WOLFSPEED INC

Previous wording

Wolfspeed, Inc. (Wolfspeed, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide materials and devices for power applications. Our product families include power devices and silicon carbide and GaN materials. Our products are targeted for various applications such as electric vehicles, fast charging and renewable energy and storage.

Current wording

Wolfspeed, Inc. (Wolfspeed, we, our, or us) is an innovator of wide bandgap semiconductors, focused on silicon carbide materials and devices for power applications. Our product families include power devices and silicon carbide and gallium nitride (GaN) materials. Our products are targeted for various applications such as electric vehicles, fast charging and renewable energy and storage.

Previous wording

During and prior to fiscal 2024, we designed, manufactured and sold radio-frequency (RF) devices. As discussed more fully above in Note 2, “Discontinued Operations,” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, we completed the sale of certain assets comprising our former RF product line (the RF Business Divestiture).

Current wording

During and prior to fiscal 2024, we designed, manufactured and sold radio-frequency (RF) devices. As discussed more fully above in Note 2, “Discontinued Operations,” to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report, we completed the sale of certain assets comprising our former RF product line (the RF Business Divestiture) in the second quarter of fiscal 2024.

Previous wording

The RF Business Divestiture represents a strategic shift that will have a major effect on our operations and financial results. As a result, we have classified the results and cash flows of the RF product line as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for all periods presented. Additionally, the related assets and liabilities associated with the transaction are classified as held for sale in the consolidated balance sheets as of June 25, 2023. Unless otherwise noted, discussion within this Quarterly Report to the consolidated financial statements relates to our continuing operations.

Current wording

The RF Business Divestiture represented a strategic shift that had a major effect on our operations and financial results. As a result, we have classified the results and cash flows of the RF product line as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows for all periods presented. Additionally, the related assets and liabilities associated with the transaction are classified as held for sale in the consolidated balance sheets as of June 25, 2023. Unless otherwise noted, discussion within this Quarterly Report to the consolidated financial statements relates to our continuing operations.

Previous wording

•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, and have continued to see supply availabilities and lead times stabilize across many direct materials, we expect the supply situation for certain items to remain tight for at least the next few quarters. In addition, although we have not experienced significant impacts to date, the ongoing military conflict between Russia and Ukraine and the ongoing conflicts in the Middle East may further exacerbate global supply constraints. The current high demand for our products has also led to supply constraints for our customers. We are working closely with our customer base to best match our supply to their demand. We have taken steps to provide continuity to our customers to the extent possible, including entering into purchase agreements and providing capacity reserve deposits with our suppliers to secure future supply to us, although we expect that our production capacity constraints as we continue to bring additional capacity online may continue to limit our shipments to our customers in the near term.

Current wording

•Supply Constraints. The semiconductor industry has experienced supply constraints for certain items. We have successfully managed through challenges relating to obtaining certain necessary production and processing equipment thus far and have continued to see supply availabilities and lead times stabilize across many direct materials. In addition, although we have not experienced significant impacts to date, the ongoing military conflict between Russia and Ukraine and the ongoing conflicts in the Middle East may further exacerbate global supply constraints. The current high demand for our products has also led to supply constraints for our customers. We are working closely with our customer base to best match our supply to their demand. We have taken steps to provide continuity to our customers to the extent possible, including entering into purchase agreements and providing capacity reserve deposits with our suppliers to secure future supply to us, although we expect that our production capacity constraints as we continue to bring additional capacity online may continue to limit our shipments to our customers.

Previous wording

•Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices. Our potential for growth depends significantly on the continued adoption of silicon carbide materials, device products in the power markets and our ability to win new designs for these applications. Demand also fluctuates based on various domestic and global economic and market cycles, continuously evolving industry supply chains, trade and tariff terms, and inflationary impacts, as well as evolving competitive dynamics in each of our respective markets. These uncertainties make demand difficult to forecast for us and our customers. Recently, we and other semiconductor companies have been experiencing softening demand for power products in industrial and energy applications. Conversely, we are experiencing significantly higher demand for our power products designed for electrical vehicle applications. We believe the increased demand for our power products reflects the value that the industry places on a transition to silicon carbide materials and devices while also evidencing the growing global focus on adopting higher efficiency energy solutions, including electric vehicle and related technologies. We believe these trends could have a significant positive impact on revenues in future periods as we increase capacity to meet this increased demand. In the near term, however, we expect to face production capacity constraints while we continue to work to bring additional capacity online.

Current wording

•Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices. Our potential for growth depends significantly on the continued adoption of silicon carbide materials, device products in the power markets and our ability to win new designs for these applications. Demand also fluctuates based on various domestic and global economic and market cycles, continuously evolving industry supply chains, trade and tariff terms, and inflationary impacts, as well as evolving competitive dynamics in each of our respective markets. These uncertainties make demand difficult to forecast for us and our customers. Recently, we and other semiconductor companies have been experiencing softening demand for power products in industrial and energy applications. Conversely, we continue to experience high demand for our power products designed for electrical vehicle applications. We believe the increased demand for our power products reflects the value that the industry places on a transition to silicon carbide materials and devices while also evidencing the growing global focus on adopting higher efficiency energy solutions, including electric vehicle and related technologies. We believe these trends could have a significant positive impact on revenues in future periods as we increase capacity to meet this increased demand.

Previous wording

•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, including China's announced export restriction of gallium and germanium (two metals used in the manufacturing of semiconductors and electronics) could reduce or limit demand for, or increase the cost of production of, our products in certain markets.

Current wording

•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.

Previous wording

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

Current wording

The following is a summary of our continuing operations financial results as of and for the nine months ended March 31, 2024 compared to the nine months ended March 26, 2023, unless otherwise stated.

Previous wording

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

Current wording

•Our year-over-year revenue increased $50.7 million to $606.5 million.

Previous wording

•Gross margin decreased to 12.9% from 34.3%. Gross profit decreased to $52.5 million from $124.4 million. Gross margin and gross profit for the six months ended December 31, 2023 include the impacts of $70.0 million of underutilization costs primarily in connection with the start of production at our silicon carbide device fabrication facility in New York (the Mohawk Valley Fab), which began revenue production in late fiscal 2023. Costs related to the Mohawk Valley Fab for the six months ended December 25, 2022 were classified as operating expenses within factory start-up costs.

Current wording

•Gross margin decreased to 12.4% from 33.1%. Gross profit decreased to $75.0 million from $184.2 million. Gross margin and gross profit for the nine months ended March 31, 2024 include the impacts of $100.4 million of underutilization costs primarily in connection with the start of production at our silicon carbide device fabrication facility in New York (the Mohawk Valley Fab), which began revenue production in late fiscal 2023. Costs related to the Mohawk Valley Fab for the nine months ended March 26, 2023 were classified as operating expenses within factory start-up costs.

Previous wording

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

Current wording

•Operating loss was $299.4 million compared to $222.2 million.

Previous wording

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

Current wording

•Diluted loss per share was $3.18 compared to $1.36.

Previous wording

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

Current wording

•Combined cash, cash equivalents and short-term investments was $2,550.9 million at March 31, 2024 and $2,954.9 million at June 25, 2023.

Previous wording

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

Current wording

•Long-term debt, net was $5,664.3 million at March 31, 2024 and $4,175.1 million at June 25, 2023.

Previous wording

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

Current wording

•Cash used in operating activities was $431.8 million compared to $63.5 million.

Previous wording

•Purchases of property and equipment, net were $972.8 million (net of $79.4 million in reimbursements) compared to $163.4 million (net of $70.7 million in reimbursements).

Current wording

•Purchases of property and equipment, net were $1,451.3 million (net of $178.4 million in reimbursements) compared to $393.9 million (net of $131.0 million in reimbursements).

Previous wording

•Design-ins were $4.3 billion compared to $4.8 billion.

Current wording

•Design-ins were $7.1 billion compared to $6.5 billion.

Previous wording

•Design-wins were $4.4 billion compared to $0.9 billion.

Current wording

•Design-wins were $5.3 billion compared to $1.5 billion.

Previous wording

We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet provides us the ability to invest in our business and increase production capacity, as indicated by the Mohawk Valley Fab, our new state-of-the-art, automated 200mm silicon carbide device fabrication facility, where we started revenue production in late fiscal 2023. In addition, an expansion of our materials factory in Durham, North Carolina, the construction of a new materials manufacturing facility in Siler City, North Carolina, the purchase of an epitaxy facility in Farmers Branch, Texas and our plan to construct a new silicon carbide device fabrication facility in Saarland, Germany are all expected to increase our production capacity.

Current wording

We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet provides us the ability to invest in our business and increase production capacity, as indicated by the Mohawk Valley Fab, our new state-of-the-art, automated 200mm silicon carbide device fabrication facility, where we started revenue production in late fiscal 2023. In addition, an expansion of our materials factory in Durham, North Carolina, the construction of a new materials manufacturing facility in Siler City, North Carolina, the renovation of an epitaxy facility in Farmers Branch, Texas, and our plan to construct a new silicon carbide device fabrication facility in Saarland, Germany are all expected to increase our production capacity.

Previous wording

We are primarily focused on investing in our business to expand the scale, further develop the technologies, and accelerate the growth opportunities of silicon carbide materials, silicon carbide power devices and modules. We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time.

Current wording

We are primarily focused on investing in our business to expand the scale of production, further develop the technologies, and accelerate the growth opportunities of silicon carbide materials, silicon carbide power devices and modules. We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time.

Previous wording

Fiscal 2024 is a 53-week fiscal year, and the second quarter of fiscal 2024 is a 14-week fiscal quarter. Fiscal 2023 was a 52-week fiscal year, and the second quarter of fiscal 2023 was a 13-week quarter.

Current wording

Fiscal 2024 is a 53-week fiscal year, and the second quarter of fiscal 2024 was a 14-week fiscal quarter. Fiscal 2023 was a 52-week fiscal year.

Previous wording

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

Current wording

Selected consolidated statements of operations data for the three and nine months ended March 31, 2024 and March 26, 2023 were as follows:

Previous wording

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

Current wording

Revenue for the three and nine months ended March 31, 2024 compared to the three and nine months ended March 26, 2023 increased primarily due to growth in our materials product line, where we improved output to meet strong demand.

Previous wording

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

Current wording

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

Previous wording

As explained further below, the operating costs of each of our new facilities will largely be reflected in cost of revenue, net once each facility reaches revenue generating production. 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 be substantial as we ramp up the facility to the expected or normal utilization level. The costs incurred to operate the facility in excess of the costs absorbed into inventory are referred to as underutilization costs and are expensed as incurred to cost of revenue, net. We expect gross profit and gross margin to continue to be significantly impacted in future periods from these underutilization costs in connection with our new facility construction and expansion projects, the costs of which have solely been expensed as factory start-up costs prior to fiscal 2024.

Current wording

As explained further below in Factory Start-up Costs, the operating costs of each of our new facilities will largely be reflected in cost of revenue, net once each facility reaches revenue generating production. During the period when revenue production begins, but before the facility is at its expected utilization level, we expect some of the costs to operate the facility will not be absorbed into the cost of inventory. We expect that these costs will continue to be substantial as we ramp up the facility to the expected or normal utilization level. The costs incurred to operate the facility in excess of the costs absorbed into inventory are referred to as underutilization costs and are expensed as incurred to cost of revenue, net. We expect gross profit and gross margin to continue to be significantly impacted in future periods from these underutilization costs in connection with our new facility construction and expansion projects, the costs of which have solely been expensed as factory start-up costs prior to fiscal 2024.

Previous wording

The decrease in gross profit and gross margin for both periods presented was primarily due to underutilization costs incurred within cost of revenue in connection with the start of production at our Mohawk Valley Fab, which began revenue production in late fiscal 2023. Underutilization costs were $35.6 million and $70.0 million for the three and six months ended December 31, 2023, respectively. Costs relating to the Mohawk Valley Fab for the three and six months ended December 25, 2022 were expensed within factory start-up costs.

Current wording

The decrease in gross profit and gross margin for both periods presented as compared to the prior year periods was primarily due to underutilization costs incurred within cost of revenue in connection with the start of production at our Mohawk Valley Fab, which began revenue production in late fiscal 2023. Underutilization costs were $30.4 million and $100.4 million for the three and nine months ended March 31, 2024, respectively. Costs relating to the Mohawk Valley Fab for the three and nine months ended March 26, 2023 were expensed within factory start-up costs.

Previous wording

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

Current wording

In addition, gross profit and gross margin for the nine months ended March 31, 2024 were impacted by a less favorable product mix, partially offset by an increase in revenue in both product lines.

Previous wording

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.

Current wording

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.

Previous wording

Sales, general and administrative (SG&A) 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 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 and other costs.

Current wording

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.

Previous wording

The increase in SG&A expenses for both periods presented was primarily due to increased salaries and benefits, including stock-based compensation, in connection with increased sales and marketing headcount, as well as increases in professional services, sponsorship costs and IT expenses.

Current wording

The increase in SG&A expenses for both periods presented was primarily due to increased salaries and benefits, including stock-based compensation, as well as increases in professional services, sponsorship costs, and travel expenses.

Previous wording

The decrease in factory start-up costs was due to the start of revenue generating production at our Mohawk Valley Fab in the fourth quarter of fiscal 2023. The majority of start-up costs for the three and six months ended December 31, 2022 related to the construction of this facility. For the three and six months ended December 31, 2023, the costs relating to this facility were expensed as part of cost of production.

Current wording

Start-up costs for the three and nine months ended March 31, 2024 primarily relate to costs incurred in connection with the construction of our new materials manufacturing facility in Siler City, North Carolina and various materials expansion activities at our Durham, North Carolina locations. The decrease in factory start-up costs as compared to the prior year periods is due to the start of revenue generating production at our Mohawk Valley Fab in the fourth quarter of fiscal 2023 and the associated transition of factory operating expenses to cost of production. The majority of start-up costs for the three and nine months ended March 26, 2023 related to the construction of this facility.

Previous wording

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.

Current wording

Loss on disposal or impairment of other assets primarily relate to write-offs of fixed assets, as well as the write-offs of impaired or abandoned patents, partially offset by proceeds from asset sales.

Previous wording

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

Current wording

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

Previous wording

Interest income. The increase in interest income in both periods was primarily driven by increased short-term investment balances, as well as increased returns on our short-term investments. Our short-term investment balances increased significantly from the net proceeds we received from the sale of our 1.875% convertible senior notes due December 1, 2029 (the 2029 Notes) and senior secured notes due 2030 (the 2030 Senior Notes), as well as from the receipt of the initial deposits from an Unsecured Customer Refundable Deposit Agreement (the CRD Agreement) with a customer, pursuant to which we received an initial deposit of $1 billion in the first quarter of fiscal 2024.

Current wording

Interest income. The increase in interest income in both periods was primarily driven by increased short-term investment balances. Our average short-term investment balances increased significantly from the net proceeds we received from the sale of our senior secured notes due 2030 (the 2030 Senior Notes) in the fourth quarter of fiscal 2023, as well as from the receipts of deposits from an Unsecured Customer Refundable Deposit Agreement (the CRD Agreement) with a customer, pursuant to which we received an initial deposit of $1 billion in the first quarter of fiscal 2024 and an additional deposit of $500 million in the third quarter of fiscal 2024.

Previous wording

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

Current wording

Interest expense, net of capitalized interest. The increase in interest expense was primarily due to interest from our 2030 Senior Notes and deposits under the CRD Agreement, which were not outstanding as of March 26, 2023.

Previous wording

Gain on arbitration proceedings. In the first quarter of 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. In the second quarter of fiscal 2023, a final payment was received. The gain recognized is net of legal fees incurred.

Current wording

Loss (gain) on legal proceedings. In the third quarter of fiscal 2024, we accrued a liability for payment of customs duties totaling approximately $7.7 million for alleged undervalued duties related to transactions by our former Lighting Products business unit from 2012 to 2017. In fiscal 2023, we received an arbitration award in relation to a former customer failing to fulfill contractual obligations to purchase a certain amount of product over a period of time. The arbitration award is recognized as non-operating income, net of legal fees incurred.

Previous wording

Loss on Wafer Supply Agreement. In connection with the completed sale of our former LED Products business unit to Smart Global Holdings, Inc. (SGH) and its wholly owned subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART) in fiscal 2021, we entered into a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which we supply CreeLED with certain silicon carbide materials and fabrication services for up to four years. We recognized a supply agreement liability in connection with this agreement, which reached full amortization in the second quarter of fiscal 2023. We expect losses from this agreement to continue through December 2025.

Current wording

Loss on Wafer Supply Agreement. In connection with the completed sale of our former LED Products business unit to SMART Global Holdings, Inc. (SGH) and its wholly owned subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART) in fiscal 2021, we entered into a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which we supply CreeLED with certain silicon carbide materials and fabrication services for up to four years. We recognized a supply agreement liability in connection with this agreement, which fully amortized in the second quarter of fiscal 2023. We expect losses from this agreement to continue through December 2025.

Previous wording

Gain on equity investment. In connection with the completed RF Business Divestiture, we received shares of MACOM common stock as a portion of the overall consideration received for the sale. The closing price of MACOM's common stock increased from $85.41 at December 1, 2023, the last trading day before the closing date of the RF Business Divestiture, to $92.95 at December 29, 2023, the last trading day of the current fiscal quarter.

Current wording

Gain on equity investment. In connection with the completed RF Business Divestiture, we received shares of MACOM common stock as a portion of the overall consideration received for the sale. The gain on equity investment for the three and nine months ended March 31, 2024 was due to MACOM's share price increasing from $85.41 at December 1, 2023, the last trading day before the closing date of the RF Business Divestiture, to $92.95 at December 29, 2023, the last trading day of the second fiscal quarter, and to $95.64 at March 28, 2024, the last trading day of the third fiscal quarter.

Previous wording

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

Current wording

The change in our effective tax rate for the three and nine months ended March 31, 2024 compared to the three and nine months ended March 26, 2023 was immaterial.

Previous wording

The significant components of our working capital are liquid assets such as cash and cash equivalents, short-term investments, accounts receivable and inventories reduced by accounts payable and accrued expenses.

Current wording

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.

Previous wording

In the first quarter of fiscal 2023, we received an early payment on an unsecured promissory note in the amount of $101.8 million issued to us in connection with the sale of certain assets and subsidiaries comprising our former LED business unit to SMART on March 1, 2021.

Current wording

In the first quarter of fiscal 2023, we received an early payment on an unsecured promissory note in the amount of $101.8 million issued to us in connection with the sale of certain assets and subsidiaries comprising our former LED Products business unit to SMART on March 1, 2021.