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 audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJune 26, 2022 (the 2022 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. (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 devices and RF devices, and our products are targeted for various applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense. 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. 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 recently opened a Silicon Carbide device fabrication facility inNew York . We operate research and development facilities inNorth Carolina ,California ,Arkansas ,Arizona andNew York .Wolfspeed, 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. 33
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Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
•Supply Constraints. The semiconductor industry has experienced supply constraints for certain items. 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 ongoing military conflict betweenRussia andUkraine may further exacerbate 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 with suppliers to secure future supply, although we expect that constraints may continue to limit our shipments in the near term. •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 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 the respective markets. These uncertainties make demand difficult to forecast for us and our customers. For example, decreasing consumer or industrial demand as a result of an economic slowdown or recession may lead our customers to delay designing in our products. Recently, we have been seeing softening demand for our RF products but significantly higher demand for our power products. 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 electrical vehicle (EV) and related technologies. We believe these trends could have a significant positive impact on revenues in future periods as we increase capacity to meet this increased demand. •Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. 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. •COVID-19 Pandemic. The global health crisis caused by COVID-19 and its resurgences has impacted and may continue to negatively impact global economic activity, which, despite the effectiveness of vaccines in preventing serious illnesses and hospitalizations, remains uncertain and cannot be predicted with confidence due to the continued emergence of variants and the likelihood that the protection conferred by existing vaccines wanes over time. The COVID-19 pandemic has affected 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 on a timely basis, and the overall impact of the aforementioned items that could cause output challenges and increased costs. The full extent to which the COVID-19 pandemic may impact our results of operations or liquidity remains uncertain. Our operations have experienced, 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. •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 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. •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-
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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 ended
The following is a summary of our financial results as of and for the six months
ended
•Our revenue increased
•Gross margin decreased to 32.1% from 32.3%. Gross profit increased to
•Operating loss was
•Diluted loss per share was
•Combined cash, cash equivalents and short-term investments was
•Convertible notes, net was$3,021.0 million atDecember 25, 2022 and$1,021.6 million atJune 26, 2022 . 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, we sold$1,750.0 million aggregate principal amount of 1.875% convertible senior notes dueDecember 1, 2029 in the second quarter of fiscal 2023.
•Cash used in operating activities was
•Purchases of property and equipment, net were$167.1 million (net of$70.7 million in reimbursements) compared to$350.8 million (net of$50.8 million in reimbursements).
•Design-ins were
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 new state-of-the-art, automated 200mm Silicon Carbide device fabrication facility inMarcy, New York , where we continue to run qualification lots, an expansion of our materials factory at ourU.S campus headquarters inDurham, North Carolina , and the recently announced plan to construct a new materials manufacturing facility inSiler City, North Carolina , all of which is expected to increase our production capacity. In fiscal 2022, we incurred$70.0 million of start-up and pre-production costs related to the ramping of production at theMarcy, New York facility. In fiscal 2023, we target approximately$125 million of start-up and underutilization costs primarily related to ramping of production at theMarcy, New York facility. 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 .
We believe we have the ability to navigate the current environment while
maintaining our capital expenditure plans to support future growth, including
the continued build out of our new facility in
Design-ins
Design-ins are customer commitments to purchase our products and are one of the
factors we use to forecast long-term demand and future revenue. To meet the
qualification of a design-in, the customer provides us with documentation (e.g.,
a letter of intent, statement of work or developmental contract) that can
include details such as the expected delivery timeline, estimated price,
necessary capacity and required support. A design-in, even with a formal
commitment, does not always convert to future revenue for a variety of reasons,
including, but not limited to, the customer delaying or abandoning the project,
capacity constraints, timeline challenges, and/or technology changes. Therefore,
management uses the design-in amount as a guide to forecast future demand but it
should not be taken as an absolute indicator of future revenue.
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Results of Operations
Selected consolidated statements of operations data for the three and six months
ended
Three months ended Six months ended
December 25, 2022 December 26, 2021 December 25, 2022 December 26, 2021
(in millions of U.S. Dollars,
except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue
Revenue, net $216.1 100.0 % $173.1 100.0 % $457.4 100.0 % $329.7 100.0 %
Cost of revenue, net 149.2 69.0 116.1 67.1 310.6 67.9 223.3 67.7
Gross profit 66.9 31.0 57.0 32.9 146.8 32.1 106.4 32.3
Research and development 57.0 26.4 50.2 29.0 112.2 24.5 100.1 30.4
Sales, general and administrative 55.7 25.8 48.0 27.7 110.7 24.2 97.0 29.4
Amortization or impairment of
acquisition-related intangibles 2.8 1.3 3.6 2.1 5.7 1.2 7.2 2.2
Loss on disposal or impairment of
other assets 0.1 - 0.5 0.3 0.2 - 0.3 0.1
Other operating expense 42.6 19.7 15.6 9.0 85.0 18.6 28.4 8.6
Operating loss (91.3) (42.2) (60.9) (35.2) (167.0) (36.5) (126.6) (38.4)
Non-operating (income) expense,
net (0.8) (0.4) 27.8 16.1 (50.5) (11.0) 31.9 9.7
Loss before income taxes (90.5) (41.9) (88.7) (51.2) (116.5) (25.5) (158.5) (48.1)
Income tax expense 0.4 0.2 8.0 4.6 0.6 0.1 8.3 2.5
Net loss ($90.9 ) (42.1) ($96.7 ) (55.9) (117.1) (25.6) (166.8) (50.6)
Basic and diluted loss per share ($0.73 ) ($0.82 ) ($0.94 ) ($1.42 )
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Revenue
Revenue was as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change
Revenue $216.1 $173.1 $43.0 25 % $457.4 $329.7 $127.7 39 %
Revenue for the three and six months ended December 25, 2022 compared to the
three and six months ended December 26, 2021 increased due to increased demand
across all of our product lines, as well as increased production capacity for
our power and materials product lines to meet strong demand during the period
and in future periods.
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 25, December 26, December 25, December 26,
Dollars) 2022 2021 Change 2022 2021 Change
Gross profit $66.9 $57.0 $9.9 17 % $146.8 $106.4 $40.4 38 %
Gross margin 31.0 % 32.9 % 32.1 % 32.3 %
The increases in gross profit for the three and six months ended December 25,
2022 compared to the three and six months ended December 26, 2021 were primarily
due to increased revenues in the current periods.
The decrease in gross margin for the three months ended
The decrease in gross margin for the six months endedDecember 25, 2022 compared to the six months endedDecember 26, 2021 was primarily due to the same factors for the three months endedDecember 25, 2022 compared to the three months endedDecember 26, 2021 , partially offset by a gross margin improvement in the current period resulting from realizing the full impact of our early fiscal 2022 change in estimate to increase our expected useful lives of certain machinery and equipment assets to more closely reflect the estimated economic lives of those assets.* * The change in our expected useful lives was applied in the first quarter of fiscal 2022 but had limited impact on that period's gross profit and gross margin because the majority of the impact in the first quarter of fiscal 2022 resulted in a reduction of inventory.
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 expansion of our new Silicon Carbide device fabrication facility inMarcy, New York .
Research and development expenses were as follows:
Three months ended Six months ended
(in millions of U.S. December 25, December 26, December 25, December 26,
Dollars) 2022 2021 Change 2022 2021 Change
Research and development $57.0 $50.2 $6.8 14 % $112.2 $100.1 $12.1 12 %
Percent of revenue 26 % 29 % 25 % 30 %
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 (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.
SG&A expenses were as follows:
Three months ended Six months ended
December 25, December 26, December 25, December 26,
(in millions of U.S. Dollars) 2022 2021 Change 2022 2021 Change
Sales, general and
administrative $55.7 $48.0 $7.7 16 % $110.7 $97.0 $13.7 14 %
Percent of revenue 26 % 28 % 24 % 29 %
The increases in SG&A expenses for the three and six months ended December 25,
2022 compared to the three and six months ended December 26, 2021 were primarily
due to increased salaries and benefits from increased headcount, including
incentive based stock-based compensation, as well as small increases in travel
costs and professional services.
Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology and non-compete agreements.
Amortization of intangible assets related to our acquisitions was as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 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) (100) % - 1.5 (1.5) (100) %
Total amortization $2.8 $3.6 ($0.8 ) (22) % $5.7 $7.2 ($1.5 ) (21) %
Amortization of acquisition-related intangible assets decreased due to an intangible asset relating to non-compete agreements reaching the end of its useful life in fiscal 2022. No other significant acquisition-related intangible activity or impairments occurred between the periods.
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 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change
Loss on disposal or
impairment of other
assets $0.1 $0.5 ($0.4 ) (80) % $0.2 $0.3 ($0.1 ) (33) %
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.
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Other Operating Expense
Other operating expense was as follows:
Three months ended Six months ended
(in millions of U.S.
Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change
Factory start-up costs 37.6 11.0 26.6 242 % 76.0 19.6 56.4 288 %
Project, transformation and
transaction costs 4.5 2.5 2.0 80 % 7.5 4.1 3.4 83 %
Restructuring costs 0.2 2.1 (1.9) (90) % 0.2 4.7 (4.5) (96) %
Non-restructuring related
executive severance 0.3 - 0.3 100 % 1.3 - 1.3 100 %
Other operating expense $42.6 $15.6 $27.0 173 % $85.0 $28.4 $56.6 199 %
Factory start-up costs are costs related to expanding our production footprint to support expected growth.
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. Restructuring costs relate to facility consolidations, disposals on certain long-lived assets, severance and other restructuring costs related 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. Other operating expense for the three and six months endedDecember 25, 2022 compared to the three and six months endedDecember 26, 2021 increased primarily due to increased start-up costs as we continue our expansion to a new Silicon Carbide device fabrication facility inMarcy, New York .
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.
Dollars) December 25, 2022 December 26, 2021 Change December 25, 2022 December 26, 2021 Change
Gain on arbitration
proceedings ($0.9 ) $- ($0.9 ) (100) % ($50.3 ) $- ($50.3 ) (100) %
Loss on debt
extinguishment related
to conversion of 2023
Notes - 24.8 (24.8) (100) % - 24.8 (24.8) (100) %
Interest income (11.6) (2.4) (9.2) 383 % (15.9) (5.0) (10.9) 218 %
Interest expense, net of
capitalized interest 7.8 5.3 2.5 47 % 12.6 12.0 0.6 5 %
Loss on Wafer Supply
Agreement 2.6 0.1 2.5 2,500 % 2.5 0.9 1.6 178 %
Gain on sale of
investments, net - (0.1) 0.1 (100) % - (0.3) 0.3 (100) %
Other, net 1.3 0.1 1.2 1,200 % 0.6 (0.5) 1.1 (220) %
Non-operating (income)
expense, net ($0.8 ) $27.8 ($28.6 ) (103) % ($50.5 ) $31.9 ($82.4 ) (258) %
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.
Loss on debt extinguishment related to conversion of 2023 Notes. In the second quarter of fiscal 2022, all of our outstanding 0.875% convertible senior notes dueSeptember 1, 2023 (the 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. 39
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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 in the second quarter of fiscal 2023 resulting from the net proceeds we received from the sale of our 1.875% convertible senior notes dueDecember 1, 2029 (2029 Notes). Interest expense, net of capitalized interest. The increase in interest expense in both periods related to interest from our 2028 Notes (as defined below) and the 2029 Notes, which were not outstanding as ofDecember 26, 2021 . In addition, interest expense increased from interest on our 1.75% convertible senior notes dueMay 1, 2026 (the 2026 Notes), the interest of which was fully capitalized in the three and six months endedDecember 26, 2021 but fully expensed in the three and six months endedDecember 25, 2022 . These increases were partially offset by a decrease in interest expense from our 2023 Notes, which were converted in the second quarter of fiscal 2022. 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 subsidiaryCreeLED, 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.
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 25, December 26, December 25, December 26,
Dollars) 2022 2021 Change 2022 2021 Change
Income tax expense $0.4 $8.0 ($7.6 ) (95) % $0.6 $8.3 ($7.7 ) (93) % Effective tax rate - % (9) % (1) % (5) %
The change in our effective tax rate was primarily due to
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. , (ii) projected income derived from international locations with differing tax rates than theU.S. , and (iii) tax credits generated. 40
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Liquidity and Capital Resources
Overview
We require cash to fund our operating expenses and working capital requirements, including the purchase of goods and services in the ordinary course of business such as raw materials, supplies and capital equipment, as well as outlays for research and development, strategic acquisitions and investments. Our principal sources of liquidity are cash on hand, marketable securities and, as described further below, availability under our line of credit. 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 the near-term expansion of our production capacity, further development of our products and, when necessary or appropriate, make selective acquisitions or other strategic investments to strengthen our product portfolio or secure key intellectual properties. However, even with our strong working capital position, we expect to need additional funding to fully complete our previously announced planned long-term capacity expansions.
Sources of Liquidity
The following table sets forth our cash, cash equivalents and short-term investments:
(in millions of U.S. Dollars) December 25, 2022 June 26, 2022 Change Cash and cash equivalents$1,085.1 $449.5 $635.6 Short-term investments 1,399.3 749.3 650.0 Total cash, cash equivalents and short-term investments$2,484.4 $1,198.8 $1,285.6
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.
In the second quarter of fiscal 2022, all outstanding 2023 Notes were
surrendered for conversion following our issuance on
In the third quarter of fiscal 2022, we issued and sold a total of$750.0 million aggregate principal amount of 0.25% convertible senior notes dueFebruary 15, 2028 (the 2028 Notes), as discussed in Note 9, "Long-term Debt," in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The total net proceeds of the 2028 Notes was$732.3 million , of which we used$108.2 million to fund the cost of entering into capped call transactions. We expect to use the remainder of the net proceeds for general corporate purposes. In the second quarter of fiscal 2023, we issued and sold a total of$1,750.0 million aggregate principal amount of 2029 Notes, as discussed in Note 9, "Long-term Debt," in our consolidated financial statements included in Part I, Item 1 of this Quarterly Report. The total net proceeds of the 2029 Notes was$1,718.6 million , of which we used$273.9 million to fund the cost of entering into capped call transactions. We expect to use the remainder of the net proceeds for general corporate purposes. In addition, we received early payments on two unsecured promissory notes issued to us in connection with the sale of certain assets and subsidiaries comprising our former LED Products segment (the LED Business) to SMART onMarch 1, 2021 (the LED Business Divestiture). In the third quarter of fiscal 2022, we received an early payment in the amount of$125.0 million , along with outstanding accrued and unpaid interest as of the payment date, relating to the unsecured promissory note issued with the completion of the transaction. In the first quarter of fiscal 2023, we received an early payment in the amount of$101.8 million in connection with the unsecured promissory note issued in the fourth quarter of fiscal 2022 as an earn-out payment. We have a$125 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, all of which was available for borrowing as ofDecember 25, 2022 . The purpose of this credit 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. 41
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As ofDecember 25, 2022 , we had unrealized losses on our short-term investments of$26.4 million . All of our short-term investments had investment grade ratings, and any such investments that were in an unrealized loss position atDecember 25, 2022 were in such position due to interest rate changes, sector credit rating changes or company-specific rating changes. We evaluate our short-term investments for expected credit losses. We believe we are able to and we intend to hold each of the investments held with an unrealized loss as ofDecember 25, 2022 until the investments fully recover in market value. No allowance for credit losses was recorded as ofDecember 25, 2022 . From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we have continued to make such evaluations. We may also access capital markets through the issuance of debt or 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.
Expected Uses of Liquidity
We recently opened our new Silicon Carbide device fabrication facility inMarcy, New York , to expand capacity for production of our Silicon Carbide devices. We expect to invest approximately$2.0 billion , an increase from our previously expected$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 ). The increase is primarily due to capacity expansions at the site that have been pulled forward as a result of increased projected demand. As ofDecember 25, 2022 , we have spent approximately$800 million and received$220.4 million in reimbursements. Additionally, we recently announced the intention to build a new materials manufacturing facility inSiler City, North Carolina . Starting in late fiscal 2023 and through fiscal 2024, we expect to invest approximately$1.3 billion in construction, equipment and other related costs for the new facility, net of estimated refundable federal investment tax credits and capital grants we expect to receive through theU.S. CHIPS and Science Act of 2022 (the CHIPS Act). The timing and amount of these estimated CHIPS Act incentives is uncertain. In addition, the facility is also further supported by an approximately$1.0 billion long-term incentive package from state, county and local governments, primarily in the form of property tax reimbursements and sales tax exemptions. For fiscal 2023, we target approximately$1.0 billion of net capital investment, which is primarily related to capacity and infrastructure projects to support longer-term growth and strategic priorities. This target is highly dependent on the timing and overall progress on our new Silicon Carbide fabrication facility inNew York and the construction of our new materials manufacturing facility inSiler City, North Carolina . Our target net capital investment figure is net of approximately$150 million of expected reimbursements from theState of New York Urban Development Corporation under the Grant Disbursement Agreement during the fiscal year.
In addition, we also intend to apply for and potentially sell tax credits as part of the Inflation Reduction Act to further fund our expansion initiatives.
Given our current cash position, we believe we will be able to fund daily
operations for at least the next 12 months but we expect to need additional
funding to fully complete our previously announced planned expansion initiatives
described above. We believe we will be able to obtain the necessary funding and
are exploring a variety of options, including, but not limited to, customer
deposits, private funding, public markets, government reimbursements and selling
transferable government tax credits.
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Cash Flows
In summary, our cash flows were as follows:
Six months ended
December 25, 2022 December 26, 2021 Change
Cash used in operating activities ($79.7 ) ($95.0 ) $15.3 16 %
Cash used in investing activities (722.0) (83.5) (638.5) (765) %
Cash provided by (used in) financing
activities 1,437.3 (15.0) 1,452.3 9,682 %
Effect of foreign exchange changes - (0.1) 0.1 100 %
Net change in cash and cash equivalents $635.6 ($193.6 ) $829.2 428 %
Cash Flows from Operating Activities
Net cash used in operating activities decreased primarily due to a decrease in net loss during the period, partially offset by increased working capital in the current period primarily related to decreased employee related accruals.
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 net purchases of short-term investments of$922.7 million , partially offset by proceeds of an earnout payment related to the LED Business Divestiture of$101.8 million and a decrease in net property and equipment purchases of$183.7 million .
Cash Flows from Financing Activities
For the six months endedDecember 25, 2022 , cash provided by financing activities primarily consisted of$1,718.6 million in net proceeds from the issuance of the 2029 Notes and$11.2 million of proceeds from the issuance of common stock, partially offset by$273.9 million in cash paid for capped call transactions in connection with the 2029 Notes and$17.3 million in tax withholdings on vested equity awards.
For the six months ended
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 ofDecember 25, 2022 , we did not have any off-balance sheet arrangements.
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 2022 Form 10-K.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements pending adoption,
including the expected dates of adoption and the estimated effects, if any, on
our consolidated financial statements, see Note 1, "Basis of Presentation and
New Accounting Standards," to our unaudited consolidated financial statements in
Part I, Item 1 of this Quarterly Report.
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