What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-04-30 compared with 2020-01-30 · 118 added, 89 removed, 242 unchanged (46% of the section changed)

31 unchanged sentences

There are a number of industry factors that affect our business which include, among others:

• COVID-19 Outbreak.

The novel strain of coronavirus (COVID-19) has spread globally, including locations where we do business.

The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread are uncertain as of the date of this Quarterly Report as this continues to evolve globally.

The potential effects of COVID-19 could impact us in a number of other ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers on their ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges.

Additionally, COVID-19 could have a number of additional adverse effects, including additional laws and regulations affecting our business, fluctuations in foreign currency markets and the credit risks of our customers.

• Overall Demand for Products and Applications using silicon carbide power devices, GaN and silicon RF devices, and LEDs .

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To enforce or protect intellectual property rights, litigation or threatened litigation is common.

Overview of the six months ended December 29, 2019

The following is a summary of our financial results for the six months ended December 29, 2019:

• Revenue decreased to $482.7 million for the six months ended December 29, 2019 from $554.7 million for the six months ended December 30, 2018.

• Gross profit decreased to $136.1 million for the six months ended December 29, 2019 from $201.8 million for the six months ended December 30, 2018.

Gross margin was 28.2% for the six months ended December 29, 2019 and 36.4% for the six months ended December 30, 2018.

• Operating loss was $95.3 million for the six months ended December 29, 2019 compared to operating income of $20.8 million for the six months ended December 30, 2018.

• Diluted loss per share from continuing operations was $0.84 for the six months ended December 29, 2019 compared to $0.01 for the six months ended December 30, 2018.

• Combined cash, cash equivalents and short-term investments was $951.5 million at December 29, 2019 and $1,051.4 million at June 30, 2019.

• Cash used in operating activities from continuing operations was $11.8 million for the six months ended December 29, 2019 compared to cash provided by operating activities from continuing operations of $109.8 million for the six months ended December 30, 2018.

• Purchases of property and equipment were $101.0 million for the six months ended December 29, 2019 compared to $63.2 million for the six months ended December 30, 2018.

Overview of the nine months ended March 29, 2020

The following is a summary of our financial results for the nine months ended March 29, 2020:

• Revenue decreased to $698.2 million for the nine months ended March 29, 2020 from $828.7 million for the nine months ended March 31, 2019.

• Gross profit decreased to $197.5 million for the nine months ended March 29, 2020 from $302.3 million for the nine months ended March 31, 2019.

Gross margin was 28.3% for the nine months ended March 29, 2020 and 36.5% for the nine months ended March 31, 2019.

• Operating loss was $145.1 million for the nine months ended March 29, 2020 compared to operating income of $9.7 million for the nine months ended March 31, 2019.

• Diluted loss per share from continuing operations was $1.41 for the nine months ended March 29, 2020 compared to $0.23 for the nine months ended March 31, 2019.

• Combined cash, cash equivalents and short-term investments was $852.9 million at March 29, 2020 and $1,051.4 million at June 30, 2019.

• Cash used in operating activities from continuing operations was $39.5 million for the nine months ended March 29, 2020 compared to cash provided by operating activities from continuing operations of $179.7 million for the nine months ended March 31, 2019.

• Purchases of property and equipment were $168.9 million for the nine months ended March 29, 2020 compared to $93.3 million for the nine months ended March 31, 2019.

Business Outlook

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• LED Products - focus our efforts where our best-in-class technology and application-optimized solutions are differentiated and valued.

In regards to COVID-19, our manufacturing facilities in the United States are currently operating as essential businesses in states that have issued shelter in place orders.

We have instituted strict measures that balance employee safety with meeting the needs of business operations.

These measures include increased employee sick days, robust health screening, social distancing policies and cleaning protocols to ensure the safety of our employees and the protection of our customers, suppliers, and partners.

Our strong balance sheet and our ability to continue operations allows us to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the construction of new facilities in New York and North Carolina.

Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows are uncertain.

Results of Operations

Selected consolidated statements of operations data for the three and six months ended December 29, 2019 and December 30, 2018 is as follows:

Three months ended Six months ended

December 29, 2019 December 30, 2018 December 29, 2019 December 30, 2018

Selected consolidated statements of operations data for the three and nine months ended March 29, 2020 and March 31, 2019 is as follows:

Three months ended Nine months ended

March 29, 2020 March 31, 2019 March 29, 2020 March 31, 2019

(in millions of U.S.

9 unchanged sentences

Operating (loss) income (49.8) (23.1) (11.1) (4.1) (145.1) (20.8) 9.7 1.2

Non-operating (income) expense, net (5.1) (2.1) 5.6 2.0 (6.7) (1.4) 15.3 2.8

(Loss) income before income taxes (51.3) (21.4) 4.4 1.6 (88.6) (18.4) 5.5 1.0

Income tax expense 1.2 0.5 4.6 1.6 1.7 0.4 6.5 1.2

Non-operating expense, net 14.5 6.7 8.4 3.1 7.8 1.1 23.7 2.9

Loss before income taxes (64.3) (29.8) (19.5) (7.1) (152.9) (21.9) (14.0) (1.7)

Income tax (benefit) expense (2.9) (1.3) 2.8 1.0 (1.2) (0.2) 9.3 1.1

Net loss from continuing operations ($61.4) (28.5) ($22.3) (8.1) ($151.7) (21.7) ($23.3) (2.8)

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Revenue was comprised of the following:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Wolfspeed revenue $113.9 $141.2 ($27.3) (19) % $362.3 $403.9 ($41.6) (10) %

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Wolfspeed Segment Revenue

The decrease in Wolfspeed segment revenue for the three and six months ended December 29, 2019 compared to the three and six months ended December 30, 2018 was due to weakening demand in Power and RF product lines and the continued trade dispute between the United States and China.

For the three months ended December 29, 2019, the Wolfspeed segment had a 6% increase in overall average selling prices (ASP) offset by a 16% decrease in the number of units sold.

The increase in ASP was due to a greater mix of higher priced products.

For the six months ended December 29, 2019, the Wolfspeed segment had a 27% increase in ASP offset by a 26% decrease in the number of units sold.

The increase in ASP was due to a greater mix of higher priced products.

The decrease in Wolfspeed segment revenue for the three and nine months ended March 29, 2020 compared to the three and nine months ended March 31, 2019 was due to the ongoing trade dispute between the United States and China, along with recent supply, labor, output and customer impacts due to the COVID-19 outbreak.

The Wolfspeed products segment had a 33% decrease in overall average selling prices (ASP) offset by a 20% increase in the number of units sold for the three months ended March 29, 2020 and a 3% increase in ASP offset by a 13% decrease in the number of units sold for the nine months ended March 29, 2020.

LED Products Segment Revenue

LED Products segment revenue for both the three and six months ended December 29, 2019 decreased due to an overall market pause in global LED demand.

The LED Products segment had an 8% decrease in the number of units sold and an 11% decrease in ASP for the three months ended December 29, 2019 and an 8% decrease in the number of units sold and a 12% decrease in ASP for the six months ended December 29, 2019.

The decrease in LED Products segment revenue for the three and nine months ended March 29, 2020 compared to the three and nine months ended March 31, 2019 was due to overall market softness in global LED demand as well as supply, labor and output challenges due to the COVID-19 outbreak.

The LED Products segment had a 14% decrease in the number of units sold and an 11% decrease in ASP for the three months ended March 29, 2020 and a 10% decrease in the number of units sold and a 12% decrease in ASP for the nine months ended March 29, 2020.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Wolfspeed gross profit $45.5 $68.8 ($23.3) (34) % $146.3 $193.9 ($47.6) (25) %

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Wolfspeed Segment Gross Profit and Gross Margin

The decreases in Wolfspeed segment gross profit and gross margin for the three and six months ended December 29, 2019 compared to the three and six months ended December 30, 2018 are primarily due to higher product costs, lower yields and product mix shift, as well as higher inventory reserves related to product manufactured for Huawei Technologies Co., Ltd.

and its affiliates.

The decrease in Wolfspeed segment gross profit and gross margin for the three months ended March 29, 2020 compared to the three months ended March 31, 2019 are primarily due to higher costs driven by lower yields on new product introductions, changes in customer and product mix, and underutilization at our Morgan Hill facility.

The decrease in Wolfspeed segment gross profit and gross margin for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 are primarily due to higher costs driven by lower yields on new product introductions, changes in customer and product mix, underutilization at our Morgan Hill facility and higher inventory reserves related to product manufactured for Huawei Technologies Co., Ltd.

and its affiliates in the second quarter of fiscal 2020.

LED Products Segment Gross Profit and Gross Margin

The decreases in LED Products segment gross profit and gross margin for the three and six months ended December 29, 2019 compared to the three and six months ended December 30, 2018 are primarily due to lower revenue as a result of decreasing demand, as well as underutilization resulting from lower factory volumes.

The decreases in LED Products segment gross profit and gross margin for the three and nine months ended March 29, 2020 compared to the three and nine months ended March 31, 2019 are primarily due to lower revenue as a result of decreasing demand, as well as underutilization resulting from lower factory volumes and higher product costs.

Unallocated Costs

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These costs were not allocated to the reportable segments' gross profit because our CODM does not review them regularly when evaluating segment performance and allocating resources.

The increases in unallocated costs in both periods were primarily attributable to increased accruals for annual incentives, stock-based compensation and matching contributions under our 401(k) plan.

Unallocated costs stayed relatively flat for the three months ended March 29, 2020 compared to the three months ended March 31, 2019.

The increase in unallocated costs for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 were primarily attributable to increased stock-based compensation and matching contributions under our 401(k) plan.

Increases in these categories were primarily the result of increased headcount.

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Research and development expenses were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Research and development $46.7 $40.7 $6.0 15 % $137.7 $117.2 $20.5 17 %

Percent of revenue 22 % 15 % 20 % 14 %

The increase in research and development expenses for both periods was primarily due to our continued investment in our silicon carbide and GaN technologies.

The increases in research and development expenses for both periods was primarily due to our continued investment in our silicon carbide and GaN technologies.

Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.

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Sales, general and administrative expenses were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Sales, general and administrative $49.7 $50.6 ($0.9) (2) % $160.1 $143.7 $16.4 11 %

Percent of revenue 23 % 18 % 23 % 17 %

The increase in sales, general and administrative expenses for the three and six months ended December 29, 2019 compared to the three and six months ended December 30, 2018 are primarily due to increases in salaries and benefits, stock-based compensation and professional service fees related to transition services from the sale of the Lighting Products business unit.

Sales, general and administrative expenses stayed relatively flat for the three months ended March 29, 2020 compared to the three months ended March 31, 2019.

The increase in sales, general and administrative expenses for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 are primarily due to increases in salaries and benefits, stock-based compensation and professional service fees related to transition services from the sale of the Lighting Products business unit.

Amortization or Impairment of Acquisition-Related Intangibles

1 unchanged sentence

Amortization of intangible assets related to our acquisitions was as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Customer relationships $1.5 $1.8 ($0.3) (17) % $4.6 $5.4 ($0.8) (15) %

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Loss on disposal or impairment of other assets were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Loss on disposal or impairment of other assets $0.3 $5.3 ($5.0) (94) % $2.1 $5.7 ($3.6) (63) %

Loss on disposal or impairment of other assets for the three months ended December 29, 2019 primarily relates to the impairment of certain leasehold improvements.

Loss on disposal or impairment of other assets for the six months ended December 29, 2019 primarily relates to write-offs of impaired or abandoned patents as well as the impairment of certain leasehold improvements.

Loss on disposal or impairment of other assets for the three months ended March 29, 2020 primarily relates to write-offs of impaired or abandoned patents.

Loss on disposal or impairment of other assets for the nine months ended March 29, 2020 primarily relates to write-offs of impaired or abandoned patents as well as the impairment of certain leasehold improvements.

Loss on disposal or impairment of other assets for the three and nine months ended March 31, 2019 primarily relates to an impairment of other assets in conjunction with our disposal of the Lighting Products business unit.

Other Operating Expense

Other operating expense was as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Factory optimization restructuring $1.1 $— $1.1 100 % $3.5 $— $3.5 100 %

5 unchanged sentences

Other operating expense $10.8 $11.1 ($0.3) (3) % $31.8 $14.3 $17.5 122 %

*Percentage change not meaningful.

Factory optimization restructuring costs relate to the movement of equipment as well as disposals on certain long-lived assets.

2 unchanged sentences

Project, transformation and transaction costs primarily relate to professional services fees associated with acquisitions, divestitures and internal transformation programs.

Factory optimization start-up costs are additional start-up costs as part of our factory optimization efforts.

The increase in other operating expense was primarily due to increased project, transformation and transaction costs, start-up costs, and the addition of non-restructuring related executive severance costs in the three and six months ended December 29, 2019.

Non-Operating (Income) Expense, net

Non-operating (income) expense, net was comprised of the following:

Three months ended Six months ended

Factory optimization start-up costs are additional start-up costs as part of our factory optimization efforts, which began in the fourth quarter of fiscal 2019.

Other operating expense stayed relatively flat for the three months ended March 29, 2020 compared to the three months ended March 31, 2019.

The increase in other operating expense for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 was primarily due to increased project, transformation and transaction costs and the addition of factory optimization start-up costs in fiscal 2020.

Non-Operating Expense, net

Non-operating expense, net was comprised of the following:

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

(Gain) loss on sale of investments, net ($1.2) $— ($1.2) (100) % ($1.3) $0.1 ($1.4) (1,400) %

(Gain) loss on equity investment, net ($6.4) $1.9 ($8.3) (437) % ($9.9) $8.6 ($18.5) (215) %

Foreign currency (gain) loss, net (1.2) — (1.2) (100) % (1.1) 0.6 (1.7) (283) %

Interest expense, net 2.8 3.6 (0.8) (22) % 4.7 6.0 (1.3) (22) %

Loss on equity investment, net $19.1 $3.8 $15.3 403 % $9.2 $12.4 ($3.2) (26) %

Gain on arbitration proceeding (8.0) — (8.0) (100) % (8.0) — (8.0) (100) %

Foreign currency loss (gain), net 0.3 0.5 (0.2) (40) % (0.8) 1.1 (1.9) (173) %

Interest expense 7.5 7.4 0.1 1 % 22.6 18.8 3.8 20 %

Interest income (3.1) (3.6) 0.5 14 % (13.5) (9.0) (4.5) (50) %

Other, net (0.1) 0.3 (0.4) (133) % (0.4) 0.3 (0.7) (233) %

Non-operating (income) expense, net ($5.1) $5.6 ($10.7) (191) % ($6.7) $15.3 ($22.0) (144) %

(Gain) loss on equity investment, net .

The gain on equity investment for the three and six months ended December 29, 2019 was due to the increase in fair value of our Lextar Electronics Corporation (Lextar) investment.

Lextar’s stock is publicly traded on the Taiwan Stock Exchange and its share price increased from 14.75 New Taiwanese Dollars (TWD) per share at June 30, 2019 to 16.05 TWD at September 29, 2019 and to 18.40 TWD at December 29, 2019.

The loss on equity investment for the three and six months ended December 30, 2018 was due to Lextar’s share price decreasing from 21.00 TWD per share at June 24, 2018 to 18.55 TWD at September 23, 2018 and to 17.85 TWD at December 30, 2018.

Non-operating expense, net $14.5 $8.4 $6.1 73 % $7.8 $23.7 ($15.9) (67) %

Loss on equity investment, net .

The loss on equity investment for the three and nine months ended March 29, 2020 was due to the decrease in fair value of our Lextar Electronics Corporation (Lextar) investment.

Lextar’s stock is publicly traded on the Taiwan Stock Exchange and its share price increased from 14.75 New Taiwanese Dollars (TWD) per share at June 30, 2019 to 18.40 TWD at December 29, 2019 but then decreased to 11.45 TWD at March 29, 2020.

The loss on equity investment for the three and nine months ended March 31, 2019 was due to Lextar’s share price decreasing from 21.00 TWD per share at June 24, 2018 to 17.85 TWD at December 30, 2018 and to 16.40 TWD at March 31, 2019.

This volatile stock price trend may continue in the future given the risks inherent in Lextar’s business and trends affecting the Taiwan and global equity markets.

2 unchanged sentences

Further losses could have a material adverse effect on our results of operations.

Foreign currency (gain) loss, net.

The gain in foreign currency for the three and six months ended December 29, 2019 was primarily due to the strengthening of the TWD against the United States Dollar, which caused foreign currency remeasurement gains on our investment in Lextar.

Interest expense, net .

The decrease in interest expense for the three and six months ended December 29, 2019 compared to the three and six months ended December 30, 2018 was due to increased interest income from higher short term investment balances, which offset the interest expense incurred on our 0.875% convertible senior notes due September 1, 2023 (the Notes).

Income tax expense

Income tax expense and our effective tax rate was as follows:

Three months ended Six months ended

Gain on arbitration proceeding .

