WOLFSPEED, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made, and except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (the SEC), we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report. Executive Summary The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 27, 2021 (the 2021 Form 10-K). Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Overview 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. 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) (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. 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 (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’. 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 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. 34 Table of Contents Wolfspeed, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • COVID-19 Pandemic. 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. • Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices . Our potential for growth depends significantly on the adoption of Silicon Carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, 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 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. 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 . 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. • Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers. 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. Innovations and advancements in materials, power, and RF technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets. • Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common. 35 Table of Contents 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. 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 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. 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 Silicon Carbide device 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 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. 36 Table of Contents 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 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 $8.3 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; (2) an improvement in both loss before income taxes and net loss of $8.2 million and $14.8 million, respectively; and (3) an improvement in basic and diluted loss per share of $0.07 and $0.12 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 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. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue Revenue, net $188.0 100.0 % $137.3 100.0 % $517.7 100.0 % $379.8 100.0 % Cost of revenue, net 124.0 66.0 93.3 68.0 347.3 67.1 259.0 68.2 Gross profit 64.0 34.0 44.0 32.0 170.4 32.9 120.8 31.8 Research and development 48.1 25.6 46.0 33.5 148.2 28.6 132.7 34.9 Sales, general and administrative 51.5 27.4 44.2 32.2 148.5 28.7 135.0 35.5 Amortization or impairment of acquisition-related intangibles 3.4 1.8 3.7 2.7 10.6 2.0 10.9 2.9 (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, 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) Income tax expense (benefit) 0.4 0.2 (3.0) (2.2) 8.7 1.7 (4.0) (1.1) Net loss from continuing operations ($66.5) (35.4) ($66.5) (48.4) ($233.3) (45.1) ($196.1) (51.6) Net loss from discontinued operations — — (41.6) (30.3) — — (178.8) (47.1) Net loss (66.5) (35.4) (108.1) (78.7) (233.3) (45.1) (374.9) (98.7) Net income from discontinued operations attributable to noncontrolling interest — — 0.8 0.6 — — 1.4 0.4 Net loss attributable to controlling interest ($66.5) (35.4) ($108.9) (79.3) ($233.3) (45.1) ($376.3) (99.1) Basic and diluted loss per share Continuing operations ($0.54) ($0.59) ($1.96) ($1.75) Net loss attributable to controlling interest ($0.54) ($0.96) ($1.96) ($3.35) 37 Table of Contents Revenue Revenue was as follows: Three months ended Nine months ended (in millions of U.S. 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 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 Nine months ended (in millions of U.S. 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 % 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 Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development costs also include developing supporting technologies for our expansion to a new Silicon Carbide device fabrication facility in Marcy, New York. Research and development expenses were as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 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 % Percent of revenue 26 % 34 % 29 % 35 % 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. 38 Table of Contents Sales, General and Administrative Sales, general and administrative expenses are comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consists of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel and other costs. Sales, general and administrative expenses were as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 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 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 As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names. Amortization of intangible assets related to our acquisitions was as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 27, 2022 March 28, 2021 Change March 27, 2022 March 28, 2021 Change Customer relationships $1.5 $1.5 $— — % $4.6 $4.6 $— — % Developed technology 1.4 1.4 — — % 4.0 4.0 — — % Non-compete agreements 0.5 0.8 (0.3) (38) % 2.0 2.3 (0.3) (13) % Total amortization $3.4 $3.7 ($0.3) (8) % $10.6 $10.9 ($0.3) (3) % 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. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our long-lived assets and capitalized patent costs for possible impairment. 39 Table of Contents (Gain) loss on disposal or impairment of other assets were as follows: Three months ended Nine months ended (in millions of U.S. 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 Nine months ended (in millions of U.S. 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) % Severance and other restructuring 0.5 0.6 (0.1) (17) % 0.5 3.4 (2.9) (85) % Total restructuring costs 1.3 4.4 (3.1) (70) % 6.0 10.1 (4.1) (41) % Project, transformation and transaction costs 1.2 2.4 (1.2) (50) % 5.3 3.7 1.6 43 % 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 % Factory optimization restructuring costs relate to facility consolidations as well as disposals on certain long-lived assets. Severance and other restructuring costs relate to corporate restructuring plans. See Note 14, "Restructuring," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on our restructuring costs. Project, transformation and transaction costs primarily relate to professional services fees associated with completed and potential acquisitions and divestitures, as well as internal transformation programs focused on optimizing our administrative processes. Factory optimization start-up costs are additional start-up costs as part of our factory optimization efforts, which began in the fourth quarter of fiscal 2019. These efforts are focused on expanding our production footprint to support expected growth. 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. 40 Table of Contents Non-Operating Expense, net Non-operating expense, net was comprised of the following: Three months ended Nine months ended (in millions of U.S. Dollars) March 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) $— — % Gain on equity investment, net — (0.9) 0.9 (100) % — (7.9) 7.9 (100) % Loss on debt extinguishment related to conversion of 2023 Notes — — — — % 24.8 — 24.8 100 % Foreign currency gain, net (0.3) (0.1) (0.2) 200 % (0.6) (2.5) 1.9 (76) % Interest income (2.8) (1.9) (0.9) 47 % (7.8) (6.8) (1.0) 15 % Interest expense, net of capitalized interest 5.1 11.2 (6.1) (54) % 17.1 36.2 (19.1) (53) % 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, 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 nine months ended March 28, 2021 relates to changes in fair value of our previously held ENNOSTAR Inc. (ENNOSTAR) investment. 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. 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 consisted of remeasurement adjustments resulting from our international subsidiaries and from our previously held ENNOSTAR investment. Interest income. 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 . 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 . 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. 41 Table of Contents Income tax expense (benefit) Income tax expense (benefit) and our effective tax rate was as follows: Three months ended Nine months ended (in millions of U.S. 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 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. 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 derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated. 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 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. 42 Table of Contents Liquidity and Capital Resources Overview We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities 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 unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. 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. With the strength of our working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties and/or expand our production capacity. From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we have continued to make such evaluations. For example, 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 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 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 43 Table of Contents 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. New information may emerge concerning the severity of COVID-19 and its variants, and additional actions may be taken in order to contain or limit their spread. To the extent our suppliers continue to be materially and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from us, which in turn could materially interrupt our business operations. Liquidity The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable. The following table presents the components of our cash conversion cycle: Three months ended March 27, 2022 June 27, 2021 Change Days of sales outstanding (a) 49 52 (3) Days of supply in inventory (b) 159 147 12 Days in accounts payable (c) (106) (92) (14) Cash conversion cycle 102 107 (5) a) Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables less receivable related accrued contract liabilities and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts receivable, less receivable related accrued contract liabilities, by the average net revenue per day for the respective 90-day period. b) Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending inventory (excluding inventory related to 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. 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 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 March 27, 2022 until the investments fully recover in market value. No allowance for credit losses was recorded as of March 27, 2022. 44 Table of Contents Cash Flows In summary, our cash flows were as follows: 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 provided by financing activities 608.3 497.6 110.7 22 % Effect of foreign exchange changes — 0.2 (0.2) (100) % Net change in cash and cash equivalents $106.9 $82.8 $24.1 29 % Cash Flows from Operating Activities 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 $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 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 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 We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of March 27, 2022, we did not have any off-balance sheet arrangements. 45 Table of Contents Critical Accounting Policies and Estimates 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 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. 46 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about our market risks, see “Part II. Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of the 2021 Form 10-K. There have been no material changes to the amounts presented therein.