Item 2. Management’s Discussion and Analysis
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 materials and devices for power applications. Our product families include power devices and silicon carbide and gallium nitride (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 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) in the second quarter of fiscal 2024.
The RF Business Divestiture represented a strategic shift that had 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 as of June 25, 2023. Unless otherwise noted, discussion within this Quarterly Report to the consolidated financial statements relates to our continuing 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. 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.
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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. We have successfully managed through challenges relating to obtaining certain necessary production and processing equipment thus far and have continued to see supply availabilities and lead times stabilize across many direct materials. 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 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.
• 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 materials, 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 our respective markets. These uncertainties make demand difficult to forecast for us and our customers. Recently, we and other semiconductor companies have been experiencing softening demand for power products in industrial and energy applications. Conversely, we continue to experience high 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.
• 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. 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.
• 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 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, could reduce or limit demand for, 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 associated with 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.
Overview of the nine months ended March 31, 2024
The following is a summary of our continuing operations financial results as of and for the nine months ended March 31, 2024 compared to the nine months ended March 26, 2023, unless otherwise stated.
• Our year-over-year revenue increased $50.7 million to $606.5 million.
• Gross margin decreased to 12.4% from 33.1%. Gross profit decreased to $75.0 million from $184.2 million. Gross margin and gross profit for the nine months ended March 31, 2024 include the impacts of $100.4 million of underutilization costs primarily in connection with the start of production at our silicon carbide device fabrication
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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 nine months ended March 26, 2023 were classified as operating expenses within factory start-up costs.
• Operating loss was $299.4 million compared to $222.2 million.
• Diluted loss per share was $3.18 compared to $1.36.
• Combined cash, cash equivalents and short-term investments was $2,550.9 million at March 31, 2024 and $2,954.9 million at June 25, 2023.
• Long-term debt, net was $5,664.3 million at March 31, 2024 and $4,175.1 million at June 25, 2023.
• Cash used in operating activities was $431.8 million compared to $63.5 million.
• Purchases of property and equipment, net were $1,451.3 million (net of $178.4 million in reimbursements) compared to $393.9 million (net of $131.0 million in reimbursements).
• Design-ins were $7.1 billion compared to $6.5 billion.
• Design-wins were $5.3 billion compared to $1.5 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 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 renovation 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 of production, 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 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
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 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.
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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 was a 14-week fiscal quarter. Fiscal 2023 was a 52-week fiscal year.
Results of Operations
Selected consolidated statements of operations data for the three and nine months ended March 31, 2024 and March 26, 2023 were as follows:
Three months ended Nine months ended
March 31, 2024 March 26, 2023 March 31, 2024 March 26, 2023
(in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue
Revenue, net $200.7 100.0 % $192.6 100.0 % $606.5 100.0 % $555.8 100.0 %
Cost of revenue, net 178.2 88.8 % 132.8 69.0 % 531.5 87.6 % 371.6 66.9 %
Gross profit 22.5 11.2 % 59.8 31.0 % 75.0 12.4 % 184.2 33.1 %
Research and development 52.5 26.2 % 42.4 22.0 % 141.9 23.4 % 122.1 22.0 %
Sales, general and administrative 55.8 27.8 % 55.1 28.6 % 184.8 30.5 % 155.5 28.0 %
Factory start-up costs 14.4 7.2 % 44.6 23.2 % 33.3 5.5 % 120.6 21.7 %
Amortization of acquisition-related intangibles 0.3 0.1 % 0.2 0.1 % 0.9 0.1 % 1.3 0.2 %
Loss on disposal or impairment of other assets 0.6 0.3 % 1.7 0.9 % 1.0 0.2 % 1.9 0.3 %
Other operating expense 5.3 2.6 % 1.5 0.8 % 12.5 2.1 % 5.0 0.9 %
Operating loss (106.4) (53.0) % (85.7) (44.5) % (299.4) (49.4) % (222.2) (40.0) %
Non-operating expense (income), net 42.4 21.1 % (2.9) (1.5) % 98.7 16.3 % (53.4) (9.6) %
Loss before income taxes (148.8) (74.1) % (82.8) (43.0) % (398.1) (65.6) % (168.8) (30.4) %
Income tax expense 0.1 — % 0.3 0.2 % 0.6 0.1 % 0.5 0.1 %
Net loss from continuing operations (148.9) (74.2) % (83.1) (43.1) % (398.7) (65.7) % (169.3) (30.5) %
Net loss from discontinued operations — — % (16.4) (8.5) % (290.6) (47.9) % (47.3) (8.5) %
Net loss ($148.9) (74.2) % ($99.5) (51.7) % ($689.3) (113.7) % ($216.6) (39.0) %
Basic and diluted loss per share
Continuing operations ($1.18) ($0.67) ($3.18) ($1.36)
Discontinued operations — (0.13) (2.32) (0.38)
Revenue
Revenue was as follows:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Power Products $102.1 $101.6 $0.5 — % $311.0 $302.1 $8.9 3 %
Materials Products $98.6 $91.0 $7.6 8 % $295.5 $253.7 $41.8 16 %
Revenue $200.7 $192.6 $8.1 4 % $606.5 $555.8 $50.7 9 %
Revenue for the three and nine months ended March 31, 2024 compared to the three and nine months ended March 26, 2023 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 Hong Kong.
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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 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Gross profit $22.5 $59.8 ($37.3) (62) % $75.0 $184.2 ($109.2) (59) %
Gross margin 11.2 % 31.0 % 12.4 % 33.1 %
As explained further below in Factory Start-up Costs, 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 continue to 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 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.
The decrease in gross profit and gross margin for both periods presented as compared to the prior year periods 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 $30.4 million and $100.4 million for the three and nine months ended March 31, 2024, respectively. Costs relating to the Mohawk Valley Fab for the three and nine months ended March 26, 2023 were expensed within factory start-up costs.
In addition, gross profit and gross margin for the nine months ended March 31, 2024 were impacted by a less favorable product mix, partially offset by an increase in revenue in both product lines.
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. 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.
Research and development expenses were as follows:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Research and development $52.5 $42.4 $10.1 24 % $141.9 $122.1 $19.8 16 %
Percent of revenue 26 % 22 % 23 % 22 %
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.
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Sales, General and Administrative
Sales, general and administrative (SG&A) expenses are comprised of costs primarily associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and substantially 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 costs.
SG&A expenses were as follows:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Sales, general and administrative $55.8 $55.1 $0.7 1 % $184.8 $155.5 $29.3 19 %
Percent of revenue 28 % 29 % 30 % 28 %
The increase in SG&A expenses for both periods presented was primarily due to increased salaries and benefits, including stock-based compensation, as well as increases in professional services, sponsorship costs, and travel expenses.
Factory Start-up Costs
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Factory start-up costs $14.4 $44.6 ($30.2) (68) % $33.3 $120.6 ($87.3) (72) %
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.
Start-up costs for the three and nine months ended March 31, 2024 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 decrease in factory start-up costs as compared to the prior year periods is due to the start of revenue generating production at our Mohawk Valley Fab in the fourth quarter of fiscal 2023 and the associated transition of factory operating expenses to cost of production. The majority of start-up costs for the three and nine months ended March 26, 2023 related to the construction of this facility.
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 Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Amortization of acquisition-related intangibles $0.3 $0.2 $0.1 50 % $0.9 $1.3 ($0.4) (31) %
No significant acquisition-related intangible activity or impairments occurred between the periods presented.
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.
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Loss on disposal or impairment of other assets was as follows:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Loss on disposal or impairment of other assets $0.6 $1.7 ($1.1) (65) % $1.0 $1.9 ($0.9) (47) %
Loss on disposal or impairment of other assets primarily relate to write-offs of fixed assets, as well as the write-offs of impaired or abandoned patents, partially offset by proceeds from asset sales.
Other Operating Expense
Other operating expense was as follows:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Project, transformation and transaction costs $ 5.3 $ 0.9 $ 4.4 489 % $ 12.5 $ 2.9 $ 9.6 331 %
Executive severance costs — 0.6 (0.6) (100) % — 1.9 (1.9) (100) %
Restructuring costs — — — — % — 0.2 (0.2) (100) %
Other operating expense $5.3 $1.5 $3.8 253 % $12.5 $5.0 $7.5 150 %
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 severance and restructuring costs.
Non-Operating Expense (Income), net
Non-operating expense (income), net was comprised of the following:
Three months ended Nine months ended
(in millions of U.S. Dollars) March 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Interest income ($30.1) ($22.2) ($7.9) (36) % ($108.9) ($38.1) ($70.8) (186) %
Interest expense, net of capitalized interest 59.5 14.1 45.4 322 % 185.5 26.7 158.8 595 %
Loss (gain) on legal proceedings 7.7 — 7.7 100 % 7.7 (50.3) 58.0 115 %
Loss on Wafer Supply Agreement 6.9 4.8 2.1 44 % 20.4 7.3 13.1 179 %
Gain on equity investment (1.9) — (1.9) (100) % (7.3) — (7.3) (100) %
Other expense, net 0.3 0.4 (0.1) (25) % 1.3 1.0 0.3 30 %
Non-operating expense (income), net $42.4 ($2.9) $45.3 1,562 % $98.7 ($53.4) $152.1 285 %
Interest income. The increase in interest income in both periods was primarily driven by increased short-term investment balances. Our average short-term investment balances increased significantly from the net proceeds we received from the sale of our senior secured notes due 2030 (the 2030 Senior Notes) in the fourth quarter of fiscal 2023, as well as from the receipts of 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 and an additional deposit of $500 million in the third quarter of fiscal 2024.
Interest expense, net of capitalized interest . The increase in interest expense was primarily due to interest from our 2030 Senior Notes and deposits under the CRD Agreement, which were not outstanding as of March 26, 2023.
