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 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. 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. 32 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, and have started to see supply availabilities and lead times stabilize, 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, 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 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. 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. • 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. • 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. • COVID-19 Pandemic. The COVID-19 pandemic has affected us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders on a timely basis, and the overall impact of the aforementioned items that could cause output challenges and increased costs. We continue to monitor the impact that the COVID-19 pandemic is having on our business, the semiconductor industry, and the economies in which we operate. 33 Table of Contents Overview of the nine months ended March 26, 2023 The following is a summary of our financial results as of and for the nine months ended March 26, 2023 compared to the nine months ended March 27, 2022, unless otherwise stated. • Our revenue increased $168.4 million to $686.1 million. • Gross margin decreased to 31.3% from 32.9%. Gross profit increased to $214.9 million from $170.4 million. • Operating loss was $268.9 million compared to $188.9 million. • Diluted loss per share was $1.74 compared to $1.96. • Combined cash, cash equivalents and short-term investments was $2,248.2 million at March 26, 2023 and $1,198.8 million at June 26, 2022. • Convertible notes, net was $3,023.3 million at March 26, 2023 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 $90.7 million compared to $123.4 million. • Purchases of property and equipment, net were $399.2 million (net of $131.0 million in reimbursements) compared to $452.0 million (net of $83.5 million in reimbursements). • Design-ins were $6.7 billion compared to $3.8 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, where we continue to run qualification lots. In addition, an expansion of our materials factory at our U.S. campus headquarters in Durham, North Carolina, the construction of a new materials manufacturing facility in Siler City, North Carolina, and the recently announced plan to construct a new Silicon Carbide device fabrication facility in Saarland, Germany are all 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 $160 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. Design-ins 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. 34 Table of Contents Results of Operations Selected consolidated statements of operations data for the three and nine months ended March 26, 2023 and March 27, 2022 was as follows: Three months ended Nine months ended March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 (in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue Revenue, net $228.7 100.0 % $188.0 100.0 % $686.1 100.0 % $517.7 100.0 % Cost of revenue, net 160.6 70.2 124.0 66.0 471.2 68.7 347.3 67.1 Gross profit 68.1 29.8 64.0 34.0 214.9 31.3 170.4 32.9 Research and development 56.1 24.5 48.1 25.6 168.3 24.5 148.2 28.6 Sales, general and administrative 60.5 26.5 51.5 27.4 171.2 25.0 148.5 28.7 Amortization or impairment of acquisition-related intangibles 2.6 1.1 3.4 1.8 8.3 1.2 10.6 2.0 Loss (gain) on disposal or impairment of other assets 1.7 0.7 (0.6) (0.3) 1.9 0.3 (0.3) (0.1) Other operating expense 49.1 21.5 23.9 12.7 134.1 19.5 52.3 10.1 Operating loss (101.9) (44.6) (62.3) (33.1) (268.9) (39.2) (188.9) (36.5) Non-operating (income) expense, net (2.9) (1.3) 3.8 2.0 (53.4) (7.8) 35.7 6.9 Loss before income taxes (99.0) (43.3) (66.1) (35.2) (215.5) (31.4) (224.6) (43.4) Income tax expense 0.5 0.2 0.4 0.2 1.1 0.2 8.7 1.7 Net loss ($99.5) (43.5) ($66.5) (35.4) (216.6) (31.6) (233.3) (45.1) Basic and diluted loss per share ($0.80) ($0.54) ($1.74) ($1.96) 35 Table of Contents Revenue Revenue was as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Revenue $228.7 $188.0 $40.7 22 % $686.1 $517.7 $168.4 33 % Revenue increased for each period presented primarily due to increased production capacity for our power and materials product lines to meet strong demand, partially offset by lower factory output and softening demand for our RF product line. Gross Profit and Gross Margin Gross profit and gross margin were as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Gross profit $68.1 $64.0 $4.1 6 % $214.9 $170.4 $44.5 26 % Gross margin 29.8 % 34.0 % 31.3 % 32.9 % The increases in gross profit for the three and nine months ended March 26, 2023 compared to the three and nine months ended March 27, 2022 were primarily due to increased revenues, partially offset by increased production costs and unfavorable product mix. The decrease in gross margin for the three months ended March 26, 2023 compared to the three months ended March 27, 2022 was primarily due to increased production costs and unfavorable product mix. The decrease in gross margin for the nine months ended March 26, 2023 compared to the nine months ended March 27, 2022 was primarily due to increased production costs and unfavorable product mix, 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. 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 Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Research and development $56.1 $48.1 $8.0 17 % $168.3 $148.2 $20.1 14 % Percent of revenue 25 % 26 % 25 % 29 % 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. 36 Table of Contents Sales, General and Administrative 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); marketing and advertising expenses; facilities and insurance costs; and travel and other costs. SG&A expenses were as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Sales, general and administrative $60.5 $51.5 $9.0 17 % $171.2 $148.5 $22.7 15 % Percent of revenue 26 % 27 % 25 % 29 % The increase in SG&A expenses for the three months ended March 26, 2023 compared to the three months ended March 27, 2022 were primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation, as well as increases in professional services and sponsorship costs. The increase in SG&A expenses for the nine months ended March 26, 2023 compared to the nine months ended March 27, 2022 were primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation, as well as increases in professional services, sponsorship, and travel costs. 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 Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Customer relationships $1.5 $1.5 $— — % $4.6 $4.6 $— — % Developed technology 1.1 1.4 (0.3) (21) % 3.7 4.0 (0.3) (8) % Non-compete agreements — 0.5 (0.5) (100) % — 2.0 (2.0) (100) % Total amortization $2.6 $3.4 ($0.8) (24) % $8.3 $10.6 ($2.3) (22) % Amortization of acquisition-related intangible assets decreased due to certain intangible assets reaching the end of their useful lives. No other significant acquisition-related intangible activity or impairments occurred between the periods. 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 Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Loss (gain) on disposal or impairment of other assets $1.7 ($0.6) $2.3 (383) % $1.9 ($0.3) $2.2 (733) % 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. 37 Table of Contents Other Operating Expense Other operating expense was as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Factory start-up costs 44.7 21.4 23.3 109 % 120.7 41.0 79.7 194 % Project, transformation and transaction costs 3.9 1.2 2.7 225 % 11.4 5.3 6.1 115 % Factory optimization restructuring costs — 0.8 (0.8) (100) % — 5.5 (5.5) (100) % Severance costs 0.5 0.5 — — % 2.0 0.5 1.5 300 % Other operating expense $49.1 $23.9 $25.2 105 % $134.1 $52.3 $81.8 156 % Factory start-up costs relate to expanding our production footprint to support expected growth. 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 restructuring costs relate to our multi-year factory optimization restructuring plan, which was implemented in connection with our expansion activities between fiscal 2019 and fiscal 2022. As part of the factory optimization restructuring plan, we incurred restructuring charges associated with the movement of equipment as well as disposals on certain long-lived assets. The factory optimization restructuring plan concluded in fiscal 2022. Other operating expense for the three and nine months ended March 26, 2023 compared to the three and nine months ended March 27, 2022 increased primarily due to increased factory start-up costs as we continue our expansion activities. 38 Table of Contents Non-Operating (Income) Expense, net Non-operating (income) expense, net was comprised of the following: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Interest income ($22.2) ($2.8) ($19.4) 693 % ($38.1) ($7.8) ($30.3) 388 % Interest expense, net of capitalized interest 14.1 5.1 9.0 176 % 26.7 17.1 9.6 56 % Gain on arbitration proceedings — — — — % (50.3) — (50.3) 100 % Loss on debt extinguishment related to conversion of 2023 Notes — — — — % — 24.8 (24.8) (100) % Loss on Wafer Supply Agreement 4.8 0.5 4.3 860 % 7.3 1.4 5.9 421 % Loss on early payment of transaction-related note receivable — 1.2 (1.2) (100) % — 1.2 (1.2) (100) % Gain on sale of investments, net — — — — % — (0.3) 0.3 (100) % Other, net 0.4 (0.2) 0.6 (300) % 1.0 (0.7) 1.7 (243) % Non-operating (income) expense, net ($2.9) $3.8 ($6.7) (176) % ($53.4) $35.7 ($89.1) (250) % Interest income. 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 (the 2029 Notes). Interest expense, net of capitalized interest . The increase in interest expense in both periods primarily relate to interest from our 2029 Notes, which were not outstanding as of March 27, 2022. In addition, – for the three months ended March 26, 2023 compared to the three months ended March 27, 2022, an increase in interest expense from our 1.75% convertible senior notes due May 1, 2026 (the 2026 Notes), the interest of which was fully capitalized in the nine months ended March 27, 2022 but fully expensed in the three months ended March 26, 2023, was offset by a decrease in interest expense from our 0.25% convertible senior notes due February 15, 2028 (the 2028 Notes) in connection with the adoption of ASU 2020-06, which removed accretion expense in connection with the 2028 Notes from our current period results; and – for the nine months ended March 26, 2023 compared to the nine months ended March 27, 2022, an increase in interest expense from our 1.75% convertible senior notes due May 1, 2026 (the 2026 Notes), the interest of which was fully capitalized in the nine months ended March 27, 2022 but fully expensed in the nine months ended March 26, 2023, was offset by a decrease in interest expense from our 2023 Notes, which were converted in the second quarter of fiscal 2022. 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. 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. 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. 39 Table of Contents Income Tax Expense Income tax expense and our effective tax rate were as follows: Three months ended Nine months ended (in millions of U.S. Dollars) March 26, 2023 March 27, 2022 Change March 26, 2023 March 27, 2022 Change Income tax expense $0.5 $0.4 $0.1 25 % $1.1 $8.7 ($7.6) (87) % Effective tax rate (1) % (1) % (1) % (4) % The change in our effective tax rate for the nine months ended March 26, 2023 compared to the nine months ended March 27, 2022 was primarily due to $7.3 million of income tax expense recognized in the second quarter of fiscal 2022 related to the restructuring of our Luxembourg holding company. 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. 40 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. 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 The following table sets forth our cash, cash equivalents and short-term investments: (in millions of U.S. Dollars) March 26, 2023 June 26, 2022 Change Cash and cash equivalents $795.1 $449.5 $345.6 Short-term investments 1,453.1 749.3 703.8 Total cash, cash equivalents and short-term investments $2,248.2 $1,198.8 $1,049.4 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 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 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 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 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 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 March 26, 2023. 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. 41 Table of Contents As of March 26, 2023, we had unrealized losses on our short-term investments of $21.4 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 26, 2023 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 March 26, 2023 until the investments fully recover in market value. No allowance for credit losses was recorded as of March 26, 2023. 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 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 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 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 March 26, 2023, we have spent approximately $870 million and received $280.7 million in reimbursements. Additionally, we recently announced the intention to build a new materials manufacturing facility in Siler City, North Carolina. 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 $775 million of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities. This target is highly dependent on the timing and overall progress on our new Silicon Carbide fabrication facility in New York and the construction of our new materials manufacturing facility in Siler City, North Carolina. 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. 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. We have a take-or-pay supplier agreement that requires a minimum of $200 million of purchases over the next five years, as outlined further in Note 13, "Commitments and Contingencies," to our unaudited financial statements in Part I, Item 1 of this Quarterly Report. 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. 42 Table of Contents Cash Flows In summary, our cash flows were as follows: Nine months ended March 26, 2023 March 27, 2022 Change Cash used in operating activities ($90.7) ($123.4) $32.7 26 % Cash used in investing activities (1,000.7) (378.0) (622.7) (165) % Cash provided by financing activities 1,437.0 608.3 828.7 136 % Effect of foreign exchange changes — — — — % Net change in cash and cash equivalents $345.6 $106.9 $238.7 223 % Cash Flows from Operating Activities Net cash used in operating activities decreased primarily due to a decrease in net loss during the period and a smaller increase in working capital in the current period compared to the prior period, which was primarily driven by increased customer reserve deposits received. Cash Flows from Investing Activities Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment, and property related reimbursements. Cash used in investing activities increased primarily due to an increase in net purchases of short-term investments of $650.8 million, partially offset by a decrease in net property and equipment purchases of $52.8 million. For the nine months ended March 26, 2023, cash from investing activities included $101.8 million of proceeds from an earnout payment related to the LED Business Divestiture. For the nine months ended March 27, 2022, cash from investing activities included $125.0 million of proceeds from a note receivable related to the LED Business Divestiture. Cash Flows from Financing Activities For the nine months ended March 26, 2023, cash provided by financing activities primarily consisted of $1,718.6 million in net proceeds from the issuance of the 2029 Notes and $11.4 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 $17.7 million in tax withholdings on vested equity awards. For the nine months ended March 27, 2022, cash provided by financing activities primarily consisted of $732.3 million in net proceeds from the issuance of the 2028 Notes and $11.7 million of proceeds from the issuance of common stock, partially offset by $108.2 million in cash paid for capped call transactions in connection with the 2028 Notes and $26.1 million in tax withholdings on vested equity awards. Off-Balance Sheet Arrangements We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of March 26, 2023, 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. 43 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.