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 27, 2021 (the 2021 Form 10-K). Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.
Overview
Wolfspeed, Inc. , formerly known asCree, Inc. (Wolfspeed , we, our, or us) is an innovator of wide bandgap semiconductors, focused on Silicon Carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications. Our product families include Silicon Carbide and GaN materials, power-switching devices and RF devices targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense. During and prior to fiscal 2021, we designed, manufactured and sold specialty lighting-class light emitting diode (LED) products targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays. OnMarch 1, 2021 , we completed the sale of certain assets and subsidiaries comprising our former LED Products segment (the LED Business) to SMART Global Holdings, Inc. (SGH) and its wholly owned newly-created acquisition subsidiaryCreeLED, Inc. (CreeLED and collectively with SGH, SMART) (the LED Business Divestiture). We retained certain assets used in and pre-closing liabilities associated with our former LED Products segment. Unless otherwise noted, discussions within this Quarterly Report relate to our continuing operations. Our continuing operations consist entirely of ourWolfspeed business, which includes 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. OnOctober 4, 2021 , we changed our corporate name fromCree, Inc. toWolfspeed, Inc. In addition, we transferred the listing of our common stock to theNew York Stock Exchange (NYSE) from The Nasdaq Global Select Market. We ceased trading as a Nasdaq-listed company at the end of the day onOctober 1, 2021 and commenced trading as a NYSE-listed company at market open onOctober 4, 2021 under the new ticker symbol 'WOLF'. The majority of our products are manufactured at our production facilities located inNorth Carolina ,California andArkansas . We also use contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. We maintain captive lines at some of our contract manufacturers. Additionally, we are in the process of building a Silicon Carbide device fabrication facility inNew York . We operate research and development facilities inNorth Carolina ,California ,Arkansas ,Arizona ,New York andChina . 32 -------------------------------------------------------------------------------- Table of ContentsWolfspeed, 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 unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. Industry Dynamics and Trends There are a number of industry factors that affect our business which include, among others: •COVID-19 Pandemic. Despite the availability of vaccines, COVID-19 and its variants continue to spread globally and impact the locations where we do business. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets. In order to combat the COVID-19 pandemic, significant business and travel restrictions and changes to behavior intended to reduce its spread were implemented, including vaccinations and more widespread availability of testing. The COVID-19 pandemic has continued to affect us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs. The potential continued spread of COVID-19 and any of its variants could result in a number of additional adverse effects, including additional laws and regulations affecting our business, restoration and/or expansion of restrictions, fluctuations in foreign currency markets and the credit risks of our customers. We continue to pay close attention to the evolving development of, and the disruption to business and economic activities caused by, the COVID-19 pandemic. However, given the dynamic nature of the COVID-19 pandemic, it is not practicable to provide a reasonable estimate of its impact on our financial position, cash flows and operating results at the present. •Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices. 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 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, inflationary impacts, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers. •Supply Constraints. The semiconductor industry has experienced supply constraints for certain items. While we have successfully managed through challenges relating to obtaining certain necessary raw materials and production and processing equipment thus far, we expect the supply situation for these items to remain tight for at least the next few quarters. In addition, the current high demand for our products has led to supply constraints for our customers. We continue to work closely with our customer base to best match our supply to their demand. We have taken steps to provide continuity to our customers, to the extent possible, although we expect that constraints may continue to limit our shipments in the near term. •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 or extension 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, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers. Market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power and RF markets we serve. •Technological Innovation and Advancement. Innovations and advancements in materials, power, and RF 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- 33 -------------------------------------------------------------------------------- Table of Contents 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 26, 2021 The following is a summary of our financial results for the six months endedDecember 26, 2021 : •Revenue increased to$329.7 million for the six months endedDecember 26, 2021 from$242.5 million for the six months endedDecember 27, 2020 . •Gross profit increased to$106.4 million for the six months endedDecember 26, 2021 from$76.8 million for the six months endedDecember 27, 2020 . Gross margin was 32.3% for the six months endedDecember 26, 2021 and 31.7% for the six months endedDecember 27, 2020 . •Operating loss was$126.6 million for the six months endedDecember 26, 2021 compared to$119.8 million for the six months endedDecember 27, 2020 . •Diluted loss per share from continuing operations was$1.42 for the six months endedDecember 26, 2021 compared to$1.18 for the six months endedDecember 27, 2020 . •Combined cash, cash equivalents and short-term investments was$686.5 million atDecember 26, 2021 and$1,154.6 million atJune 27, 2021 . •Convertible notes, net was$453.9 million atDecember 26, 2021 and$823.9 million atJune 27, 2021 . As discussed further below and in Note 9, "Long-term Debt," to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, our 0.875% convertible senior notes dueSeptember 1, 2023 (2023 Notes) were converted into approximately 7.1 million shares of our common stock in the second quarter of fiscal 2022. •Cash used in operating activities from continuing operations was$95.0 million for the six months endedDecember 26, 2021 compared to$32.1 million for the six months endedDecember 27, 2020 . •Purchases of property and equipment, net were$350.8 million (net of$50.8 million in reimbursements) for the six months endedDecember 26, 2021 compared to$257.5 million for the six months endedDecember 27, 2020 . Business Outlook We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet provides us the ability to invest in our business, as indicated by our ongoing construction of a state-of-the-art, automated 200mm Silicon Carbide device fabrication facility and an expansion of our materials factory to grow our Silicon Carbide production capacity, each of which was announced inMay 2019 . InSeptember 2019 , we announced our intention to build a new Silicon Carbide device fabrication facility inMarcy, New York to complement the factory expansion already underway at ourU.S. campus headquarters inDurham, North Carolina . Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020 and the facility is expected to start production in fiscal 2022. In fiscal 2022, we expect to incur an estimated$80.0 million of start-up and pre-production costs as we ramp production at this facility. The completion of the LED Business Divestiture onMarch 1, 2021 represented a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications. This transaction positioned us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to Silicon Carbide and further strengthened our financial position, which we plan to utilize in order to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications. We are focused on investing in our business to expand the scale, further develop the technologies, and accelerate the growth opportunities of Silicon Carbide materials, Silicon Carbide power devices and modules, and GaN and silicon RF devices. 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 process, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition to our new Silicon Carbide device fabrication facility inMarcy, New York . In regards to COVID-19, we have instituted strict measures designed to balance employee safety with meeting the needs of business operations. These measures include increased employee sick days, robust health screening, social distancing policies and cleaning protocols to ensure the safety of our employees and the protection of our customers, suppliers, and partners. 34 -------------------------------------------------------------------------------- Table of Contents We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the construction of new facilities inNew York and additional production capacity inNorth Carolina . Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows remain uncertain. Change in Estimate As a result of the LED Business Divestiture and our continued investment in 200mm technology, we evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use. In the first quarter of fiscal 2022, we increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets. This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of$8.5 million and$16.9 million for the three and six months endedDecember 26, 2021 , respectively. Approximately$10.3 million of the decrease in depreciation expense for the six months endedDecember 26, 2021 resulted in a net reduction of inventory as ofDecember 26, 2021 and will impact cost of revenue, net in future periods as the inventory is relieved. The remaining$6.6 million of the decrease in depreciation expense resulted in the following for the three and six months endedDecember 26, 2021 : (1) an improvement in gross profit of$4.4 million and$4.9 million , respectively; (2) an improvement in both loss before income taxes and net loss of$5.3 million and$6.6 million , respectively; and (3) an improvement in basic and diluted loss per share of$0.05 and$0.06 per share, respectively. We expect the impact to gross profit to be approximately$8.0 million per quarter by the end of the fiscal year as inventory is relieved. Results of Operations Selected consolidated statements of operations data for the three and six months endedDecember 26, 2021 andDecember 27, 2020 is as follows: Three months ended Six months ended December 26, 2021 December 27, 2020 December 26, 2021 December 27, 2020 (in millions ofU.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue Revenue, net$173.1 100.0 %$127.0 100.0 %$329.7 100.0 %$242.5 100.0 % Cost of revenue, net 116.1 67.1 85.7 67.5 223.3 67.7 165.7 68.3 Gross profit 57.0 32.9 41.3 32.5 106.4 32.3 76.8 31.7 Research and development 50.2 29.0 45.5 35.8 100.1 30.4 86.7 35.8 Sales, general and administrative 48.0 27.7 46.8 36.9 97.0 29.4 90.8 37.4 Amortization or impairment of acquisition-related intangibles 3.6 2.1 3.6 2.8 7.2 2.2 7.2 3.0 Loss on disposal or impairment of other assets 0.5 0.3 0.4 0.3 0.3 0.1 0.7 0.3 Other operating expense 15.6 9.0 2.6 2.0 28.4 8.6 11.2 4.6 Operating loss (60.9) (35.2) (57.6) (45.4) (126.6) (38.4) (119.8) (49.4) Non-operating expense (income), net 27.8 16.1 (3.1) (2.4) 31.9 9.7 10.8 4.5 Loss before income taxes (88.7) (51.2) (54.5) (42.9) (158.5) (48.1) (130.6) (53.9) Income tax expense (benefit) 8.0 4.6 (0.2) (0.2) 8.3 2.5 (1.0) (0.4) Net loss from continuing operations ($96.7 ) (55.9) ($54.3 ) (42.8) ($166.8 ) (50.6) ($129.6 ) (53.4) Net loss from discontinued operations - - (28.4) (22.4) - - (137.2) (56.6) Net loss (96.7) (55.9) (82.7) (65.1) (166.8) (50.6) (266.8) (110.0) Net income from discontinued operations attributable to noncontrolling interest - - 0.3 0.2 - - 0.6 0.2 Net loss attributable to controlling interest ($96.7 ) (55.9) ($83.0 ) (65.4) ($166.8 ) (50.6) ($267.4 ) (110.3) Basic and diluted loss per share Continuing operations ($0.82 ) ($0.49 ) ($1.42 ) ($1.18 ) Net loss attributable to controlling interest ($0.82 ) ($0.75 ) ($1.42 ) ($2.42 ) 35
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Revenue
Revenue was as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change
Revenue $173.1 $127.0 $46.1 36 % $329.7 $242.5 $87.2 36 %
Revenue
Revenue for the three months ended December 26, 2021 compared to the three
months ended December 27, 2020 increased primarily due to increased production
capacity for our power products to meet strong demand during the period.
Revenue for the six months ended December 26, 2021 compared to the six months
ended December 27, 2020 increased due to increased demand across all of our
product lines, as well as increased production capacity for our power products
to meet strong demand during the period.
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 26, December 27, December 26, December 27,
Dollars) 2021 2020 Change 2021 2020 Change
Gross profit $57.0 $41.3 $15.7 38 % $106.4 $76.8 $29.6 39 %
Gross margin 32.9 % 32.5 % 32.3 % 31.7 %
Gross Profit and Gross Margin
The increases in gross profit and gross margin for the three and six months
ended December 26, 2021 compared to the three and six months ended December 27,
2020 were primarily due to increased revenues in the current period,
manufacturing cost improvements and the impact of increasing the expected useful
lives of certain machinery and equipment assets to more closely reflect the
estimated economic lives of those assets, partially offset by impacts from
product mix.
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 our expansion to a new Silicon Carbide
device fabrication facility in Marcy, New York .
Research and development expenses were as follows:
Three months ended Six months ended
(in millions of U.S. December 26, December 27, December 26, December 27,
Dollars) 2021 2020 Change 2021 2020 Change
Research and development $50.2 $45.5 $4.7 10 % $100.1 $86.7 $13.4 15 %
Percent of revenue 29 % 36 % 30 % 36 %
The increase in research and development expenses was primarily due to our
continued investment in our Silicon Carbide and GaN technologies, including the
development of existing Silicon Carbide materials and fabrication technology for
next generation platforms and expansion of our power and RF product portfolio.
Our research and development expenses vary significantly from year to year based
on a number of factors, including the timing of new product introductions and
the number and nature of our ongoing research and development activities.
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Sales, General and Administrative
Sales, general and administrative expenses are comprised primarily of costs
associated with our sales and marketing personnel and our executive and
administrative personnel (for example, finance, human resources, information
technology and legal) and consists 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 26, December 27, December 26, December 27,
(in millions of U.S. Dollars) 2021 2020 Change 2021 2020 Change
Sales, general and
administrative $48.0 $46.8 $1.2 3 % $97.0 $90.8 $6.2 7 %
Percent of revenue 28 % 37 % 29 % 37 %
The increase in sales, general and administrative expenses for the three months
ended December 26, 2021 compared to December 27, 2020 was primarily due to
increased salaries and benefits, including incentive based stock-based
compensation, partially offset by a decrease in costs related to transition
services incurred in the second quarter of fiscal 2021 in connection with the
sale of our former Lighting Products business unit.
The increase in sales, general and administrative expenses for the six months
ended December 26, 2021 compared to December 27, 2020 was primarily due to
increased salaries and benefits, including incentive based stock-based
compensation, as well as increased consulting and legal fees, partially offset
by a decrease in costs related to transition services incurred in the first half
of fiscal 2021 in connection with the sale of our former Lighting Products
business unit.
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.
Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change
Customer relationships $1.6 $1.6 $- - % $3.1 $3.1 $- - %
Developed technology 1.2 1.2 - - % 2.6 2.6 - - %
Non-compete agreements 0.8 0.8 - - % 1.5 1.5 - - %
Total amortization $3.6 $3.6 $- - % $7.2 $7.2 $- - %
Amortization of acquisition-related intangible assets remained consistent due to
the absence of acquisition-related intangible activity between the periods, as
well as no impairments.
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Loss on Disposal or Impairment of Other Assets
We operate a capital-intensive business. As such, we dispose of a certain level
of our equipment in the normal course of business as our production processes
change due to production improvement initiatives or product mix changes. Due to
the risk of technological obsolescence or changes in our production process, we
regularly review our long-lived assets and capitalized patent costs for possible
impairment.
Loss on disposal or impairment of other assets were as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change
Loss on disposal or
impairment of other
assets $0.5 $0.4 $0.1 25 % $0.3 $0.7 ($0.4 ) (57) %
Loss on disposal or impairment of other assets primarily relate to proceeds from
asset sales offset by write-offs of fixed asset projects, as well as the
write-offs of impaired or abandoned patents.
Other Operating Expense
Other operating expense was as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change
Factory optimization
restructuring $2.1 $1.3 $0.8 62 % $4.7 $2.9 $1.8 62 %
Severance and other
restructuring - - - - % - 2.8 (2.8) (100) %
Total restructuring costs 2.1 1.3 0.8 62 % 4.7 5.7 (1.0) (18) %
Project, transformation and
transaction costs 2.5 0.1 2.4 2,400 % 4.1 1.3 2.8 215 %
Factory optimization
start-up costs 11.0 1.2 9.8 817 % 19.6 4.2 15.4 367 %
Other operating expense $15.6 $2.6 $13.0 500 % $28.4 $11.2 $17.2 154 %
Factory optimization restructuring costs relate to facility consolidations as
well as disposals on certain long-lived assets. Severance and other
restructuring costs relate to corporate restructuring plans. See Note 14,
"Restructuring," to our unaudited consolidated financial statements in Part I,
Item 1 of this Quarterly Report for additional information on our restructuring
costs.
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 start-up costs are additional start-up costs as part of our
factory optimization efforts, which began in the fourth quarter of fiscal 2019.
These efforts are focused on expanding our production footprint to support
expected growth.
Other operating expense for the three and six months ended December 26, 2021
compared to the three and six months ended December 27, 2020 increased primarily
due to increased factory optimization start-up costs as we continue our
expansion to a new Silicon Carbide device fabrication facility in Marcy, New
York , as well as increased project, transformation and transaction costs
associated with changing our corporate name from Cree, Inc. to Wolfspeed, Inc.
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Non-Operating Expense (Income), net
Non-operating expense (income), net was comprised of the following:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 26, 2021 December 27, 2020 Change December 26, 2021 December 27, 2020 Change
Gain on sale of
investments, net ($0.1 ) ($0.2 ) $0.1 (50) % ($0.3 ) ($0.2 ) ($0.1 ) 50 %
Gain on equity
investment, net - (10.4) 10.4 (100) % - (7.0) 7.0 (100) %
Loss on debt
extinguishment related
to conversion of 2023
Notes 24.8 - 24.8 100 % 24.8 - 24.8 100 %
Foreign currency gain,
net (0.2) (2.2) 2.0 (91) % (0.3) (2.4) 2.1 (88) %
Interest income (2.4) (2.2) (0.2) 9 % (5.0) (4.9) (0.1) 2 %
Interest expense, net
of capitalized interest 5.3 11.9 (6.6) (55) % 12.0 25.0 (13.0) (52) %
Loss on Wafer Supply
Agreement 0.1 - 0.1 100 % 0.9 - 0.9 100 %
Other, net 0.3 - 0.3 100 % (0.2) 0.3 (0.5) (167) %
Non-operating expense
(income), net $27.8 ($3.1 ) $30.9 (997) % $31.9 $10.8 $21.1 195 %
Gain on equity investment, net. The gain on equity investment for the three and
six months ended December 27, 2020 relates to changes in fair value of our
previously held ENNOSTAR Inc. (ENNOSTAR) investment. In the fourth quarter of
fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR. We
no longer hold any equity interest in ENNOSTAR.
Loss on debt extinguishment related to conversion of 2023 Notes. In the second
quarter of fiscal 2022, all of our outstanding 2023 Notes were converted into
shares of our common stock, which resulted in a loss on extinguishment of $24.8
million . See Note 9, "Long-term Debt," to our unaudited consolidated financial
statements in Part I, Item 1 of this Quarterly Report for additional information
on this loss on debt extinguishment.
Foreign currency gain, net. Foreign currency gain, net primarily consisted of
remeasurement adjustments resulting from our international subsidiaries and from
our previously held ENNOSTAR investment.
Interest income. The slight increase in interest income for both periods was
primarily due to interest income received on our note receivable from SMART in
connection with the completed sale of our former LED Products business unit,
partially offset by decreased interest income on our short-term investments
driven by lower investment balances.
Interest expense, net of capitalized interest. The decrease in interest expense
for both periods was primarily due to an increase in capitalized interest
expense on our 1.75% convertible senior notes due May 1, 2026 (2026 Notes) in
connection with the building of a new Silicon Carbide device fabrication
facility in New York .
Loss on Wafer Supply Agreement. In connection with the completed sale of our
former LED Products business unit to 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.
Income tax expense (benefit)
Income tax expense (benefit) and our effective tax rate was as follows:
Three months ended Six months ended
(in millions of U.S. December 26, December 27, December 26, December 27,
Dollars) 2021 2020 Change 2021 2020 Change
Income tax expense
(benefit) $8.0 ($0.2 ) $8.2 (4,100) % $8.3 ($1.0 ) $9.3 (930) % Effective tax rate (9) % - % (5) % 1 % The change in our effective tax rate 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. This restructuring is discussed further in Note 12, "Income Taxes," to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. 39 -------------------------------------------------------------------------------- Table of Contents In general, the variation between our effective income tax rate and the currentU.S. statutory rate of 21.0% is primarily due to: (i) changes in our valuation allowances against deferred tax assets in theU.S. and Luxembourg, (ii) projected income derived from international locations with differing tax rates than theU.S. , and (iii) tax credits generated. Net loss from discontinued operations As discussed above, we have classified the results of our former LED Products segment 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 LED Products business upon classification as discontinued operations inOctober 2020 . For the three and six months endedDecember 27, 2020 , we recorded a net loss from discontinued operations of$28.4 million and$137.2 million , respectively. We did not have any discontinued operations related activity for the three and six months endedDecember 26, 2021 . 40 -------------------------------------------------------------------------------- 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 and availability under our line of credit. We have a$125 million line of credit as discussed in Note 9, "Long-term Debt," in our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The purpose of this facility is to provide short-term flexibility to optimize returns on our cash and investment portfolio while funding capital expenditures and other general business needs. OnJanuary 25, 2022 , we entered into an amendment to the credit agreement governing the line of credit that extends the maturity date by three years toJanuary 9, 2026 and adopts secured overnight financing rate (SOFR) interest rates as the benchmark interest rate under the credit agreement. In the third quarter of fiscal 2021, we implemented an at-the-market program under a shelf registration statement on Form S-3 and prospectus supplement filed with theSEC onFebruary 11, 2021 in which we sold 4,222,511 shares of our common stock at a weighted average price of$118.41 per share for total gross proceeds of approximately$500.0 million and net proceeds of approximately$489.1 million , after$10.0 million in commissions to the managers of the program and$0.9 million in other offering costs. In the fourth quarter of fiscal 2021, we liquidated our common stock ownership interest in ENNOSTAR and received net proceeds of$66.4 million . In the second quarter of fiscal 2022, all outstanding 2023 Notes were surrendered for conversion following our issuance onDecember 8, 2021 of a notice to holders of the 2023 Notes calling for the redemption of all outstanding 2023 Notes, resulting in the settlement of the previously outstanding$424.8 million aggregate principal amount of 2023 Notes in approximately 7.1 million shares of our common stock. 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 the strength of our 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 and/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 have continued to make such evaluations. For example, we recently completed the LED Business Divestiture, which provided us with (i)$50 million in upfront payments (ii) a$125 million unsecured promissory note due inAugust 2023 , and (iii) the potential to receive an earn-out payment between$2.5 million and$125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing, also payable in the form of an unsecured promissory note dueMarch 2025 . We may also access capital markets through the issuance of debt or additional shares of common stock, 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. We are currently building a new Silicon Carbide device fabrication facility inMarcy, New York , to expand capacity for our Silicon Carbide device business. We expect to invest more than$1.0 billion in construction, equipment and other related costs for the new facility through fiscal 2024, of which approximately$500 million is expected to be reimbursed over time by theState of New York through a grant program administered by theState of New York Urban Development Corporation (doing business asEmpire State Development ). Given our current cash position, we believe we are positioned to adequately fund the construction of the facility. The full extent to which the COVID-19 pandemic may impact our results of operations or liquidity remains uncertain. Our operations have, and likely will continue, to experience supply, labor, demand and output challenges. We continue to monitor the impact that the COVID-19 pandemic is having on our business, the semiconductor industry, and the economies in which we operate. To the extent the COVID-19 virus and its variants continue to spread, we believe our future results of operations, including the results for fiscal 2022, could be materially impacted by the COVID-19 pandemic, but at this time we do not expect the impact from the COVID-19 pandemic will have a material effect on our liquidity or financial position. However, given the speed and frequency of continuously evolving developments with respect to this pandemic, we cannot reasonably estimate the magnitude of the impact to our results of operations. The ultimate extent to which the COVID-19 pandemic will impact our business depends on future developments, which include the effectiveness and utilization of vaccines and boosters 41 -------------------------------------------------------------------------------- Table of Contents for COVID-19 and its variants. New information may emerge concerning the severity of COVID-19 and its variants, and additional actions may be taken in order to contain or limit their spread. To the extent our suppliers continue to be materially and adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from us, which in turn could materially interrupt our business operations. Liquidity 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 26, 2021 June 27, 2021 Change Days of sales outstanding (a) 48 52 (4) Days of supply in inventory (b) 154 147 7 Days in accounts payable (c) (102) (92) (10) Cash conversion cycle 100 107 (7) 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 (excluding inventory related to the Wafer Supply Agreement entered into in connection with the LED Business Divestiture) 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. Due to the significant amount of capital expenditures associated with our Silicon Carbide device fabrication facility under construction inNew York , we exclude accounts payable related to capital expenditures in connection with the facility. DPO is calculated by dividing ending accounts payable and accrued expenses (less accounts payable balances related to our Silicon Carbide device fabrication facility under construction inNew York ) 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 our days of sales outstanding as a result of our revenue increasing more than the increase to our net receivable balance. Additionally, an increase in our days in accounts payable, due to our accounts payable balance (after excluding amounts related to capital expenditures for our Silicon Carbide device fabrication facility under construction inMarcy, New York ) increasing more than the increase to our cost of revenue, net, was partially offset by increased inventory balances as we expand production globally and build a raw materials buffer to ensure continuity of supply. As ofDecember 26, 2021 , we had unrealized losses on our short-term investments of$1.6 million . All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position atDecember 26, 2021 were in such position due to interest rate changes, sector credit rating changes, company-specific rating changes or volatile market conditions surrounding the ongoing COVID-19 pandemic. 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 ofDecember 26, 2021 until the investments fully recover in market value. No allowance for credit losses was recorded as ofDecember 26, 2021 . 42 -------------------------------------------------------------------------------- Table of Contents Cash Flows In summary, our cash flows were as follows: Six
months ended
December 26, 2021 December 27, 2020 Change
Cash used in operating activities ($95.0 ) ($25.9 ) ($69.1 ) (267) %
Cash used in investing activities (83.5) (49.8) (33.7) (68) %
Cash (used in) provided by financing
activities (15.0) 14.5 (29.5) (203) %
Effect of foreign exchange changes (0.1) 0.5 (0.6) (120) %
Net change in cash and cash equivalents ($193.6 ) ($60.7 ) ($132.9 ) (219) %
Cash Flows from Operating Activities
Net cash used in operating activities increased primarily due to decreased
working capital as a result of inventory growth, employee incentive payments and
increased spending to fund expanded operations.
Total cash used in operating activities included $6.2 million of cash provided
by operating activities from discontinued operations for the six months ended
December 27, 2020 .
Cash Flows from Investing Activities
Our investing activities primarily relate to short-term investment transactions,
purchases of property and equipment, and property related reimbursements.
Cash used in investing activities increased primarily due to an increase in
property and equipment purchases of $144.1 million partially offset by an
increase in net proceeds from short-term investments of $60.4 million and $50.8
million of property related reimbursements in the first quarter of fiscal 2022
from the State of New York Urban Development Corporation under a Grant
Disbursement Agreement (GDA). For more details on the GDA, see Note 13,
"Commitments and Contingencies," to our unaudited consolidated financial
statements in Part I, Item 1 of this Quarterly Report.
For fiscal 2022, we target approximately $475.0 million of net capital
investment, which is primarily related to capacity and infrastructure projects
to support longer-term growth and strategic priorities. This target is highly
dependent on the timing and overall progress on the construction of our new
Silicon Carbide fabrication facility in New York and is net of approximately
$300.0 million of expected reimbursements from the State of New York Urban
Development Corporation under the GDA.
Total cash used in investing activities included $2.7 million of cash provided
by investing activities from discontinued operations for the six months ended
December 27, 2020 .
Cash Flows from Financing Activities
For the six months ended December 26, 2021 , our financing activities primarily
consisted of $25.3 million in tax withholdings on vested equity awards,
partially offset by $11.5 million of proceeds from the issuance of common stock.
For the six months ended December 27, 2020 , our financing activities primarily
consisted of net proceeds of $15.2 million from issuances of common stock
pursuant to the exercise of employee stock awards.
Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or
related parties, nor do we use any other forms of off-balance sheet
arrangements. Accordingly, our liquidity and capital resources are not subject
to off-balance sheet risks from unconsolidated entities. As of December 26,
2021 , 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
For information on critical accounting policies and estimates, see the "Critical
Accounting Policies and Estimates" section of "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the 2021 Form
10-K.
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Recent Accounting Pronouncements
For a description of recent accounting pronouncements pending adoption,
including the expected dates of adoption and the estimated effects, if any, on
our consolidated financial statements, see Note 1, "Basis of Presentation and
New Accounting Standards," to our unaudited consolidated financial statements in
Part I, Item 1 of this Quarterly Report.
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