Wolfspeed, Inc. — Form 10-Q summary
Period clarification: The supplied filing is for the quarter ended March 31, 2024—Wolfspeed’s fiscal 2024 third quarter—not 2023 Q3. The filing is unaudited and was signed May 2, 2024. Unless noted, operating results below are for continuing operations.
Business context and reporting period
Wolfspeed develops silicon carbide materials and power devices for applications including electric vehicles, charging, renewable energy and industrial markets. It completed the sale of its RF product line to MACOM on December 2, 2023; RF results are reported as discontinued operations. The remaining business comprises Power Products and silicon carbide and GaN Materials Products.
Financial performance and liquidity
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $200.7 million | $192.6 million | $606.5 million | $555.8 million |
| Gross profit / margin | $22.5 million / 11.2% | $59.8 million / 31.0% | $75.0 million / 12.4% | $184.2 million / 33.1% |
| Operating loss | $106.4 million | $85.7 million | $299.4 million | $222.2 million |
| Net loss from continuing operations | $148.9 million | $83.1 million | $398.7 million | $169.3 million |
| Net loss, including discontinued operations | $148.9 million | $99.5 million | $689.3 million | $216.6 million |
| Basic and diluted loss per share | $1.18 | $0.80 | $5.49 | $1.74 |
Quarterly revenue grew 4%; nine-month revenue grew 9%. For the quarter, Power Products revenue was $102.1 million, essentially flat year over year, and Materials Products revenue rose 8% to $98.6 million. For nine months, Power Products rose 3% to $311.0 million and Materials Products rose 16% to $295.5 million.
- Margins: Gross profit and margin fell sharply. Management attributed the decline principally to Mohawk Valley Fab underutilization costs—$30.4 million in the quarter and $100.4 million year to date—and, for the nine-month period, a less favorable product mix. Some costs previously recorded as factory start-up expense shifted into cost of revenue after production began.
- Expenses and interest: Nine-month R&D was $141.9 million and SG&A was $184.8 million. Nine-month net non-operating expense was $98.7 million, versus $53.4 million of non-operating income a year earlier; the change largely reflects higher interest expense, partly offset by higher interest income.
- Cash flow: Nine-month cash used in continuing operations was $431.8 million, versus $63.5 million. Continuing investing activities used $1,571.4 million, including $1,629.7 million of property and equipment purchases, partly offset by $178.4 million of reimbursements. Financing activities provided $1,446.1 million. Cash and cash equivalents declined to $1,142.4 million; cash, equivalents and short-term investments totaled $2,550.9 million at March 31, 2024.
- Balance sheet and debt: Long-term debt, net was $2,631.7 million and convertible notes, net were $3,032.6 million, totaling $5,664.3 million. The debt figure includes customer deposits under the CRD Agreement. Shareholders’ equity was $1,022.6 million, down from $1,621.9 million at June 25, 2023. Inventories increased to $421.2 million from $284.9 million.
- Other financial items: The RF divestiture contributed to a $290.6 million nine-month loss from discontinued operations, including a $204.0 million loss on sale. The company accrued $7.7 million for alleged customs-duty underpayments relating to its former Lighting Products business.
Material changes, outlook and management commentary
Management says EV-related power-product demand remains strong, while demand in industrial and energy applications has softened. Supply limitations, customer demand shifts and the pace of factory ramp-up affect the company’s ability to fulfill demand. Management expects underutilization costs to continue to weigh on margins as new capacity ramps.
Wolfspeed targets approximately $2.0 billion of net capital investment for fiscal 2024. Its expansion program includes the Mohawk Valley Fab, a new materials facility in Siler City, North Carolina, Durham expansions and a planned facility in Germany. Management believes liquidity is adequate for daily operations and capital expenditures for at least the next 12 months, but expects to need additional funding to complete all planned expansions. German and CHIPS Act incentive timing and amounts remain uncertain. No specific revenue or earnings guidance is provided in the supplied filing text.
- The customer deposit agreement provides for up to $2.0 billion of unsecured deposits; $1.5 billion had been received by March 31, 2024. Deposits bear 6% interest, potentially rising to 10% or 15% if specified supply targets are not met, and are repayable at maturity in 2033 unless earlier repayment applies.
- The 2030 Senior Notes have a 9.875% annual rate for the first three years, rising thereafter under the note terms. They carry a liquidity covenant requiring at least $500 million of qualifying unrestricted cash and cash equivalents at each month-end; the company reported compliance at March 31, 2024.
- Other notable exposures include supplier take-or-pay commitments, customer supply obligations, the Purdue patent litigation, and restrictions and potential forfeiture provisions affecting the MACOM shares received in the RF sale. The company says it cannot estimate a possible loss range in the Purdue case.
- The $515.4 million investment tax credit receivable is an estimate based on the company’s interpretation of Section 48D; final government guidance could change qualifying expenditure estimates. The company also maintains a full valuation allowance against U.S. deferred tax assets.
Important facts for investors to verify
- Whether Mohawk Valley utilization, yields and product mix improve enough to reduce underutilization costs and restore gross margins.
- Actual spending against the fiscal 2024 net capital investment target, and the timing and certainty of public incentives and additional financing.
- Terms, supply targets, interest costs and repayment obligations under the customer deposit agreement, alongside debt covenant headroom and total debt service.
- Progress on RF transaction obligations, including the RTP Fab transfer timeline, MACOM share transfer restrictions and potential forfeiture.
- Whether demand softness, customer concentration, supply constraints and supplier commitments affect revenue, inventory and cash consumption; and developments in the Purdue litigation and customs-duty matter.