Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, 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 our consolidated financial statements included in Item 8 of this Annual Report. 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.
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
• 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 and device products in the power market, and our ability to win new designs for these applications. Demand also fluctuates based on various domestic and global economic and market cycles, continuously evolving industry supply chains, trade and tariff terms, and inflationary impacts, as well as evolving competitive dynamics in each of 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. We continue to experience increased demand for our power products designed for electrical vehicle applications, and we are working closely with our customer base to best match our supply to their demand. 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.
• 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 we 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. We have taken steps to provide continuity in supply 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.
• 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.
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Fiscal 2024 Overview
The following is a summary of our financial results for the year ended June 30, 2024:
• Our year-over-year revenue increased by $48.7 million to $807.2 million.
• Gross margin decreased to 9.6% in fiscal 2024 from 32.0% in fiscal 2023. Gross profit decreased to $77.4 million in fiscal 2024 from $242.9 million in fiscal 2023. Gross margin and gross profit for fiscal 2024 include the impacts of $124.4 million of underutilization costs primarily in connection with the start of production at the Mohawk Valley Fab, which began revenue production in late fiscal 2023. Costs related to the Mohawk Valley Fab for fiscal year 2023 and fiscal year 2022 were classified as operating expenses within factory start-up costs.
• Operating loss from continuing operations was $445.3 million in fiscal 2024 as compared to $311.8 million in fiscal 2023.
• Diluted loss per share from continuing operations was $4.56 in fiscal 2024 as compared to $2.09 in fiscal 2023.
• Combined cash, cash equivalents and short-term investments decreased to $2,174.6 million at June 30, 2024 from $2,954.9 million at June 25, 2023.
• Long-term debt, net, including convertible notes, was $6,161.1 million at June 30, 2024 and $4,175.1 million at June 25, 2023.
• Net cash used in operating activities of continuing operations was $671.3 million in fiscal 2024 as compared to $102.2 million in fiscal 2023.
• Purchases of property and equipment, net were $2,095.5 million (net of $178.5 million in reimbursements) in fiscal 2024 as compared to $794.1 million (net of $155.5 million in reimbursements) in fiscal 2023.
• Design-ins were $9.1 billion in fiscal 2024 as compared to $7.9 billion in fiscal 2023.
• Design-wins were $5.8 billion in fiscal 2024 as compared to $1.8 billion in fiscal 2023.
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, 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 are prioritizing the identification of opportunities to reduce operating costs and to optimize our capital structure in support of these investments in our business. 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 have improved yields significantly and expect that we will continue to improve yield levels to support our future growth, particularly as we transition more production to the Mohawk Valley Fab. We are also assessing the closure timeline of our existing device fabrication operations in Durham, North Carolina as part of this transition.
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 mid-term appears to be ahead of the industry's supply capabilities. For fiscal 2025, we target approximately $1.2 billion to $1.4 billion of net capital investment.
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Results of Operations
Selected consolidated statement of operations data for the years ended June 30, 2024, June 25, 2023 and June 26, 2022 is as follows:
Fiscal Years Ended
June 30, 2024 June 25, 2023 June 26, 2022
(in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue
Revenue, net $807.2 100.0 % $758.5 100.0 % $572.1 100.0 %
Cost of revenue, net 729.8 90.4 % 515.6 68.0 % 364.0 63.6 %
Gross profit 77.4 9.6 % 242.9 32.0 % 208.1 36.4 %
Research and development 201.9 25.0 % 165.7 21.8 % 142.6 24.9 %
Sales, general and administrative 246.4 30.5 % 214.3 28.3 % 183.0 32.0 %
Factory start-up costs 53.8 6.7 % 160.2 21.1 % 70.0 12.2 %
Amortization of acquisition-related intangibles 1.1 0.1 % 1.7 0.2 % 2.2 0.4 %
Loss (gain) on disposal or impairment of other assets 1.2 0.1 % 2.0 0.3 % (0.3) (0.1) %
Other operating expense 18.3 2.3 % 10.8 1.4 % 13.7 2.4 %
Operating loss (445.3) (55.2) % (311.8) (41.1) % (203.1) (35.5) %
Non-operating expense (income), net 127.2 15.8 % (52.0) (6.9) % 38.8 6.8 %
Loss before income taxes (572.5) (70.9) % (259.8) (34.3) % (241.9) (42.3) %
Income tax expense 1.1 0.1 % 0.7 0.1 % 8.2 1.4 %
Net loss from continuing operations (573.6) (71.1) % (260.5) (34.3) % (250.1) (43.7) %
Net (loss) income from discontinued operations (290.6) (36.0) % (69.4) (9.1) % 49.2 8.6 %
Net loss ($864.2) (107.1) % ($329.9) (43.5) % ($200.9) (35.1) %
Basic and diluted loss per share
Continuing operations ($4.56) ($2.09) ($2.08)
Net loss ($6.88) ($2.65) ($1.67)
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Revenue
Revenue was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Power Products $415.6 $409.2 $276.6 $6.4 2 % $132.6 48 %
Materials Products $391.6 $349.3 $295.5 $42.3 12 % $53.8 18 %
Revenue $807.2 $758.5 $572.1 $48.7 6 % $186.4 33 %
The increase in revenue for fiscal 2024 as compared to fiscal 2023 was primarily due to increased demand and production capacity in our materials product line. Additionally, our power product line revenue increased primarily in connection with the addition of revenue from automotive applications produced in our Mohawk Valley Fab in fiscal 2024. This increase has been partially offset by the impact of softening demand in industrial applications, which has been largely fulfilled from our North Carolina fab.
The increase in revenue for fiscal 2023 as compared to fiscal 2022 was primarily due to growth in our power product line, where we increased production capacity to meet strong demand. Increased production capacity for our materials product line also contributed to increased revenues.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Gross profit $77.4 $242.9 $208.1 ($165.5) (68) % $34.8 17 %
Gross margin 10 % 32 % 36 %
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 such 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 be significantly impacted in future periods from these underutilization costs in connection with our new facility construction and expansion projects, the costs of which were expensed as factory start-up costs prior to fiscal 2024.
The decrease in gross profit and gross margin in fiscal 2024 as compared to the prior years 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 $124.4 million for fiscal 2024. Costs relating to the Mohawk Valley Fab for fiscal 2023 and fiscal 2022 were expensed within factory start-up costs.
In addition, gross profit and gross margin for fiscal 2024 were impacted by a less favorable product mix, due in part to the shift of production capacity in the North Carolina fab from industrial and energy products to automotive products, which have a higher production cost in this fab.
The increase in gross profit for fiscal 2023 as compared to fiscal 2022 was primarily due to increased revenues in both product lines. This increase was offset partially by increased production costs, unfavorable product mix and higher stock-based compensation costs, which also impacted gross margin during this period.
The decrease in gross margin for fiscal 2023 as compared to fiscal 2022 was primarily due to increased production costs and unfavorable product mix. These impacts were partially offset by a gross margin improvement in fiscal 2023 from realizing the full impact of our early fiscal 2022 change in estimate to increase our expected useful lives of certain machinery and equipment assets to more closely reflect the estimated economic lives of those assets.
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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:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Research and development $201.9 $165.7 $142.6 $36.2 22 % $23.1 16 %
Percent of revenue 25 % 22 % 25 %
The increases in research and development expenses were primarily due to our continued investment in our silicon carbide technologies, including the development of existing silicon carbide materials and fabrication technology for next generation platforms and expansion of our power product portfolio.
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:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Sales, general and administrative $246.4 $214.3 $183.0 $32.1 15 % $31.3 17 %
Percent of revenue 31 % 28 % 32 %
The increase in SG&A expenses in all periods was primarily due to increased salaries and benefits from increased headcount, including incentive based stock-based compensation, as well as increases in professional services and sponsorship costs.
Factory Start-up Costs
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Factory start-up costs $53.8 $160.2 $70.0 ($106.4) (66) % $90.2 129 %
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.
Factory start-up costs in fiscal 2024 primarily related to costs incurred in connection with the construction of our new materials manufacturing facility in Siler City, North Carolina and materials expansion activities at our Durham, North Carolina location. 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 fiscal 2022 and fiscal 2023 related to the construction of this facility.
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Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology and non-compete agreements.
Amortization of intangible assets related to our acquisitions was as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Developed technology $ 1.1 $ 1.7 $ 2.2 $ (0.6) (35) % $ (0.5) (23) %
Amortization of acquisition-related intangible assets decreased in all periods presented due to certain intangible assets reaching the end of their useful lives. No other significant acquisition-related intangible activity or impairments occurred between the periods.
Loss (gain) on Disposal or Impairment of Other Assets
We dispose of a certain level of our equipment in the normal course of business as our production processes change due to production improvement initiatives or product mix changes. Due to the risk of technological obsolescence or changes in our production process, we regularly review our long-lived assets and capitalized patent costs for possible impairment.
Loss (gain) on disposal or impairment of other assets were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Loss (gain) on disposal or impairment of other assets $1.2 $2.0 ($0.3) ($0.8) (40) % $2.3 (767) %
Loss (gain) on disposal or impairment of other assets primarily relate to proceeds from asset sales offset by write-offs of fixed asset projects, as well as the write-offs of impaired or abandoned patents. Additionally, the gain on disposal or impairment of other assets for the fiscal year ended June 26, 2022 includes a $0.7 million net gain related to consideration received from the early payment of the unsecured promissory note (the Purchase Price Note) issued by SGH at the closing of the LED Business Divestiture (as defined below), as discussed in Note 3, "Discontinued Operations," in our consolidated financial statements included in Item 8 of this Annual Report.
Other Operating Expense
Other operating expense was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Project, transformation and transaction costs $18.3 $7.4 $6.4 $10.9 147 % $1.0 16 %
Factory optimization restructuring costs — — 6.1 — — % (6.1) (100) %
Severance costs — 3.4 1.2 (3.4) (100) % 2.2 183 %
Other operating expense $18.3 $10.8 $13.7 $7.5 69 % ($2.9) (21) %
Project, transformation and transaction costs primarily relate to professional services fees associated with completed and potential acquisitions and divestitures, as well as internal transformation programs focused on optimizing our administrative processes.
Factory optimization restructuring costs relate to our multi-year factory optimization restructuring plan, which was implemented in connection with our expansion activities between fiscal 2019 and fiscal 2022. As part of the factory optimization restructuring plan, we incurred restructuring charges associated with the movement of equipment as well as disposals on certain long-lived assets. The factory optimization restructuring plan concluded in fiscal 2022.
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Non-Operating Expense (Income), net
Non-operating expense (income), net was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Interest income ($135.0) ($58.2) ($11.3) ($76.8) (132) % ($46.9) (415) %
Interest expense, net of capitalized interest 246.3 42.6 25.1 203.7 478 % 17.5 70 %
Loss (gain) on legal proceedings 7.7 (50.3) — 58.0 115 % (50.3) (100) %
Loss on debt extinguishment — — 24.8 — — % (24.8) (100) %
Gain on equity investment (18.5) — — (18.5) (100) % — — %
Loss on Wafer Supply Agreement 25.3 13.6 0.8 11.7 86 % 12.8 1,600 %
Other expense, net 1.4 0.3 (0.6) 1.1 367 % 0.9 150 %
Non-operating expense (income), net $127.2 ($52.0) $38.8 $179.2 345 % ($90.8) (234) %
Interest income. The increase in interest income in fiscal 2024 and fiscal 2023 was primarily driven by increased average short-term investment balances throughout fiscal 2024. Our average short-term investment balances increased significantly from the net proceeds we received from the sale of our 2030 Senior Notes in the fourth quarter of fiscal 2023, as well as from the receipt of deposits under the CRD Agreement with Renesas America, pursuant to which we received an initial deposit of $1 billion in the first quarter of fiscal 2024 and additional deposits of $500 million each in the third and fourth quarters of fiscal 2024.
The increase in interest income in fiscal 2022 was primarily due to interest income received on our previously held note receivable from SGH in connection with the LED Business Divestiture (as defined below), partially offset by decreased investment returns from our short-term investment securities.
Interest expense, net of capitalized interest. The increase in interest expense in fiscal 2024 as compared to fiscal 2023 was primarily due to interest on deposits under the CRD Agreement, which were not outstanding as of June 25, 2023, and interest from the 2030 Senior Notes which were issued at the end of fiscal 2023. The increase in fiscal 2023 as compared to fiscal 2022 was primarily due to interest from our 2029 Notes and 2030 Senior Notes, which were not outstanding as of June 26, 2022. This increase was partially offset by a decrease in interest expense from our 2028 Notes, primarily due to the adoption of ASU 2020-06, which eliminated interest expense relating to the accretion on discount in the current period. In addition, an increase in interest expense from the 2026 Notes, the interest of which was fully capitalized in fiscal 2022 but was almost fully expensed in fiscal 2023, was offset by a decrease in interest expense from our 0.875% convertible senior notes due September 1, 2023 (the 2023 Notes), which were extinguished in the second quarter of fiscal 2022.
Loss (gain) on legal proceedings . In fiscal 2024, we recognized approximately $7.7 million of customs duties for alleged undervaluation of 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 gain recognized is net of legal fees incurred.
Loss on debt extinguishment . In the second quarter of fiscal 2022, all of our then-outstanding 2023 Notes were converted into shares of our common stock, which resulted in a loss on extinguishment of $24.8 million.
Gain on equity investment . The gain on equity investment for fiscal 2024 relates to changes in fair value of the MACOM Shares.
Loss on Wafer Supply Agreement . In connection with the completed sale of our former LED Business to 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 September 2024.
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. Income Tax Expense
Income tax expense and our effective tax rate was as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Income tax expense $1.1 $0.7 $8.2 0.4 57 % (7.5) (91) %
Effective tax rate — % — % (3) %
The change in the effective tax rate from (3)% in fiscal 2022 to 0% in fiscal 2023 and fiscal 2024 was primarily due to $7.3 million of income tax expense recognized in the second quarter of fiscal 2022 related to the restructuring of our Luxembourg holding company.
In general, the variation between our effective income tax rate and the current United States 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 United States, and (iii) tax credits generated.
Net Loss from Discontinued Operations
We have classified the results of our former RF Business as discontinued operations in our consolidated statements of operations for all periods presented. We ceased recording depreciation and amortization of long-lived assets of the RF Business upon classification as discontinued operations in August 2023.
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Net (loss) income from discontinued operations ($290.6) ($69.4) $ 49.2 ($221.2) (319) % ($118.6) (241) %
Net loss from discontinued operations in fiscal 2024 included a $204.0 million loss on sale of our former RF Business.
Net income from discontinued operations in fiscal 2022 included the receipt of an unsecured promissory note from CreeLED as additional consideration to satisfy the earnout obligations pursuant to the LED Purchase Agreement. The additional consideration was based upon the revenue and gross profit performance of our former LED Business in the first four full fiscal quarters following the closing.
Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses, debt service costs, working capital requirements and capital expenditures, 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 will be adequate to meet our cash needs 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.
