What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2022-01-27 · 122 added, 107 removed, 249 unchanged (48% of the section changed)

11 unchanged sentences

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.

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.

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 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.

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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.

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

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’.

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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.

Additionally, we recently opened our Silicon Carbide device fabrication facility in New York.

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

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• COVID-19 Pandemic.

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, 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.

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.

The global health crisis caused by COVID-19 and its resurgences has impacted and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence.

In addition, variants of COVID-19 continue to emerge.

Early in 2022, cases of COVID-19 reached all-time highs as a result of the emergence and rapid spread of the Omicron variant.

Although cases have declined significantly in recent months, there can be no assurance that a future variant will not emerge.

In addition, while vaccines have proven effective in preventing serious illnesses and hospitalizations, there is no assurance that such vaccines will remain effective against new variants or that the protection conferred by existing vaccines will not wane over time.

Over the past two years, the COVID-19 pandemic has affected 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 on a timely basis, and the overall impact of the aforementioned items that could cause output challenges and increased costs.

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.

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

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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.

In addition, the ongoing military conflict between Russia and Ukraine may further exacerbate supply constraints.

The current high demand for our products has also led to supply constraints for our customers.

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

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• Governmental Trade and Regulatory Conditions .

Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business.

Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, geopolitical, economic and regulatory environment among the countries where we do business.

Changes in trade policy such as the imposition or extension of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets.

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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 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.

Overview of the nine months ended March 27, 2022

The following is a summary of our financial results for the nine months ended March 27, 2022:

• Revenue increased to $517.7 million for the nine months ended March 27, 2022 from $379.8 million for the nine months ended March 28, 2021.

• Gross profit increased to $170.4 million for the nine months ended March 27, 2022 from $120.8 million for the nine months ended March 28, 2021.

Gross margin was 32.9% for the nine months ended March 27, 2022 and 31.8% for the nine months ended March 28, 2021.

• Operating loss was $188.9 million for the nine months ended March 27, 2022 compared to $181.2 million for the nine months ended March 28, 2021.

• Diluted loss per share from continuing operations was $1.96 for the nine months ended March 27, 2022 compared to $1.75 for the nine months ended March 28, 2021.

• Combined cash, cash equivalents and short-term investments was $1,286.1 million at March 27, 2022 and $1,154.6 million at June 27, 2021.

• Convertible notes, net was $1,008.4 million at March 27, 2022 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.

Additionally, in the third quarter of fiscal 2022, we sold $750.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2028.

• Cash used in operating activities from continuing operations was $123.4 million for the nine months ended March 27, 2022 compared to $58.9 million for the nine months ended March 28, 2021.

• Purchases of property and equipment, net were $452.0 million (net of $83.5 million in reimbursements) for the nine months ended March 27, 2022 compared to $394.0 million for the nine months ended March 28, 2021.

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 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 and the facility is expected to start production in fiscal 2022.

The strength of our balance sheet provides us the ability to invest in our business, as indicated by our state-of-the-art, automated 200mm Silicon Carbide device fabrication facility in Marcy, New York and an expansion of our materials factory at our U.S campus headquarters in Durham, North Carolina, both of which will increase our Silicon Carbide production capacity.

Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020 and the facility started running qualification lots in the fourth quarter of 2022.

In fiscal 2022, we expect to incur an estimated $75.0 million of start-up and pre-production costs as we ramp production at this facility.

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Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows remain uncertain.

We continue to closely monitor the ongoing military conflict between Russia and Ukraine to evaluate our potential exposure to this conflict.

We do not have significant credit, supplier or customer concentrations in Russia, Belarus or Ukraine at this time.

As a result, we do not currently expect any material impacts to our consolidated financial statements.

However, we believe the full impact of the conflict remains uncertain and we continue to assess if ongoing developments, such as further sanctions or other increased involvements from countries we operate in and do business with, may cause future material impacts to our consolidated financial statements.

Change in Estimate

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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 $8.5 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:

This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of $8.3 million and $25.2 million for the three and nine months ended March 27, 2022, respectively.

Approximately $10.4 million of the decrease in depreciation expense for the six months ended March 27, 2022 resulted in a net reduction of inventory as of March 27, 2022 and will impact cost of revenue, net in future periods as the inventory is relieved.

The remaining $14.8 million of the decrease in depreciation expense resulted in the following for the three and nine months ended March 27, 2022:

(1) an improvement in gross profit of $7.3 million and $12.2 million, respectively;

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Results of Operations

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

Selected consolidated statements of operations data for the three and nine months ended March 27, 2022 and March 28, 2021 is as follows:

Three months ended Nine months ended

March 27, 2022 March 28, 2021 March 27, 2022 March 28, 2021

(in millions of U.S.

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Amortization or impairment of acquisition-related intangibles 3.4 1.8 3.7 2.7 10.6 2.0 10.9 2.9

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

(Gain) loss on disposal or impairment of other assets (0.6) (0.3) 0.1 0.1 (0.3) (0.1) 0.8 0.2

Other operating expense 23.9 12.7 11.4 8.3 52.3 10.1 22.6 6.0

Operating loss (62.3) (33.1) (61.4) (44.7) (188.9) (36.5) (181.2) (47.7)

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

Non-operating expense, net 3.8 2.0 8.1 5.9 35.7 6.9 18.9 5.0

Loss before income taxes (66.1) (35.2) (69.5) (50.6) (224.6) (43.4) (200.1) (52.7)

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Revenue was as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Revenue $188.0 $137.3 $50.7 37 % $517.7 $379.8 $137.9 36 %

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.

Revenue for the three and nine months ended March 27, 2022 compared to the three and nine months ended March 28, 2021 increased due to increased demand across all of our product lines, as well as increased production capacity for our power and materials product lines to meet strong demand during the period and in future periods.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Gross profit $64.0 $44.0 $20.0 45 % $170.4 $120.8 $49.6 41 %

Gross margin 34.0 % 32.0 % 32.9 % 31.8 %

Gross Profit and Gross Margin

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.

The increases in gross profit and gross margin for the three months ended March 27, 2022 compared to the three months ended March 28, 2021 were primarily due to increased revenues in the current period, product mix 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.

The increase in gross profit for the nine months ended March 27, 2022 compared to the nine months ended March 28, 2021 was primarily due to increased revenues in the current period and lower manufacturing costs, including 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.

The increase in gross margin for the nine months ended March 27, 2022 compared to the nine months ended March 28, 2021 was primarily due to the same factors as the increase to gross profit, partly offset by product mix.

Research and Development

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Research and development expenses were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Research and development $48.1 $46.0 $2.1 5 % $148.2 $132.7 $15.5 12 %

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Sales, general and administrative expenses were as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Sales, general and administrative $51.5 $44.2 $7.3 17 % $148.5 $135.0 $13.5 10 %

Percent of revenue 27 % 32 % 29 % 36 %

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.

The increase in sales, general and administrative expenses for the three months ended March 27, 2022 compared to March 28, 2021 was primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation.

The increase in sales, general and administrative expenses for the nine months ended March 27, 2022 compared to March 28, 2021 was primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation, as well as increased consulting, legal and travel 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 Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

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

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Total amortization $3.4 $3.7 ($0.3) (8) % $10.6 $10.9 ($0.3) (3) %

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.

Loss on Disposal or Impairment of Other Assets

Amortization of acquisition-related intangible assets slightly decreased due to an intangible asset relating to non-compete agreements reaching the end of its useful life.

No other significant acquisition-related intangible activity or impairments occurred between the periods.

(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 Six months ended

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

Three months ended Nine months ended

(in millions of U.S.

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.

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

(Gain) loss on disposal or impairment of other assets ($0.6) $0.1 ($0.7) (700) % ($0.3) $0.8 ($1.1) (138) %

(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.

Additionally, the gain on disposal or impairment of other assets for the three and nine months ended March 27, 2022 includes a $0.7 million net gain related to consideration received from the early payment of the unsecured promissory note issued by SGH at the closing of the LED Business Divestiture (the Purchase Price Note), as discussed in Note 2, "Discontinued Operations", to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.

Other Operating Expense

Other operating expense was as follows:

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Factory optimization restructuring $0.8 $3.8 ($3.0) (79) % $5.5 $6.7 ($1.2) (18) %

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Factory optimization start-up costs 21.4 1.8 19.6 1,089 % 41.0 6.0 35.0 583 %

Non-restructuring related executive severance — 2.8 (2.8) (100) % — 2.8 (2.8) (100) %

Other operating expense $23.9 $11.4 $12.5 110 % $52.3 $22.6 $29.7 131 %

5 unchanged sentences

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

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

Other operating expense for the three and nine months ended March 27, 2022 compared to the three and nine months ended March 28, 2021 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

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Gain on sale of investments, net $— ($0.1) $0.1 (100) % ($0.3) ($0.3) $— — %

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Loss on Wafer Supply Agreement 0.5 0.1 0.4 400 % 1.4 0.1 1.3 1,300 %

Loss on early payment of transaction-related note receivable 1.2 — 1.2 100 % 1.2 — 1.2 100 %

Other, net 0.1 (0.2) 0.3 (150) % (0.1) 0.1 (0.2) (200) %

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

Non-operating expense, net $3.8 $8.1 ($4.3) (53) % $35.7 $18.9 $16.8 89 %

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.

The gain on equity investment for the three and nine months ended March 28, 2021 relates to changes in fair value of our previously held ENNOSTAR Inc.

(ENNOSTAR) investment.

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Interest income.

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.

The slight increase in interest income for both periods was primarily due to interest income received on our note receivable from SGH in connection with the LED Business Divestiture, partially offset by decreased interest income on our short-term investments driven by lower average investment balances.

Interest expense, net of capitalized interest .

1 unchanged sentence

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.

In connection with the LED Business Divestiture, 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.

Loss on early payment of transaction-related note receivable .

In the third quarter of fiscal 2022, we received an early payment for the Purchase Price Note that resulted in a loss of $1.2 million.

See Note 2, "Discontinued Operations," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on this loss on early payment of transaction-related note receivable.

Income tax expense (benefit)

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

Three months ended Six months ended

Three months ended Nine months ended

(in millions of U.S.

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

Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change

Income tax expense (benefit) $0.4 ($3.0) $3.4 (113) % $8.7 ($4.0) $12.7 (318) %

Effective tax rate (1) % 4 % (4) % 2 %

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.

The change in our effective tax rate for the three months ended March 27, 2022 was primarily due to an increase in projected income from international locations in fiscal 2022.

The change in our effective tax rate for the nine months ended March 27, 2022 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.

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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.

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.

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

For the three and nine months ended March 28, 2021, we recorded a net loss from discontinued operations of $41.6 million and $178.8 million, respectively.

We did not have any discontinued operations related activity for the three and nine months ended March 27, 2022.

Liquidity and Capital Resources

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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.

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 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 of the program and $0.9 million in other offering costs.

The purpose of this credit 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 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 adopted secured overnight financing rate (SOFR) interest rates as the benchmark interest rate under the credit agreement.

In the third quarter of fiscal 2021, we implemented an at-the-market program (the ATM 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 of the program 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.

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.

In the third quarter of fiscal 2022, we issued and sold a total of $750.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2028 (the 2028 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 2028 Notes was $732.3 million, of which we used $108.2 million to fund the cost of entering into capped call transactions.

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

In addition, during the third quarter of 2022, we received an early payment for the Purchase Price Note resulting in receipt of the principal amount of $125.0 million along with outstanding accrued and unpaid interest as of the payment date.

Based on past performance and current expectations, we believe our current working capital, availability under our line of credit and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months.

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From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we have continued to make such evaluations.

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

For example, in March 2021 we completed the LED Business Divestiture, which provided us with (i) $50 million in upfront payments (ii) a $125 million unsecured promissory note due in August 2023 (which amount plus accrued and unpaid interest was prepaid during the third quarter of 2022), and (iii) the potential to receive an earn-out payment between $2.5 million and $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, also payable in the form of an unsecured promissory note due March 2025.

We may also access capital markets through the issuance of debt or additional shares of common stock, which we may use in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities or general corporate purposes.

We are currently building a new Silicon Carbide device fabrication facility in Marcy, New York, to expand capacity for our Silicon Carbide device business.

We recently opened our new Silicon Carbide device fabrication facility in Marcy, New York, to expand capacity for our Silicon Carbide device business.

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.

Given our current cash position, we believe we are positioned to adequately fund the remaining construction of the facility.

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 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.

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 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.

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Three months ended

December 26, 2021 June 27, 2021 Change

March 27, 2022 June 27, 2021 Change

Days of sales outstanding (a)

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

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

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

Our cash conversion cycle had a slight decrease for the three months ended March 27, 2022 as compared to the three months ended June 27, 2021.

An increase in our days of supply in inventory was primarily due to increased inventory balances as we expand production globally and build a raw materials buffer to try to ensure continuity of supply.

The increase in our days in accounts payable was driven by our accounts payable balance (after excluding amounts related to capital expenditures for our Silicon Carbide device fabrication facility in Marcy, New York) increasing more than the increase to our cost of revenue, net.

Additionally, our days of sales outstanding decreased slightly as a result of our revenue increasing more than the increase to our net receivable balance.

As of March 27, 2022, we had unrealized losses on our short-term investments of $15.8 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 27, 2022 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or volatile market conditions related to the conflict in Ukraine and 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 December 26, 2021 until the investments fully recover in market value.

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

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of March 27, 2022 until the investments fully recover in market value.

No allowance for credit losses was recorded as of March 27, 2022.

In summary, our cash flows were as follows:

Six months ended

December 26, 2021 December 27, 2020 Change

Nine months ended

March 27, 2022 March 28, 2021 Change

Cash used in operating activities ($123.4) ($75.5) ($47.9) (63) %

Cash used in investing activities (378.0) (339.5) (38.5) (11) %

Cash (used in) provided by financing activities (15.0) 14.5 (29.5) (203) %

Cash provided by financing activities 608.3 497.6 110.7 22 %

Effect of foreign exchange changes — 0.2 (0.2) (100) %

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Cash Flows from Operating Activities

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.

Net cash used in operating activities increased primarily due to decreased working capital as a result of inventory growth and increased receivables related to timing of shipments.

Total cash used in operating activities included $16.6 million of cash used in operating activities from discontinued operations for the nine months ended March 28, 2021.

Cash Flows from Investing Activities

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 $144.1 million partially offset by an increase in net proceeds from short-term investments of $60.4 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).

Cash used in investing activities increased primarily due to an increase in property and equipment purchases of $141.5 million and an increase in net purchases of short-term investments of $71.1 million, partially offset by a net increase in proceeds from the LED Business Divestiture of $88.4 million and $83.5 million of property related reimbursements 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.

For fiscal 2022, we target approximately $550.0 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 $2.7 million of cash provided by investing activities from discontinued operations for the six months ended December 27, 2020.

This target is highly dependent on the timing and overall progress on our new Silicon Carbide fabrication facility in New York and is net of approximately $200.0 million of expected reimbursements from the State of New York Urban Development Corporation under the GDA.

Total cash used in investing activities included $0.3 million of cash used in investing activities from discontinued operations for the nine months ended March 28, 2021.

Cash Flows from Financing Activities

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.

For the nine months ended March 27, 2022, our financing activities primarily consisted of $732.3 million in net proceeds from issuing our 2028 Notes and $11.7 million of proceeds from the issuance of common stock, partially offset by $108.2 million in cash paid for capped call transactions and $26.1 million in tax withholdings on vested equity awards.

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 in connection with the ATM program in the third quarter of fiscal 2021 and issuances of common stock pursuant to the exercise of employee stock options.

Off-Balance Sheet Arrangements

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Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities.

As of December 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 March 27, 2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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What changed 10-Q

Item 2. Management’s Discussion and Analysis