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 25, 2023 (the 2023 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. Unless otherwise noted, the following information and discussion relates to our continuing operations. 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. As discussed more fully above in Note 2, “Discontinued Operations,” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, we have entered into a definitive agreement to sell certain assets comprising our RF product line (the RF Business Divestiture). The RF Business Divestiture represents a strategic shift that will have a major effect on our operations and financial results. As a result, we have classified the results and cash flows of the RF product line as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for all periods presented. Additionally, the related assets and liabilities associated with the transaction are classified as held for sale in the consolidated balance sheets. Unless otherwise noted, discussion within this Quarterly Report to the consolidated financial statements relates to our continuing operations. Our continuing operations consist of power devices, which are used in electric vehicles, motor drives, power supplies, solar and transportation applications, and silicon carbide and GaN materials, which are targeted for customers who use them to manufacture products for RF, power and other applications. The majority of our products are manufactured at our production facilities located in North Carolina, New York and Arkansas for our continuing operations and in California for our discontinued operations. We also use contract manufacturers, some of which include captive lines, for certain products and aspects of product fabrication, assembly and packaging for both continuing and discontinued operations. We operate research and development facilities in North Carolina, Arkansas and New York for our continuing operations and in California and Arizona for our discontinued operations. 31 Table of Contents Wolfspeed, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: • 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 continued to see supply availabilities and lead times stabilize across many direct materials, we expect the supply situation for certain items to remain tight for at least the next few quarters. In addition, although we have not experienced significant impacts to date, the ongoing military conflict between Russia and Ukraine and the recent conflict between Hamas and Israel may further exacerbate global 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 and providing customer reserve deposits with our suppliers to secure future supply to us, although we expect that our production capacity constraints as we continue to bring additional capacity online may continue to limit our shipments to our customers in the near term. • Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices . Our potential for growth depends significantly on the continued adoption of silicon carbide and GaN materials and device products in the power markets 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, similar to other semiconductor companies, we have been seeing softening demand for our power products for industrial and energy applications in China, but significantly higher demand for our power products throughout the rest of the world, especially in automotive applications. 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 electric vehicle 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, but in the short and near term we expect to face production capacity constraints while we continue to work to bring additional capacity online. • 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 new production facilities, as well as 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 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, including China's recently announced export restriction of gallium and germanium, two metals used in the manufacturing of semiconductors and electronics, could reduce or limit demand, or increase the cost of production, of our products in certain markets. • Technological Innovation and Advancement. Innovations and advancements in materials and power 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 24, 2023 The following is a summary of our continuing operations financial results as of and for the three months ended September 24, 2023 compared to the three months ended September 25, 2022, unless otherwise stated. • Our year-over-year revenue increased $8.0 million to $197.4 million. • Gross margin decreased to 12.5% from 35.7%. Gross profit decreased to $24.7 million from $67.7 million. Gross profit and gross margin for the three months ended September 24, 2023 include the impacts of $34.4 million of underutilization costs primarily in connection with the start of production at our silicon carbide device fabrication facility in New York (the Mohawk Valley Fab), which began revenue production in late fiscal 2023. Costs relating to the Mohawk Valley Fab for the three months ended September 25, 2022 were expensed within factory start-up costs. • Operating loss was $94.9 million compared to $63.5 million. • Diluted loss per share was $0.99 compared to $0.11. • Combined cash, cash equivalents and short-term investments was $3,347.6 million at September 24, 2023 and $2,954.9 million at June 25, 2023. • Long-term debt, net was $5,159.4 million at September 24, 2023 and $4,175.1 million at June 25, 2023. 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 entered into an Unsecured Customer Refundable Deposit Agreement (the CRD Agreement) with a customer, pursuant to which the customer will provide the Company up to $2 billion in unsecured deposits. Under the CRD Agreement, the Company received an initial deposit of $1 billion in the first quarter of fiscal 2024. • Cash used in operating activities was $112.7 million compared to $6.7 million. • Purchases of property and equipment, net were $402.4 million (net of $39.6 million in reimbursements) compared to $61.0 million (net of $46.7 million in reimbursements). • Design-ins were $2.2 billion compared to $3.4 billion. • Design-wins were $1.5 billion compared to $0.5 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 the Mohawk Valley Fab, our new state-of-the-art, automated 200mm silicon carbide device fabrication facility, where we started revenue production in late fiscal 2023. In addition, an expansion of our materials factory in Durham, North Carolina, the construction of a new materials manufacturing facility in Siler City, North Carolina, the recent purchase of an epitaxy facility in Farmers Branch, Texas 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. We are primarily 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. 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 processes, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition more production to the Mohawk Valley Fab. We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth to meet long-term demand, which demand in the short-term and mid-term appears to be ahead of the industry's supply capabilities. Our expansion plans to increase supply include the continued build out of our new facility in New York, the construction of additional production capacity in North Carolina, the purchase of an epitaxy facility in Farmers Branch, Texas and the planned construction of a new silicon carbide device fabrication facility in Saarland, Germany. For fiscal 2024, we target approximately $2.0 billion of net capital investment. 33 Table of Contents 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 (a 'design-win') 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. Design-wins Design-ins are considered design-wins when a customer issues a purchase order for at least 20% of the expected first year revenue. Design-wins reflect each project's entire commitment at the time this criteria is satisfied and should not be taken as an absolute indicator of future revenue. Depending on timing, certain projects may be reflected within a single period's design-in and design-win figures. Results of Operations Selected consolidated statements of operations data for the three months ended September 24, 2023 and September 25, 2022 were as follows: Three months ended September 24, 2023 September 25, 2022 (in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Revenue, net $197.4 100.0 % $189.4 100.0 % Cost of revenue, net 172.7 87.5 121.7 64.3 Gross profit 24.7 12.5 67.7 35.7 Research and development 44.1 22.3 40.3 21.3 Sales, general and administrative 64.1 32.5 50.0 26.4 Factory start-up costs 8.4 4.3 38.4 20.3 Amortization or impairment of acquisition-related intangibles 0.3 0.2 0.5 0.3 Loss on disposal or impairment of other assets 0.1 0.1 0.1 0.1 Other operating expense 2.6 1.3 1.9 1.0 Operating loss (94.9) (48.1) (63.5) (33.5) Non-operating expense (income), net 28.5 14.4 (49.5) (26.1) Loss before income taxes (123.4) (62.5) (14.0) (7.4) Income tax expense 0.2 0.1 0.1 0.1 Net loss from continuing operations (123.6) (62.6) (14.1) (7.4) Net loss from discontinued operations (272.1) (137.8) (12.1) (6.4) Net loss ($395.7) (200.5) ($26.2) (13.8) Basic and diluted loss per share Continuing operations ($0.99) ($0.11) Discontinued operations (2.17) (0.10) 34 Table of Contents Revenue Revenue was as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Power Products $101.2 $104.5 ($3.3) (3) % Materials Products $96.2 $84.9 $11.3 13 % Revenue $197.4 $189.4 $8.0 4 % Revenue increased primarily due to growth in our materials product line, where we improved output to meet strong demand. This was partially offset by a decrease in revenue in our power product line, where the impact of softening demand in industrial applications in China exceeded the addition of revenue from our Mohawk Valley Fab in the first quarter of fiscal 2024. Gross Profit and Gross Margin Gross profit and gross margin were as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Gross profit $24.7 $67.7 ($43.0) (64) % Gross margin 12.5 % 35.7 % The decrease in gross profit and gross margin was primarily due to $34.4 million of underutilization costs incurred within cost of revenue in connection with the start of production at our Mohawk Valley Fab, which began revenue production in late fiscal 2023. Costs relating to the Mohawk Valley Fab for the three months ended September 25, 2022 were expensed within factory start-up costs. In addition, the decrease in gross profit and gross margin was driven by unfavorable product mix in our power product line, partially offset by impacts from increased revenues in our materials product line. As explained further below, the operating costs of each of our new facilities will largely be reflected in cost of revenue, net once each facility reaches revenue generating production. During the period when revenue production begins, but before the facility is at its expected utilization level, we expect some of the costs to operate the facility will not be absorbed into the cost of inventory. We expect that these costs will be substantial as we ramp up the facility to the expected or normal utilization level. The costs incurred to operate the facility in excess of the costs absorbed into inventory are referred to as underutilization costs and are expensed as incurred to cost of revenue, net. We expect gross profit and gross margin to be significantly impacted in future periods from these underutilization costs in connection with our new facility construction and expansion projects, the costs of which have solely been expensed as factory start-up costs prior to the three months ended September 24, 2023. 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 the expansion of the Mohawk Valley Fab. Research and development expenses were as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Research and development $44.1 $40.3 $3.8 9 % Percent of revenue 22 % 21 % 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 device 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. 35 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 (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Sales, general and administrative $64.1 $50.0 $14.1 28 % Percent of revenue 32 % 26 % The increase in SG&A expenses was primarily due to increased salaries and benefits, including stock-based compensation, in connection with increased sales and marketing headcount, as well as increases in professional services and sponsorship costs. Factory Start-up Costs Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Factory start-up costs $8.4 $38.4 ($30.0) (78) % Factory start-up costs relate to facilities that have not yet started revenue generating production. When a new facility begins revenue generating production, the operating costs of that facility previously expensed as start-up costs will instead be primarily expensed as part of the cost of the production within the cost of revenue, net line item in our statement of operations. The decrease in factory start-up costs was due to the start of revenue generating production at our Mohawk Valley Fab in the fourth quarter of fiscal 2023. The majority of start-up costs for the three months ended September 25, 2022 relate to the construction of this facility. For the three months ended September 24, 2023, the costs relating to this facility were expensed as part of cost of production. Start-up costs for the three months ended September 24, 2023 primarily relate to costs incurred in connection with the construction of our new materials manufacturing facility in Siler City, North Carolina and various materials expansion activities at our Durham, North Carolina locations. Amortization or Impairment of Acquisition-Related Intangibles As a result of our acquisitions, we have amortizable intangible assets related to developed technology. Amortization of intangible assets related to our acquisitions was as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Amortization of acquisition-related intangibles $0.3 $0.5 ($0.2) (40) % Amortization of acquisition-related intangible assets decreased due to certain intangible assets reaching the end of their useful lives. Loss on Disposal or Impairment of Other Assets We operate a capital-intensive business. As such, we dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our long-lived assets and capitalized patent costs for possible impairment. 36 Table of Contents Loss on disposal or impairment of other assets were as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Loss on disposal or impairment of other assets $0.1 $0.1 $— — % 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 (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Project, transformation and transaction costs 2.6 0.9 1.7 189 % Executive severance costs — 1.0 (1.0) (100) % Other operating expense $2.6 $1.9 $0.7 37 % Other operating expense increased primarily due to increased professional service fees, which are associated with completed and potential acquisitions and divestitures, partially offset by a decrease in personnel related severance costs. Non-Operating Expense (Income), net Non-operating expense (income), net was comprised of the following: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Interest income ($40.6) ($4.3) ($36.3) 844 % Interest expense, net of capitalized interest 61.7 4.8 56.9 1,185 % Gain on arbitration proceedings — (49.4) 49.4 (100) % Loss (gain) on Wafer Supply Agreement 6.9 (0.1) 7.0 (7,000) % Other, net 0.5 (0.5) 1.0 (200) % Non-operating expense (income), net $28.5 ($49.5) $78.0 (158) % Interest income. The increase in interest income 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 after the first quarter of fiscal 2023 from the net proceeds we received from the sale of our 1.875% convertible senior notes due December 1, 2029 (the 2029 Notes) and senior secured notes due 2030 (the 2030 Senior Notes), as well as from the receipt of the initial deposits under the CRD Agreement. Interest expense, net of capitalized interest . The increase in interest expense was primarily due to interest from our 2029 Notes, 2030 Senior Notes and initial deposit under the CRD Agreement, which were not outstanding as of September 25, 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 (gain) 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. We expect losses from this agreement to continue through December 2025. 37 Table of Contents Income Tax Expense Income tax expense and our effective tax rate were as follows: Three months ended (in millions of U.S. Dollars) September 24, 2023 September 25, 2022 Change Income tax expense $0.2 $0.1 $0.1 100 % Effective tax rate — % (1) % The change in our effective tax rate for the three months ended September 24, 2023 compared to the three months ended September 22, 2022 was immaterial. 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, (ii) income derived from international locations with differing tax rates than the U.S., and (iii) tax credits generated. 38 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 and marketable securities. Based on past performance and current expectations, we believe our current working capital 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 develop our product portfolio 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 all of our intended capacity expansions. Sources of Liquidity The following table sets forth our cash, cash equivalents and short-term investments: (in millions of U.S. Dollars) September 24, 2023 June 25, 2023 Change Cash and cash equivalents $1,762.0 $1,757.0 $5.0 Short-term investments 1,585.6 1,197.9 387.7 Total cash, cash equivalents and short-term investments $3,347.6 $2,954.9 $392.7 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 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. In the fourth quarter of fiscal 2023, we sold $1,250 million aggregate principal amount of 2030 Senior 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 2030 Senior Notes was approximately $1,149.3 million. In the first quarter of fiscal 2024, we entered into the CRD Agreement with a customer, pursuant to which the customer will provide us up to $2 billion in unsecured deposits. Under the CRD Agreement, we received an initial deposit of $1 billion with additional deposits of up to an additional $1 billion at our request, subject to certain conditions during the 2024 calendar year. In addition, in the first quarter of fiscal 2023, we received an early payment on an unsecured promissory note in the amount of $101.8 million issued to us in connection with the sale of certain assets and subsidiaries comprising our former LED business unit to SMART on March 1, 2021. As of September 24, 2023, we had unrealized losses on our short-term investments of $20.8 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at September 24, 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 September 24, 2023 until the investments fully recover in market value. No allowance for credit losses was recorded as of September 24, 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. 39 Table of Contents Expected Uses of Liquidity We recently opened the Mohawk Valley Fab to expand capacity for production of our silicon carbide devices. We now expect to invest approximately $2.0 billion in construction, equipment and other related costs for the new facility, of which approximately $500 million is expected to be reimbursed over time by the State of New York Urban Development Corporation (doing business as Empire State Development) under a Grant Disbursement Agreement (the GDA). As of September 24, 2023, we have spent approximately $960 million and received $344.8 million in reimbursements. Additionally, we recently started construction on a new materials manufacturing facility in Siler City, North Carolina. 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 and could happen after fiscal 2024. 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. We also recently announced the intention to build a highly automated, cutting-edge wafer fabrication facility in Saarland, Germany. We expect to invest approximately $3.5 billion in construction, equipment and other related costs for the new facility, with the vast majority of such investment occurring after fiscal 2024. For fiscal 2024, we target approximately $2.0 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 Mohawk Valley Fab 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 GDA during the fiscal year, inclusive of $39.6 million received in the first quarter of fiscal 2024. In addition, we may also 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 all of our previously announced planned expansion initiatives described above. We may seek to obtain funding through, among other avenues, government funding in both the United States or Europe, public or private equity offerings and debt financings (which may involve retiring some of our existing debt). Cash Flows In summary, our cash flows were as follows: Three months ended September 24, 2023 September 25, 2022 Change Net cash used in operating activities of continuing operations ($112.7) ($6.7) ($106.0) (1,582) % Net cash (used in) provided by investing activities of continuing operations (784.2) 106.6 (890.8) (836) % Net cash provided by (used in) financing activities of continuing operations 938.4 (17.6) 956.0 5,432 % Effects of foreign exchange changes on cash and cash equivalents (0.1) (0.4) 0.3 75 % Cash used in discontinued operations ($36.4) ($9.8) (26.6) (271) % Net change in cash and cash equivalents $5.0 $72.1 ($67.1) (93) % Cash Flows from Operating Activities Net cash used in operating activities increased primarily due to an increased net loss. Cash Flows from Investing Activities Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment, and property and equipment related reimbursements. 40 Table of Contents Cash used in investing activities increased primarily due to an increase in net purchases of short-term investments of $445.8 million and an increase in net property and equipment purchases of $341.4 million as we continue to build out additional expansion facilities. In addition, cash used in investing activities increased as a result of a $101.8 million earnout payment related to the divestiture of our former LED Products segment received in the first quarter of fiscal 2023. Cash Flows from Financing Activities For the three months ended September 24, 2023, cash provided by financing activities primarily consisted of $954.0 million in net deposits from the CRD Agreement, partially offset by $15.0 million in tax withholdings on vested equity awards. For the three months ended September 25, 2022, cash used in financing activities primarily consisted of $16.9 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 September 24, 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 2023 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. 41 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 2023 Form 10-K. There have been no material changes to the amounts presented therein.