WOLFSPEED, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made, and except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (the SEC), we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report. Executive Summary The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 28, 2020. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Overview Cree, Inc. (Cree, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials, devices for power and radio-frequency (RF) applications and specialty lighting-class light emitting diode (LED) products. Our silicon carbide and gallium nitride (GaN) materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems. Our LEDs are targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays. We operate in two reportable segments: • Wolfspeed , which consists of silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon. Our materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. Our 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. Our LED products enable our customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications. The majority of our products are manufactured at our production facilities located in North Carolina, California, Arkansas and China. We also use contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. Additionally, we are in the process of building a silicon carbide fabrication facility in New York. We operate research and development facilities in North Carolina, Arizona, Arkansas, New York, California and China (including Hong Kong). Cree, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 1 of this Quarterly Report. As discussed more fully in "Business Outlook", on October 18, 2020, we entered into a definitive agreement to sell certain assets and subsidiaries comprising our LED Products segment (the LED Business) to SMART Global Holdings, Inc. (SGH) and its wholly owned subsidiary Chili Acquisition, Inc. (collectively with SGH, SMART) for up to $300 million, including fixed upfront and deferred payments and contingent consideration (the LED Business Divestiture). We will retain certain assets used in and pre-closing liabilities associated with the LED Products segment. Following the LED Business Divestiture, we will operate solely in our Wolfspeed segment. 31 Table of Contents Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • COVID-19 Outbreak. COVID-19 has continued to spread globally, including locations where we do business. While the financial impact of COVID-19 on our results is difficult to measure, we believe it has had an unfavorable impact on our operating income. 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 the pandemic continues to evolve globally. The potential effects of COVID-19 could affect us in a number of 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' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs. 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 . Our potential for growth depends significantly on the adoption of silicon carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market, the continued adoption of LEDs and LED lighting, and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers. • Governmental Trade and Regulatory Conditions . Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition or extension of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets. • Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development and production equipment. Product pricing pressures exist as market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power, RF and LED markets we serve. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers. • Technological Innovation and Advancement. Innovations and advancements in materials, power, RF, and LED technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets. • Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common. Overview of the three months ended September 27, 2020 Financial results for the three months ended September 27, 2020 include the impacts of a $105.7 million goodwill impairment charge associated with our determination as of September 27, 2020 that it was more likely than not that we would sell all or a portion of the assets comprising the LED Products segment below carrying value. The following is a summary of our financial results for the three months ended September 27, 2020: • Revenue decreased to $216.6 million for the three months ended September 27, 2020 from $242.8 million for the three months ended September 29, 2019. • Gross profit decreased to $54.0 million for the three months ended September 27, 2020 from $74.2 million for the three months ended September 29, 2019. Gross margin was 24.9% for the three months ended September 27, 2020 and 30.6% for the three months ended September 29, 2019. 32 Table of Contents • Operating loss was $170.0 million for the three months ended September 27, 2020 compared to $38.9 million for the three months ended September 29, 2019. • Diluted loss per share was $1.68 for the three months ended September 27, 2020 compared to $0.35 for the three months ended September 29, 2019. • Combined cash, cash equivalents and short-term investments was $1,138.5 million at September 27, 2020 and $1,251.7 million at June 28, 2020. • Cash provided by operating activities was $0.4 million for the three months ended September 27, 2020 compared to cash used in operating activities of $20.0 million for the three months ended September 29, 2019. • Purchases of property and equipment were $114.0 million for the three months ended September 27, 2020 compared to $42.0 million for the three months ended September 29, 2019. Business Outlook We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet and ability to generate cash provides us the ability to invest in our business, as indicated by our planned construction of a state-of-the-art, automated 200mm capable silicon carbide fabrication facility and a large materials factory to expand our silicon carbide capacity, each of which was announced in May 2019. In September 2019, we announced our intention to build the new fabrication facility in Marcy, New York to complement the factory expansion already underway at our U.S. campus headquarters in Durham, North Carolina. Construction on the new fabrication facility commenced in the fourth quarter of fiscal 2020. When completed, the LED Business Divestiture will represent a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications. This transaction positions us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to silicon carbide and further strengthens our financial position, which we target to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications. We are focused on investing in the Wolfspeed business to expand the scale, further develop the technologies, and accelerate the growth opportunities of silicon carbide materials, silicon carbide power devices and modules, and GaN and silicon RF devices. We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time. In addition, we are focused on improving the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex. Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth. In regards to COVID-19, our manufacturing facilities in the United States are currently operating as essential businesses. We have instituted strict measures designed to 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 manufacturing facilities in China briefly closed mid-third quarter of fiscal 2020 and have remained open since that time. Our manufacturing facilities in China mostly support the LED Products segment and will transfer to SMART in connection with the LED Business Divestiture through the sale of our ownership interest in Cree Huizhou Solid State Lighting Company Limited. We believe the strength of our balance sheet and our ability to continue operations allow 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 additional production capacity in North Carolina. Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows are uncertain. 33 Table of Contents Results of Operations Selected consolidated statements of operations data for the three months ended September 27, 2020 and September 29, 2019 is as follows: Three months ended September 27, 2020 September 29, 2019 (in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Revenue, net $216.6 100.0 % $242.8 100.0 % Cost of revenue, net 162.6 75.1 168.6 69.4 Gross profit 54.0 24.9 74.2 30.6 Research and development 49.6 22.9 43.7 18.0 Sales, general and administrative 51.9 24.0 57.6 23.7 Amortization or impairment of acquisition-related intangibles 3.6 1.7 3.6 1.5 (Gain) loss on disposal or impairment of other assets (0.2) (0.1) 1.0 0.4 Goodwill impairment 105.7 48.8 — — Other operating expense 13.4 6.2 7.2 3.0 Operating (loss) income (170.0) (78.5) (38.9) (16.0) Non-operating expense (income), net 14.0 6.5 (1.6) (0.7) Loss before income taxes (184.0) (84.9) (37.3) (15.4) Income tax expense 0.1 — 0.5 0.2 Net loss (184.1) (85.0) (37.8) (15.6) Net income attributable to non-controlling interest 0.3 0.1 — — Net loss attributable to controlling interest ($184.4) (85.1) ($37.8) (15.6) Basic and diluted loss per share Net loss attributable to controlling interest ($1.68) ($0.35) Revenue Revenue was comprised of the following: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Wolfspeed revenue $115.5 $127.7 ($12.2) (10) % Percent of revenue 53 % 53 % LED Products revenue 101.1 115.1 (14.0) (12) % Percent of revenue 47 % 47 % Total revenue $216.6 $242.8 ($26.2) (11) % Wolfspeed Segment Revenue The decrease in Wolfspeed segment revenue was primarily due to supply and demand factors relating to the COVID-19 pandemic, the ongoing trade dispute between the United States and China, which has led some customers to adjust their materials-related supply chain to other suppliers and the timing of shipments to certain customers. LED Products Segment Revenue The decrease in LED Products segment revenue was primarily due to decreases in demand related to COVID-19 and factory capacity restrictions. 34 Table of Contents Gross Profit and Gross Margin Gross profit and gross margin were as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Wolfspeed gross profit $42.3 $59.0 ($16.7) (28) % Wolfspeed gross margin 36.6 % 46.2 % LED Products gross profit 22.4 22.1 0.3 1 % LED Products gross margin 22.2 % 19.2 % Unallocated costs (1) (10.7) (6.9) (3.8) (55) % Consolidated gross profit $54.0 $74.2 ($20.2) (27) % Consolidated gross margin 24.9 % 30.6 % (1) Unallocated costs for the three months ended September 27, 2020 include $0.9 million in incremental manufacturing costs relating to COVID-19. Wolfspeed Segment Gross Profit and Gross Margin The decreases in Wolfspeed segment gross profit and gross margin are primarily due to higher costs, customer mix and impacts from decreased revenue. LED Products Segment Gross Profit and Gross Margin The increases in LED Products segment gross profit and gross margin are primarily due to more favorable product and customer mix, offset by impacts from decreased revenue. Unallocated Costs Unallocated costs primarily consist of manufacturing employees' stock-based compensation, expenses for annual incentive plans, and matching contributions under our 401(k) plan. 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. For the first quarter of fiscal 2021, unallocated costs also include incremental costs relating to operating our manufacturing operations during the COVID-19 pandemic. These incremental costs are primarily comprised of increased cleaning costs, cleaning supplies and protective equipment, as well as the costs from implementing preventative safety measures, including increased wellness checks and time off policies. Unallocated costs increased primarily due to incremental operational costs as a result of operating our manufacturing operations during the COVID-19 pandemic and underutilization charges related to transitioning certain LED Products operations to Wolfspeed operations as part of our factory optimization efforts. Additionally, increased stock based compensation was offset by a decrease in annual incentive expense. Research and Development Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development expenses were as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Research and development $49.6 $43.7 $5.9 14 % Percent of revenue 23 % 18 % The increase in research and development expenses is primarily due to our continued investment in our silicon carbide and GaN technologies, including the development of existing silicon carbide materials and fabrication technology for next generation platforms and expansion of our Power and RF product portfolio. 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. 35 Table of Contents Sales, General and Administrative Sales, general and administrative expenses are comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consists of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel and other costs. Sales, general and administrative expenses were as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Sales, general and administrative $51.9 $57.6 ($5.7) (10) % Percent of revenue 24 % 24 % The decrease in sales, general and administrative expenses is primarily due to decreases in stock based compensation, as stock based compensation expense for the three months ended September 29, 2019 included certain adjustments relating to former executives’ awards. Additionally, our travel costs decreased as a result of the COVID-19 pandemic and we incurred lower legal fees in the current quarter, partially offset by increased information technology costs. Amortization or Impairment of Acquisition-Related Intangibles As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names. Amortization of intangible assets related to our acquisitions was as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Customer relationships $1.5 $1.5 $— — % Developed technology 1.4 1.4 — — % Non-compete agreements 0.7 0.7 — — % Total amortization $3.6 $3.6 $— — % Amortization of acquisition-related intangible assets stayed consistent due to the absence of acquisition-related intangible activity between the periods, as well as no impairments. Amortization of acquisition-related intangibles relate to operations under our Wolfspeed segment. Loss on Disposal and Impairment of Other Assets We operate a capital-intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our long-lived assets and capitalized patent costs for possible impairment. Loss on disposal or impairment of other assets were as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change (Gain) loss on disposal or impairment of other assets ($0.2) $1.0 ($1.2) (120) % Gain on disposal or impairment of other assets for the three months ended September 27, 2020 primarily relates to proceeds from asset sales offset by write-offs of impaired or abandoned patents. Loss on disposal or impairment of other assets for the three months ended September 29, 2019 primarily relates to write-offs of impaired or abandoned patents. 36 Table of Contents Goodwill Impairment We review goodwill for impairment whenever events or circumstances indicate potential impairment. In the first quarter of fiscal 2021, we determined we would more likely than not sell all or a portion of the assets comprising the LED Products segment below carrying value. As a result of this triggering event, we recorded an impairment to goodwill of $105.7 million as of September 27, 2020. As of September 27, 2020, we had not met the held-for-sale criteria. No goodwill impairment was made as of September 29, 2019. Other Operating Expense Other operating expense was as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Factory optimization restructuring $1.6 $1.2 $0.4 33 % Severance and other restructuring 3.2 0.8 2.4 300 % Total restructuring costs 4.8 2.0 2.8 140 % Project, transformation and transaction costs 5.6 2.6 3.0 115 % Factory optimization start-up costs 3.0 1.4 1.6 114 % Non-restructuring related executive severance — 1.2 (1.2) (100) % Other operating expense $13.4 $7.2 $6.2 86 % Factory optimization restructuring costs relate to facility consolidations as well as disposals on certain long-lived assets. Severance and other restructuring costs relate to corporate restructuring plans. See Note 15, "Restructuring," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on our restructuring costs. Project, transformation and transaction costs primarily relate to professional services fees associated with completed and potential acquisitions and divestitures, as well as internal transformation programs focused on optimizing our administrative processes and upgrading our enterprise resource planning (ERP) system to support our expected future growth. 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. These efforts are focused on expanding our production footprint to support expected growth in the Wolfspeed segment. Other operating expense increased primarily from increased project costs related to the LED Business Divestiture and a corporate restructuring event in the first quarter of fiscal 2021. Non-Operating Expense (Income), net Non-operating expense (income), net was comprised of the following: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Loss (gain) on equity investment, net $3.4 ($3.5) $6.9 (197) % Foreign currency loss, net — 0.1 (0.1) (100) % Interest income (2.7) (5.5) 2.8 (51) % Interest expense, net of capitalized interest 13.1 7.4 5.7 (77) % Other, net 0.2 (0.1) 0.3 (300) % Non-operating expense (income), net $14.0 ($1.6) $15.6 (975) % Loss (gain) on equity investment, net . The loss on equity investment for the three months ended September 27, 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 decreased from 19.90 New Taiwanese Dollars (TWD) per share at June 28, 2020 to 18.70 TWD at September 27, 2020. The gain on equity investment for the three months ended September 29, 2019 was due to Lextar’s share price increasing from 14.75 TWD per share at June 30, 2019 to 16.05 TWD at September 29, 2019. 37 Table of Contents 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. We have a 16% common stock ownership interest in Lextar and utilize the fair value option in accounting for the ownership interest. In June 2020, Lextar announced a plan to restructure under a holding company with EPISTAR Corporation (EPISTAR) via a share swap. As approved by the shareholders of Lextar and EPISTAR at the meetings held on August 7, 2020, we will receive 0.275 shares of common stock of the holding company, to be named ENNOSTAR Inc. (ENNOSTAR), for each share for Lextar common stock once the share swap is effected (currently scheduled for January 6, 2021), representing in the aggregate an approximately 3.3% common stock ownership interest in ENNOSTAR. The shares of ENNOSTAR will be listed on the Taiwan Stock Exchange. Any future stock price changes will be recorded as further gains or losses on equity investment based on the increase or decrease, respectively, in the fair value of the investment during the applicable fiscal period. Further losses could have a material adverse effect on our results of operations. Foreign currency loss, net. Foreign currency loss (gain), net, primarily consists of remeasurement adjustments resulting from our Lextar investment and from our international subsidiaries. Interest income. The decrease in interest income was due to significant reductions in investment returns on our short-term investment securities. Interest expense, net of capitalized interest . The increase in interest expense was primarily due to the addition of our 1.75% convertible senior notes due May 1, 2026 (2026 Notes), which were sold on April 21, 2020. Income tax expense Income tax expense and our effective tax rate was as follows: Three months ended (in millions of U.S. Dollars) September 27, 2020 September 29, 2019 Change Income tax expense $0.1 $0.5 ($0.4) (80) % Effective tax rate — % (1) % Our effective tax rate remained steady due to relatively consistent year-to-date income in jurisdictions where we do not recognize a full valuation allowance. In general, the variation between our effective income tax rate and the U.S. statutory rate of 21% is primarily due to: (i) changes in our valuation allowances against deferred tax assets in the U.S. and Luxembourg, (ii) projected income for the full year derived from international locations with differing tax rates than the U.S., and (iii) projected tax credits generated. 38 Table of Contents Liquidity and Capital Resources Overview We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities, cash generated from operations and availability under our line of credit. We have a $125 million line of credit as discussed in Note 9, “Long-term Debt,” in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The purpose of this facility is to provide short term flexibility to optimize returns on our cash and investment portfolio while funding 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 2026 Notes, as discussed in Note 9, “Long-term Debt,” 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 0.875% convertible senior notes due September 1, 2023 (the 2023 Notes). We expect to use the remainder of the net proceeds for general corporate purposes. 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 the strength of our 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 and/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 have continued to make such evaluations. For example, we recently entered into a definitive agreement with SMART regarding the LED Business Divestiture, which, when completed, will provide us with $50 million in up front payments, a $125 million unsecured promissory note due in August 2023 and the potential of up to $125 million in contingent consideration. We may also access capital markets through the issuance of debt or additional shares of common stock, which we may use in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities or general corporate purposes. We are currently building a new silicon carbide fabrication facility in Marcy, New York, to expand capacity for our silicon carbide device business. We expect to invest approximately $1.0 billion in construction, equipment and other related costs for the new facility through fiscal 2024, of which approximately $500 million is expected to be reimbursed in future fiscal years by the State of New York through a grant program administered by the State of New York Urban Development Corporation (doing business as Empire State Development). Given our current cash position, we believe we are positioned to adequately fund the construction of the facility. 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 we do not 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 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. Liquidity Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital. The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable. 39 Table of Contents The following table presents the components of our cash conversion cycle: Three months ended September 27, 2020 June 28, 2020 Change Days of sales outstanding (a) 33 37 (4) Days of supply in inventory (b) 104 104 — Days in accounts payable (c) (112) (103) (9) Cash conversion cycle 25 38 (13) a) Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables less receivable related accrued contract liabilities and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts receivable, less receivable related accrued contract liabilities, by the average net revenue per day for the respective 90-day period. b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90-day period. c) Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. 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 increased accounts payable balances relating to investment at our future silicon carbide fabrication facility in New York. As of September 27, 2020, we had unrealized losses on our short-term investments of $0.1 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 27, 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 evaluate our short-term investments for expected credit losses. We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of September 27, 2020 until the investments fully recover in market value. No allowance for credit losses was recorded as of September 27, 2020. Cash Flows In summary, our cash flows were as follows: Three months ended September 27, 2020 September 29, 2019 Change Cash provided by (used in) operating activities $0.4 ($20.0) $20.4 (102) % Cash used in investing activities (16.0) (52.3) 36.3 69 % Cash provided by financing activities 3.1 5.4 (2.3) (43) % Effect of foreign exchange changes 0.1 (0.3) 0.4 (133) % Net change in cash and cash equivalents ($12.4) ($67.2) $54.8 (82) % Cash Flows from Operating Activities Net cash provided by operating activities increased primarily due to improved working capital. 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 primarily due to increased net proceeds from short-term investments of $108.5 million offset by an increase in property and equipment purchases of $72.0 million. For fiscal 2021, we target approximately $400.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support our Wolfspeed segment longer-term growth and strategic priorities. This target is highly dependent on the timing and overall progress on the construction of our new silicon carbide fabrication facility in New York and is net of expected reimbursements from Empire State Development under a Grant Disbursement Agreement (GDA). For more details on the GDA, see Note 13, "Commitments and Contingencies," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report. 40 Table of Contents Cash Flows from Financing Activities For the three months ended September 27, 2020, our financing activities primarily consisted of net proceeds of $3.7 million from issuances of common stock pursuant to the exercise of employee stock options. For the three months ended September 29, 2019, our financing activities consisted of net proceeds of $5.4 million from issuances of common stock pursuant to the exercise of employee stock options. Off-Balance Sheet Arrangements We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 27, 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 Allowance for Available-for-sale Debt Securities (new for fiscal 2021 due to ASC 326 Adoption) Available-for-sale debt securities in an unrealized loss position at each measurement date are individually evaluated for expected credit losses. First, we determine our intent and ability to hold the security in an unrealized loss position until it recovers its fair value. If we do not have the intent or ability to hold the security until recovery, we recognize an expected credit loss equal to the decrease in fair value. If we have the intent and ability to hold the security until recovery, we evaluate if the unrealized loss is the result of credit related factors, primarily using qualitative data. If we determine the security has an unrealized loss as a result of credit related factors, we use a discounted cash flow model to determine the present value of expected cash flows. If the security has a present value of expected cash flows less than its amortized cost, we record an allowance and an expense equal to the amount of the unrealized loss. If the investment recovers its fair value, the allowance is reversed and a recovery is recognized in earnings. We record any unrealized loss related to market interest rate changes or other non-credit related factors as an adjustment to other comprehensive income. We do not include accrued interest in our assessment of credit losses for available-for-sale debt securities. We record losses related to noncollectable interest receivable as an adjustment to interest income in the period the losses are realized. Allowance for Doubtful Accounts (updated for fiscal 2021 due to ASC 326 Adoption) Receivables are evaluated for expected credit losses on a collective (pool) basis and aggregated on the basis of similar risk characteristics, including customers' financial strength, credit standing, payment history and historical defaults, as well as geographical and industry conditions. Pooling criteria is evaluated each period to ensure the risk profile for each pool is consistent with the prior period. If a receivable does not fit into defined risk pool, it is evaluated for expected credit losses on an individual basis. Each risk pool is assigned an expected credit loss rate (if any), which is calculated by considering historical write offs, current market conditions, forecast data and other qualitative data. Expected credit losses are recorded each period by applying the expected credit loss rates to the total balance of each defined risk pool. For information our other critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 28, 2020. Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and the estimated effects, if any, on our consolidated financial statements, see Note 1, “Basis of Presentation and New Accounting Standards,” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report. 41 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about our market risks, see “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 28, 2020. There have been no material changes to the amounts presented therein.