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Item 2. Management’s Discussion and Analysis

2024-02-01 compared with 2023-11-02 · 116 added, 106 removed, 220 unchanged (50% of the section changed)

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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.

(Wolfspeed, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide materials and devices for power applications.

Our product families include power devices and silicon carbide and GaN materials.

Our products are targeted for various applications such as electric vehicles, fast charging and renewable energy and storage.

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).

Our materials products are also used in military communications, radar, satellite and telecommunication applications.

During and prior to fiscal 2024, we designed, manufactured and sold radio-frequency (RF) devices.

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 completed the sale of certain assets comprising our former 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.

Additionally, the related assets and liabilities associated with the transaction are classified as held for sale in the consolidated balance sheets as of June 25, 2023.

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.

The majority of our products are manufactured at our production facilities located in North Carolina, New York and Arkansas.

We also use contract manufacturers, some of which include captive lines, for certain products and aspects of product fabrication, assembly and packaging.

We operate research and development facilities in North Carolina, Arkansas and New York.

Wolfspeed, Inc.

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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.

In addition, although we have not experienced significant impacts to date, the ongoing military conflict between Russia and Ukraine and the ongoing conflicts in the Middle East 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.

We have taken steps to provide continuity to our customers to the extent possible, including entering into purchase agreements and providing capacity 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.

Our potential for growth depends significantly on the continued adoption of silicon carbide materials, device products in the power markets and our ability to win new designs for these applications.

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.

Recently, we and other semiconductor companies have been experiencing softening demand for power products in industrial and energy applications.

Conversely, we are experiencing significantly higher demand for our power products designed for electrical vehicle 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.

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

In the near term, however, we expect to face production capacity constraints while we continue to work to bring additional capacity online.

• Intense and Constantly Evolving Competitive Environment.

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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, 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.

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 increase levels of product 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.

Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, geopolitical, economic and regulatory environment in 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 announced export restriction of gallium and germanium (two metals used in the manufacturing of semiconductors and electronics) could reduce or limit demand for, or increase the cost of production of, our products in certain markets.

• Technological Innovation and Advancement.

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• 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.

Market participants rely on patented and non-patented proprietary information associated with product development, manufacturing capabilities and other core competencies of their business.

Protection of intellectual property is critical.

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

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.

Overview of the six months ended December 31, 2023

The following is a summary of our continuing operations financial results as of and for the six months ended December 31, 2023 compared to the six months ended December 25, 2022, unless otherwise stated.

• Our year-over-year revenue increased $42.6 million to $405.8 million.

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Gross profit decreased to $52.5 million from $124.4 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.

Gross margin and gross profit for the six months ended December 31, 2023 include the impacts of $70.0 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 related to the Mohawk Valley Fab for the six months ended December 25, 2022 were classified as operating expenses within factory start-up costs.

• Operating loss was $193.0 million compared to $136.5 million.

• Diluted loss per share was $1.99 compared to $0.69.

• 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.

• Combined cash, cash equivalents and short-term investments was $2,635.7 million at December 31, 2023 and $2,954.9 million at June 25, 2023.

• Long-term debt, net was $5,167.6 million at December 31, 2023 and $4,175.1 million at June 25, 2023.

• Cash used in operating activities was $295.6 million compared to $69.9 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 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.

The strength of our balance sheet provides us the ability to invest in our business and increase production capacity, 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 purchase of an epitaxy facility in Farmers Branch, Texas and our 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.

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In addition, we are focused on improving the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex.

Despite increased complexities in our manufacturing 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.

Despite increased complexities in our manufacturing processes, we believe we are in a favorable 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, although demand in the short-term and mid-term appears to be ahead of the industry's supply capabilities.

For fiscal 2024, we have targeted approximately $2.0 billion of net capital investment.

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.

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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.

Design-wins reflect each project's entire commitment at the time this criterion 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.

Fiscal Quarters

Our fiscal quarters end on the last Sunday of the month in September, December, March and June.

Each fiscal quarter is generally 13 weeks as part of a 52-week fiscal year.

Occasionally we have a 53-week fiscal year, and in those instances, one quarter within the fiscal year is comprised of 14 weeks instead of 13 weeks.

Fiscal 2024 is a 53-week fiscal year, and the second quarter of fiscal 2024 is a 14-week fiscal quarter.

Fiscal 2023 was a 52-week fiscal year, and the second quarter of fiscal 2023 was a 13-week quarter.

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

Selected consolidated statements of operations data for the three and six months ended December 31, 2023 and December 25, 2022 were as follows:

Three months ended Six months ended

December 31, 2023 December 25, 2022 December 31, 2023 December 25, 2022

(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 $208.4 100.0 % $173.8 100.0 % $405.8 100.0 % $363.2 100.0 %

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Factory start-up costs 10.5 5.0 37.6 21.6 18.9 4.7 76.0 20.9

Amortization or impairment of acquisition-related intangibles 0.3 0.2 0.5 0.3

Amortization of acquisition-related intangibles 0.3 0.1 0.6 0.3 0.6 0.1 1.1 0.3

Loss on disposal or impairment of other assets 0.3 0.1 0.1 0.1 0.4 0.1 0.2 0.1

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Revenue was as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Power Products $107.7 $96.0 $11.7 12 % $208.9 $200.5 $8.4 4 %

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Revenue $208.4 $173.8 $34.6 20 % $405.8 $363.2 $42.6 12 %

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.

Revenue for the three and six months ended December 31, 2023 compared to the three and six months ended December 25, 2022 increased primarily due to growth in our materials product line, where we improved output to meet strong demand.

Additionally, our power product line revenue increased primarily in connection with the addition of revenue from our Mohawk Valley Fab in fiscal 2024, partially offset by the impact of softening demand in industrial applications in China.

Gross Profit and Gross Margin

Gross profit and gross margin were as follows:

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Gross profit $27.8 $56.7 ($28.9) (51) % $52.5 $124.4 ($71.9) (58) %

Gross margin 13.3 % 32.6 % 12.9 % 34.3 %

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.

The decrease in gross profit and gross margin for both periods presented was primarily due to 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.

Underutilization costs were $35.6 million and $70.0 million for the three and six months ended December 31, 2023, respectively.

Costs relating to the Mohawk Valley Fab for the three and six months ended December 25, 2022 were expensed within factory start-up costs.

In addition, gross profit and gross margin for the six months ended December 31, 2023 were adversely impacted by product mix.

The decrease in gross profit and gross margin for both periods presented was partially offset by impacts from increased revenues in both product lines.

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.

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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.

We expect gross profit and gross margin to continue 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 fiscal 2024.

Research and Development

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Research and development expenses were as follows:

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Research and development $45.3 $39.4 $5.9 15 % $89.4 $79.7 $9.7 12 %

Percent of revenue 22 % 23 % 22 % 22 %

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.

The increase in research and development expenses was primarily due to our continued investment in our 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.

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SG&A expenses were as follows:

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Sales, general and administrative $64.9 $50.4 $14.5 29 % $129.0 $100.4 $28.6 28 %

Percent of revenue 31 % 29 % 32 % 28 %

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.

The increase in SG&A expenses for both periods presented 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, sponsorship costs and IT expenses.

Factory Start-up Costs

Three months ended

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Factory start-up costs $10.5 $37.6 ($27.1) (72) % $18.9 $76.0 ($57.1) (75) %

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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.

The majority of start-up costs for the three and six months ended December 31, 2022 related to the construction of this facility.

For the three and six months ended December 31, 2023, the costs relating to this facility were expensed as part of cost of production.

Start-up costs for the three and six months ended December 31, 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

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

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Amortization of acquisition-related intangibles $0.3 $0.6 ($0.3) (50) % $0.6 $1.1 ($0.5) (45) %

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

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Loss on disposal or impairment of other assets $0.3 $0.1 $0.2 200 % $0.4 $0.2 $0.2 100 %

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Other operating expense was as follows:

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Project, transformation and transaction costs 4.6 1.1 3.5 318 % 7.2 2.0 5.2 260 %

Executive severance costs — 0.3 (0.3) (100) % — 1.3 (1.3) (100) %

Restructuring costs — 0.2 (0.2) (100) % — 0.2 (0.2) (100) %

Other operating expense $4.6 $1.6 $3.0 188 % $7.2 $3.5 $3.7 106 %

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.

Other operating expense increased in both periods presented primarily due to increased professional service fees, which are associated with completed and potential strategic transactions, including divestitures, as well as work related to obtaining government incentives both in the United States and Europe, partially offset by decreases in personnel related severance and restructuring costs.

Non-Operating Expense (Income), net

Non-operating expense (income), net was comprised of the following:

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Interest income ($38.2) ($11.6) ($26.6) 229 % ($78.8) ($15.9) ($62.9) 396 %

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

Loss (gain) on Wafer Supply Agreement 6.9 (0.1) 7.0 (7,000) %

Loss on Wafer Supply Agreement 6.6 2.6 4.0 154 % 13.5 2.5 11.0 440 %

Gain on equity investment (5.4) — (5.4) 100 % (5.4) — (5.4) 100 %

Other, net 0.5 1.1 (0.6) (55) % 1.0 0.6 0.4 67 %

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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.

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 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 from an Unsecured Customer Refundable Deposit Agreement (the CRD Agreement) with a customer, pursuant to which we received an initial deposit of $1 billion in the first quarter of fiscal 2024.

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.

The increase in interest expense was primarily due to interest from our 2030 Senior Notes and initial deposit under the CRD Agreement, which were not outstanding as of December 31, 2022, and interest from our 2029 Notes, which were issued near the end of the second quarter of fiscal 2023.

Gain on arbitration proceedings .

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The gain recognized is net of legal fees incurred.

Loss (gain) on Wafer Supply Agreement.

Loss on Wafer Supply Agreement.

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

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We expect losses from this agreement to continue through December 2025.

Gain on equity investment.

In connection with the completed RF Business Divestiture, we received shares of MACOM common stock as a portion of the overall consideration received for the sale.

The closing price of MACOM's common stock increased from $85.41 at December 1, 2023, the last trading day before the closing date of the RF Business Divestiture, to $92.95 at December 29, 2023, the last trading day of the current fiscal quarter.

Income Tax Expense

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

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(in millions of U.S.

Dollars) September 24, 2023 September 25, 2022 Change

Dollars) December 31, 2023 December 25, 2022 Change December 31, 2023 December 25, 2022 Change

Income tax expense $0.3 $0.1 $0.2 200 % $0.5 $0.2 $0.3 150 %

Effective tax rate — % — % — % — %

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.

The change in our effective tax rate for the three and six months ended December 31, 2023 compared to the three and six months ended December 25, 2022 was immaterial.

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

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(in millions of U.S.

Dollars) September 24, 2023 June 25, 2023 Change

Dollars) December 31, 2023 June 25, 2023 Change

Cash and cash equivalents $904.4 $1,757.0 ($852.6)

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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 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.

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.

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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.

In the second quarter of fiscal 2024, we completed the sale of our RF product line and received approximately $75 million in cash, subject to a customary purchase price adjustment.

As of December 31, 2023, we had unrealized losses on our short-term investments of $12.3 million.

All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at December 31, 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.

We believe we are able to and we intend to hold each of the investments held with an unrealized loss as of December 31, 2023 until the investments fully recover in market value.

No allowance for credit losses was recorded as of December 31, 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.

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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.

We opened the Mohawk Valley Fab in the fourth quarter of fiscal 2022 to expand capacity for production of our silicon carbide devices and started revenue generating production at the facility in the fourth quarter of fiscal 2023.

We now expect to invest approximately $2.0 billion in total 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 December 31, 2023, we have spent approximately $1.0 billion and received $384.0 million in reimbursements.

Additionally, we recently started construction on a new materials manufacturing facility in Siler City, North Carolina.

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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 also announced in February 2023 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.

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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.

Our target net capital investment figure is net of approximately $150 million of expected reimbursements from the GDA during the fiscal year, inclusive of $79.2 million received in the first and second quarters 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.

We have take-or-pay supplier agreements that require a minimum of $268.2 million of purchases over the next five years and a commitment to provide quarterly capacity reservation deposits with a remaining total of $33.8 million, 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.

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In summary, our cash flows were as follows:

Three months ended

September 24, 2023 September 25, 2022 Change

Six months ended

December 31, 2023 December 25, 2022 Change

Net cash used in operating activities of continuing operations ($295.6) ($69.9) ($225.7) (323) %

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 %

Net cash used in investing activities of continuing operations (1,446.7) (717.7) (729.0) (102) %

Net cash provided by financing activities of continuing operations 947.0 1,437.3 (490.3) (34) %

Effects of foreign exchange changes on cash and cash equivalents 0.1 — 0.1 — %

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Cash Flows from Operating Activities

Net cash used in operating activities increased primarily due to an increased net loss.

Net cash used in operating activities of continuing operations increased primarily due to an increased net loss and decreased working capital as a result of inventory growth, increased spending on customer deposits and timing of payables.

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.

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.

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

Cash used in investing activities of continuing operations increased primarily due to an increase in net property and equipment purchases of $809.4 million as we continue to build out additional expansion facilities.

This was partially offset by a decrease in net purchases of short-term investments of $108.8 million.

In addition, the six months ended December 31, 2023 included $75.6 million in net cash received in connection with the completed RF Business Divestiture and the six months ended December 25, 2022 included a $101.8 million earnout payment related to the divestiture of our former LED Products segment.

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.

For the six months ended December 31, 2023, cash provided by financing activities primarily consisted of $954.0 million in net deposits from the CRD Agreement and $10.9 million of proceeds from the issuance of common stock, partially offset by $16.7 million in tax withholdings on vested equity awards.

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.

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 24, 2023, we did not have any off-balance sheet arrangements.

As of December 31, 2023, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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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.

Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about our market risks, see “Part II.

Quantitative and Qualitative Disclosures About Market Risk” of the 2023 Form 10-K.

There have been no material changes to the amounts presented therein.

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