Wolfspeed, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter ended December 26, 2021; comparisons are with the quarter ended December 27, 2020. Six-month figures cover the first half of fiscal 2022. The statements are unaudited. Wolfspeed focuses on silicon carbide (SiC) and gallium nitride (GaN) materials and power and RF devices. Its former LED Products business was sold on March 1, 2021 and is reported as discontinued operations. The company changed its name from Cree, Inc. and moved its listing to the NYSE in October 2021.
Financial performance and position
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $173.1 million | $127.0 million | $329.7 million | $242.5 million |
| Gross profit / margin | $57.0 million / 32.9% | $41.3 million / 32.5% | $106.4 million / 32.3% | $76.8 million / 31.7% |
| Operating loss | $60.9 million | $57.6 million | $126.6 million | $119.8 million |
| Net loss from continuing operations | $96.7 million | $54.3 million | $166.8 million | $129.6 million |
| Loss per share from continuing operations | $0.82 | $0.49 | $1.42 | $1.18 |
Q2 revenue rose 36% year over year, primarily on increased power-product capacity and strong demand. Management attributed higher gross profit and margin to revenue growth, manufacturing cost improvements and longer estimated useful lives for certain equipment, partly offset by product mix. Operating loss nevertheless widened, reflecting higher operating expenses, particularly factory start-up costs. Non-operating expense was $27.8 million in Q2, including a $24.8 million loss on extinguishment of the 2023 convertible notes. A $7.3 million tax expense related to restructuring the Luxembourg holding company contributed to the quarter’s tax expense.
For the six months, continuing-operations operating cash use was $95.0 million, versus $32.1 million a year earlier. Net cash used in investing activities was $83.5 million; property and equipment purchases were $401.6 million, partly offset by $50.8 million of state reimbursements. Cash and cash equivalents declined to $185.4 million from $379.0 million at June 27, 2021. Cash, cash equivalents and short-term investments totaled $686.5 million, down from $1.155 billion.
At December 26, 2021, total assets were $3.217 billion, total liabilities were $838.0 million and shareholders’ equity was $2.379 billion. Convertible notes had a $453.9 million net carrying value and $575.0 million principal outstanding. The $424.8 million principal balance of the 2023 Notes was converted into approximately 7.1 million shares during the quarter. The company had no borrowings under its $125 million revolving credit line; the line’s maturity was extended to January 2026 in an amendment dated January 25, 2022. The 2026 Notes became holder-convertible through March 31, 2022 under the stated stock-price test.
Material changes and unusual items
- Compared with the prior-year quarter, continuing-operations revenue and gross profit increased, but operating and continuing-operations net losses also increased. Prior-year total net loss included substantial discontinued-operations losses, so total net loss comparisons are not directly comparable.
- Other operating expense rose to $15.6 million in Q2 from $2.6 million, including $11.0 million of factory optimization start-up costs. Management expects approximately $80 million of start-up and pre-production costs in FY2022 as the New York facility ramps.
- A prospective useful-life estimate change reduced depreciation expense by $8.5 million in Q2 and $16.9 million in the first half. For the six-month period, $4.9 million of the remaining reduction improved gross profit, while $10.3 million reduced inventory and is expected to affect cost of revenue when inventory is sold. Management estimated the gross-profit benefit could reach approximately $8 million per quarter by fiscal year-end as inventory is relieved.
- The company is constructing a SiC device fabrication facility in Marcy, New York, and expanding materials capacity. It expects to invest more than $1 billion in the New York facility through FY2024, with approximately $500 million expected to be reimbursed over time under a state grant. The FY2022 net capital investment target is approximately $475 million, net of about $300 million of expected state reimbursements.
Outlook, commentary and risks
Management said current working capital, the credit line and anticipated operating cash flows should cover operating needs and capital expenditures for at least the next 12 months. It expects the New York facility to start production in FY2022 and is investing to expand capacity for anticipated growth in EV, 5G and industrial applications. The filing does not provide a specific revenue or earnings forecast for the next quarter.
Management reported that semiconductor supply constraints were expected to persist for at least the next few quarters and could limit shipments despite strong demand. COVID-19 effects on supply, labor, customers and output remain uncertain. Other highlighted risks include production yields and facility ramp execution, customer and product concentration, competitive pricing, supply-chain dependencies, and the timing and receipt of state grant reimbursements. The company disclosed legal proceedings but said outcomes were not reasonably estimable; management did not expect the matters, individually or in aggregate, to materially harm the company, while noting an adverse outcome could have a material effect.
Key facts for investors to verify
- Whether revenue growth and demand translate into improved operating performance, given continued operating losses and negative operating cash flow.
- Actual capital spending, factory start-up costs, production timing and yields at the New York facility, and progress on capacity expansion.
- Timing and amount of state grant reimbursements, including satisfaction of the grant’s employment, investment and other conditions.
- Cash burn and liquidity after the substantial decline in cash and investments, and the potential dilution or settlement terms if holders convert the 2026 Notes.
- The ongoing effect of the useful-life estimate change on reported gross profit, including inventory-related timing effects.
- Supply constraints, COVID-19 impacts, customer concentration, and collectability of the $125 million LED-sale note and any earn-out consideration.