What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-01-27 compared with 2021-10-28 · 106 added, 100 removed, 250 unchanged (45% of the section changed)

13 unchanged sentences

(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.

Our product families include Silicon Carbide and GaN materials, power-switching devices and RF devices targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense.

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.

7 unchanged sentences

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.

On October 4, 2021, we changed our corporate name from Cree, Inc.

to Wolfspeed, Inc.

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

7 unchanged sentences

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.

For further information about our consolidated revenue and earnings, please see our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

Industry Dynamics and Trends

1 unchanged sentence

• COVID-19 Pandemic.

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.

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

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

In order to combat the COVID-19 pandemic, significant business and travel restrictions and changes to behavior intended to reduce its spread were implemented, including vaccinations and more widespread availability of testing.

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.

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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.

Therefore, steps such as additional patent applications, confidentiality and non-

disclosure agreements, as well as other security measures are generally taken.

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

Overview of the three months ended September 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.

Overview of the six months ended December 26, 2021

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

• Revenue increased to $329.7 million for the six months ended December 26, 2021 from $242.5 million for the six months ended December 27, 2020.

• Gross profit increased to $106.4 million for the six months ended December 26, 2021 from $76.8 million for the six months ended December 27, 2020.

Gross margin was 32.3% for the six months ended December 26, 2021 and 31.7% for the six months ended December 27, 2020.

• Operating loss was $126.6 million for the six months ended December 26, 2021 compared to $119.8 million for the six months ended December 27, 2020.

• Diluted loss per share from continuing operations was $1.42 for the six months ended December 26, 2021 compared to $1.18 for the six months ended December 27, 2020.

• Combined cash, cash equivalents and short-term investments was $686.5 million at December 26, 2021 and $1,154.6 million at June 27, 2021.

• Convertible notes, net was $453.9 million at December 26, 2021 and $823.9 million at June 27, 2021.

As discussed further below and in Note 9, "Long-term Debt," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, our 0.875% convertible senior notes due September 1, 2023 (2023 Notes) were converted into approximately 7.1 million shares of our common stock in the second quarter of fiscal 2022.

• Cash used in operating activities from continuing operations was $95.0 million for the six months ended December 26, 2021 compared to $32.1 million for the six months ended December 27, 2020.

• Purchases of property and equipment, net were $350.8 million (net of $50.8 million in reimbursements) for the six months ended December 26, 2021 compared to $257.5 million for the six months ended December 27, 2020.

Business Outlook

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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.

This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of $8.5 million and $16.9 million for the three and six months ended December 26, 2021, respectively.

Approximately $10.3 million of the decrease in depreciation expense for the six months ended December 26, 2021 resulted in a net reduction of inventory as of December 26, 2021 and will impact cost of revenue, net in future periods as the inventory is relieved.

The remaining $6.6 million of the decrease in depreciation expense resulted in the following for the three and six months ended December 26, 2021:

(1) an improvement in gross profit of $4.4 million and $4.9 million, respectively;

(2) an improvement in both loss before income taxes and net loss of $5.3 million and $6.6 million, respectively;

and (3) an improvement in basic and diluted loss per share of $0.05 and $0.06 per share, respectively.

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

Results of Operations

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

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

Three months ended Six months ended

December 26, 2021 December 27, 2020 December 26, 2021 December 27, 2020

(in millions of U.S.

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

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

Revenue, net $173.1 100.0 % $127.0 100.0 % $329.7 100.0 % $242.5 100.0 %

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Amortization or impairment of acquisition-related intangibles 3.6 2.1 3.6 2.8 7.2 2.2 7.2 3.0

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

Loss on disposal or impairment of other assets 0.5 0.3 0.4 0.3 0.3 0.1 0.7 0.3

Other operating expense 15.6 9.0 2.6 2.0 28.4 8.6 11.2 4.6

Operating loss (60.9) (35.2) (57.6) (45.4) (126.6) (38.4) (119.8) (49.4)

Non-operating expense, net 4.1 2.6 13.9 12.0

Non-operating expense (income), net 27.8 16.1 (3.1) (2.4) 31.9 9.7 10.8 4.5

Loss before income taxes (88.7) (51.2) (54.5) (42.9) (158.5) (48.1) (130.6) (53.9)

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Net loss attributable to controlling interest ($0.82) ($0.75) ($1.42) ($2.42)

Revenue was comprised of the following:

Three months ended

Revenue was as follows:

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Revenue $173.1 $127.0 $46.1 36 % $329.7 $242.5 $87.2 36 %

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.

Revenue for the three months ended December 26, 2021 compared to the three months ended December 27, 2020 increased primarily due to increased production capacity for our power products to meet strong demand during the period.

Revenue for the six months ended December 26, 2021 compared to the six months ended December 27, 2020 increased due to increased demand across all of our product lines, as well as increased production capacity for our power products to meet strong demand during the period.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Gross profit $57.0 $41.3 $15.7 38 % $106.4 $76.8 $29.6 39 %

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Gross Profit and Gross Margin

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.

The increases in gross profit and gross margin for the three and six months ended December 26, 2021 compared to the three and six months ended December 27, 2020 were primarily due to increased revenues in the current period, manufacturing cost improvements and the impact of increasing the expected useful lives of certain machinery and equipment assets to more closely reflect the estimated economic lives of those assets, partially offset by impacts from product mix.

Research and Development

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Research and development expenses were as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Research and development $50.2 $45.5 $4.7 10 % $100.1 $86.7 $13.4 15 %

Percent of revenue 29 % 36 % 30 % 36 %

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.

The increase in research and development expenses was 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.

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Sales, general and administrative expenses were as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Sales, general and administrative $48.0 $46.8 $1.2 3 % $97.0 $90.8 $6.2 7 %

Percent of revenue 28 % 37 % 29 % 37 %

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.

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

The increase in sales, general and administrative expenses for the six months ended December 26, 2021 compared to December 27, 2020 was primarily due to increased salaries and benefits, including incentive based stock-based compensation, as well as increased consulting and legal fees, partially offset by a decrease in costs related to transition services incurred in the first half 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

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Customer relationships $1.6 $1.6 $— — % $3.1 $3.1 $— — %

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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

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.

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

Three months ended

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

Three months ended Six months ended

(in millions of U.S.

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.

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Loss on disposal or impairment of other assets $0.5 $0.4 $0.1 25 % $0.3 $0.7 ($0.4) (57) %

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

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Factory optimization restructuring $2.1 $1.3 $0.8 62 % $4.7 $2.9 $1.8 62 %

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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

Other operating expense for the three and six months ended December 26, 2021 compared to the three and six months ended December 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, as well as increased project, transformation and transaction costs associated with changing our corporate name from Cree, Inc.

to Wolfspeed, Inc.

Non-Operating Expense (Income), net

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

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Gain on sale of investments, net ($0.1) ($0.2) $0.1 (50) % ($0.3) ($0.2) ($0.1) 50 %

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

Gain on equity investment, net — (10.4) 10.4 (100) % — (7.0) 7.0 (100) %

Loss on debt extinguishment related to conversion of 2023 Notes 24.8 — 24.8 100 % 24.8 — 24.8 100 %

Foreign currency gain, net (0.2) (2.2) 2.0 (91) % (0.3) (2.4) 2.1 (88) %

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Other, net 0.3 — 0.3 100 % (0.2) 0.3 (0.5) (167) %

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

Loss on equity investment, net .

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

Non-operating expense (income), net $27.8 ($3.1) $30.9 (997) % $31.9 $10.8 $21.1 195 %

Gain on equity investment, net .

The gain on equity investment for the three and six months ended December 27, 2020 relates to changes in fair value of our previously held ENNOSTAR Inc.

(ENNOSTAR) investment.

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We no longer hold any equity interest in ENNOSTAR.

Loss on debt extinguishment related to conversion of 2023 Notes .

In the second quarter of fiscal 2022, all of our outstanding 2023 Notes were converted into shares of our common stock, which resulted in a loss on extinguishment of $24.8 million.

See Note 9, "Long-term Debt," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on this loss on debt extinguishment.

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.

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

Interest income.

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

The slight increase in interest income for both periods was primarily due to interest income received on our note receivable from SMART in connection with the completed sale of our former LED Products business unit, partially offset by decreased interest income on our short-term investments driven by lower investment balances.

Interest expense, net of capitalized interest .

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.

The decrease in interest expense for both periods was primarily due to an increase in capitalized interest expense on 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 .

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

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 26, 2021 September 27, 2020 Change

Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change

Income tax expense (benefit) $8.0 ($0.2) $8.2 (4,100) % $8.3 ($1.0) $9.3 (930) %

Effective tax rate (9) % — % (5) % 1 %

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

The change in our effective tax rate was primarily due to $7.3 million of income tax expense recognized in the second quarter of fiscal 2022 related to the restructuring of our Luxembourg holding company.

This restructuring is discussed further in Note 12, "Income Taxes," to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

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

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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

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

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.

For the three and six months ended December 27, 2020, we recorded a net loss from discontinued operations of $28.4 million and $137.2 million, respectively.

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

Liquidity and Capital Resources

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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.

We have a $125 million line of credit as discussed in Note 9, “Long-term Debt,” in our unaudited 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.

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.

On January 25, 2022, we entered into an amendment to the credit agreement governing the line of credit that extends the maturity date by three years to January 9, 2026 and adopts secured overnight financing rate (SOFR) interest rates as the benchmark interest rate under the credit agreement.

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

In the second quarter of fiscal 2022, all outstanding 2023 Notes were surrendered for conversion following our issuance on December 8, 2021 of a notice to holders of the 2023 Notes calling for the redemption of all outstanding 2023 Notes, resulting in the settlement of the previously outstanding $424.8 million aggregate principal amount of 2023 Notes in approximately 7.1 million shares of our common stock.

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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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 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.

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.

3 unchanged sentences

Three months ended

September 26, 2021 June 27, 2021 Change

December 26, 2021 June 27, 2021 Change

Days of sales outstanding (a)

1 unchanged sentence

Days in accounts payable (c)

(102) (92) (10)

Cash conversion cycle 100 107 (7)

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

Due to the significant amount of capital expenditures associated with our future Silicon Carbide 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 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.

Due to the significant amount of capital expenditures associated with our Silicon Carbide device fabrication facility under construction 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 accounts payable balances related to our Silicon Carbide device fabrication facility under construction in New York) by the average cost of revenue, net per day for the respective 90-day period.

The decrease in our cash conversion cycle was primarily driven by a decrease in our days of sales outstanding as a result of our revenue increasing more than the increase to our net receivable balance.

Additionally, an increase in our days in accounts payable, due to our accounts payable balance (after excluding amounts related to capital expenditures for our Silicon Carbide device fabrication facility under construction in Marcy, New York) increasing more than the increase to our cost of revenue, net, was partially offset by increased inventory balances as we expand production globally and build a raw materials buffer to ensure continuity of supply.

As of December 26, 2021, we had unrealized losses on our short-term investments of $1.6 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at December 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 September 26, 2021 until the investments fully recover in market value.

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

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

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

In summary, our cash flows were as follows:

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) %

Six months ended

December 26, 2021 December 27, 2020 Change

Cash used in operating activities ($95.0) ($25.9) ($69.1) (267) %

Cash used in investing activities (83.5) (49.8) (33.7) (68) %

3 unchanged sentences

Cash Flows from Operating Activities

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.

Net cash used in operating activities increased primarily due to decreased working capital as a result of inventory growth, employee incentive payments and increased spending to fund expanded operations.

Total cash used in operating activities included $6.2 million of cash provided by operating activities from discontinued operations for the six months ended December 27, 2020.

Cash Flows from Investing Activities

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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.

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

Cash Flows from Financing Activities

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.

For the six months ended December 26, 2021, our financing activities primarily consisted of $25.3 million in tax withholdings on vested equity awards, partially offset by $11.5 million of proceeds from the issuance of common stock.

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

As of December 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis