WOLFSPEED, INC. 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 theU.S. federal securities laws and the rules and regulations of theSecurities and Exchange Commission (theSEC ), 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 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 endedJune 30, 2019 . 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. OverviewCree, Inc. (Cree, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials, products for power and radio-frequency (RF) applications and specialty lighting-class light emitting diode (LED) products. Our silicon carbide and gallium nitride (GaN) materials and products are targeted for applications such as transportation, power supplies, inverters, wireless systems, and our LEDs are targeted for indoor and outdoor lighting, electronic signs and signals and video displays. We operate in two reportable segments: •Wolfspeed, which consists of silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon. Our materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. Our materials products and RF devices are used in military communications, radar, satellite and telecommunication applications. •LED Products, which consists of LED chips and LED components. Our LED products enable our customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications. In addition, we previously designed, manufactured and sold LED lighting fixtures and lamps for the commercial, industrial and consumer markets. We referred to these product lines as the Lighting Products business unit. OnMay 13, 2019 , we sold our Lighting Products business unit toIDEAL Industries, Inc. (IDEAL) and have classified this business unit as discontinued operations. The Lighting Products business unit represented the Lighting Products segment disclosed in our historical financial statements. The majority of our products are manufactured at our production facilities located inNorth Carolina ,California ,Arkansas andChina . We also use contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. We operate research and development facilities inNorth Carolina ,Arizona ,Arkansas ,California andChina (includingHong Kong ).Cree, Inc. is aNorth Carolina corporation established in 1987, and our headquarters are inDurham, North Carolina . For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 1 of this Quarterly Report. 31 -------------------------------------------------------------------------------- Table of Contents 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 silicon carbide power devices, GaN and silicon RF devices, and LEDs. Our potential for growth depends significantly on the adoption of silicon carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market, the continued adoption of LEDs and LED lighting, and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and 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, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets. •Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development and production equipment. Product pricing pressures exist as 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, RF and LED markets we serve. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers. •Technological Innovation and Advancement. Innovations and advancements in materials, power, RF, and LED technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets. •Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common. Overview of the six months endedDecember 29, 2019 The following is a summary of our financial results for the six months endedDecember 29, 2019 : •Revenue decreased to$482.7 million for the six months endedDecember 29, 2019 from$554.7 million for the six months endedDecember 30, 2018 . •Gross profit decreased to$136.1 million for the six months endedDecember 29, 2019 from$201.8 million for the six months endedDecember 30, 2018 . Gross margin was 28.2% for the six months endedDecember 29, 2019 and 36.4% for the six months endedDecember 30, 2018 . •Operating loss was$95.3 million for the six months endedDecember 29, 2019 compared to operating income of$20.8 million for the six months endedDecember 30, 2018 . •Diluted loss per share from continuing operations was$0.84 for the six months endedDecember 29, 2019 compared to$0.01 for the six months endedDecember 30, 2018 . •Combined cash, cash equivalents and short-term investments was$951.5 million atDecember 29, 2019 and$1,051.4 million atJune 30, 2019 . •Cash used in operating activities from continuing operations was$11.8 million for the six months endedDecember 29, 2019 compared to cash provided by operating activities from continuing operations of$109.8 million for the six months endedDecember 30, 2018 . •Purchases of property and equipment were$101.0 million for the six months endedDecember 29, 2019 compared to$63.2 million for the six months endedDecember 30, 2018 . 32 -------------------------------------------------------------------------------- Table of Contents Business Outlook We are uniquely positioned as an innovator in both of our business segments. The strength of our balance sheet and operating cash flow provides us the ability to invest in our businesses, as indicated by our planned construction of a state-of-the-art, automated 200mm capable silicon carbide and GaN fabrication facility and a large materials factory to expand our silicon carbide capacity which was announced inMay 2019 . We are focused on the following priorities to support our goals of delivering higher revenue and shareholder returns over time: •Wolfspeed - invest in the business to expand the scale, further develop the technologies, and accelerate the growth opportunities of silicon carbide materials, silicon carbide power devices and modules, and GaN and silicon RF devices. •LED Products - focus our efforts where our best-in-class technology and application-optimized solutions are differentiated and valued. Results of Operations Selected consolidated statements of operations data for the three and six months endedDecember 29, 2019 andDecember 30, 2018 is as follows: Three months ended Six months endedDecember 29, 2019 December 30, 2018 December 29, 2019 December 30, 2018 (in millions ofU.S. Dollars, except share data) Dollars % of Revenue Dollars % of Revenue Amount % of Revenue Amount % of Revenue Revenue, net$239.9 100.0 %$280.5 100.0 %$482.7 100.0 %$554.7 100.0 % Cost of revenue, net 178.0 74.2 177.0 63.1 346.6 71.8 352.9 63.6 Gross profit 61.9 25.8 103.5 36.9 136.1 28.2 201.8 36.4 Research and development 47.3 19.7 40.2 14.3 91.0 18.9 76.5 13.8 Sales, general and administrative 52.8 22.0 49.2 17.5 110.4 22.9 93.1 16.8 Amortization or impairment of acquisition-related intangibles 3.6 1.5 3.9 1.4 7.2 1.5 7.8 1.4 Loss on disposal or impairment of other assets 0.8 0.3 - - 1.8 0.4 0.4 0.1 Other operating expense 13.8 5.8 0.2 0.1 21.0 4.4 3.2 0.6 Operating (loss) income (56.4) (23.5) 10.0 3.6 (95.3) (19.7) 20.8 3.7 Non-operating (income) expense, net (5.1) (2.1) 5.6 2.0 (6.7) (1.4) 15.3 2.8 (Loss) income before income taxes (51.3) (21.4) 4.4 1.6 (88.6) (18.4) 5.5 1.0 Income tax expense 1.2 0.5 4.6 1.6 1.7 0.4 6.5 1.2 Net loss from continuing operations ($52.5 ) (21.9) ($0.2 ) (0.1) ($90.3 ) (18.7) ($1.0 ) (0.2) Net loss from discontinued operations - - (2.3) (0.8) - - (12.6) (2.3) Net loss (52.5) (21.9) (2.5) (0.9) (90.3) (18.7) (13.6) (2.5) Net income attributable to non-controlling interest 0.3 0.1 - - 0.3 0.1 - - Net loss attributable to controlling interest ($52.8 ) (22.0) ($2.5 ) (0.9) ($90.6 ) (18.8) ($13.6 ) (2.5) Basic and diluted loss per share Continuing operations attributable to controlling interest ($0.49 ) $- ($0.84 ) ($0.01 ) Net loss attributable to controlling interest ($0.49 ) ($0.02 ) ($0.84 ) ($0.13 ) 33
-------------------------------------------------------------------------------- Table of Contents Revenue
Revenue was comprised of the following:
Three months ended Six months ended
(in millions of U.S. December 29, December 30, December 29, December 30,
Dollars) 2019 2018 Change 2019 2018 Change
Wolfspeed revenue $120.7 $135.3 ($14.6 ) (11) % $248.4 $262.7 ($14.3 ) (5) %
Percent of revenue 50 % 48 % 51 % 47 %
LED Products revenue 119.2 145.2 (26.0) (18) % 234.3 292.0 (57.7) (20) %
Percent of revenue 50 % 52 % 49 % 53 %
Total revenue $239.9 $280.5 ($40.6 ) (14) % $482.7 $554.7 ($72.0 ) (13) %
Wolfspeed Segment Revenue
The decrease in Wolfspeed segment revenue for the three and six months ended
December 29, 2019 compared to the three and six months ended December 30, 2018
was due to weakening demand in Power and RF product lines and the continued
trade dispute between the United States and China .
For the three months ended December 29, 2019 , the Wolfspeed segment had a 6%
increase in overall average selling prices (ASP) offset by a 16% decrease in the
number of units sold. The increase in ASP was due to a greater mix of higher
priced products.
For the six months ended December 29, 2019 , the Wolfspeed segment had a 27%
increase in ASP offset by a 26% decrease in the number of units sold. The
increase in ASP was due to a greater mix of higher priced products.
LED Products Segment Revenue
LED Products segment revenue for both the three and six months ended
December 29, 2019 decreased due to an overall market pause in global LED demand.
The LED Products segment had an 8% decrease in the number of units sold and an
11% decrease in ASP for the three months ended December 29, 2019 and an 8%
decrease in the number of units sold and a 12% decrease in ASP for the six
months ended December 29, 2019 .
Gross Profit and Gross Margin
Gross profit and gross margin were as follows:
Three months ended Six months ended
(in millions of U.S. December 29, December 30, December 29, December 30,
Dollars) 2019 2018 Change 2019 2018 Change
Wolfspeed gross profit $41.8 $64.7 ($22.9 ) (35) % $100.8 $125.1 ($24.3 ) (19) %
Wolfspeed gross margin 34.6 % 47.8 % 40.6 % 47.6 %
LED Products gross profit 26.5 43.5 (17.0) (39) % 48.6 84.8 (36.2) (43) %
LED Products gross margin 22.2 % 30.0 % 20.7 % 29.0 %
Unallocated costs (6.4) (4.7) (1.7) (36) % (13.3) (6.9) (6.4) (93) %
COGS acquisition related
costs - - - - % - (1.2) 1.2 100 %
Consolidated gross profit $61.9 $103.5 ($41.6 ) (40) % $136.1 $201.8 ($65.7 ) (33) %
Consolidated gross margin 25.8 % 36.9 % 28.2 % 36.4 %
Wolfspeed Segment Gross Profit and Gross Margin
The decreases in Wolfspeed segment gross profit and gross margin for the three
and six months ended December 29, 2019 compared to the three and six months
ended December 30, 2018 are primarily due to higher product costs, lower yields
and product mix shift, as well as higher inventory reserves related to product
manufactured for Huawei Technologies Co., Ltd. and its affiliates.
LED Products Segment Gross Profit and Gross Margin
The decreases in LED Products segment gross profit and gross margin for the
three and six months ended December 29, 2019 compared to the three and six
months ended December 30, 2018 are primarily due to lower revenue as a result of
decreasing demand, as well as underutilization resulting from lower factory
volumes.
34
--------------------------------------------------------------------------------
Table of Contents
Unallocated Costs
Unallocated costs primarily consist of manufacturing employees' stock-based
compensation, expenses for annual incentive plans, and matching contributions
under our 401(k) plan. These costs were not allocated to the reportable
segments' gross profit because our CODM does not review them regularly when
evaluating segment performance and allocating resources.
The increases in unallocated costs in both periods were primarily attributable
to increased accruals for annual incentives, stock-based compensation and
matching contributions under our 401(k) plan. Increases in these categories were
primarily the result of increased headcount.
COGS Acquisition Related Costs
The COGS acquisition related cost adjustment includes inventory fair value
amortization of the fair value increase to inventory recognized at the date of
acquisition, and other RF Power acquisition costs, impacting cost of revenue for
fiscal 2018. These costs were not allocated to the reportable segments' gross
profit for fiscal 2019 because they represent an adjustment which does not
provide comparability to the corresponding prior period and therefore were not
reviewed by our CODM when evaluating segment performance and allocating
resources.
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 expenses were as follows:
Three months ended Six months ended
(in millions of U.S. December 29, December 30, December 29, December 30,
Dollars) 2019 2018 Change 2019 2018 Change
Research and development $47.3 $40.2 $7.1 18 % $91.0 $76.5 $14.5 19 %
Percent of revenue 20 % 14 % 19 % 14 %
The increase in research and development expenses for both periods was primarily
due to our continued investment in our silicon carbide and GaN technologies.
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.
Sales, General and Administrative
Sales, general and administrative expenses were comprised primarily of costs
associated with our sales and marketing personnel and our executive and
administrative personnel (for example, finance, human resources, information
technology and legal) and consisted of salaries and related compensation costs;
consulting and other professional services (such as litigation and other outside
legal counsel fees, audit and other compliance costs); marketing and advertising
expenses; facilities and insurance costs; and travel and other costs.
Sales, general and administrative expenses were as follows:
Three months ended Six months ended
December 29, December 30, December 29, December 30,
(in millions of U.S. Dollars) 2019 2018 Change 2019 2018 Change
Sales, general and
administrative $52.8 $49.2 $3.6 7 % $110.4 $93.1 $17.3 19 %
Percent of revenue 22 % 18 % 23 % 17 %
The increase in sales, general and administrative expenses for the three and six
months ended December 29, 2019 compared to the three and six months ended
December 30, 2018 are primarily due to increases in salaries and benefits,
stock-based compensation and professional service fees related to transition
services from the sale of the Lighting Products business unit.
35
--------------------------------------------------------------------------------
Table of Contents
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,
non-compete agreements and trade names.
Amortization of intangible assets related to our acquisitions was as follows:
Three months ended Six months ended
(in millions of U.S. December 29, December 30, December 29, December 30,
Dollars) 2019 2018 Change 2019 2018 Change
Customer relationships $1.6 $1.8 ($0.2 ) (11) % $3.1 $3.6 ($0.5 ) (14) %
Developed technology 1.2 1.3 (0.1) (8) % 2.6 2.7 (0.1) (4) %
Non-compete agreements 0.8 0.8 - - % 1.5 1.5 - - %
Total amortization $3.6 $3.9 ($0.3 ) (8) % $7.2 $7.8 ($0.6 ) (8) %
Amortization of intangible assets stayed fairly consistent due to the absence of
significant intangible-related activity between the periods. Amortization of
customer relationships decreased slightly in each period due to certain
intangible assets relating to customer relationships reaching the end of their
amortization period in fiscal 2019.
Loss on Disposal and Impairment of Other Assets
We operate a capital-intensive business. As such, we dispose of a certain level
of our equipment in the normal course of business as our production processes
change due to production improvement initiatives or product mix changes. Due to
the risk of technological obsolescence or changes in our production process, we
regularly review our long-lived assets and capitalized patent costs for possible
impairment.
Loss on disposal or impairment of other assets were as follows:
Three months ended Six months ended
(in millions of U.S. December 29, December 30, December 29, December 30,
Dollars) 2019 2018 Change 2019 2018 Change
Loss on disposal or
impairment of other
assets $0.8 $- $0.8 100 % $1.8 $0.4 $1.4 350 %
Loss on disposal or impairment of other assets for the three months ended
December 29, 2019 primarily relates to the impairment of certain leasehold
improvements.
Loss on disposal or impairment of other assets for the six months ended
December 29, 2019 primarily relates to write-offs of impaired or abandoned
patents as well as the impairment of certain leasehold improvements.
Other Operating Expense
Other operating expense was as follows:
Three months ended Six months ended
December 29, December 30, December 29, December 30,
(in millions of U.S. Dollars) 2019 2018 Change 2019 2018 Change
Factory optimization
restructuring $1.2 $- $1.2 100 % $2.4 $- $2.4 100 % Severance and other restructuring - - - - % 0.8 2.6 (1.8) (69) % Total restructuring costs 1.2 - 1.2 100 % 3.2 2.6 0.6 23 % Project, transformation and transaction costs 10.8 0.2 10.6 * 13.4 0.6 12.8 * Factory optimization start-up costs 1.5 - 1.5 100 % 2.9 - 2.9 100 % Non-restructuring related executive severance 0.3 - 0.3 100 % 1.5 - 1.5 100 % Other operating expense$13.8 $0.2 $13.6 *$21.0 $3.2 $17.8 * *Percentage change not meaningful. Factory optimization restructuring costs relate to the movement of equipment as well as disposals on certain long-lived assets. Severance and other restructuring costs relate to corporate restructuring plans. See Note 15, "Restructuring," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information on our restructuring costs. 36 -------------------------------------------------------------------------------- Table of Contents Project, transformation and transaction costs primarily relate to professional services fees associated with acquisitions, divestitures and internal transformation programs. Factory optimization start-up costs are additional start-up costs as part of our factory optimization efforts. The increase in other operating expense was primarily due to increased project, transformation and transaction costs, start-up costs, and the addition of non-restructuring related executive severance costs in the three and six months endedDecember 29, 2019 . Non-Operating (Income) Expense, net Non-operating (income) expense, net was comprised of the following: Three months ended Six months ended (in millions of U.S. December 29, December 30, December 29, December 30, Dollars) 2019 2018 Change 2019 2018 Change (Gain) loss on sale of investments, net ($0.1 )$0.1 ($0.2 ) (200) % ($0.1 )$0.1 ($0.2 ) (200) % (Gain) loss on equity investment, net ($6.4 )$1.9 ($8.3 ) (437) % ($9.9 )$8.6 ($18.5 ) (215) % Foreign currency (gain) loss, net (1.2) - (1.2) (100) % (1.1) 0.6 (1.7) (283) % Interest expense, net 2.8 3.6 (0.8) (22) % 4.7 6.0 (1.3) (22) % Other, net (0.2) - (0.2) (100) % (0.3) - (0.3) (100) % Non-operating (income) expense, net ($5.1 )$5.6 ($10.7 ) (191) % ($6.7 )$15.3 ($22.0 ) (144) % (Gain) loss on equity investment, net. The gain on equity investment for the three and six months endedDecember 29, 2019 was due to the increase in fair value of our Lextar Electronics Corporation (Lextar) investment. Lextar's stock is publicly traded on theTaiwan Stock Exchange and its share price increased from 14.75 New Taiwanese Dollars (TWD) per share atJune 30, 2019 to16.05 TWD atSeptember 29, 2019 and to18.40 TWD atDecember 29, 2019 . The loss on equity investment for the three and six months endedDecember 30, 2018 was due to Lextar's share price decreasing from21.00 TWD per share atJune 24, 2018 to18.55 TWD atSeptember 23, 2018 and to17.85 TWD atDecember 30, 2018 . This volatile stock price trend may continue in the future given the risks inherent in Lextar's business and trends affecting theTaiwan and global equity markets. We have a 16% common stock ownership interest in Lextar and utilize the fair value option in accounting for the ownership interest. Any future stock price changes will be recorded as further gains or losses on equity investment based on the increase or decrease, respectively, in the fair value of the investment during the applicable fiscal period. Further losses could have a material adverse effect on our results of operations. Foreign currency (gain) loss, net. The gain in foreign currency for the three and six months endedDecember 29, 2019 was primarily due to the strengthening of the TWD against the United States Dollar, which caused foreign currency remeasurement gains on our investment in Lextar. Interest expense, net. The decrease in interest expense for the three and six months endedDecember 29, 2019 compared to the three and six months endedDecember 30, 2018 was due to increased interest income from higher short term investment balances, which offset the interest expense incurred on our 0.875% convertible senior notes dueSeptember 1, 2023 (the Notes). Income tax expense Income tax expense and our effective tax rate was as follows: Three months ended Six months ended (in millions of U.S. December 29, December 30, December 29, December 30, Dollars) 2019 2018 Change 2019 2018 Change Income tax expense$1.2 $4.6 ($3.4 ) 74 %$1.7 $6.5 ($4.8 ) (74) % Effective tax rate (2) % 105 % (2) % 118 % The change in our effective tax rate for the three and six months endedDecember 29, 2019 was primarily due to the increased impact of tax credits and other deductions as a result of the change from income before taxes during the three and six months endedDecember 30, 2018 to loss before taxes for the three and six months endedDecember 29, 2019 . 37 -------------------------------------------------------------------------------- Table of Contents In general, the variation between our effective income tax rate and theU.S. statutory rate of 21% is primarily due to: (i) changes in our valuation allowances against deferred tax assets in theU.S. and Luxembourg, (ii) projected income for the full year derived from international locations with differing tax rates than theU.S. , and (iii) projected tax credits generated. Net Loss from Discontinued Operations We recorded a net loss from discontinued operations of$2.3 million and$12.6 million for the three and six months endedDecember 30, 2018 , which related to operational results of the discontinued operations of the Lighting Products business unit. We did not have any discontinued operations related activity for the three and six months endedDecember 29, 2019 . 38 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Overview We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities, cash generated from operations and availability under our line of credit. Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with substantial flexibility in meeting our operating, financing and investing needs. We have a$250 million line of credit as discussed in Note 9, "Long-term Debt," in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The purpose of this facility is to provide short term flexibility to optimize returns on our cash and investment portfolio while funding share repurchases, capital expenditures and other general business needs. Based on past performance and current expectations, we believe our current working capital, availability under our line of credit and anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations and capital expenditures for at least the next 12 months. With our strong working capital position, we believe that we have the ability to continue to invest in further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio, secure key intellectual properties or expand our production capacity. From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we continue to make such evaluations. We may also access capital markets through the issuance of debt or additional shares of common stock in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities. Liquidity Our liquidity and capital resources primarily depend on our cash flows from operations and our working capital. The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by trade accounts payable. The following table presents the components of our cash conversion cycle: Three months ended December 29, 2019 June 30, 2019 Change Days of sales outstanding (a) 39 34 5 Days of supply in inventory (b) 84 104 (20) Days in accounts payable (c) (66) (72) 6 Cash conversion cycle 57 66 (9) a)Days of sales outstanding (DSO) measures the average collection period of our receivables. DSO is based on the ending net trade receivables less receivable related accrued contract liabilities and the revenue, net for the quarter then ended. DSO is calculated by dividing ending accounts receivable, less receivable related accrued contract liabilities, by the average net revenue per day for the respective 90-day period. b)Days of supply in inventory (DSI) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and cost of revenue, net for the quarter then ended. DSI is calculated by dividing ending inventory by average cost of revenue, net per day for the respective 90-day period. c)Days in accounts payable (DPO) measures the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenue, net for the quarter then ended. DPO is calculated by dividing ending accounts payable and accrued expenses (less accrued salaries and wages) by the average cost of revenue, net per day for the respective 90-day period. The decrease in our cash conversion cycle was primarily driven by a decrease in days of supply in inventory. As ofDecember 29, 2019 , we had unrealized losses on our investments of$0.1 million . All of our investments had investment grade ratings, and any such investments that were in an unrealized loss position atDecember 29, 2019 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. We intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for anticipated recovery in market value, and we currently expect to receive the full principal or recover our cost basis in these securities. The declines in value of the securities in our portfolio are considered to be temporary in nature and, accordingly, we do not believe these securities are impaired as ofDecember 29, 2019 . 39 -------------------------------------------------------------------------------- Table of Contents Cash Flows In summary, our cash flows were as follows: Six months
ended
December 29, 2019 December 30, 2018 Change
Cash (used in) provided by operating
activities ($11.8 ) $127.7 ($139.5 ) (109) %
Cash used in investing activities (120.5) (178.8) 58.3 33 %
Cash provided by financing activities 14.5 288.3 (273.8) (95) %
Effect of foreign exchange changes (0.1) (0.1) - - %
Net change in cash and cash equivalents ($117.9 ) $237.1 ($355.0 ) (150) %
Cash Flows from Operating Activities
Net cash used in operating activities decreased primarily due to lower net
earnings and a decrease in overall working capital mainly driven by a higher
performance related annual incentive payout in the six months ended December 29,
2019 and decreases in inventory and payables. Total cash provided by operating
activities for the six months ended December 30, 2018 includes $17.9 million of
cash provided by operating activities of discontinued operations.
Cash Flows from Investing Activities
Our investing activities primarily relate to short-term investment transactions,
purchases of property and equipment and payments for patents and licensing
rights. Cash used in investing activities decreased in the six months ended
December 29, 2019 compared to the six months ended December 30, 2018 primarily
due to $82.3 million less net purchases of short-term investments offset by an
increase in property and equipment purchases of $37.8 million . Total cash used
in investing activities for the six months ended December 30, 2018 includes
$11.8 million of cash used in investing activities of discontinued operations.
For fiscal 2020, we target approximately $230.0 million of capital investment,
which is primarily related to infrastructure projects to support our longer term
growth and strategic priorities.
Cash Flows from Financing Activities
For the six months ended December 29, 2019 , our financing activities primarily
consisted of net proceeds of $14.6 million from issuances of common stock
pursuant to the exercise of employee stock options.
For the six months ended December 30, 2018 , our financing activities primarily
consisted of proceeds of $575.0 million from the issuance of the Notes and net
proceeds of $18.2 million from issuances of common stock pursuant to the
exercise of employee stock options, partially offset by the net repayment on our
line of credit of $292.0 million and the payment of debt issuance costs of $12.9
million from the issuance of the Notes.
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 December 29,
2019 , we did not have any off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
Leases (new for fiscal 2020 due to ASC 842 Adoption)
At lease inception, we determine an arrangement is a lease if the contract
involves the use of a distinct identified asset, the lessor does not have
substantive substitution rights and we obtain control of the asset throughout
the period by obtaining substantially all of the economic benefit of the asset
and the right to direct the use of the asset.
Right-of-use assets represent our right to use an underlying asset during the
lease term and lease liabilities represent our obligation to make lease payments
arising from the lease. Assets and liabilities are recognized based on the
present value of lease payments over the lease term. Most leases include one or
more options to renew, with renewal terms that can extend the lease term from
one to five years or more. The exercise of the renewal option is at our sole
discretion and we consider these
40
--------------------------------------------------------------------------------
Table of Contents
options in determining the lease term used to establish our right-of-use assets
and lease liabilities. We will remeasure our lease liability and adjust the
related right-of-use asset upon the occurrence of the following: lease
modifications not accounted for as a separate contract; a triggering event that
changes the certainty of the lessee exercising an option to renew or terminate
the lease, or purchase the underlying asset; a change to the amount probable of
being owed by us under a residual value guarantee; or the resolution of a
contingency upon which the variable lease payments are based such that those
payments become fixed.
Because most of our leases do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at the lease
commencement date in determining the present value of lease payments. We use the
implicit rate when readily determinable. Operating lease expense is generally
recognized on a straight-line basis over the lease term. Finance lease assets
are amortized on a straight-line basis over the shorter of the useful life of
the asset or the lease term. Interest expense on the finance lease liability is
recognized using the effective interest rate method and is presented within
interest expense on our consolidated statements of operations.
We have agreements with lease and non-lease components, which are accounted for
as a single lease component. Leases with a lease term of 12 months or less are
not recorded on the balance sheet. We recognize lease expense for these leases
on a straight-line basis over the lease term. Variable lease payment amounts
that cannot be determined at the commencement of the lease, such as increases in
lease payments based on changes in index rates, are not included in the
right-of-use assets or liabilities. These variable lease payments are expensed
as incurred.
For information about our other 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 our Annual Report on Form 10-K for the fiscal year ended June 30,
2019 .
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected
dates of adoption and the estimated effects, if any, on our consolidated
financial statements, see Note 1, "Basis of Presentation and New Accounting
Standards," to our unaudited consolidated financial statements in Part I, Item 1
of this Quarterly Report.
41--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
