Wolfspeed, Inc. — Form 10-Q summary
Reporting period: The filing covers the quarter ended March 27, 2022, Wolfspeed’s fiscal third quarter of 2022—not 2021 Q3. Amounts are in U.S. dollars.
Business context and results
Wolfspeed develops and manufactures silicon carbide (SiC) and gallium nitride (GaN) materials and devices for power and radio-frequency applications, including electric vehicles, fast charging, renewable energy, 5G, and aerospace and defense. The former LED business was sold in March 2021 and is reported as discontinued operations.
| Metric | Three months ended Mar. 27, 2022 | Prior-year quarter | Nine months ended Mar. 27, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $188.0 million | $137.3 million | $517.7 million | $379.8 million |
| Gross profit / margin | $64.0 million / 34.0% | $44.0 million / 32.0% | $170.4 million / 32.9% | $120.8 million / 31.8% |
| Operating loss | $62.3 million | $61.4 million | $188.9 million | $181.2 million |
| Net loss from continuing operations | $66.5 million | $66.5 million | $233.3 million | $196.1 million |
| Loss per share from continuing operations | $0.54 | $0.59 | $1.96 | $1.75 |
Financial position, cash flow and liquidity
- At March 27, cash and cash equivalents were $485.9 million and short-term investments were $800.2 million, totaling $1.286 billion, up from $1.155 billion at June 27, 2021.
- Current assets were $1.838 billion and current liabilities were $322.6 million. Inventory was $219.4 million, compared with $166.6 million at fiscal year-end.
- Net cash used in operating activities was $123.4 million for the nine months, versus $58.9 million from continuing operations in the prior-year period. The filing attributes the higher use mainly to inventory growth and increased receivables.
- Investing activities used $378.0 million; property and equipment purchases were $535.5 million, partly offset by $83.5 million in New York grant reimbursements. Management reported net capital investment of $452.0 million.
- Financing activities provided $608.3 million, chiefly from the 2028 convertible notes offering. Cash and cash equivalents increased by $106.9 million over the nine months.
- Convertible notes had $1.325 billion aggregate principal outstanding and a $1.008 billion net carrying amount. The $125 million revolving credit facility was undrawn and fully available at quarter-end.
Changes and unusual items
- Revenue increased 37% in the quarter and 36% year to date, which management attributed to stronger demand across product lines and increased power and materials production capacity. Quarterly gross margin rose 2.0 percentage points year over year.
- Operating expenses included factory-optimization start-up costs of $21.4 million for the quarter and $41.0 million year to date, primarily associated with the Marcy, New York SiC facility. These costs contributed to higher other operating expense.
- A change in estimated useful lives for certain machinery reduced depreciation expense by $25.2 million year to date. Management said the change improved year-to-date gross profit by $12.2 million and reduced net loss by $14.8 million; some benefit was reflected in inventory and will affect cost of revenue when sold.
- In the second quarter, conversion of the 2023 notes into approximately 7.1 million shares generated a $24.8 million debt-extinguishment loss. In the third quarter, Wolfspeed issued $750 million principal amount of 0.25% notes due 2028, receiving $732.3 million net proceeds and paying $108.2 million for capped calls.
- The prior-year comparison includes losses from discontinued LED operations: $41.6 million for the prior-year quarter and $178.8 million for the prior-year nine months. There was no discontinued-operations loss in the current periods.
Outlook, commentary and risks
- Management targeted approximately $550 million of net capital investment for fiscal 2022, including approximately $200 million of expected New York reimbursements, and estimated $75 million of fiscal 2022 start-up and pre-production costs for the new facility.
- The Marcy facility and Durham materials expansion are intended to increase SiC capacity. Management expected to invest more than $1 billion in the Marcy facility through fiscal 2024, with approximately $500 million expected to be reimbursed under the New York grant program. The facility began running qualification lots in the fourth quarter of fiscal 2022.
- Management stated that current working capital, available credit and expected operating cash flows should cover operating needs and capital expenditures for at least 12 months. It also noted uncertainty around pandemic effects and continuing supply constraints that could limit near-term shipments.
- Key risks include supply availability and costs, production yields and facility ramp execution, customer demand and concentration, competitive pricing, COVID-19 disruption, and geopolitical or trade developments related to Russia and Ukraine. Management said it did not then expect material financial-statement impacts from the conflict but described the full effects as uncertain.
- The company had $15.8 million of unrealized losses on short-term investments, which management attributed to market and interest-rate conditions; it reported investment-grade ratings and no credit-loss allowance. Pending legal proceedings were not reasonably estimable; management said unfavorable outcomes could nevertheless materially affect the business.
- Wolfspeed recognized $7.3 million of tax expense in the second quarter related to restructuring its Luxembourg holding company and maintained a full valuation allowance against U.S. deferred tax assets.
Investor facts to verify
- Whether revenue growth and customer demand translate into sustained production, shipment growth and improved operating results.
- Actual factory start-up costs, production yields, qualification progress and capacity ramp at Marcy, alongside the expected timing and receipt of New York reimbursements.
- Working-capital trends, particularly inventory growth, operating cash use and the company’s ability to fund its elevated capital program.
- Convertible-note terms, potential dilution and conversion exposure, including the limits of the capped-call protection.
- The effect of the useful-life accounting estimate on reported margins and the timing of depreciation-related inventory benefits flowing through cost of revenue.
- Developments in supply constraints, pandemic disruption, geopolitical risks, litigation and tax matters.