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Sources of Liquidity
The following table sets forth our cash, cash equivalents and short-term investments:
(in millions of U.S. Dollars) June 30, 2024 June 25, 2023 Change
Cash and cash equivalents $1,045.9 $1,757.0 ($711.1)
Short-term investments 1,128.7 1,197.9 (69.2)
Total cash, cash equivalents and short-term investments $2,174.6 $2,954.9 ($780.3)
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 2024, we entered into the CRD Agreement with Renesas America, pursuant to which Renesas America agreed to provide us up to $2 billion in unsecured deposits, subject to certain conditions. We received an initial deposit of $1 billion in the first quarter of fiscal 2024, a second deposit of $500 million in the third quarter of fiscal 2024 and the third and final deposit of $500 million in the fourth quarter of fiscal 2024.
In the second quarter of fiscal 2024, we completed the sale of the RF Business and received approximately $75 million in cash. In the third quarter of fiscal 2024, we received a $57.5 million Land Acquisition Business Investment Grant from the North Carolina Department of Commerce.
In fiscal 2023, we issued and sold a total of $1,750.0 million aggregate principal amount of 2029 Notes and $1,250.0 million aggregate principal amount of 2030 Senior Notes, as discussed in Note 10, "Long-term Debt," to our consolidated financial statements in Item 8 of this Annual Report. The total net proceeds from the sale of the 2029 Notes were $1,718.6 million, of which we used $273.9 million to fund the cost of entering into capped call transactions. The total net proceeds from the sale of the 2030 Senior Notes were approximately $1,149.3 million. In connection with the sale of our 2030 Senior Notes, we terminated the $125.0 million secured revolving line of credit prior to its scheduled maturity date of January 9, 2026.
In fiscal 2022, all outstanding 2023 Notes were surrendered for conversion following our issuance on December 8, 2021 of a notice to holders of the 2023 Notes calling for the redemption of the remaining outstanding 2023 Notes, resulting in the settlement of the outstanding $424.8 million aggregate principal amount of 2023 Notes in approximately 7.1 million shares of our common stock. Also in fiscal 2022, we issued and sold a total of $750.0 million aggregate principal amount of 2028 Notes, as discussed in Note 10, "Long-term Debt," to our consolidated financial statements in Item 8 of this Annual Report. The total net proceeds of the 2028 Notes were $732.3 million, of which we used $108.2 million to fund the cost of entering into capped call transactions.
In addition, we received early payments on two unsecured promissory notes issued to us in connection with the sale of certain assets and subsidiaries comprising the LED Business to SMART on March 1, 2021 (the LED Business Divestiture). In the third quarter of fiscal 2022, we received an early payment in the amount of $125.0 million, along with outstanding accrued and unpaid interest as of the payment date, relating to the Purchase Price Note. In the first quarter of fiscal 2023, we received an early payment in the amount of $101.8 million in connection with the unsecured promissory note issued in the fourth quarter of fiscal 2022 as an earn-out payment.
As of June 30, 2024, we had unrealized losses on our short-term investments of $9.3 million. All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position at June 30, 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 to and we intend to hold each of the investments held with an unrealized loss as of June 30, 2024 until the investments fully recover in market value. No allowance for credit losses was recorded as of June 30, 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 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.
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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 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 June 30, 2024, we have spent approximately $1.2 billion and received $425.4 million in reimbursements.
Additionally, we recently started construction on a new materials manufacturing facility in Siler City, North Carolina. We expect to invest approximately $2.3 billion in total construction, equipment and other related costs for the facility through fiscal 2025. As of June 30, 2024, we have spent approximately $1.3 billion.
In February 2023, we announced 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 2026 or beyond. We will not commence construction of this facility until we have finalized these incentives, and we expect the vast majority of the investment to occur after fiscal 2025.
For fiscal 2025, we target approximately $1.2 billion to $1.4 billion of 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 the Mohawk Valley Fab and the construction of our new materials manufacturing facility in Siler City, North Carolina. Compared to fiscal 2024, our capital investment related to these new facilities during the next 12 months will be significantly less and will continue to decrease substantially as we complete the majority of construction related to this phase of our expansion efforts. As such, our ability to modulate capital investment up or down in response to expected production capacity requirements will continue to increase.
We have take-or-pay supplier agreements that require a minimum of $235.2 million of purchases over the next four years and a commitment to provide quarterly capacity reservation deposits with a remaining total of $21.6 million over the next 18 months, as outlined further in Note 15, "Commitments and Contingencies," to our consolidated financial statements in Item 8 of this Annual Report.
Given our current cash and investments position, we believe we will be able to fund daily operating expenses, debt service, working capital and capital requirements 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 refinancing, modifying or retiring some of our existing debt). In addition, we may also apply for and potentially sell tax credits as part of the IRA to further fund our expansion initiatives.
In addition to ordinary operating expenses, our estimated future obligations consist of leases, debt, and interest on long-term debt. For a description of contractual obligations, including lease and debt obligations, see Note 5, "Leases," Note 10, "Long-term Debt," and Note 15, "Commitments and Contingencies," in our consolidated financial statements included in Item 8 of this Annual Report.
Cash Flows
In summary, our cash flows were as follows (in millions of U.S. Dollars):
Fiscal Years Ended Year-Over-Year Change
June 30, 2024 June 25, 2023 June 26, 2022 2023 to 2024 2022 to 2023
Cash used in operating activities of continuing operations ($671.3) ($102.2) ($124.8) ($569.1) $22.6
Cash used in investing activities of continuing operations (1,940.2) (1,139.2) (382.0) (801.0) (757.2)
Cash provided by financing activities of continuing operations 1,958.0 2,597.1 615.9 (639.1) 1,981.2
Effect of foreign exchange changes (0.2) — (0.2) (0.2) 0.2
Cash used in discontinued operations (57.4) (48.2) (38.4) (9.2) (9.8)
Net increase (decrease) in cash and cash equivalents ($711.1) $1,307.5 $70.5 ($2,018.6) $1,237.0
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Cash Flows from Operating Activities
Net cash used in operating activities increased in fiscal 2024 as compared to fiscal 2023 primarily due to an increased net loss and decreased working capital as a result of inventory growth, interest payments on long-term debt and increased payments for supplier deposits.
Net cash used in operating activities decreased in fiscal 2023 as compared to fiscal 2022 primarily due to a decrease in working capital in fiscal 2023, which was primarily driven by increased customer reserve deposits received and a smaller increase in accounts receivable, net, both of which offset increased inventory growth. This was partially offset by an increase in net loss during the period.
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.
The increase in net cash used in investing activities in fiscal 2024 as compared to fiscal 2023 was primarily due to an increase in net property and equipment purchases of $1,301.4 million, partially offset by an increase in net proceeds from maturities and sales of short-term investments.
The increase in net cash used in investing activities in fiscal 2023 as compared to fiscal 2022 was primarily due to a $296.3 million increase in net property and equipment, and a $436.2 million increase in net purchases of short-term investments.
Cash Flows from Financing Activities
Net cash provided by financing activities in fiscal 2024 primarily consisted of $2.0 billion in net proceeds from the receipt of deposits under the CRD Agreement.
Net cash provided by financing activities in fiscal 2023 primarily consisted of $2.9 billion in net proceeds from issuing the 2029 Notes and the 2030 Senior Notes, partially offset by $273.9 million in cash paid for the capped call transactions in connection with issuing the 2029 Notes.
Financial and Market Risks
We are exposed to financial and market risks, including changes in interest rates, equity prices, currency exchange rates and commodities risk. We have entered, and may in the future enter, into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations and financial performance. All of the potential changes noted below are based on sensitivity analysis performed on our financial positions at June 30, 2024 and June 25, 2023. Actual results may differ materially.
Interest Rate Risk
We maintain an investment portfolio principally composed of money market funds, municipal bonds, corporate bonds, United States agency securities, United States treasury securities, commercial paper, certificates of deposit, and variable rate demand notes. In order to minimize risk, our cash management policy permits us to acquire investments rated “A” grade or better. As of June 30, 2024 and June 25, 2023, our cash equivalents and short-term investments had a fair value of $1,226.0 million and $1,456.0 million, respectively. If interest rates were to hypothetically increase by 100 basis points, the fair value of our short-term investments would decrease by $12.3 million at June 30, 2024 and $14.6 million at June 25, 2023.
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Equity Prices
In connection with the RF Business Divestiture, we received the MACOM Shares which had a market value of approximately $79.3 million as of June 30, 2024, based on the closing price of MACOM common stock on June 28, 2024, the last trading day of our fourth fiscal quarter. If quoted market values on MACOM's common stock were to hypothetically decrease 10%, the fair value of the MACOM Shares would decrease by $7.9 million at June 30, 2024.
Currency Rate and Price Risk
All of our operations have a functional currency of the United States Dollar. However, we operate internationally and have transactions denominated in foreign currencies, and therefore we are exposed to currency exchange rate risks. Fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.
Commodities
We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes. General economic conditions, market specific changes or other factors outside of our control may affect the pricing of these commodities. We do not use financial instruments to hedge commodity prices.
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 June 30, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(b) of SEC Regulation S-K.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In the application of U.S. GAAP, we are required to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.
We evaluate our estimates on an ongoing basis, including those related to revenue recognition, valuation of inventories, tax-related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our significant accounting policies and a description of recent accounting pronouncements are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting estimates and the related disclosures with the audit committee of our board of directors.
Revenue Recognition
For the year ended June 30, 2024, approximately a quarter of our revenue was from sales to distributors. Distributors stock inventory and sell our products to their own customer base, which may include value added resellers, manufacturers who incorporate our products into their own manufactured goods, or ultimate end users of our products. We recognize revenue upon shipment of our products to our distributors. This arrangement is often referred to as a “sell-in” or “point-of-purchase” model as opposed to a “sell-through” or “point-of-sale” model, where revenue is deferred and not recognized until the distributor sells the product through to their customer.
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Our distributors may be provided limited rights that allow them to return or scrap a portion of inventory (product exchange rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under our “ship and debit” program or other targeted sales incentives. When determining our net revenue, we make significant judgments and estimates corresponding with product shipments. We recognize a reserve for estimated future returns, changes in selling prices, and other targeted sales incentives when product ships. We also recognize an asset for the estimated value of product returns that we believe will be returned to inventory in the future and resold, and these estimates are based upon historical data, current economic trends, distributor inventory levels and other related factors. Our financial condition and operating results are dependent upon our ability to make reliable estimates. Actual results may vary and could have a significant impact on our operating results.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within our standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling that particular part to the customer. If we approve an allowance and the distributor resells the product to the target customer, we credit the distributor according to the allowance we approved. These credits are applied against a reserve we establish upon initial shipment of product to the distributor.
Inventories
Inventories are stated at the lower of cost or net realizable value. We write-down our inventories for estimated obsolescence equal to the difference between the cost of the inventory and its estimated market value based upon an aging analysis of the inventory on hand, specifically known inventory-related risks (such as technological obsolescence), and assumptions about future demand. We also analyze sales levels by product type, including historical and estimated future customer demand for those products to determine if any additional reserves are appropriate. For example, we adjust for items that are considered obsolete based upon changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product. In addition, our international sales and purchases are subject to numerous United States and foreign laws and regulations which may limit or restrict our sales and shipments to foreign customers. Any adjustment to our inventories as a result of an estimated obsolescence or net realizable condition is reflected as a component of our cost of revenue.
In order to determine what costs can be included in the valuation of inventories, we determine normal capacity for our manufacturing facilities based on historical patterns. If our estimates regarding customer demand are inaccurate, or market conditions or technology change in ways that are less favorable than those projected by management, we may be required to take excess capacity charges in accordance with U.S. GAAP, which could have an adverse effect on our operating results.
Deferred Tax Asset Valuation Allowances
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, “Income Taxes” (ASC 740), we evaluate all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a deferred tax asset is more likely than not to be realized. In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate if sufficient future taxable income of the right character will be generated to utilize the existing deferred tax assets by jurisdiction. This consideration includes a variety of factors such as historical and projected future taxable income and prudent and feasible tax planning strategies. When we establish or increase a valuation allowance, our income tax expense increases in the period such a determination is made; conversely, if we decrease a valuation allowance, our income tax expense decreases in the period such a determination is made.
Tax Contingencies
We are subject to periodic audits of our income tax returns by federal, state, local and foreign agencies. These audits typically include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In accordance with ASC 740, we regularly evaluate the exposures associated with our various tax filing positions. ASC 740 states that a tax benefit should not be recognized for financial statement purposes for an uncertain tax filing position where it is not more likely than not (likelihood of greater than 50%) of being sustained by the taxing authorities based on the technical merits of the position.
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In accordance with the provisions of ASC 740, we establish unrecognized tax benefits (as a reduction to the deferred tax asset or as an increase to other liabilities) to reduce some or all of the tax benefit of any of our tax positions at such time that we determine the position has become uncertain based upon one of the following conditions: the tax position is not “more likely than not” to be sustained; the tax position is “more likely than not” to be sustained, but for a lesser amount; or the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We adjust these unrecognized tax benefits, including any impact on related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay amounts in excess of what we have recognized, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash, existing deferred tax assets, and/or result in an increase in our effective tax rate in the year of resolution, whereas, a favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
Stock-Based Compensation
We account for awards of stock-based compensation under our employee stock-based compensation plans using the fair value method. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term. We currently use the Black-Scholes option-pricing model to estimate the fair value of our Employee Stock Purchase Plan (ESPP) awards. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.
Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in our financial statements. For restricted stock and stock unit awards, grant date fair value is based upon the market price of our common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term. As of June 30, 2024, we have $136.7 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 2.42 years.
We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Our determination of an estimated forfeiture rate is primarily based upon a review of historical experience but may also include consideration of other facts and circumstances we believe are indicative of future activity. The assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this recognition as compensation expense is adjusted to reflect instruments that vest.
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Long-Lived Assets
We evaluate long-lived assets such as property, equipment and finite-lived intangible assets, such as patents, for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change in the way an asset is being used, or a significant change, delay or departure in our strategy for that asset. Our assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our assumptions, which we believe are consistent with the assumptions hypothetical marketplace participants use. Factors that we must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales volumes, prices, the cost of capital, tax rates, and capital spending. These factors are often interdependent and therefore do not change in isolation. If an impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets; if so, an impairment loss is measured and recognized. Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to recognize additional impairment losses which could be material to our results of operations.
After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.
Goodwill
We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. We conduct impairment testing for goodwill at the reporting unit level. Reporting units, as defined by FASB ASC 350, “Intangibles - Goodwill and Other,” may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. We have determined that we have one reporting unit.
We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit’s carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit’s expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate, such as, unanticipated competition or slower growth rates; as well as changes in management, key personnel, strategy, and customers. If our qualitative assessment indicates that goodwill impairment is more likely than not, we determine the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
We compare the fair value of the reporting unit to its carrying value, including goodwill. We derive a reporting unit ’ s fair value through a combination of the market approach (a guideline transaction method) and the income approach (a discounted cash flow analysis). The market and income approaches require significant judgment, including (i) the estimation of future revenues, gross margins, and operating expenses, all of which are dependent on internal forecasts, current and anticipated economic conditions and trends, (ii) the selection of market multiples through an assessment of the reporting unit’s performance relative to peer competitors, (iii) the estimation of the long-term revenue growth rate and discount rate from the capital asset pricing model and (iv) the determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge. The fair values are reconciled back to our consolidated market capitalization.
If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit ’ s goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Financial and Market Risks” included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report.
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