 

 
5.9

 

Total
 

$55.8

 

$

 

$48.4

 

($0.1
)
 

$104.2

 

($0.1
)
Number of securities with an unrealized loss
 
 
 
46

 
 
 
47

 
 
 
93


The Company utilizes specific identification in computing realized gains and losses on the sale of investments. There were no realized losses on the sale of investments for the three months ended September 29, 2019 and September 23, 2018. If incurred, realized losses are included in non-operating expense in the consolidated statements of operations. Unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.
The Company evaluates its investments for possible impairment or a decline in fair value below cost basis that is deemed to be other-than-temporary on a periodic basis. It considers such factors as the length of time and extent to which the fair value has been below the cost basis, the financial condition of the investee, and its ability and intent to hold the investment for a period of time that may be sufficient for an anticipated full recovery in market value. Accordingly, the Company considered declines in its investments to be temporary in nature, and did not consider its investments to be impaired as of September 29, 2019 and June 30, 2019.
The contractual maturities of short-term investments as of September 29, 2019 were as follows:
 
 
 
Within One Year
 
After One, Within Five Years
 
After Five, Within Ten Years
 
After Ten
Years
 
Total
Municipal bonds
 

$24.9

 

$37.7

 

$

 

$

 

$62.6

Corporate bonds
 
157.1

 
120.0

 

 

 
277.1

U.S. agency securities
 
11.0

 
11.5

 

 

 
22.5

U.S. treasury securities
 
93.4

 
11.2

 

 

 
104.6

Non-U.S. certificates of deposit
 
60.1

 
1.0

 

 

 
61.1

U.S. certificates of deposit
 
20.5

 

 

 

 
20.5

Commercial paper
 
12.2