Loss (gain) on legal proceedings . In the third quarter of fiscal 2024, we accrued a liability for payment of customs duties totaling approximately $7.7 million for alleged undervalued duties related to transactions by our former Lighting Products business unit from 2012 to 2017. In fiscal 2023, we received an arbitration award in relation to a former customer failing to fulfill contractual obligations to purchase a certain amount of product over a period of time. The arbitration award is recognized as non-operating income, net of legal fees incurred.
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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 fully amortized in the second quarter of fiscal 2023. 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 gain on equity investment for the three and nine months ended March 31, 2024 was due to MACOM's share price increasing 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 second fiscal quarter, and to $95.64 at March 28, 2024, the last trading day of the third fiscal quarter.
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 31, 2024 March 26, 2023 Change March 31, 2024 March 26, 2023 Change
Income tax expense $0.1 $0.3 ($0.2) (67) % $0.6 $0.5 $0.1 20 %
Effective tax rate — % — % — % — %
The change in our effective tax rate for the three and nine months ended March 31, 2024 compared to the three and nine months ended March 26, 2023 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.
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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) March 31, 2024 June 25, 2023 Change
Cash and cash equivalents $1,142.4 $1,757.0 ($614.6)
Short-term investments 1,408.5 1,197.9 210.6
Total cash, cash equivalents and short-term investments $2,550.9 $2,954.9 ($404.0)
The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories, partially 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 Products 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 our 1.875% convertible senior notes due December 1, 2029 (the 2029 Notes), as discussed in Note 9, “Long-term Debt,” in our unaudited 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 unaudited 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, subject to certain conditions. Under the CRD Agreement, we received an initial deposit of $1 billion in the first quarter of fiscal 2024 with the option to receive additional deposits up to $1 billion at our request, subject to certain conditions during the 2024 calendar year. We received a second deposit of $500 million in the third quarter of fiscal 2024.
In the second quarter of fiscal 2024, we completed the sale of our RF product line and received approximately $75 million in cash.
As of March 31, 2024, we had unrealized losses on our short-term investments of $10.9 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at March 31, 2024 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 and intend to hold each of the investments held with an unrealized loss as of March 31, 2024 until the investments fully recover in market value. No allowance for credit losses was recorded as of March 31, 2024.
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
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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 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 March 31, 2024, we have spent approximately $1.1 billion and received $425.4 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, if at all, in fiscal 2025 or beyond. In addition, the facility is 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 announced in February 2023 the intention to build a highly automated, cutting-edge wafer fabrication facility in Saarland, Germany. We are continuing to work with the European Union, German and Saarland governments on the incentive package for this facility. The timing and amount of these incentives are uncertain and could happen, if at all, in fiscal 2025 or beyond. We will not commence construction of this facility until we have finalized these incentives and we expect the vast majority of investment to occur 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 $144 million of expected reimbursements from the GDA during the fiscal year, inclusive of $120.7 million received in the first three quarters of fiscal 2024. Our target net capital investment figure is also net $57.5 million for a Land Acquisition Business Investment Grant from the State of North Carolina, which was received in the third 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 take-or-pay supplier agreements that require a minimum of $261.0 million of purchases over the next five years and a commitment to provide quarterly capacity reservation deposits with a remaining total of $28.1 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. We may seek to obtain funding through, among other avenues, government funding in both the United States and Europe, public or private equity offerings and debt financings (which may involve retiring some of our existing debt).
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Cash Flows
In summary, our cash flows were as follows:
Nine months ended
March 31, 2024 March 26, 2023 Change
Net cash used in operating activities of continuing operations ($431.8) ($63.5) ($368.3) (580) %
Net cash used in investing activities of continuing operations (1,571.4) (994.3) (577.1) (58) %
Net cash provided by financing activities of continuing operations 1,446.1 1,437.0 9.1 1 %
Effects of foreign exchange changes on cash and cash equivalents (0.1) — (0.1) — %
Cash used in discontinued operations ($57.4) ($33.6) (23.8) (71) %
Net change in cash and cash equivalents ($614.6) $345.6 ($960.2) (278) %
Cash Flows from Operating Activities
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 payments for supplier deposits and timing of payables.
Cash Flows from Investing Activities
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 $1,057.4 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 $508.5 million.
In addition, the nine months ended March 31, 2024 included $75.6 million in net cash received in connection with the completed RF Business Divestiture and the nine months ended March 26, 2023 included a $101.8 million earnout payment related to the divestiture of our former LED Products segment.
Cash Flows from Financing Activities
For the nine months ended March 31, 2024, cash provided by financing activities primarily consisted of $1,454.0 million in net deposits from the CRD Agreement and $10.9 million of proceeds from the issuance of common stock, partially offset by $17.5 million in tax withholdings on vested equity awards.
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.
Off-Balance Sheet Arrangements
As of March 31, 2024, we did not have any 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.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.