What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-22 compared with 2021-08-18 · 154 added, 239 removed, 322 unchanged (55% of the section changed)

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• COVID-19 Pandemic.

While certain COVID-19 vaccines have been approved and are now generally available for use in the United States and certain other countries, we are unable to predict how widely utilized the vaccines will be, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume.

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

While the number of new cases is significantly below the levels witnessed at the height of the pandemic, there has been a recent uptick in the number of new cases.

Despite the availability of vaccines, COVID-19 continues to spread globally and to impact the locations where we do business.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets.

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

The COVID-19 pandemic caused us to modify our business practices (including employee travel, employee work locations and cancellation of physical participation in meetings, events and conferences).

In light of the recent uptick in the number of new cases, the COVID-19 pandemic could continue to affect us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs.

The potential continued spread of COVID-19 and any of its variants could result in a number of additional adverse effects, including additional laws and regulations affecting our business, restoration and/or expansion of restrictions, fluctuations in foreign currency markets and the credit risks of our customers.

We continue to pay close attention to the evolving development of, and the disruption to business and economic activities caused by, the COVID-19 pandemic.

However, given the dynamic nature of the COVID-19 pandemic, it is not practicable to provide a reasonable estimate of its impact on our financial position, cash flows and operating results at the present.

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.

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.

Since its beginning in the early months of 2020, 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.

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

Our operations have experienced, 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.

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

Our potential for growth depends significantly on the adoption of Silicon Carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market and our ability to win new designs for these applications.

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

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.

Lately, we have seen demand increase across all our product lines, which we believe reflects the value that the industry places on a transition to Silicon Carbide materials and devices.

Particularly, we have seen significantly higher demand for our power products as the world has continued to focus on and adopt higher efficiency energy solutions, including electrical vehicle (EV) and related technologies.

We believe these trends could have a significant positive impact on revenues in future periods as we increase capacity to meet increased demand.

• 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 are working 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, 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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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.

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.

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• Our year-over-year revenue increased by $220.6 million to $746.2 million.

• Gross margin decreased to 31.3% from 33.7%.

• Gross margin increased to 33.4% from 31.3%.

Gross profit increased to $249.3 million from $164.6 million.

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• Diluted loss per share from continuing operations was $2.46 in fiscal 2022 compared to $3.04 in fiscal 2021.

• Combined cash, cash equivalents and short-term investments decreased to $1,154.6 million at June 27, 2021 from $1,239.7 million at June 28, 2020.

• Combined cash, cash equivalents and short-term investments increased to $1,198.8 million at June 26, 2022 from $1,154.6 million at June 27, 2021.

• Convertible notes, net was $1,021.6 million at June 26, 2022 and $823.9 million at June 27, 2021.

• Net cash used in operating activities of continuing operations was $154.2 million in fiscal 2022 compared to net cash used in operating activities of continuing operations of $112.5 million in fiscal 2021.

• Purchases of property and equipment, net of $10.7 million in reimbursements, was $559.8 million in fiscal 2021 compared to $229.9 million in fiscal 2020.

• Purchases of property and equipment, net were $505.9 million (net of $139.0 million in reimbursements) in fiscal 2022 compared to $559.8 million (net of $10.7 million in reimbursements) in fiscal 2021.

• Design-ins were $6.4 billion in fiscal 2022 compared to $2.9 billion in fiscal 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 planned construction of a state-of-the-art, automated 200mm silicon carbide device fabrication facility and an expansion of our materials factory to expand our silicon carbide capacity, each of which was announced in May 2019.

In September 2019, we announced our intention to build the new device fabrication facility in Marcy, New York to complement the factory expansion already underway at our U.S.

campus headquarters in Durham, North Carolina.

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

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

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

This transaction positions us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to silicon carbide and further strengthens our financial position, which we target to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications.

The strength of our balance sheet provides us the ability to invest in our business, as indicated by our new state-of-the-art, automated 200mm Silicon Carbide device fabrication facility in Marcy, New York, which started running qualification lots in the fourth quarter of fiscal 2022, and an expansion of our materials factory at our U.S campus headquarters in Durham, North Carolina, both of which will increase our production capacity.

In fiscal 2022, we incurred $70.0 million of start-up and pre-production costs related to the ramping of production at the Marcy, New York facility.

In fiscal 2023, we expect approximately $100 million of start-up and underutilization costs primarily related to ramping of production at the Marcy, New York 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.

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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 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 the strength of our balance sheet and our ability to continue operations allow us to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the construction of new facilities in New York and additional production capacity in North Carolina.

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

We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the completion and build out of our new facility in New York and additional production capacity in North Carolina.

Even so, the 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 involvement from countries where we operate and do business, 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 $33.3 million for the fiscal year ended June 26, 2022.

Approximately $10.4 million of the decrease in year-to-date depreciation expense resulted in a net reduction of inventory as of June 26, 2022 and the remaining $22.9 million resulted in an improvement in both loss before income taxes and net loss, of which $19.6 million related to an improvement in gross profit.

This change in estimate resulted in an improvement in year-to-date basic and diluted loss per share of $0.19 per share.

Design-ins are customer commitments to purchase our product and are one of the factors we use to forecast long-term demand and future revenue.

To meet the qualification of a design-in, the customer provides us with documentation (e.g., a letter of intent, statement of work or developmental contract) that can include details such as the expected delivery timeline, estimated price, necessary capacity and required support.

A design-in, even with a formal commitment, does not always convert to future revenue for a variety of reasons, including, but not limited to, the customer delaying or abandoning the project, capacity constraints, timeline challenges, and/or technology changes.

Therefore management uses the design-in amount as a guide to forecast future demand but it should not be taken as an absolute indicator of future revenue.

Results of Operations

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Abandonment of long-lived assets — — % 73.9 14.1 % — — %

Loss on disposal or impairment of other assets 1.6 0.3 % 1.5 0.3 % 5.0 0.9 %

(Gain) loss on disposal or impairment of other assets (0.3) — % 1.6 0.3 % 1.5 0.3 %

Other operating expense 83.9 11.2 % 29.1 5.5 % 32.9 7.0 %

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Net loss from continuing operations (295.1) (39.5) % (341.3) (64.9) % (197.6) (42.0) %

Net (loss) income from discontinued operations (181.2) (34.5) % 7.0 1.5 % (256.6) (47.7) %

Net income (loss) from discontinued operations 94.2 12.6 % (181.2) (34.5) % 7.0 1.5 %

Net loss (200.9) (26.9) % (522.5) (99.4) % (190.6) (40.5) %

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Revenue $746.2 $525.6 $470.7 $220.6 42 % $54.9 12 %

The increase in revenue for fiscal 2022 compared to fiscal 2021 was primarily 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 the strong demand during the period.

The increase in revenue for fiscal 2021 compared to fiscal 2020 was primarily due to increases in demand for power and RF devices and increases in production capacity for our power devices.

The decrease in revenue for fiscal 2020 compared to fiscal 2019 was primarily due to the ongoing trade dispute between the United States and China, weakening demand in Asia, and customer demand limitations due to the COVID-19 outbreak.

Gross Profit and Gross Margin

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Gross margin 33 % 31 % 34 %

Gross Profit and Gross Margin

The increase in gross profit for fiscal 2022 compared to fiscal 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 fiscal 2022 compared to fiscal 2021 was primarily due to the same factors as the increase to gross profit, partly offset by product mix.

The increase in gross profit for fiscal 2021 compared to fiscal 2020 was primarily due to increased revenues in the current period.

The decrease in gross margin for fiscal 2021 compared to fiscal 2020 was primarily due to an unfavorable product mix shift and higher factory costs as we continue to bring on additional capacity.

The decrease in gross profit and gross margin for fiscal 2020 compared to fiscal 2019 was primarily due to changes in customer and product mix, higher costs driven by factory and technology transitions, underutilization at some of our facilities and higher inventory reserves related to product manufactured for Huawei Technologies Co., Ltd.

in the second quarter of fiscal 2020.

The decrease was further impacted by increased stock-based compensation and incremental manufacturing costs related to the COVID-19 pandemic.

The decrease in gross margin for fiscal 2021 compared to fiscal 2020 was primarily due to an unfavorable product mix shift and higher factory costs as we continued to bring on additional capacity.

Research and Development

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These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies.

Research and development costs also include developing supporting technologies for our planned expansion to a new silicon carbide device fabrication facility in Marcy, New York.

Research and development costs also include developing supporting technologies for expansion of our new Silicon Carbide device fabrication facility in Marcy, New York.

Research and development expenses were as follows:

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Percent of revenue 26 % 34 % 32 %

The increases in research and development expenses are primarily due to our continued investment in our silicon carbide and GaN technologies, including the development of existing silicon carbide materials and fabrication technology for next generation platforms and expansion of our power and RF product portfolio.

The increases in research and development expenses were primarily due to our continued investment in our Silicon Carbide and GaN technologies, including the development of existing Silicon Carbide materials and fabrication technology for next generation platforms and expansion of our power and RF product portfolio.

Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.

Sales, General and Administrative

Sales, general and administrative expenses are comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consists of salaries and related compensation costs;

consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs);

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Percent of revenue 27 % 35 % 39 %

The increase in sales, general and administrative expenses in fiscal 2022 compared to fiscal 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 costs, 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.

Sales, general and administrative expenses stayed fairly steady in fiscal 2021 compared to fiscal 2020.

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Additionally, further offsetting decreases related to a decrease of travel costs as a result of travel restrictions related to the COVID-19 pandemic and employee relocation expenses.

The increase in sales, general and administrative expenses in fiscal 2020 compared to fiscal 2019 was primarily due to increases in salaries and benefits, stock-based compensation and professional service fees related to transition services from the sale of the Lighting Products business unit, offset by decreases in legal fees, sales commissions and travel costs.

Amortization or Impairment of Acquisition-Related Intangibles

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Total $13.6 $14.5 $14.5 ($0.9) (6) % $— — %

Amortization of acquisition-related intangibles stayed fairly consistent throughout fiscal 2021, 2020 and 2019 due to the absence of acquisition-related intangible activity between the periods, as well as no impairments.

The slight decrease in fiscal 2020 compared to fiscal 2019 was due to certain intangible assets relating to customer relationships reaching the end of their amortization period in fiscal 2019 and the reclassification of $0.9 million of developed technology, net to a right-of-use asset in accordance with our adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 842, "Leases", due to the value representing a favorable lease.

Abandonment on Long-Lived Assets

Amortization of acquisition-related intangible assets decreased in fiscal 2022 compared to fiscal 2021 due to an intangible asset relating to non-compete agreements reaching the end of its useful life during fiscal 2022.

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

Abandonment of Long-Lived Assets

In the fourth quarter of fiscal 2021, we modified our long-range plan regarding a portion of our Durham, North Carolina campus originally intended for expanding our LED production capacity that we had considered using to expand the manufacturing footprint for our Silicon Carbide materials product line.

After we complete our current ongoing silicon carbide materials production capacity expansion in Durham, we now plan on further expansion of our silicon carbide materials production capacity outside of the Durham campus.

As a result, we have decided we will no longer complete the construction of certain buildings on the Durham campus.

Accordingly, an expense of $73.9 million was recorded upon an updated valuation of the property in connection with the preparation of our financial statements for the period ended June 27, 2021.

Loss on Disposal or Impairment of Other Assets

After we complete our current ongoing Silicon Carbide materials production capacity expansion in Durham, we plan on further expansion of our Silicon Carbide materials production capacity outside of the Durham campus.

As a result, we decided we will no longer complete the construction of certain buildings on the Durham campus.

Accordingly, an expense of $73.9 million was recorded based upon an updated valuation of the property in connection with the preparation of our financial statements for the fiscal year ended June 27, 2021.

(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:

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

Fiscal Years Ended Year-Over-Year Change

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Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021

Loss on disposal or impairment of other assets $1.6 $1.5 $5.0 $0.1 7 % ($3.5) (70) %

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.

The loss in fiscal 2019 primarily relates to an impairment of other assets in conjunction with our disposal of the Lighting Products business unit.

(Gain) loss on disposal or impairment of other assets ($0.3) $1.6 $1.5 ($1.9) (119) % $0.1 7 %

(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 fiscal year ended June 26, 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 3, "Discontinued Operations," in our consolidated financial statements included in Item 8 of this Annual Report.

Other Operating Expense

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Project, transformation and transaction costs 6.6 7.3 12.2 (0.7) (10) % (4.9) (40) %

Factory optimization start-up costs 8.0 9.5 1.5 (1.5) (16) % 8.0 533 %

Factory start-up costs 70.0 8.0 9.5 62.0 775 % (1.5) (16) %

Non-restructuring related executive severance — 2.8 2.1 (2.8) (100) % 0.7 33 %

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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.

Factory start-up costs are start-up costs incurred as part of our factory optimization efforts to expand our production footprint to support expected growth.

Our factory optimization efforts began in fiscal 2019 and ended in fiscal 2022.

Additionally, we began incurring start-up costs related to the opening of a new Silicon Carbide device fabrication facility in Marcy, New York in the third quarter of fiscal 2022.

The increase in other operating expense in fiscal 2022 compared to fiscal 2021 was primarily due to increased factory start-up costs as we continued our expansion of a new Silicon Carbide device fabrication facility in Marcy, New York, partially offset by a decrease in total restructuring costs and non-restructuring related executive severance.

The decrease in other operating expense in fiscal 2021 compared to fiscal 2020 was primarily due to decreased project, transformation and transaction costs, partially offset by a slight increase in total restructuring costs.

The increase in other operating expense in fiscal 2020 compared to fiscal 2019 was primarily due to a full year of factory optimization restructuring and start-up costs in fiscal 2020, offset by a decrease in project, transformation and transaction costs and severance and other restructuring.

Non-Operating Expense (Income), net

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Dollars) June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021

(Gain) loss on sale of investments, net ($0.4) ($1.5) $0.1 $1.1 (73) % ($1.6) (1,600) %

(Gain) loss on equity investment (8.3) (14.2) 16.2 5.9 42 % (30.4) (188) %

Gain on partial debt extinguishment — (11.0) — 11.0 100 % (11.0) (100) %

Gain on sale of investments, net ($0.3) ($0.4) ($1.5) $0.1 (25) % $1.1 73 %

Gain on equity investment — (8.3) (14.2) 8.3 100 % 5.9 42 %

Loss (gain) on debt extinguishment 24.8 — (11.0) 24.8 100 % 11.0 100 %

Gain on arbitration proceedings — — (7.9) — — % 7.9 100 %

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Interest expense 25.1 45.4 34.9 (20.3) (45) % 10.5 30 %

Foreign currency (gain) loss, net (1.3) (2.0) 1.3 0.7 35 % (3.3) (254) %

Loss on Wafer Supply Agreement 0.8 — — 0.8 100 % — — %

Other, net 0.5 (0.3) (2.5) 0.8 267 % 2.2 88 %

Non-operating expense (income), net $38.3 $26.3 ($18.5) $12.0 46 % $44.8 242 %

(Gain) loss on equity investment.

The (gain) loss on equity investment relates to changes in fair value of our previously held ENNOSTAR Inc.

Gain on equity investment.

The gain on equity investment for fiscal 2021 and 2020 relates to changes in fair value of our previously held ENNOSTAR Inc.

(ENNOSTAR) investment.

Our previously held ENNOSTAR equity investment was originally a 16% common stock ownership interest in Lextar Electronics Corporation (Lextar).

In June 2020, Lextar announced a plan to restructure under a holding company with EPISTAR Corporation via a share swap.

Effective January 6, 2021, we received 0.275 shares of common stock of the holding company named ENNOSTAR for each of our shares of Lextar, representing in the aggregate an approximate 3.3% common stock ownership interest in ENNOSTAR.

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.

Gain on partial debt extinguishment .

The gain on partial debt extinguishment relates to a gain recognized as a result of spending $144.3 million to repurchase $150.2 million of the principal amount held on our 2023 Notes.

Loss (gain) on debt extinguishment .

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

Additionally, in the fourth quarter of fiscal 2020, we recognized a gain on partial debt extinguishment as a result of spending $144.3 million to repurchase $150.2 million of the principal amount held on our previously held 2023 Notes.

See Note 10, "Long-term Debt," to our consolidated financial statements in Item 8 of this Annual Report for additional information.

Gain on arbitration proceedings .

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Interest income .

The increase in interest income in fiscal 2022 compared to fiscal 2021 was primarily due to interest income received on our previously held note receivable from SGH in connection with the LED Business Divestiture, partially offset by decreased investment returns from our short-term investment securities.

The decrease in interest income in fiscal 2021 compared to fiscal 2020 was primarily due to significant reductions in investment returns on our short-term investment securities.

The increase in interest income in fiscal 2020 compared to fiscal 2019 was primarily due to higher balances on our short-term investments.

Interest expense .

The increases in interest expense in both comparative periods was primarily due to the addition of our 2026 Notes, which were sold on April 21, 2020, partially offset by the partial repurchase of our 2023 Notes soon after the sale of the 2026 Notes.

Foreign currency (gain) loss, net.

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

Loss on Wafer Supply Agreement .

In connection with the completed sale of the LED Products business unit to SMART in fiscal 2021, we entered into the Wafer Supply Agreement, pursuant to which we will supply CreeLED with certain silicon carbide materials and fabrication services for up to four years.

The decrease in interest expense in fiscal 2022 compared to fiscal 2021 was primarily due to capitalizing interest on the 2026 Notes in connection with the building of our new Silicon Carbide device fabrication facility in New York, which we began capitalizing in the fourth quarter of fiscal 2021.

The decrease in interest expense resulting from the extinguishment of the 2023 Notes in the second quarter of fiscal 2022 was mostly offset by an increase in interest expense from the sale of the 2028 Notes in the third quarter of fiscal 2022.

The increase in interest expense in fiscal 2021 compared to fiscal 2020 was primarily due to the addition of the 2026 Notes on April 21, 2020, partially offset by a partial extinguishment of our then-outstanding 2023 Notes.

Other, net, primarily includes (i) foreign currency (gain) loss, net resulting from remeasurement adjustments from our international subsidiaries, (ii) net losses on the Wafer Supply Agreement entered into in fiscal 2021, pursuant to which we supply CreeLED with certain Silicon Carbide materials and fabrication services for up to four years, and (iii) a loss related to receiving an early payment for the Purchase Price Note.

See Note 2, "Discontinued Operations," in our consolidated financial statements included in Item 8 of this Annual Report for additional information on the Wafer Supply Agreement and the loss on early payment of the Purchase Price Note.

Income Tax Expense (Benefit)

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Effective tax rate (3) % — % 4 %

The change in the effective tax rate from 0% in fiscal 2021 to (3)% in fiscal 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 14, "Income Taxes," to our consolidated financial statements included in Item 8 of this Annual Report.

The change in the effective tax rate from 4% in fiscal 2020 to 0% in fiscal 2021 was primarily due to the increased tax benefit recorded in fiscal 2020 related to net operating loss provisions of the Coronavirus Aid, Relief, and Economic Security Act.

There was no change in the effective tax rate from fiscal 2019 to fiscal 2020.

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

As a result of the LED Business Divestiture and the liquidation of our common stock ownership interest in ENNOSTAR, and as discussed further in Note 14, "Income Taxes," to our consolidated financial statements included in Item 8 of this Annual Report, we are reviewing our legal entity structure and performing the due diligence necessary to understand our ability and desire to restructure our Luxembourg holding company.

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

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

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

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

(i) changes in our valuation allowances against deferred tax assets, (ii) income derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated.

Net Loss from Discontinued Operations

Fiscal Years Ended Year-Over-Year Change

(in millions of U.S.

Dollars) June 27, 2021 June 28, 2020 June 30, 2019 2020 to 2021 2019 to 2020

Net loss from discontinued operations of the Lighting Products business unit $— $— ($317.2) $— — % $317.2 100 %

Net (loss) income from discontinued operations of the LED Products business (181.2) 7.0 60.6 (188.2) (1) (53.6) (88) %

Total ($181.2) $7.0 ($256.6) ($188.2) (1) $263.6 103 %

(1) Percentage not relevant for analysis.

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.

Net loss from discontinued operations for fiscal 2021 includes $112.6 million of goodwill impairment, an impairment to assets held for sale associated with the LED Business Divestiture of $19.5 million and a loss on sale of $29.1 million.

Additionally, total costs to sell of $27.4 million were recognized throughout fiscal 2021 and fiscal 2020 and are included in net loss from discontinued operations for those periods.

For fiscal 2019, net loss from discontinued operations also includes the operational results of our former Lighting Products business unit, and includes $90.3 million of goodwill impairment as well as a $66.2 million loss on the sale of the Lighting Products business unit.

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

We recorded net income from discontinued operations of $94.2 million, net loss from discontinued operations of $181.2 million and net income from discontinued operations of $7.0 million in fiscal 2022, 2021 and 2020, respectively.

Net income from discontinued operations in fiscal 2022 relates to the receipt of an unsecured promissory note from CreeLED as additional consideration to satisfy the earnout obligations pursuant to the Asset Purchase Agreement (the LED Purchase Agreement), dated October 18, 2020, as amended.

The additional consideration was based upon the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing.

Net loss from discontinued operations in fiscal 2021 includes a $112.6 million goodwill impairment, a $19.5 million impairment to assets held for sale associated with the LED Business Divestiture and a $29.1 million loss on sale.

Additionally, total costs to sell of $27.4 million were recognized throughout fiscal 2021 and fiscal 2020 and are included in net (loss) income from discontinued operations for those periods.

Liquidity and Capital Resources

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments.

Our principal sources of liquidity are cash on hand, marketable securities and availability under our line of credit.

We have a $125 million line of credit as discussed in Note 10, “Long-term Debt,” to our consolidated financial statements included in Item 8 of this Annual Report.

The purpose of this facility is to provide short-term flexibility to optimize returns on our cash and investment portfolio while funding capital expenditures and other general business needs.

On April 21, 2020, we issued and sold a total of $575.0 million aggregate principal amount of our 2026 Notes, as discussed in Note 10, “Long-term Debt,” to our consolidated financial statements included in Item 8 of this Annual Report.

The total net proceeds of the 2026 Notes was $561.4 million, of which we used $144.3 million to repurchase $150.2 million aggregate principal amount of our 2023 Notes.

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

Additionally, in the third quarter of fiscal 2021, we filed a shelf registration statement on Form S-3 to register for possible future sale shares of our common stock.

We may offer an indeterminate amount of common stock in amounts, at prices and on terms to be determined by the board of directors if and when shares are issued.

The registration statement became automatically effective upon filing with the SEC on February 11, 2021.

Using this shelf registration statement, we implemented an at-the-market program (the ATM Program) as described in Note 11, “Shareholders’ Equity,” to our consolidated financial statements included in Item 8 of this Annual Report.

The ATM Program was conducted pursuant to an equity distribution agreement (the Equity Distribution Agreement) with Wells Fargo Securities, LLC, BMO Capital Markets Corp., BofA Securities Inc., Canaccord Genuity LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

LLC, Morgan Stanley & Co.

LLC and Truist Securities, Inc.

(the Managers).

On February 19, 2021, we announced that we had sold approximately $500.0 million of common stock under the ATM Program.

As such, the ATM Program automatically terminated in accordance with the terms of the Equity Distribution Agreement.

In total, we sold and received payment for 4,222,511 shares of our common stock at a weighted average price of $118.41 per share for total gross proceeds of approximately $500.0 million and net proceeds of approximately $489.1 million, after $10.0 million in commissions to the Managers and $0.9 million in other offering costs.

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

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

We require cash to fund our operating expenses and working capital requirements, including the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment, as well as outlays for research and development, strategic acquisitions and investments.

Our principal sources of liquidity are cash on hand, marketable securities and, as described further below, availability under our line of credit.

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

With the strength of our working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties and/or expand our production capacity.

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

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

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

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

We expect to invest 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 in future fiscal years by the State of New York through a grant program administered by the State of New York Urban Development Corporation (doing business as Empire State Development).

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

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

Our operations have, and likely will continue, to experience supply, labor, demand and output challenges.

We continue to monitor the impact that the COVID-19 pandemic is having on our business, the semiconductor industry, and the economies in which we operate.

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 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.

Contractual Obligations

At June 27, 2021, payments to be made pursuant to significant contractual obligations are as follows:

Payments Due by Period

(in millions of U.S.

Dollars) Total Less than

One Year One to

Three Years Three to

Five Years More Than

Operating lease obligations 12.0 4.5 5.5 1.8 0.2

Finance lease obligations 15.2 3.7 0.9 0.9 9.7

Purchase obligations 470.1 468.9 1.2 — —

Long-term debt (1)

999.8 — 424.8 575.0 —

Interest payments on long-term debt (2)

59.6 13.8 25.7 20.1 —

Other long-term liabilities (3)

4.6 — 4.6 — —

Total contractual obligations $1,561.3 $490.9 $462.7 $597.8 $9.9

(1) Long-term debt represents the principal due on the Notes, but does not include interest expense.

(2) Interest payments on long-term debt represent semi-annual interest payments on the Notes.

(3) Other long-term liabilities as of June 27, 2021 also includes customer deposits of $22.2 million, long-term tax contingencies and other tax liabilities of $3.3 million, and a Wafer Supply Agreement liability of $9.4 million.

These liabilities were not included in the table above as they will either not be settled in cash and/or the timing of payments is uncertain.

Operating lease obligations include rental amounts due on leases of certain office and manufacturing space under the terms of non-cancelable operating leases.

These leases expire at various times through December 2027.

Finance lease obligations primarily include Wolfspeed manufacturing space in Malaysia and a 49-year ground lease on a future silicon carbide device fabrication facility in New York.

The leases for our Wolfspeed manufacturing space in Malaysia expire in November 2026 and the 49-year ground lease in New York expires in April 2069.

Purchase obligations represent purchase commitments, including open purchase orders and contracts, and are generally related to the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment.

Financial Condition

With the strength of our working capital position, we believe that we have the ability to continue to invest in expansion of our production capacity, further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio or secure key intellectual properties.

Sources of Liquidity

The following table sets forth our cash, cash equivalents and short-term investments:

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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

June 27, 2021 June 28, 2020 Change

Days of sales outstanding (a) 52 53 (1)

Days of supply in inventory (b) 147 117 30

Days in accounts payable (c) (92) (115) 23

Cash conversion cycle 107 55 52

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 future silicon carbide device fabrication facility in New York, we exclude accounts payable related to capital expenditures in connection with the facility.

DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages and accounts payable balances related to our future silicon carbide device fabrication facility in New York) by the average cost of revenue, net per day for the respective 90-day period.

The increase in the cash conversion cycle was primarily driven by increased inventory balances as we expand production globally and build a raw materials buffer to ensure continuity of supply during the pandemic.

Further contributing to the increase was a decrease in accounts payable (excluding amounts related to capital expenditures for our future silicon carbide device fabrication facility in Marcy, New York) while our cost of revenue for the quarter increased.

In the third quarter of fiscal 2021, we implemented an at-the-market program (the ATM program) 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 the 2028 Notes, as discussed in Note 10, “Long-term Debt,” in our consolidated financial statements included in Item 8 of this Annual 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, which are expected generally to reduce the potential dilution to our common stock upon any conversion of the 2028 Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of the converted 2028 Notes, as the case may be, upon conversion of the 2028 Notes.

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.

We have a $125 million line of credit as discussed in Note 10, “Long-term Debt,” in our consolidated financial statements included in Item 8 of this Annual Report, all of which was available for borrowing as of June 26, 2022.

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.

As of June 26, 2022, we had unrealized losses on our short-term investments of $23.0 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 27, 2021 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or negative market conditions surrounding the COVID-19 pandemic.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 26, 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.

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No allowance for credit losses was recorded as of June 26, 2022.

For example, in March 2021 we completed the LED Business Divestiture, which provided us with (i) $50 million in cash, subject to customary adjustments, (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) an earn-out payment of $101.8 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, which is payable in the form of an unsecured promissory note due March 2025.

We may also access capital markets through the issuance of debt or equity, 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.

Expected Uses of Liquidity

For fiscal 2023, we target approximately $550 million of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities.

We are exploring additional expansion options and will update targeted net capital investment if and when those capacity expansion options are announced.

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 $275 million of expected reimbursements from the State of New York Urban Development Corporation under the GDA during the fiscal year.

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

We expect to invest approximately $2.0 billion, an increase from our previously expected $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).

The increase is primarily due to capacity expansions now planned at the site as a result of increased projected demand.

As of June 26, 2022, we have spent approximately $750 million and received approximately $150 million in reimbursements.

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

In addition to ordinary operating expenses, our estimated future obligations consist of leases, debt, and interest on long-term debt.

For a description of contractual obligations, including lease and debt obligations, see Note 5, "Leases," Note 10, "Long-term Debt," and Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.

In summary, our cash flows were as follows (in millions of U.S.

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June 26, 2022 June 27, 2021 June 28, 2020 2021 to 2022 2020 to 2021

Cash (used in) provided by operating activities ($125.5) ($29.0) $202.3 ($96.5) ($231.3)

Cash used in operating activities ($154.2) ($125.5) ($29.0) ($28.7) ($96.5)

Cash used in investing activities (391.0) (448.6) (486.9) 57.6 38.3

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Effect of foreign exchange changes (0.2) 0.2 (0.1) (0.4) 0.3

Net (decrease) increase in cash and cash equivalents ($69.8) ($51.7) $381.6 ($18.1) ($433.3)

Net increase (decrease) in cash and cash equivalents $70.5 ($69.8) ($51.7) $140.3 ($18.1)

Cash Flows from Operating Activities

Net cash used in operating activities increased in fiscal 2022 compared to fiscal 2021 primarily due to decreased working capital as a result of inventory growth and increased receivables as a result of revenue growth.

Net cash used in operating activities increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in net loss during the period and decreased cash provided by operating activities of discontinued operations, as well as slightly decreased working capital.

Net cash from operating activities decreased in fiscal 2020 compared to fiscal 2019 primarily due to cash used from our increased operating loss and a larger annual incentive payment in the first quarter of fiscal 2020 compared to the previous year.

Annual incentive payments are made in the first quarter of the subsequent fiscal year.

Total cash flows from operating activities in fiscal 2021, 2020 and 2019 includes ($13.0) million, $62.6 million and $105.1 million of cash (used in) provided by operating activities of discontinued operations.

Total cash flows from operating activities in fiscal 2021 and 2020 includes ($13.0) million and $62.6 million of cash (used in) provided by operating activities of discontinued operations.

Cash Flows from Investing Activities

Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment and payments for patents and licensing rights.

The decrease in net cash used in investing activities in fiscal 2021 compared to fiscal 2020 was primarily due to an increase in property and equipment purchases of $340.6 million partially offset by an increase in net proceeds from short-term investments of $247.8 million, net proceeds from the sale of the LED Business of $43.7 million, net proceeds from the liquidation of our ENNOSTAR equity investment of $66.4 million and $10.7 million of property related reimbursements from the State of New York Urban Development Corporation under a Grant Disbursement Agreement (GDA).

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

The decrease in net cash used in investing activities in fiscal 2022 compared to fiscal 2021 was primarily due to a $128.3 million increase in property and equipment related reimbursements from the State of New York Urban Development Corporation under a Grant Disbursement Agreement (the GDA) and a $81.3 million net increase in proceeds from the LED Business Divestiture.

These increases in proceeds from investing activities were partially offset by a $74.4 million increase in purchases of property and equipment and a $12.5 million decrease in net proceeds from short-term investments.

Additionally, we received $66.4 million in net proceeds from the liquidation of our ENNOSTAR equity investment in fiscal 2021.

The decrease in net cash used in investing activities in fiscal 2021 compared to fiscal 2020 was primarily due to an increase in net proceeds from short-term investments of $247.8 million, net proceeds from the sale of the LED Business of $43.7 million, net proceeds from the liquidation of our ENNOSTAR equity investment of $66.4 million and $10.7 million of property related reimbursements under the GDA, partially offset by an increase in property and equipment purchases of $340.6 million.

For more details on the GDA, see Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.

The increase in net cash used in investing activities in fiscal 2020 compared to fiscal 2019 was primarily due to the net proceeds from the sale of the Lighting Products business unit of $219.0 million received in fiscal 2019.

Excluding the proceeds from the sale, cash used in investing activities stayed relatively flat with an increase in property and equipment purchases of $105.2 million offset by a decrease in net purchases of short term investments of $50.6 million.

Total cash used in investing activities in fiscal 2021, 2020 and 2019 includes $0.3 million, $12.4 million and $25.0 million of cash used in investing activities of discontinued operations.

For fiscal 2022, we target approximately $475.0 million of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities.

This target is highly dependent on the timing and overall progress on the construction of our new silicon carbide fabrication facility in New York and is net of approximately $300.0 million of expected reimbursements from the State of New York Urban Development Corporation under the GDA.

Total cash used in investing activities in fiscal 2021 and 2020 includes $0.3 million and $12.4 million, respectively, of cash used in investing activities of discontinued operations.

Cash Flows from Financing Activities

Net cash provided by financing activities in fiscal 2021 primarily consisted of net proceeds of $503.5 million from issuances of common stock pursuant to the exercise of employee stock options and issuances of common stock in connection with the ATM Program.

Net cash provided by financing activities in fiscal 2020 primarily consisted of proceeds of $575.0 million from the issuance of the 2026 Notes and net proceeds of $59.5 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by payments on long-term debt of $145.1 million, the payment of $13.6 million in debt issuance costs from the issuance of the 2026 Notes and incentive-related refundable escrow deposits of $11.5 million relating to the construction of our future silicon carbide fabrication facility in New York.

The escrow deposits will be returned to us upon successful completion of defined objectives relating to New York state funded incentives.

Net cash provided by financing activities in fiscal 2019 primarily consisted of $575.0 million in proceeds from the issuance of the 2023 Notes and net proceeds of $136.4 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by the net repayment on our line of credit of $292.0 million and the payment of debt issuance costs of $12.9 million from the issuance of the 2023 Notes.

Net cash provided by financing activities in fiscal 2022 primarily consisted of $732.3 million in net proceeds from issuing the 2028 Notes and $22.4 million of proceeds from the issuance of common stock, partially offset by $108.2 million in cash paid for the capped call transactions and $29.1 million in tax withholdings on vested equity awards.

Net cash provided by financing activities in fiscal 2021 primarily consisted of net proceeds of $503.5 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.

Net cash provided by financing activities in fiscal 2020 primarily consisted of proceeds of $575.0 million from the issuance of the 2026 Notes and net proceeds of $59.5 million from issuances of common stock pursuant to the exercise of employee stock options, partially offset by payments on long-term debt of $145.1 million, the payment of $13.6 million in debt issuance costs from the issuance of the 2026 Notes and incentive-related refundable escrow deposits of $11.5 million relating to the construction of our new Silicon Carbide fabrication facility in New York.

Financial and Market Risks

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If interest rates were to hypothetically increase by 100 basis points, the fair value of our short-term investments would decrease by $9.9 million at June 26, 2022 and $9.8 million at June 27, 2021.

Additionally, as part of the completed LED Business Divestiture, we hold a $125 million unsecured promissory note due in August 2023.

Additionally, as part of the completed LED Business Divestiture, we hold a $101.8 million unsecured promissory note due in March 2025, which was received as an earnout payment.

The promissory note bears interest at the London Interbank Offered Rate (LIBOR) plus 3%.

Due to relatively low LIBOR rates as of June 27, 2021, combined with the 3% minimum interest rate of the note, a hypothetical decrease in interest rates would result in an immaterial impact to interest income as of June 27, 2021.

A hypothetical increase in interest rates by 100 basis points would result in an immaterial impact to interest income as of June 26, 2022.

As of June 26, 2022, we maintain a secured revolving line of credit under which we can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2026.

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Currency Rate and Price Risk

We operate internationally and have transactions denominated in foreign currencies and are exposed to currency exchange rate risks.

As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.

All of our operations have a functional currency of the U.S.

However, we operate internationally and have transactions denominated in foreign currencies, and therefore we are exposed to currency exchange rate risks.

Fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.

We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes.

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

As of June 27, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

As of June 26, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(b) of SEC Regulation S-K.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S.

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We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our significant accounting policies are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report.

We believe that the following are our most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments.

Our management has reviewed our critical accounting policies and the related disclosures with the Audit Committee of our Board of Directors.

Our significant accounting policies and a description of recent accounting pronouncements are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report.

We believe that the following are our most critical accounting estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments.

Our management has reviewed our critical accounting estimates and the related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition

Revenue is recognized when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer.

Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service.

The majority of our revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract.

We provide our customers with limited rights of return for non-conforming shipments.

We estimate an allowance for anticipated sales returns based upon an analysis of historical sales returns and other relevant data.

We recognize an allowance for non-conforming returns at the time of sale as a reduction of product revenue.

We adopted FASB ASC 606 "Revenue from Contracts with Customers" (ASC 606) on June 25, 2018 using the modified retrospective approach.

Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" and Note 4, "Revenue Recognition" for additional information related to the adoption of ASC 606.

For the year ended June 27, 2021, 26% of our revenue was from sales to distributors.

For the year ended June 26, 2022, approximately a third of our revenue was from sales to distributors.

Distributors stock inventory and sell our products to their own customer base, which may include:

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These credits are applied against a reserve we establish upon initial shipment of product to the distributor.

We also have inventory consignment agreements in which revenue is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations.

Delivery and transfer of control occur at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory.

Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products.

From time to time, we may enter into licensing arrangements related to our intellectual property.

Revenue from licensing arrangements is recognized when earned and estimable.

The timing of revenue recognition is dependent on the terms of each license agreement.

Generally, we will recognize non-refundable upfront licensing fees related to patent licenses immediately upon receipt of the funds if we have no significant future obligations to perform under the arrangement.

However, we will defer recognition for licensing fees where we have significant future performance requirements, the fee is not fixed (such as royalties earned as a percentage of future revenue), or the fees are otherwise contingent.

Inventories are stated at the lower of cost or net realizable value.

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Deferred Tax Asset Valuation Allowances

In accordance with FASB ASC 740, “Income Taxes” (ASC 740), we evaluate all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a deferred tax asset is more likely than not to be realized.

In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction.

In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, “Income Taxes” (ASC 740), we evaluate all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a deferred tax asset is more likely than not to be realized.

In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate if sufficient future taxable income of the right character will be generated to utilize the existing deferred tax assets by jurisdiction.

This consideration includes a variety of factors such as historical and projected future taxable income and prudent and feasible tax planning strategies.

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To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay amounts in excess of what we have recognized, our effective tax rate in a given financial statement period could be materially affected.

An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the year of resolution.

An unfavorable tax settlement might require use of our cash, existing deferred tax assets, and/or result in an increase in our effective tax rate in the year of resolution.

A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

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Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.

Government Grant Disbursements

Government grant disbursements are recognized when there is reasonable assurance that:

(1) we will comply with the relevant conditions and (2) the grant disbursement will be received.

We receive grant disbursements from the State of New York Development Corporation relating to property, plant and equipment purchases in connection with our construction of a new silicon carbide device fabrication facility in Marcy, New York.

Grant disbursements are recorded as a reduction to the related asset(s), which then reduces depreciation expense over the expected useful life of the asset on a straight-line basis.

We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist.

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Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.

Contingent Liabilities

We provide for contingent liabilities in accordance with U.S.

GAAP, under which a loss contingency is charged to income when (1) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of the loss can be reasonably estimated.

Periodically, we review the status of each significant matter to assess the potential financial exposure.

If a potential loss is considered probable and the amount can be reasonably estimated, we reflect the estimated loss in our results of operations.

Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably estimable.

Because of uncertainties related to these matters, accruals are based on the best information available at the time.

Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that may have been included in the accompanying consolidated financial statements.

In determining the probability of an unfavorable outcome of a particular contingent liability and whether such liability is reasonably estimable, we consider the individual facts and circumstances related to the liability, opinions of legal counsel and recent legal rulings by the appropriate regulatory bodies, among other factors.

As additional information becomes available, we reassess the potential liability related to our pending and threatened claims and litigation and may revise our estimates accordingly.

Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

See also a discussion of specific contingencies in Note 15, “Commitments and Contingencies,” to our consolidated financial statements in Item 8 of this Annual Report.

Recent Accounting Pronouncements

See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements in Item 8 of this Annual Report for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis