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 26, 2022 (the 2022 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. (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 devices and RF devices, and our products are targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense. 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. 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 a Silicon Carbide device fabrication facility in New York. We operate research and development facilities in North Carolina, California, Arkansas, Arizona and New York. 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. 31 Table of Contents Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • 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. • 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. 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 this increased demand. • 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. • 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 the effectiveness of vaccines in preventing serious illnesses and hospitalizations, remains uncertain and cannot be predicted with confidence due to the continued emergence of variants and the likelihood that the protection conferred by existing vaccines wanes 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. • 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. • 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. 32 Table of Contents Overview of the three months ended September 25, 2022 The following is a summary of our financial results as of and for the three months ended September 25, 2022 compared to the three months ended September 26, 2021, unless otherwise stated. • Our revenue increased $84.7 million to $241.3 million. • Gross margin increased to 33.1% from 31.5%. Gross profit increased to $79.9 million from $49.4 million. • Operating loss was $75.7 million compared to $65.7 million. • Diluted loss per share was $0.21 compared to $0.60. • Combined cash, cash equivalents and short-term investments was $1,197.2 million at September 25, 2022 and $1,198.8 million at June 26, 2022. • Convertible notes, net was $1,300.8 million at September 25, 2022 and $1,021.6 million at June 26, 2022. See Note 9, "Long-term Debt," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for a discussion of the impact of our adoption of Accounting Standards Update (ASU) 2020-06 on June 27, 2022, the first day of fiscal 2023. • Cash used in operating activities was $12.7 million compared to $62.5 million. • Purchases of property and equipment, net were $64.4 million (net of $46.7 million in reimbursements) compared to $208.5 million (net of $50.8 million in reimbursements). • Design-ins were $3.5 billion compared to $0.6 billion. 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 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, an expansion of our materials factory at our U.S campus headquarters in Durham, North Carolina, and the recently announced plan to construct a new materials manufacturing facility in Siler City, North Carolina, all of which is expected to 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 target approximately $100 million of start-up and underutilization costs primarily related to ramping of production at the Marcy, New York facility. 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. We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the continued build out of our new facility in New York and additional production capacity in North Carolina. 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. Design-ins 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 33 Table of Contents 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 Selected consolidated statements of operations data for the three months ended September 25, 2022 and September 26, 2021 is as follows: Three months ended September 25, 2022 September 26, 2021 (in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Revenue, net $241.3 100.0 % $156.6 100.0 % Cost of revenue, net 161.4 66.9 107.2 68.5 Gross profit 79.9 33.1 49.4 31.5 Research and development 55.2 22.9 49.9 31.9 Sales, general and administrative 55.0 22.8 49.0 31.3 Amortization or impairment of acquisition-related intangibles 2.9 1.2 3.6 2.3 Loss (gain) on disposal or impairment of other assets 0.1 — (0.2) (0.1) Other operating expense 42.4 17.6 12.8 8.2 Operating loss (75.7) (31.4) (65.7) (42.0) Non-operating (income) expense, net (49.7) (20.6) 4.1 2.6 Loss before income taxes (26.0) (10.8) (69.8) (44.6) Income tax expense 0.2 0.1 0.3 0.2 Net loss (26.2) (10.9) (70.1) (44.8) Basic and diluted loss per share ($0.21) ($0.60) Revenue Revenue was as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Revenue $241.3 $156.6 $84.7 54 % Revenue 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 (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Gross profit $79.9 $49.4 $30.5 62 % Gross margin 33.1 % 31.5 % The increase in gross profit was primarily due to increased revenues in the current period and the full impact of our early fiscal 2022 change in estimate to increase our 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 was primarily due to the same factors partially offset by product mix. * The change in our expected useful lives was applied in the first quarter of fiscal 2022 but had limited impact on that period's gross profit and gross margin because the majority of the impact in the first quarter of fiscal 2022 resulted in a reduction of inventory. 34 Table of Contents 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 expansion of our new Silicon Carbide device fabrication facility in Marcy, New York. Research and development expenses were as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Research and development $55.2 $49.9 $5.3 11 % Percent of revenue 23 % 32 % 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. 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 consist 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 (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Sales, general and administrative $55.0 $49.0 $6.0 12 % Percent of revenue 23 % 31 % The increase in sales, general and administrative expenses was primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation. 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 and non-compete agreements. Amortization of intangible assets related to our acquisitions was as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Customer relationships $1.5 $1.5 $— — % Developed technology 1.4 1.4 — — % Non-compete agreements — 0.7 (0.7) (100) % Total amortization $2.9 $3.6 ($0.7) (19) % Amortization of acquisition-related intangible assets decreased due to an intangible asset relating to non-compete agreements reaching the end of its useful life in fiscal 2022. No other significant acquisition-related intangible activity or impairments occurred between the periods. 35 Table of Contents Loss (gain) 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. Loss (gain) on disposal or impairment of other assets were as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Loss (gain) on disposal or impairment of other assets $0.1 ($0.2) $0.3 (150) % Loss (gain) on disposal or impairment of other assets primarily relate to proceeds from asset sales offset by write-offs of fixed asset projects, as well as the write-offs of impaired or abandoned patents. Other Operating Expense Other operating expense was as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Restructuring costs — 2.6 (2.6) (100) % Project, transformation and transaction costs 3.0 1.6 1.4 88 % Factory start-up costs 38.4 8.6 29.8 347 % Non-restructuring related executive severance 1.0 — 1.0 100 % Other operating expense $42.4 $12.8 $29.6 231 % Restructuring costs relate to factory optimization facility consolidations as well as disposals on certain long-lived assets. 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 start-up costs are costs related to expanding our production footprint to support expected growth. Other operating expense increased primarily due to increased factory start-up costs as we continue our expansion to a new Silicon Carbide device fabrication facility in Marcy, New York. Non-Operating (Income) Expense, net Non-operating (income) expense, net was comprised of the following: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Gain on sale of investments, net $— ($0.2) $0.2 (100) % Gain on arbitration proceedings (49.4) — (49.4) (100) % Interest income (4.3) (2.6) (1.7) 65 % Interest expense, net of capitalized interest 4.8 6.7 (1.9) (28) % Other, net (0.8) 0.2 (1.0) (500) % Non-operating (income) expense, net ($49.7) $4.1 ($53.8) (1,312) % Gain on arbitration proceedings . In the first quarter of fiscal 2023, we received an arbitration award in relation to a former customer failing to fulfill contractual obligations to purchase a certain amount of product over a period of time. The gain recognized is net of legal fees incurred. Interest income. The increase in interest income was primarily driven by increased investment returns on our short-term investment balances, partially offset by lower average short-term investment balances. 36 Table of Contents Interest expense, net of capitalized interest . The decrease in interest expense was primarily due to the adoption of ASU 2020-06, which resulted in the elimination of accretion expense starting in the first quarter of fiscal 2023. This was partially offset by an increase in interest expense resulting from no interest on our 1.75% convertible senior notes due May 1, 2026 (the 2026 Notes) being capitalized in the first quarter of fiscal 2023. Interest relating to the 2026 Notes was capitalized in the first quarter of fiscal 2022 in connection with the building of a new Silicon Carbide device fabrication facility in New York but was not capitalized in the first quarter of fiscal 2023 due to the construction of the facility being substantially complete. Income Tax Expense Income tax expense and our effective tax rate was as follows: Three months ended (in millions of U.S. Dollars) September 25, 2022 September 26, 2021 Change Income tax expense $0.2 $0.3 ($0.1) (33) % Effective tax rate (1) % — % The change in our effective tax rate was minimal. 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., (ii) projected income derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated. 37 Table of Contents Liquidity and Capital Resources Overview 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. We believe 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 or secure key intellectual properties. However, even with our strong working capital position, we expect to need additional funding to fully complete additional capacity expansions at our new Silicon Carbide device fabrication facility in Marcy, New York and the construction of a new materials manufacturing facility in Siler City, North Carolina, as discussed further below. Sources of Liquidity The following table sets forth our cash, cash equivalents and short-term investments: (in millions of U.S. Dollars) September 25, 2022 June 26, 2022 Change Cash and cash equivalents $521.6 $449.5 $72.1 Short-term investments 675.6 749.3 (73.7) Total cash, cash equivalents and short-term investments $1,197.2 $1,198.8 ($1.6) 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 accounts payable and accrued expenses. In the second quarter of fiscal 2022, all outstanding 0.875% convertible senior notes due September 1, 2023 (the 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, we received early payments on two unsecured promissory notes issued to us in connection with 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 subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART) on March 1, 2021 (the LED Business Divestiture). In the third quarter of fiscal 2022, we received an early payment in the amount of $125.0 million, along with outstanding accrued and unpaid interest as of the payment date, relating to the unsecured promissory note issued with the completion of the transaction. In the first quarter of fiscal 2023, we received an early payment in the amount of $101.8 million in connection with the unsecured promissory note issued in the fourth quarter of fiscal 2022 as an earn-out payment. We have a $125 million line of credit as discussed in Note 9, “Long-term Debt,” in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, all of which was available for borrowing as of September 25, 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. 38 Table of Contents As of September 25, 2022, we had unrealized losses on our short-term investments of $29.9 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 25, 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 September 25, 2022 until the investments fully recover in market value. No allowance for credit losses was recorded as of September 25, 2022. 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. 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. Expected Uses of Liquidity 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 at the site that have been pulled forward as a result of increased projected demand. As of September 25, 2022, we have spent approximately $770 million and received $196.4 million in reimbursements. Additionally, we recently announced the intention to build a new materials manufacturing facility in Siler City, North Carolina. Starting late fiscal 2023 and through fiscal 2024, we expect to invest approximately $1.3 billion into the facility's initial construction, with the potential to invest in further expansions to add additional capacity as needed. The facility is partially supported by an approximately $1.0 billion incentive package from state, county and local governments. In addition, we hope to apply for federal funding from the CHIPS and Science Act of 2022 to accelerate the construction and build-out of the facility. We also intend to apply for and potentially sell tax credits as part of the Inflation Reduction Act to further fund our expansion initiatives. For fiscal 2023, we target approximately $1.0 billion 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 the construction of our new materials manufacturing facility in Siler City, North Carolina. Our target net capital investment figure is net of approximately $275 million of expected reimbursements from the State of New York Urban Development Corporation under the Grant Disbursement Agreement during the fiscal year. Given our current cash position, we believe we will be able to fund daily operations for at least the next 12 months but may need to obtain additional funding to fully complete our intended expansion initiatives described above. We believe we will be able to obtain the necessary funding and are exploring a variety of options, including, but not limited to, customer deposits, private funding, public markets, government reimbursements and selling transferable government tax credits. 39 Table of Contents Cash Flows In summary, our cash flows were as follows: Three months ended September 25, 2022 September 26, 2021 Change Cash used in operating activities ($12.7) ($62.5) $49.8 (80) % Cash provided by (used in) investing activities 102.8 (32.0) 134.8 (421) % Cash used in financing activities (17.6) (22.9) 5.3 (23) % Effect of foreign exchange changes (0.4) (0.1) (0.3) (300) % Net change in cash and cash equivalents $72.1 ($117.5) $189.6 (161) % Cash Flows from Operating Activities Net cash used in operating activities decreased primarily due to the receipt of a $49.4 million arbitration award in relation to a former customer failing to fulfill contractual obligations to purchase a certain amount of product over a period of time. 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 provided by investing activities increased primarily due to proceeds of an earnout payment related to the LED Business Divestiture of $101.8 million and a decrease in property and equipment purchases of $148.2 million, which was partially offset by a decrease in net proceeds from short-term investments of $111.7 million. Cash Flows from Financing Activities For the three months ended September 25, 2022 and September 26, 2021, cash used in financing activities primarily consisted of $16.9 million and $22.5 million in tax withholdings on vested equity awards, respectively. 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 September 25, 2022, we did not have any off-balance sheet arrangements. 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 2022 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. 40 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 2022 Form 10-K. There have been no material changes to the amounts presented therein.