The gain on arbitration proceeding relates to an award from an arbitration proceeding in the third quarter of fiscal 2020 with a former vendor in which we were awarded damages for defective inventory.

Foreign currency loss (gain), net.

The loss in foreign currency for the three months ended March 29, 2020 was due to a slight weakening of the TWD against the United States Dollar, which caused foreign currency remeasurement losses on our investment in Lextar.

This loss slightly offset gains experienced in the first two quarters of our fiscal year, lowering our foreign currency gain for the nine months ended March 29, 2020.

Interest expense .

The increase in interest expense for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 was due to the current year having a full year of interest expense on our 0.875% convertible senior notes due September 1, 2023 (the 2023 Notes), which were sold on August 24, 2018.

Interest income.

The increase in interest income for the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 was due to higher balances on our short-term investments.

Income tax (benefit) expense

Income tax (benefit) expense and our effective tax rate was as follows:

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 29, 2019 December 30, 2018 Change December 29, 2019 December 30, 2018 Change

Income tax expense $1.2 $4.6 ($3.4) 74 % $1.7 $6.5 ($4.8) (74) %

Dollars) March 29, 2020 March 31, 2019 Change March 29, 2020 March 31, 2019 Change

Income tax (benefit) expense ($2.9) $2.8 ($5.7) (204) % ($1.2) $9.3 ($10.5) (113) %

Effective tax rate 5 % (14) % 1 % (66) %

The change in our effective tax rate for the three and six months ended December 29, 2019 was primarily due to the increased impact of tax credits and other deductions as a result of the change from income before taxes during the three and six months ended December 30, 2018 to loss before taxes for the three and six months ended December 29, 2019.

The change in our effective tax rate for the three months ended March 29, 2020 was primarily due to a net $5.1 million discrete tax benefit related to net operating loss provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

The change in our effective tax rate for the nine months ended March 29, 2020 was primarily due to the discrete tax benefit related to net operating loss provisions of the CARES Act and a decrease in projected income derived from international locations for the full year due to impacts of COVID-19.

In general, the variation between our effective income tax rate and the U.S.

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Net Loss from Discontinued Operations

We recorded a net loss from discontinued operations of $2.3 million and $12.6 million fo r the three and six months ended December 30, 2018, which related to operational results of the discontinued operations of the Lighting Products business unit.

We did not have any discontinued operations related activity for the three and six months ended December 29, 2019.

We recorded a net loss from discontinued operations of $205.4 million and $218.0 million fo r the three and nine months ended March 31, 2019, which related to operational results of the discontinued operations of the Lighting Products business unit.

We did not have any discontinued operations related activity for the three and nine months ended March 29, 2020.

Liquidity and Capital Resources

4 unchanged sentences

The purpose of this facility is to provide short term flexibility to optimize returns on our cash and investment portfolio while funding share repurchases, capital expenditures and other general business needs.

Additionally, on April 21, 2020 we issued and sold a total of $575.0 million aggregate principal amount of 1.75% convertible senior notes (the 2026 Notes), as discussed in Note 16, "Subsequent Events," in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

The total net proceeds of the 2026 Notes was $561.4 million, of which we used $144.3 million to repurchase $150.2 million aggregate principal amount of our 2023 Notes.

We expect to use the remainder of the net proceeds for general corporate purchases.

Based on past performance and current expectations, we believe our current working capital, availability under our line of credit and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months.

With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties or expand our production capacity.

From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we continue to make such evaluations.

We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.

The full extent to which COVID-19 may impact our results of operations or liquidity is uncertain.

Currently, the local governments in the locations in which we operate have designated our Company as an essential business, but our operations have, and likely will continue, to experience supply, labor, demand and output challenges.

We continue to monitor the impact that the COVID-19 pandemic is having on our business, the semiconductor and LED industries, and the economies in which we operate.

We anticipate our future results of operations, including the results for fiscal 2021, will be materially impacted by COVID-19, but at this time do expect the impact from the COVID-19 outbreak will have a material effect on our liquidity or financial position.

However, given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations, and, if the outbreak continues on its current trajectory, such impacts could grow and become material to our liquidity or financial position.

To the extent our customers and suppliers continue to be materially and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from us, which in turn could materially interrupt our business operations.

Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital.

