Operator: Please standby for our next question. Our next question comes from Ross Seymore with DB. Your line is now open.
Ross Seymore: Hi, guys. Congrats on the solid results and thanks let me ask a question. I just wanted to go back to something Tom you said earlier about the prepayments rose I think 34% sequentially. How do I reconcile those with the end demand caution? Is this something where people are just having to pay upfront for pushing out the duration? Because I otherwise would have expected, kind of, the urge to prepay or the need to kind of wane as some of the caution from your customers enters the equation? So any color there would be helpful.
Tom Caulfield: Yes. Look, for me, it’s pretty simple. This is single source business by and large. Customers are looking to secure their supply. In some cases, it requires investment. The only way the investment can be made and make economic sense for both parties is we both put our balance sheets in there. So the rated pace of some of these LTAs where they’re talking about adding capacity will always get a little bit softer in a period, we’re in now just, because of the uncertainty of when customers will want that growth. But that’s what we’re going through right now. And you could see even in the fourth quarter of last year, we were able to ink some long-term agreements where customers had visibility, especially in the auto side of things of what they wanted longer term.
Dave Reeder: And if I could build on that, I think when you think about that increase in the fourth quarter, Ross, call it $1.2 billion maybe around $1.3 billion, 34% as you mentioned to $5 billion of customer committed funding. The LTAs that are being signed today are not for really capacity in kind of 23% and 24%, it’s really for capacity that’s being added for ramps and really 25%, 26% and 27%. And so those committed customer funds, those are being deployed in the areas of capacity increases, as well as process technology qualifications for the design wins associated with those LTAs. So the customers are looking through this kind of near-term demand perturbation. They’re looking through this near-term period. They’re looking out into time.
And they’re saying we believe that the industry will still be structurally short of capacity, especially in the technologies and the geographies where we would like to have it and they’re making the investments now to ensure that, that supply chain is there in the future.
Ross Seymore: Thanks for that color. I guess is my yes, if I can. I just want to go into the CHIPS Act and the investment tax credit side of things. I think the CapEx numbers you gave are all on the growth side of things. I know you guys have been very committed to those programs and Tom you highlighted that earlier, but mechanically how should we think about that starting to flow through and kind of timing and magnitude?
Tom Caulfield: Well, let me tell you how we’re going to put that funding to good use and then I’ll let David talk about how it flows through. Most importantly, the capital investment and free cash flow and then maybe on top of the P&L. We are in the process of bringing in a three-part proposal to leverage the CHIPS funding for capacity expansion. One phase is in our 200-millimeter facility in Vermont. We’re remixing that technology more towards wide bandgap types of devices. And also to do some modernization in that facility to keep it strong going forward. We have a Phase 1 expansion plan in our Fab 8 facility where will use the investment to fill up their existing floor space with additional tools for capacity. That’s more or less where the GM capacity will be solution from.
And then the last part of our proposal will be a new brick and mortar investment module expansion and that’s very same Fab 8 facility in Malta, New York to add somewhere between 350,000 to 500,000 wafers of capacity to make much longer-term needs. That’s the play for GF in this first phase of CHIPS funding. Dave, I’ll hand it over to you to talk about the implications on free cash flow and P&L.
Dave Reeder: Yes. So touching on the two elements, I think Tom covered CHIPS in some detail there where we think for any funding or any CapEx and investment in the U.S. Where we can get kind of 30% to 40%, we think of a project refunded via the chipset. There is also the ITC, so the investment tax credit enables companies that deploy CapEx in the U.S. to claim back essentially 25% of the value of that CapEx. The way that it would flow through the P&L is that you would essentially and call it late first quarter, early second quarter of this subsequent year. You would file that ITC; you would get that credit back from the government that would then go on the balance sheet and it would net against that gross CapEx number. And so we have then a net CapEx number that then depreciates over whatever your depreciable period is.
So that’s how it would flow through the P&L as we make additional investments in the U.S., for some of those projects that Tom mentioned. We will be able to claim not only the CHIPS Act funding, but also the ITC as well. One thing that I would touch on just briefly, because it is a similar type of program that we actually are just seeing the benefit of. So we won a case recently, you may have seen a few details about it, but we’re essentially getting a $152 million tax refund here in the first quarter, that $152 million will essentially be offset against the purchase of the equipment that we made in kind of that 2014, 2015 period. As it’s netted against that equipment, some of it will flow through as a gain, some of it will just flow through as a net to that equipment through the depreciation.
And I think the treatment of that refund will look very similar to the ITC.
Ross Seymore: Thank you.
Operator: Please standby for our next question. Our next question comes from Chris Caso with Credit Suisse. Your line is now open.
Dave Reeder: Chris? Are you there?
Chris Caso: Hi, sorry, long-view. Good morning.
