Wolfspeed, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended September 24, 2023. Comparative period: three months ended September 25, 2022. Figures are unaudited and in U.S. dollars. Wolfspeed develops silicon carbide and gallium nitride materials and devices; continuing operations comprise Power Products and Materials Products. The RF product line is classified as discontinued operations following a pending sale to MACOM.
Financial performance and liquidity
| Metric | Quarter | Prior-year quarter |
|---|---|---|
| Continuing-operations revenue | $197.4 million | $189.4 million |
| Gross profit / margin | $24.7 million / 12.5% | $67.7 million / 35.7% |
| Operating loss | $94.9 million | $63.5 million |
| Net loss from continuing operations | $123.6 million | $14.1 million |
| Net loss from discontinued operations | $272.1 million | $12.1 million |
| Total net loss | $395.7 million | $26.2 million |
| Loss per share, continuing operations | $0.99 | $0.11 |
Revenue increased 4% year over year: Materials Products rose 13% to $96.2 million, while Power Products declined 3% to $101.2 million. Management attributed materials growth to improved output and the power decline primarily to softer industrial demand in China.
- Margins and costs: Gross margin fell to 12.5%, mainly reflecting $34.4 million of Mohawk Valley Fab underutilization costs recorded in cost of revenue, plus unfavorable Power Products mix. Management expects underutilization costs to weigh on margins as new facilities ramp.
- Cash flow and investment: Cash used in operating activities of continuing operations was $112.7 million, versus $6.7 million a year earlier; cash used by discontinued operations was $34.7 million. Property and equipment purchases were $442.0 million, partly offset by $39.6 million in reimbursements. Cash and cash equivalents increased $5.0 million to $1.762 billion; short-term investments rose to $1.586 billion. Together, cash, cash equivalents and short-term investments totaled $3.348 billion.
- Debt and liquidity: Long-term debt, net, was $2.132 billion and convertible notes, net, were $3.028 billion, totaling $5.159 billion in carrying value. The debt figure includes the $1 billion customer refundable deposit received under the CRD Agreement. The company reported compliance with the 2030 Senior Notes covenants, including a $500 million minimum-liquidity covenant as of month-end. Management believes available liquidity and anticipated operating cash flows can support operations and capital expenditures for at least 12 months, but says additional funding will be needed to complete all planned expansions.
Material changes and unusual items
- The pending RF Business Divestiture drove a $272.1 million discontinued-operations loss. It included a $144.6 million impairment of assets held for sale and a $75.4 million excess-loss liability. The proposed consideration is approximately $75 million in cash, subject to adjustment, plus MACOM shares valued at $50 million at agreement signing. Closing was expected by the end of calendar 2023; completion remains subject to closing conditions.
- Interest expense, net of capitalized interest, rose to $61.7 million from $4.8 million, largely reflecting the 2029 Notes, 2030 Senior Notes and CRD Agreement deposit. Interest income increased to $40.6 million from $4.3 million. Prior-year non-operating income included a $49.4 million arbitration gain, which did not recur.
- The customer deposit agreement may provide up to $2 billion in unsecured deposits; the initial $1 billion was received in the quarter. Deposits bear 6% interest, potentially increasing to 10% or 15% if specified supply targets are not met. Repayment is due at maturity in 2033 unless earlier triggered or prepaid under the agreement.
- Design-ins were $2.2 billion versus $3.4 billion; design-wins were $1.5 billion versus $0.5 billion. The filing cautions that neither measure guarantees future revenue.
Outlook, commentary and risks
For fiscal 2024, Wolfspeed targets approximately $2.0 billion of net capital investment, including expected reimbursements. It is expanding Mohawk Valley, building a materials facility in Siler City, expanding Durham capacity, and planning a silicon carbide fab in Germany. The company says demand for power products outside China, particularly automotive, is strong, but production capacity constraints may limit near-term shipments. It identifies yield improvement, successful facility ramp-up, and capacity expansion as important to growth. The filing provides no specific revenue or earnings forecast.
Key risks include substantial ramp-related costs and execution challenges, yield and capacity constraints, supply availability and take-or-pay commitments, demand and pricing volatility, reliance on a limited number of customers, and the need for additional financing to complete expansion plans. The 2030 Senior Notes bear interest of 9.875% for the first three years, rising thereafter under the indenture. A Purdue patent case remains in fact discovery, with trial scheduled for November 2024; the company says potential loss cannot currently be estimated. Management stated that disclosure controls were effective and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether and when the MACOM RF sale closed, final proceeds and share restrictions, and any resulting changes to continuing operations.
- Mohawk Valley utilization, yields, underutilization costs and the pace at which these costs may decline.
- Actual fiscal 2024 capital spending and reimbursements, plus the timing and terms of any additional funding.
- Compliance with debt liquidity requirements and the CRD Agreement’s supply targets, interest provisions and repayment obligations.
- Whether design-ins convert into orders and revenue, and how demand trends in China, automotive and other end markets evolve.