What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2021-01-28 · 142 added, 122 removed, 227 unchanged (54% of the section changed)

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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 (the 2020 Form 10-K) and our Current Report on Form 8-K filed with the SEC on February 11, 2021, which recast the relevant financial information in the 2020 Form 10-K to present the financial results of the LED Business (as defined below) as discontinued operations and held for sale in our consolidated financial statements for all periods presented in the 2020 Form 10-K.

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.

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Our silicon carbide and gallium nitride materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

In addition, we are an innovator of specialty lighting-class light emitting diode (LED) products.

Our LEDs are targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays.

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 former LED Products segment (the LED Business) to SMART Global Holdings, Inc.

(SGH) and its wholly owned newly-created acquisition subsidiary (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 through our Wolfspeed business.

The LED Business Divestiture represents a strategic shift that will have a major effect on our operations and financial results.

Previously, we designed, manufactured, and sold specialty lighting-class light emitting diode (LED) products targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays.

As discussed more fully in "Business Outlook", on March 1, 2021, we completed our previously announced sale of certain assets and subsidiaries comprising our former LED Products segment (the LED Business) to SMART Global Holdings, Inc.

(SGH) and its wholly owned newly-created acquisition subsidiary CreeLED, Inc.

(CreeLED and collectively with SGH, SMART) for up to $300 million, including fixed upfront and deferred payments and contingent consideration (the LED Business Divestiture).

We retained certain assets used in and pre-closing liabilities associated with the LED Products segment.

Following the LED Business Divestiture, we operate solely within our Wolfspeed business.

The LED Business Divestiture represented a strategic shift that will have a major effect on our operations and financial results.

As a result, we have classified the results and cash flows of the LED Products segment as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for all periods presented.

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Our materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.

The majority of our products are manufactured at our production facilities located in North Carolina, California, Arkansas and China.

The majority of our products are manufactured at our production facilities located in North Carolina, California and Arkansas.

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).

Additionally, we are in the process of building a silicon carbide device fabrication facility in New York.

We operate research and development facilities in North Carolina, California, Arkansas, Arizona and New York.

is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina.

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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.

• COVID-19 Pandemic.

While certain COVID-19 vaccines have been approved in recent months and are now available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume.

Despite increasing availability of vaccines, COVID-19 continues to spread globally and to impact the locations where we do business.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets.

The full extent of the pandemic, related business and travel restrictions and changes to behavior intended to reduce its spread remain uncertain as of the date of this Quarterly Report as the pandemic and the potential impact of variants of the virus that causes COVID-19 continue to evolve globally.

The COVID-19 pandemic has caused us to modify our business practices (including employee travel, employee work locations and cancellation of physical participation in meetings, events and conferences).

In addition, the COVID-19 pandemic could continue to 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.

While travel and other restrictions are generally expected to start loosening in the coming months, the potential continued spread of COVID-19 and any of its variants could result in 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.

We are paying close attention to the evolving development of, and the disruption to business and economic activities caused by, the COVID-19 pandemic.

However, given the dynamic nature of the COVID-19 pandemic, it is not practicable to provide a reasonable estimate of its impact on our financial position, cash flows and operating results at the present.

• Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices .

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 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.

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Many companies have made significant investments in product development, production equipment and production facilities.

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.

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• Technological Innovation and Advancement.

Innovations and advancements in materials, power, RF, and LED technologies continue to expand the potential commercial application for our products.

Innovations and advancements in materials, power, and RF 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.

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

Overview of the six months ended December 27, 2020

The following is a summary of our financial results for the six months ended December 27, 2020:

• Revenue decreased to $242.5 million for the six months ended December 27, 2020 from $248.4 million for the six months ended December 29, 2019.

• Gross profit decreased to $76.8 million for the six months ended December 27, 2020 from $88.1 million for the six months ended December 29, 2019.

Gross margin was 31.7% for the six months ended December 27, 2020 and 35.5% for the six months ended December 29, 2019.

• Operating loss was $119.8 million for the six months ended December 27, 2020 compared to $105.6 million for the six months ended December 29, 2019.

• Diluted loss per share from continuing operations was $1.18 for the six months ended December 27, 2020 compared to $0.90 for the six months ended December 29, 2019.

• Combined cash, cash equivalents and short-term investments was $968.7 million at December 27, 2020 and $1,239.7 million at June 28, 2020.

• Cash used in operating activities from continuing operations was $32.1 million for the six months ended December 27, 2020 compared to $39.6 million for the six months ended December 29, 2019.

• Purchases of property and equipment were $257.5 million for the six months ended December 27, 2020 compared to $100.3 million for the six months ended December 29, 2019.

Overview of the nine months ended March 28, 2021

The following is a summary of our financial results for the nine months ended March 28, 2021:

• Revenue increased to $379.8 million for the nine months ended March 28, 2021 from $362.3 million for the nine months ended March 29, 2020.

• Gross profit decreased to $120.8 million for the nine months ended March 28, 2021 from $129.4 million for the nine months ended March 29, 2020.

Gross margin was 31.8% for the nine months ended March 28, 2021 and 35.7% for the nine months ended March 29, 2020.

• Operating loss was $181.2 million for the nine months ended March 28, 2021 compared to $153.6 million for the nine months ended March 29, 2020.

• Diluted loss per share from continuing operations was $1.75 for the nine months ended March 28, 2021 compared to $1.42 for the nine months ended March 29, 2020.

• Combined cash, cash equivalents and short-term investments was $1,293.3 million at March 28, 2021 and $1,239.7 million at June 28, 2020.

• Cash used in operating activities from continuing operations was $58.9 million for the nine months ended March 28, 2021 compared to $64.9 million for the nine months ended March 29, 2020.

• Purchases of property and equipment were $394.0 million for the nine months ended March 28, 2021 compared to $166.9 million for the nine months ended March 29, 2020.

Business Outlook

We believe we are uniquely positioned as an innovator in the global semiconductor industry.

The strength of our balance sheet provides us the ability to invest in our business, as indicated by our planned construction of a state-of-the-art, automated 200mm 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.

The strength of our balance sheet provides us the ability to invest in our business, as indicated by our planned construction of a state-of-the-art, automated 200mm silicon carbide device 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 device 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.

Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020.

The completion of the LED Business Divestiture on March 1, 2021 represents 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.

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Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition to our new fabrication facility in Marcy, New York.

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.

In regards to COVID-19, 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.

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Results of Operations

Selected consolidated statements of operations data for the three and six months ended December 27, 2020 and December 29, 2019 is as follows:

Three months ended Six months ended

December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Selected consolidated statements of operations data for the three and nine months ended March 28, 2021 and March 29, 2020 is as follows:

Three months ended Nine months ended

March 28, 2021 March 29, 2020 March 28, 2021 March 29, 2020

(in millions of U.S.

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Operating loss (61.4) (44.7) (48.0) (42.1) (181.2) (47.7) (153.6) (42.4)

Non-operating (income) expense, net (3.1) (2.4) (5.0) (4.1) 10.8 4.5 (6.6) (2.7)

Non-operating expense, net 8.1 5.9 14.7 12.9 18.9 5.0 8.1 2.2

Loss before income taxes (69.5) (50.6) (62.7) (55.0) (200.1) (52.7) (161.7) (44.6)

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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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Revenue $137.3 $113.9 $23.4 21 % $379.8 $362.3 $17.5 5 %

Revenue for the three months ended December 27, 2020 compared to the three months ended December 29, 2019 increased due to increases in the demand for power and RF devices.

Revenue for the six months ended December 27, 2020 compared to the six months ended December 29, 2019 decreased due to supply and demand factors relating to the COVID-19 pandemic and lower RF demand in China offset by increased demand and production capacity for our power applications.

Revenue for the three months ended March 28, 2021 compared to the three months ended March 29, 2020 increased due to increases in demand for power and RF devices.

Revenue for the nine months ended March 28, 2021 compared to the nine months ended March 29, 2020 increased due to increases in demand for power and RF devices, and increases in production capacity for our power devices, offset by supply and demand factors relating to the COVID-19 pandemic.

Comparatively, COVID-19 related supply and demand factors were more impactful in the first and second quarters in fiscal 2021 compared to fiscal 2020 due to COVID-19 impacts beginning in the third quarter of fiscal 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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Gross profit $44.0 $41.3 $2.7 7 % $120.8 $129.4 ($8.6) (7) %

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Gross Profit and Gross Margin

The increase in gross profit and gross margin for the three months ended December 27, 2020 compared to the three months ended December 29, 2019 are primarily due to increased revenues in the current period and the impact of higher inventory reserves related to product originally manufactured for Huawei Technologies Co., Ltd.

and its affiliates (collectively, "Huawei") in the prior period that the Company was prevented from selling to Huawei, partially offset by unfavorable product mix shift.

The decrease in gross profit and gross margin for the six months ended December 27, 2020 compared to the six months ended December 29, 2019 are primarily due unfavorable product mix shift, partially offset by the impact of higher inventory reserves related to product originally manufactured for Huawei in the prior period that the Company was prevented from selling to Huawei.

The increase in gross profit for the three months ended March 28, 2021 compared to the three months ended March 29, 2020 is primarily due to increased revenues in the current period as well as improved yields.

The decrease in gross margin for the three months ended March 28, 2021 compared to the three months ended March 29, 2020 is primarily due to unfavorable product mix shift and higher factory costs.

The decrease in gross profit and gross margin for the nine months ended March 28, 2021 compared to the nine months ended March 29, 2020 is primarily due to unfavorable product mix shift and higher factory costs.

Research and Development

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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 costs also include developing supporting technologies for our planned expansion to a new silicon carbide fabrication facility in Marcy, New York.

Research and development costs also include developing supporting technologies for our planned expansion to a new silicon carbide device fabrication facility in Marcy, New York.

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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Research and development $46.0 $38.6 $7.4 19 % $132.7 $112.5 $20.2 18 %

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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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Sales, general and administrative $44.2 $41.7 $2.5 6 % $135.0 $135.7 ($0.7) (1) %

Percent of revenue 32 % 37 % 36 % 37 %

The increase in sales, general and administrative expenses for the three months ended December 27, 2020 compared to December 29, 2019 was primarily due to higher professional service fees and increased information technology costs.

The decrease in sales, general and administrative expenses for the six months ended December 27, 2020 compared to December 29, 2019 was primarily due decreases in stock-based compensation expense, in part due to the impact of modifications to existing equity awards in the prior period.

Additionally, our travel costs decreased as a result of the COVID-19 pandemic.

The increase in sales, general and administrative expenses for the three months ended March 28, 2021 compared to March 29, 2020 was primarily due to increased stock based compensation expense and increased employee incentive compensation expense.

These additional costs were offset in part by lower information technology costs.

The decrease in sales, general and administrative expenses for the nine months ended March 28, 2021 compared to March 29, 2020 was primarily due to decreased information technology costs and decreased professional and legal fees, offset by increased employee incentive compensation expense.

Additionally, our travel costs decreased as a result of travel restrictions due to the COVID-19 pandemic.

Amortization or Impairment of Acquisition-Related Intangibles

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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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Customer relationships $1.5 $1.5 $— — % $4.6 $4.6 $— — %

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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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Loss on disposal or impairment of other assets $0.1 $0.1 $— — % $0.8 $1.7 ($0.9) (53) %

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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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Factory optimization restructuring $3.8 $1.1 $2.7 245 % $6.7 $3.5 $3.2 91 %

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See Note 14, "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 business.

The decreases in other operating expense was primarily due to decreased project and transaction costs, driven by higher continuing operations project and transaction activity in the prior period.

Non-Operating (Income) Expense, net

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

Three months ended Six months ended

Other operating expense for the three months ended March 28, 2021 compared to the three months ended March 29, 2020 primarily increased due to increased restructuring and severance costs.

Other operating expense for the nine months ended March 28, 2021 compared to the nine months ended March 29, 2020 stayed fairly steady due to increased restructuring costs offset by decreased project and transaction costs.

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 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Gain on sale of investments, net ($0.1) ($0.9) $0.8 (89) % ($0.3) ($1.0) $0.7 (70) %

Gain on equity investment, net ($10.4) ($6.4) ($4.0) 63 % ($7.0) ($9.9) $2.9 (29) %

Foreign currency loss, net (2.2) (1.3) (0.9) 69 % (2.4) (1.2) (1.2) 100 %

(Gain) loss on equity investment, net ($0.9) $19.1 ($20.0) (105) % ($7.9) $9.2 ($17.1) (186) %

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

Foreign currency (gain) loss, net (0.1) 0.3 (0.4) (133) % (2.5) (0.9) (1.6) 178 %

Interest income (1.9) (3.2) 1.3 (41) % (6.8) (13.4) 6.6 (49) %

Interest expense, net of capitalized interest 11.2 7.5 3.7 (49) % 36.2 22.6 13.6 (60) %

Loss on Wafer Supply Agreement 0.1 — 0.1 100 % 0.1 — 0.1 100 %

Other, net (0.2) (0.1) (0.1) 100 % 0.1 (0.4) 0.5 (125) %

Non-operating (income) expense, net ($3.1) ($5.0) $1.9 (38) % $10.8 ($6.6) $17.4 (264) %

Gain on equity investment, net .

The gain on equity investment for the three and six months ended December 27, 2020 was due to changes in fair value of our Lextar Electronics Corporation (Lextar) investment.

During the six months ended December 27, 2020, Lextar’s stock was 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 before increasing to 22.25 TWD at December 27, 2020.

The gain on equity investment for the three and six months ended December 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 and to 18.40 TWD at December 29, 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.

As of December, 27, 2020, we had 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.

Effective January 6, 2021, we received 0.275 shares of common stock of the holding company named ENNOSTAR Inc.

(ENNOSTAR) for each of our shares of Lextar common stock, representing in the aggregate an approximately 3.3% common stock ownership interest in ENNOSTAR.

The shares of ENNOSTAR are 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, net, primarily consists of remeasurement adjustments resulting from our Lextar investment and from our international subsidiaries.

Non-operating expense, net $8.1 $14.7 ($6.6) (45) % $18.9 $8.1 $10.8 133 %

(Gain) loss on equity investment, net .

The (gain) loss on equity investment for the three and nine months ended March 28, 2021 and March 29, 2020 relate to changes in fair value of our ENNOSTAR Inc.

(ENNOSTAR) investment.

Our ENNOSTAR equity investment was previously held as a 16% common stock ownership interest in Lextar Electronics Corporation (Lextar).

In June 2020, Lextar announced a plan to restructure under a holding company with EPISTAR Corporation via a share swap.

Effective January 6, 2021, we received 0.275 shares of common stock of the holding company named ENNOSTAR for each of our shares of Lextar, representing in the aggregate an approximate 3.3% common stock ownership interest in ENNOSTAR.

The shares of ENNOSTAR are listed on the Taiwan Stock Exchange, as was our previously held Lextar common stock.

Gain on arbitration proceeding.

The gain on arbitration proceeding relates to an award from an arbitration proceeding in the third quarter of fiscal 2020 for which we were awarded damages for a claim by us against a contract manufacturer.

Foreign currency (gain) loss, net.

Foreign currency (gain) loss, net, primarily consists of remeasurement adjustments resulting from our ENNOSTAR investment and from our international subsidiaries.

Interest income.

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

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

Dollars) December 27, 2020 December 29, 2019 Change December 27, 2020 December 29, 2019 Change

Dollars) March 28, 2021 March 29, 2020 Change March 28, 2021 March 29, 2020 Change

Income tax benefit ($3.0) ($6.5) $3.5 (54) % ($4.0) ($8.3) $4.3 (52) %

Effective tax rate 4 % 10 % 2 % 5 %

The change in our effective tax rate for the three and six months ended December 27, 2020 remained steady due to relatively consistent year-to-date income in jurisdictions where we do not recognize a full valuation allowance.

The change in our effective tax rate for the three and nine months ended March 28, 2021 was primarily due to the increased tax benefit recorded in the third quarter of fiscal 2020 related to net operating loss provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and lower forecasted income derived from international locations in fiscal 2020.

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

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We ceased recording depreciation and amortization of long-lived assets of the LED Products business upon classification as discontinued operations in October 2020.

Net loss from discontinued operations was $28.4 million and $137.2 million for the three and six months ended December 27, 2020, respectively.

Net income from discontinued operations was $3.9 million and $5.4 million for the three and six months ended December 29, 2019.

Net loss from discontinued operations was $41.6 million and $178.8 million for the three and nine months ended March 28, 2021, respectively.

For the three and nine months ended March 29, 2020, we recorded a net loss of $3.7 million and net income of $1.7 million, respectively.

Liquidity and Capital Resources

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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.

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 2023 Notes.

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

Additionally, in the third quarter of fiscal 2021, we filed a shelf registration statement on Form S-3 to register for possible future sale shares of our common stock.

We may offer an indeterminate amount of common stock in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued.

The registration statement became automatically effective upon filing with the SEC on February 11, 2021.

Using this shelf registration statement, we implemented an at-the-market program (the ATM Program) as described in the prospectus supplement filed with the SEC on February 11, 2021 and Note 15, “Shareholders’ Equity” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.

The ATM Program was conducted pursuant to an equity distribution agreement (the Equity Distribution Agreement) with Wells Fargo Securities, LLC, BMO Capital Markets Corp., BofA Securities Inc., Canaccord Genuity LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

LLC, Morgan Stanley & Co.

LLC and Truist Securities, Inc.

(the Managers).

On February 19, 2021, we announced that we had sold approximately $500.0 million of common stock under the ATM Program.

As such, the ATM Program automatically terminated in accordance with the terms of the Equity Distribution Agreement.

In total, we sold and received payment for 4,222,511 shares of our common stock at a weighted average price of $118.41 per share for total gross proceeds of approximately $500.0 million and net proceeds of approximately $489.1 million, after $10.0 million in commissions to the Managers and $0.9 million in other offering costs.

We expect to use 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.

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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 upfront payments, a $125 million unsecured promissory note due in August 2023 and the potential of up to $125 million in contingent consideration.

For example, we recently completed the LED Business Divestiture, which provided us with (i) $50 million in upfront payments (ii) a $125 million unsecured promissory note due in August 2023, and (iii) the potential to receive an earn-out payment between $2.5 million and $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, also payable in the form of an unsecured promissory note due March 2025.

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 are currently building a new silicon carbide device 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.

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

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 industry, and the economies in which we operate.

We believe our future results of operations, including the results for fiscal 2021, could be materially impacted by the

COVID-19 pandemic, but at this time we do not expect the impact from the COVID-19 pandemic 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.

The ultimate extent to which COVID-19 will impact our business depends on future developments, which include the effectiveness and utilization of vaccines for COVID-19 and its variants.

New information may emerge concerning the severity of COVID-19 and its variants, and additional actions may be taken in order to contain or limit their spread.

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.

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Three months ended

December 27, 2020 June 28, 2020 Change

March 28, 2021 June 28, 2020 Change

Days of sales outstanding (a)

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DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended.

Due to the significant amount of capital expenditures associated with our future silicon carbide fabrication facility in New York, we exclude accounts payable related to capital expenditures in connection with the facility.

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages and accounts payable balances related to our future silicon carbide fabrication facility in New York) by the average cost of revenue, net per day for the respective 90-day period.

The increase in our cash conversion cycle was primarily driven by increased inventory balances as we expand production.

As of December 27, 2020, we had unrealized losses on our short-term investments of less than $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 December 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.

Due to the significant amount of capital expenditures associated with our future silicon carbide device fabrication facility in New York, we exclude accounts payable related to capital expenditures in connection with the facility.

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages and accounts payable balances related to our future silicon carbide device fabrication facility in New York) by the average cost of revenue, net per day for the respective 90-day period.

The increase in our cash conversion cycle was primarily driven by increased inventory balances as we expand production globally and build a raw materials buffer to ensure continuity of supply during the pandemic.

Further contributing to the increase was a decrease in accounts payable (excluding amounts related to capital expenditures for our future silicon carbide device fabrication facility in Mohawk Valley) while our cost of sales for the quarter increased.

As of March 28, 2021, we had unrealized losses on our short-term investments of $0.2 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 28, 2021 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 pandemic.

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 December 27, 2020 until the investments fully recover in market value.

No allowance for credit losses was recorded as of December 27, 2020.

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of March 28, 2021 until the investments fully recover in market value.

No allowance for credit losses was recorded as of March 28, 2021.

In summary, our cash flows were as follows:

Six months ended

December 27, 2020 December 29, 2019 Change

Nine months ended

March 28, 2021 March 29, 2020 Change

Cash used in operating activities ($75.5) ($39.5) ($36.0) 91 %

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Cash Flows from Operating Activities

Net cash used in operating activities increased primarily due to decreased working capital in the current period.

Total cash provided by operating activities includes $6.2 million and $27.8 million of cash provided by operating activities from discontinued operations for the six months ended December 27, 2020 and December 29, 2019.

Net cash used in operating activities increased primarily due to an increase in net loss during the period and decreased cash provided by operating activities of discontinued operations, offset by increased working capital.

Total cash (used in) provided by operating activities includes $16.6 million of cash used in and $25.4 million of cash provided by operating activities from discontinued operations for the nine months ended March 28, 2021 and March 29, 2020, respectively.

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 $227.7 million partially offset by an increase in property and equipment purchases of $157.2 million.

For the nine months ended March 28, 2021, our investing activities include net proceeds from the sale of the LED Business.

Cash used in investing activities increased primarily due to an increase in property and equipment purchases of $227.1 million partially offset by an increase in net proceeds from short-term investments of $3.9 million and net proceeds from the sale of the LED business of $36.6 million.

For fiscal 2021, we target approximately $550.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support our Wolfspeed business 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).

This target is highly dependent on the timing and overall progress on the construction of our new silicon carbide device 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.

Total cash used in investing activities includes $2.7 million and $0.4 million of cash provided by investing activities from discontinued operations for the six months ended December 27, 2020 and December 29, 2019.

Total cash used in investing activities includes $0.3 million and $2.0 million of cash provided by investing activities from discontinued operations for the nine months ended March 28, 2021 and March 29, 2020, respectively.

Cash Flows from Financing Activities

For the six months ended December 27, 2020, our financing activities primarily consisted of net proceeds of $15.2 million from issuances of common stock pursuant to the exercise of employee stock options.

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

For the nine months ended March 28, 2021, our financing activities primarily consisted of net proceeds of $498.4 million from issuances of common stock pursuant to the exercise of employee stock options and issuances of common stock in connection with the ATM Program.

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

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 27, 2020, 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 28, 2021, 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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For information on 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2020 Form 10-K and 2020 Form 10-K Recast.

Recent Accounting Pronouncements

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For quantitative and qualitative disclosures about our market risks, see “Part II.

Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended June 28, 2020.

Quantitative and Qualitative Disclosures About Market Risk” of the 2020 Form 10-K.

There have been no material changes to the amounts presented therein.

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