2 unchanged sentences

Three months ended

December 29, 2019 June 30, 2019 Change

March 29, 2020 June 30, 2019 Change

Days of sales outstanding (a)

1 unchanged sentence

Days in accounts payable (c)

(73) (72) (1)

Cash conversion cycle 79 66 13

8 unchanged sentences

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages) by the average cost of revenue, net per day for the respective 90-day period.

The decrease in our cash conversion cycle was primarily driven by a decrease in days of supply in inventory.

As of December 29, 2019, we had unrealized losses on our investments of $0.1 million.

All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at December 29, 2019 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes.

The increase in our cash conversion cycle was primarily driven by an increase in days of sales outstanding related to short-term shipping delays at the end of the quarter as a result of the COVID-19 outbreak.

As of March 29, 2020, we had unrealized losses on our investments of $2.4 million.

All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 29, 2020 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or negative market conditions surrounding the COVID-19 outbreak.

We intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, and we currently expect to receive the full principal or recover our cost basis in these securities.

The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of December 29, 2019.

The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as of March 29, 2020.

We will continue to assess if ongoing developments related to the outbreak may cause these unrealized losses to become other than temporary.

In summary, our cash flows were as follows:

Six months ended

December 29, 2019 December 30, 2018 Change

Nine months ended

March 29, 2020 March 31, 2019 Change

Cash (used in) provided by operating activities ($39.5) $189.0 ($228.5) (121) %

4 unchanged sentences

Cash Flows from Operating Activities

Net cash used in operating activities decreased primarily due to lower net earnings and a decrease in overall working capital mainly driven by a higher performance related annual incentive payout in the six months ended December 29, 2019 and decreases in inventory and payables.

Total cash provided by operating activities for the six months ended December 30, 2018 includes $17.9 million of cash provided by operating activities of discontinued operations.

Net cash used in operating activities decreased primarily due to lower net earnings and a decrease in overall working capital mainly driven by decreases in inventory and payables, as well as significant cash inflows from customer reserve deposits in the prior year.

Total cash provided by operating activities for the nine months ended March 31, 2019 includes $9.3 million of cash provided by operating activities of discontinued operations.

Cash Flows from Investing Activities

Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment and payments for patents and licensing rights.

Cash used in investing activities decreased in the six months ended December 29, 2019 compared to the six months ended December 30, 2018 primarily due to $82.3 million less net purchases of short-term investments offset by an increase in property and equipment purchases of $37.8 million.

Total cash used in investing activities for the six months ended December 30, 2018 includes $11.8 million of cash used in investing activities of discontinued operations.

Cash used in investing activities decreased in the nine months ended March 29, 2020 compared to the nine months ended March 31, 2019 primarily due to $97.2 million less net purchases of short-term investments offset by an increase in property and equipment purchases of $75.6 million.

Total cash used in investing activities for the nine months ended March 31, 2019 includes $15.4 million of cash used in investing activities of discontinued operations.

For fiscal 2020, we target approximately $240.0 million of capital investment, which is primarily related to infrastructure projects to support our longer term growth and strategic priorities.

Cash Flows from Financing Activities

For the six months ended December 29, 2019, our financing activities primarily consisted of net proceeds of $14.6 million from issuances of common stock pursuant to the exercise of employee stock options.

For the six months ended December 30, 2018, our financing activities primarily consisted of proceeds of $575.0 million from the issuance of the Notes and net proceeds of $18.2 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by the net repayment on our line of credit of $292.0 million and the payment of debt issuance costs of $12.9 million from the issuance of the Notes.

For the nine months ended March 29, 2020, our financing activities primarily consisted of net proceeds of $14.8 million from issuances of common stock pursuant to the exercise of employee stock options.

For the nine months ended March 31, 2019, our financing activities primarily consisted of proceeds of $575.0 million from the issuance of the 2023 Notes and net proceeds of $70.9 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by the net repayment on our line of credit of $292.0 million and the payment of debt issuance costs of $12.9 million from the issuance of the 2023 Notes.

Off-Balance Sheet Arrangements

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Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities.

As of December 29, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of March 29, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

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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 our sole discretion and we consider these

options in determining the lease term used to establish our right-of-use assets and lease liabilities.

The exercise of the renewal option is at our sole discretion and we consider these options in determining the lease term used to establish our right-of-use assets and lease liabilities.

We will remeasure our lease liability and adjust the related right-of-use asset upon the occurrence of the following:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis