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 (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. Overview Cree, Inc. (Cree, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride (GaN) materials, and devices for power and radio-frequency (RF) applications. Our silicon carbide and gallium nitride materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems. 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. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the consolidated balance sheets. Unless otherwise noted, discussion within this Quarterly Report to the consolidated financial statements relates to our continuing operations. Our continuing operations consist of the Wolfspeed business, which includes 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. 33 Table of Contents 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 device fabrication facility in New York. We operate research and development facilities in North Carolina, California, Arkansas, Arizona and New York. 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. Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • 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. 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, 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 and RF 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, 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. 34 Table of Contents • 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 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 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 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. We are focused on investing in our 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, particularly as we transition to our new fabrication facility in Marcy, New York. 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. 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. 35 Table of Contents Results of Operations 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. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue Revenue, net $137.3 100.0 % $113.9 100.0 % $379.8 100.0 % $362.3 100.0 % Cost of revenue, net 93.3 68.0 72.6 63.7 259.0 68.2 232.9 64.3 Gross profit 44.0 32.0 41.3 36.3 120.8 31.8 129.4 35.7 Research and development 46.0 33.5 38.6 33.9 132.7 34.9 112.5 31.1 Sales, general and administrative 44.2 32.2 41.7 36.6 135.0 35.5 135.7 37.5 Amortization or impairment of acquisition-related intangibles 3.7 2.7 3.7 3.2 10.9 2.9 10.9 3.0 Loss on disposal or impairment of other assets 0.1 0.1 0.1 0.1 0.8 0.2 1.7 0.5 Other operating expense 11.4 8.3 5.2 4.6 22.6 6.0 22.2 6.1 Operating loss (61.4) (44.7) (48.0) (42.1) (181.2) (47.7) (153.6) (42.4) 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) Income tax benefit (3.0) (2.2) (6.5) (5.7) (4.0) (1.1) (8.3) (2.3) Net loss from continuing operations ($66.5) (48.4) ($56.2) (49.3) ($196.1) (51.6) ($153.4) (42.3) Net (loss) income from discontinued operations (41.6) (30.3) (3.7) (3.2) (178.8) (47.1) 1.7 0.5 Net loss (108.1) (78.7) (59.9) (52.6) (374.9) (98.7) (151.7) (41.9) Net income from discontinued operations attributable to noncontrolling interest 0.8 0.6 0.2 0.2 1.4 0.4 0.5 0.1 Net loss attributable to controlling interest ($108.9) (79.3) ($60.1) (52.8) ($376.3) (99.1) ($152.2) (42.0) Basic and diluted loss per share Continuing operations ($0.59) ($0.52) ($1.75) ($1.42) Net loss attributable to controlling interest ($0.96) ($0.56) ($3.35) ($1.41) Revenue Revenue was comprised of the following: Three months ended Nine months ended (in millions of U.S. 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 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. 36 Table of Contents Gross Profit and Gross Margin Gross profit and gross margin were as follows: Three months ended Nine months ended (in millions of U.S. 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) % Gross margin 32.0 % 36.3 % 31.8 % 35.7 % Gross Profit and Gross Margin 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 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 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 Nine months ended (in millions of U.S. 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 % Percent of revenue 34 % 34 % 35 % 31 % 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. 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 Nine months ended (in millions of U.S. 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 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. 37 Table of Contents 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 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 Nine months ended (in millions of U.S. 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 $— — % Developed technology 1.4 1.4 — — % 4.0 4.0 — — % Non-compete agreements 0.8 0.8 — — % 2.3 2.3 — — % Total amortization $3.7 $3.7 $— — % $10.9 $10.9 $— — % 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. Loss on Disposal or 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 Nine months ended (in millions of U.S. 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) % Loss on disposal or impairment of other assets primarily relate to proceeds from asset sales offset by write-offs of fixed asset projects, as well as the write-offs of impaired or abandoned patents. Other Operating Expense Other operating expense was as follows: Three months ended Nine months ended (in millions of U.S. 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 % Severance and other restructuring 0.6 — 0.6 100 % 3.4 0.8 2.6 325 % Total restructuring costs 4.4 1.1 3.3 300 % 10.1 4.3 5.8 135 % Project, transformation and transaction costs 2.4 1.4 1.0 71 % 3.7 10.8 (7.1) (66) % Factory optimization start-up costs 1.8 2.1 (0.3) (14) % 6.0 5.0 1.0 20 % Non-restructuring related executive severance 2.8 0.6 2.2 367 % 2.8 2.1 0.7 33 % Other operating expense $11.4 $5.2 $6.2 119 % $22.6 $22.2 $0.4 2 % 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 14, "Restructuring," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on our restructuring costs. 38 Table of Contents 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. 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. 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) 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) 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 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. 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, partially offset by the partial repurchase of our 0.875% convertible senior notes due September 1, 2023 (2023 Notes) soon after the sale of the 2026 Notes. 39 Table of Contents Income tax benefit Income tax benefit and our effective tax rate was as follows: Three months ended Nine months ended (in millions of U.S. 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 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. 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. Net (loss) income from discontinued operations As discussed above, we have classified the results of our former LED Products segment as discontinued operations in our consolidated statements of operations for all periods presented. 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 $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. 40 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. 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. 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 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 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 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 41 Table of Contents 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. Liquidity Our liquidity and capital resources primarily depend on our cash flows from continuing 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. The following table presents the components of our cash conversion cycle: Three months ended March 28, 2021 June 28, 2020 Change Days of sales outstanding (a) 47 53 (6) Days of supply in inventory (b) 142 117 25 Days in accounts payable (c) (90) (115) 25 Cash conversion cycle 99 55 44 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 (excluding inventory related to a future Wafer Supply and Fabrication Services Agreement to be entered into in connection with the LED Business Divestiture (the Wafer Supply Agreement) 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. 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 March 28, 2021 until the investments fully recover in market value. No allowance for credit losses was recorded as of March 28, 2021. Cash Flows In summary, our cash flows were as follows: Nine months ended March 28, 2021 March 29, 2020 Change Cash used in operating activities ($75.5) ($39.5) ($36.0) 91 % Cash used in investing activities (339.5) (152.2) (187.3) (123) % Cash provided by financing activities 497.6 14.4 483.2 3,356 % Effect of foreign exchange changes 0.2 (0.2) 0.4 (200) % Net change in cash and cash equivalents $82.8 ($177.5) $260.3 (147) % 42 Table of Contents Cash Flows from Operating Activities 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. 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 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 $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 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 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 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 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. 43 Table of Contents 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 a 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 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 the 2020 Form 10-K and 2020 Form 10-K Recast. 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. 44 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 the 2020 Form 10-K. There have been no material changes to the amounts presented therein.