What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-26 compared with 2022-10-27 · 105 added, 92 removed, 209 unchanged (49% of the section changed)

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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).

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 audited 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.

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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.

We have taken steps to provide continuity to our customers to the extent possible, including entering into purchase agreements with suppliers to secure future supply, 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.

Demand also fluctuates based on various domestic and global economic and market cycles, continuously evolving industry supply chains, trade and tariff terms, and 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.

For example, decreasing consumer or industrial demand as a result of an economic slowdown or recession may lead our customers to delay designing in our products.

Recently, we have been seeing softening demand for our RF products but significantly higher demand for our power products.

We believe the increased demand for our power products reflects the value that the industry places on a transition to Silicon Carbide materials and devices while also evidencing the growing global focus on adopting 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.

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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 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.

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Protection of intellectual property is critical.

Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken.

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

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

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

Overview of the three months ended September 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.

Overview of the six months ended December 25, 2022

The following is a summary of our financial results as of and for the six months ended December 25, 2022 compared to the six months ended December 26, 2021, unless otherwise stated.

• Our revenue increased $127.7 million to $457.4 million.

• Gross margin increased to 33.1% from 31.5%.

• Gross margin decreased to 32.1% from 32.3%.

Gross profit increased to $146.8 million from $106.4 million.

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• Diluted loss per share was $0.94 compared to $1.42.

• 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.

• Combined cash, cash equivalents and short-term investments was $2,484.4 million at December 25, 2022 and $1,198.8 million at June 26, 2022.

• Convertible notes, net was $3,021.0 million at December 25, 2022 and $1,021.6 million at June 26, 2022.

As discussed further below and in Note 9, "Long-term Debt," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, we sold $1,750.0 million aggregate principal amount of 1.875% convertible senior notes due December 1, 2029 in the second quarter of fiscal 2023.

• Cash used in operating activities was $79.7 million compared to $95.0 million.

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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.

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, where we continue to run qualification lots, 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.

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

Design-ins are customer commitments to purchase our products 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

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

Selected consolidated statements of operations data for the three and six months ended December 25, 2022 and December 26, 2021 is as follows:

Three months ended Six months ended

December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021

(in millions of U.S.

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

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

Revenue, net $216.1 100.0 % $173.1 100.0 % $457.4 100.0 % $329.7 100.0 %

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Amortization or impairment of acquisition-related intangibles 2.8 1.3 3.6 2.1 5.7 1.2 7.2 2.2

Loss (gain) on disposal or impairment of other assets 0.1 — (0.2) (0.1)

Loss on disposal or impairment of other assets 0.1 — 0.5 0.3 0.2 — 0.3 0.1

Other operating expense 42.6 19.7 15.6 9.0 85.0 18.6 28.4 8.6

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Revenue was as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Revenue $216.1 $173.1 $43.0 25 % $457.4 $329.7 $127.7 39 %

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.

Revenue for the three and six months ended December 25, 2022 compared to the three and six months ended December 26, 2021 increased due to increased demand across all of our product lines, as well as increased production capacity for our power and materials product lines to meet strong demand during the period and in future periods.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Gross profit $66.9 $57.0 $9.9 17 % $146.8 $106.4 $40.4 38 %

Gross margin 31.0 % 32.9 % 32.1 % 32.3 %

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 increases in gross profit for the three and six months ended December 25, 2022 compared to the three and six months ended December 26, 2021 were primarily due to increased revenues in the current periods.

The decrease in gross margin for the three months ended December 25, 2022 compared to the three months ended December 26, 2021 was primarily due to impacts from product mix, partially offset by impacts from increased revenues in the current period.

The decrease in gross margin for the six months ended December 25, 2022 compared to the six months ended December 26, 2021 was primarily due to the same factors for the three months ended December 25, 2022 compared to the three months ended December 26, 2021, partially offset by a gross margin improvement in the current period resulting from realizing 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 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.

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Research and development expenses were as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Research and development $57.0 $50.2 $6.8 14 % $112.2 $100.1 $12.1 12 %

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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;

Sales, general and administrative (SG&A) 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);

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and travel and other costs.

Sales, general and administrative expenses were as follows:

Three months ended

SG&A expenses were as follows:

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Sales, general and administrative $55.7 $48.0 $7.7 16 % $110.7 $97.0 $13.7 14 %

Percent of revenue 26 % 28 % 24 % 29 %

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.

The increases in SG&A expenses for the three and six months ended December 25, 2022 compared to the three and six months ended December 26, 2021 were primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation, as well as small increases in travel costs and professional services.

Amortization or Impairment of Acquisition-Related Intangibles

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Amortization of intangible assets related to our acquisitions was as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

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

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

Loss (gain) on Disposal or Impairment of Other Assets

Loss on Disposal or Impairment of Other Assets

We operate a capital-intensive business.

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Due to the risk of technological obsolescence or changes in our production process, we regularly review our long-lived assets and capitalized patent costs for possible impairment.

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

Three months ended

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

Three months ended Six months ended

(in millions of U.S.

Dollars) September 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.

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Loss on disposal or impairment of other assets $0.1 $0.5 ($0.4) (80) % $0.2 $0.3 ($0.1) (33) %

Loss on disposal or impairment of other assets primarily relate to proceeds from asset sales offset by write-offs of fixed asset projects, as well as the write-offs of impaired or abandoned patents.

Other Operating Expense

Other operating expense was as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 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 %

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Factory start-up costs 37.6 11.0 26.6 242 % 76.0 19.6 56.4 288 %

Project, transformation and transaction costs 4.5 2.5 2.0 80 % 7.5 4.1 3.4 83 %

Restructuring costs 0.2 2.1 (1.9) (90) % 0.2 4.7 (4.5) (96) %

Non-restructuring related executive severance 0.3 — 0.3 100 % 1.3 — 1.3 100 %

Other operating expense $42.6 $15.6 $27.0 173 % $85.0 $28.4 $56.6 199 %

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.

Restructuring costs relate to facility consolidations, disposals on certain long-lived assets, severance and other restructuring costs related to corporate restructuring plans.

See Note 14, "Restructuring," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on our restructuring costs.

Other operating expense for the three and six months ended December 25, 2022 compared to the three and six months ended December 26, 2021 increased primarily due to increased 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

Three months ended Six 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) %

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Gain on arbitration proceedings ($0.9) $— ($0.9) (100) % ($50.3) $— ($50.3) (100) %

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

Interest income (11.6) (2.4) (9.2) 383 % (15.9) (5.0) (10.9) 218 %

Interest expense, net of capitalized interest 7.8 5.3 2.5 47 % 12.6 12.0 0.6 5 %

Loss on Wafer Supply Agreement 2.6 0.1 2.5 2,500 % 2.5 0.9 1.6 178 %

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

Other, net 1.3 0.1 1.2 1,200 % 0.6 (0.5) 1.1 (220) %

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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.

In the second quarter of fiscal 2023, a final payment was received.

The gain recognized is net of legal fees incurred.

Loss on debt extinguishment related to conversion of 2023 Notes.

In the second quarter of fiscal 2022, all of our outstanding 0.875% convertible senior notes due September 1, 2023 (the 2023 Notes) were converted into shares of our common stock, which resulted in a loss on extinguishment of $24.8 million.

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

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.

The increase in interest income in both periods was primarily driven by increased short-term investment balances, as well as increased returns on our short-term investments.

Our short-term investment balances increased significantly in the second quarter of fiscal 2023 resulting from the net proceeds we received from the sale of our 1.875% convertible senior notes due December 1, 2029 (2029 Notes).

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.

The increase in interest expense in both periods related to interest from our 2028 Notes (as defined below) and the 2029 Notes, which were not outstanding as of December 26, 2021.

In addition, interest expense increased from interest on our 1.75% convertible senior notes due May 1, 2026 (the 2026 Notes), the interest of which was fully capitalized in the three and six months ended December 26, 2021 but fully expensed in the three and six months ended December 25, 2022.

These increases were partially offset by a decrease in interest expense from our 2023 Notes, which were converted in the second quarter of fiscal 2022.

Loss on Wafer Supply Agreement.

In connection with the completed sale of our former LED Products business unit to SMART Global Holdings, Inc.

(SGH) and its wholly owned subsidiary CreeLED, Inc.

(CreeLED and collectively with SGH, SMART) in fiscal 2021, we entered into a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which we supply CreeLED with certain Silicon Carbide materials and fabrication services for up to four years.

We recognized a supply agreement liability in connection with this agreement, which reached full amortization in the second quarter of fiscal 2023.

Income Tax Expense

Income tax expense and our effective tax rate was as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 25, 2022 September 26, 2021 Change

Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change

Income tax expense $0.4 $8.0 ($7.6) (95) % $0.6 $8.3 ($7.7) (93) %

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

The change in our effective tax rate was minimal.

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

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

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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.

With the strength of our working capital position, we believe that we have the ability to continue to invest in the near-term 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.

However, even with our strong working capital position, we expect to need additional funding to fully complete our previously announced planned long-term capacity expansions.

Sources of Liquidity

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(in millions of U.S.

Dollars) September 25, 2022 June 26, 2022 Change

Dollars) December 25, 2022 June 26, 2022 Change

Cash and cash equivalents $1,085.1 $449.5 $635.6

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

In the third quarter of fiscal 2022, we issued and sold a total of $750.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2028 (the 2028 Notes), as discussed in Note 9, “Long-term Debt,” in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

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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 second quarter of fiscal 2023, we issued and sold a total of $1,750.0 million aggregate principal amount of 2029 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 2029 Notes was $1,718.6 million, of which we used $273.9 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 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.

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.

As of December 25, 2022, we had unrealized losses on our short-term investments of $26.4 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at December 25, 2022 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes.

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.

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of December 25, 2022 until the investments fully recover in market value.

No allowance for credit losses was recorded as of December 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.

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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.

As of December 25, 2022, we have spent approximately $800 million and received $220.4 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.

Starting in late fiscal 2023 and through fiscal 2024, we expect to invest approximately $1.3 billion in construction, equipment and other related costs for the new facility, net of estimated refundable federal investment tax credits and capital grants we expect to receive through the U.S.

CHIPS and Science Act of 2022 (the CHIPS Act).

The timing and amount of these estimated CHIPS Act incentives is uncertain.

In addition, the facility is also further supported by an approximately $1.0 billion long-term incentive package from state, county and local governments, primarily in the form of property tax reimbursements and sales tax exemptions.

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.

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Our target net capital investment figure is net of approximately $150 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.

In addition, we also intend to apply for and potentially sell tax credits as part of the Inflation Reduction Act to further fund our expansion initiatives.

Given our current cash position, we believe we will be able to fund daily operations for at least the next 12 months but we expect to need additional funding to fully complete our previously announced planned 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.

In summary, our cash flows were as follows:

Three months ended

September 25, 2022 September 26, 2021 Change

Six months ended

December 25, 2022 December 26, 2021 Change

Cash used in operating activities ($79.7) ($95.0) $15.3 16 %

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) %

Cash used in investing activities (722.0) (83.5) (638.5) (765) %

Cash provided by (used in) financing activities 1,437.3 (15.0) 1,452.3 9,682 %

Effect of foreign exchange changes — (0.1) 0.1 100 %

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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.

Net cash used in operating activities decreased primarily due to a decrease in net loss during the period, partially offset by increased working capital in the current period primarily related to decreased employee related accruals.

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 used in investing activities increased primarily due to an increase in net purchases of short-term investments of $922.7 million, partially offset by proceeds of an earnout payment related to the LED Business Divestiture of $101.8 million and a decrease in net property and equipment purchases of $183.7 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.

For the six months ended December 25, 2022, cash provided by financing activities primarily consisted of $1,718.6 million in net proceeds from the issuance of the 2029 Notes and $11.2 million of proceeds from the issuance of common stock, partially offset by $273.9 million in cash paid for capped call transactions in connection with the 2029 Notes and $17.3 million in tax withholdings on vested equity awards.

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

Off-Balance Sheet Arrangements

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

As of September 25, 2022, we did not have any off-balance sheet arrangements.

As of December 25, 2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis