What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-04-29 · 159 added, 178 removed, 191 unchanged (64% 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.

(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.

Wolfspeed, Inc., formerly known as Cree, Inc.

(Wolfspeed, 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 GaN materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

During and prior to fiscal 2021, 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.

On March 1, 2021, we completed the 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.

(CreeLED and collectively with SGH, SMART) (the LED Business Divestiture).

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

Unless otherwise noted, discussions within this Quarterly Report relate to our continuing operations.

Our continuing operations consist entirely of our 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.

In January 2021, we announced plans to change our corporate name from Cree, Inc.

to Wolfspeed, Inc., which was completed on October 4, 2021.

In addition, we transferred the listing of our common stock to the New York Stock Exchange (NYSE) from The Nasdaq Global Select Market.

We ceased trading as a Nasdaq-listed company at the end of the day on October 1, 2021 and commenced trading as a NYSE-listed company at market open on October 4, 2021 under the new ticker symbol ‘WOLF’.

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.

We maintain captive lines at some of our contract manufacturers.

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.

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

Wolfspeed, Inc.

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

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• 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.

Although vaccines for COVID-19 have been made available to the general public in the United States and in many places around the world, vaccination rates vary and vaccines may lose effectiveness over time.

We are unable to predict how widely utilized the vaccines and boosters will be, whether and for how long 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.

In light of the increasing percentage of vaccinated individuals, many previously implemented restrictions have gradually been lifted.

While the number of new cases is significantly below the levels witnessed at the height of the COVID-19 pandemic, there was a significant uptick in the number of new cases, including so called ‘breakthrough’ cases involving individuals who were previously vaccinated, during the first quarter of fiscal 2022.

Despite the availability of vaccines, COVID-19 and its variants continue 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.

In order to combat the COVID-19 pandemic, significant business and travel restrictions and changes to behavior intended to reduce its spread were implemented.

The COVID-19 pandemic has continued 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' and contract manufacturers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs.

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, restoration and/or expansion of restrictions, fluctuations in foreign currency markets and the credit risks of our customers.

We continue to pay 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.

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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.

Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, inflationary impacts, as well as evolving competitive dynamics in each of the respective markets.

These uncertainties make demand difficult to forecast for us and our customers.

• Supply Constraints.

The semiconductor industry has experienced supply constraints for certain items.

While we have successfully managed through challenges relating to obtaining certain necessary raw materials and production and processing equipment thus far, we expect the supply situation for these items to remain tight for at least the next few quarters.

In addition, the current high demand for our products has led to supply constraints for our customers.

We continue to work closely with our customer base to best match our supply to their demand.

We have taken steps to provide continuity to our customers, to the extent possible, although we expect that constraints may continue to limit our shipments in the near term.

• Governmental Trade and Regulatory Conditions .

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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 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.

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In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers.

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.

• Technological Innovation and Advancement.

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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.

Overview of the three months ended September 26, 2021

The following is a summary of our financial results for the three months ended September 26, 2021:

• Revenue increased to $156.6 million for the three months ended September 26, 2021 from $115.5 million for the three months ended September 27, 2020.

• Gross profit increased to $49.4 million for the three months ended September 26, 2021 from $35.5 million for the three months ended September 27, 2020.

Gross margin was 31.5% for the three months ended September 26, 2021 and 30.7% for the three months ended September 27, 2020.

• Operating loss was $65.7 million for the three months ended September 26, 2021 compared to $62.2 million for the three months ended September 27, 2020.

• Diluted loss per share from continuing operations was $0.60 for the three months ended September 26, 2021 compared to $0.69 for the three months ended September 27, 2020.

• Combined cash, cash equivalents and short-term investments was $857.8 million at September 26, 2021 and $1,154.6 million at June 27, 2021.

• Cash used in operating activities from continuing operations was $62.5 million for the three months ended September 26, 2021 compared to cash provided by operating activities from continuing operations of $0.7 million for the three months ended September 27, 2020.

• Purchases of property and equipment, net were $208.5 million (net of $50.8 million in reimbursements) for the three months ended September 26, 2021 compared to $113.5 million for the three months ended September 27, 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.

The strength of our balance sheet provides us the ability to invest in our business, as indicated by our ongoing construction of a state-of-the-art, automated 200mm Silicon Carbide device fabrication facility and an expansion of our materials factory to grow our Silicon Carbide production capacity, each of which was announced in May 2019.

In September 2019, we announced our intention to build a new Silicon Carbide 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.

Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020 and the facility is expected to start production in fiscal 2022.

In fiscal 2022, we expect to incur an estimated $80.0 million of start-up and pre-production costs as we ramp production at this facility.

The completion of the LED Business Divestiture on March 1, 2021 represented a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications.

This transaction positioned us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to Silicon Carbide and further strengthened our financial position, which we plan to utilize in order 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 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.

We believe we have the ability 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 remain uncertain.

Change in Estimate

As a result of the LED Business Divestiture and our continued investment in 200mm technology, we evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use.

In the first quarter of fiscal 2022, we increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets.

This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of $8.4 million for the first quarter of fiscal 2022.

Approximately $7.1 million of the decrease in depreciation expense resulted in a reduction of inventory as of September 26, 2021 and will impact cost of revenue, net in future periods as the inventory is relieved.

The remaining $1.3 million of reduced depreciation expense resulted in the following:

(1) an improvement in gross profit of $0.5 million;

(2) an improvement in both loss before income taxes and net loss of $1.3 million;

and (3) an improvement in basic and diluted loss per share of $0.01 per share.

We expect the impact to gross profit to be approximately $8.0 million per quarter by the end of the year as inventory is relieved.

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

Selected consolidated statements of operations data for the three months ended September 26, 2021 and September 27, 2020 is as follows:

Three months ended

September 26, 2021 September 27, 2020

(in millions of U.S.

Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue

Dollars, except share data) Amount % of Revenue Amount % of Revenue

Revenue, net $156.6 100.0 % $115.5 100.0 %

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Amortization or impairment of acquisition-related intangibles 3.6 2.3 3.6 3.1

Loss on disposal or impairment of other assets 0.1 0.1 0.1 0.1 0.8 0.2 1.7 0.5

(Gain) loss on disposal or impairment of other assets (0.2) (0.1) 0.3 0.3

Other operating expense 12.8 8.2 8.6 7.4

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Loss before income taxes (69.8) (44.6) (76.1) (65.9)

Income tax benefit (3.0) (2.2) (6.5) (5.7) (4.0) (1.1) (8.3) (2.3)

Income tax expense (benefit) 0.3 0.2 (0.8) (0.7)

Net loss from continuing operations ($70.1) (44.8) ($75.3) (65.2)

Net (loss) income from discontinued operations (41.6) (30.3) (3.7) (3.2) (178.8) (47.1) 1.7 0.5

Net loss from discontinued operations — — (108.8) (94.2)

Net loss (70.1) (44.8) (184.1) (159.4)

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Revenue was comprised of the following:

Three months ended Nine months ended

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Revenue $156.6 $115.5 $41.1 36 %

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.

Revenue for the three months ended September 26, 2021 increased when compared to the three months ended September 27, 2020 due to increased demand across all of our product lines, as well as increased production capacity to meet the increased demand.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Three months ended Nine months ended

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Gross profit $49.4 $35.5 $13.9 39 %

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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.

The increase in gross profit and gross margin for the three months ended September 26, 2021 compared to the three months ended September 27, 2020 is primarily due to increased revenues in the current period and cost improvements.

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 device fabrication facility in Marcy, New York.

Research and development costs also include developing supporting technologies for our 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

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Research and development $49.9 $41.2 $8.7 21 %

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Sales, general and administrative expenses were as follows:

Three months ended Nine months ended

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Sales, general and administrative $49.0 $44.0 $5.0 11 %

Percent of revenue 31 % 38 %

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.

The increase in sales, general and administrative expenses for the three months ended September 26, 2021 compared to September 27, 2020 was primarily due to increased salaries and benefits, including incentive based stock-based compensation, partially offset by a decrease in professional service fees primarily related to transition services incurred in the first quarter of fiscal 2021 in connection with the sale of our former Lighting Products business unit.

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 Nine months ended

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Customer relationships $1.5 $1.5 $— — %

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Total amortization $3.6 $3.6 $— — %

Amortization of acquisition-related intangible assets stayed consistent due to the absence of acquisition-related intangible activity between the periods, as well as no impairments.

Loss on Disposal or Impairment of Other Assets

Amortization of acquisition-related intangible assets remained consistent due to the absence of acquisition-related intangible activity between the periods, as well as no impairments.

(Gain) Loss on Disposal or Impairment of Other Assets

We operate a capital-intensive business.

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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

(Gain) loss on disposal or impairment of other assets were as follows:

Three 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.

Dollars) September 26, 2021 September 27, 2020 Change

(Gain) loss on disposal or impairment of other assets ($0.2) $0.3 ($0.5) (167) %

(Gain) 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

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Factory optimization restructuring $2.6 $1.6 $1.0 63 %

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Factory optimization start-up costs 8.6 3.0 5.6 187 %

Non-restructuring related executive severance 2.8 0.6 2.2 367 % 2.8 2.1 0.7 33 %

Other operating expense $12.8 $8.6 $4.2 49 %

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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.

These efforts are focused on expanding our production footprint to support expected growth.

Other operating expense for the three months ended September 26, 2021 compared to the three months ended September 27, 2020 increased primarily due to increased factory optimization start-up costs as we continue our expansion to a new Silicon Carbide device fabrication facility in Marcy, New York.

Non-Operating Expense, net

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

Three months ended Nine months ended

Three months ended

(in millions of U.S.

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

Dollars) September 26, 2021 September 27, 2020 Change

Gain on sale of investments, net ($0.2) $— ($0.2) (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 %

Loss on equity investment, net — 3.4 (3.4) (100) %

Foreign currency gain, net (0.1) (0.2) 0.1 (50) %

Interest income (2.6) (2.7) 0.1 (4) %

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Non-operating expense, net $4.1 $13.9 ($9.8) (71) %

(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.

Loss on equity investment, net .

The loss on equity investment related to changes in fair value of our previously held 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.

In the fourth quarter of fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR.

We no longer hold any equity interest in ENNOSTAR.

Foreign currency gain, net.

Foreign currency gain, net primarily consists of remeasurement adjustments resulting from our international subsidiaries and from our previously held ENNOSTAR investment.

Interest income.

The decrease in interest income was due to significant reductions in investment returns on our short-term investment securities.

The slight decrease in interest income was primarily due to lower balances on our short-term investments.

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.

Income tax benefit

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

Three months ended Nine months ended

The decrease in interest expense was primarily due to an increase in capitalized interest on our 0.875% convertible senior notes due September 1, 2023 (2023 Notes) and our 1.75% convertible senior notes due May 1, 2026 (2026 Notes) in connection with the building of a new Silicon Carbide device fabrication facility in New York.

Loss on Wafer Supply Agreement .

In connection with the completed sale of our former LED Products business unit to SMART in fiscal 2021, we entered into a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which we supply CreeLED with certain Silicon Carbide materials and fabrication services for up to four years.

Income tax expense (benefit)

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

Three 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) %

Dollars) September 26, 2021 September 27, 2020 Change

Income tax expense (benefit) $0.3 ($0.8) $1.1 (138) %

Effective tax rate — % 1 %

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.

The change in our effective tax rate was primarily due to an increase in projected income from international locations in fiscal 2022.

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

statutory rate of 21.0% 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

and Luxembourg, (ii) projected income derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated.

As a result of the LED Business Divestiture and the liquidation of our common stock ownership interest in ENNOSTAR, and as discussed further in Note 12, "Income Taxes," to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, we are reviewing our legal entity structure and performing the due diligence necessary to understand our ability and desire to restructure our Luxembourg holding company.

If we decide to restructure our Luxembourg holding company, which could happen as soon as the second quarter of fiscal 2022, it is reasonably possible that this action could generate taxable income of the right character to utilize all or a portion of our existing $121.8 million of deferred tax assets in Luxembourg.

This may result in the release of all or a portion of our valuation allowance on the Luxembourg holding company.

The release of this valuation allowance could result in the recognition of $121.8 million of net operating loss deferred tax assets and a decrease to income tax expense in the period the release is recorded.

There can be no assurance that we will make the decision to restructure our Luxembourg holding company or, if we do, that we will be able to recognize some or all of the net operating loss deferred tax assets in Luxembourg.

Net loss 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.

For the three months ended September 27, 2020, we recorded a net loss from discontinued operations of $108.8 million.

We did not have any discontinued operations related activity for the three months ended September 26, 2021.

Liquidity and Capital Resources

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.

Our principal sources of liquidity are cash on hand, marketable securities 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.

In the third quarter of fiscal 2021, we implemented an at-the-market program under a shelf registration statement on Form S-3 and prospectus supplement filed with the SEC on February 11, 2021 in which we sold 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.

In the fourth quarter of fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR and received net proceeds of $66.4 million.

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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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).

We expect to invest more than $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 over time 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.

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

To the extent the COVID-19 virus and its variants continue to spread, we believe our future results of operations, including the results for fiscal 2022, 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.

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

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.

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Three months ended

March 28, 2021 June 28, 2020 Change

September 26, 2021 June 27, 2021 Change

Days of sales outstanding (a)

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Days in accounts payable (c)

(90) (115) 25

Cash conversion cycle 128 107 21

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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.

DSI is calculated by dividing ending inventory (excluding inventory related to the Wafer Supply Agreement entered into in connection with the LED Business Divestiture) 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.

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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.

DPO is calculated by dividing ending accounts payable and accrued expenses (less 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.

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 Marcy, New York) while our cost of revenue for the quarter increased.

As of September 26, 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 September 26, 2021 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or volatile market conditions surrounding the ongoing 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.

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of September 26, 2021 until the investments fully recover in market value.

No allowance for credit losses was recorded as of September 26, 2021.

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 %

Three months ended

September 26, 2021 September 27, 2020 Change

Cash (used in) provided by operating activities ($62.5) $0.4 ($62.9) (15,725) %

Cash used in investing activities (32.0) (16.0) (16.0) (100) %

Cash provided by financing activities 497.6 14.4 483.2 3,356 %

Cash (used in) provided by financing activities (22.9) 3.1 (26.0) (839) %

Effect of foreign exchange changes (0.1) 0.1 (0.2) (200) %

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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.

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

Total cash (used in) provided by operating activities included $0.3 million of cash used in operating activities from discontinued operations for the three months ended September 27, 2020.

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).

Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment, and property related reimbursements.

Cash used in investing activities increased primarily due to an increase in property and equipment purchases of $145.8 million partially offset by an increase in net proceeds from short-term investments of $77.7 million and $50.8 million of property related reimbursements in the first quarter of fiscal 2022 from the State of New York Urban Development Corporation 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.

For fiscal 2022, we target approximately $475.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support 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 approximately $300.0 million of expected reimbursements from the State of New York Urban Development Corporation under the GDA.

Total cash used in investing activities included $1.2 million of cash used in investing activities from discontinued operations for the three months ended September 27, 2020.

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.

For the three months ended September 26, 2021, our financing activities primarily consisted of net cash used of $21.8 million from issuances of common stock pursuant to the exercise of employee stock awards, primarily as a result of tax withholdings on vested equity awards exceeding proceeds from the issuance of common stock.

For the three months ended September 27, 2020, our financing activities primarily consisted of net proceeds of $3.7 million from issuances of common stock pursuant to the exercise of employee stock awards.

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 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.

As of September 26, 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.

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.

For information on 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 2021 Form 10-K.

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.

For a description of recent accounting pronouncements pending adoption, 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.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis