Wolfspeed, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 25, 2022, the first quarter of fiscal 2023. Comparative period: three months ended September 26, 2021. The filing is unaudited.
Business context and financial results
Wolfspeed develops silicon carbide (SiC) and gallium nitride (GaN) materials and semiconductor devices for power and radio-frequency applications, including electric vehicles, renewable energy, fast charging, telecommunications, and aerospace and defense.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $241.3 million | $156.6 million |
| Gross profit / margin | $79.9 million / 33.1% | $49.4 million / 31.5% |
| Operating loss | $75.7 million | $65.7 million |
| Net loss | $26.2 million | $70.1 million |
| Diluted loss per share | $0.21 | $0.60 |
| Cash used in operating activities | $12.7 million | $62.5 million |
Revenue rose 54%, which management attributed to stronger demand across product lines and increased production capacity for power and materials products. Gross margin improved 1.6 percentage points, mainly from higher revenue and the full-period effect of a prior useful-life estimate change, partly offset by product mix. Operating loss widened despite revenue growth, with higher factory start-up and other operating costs.
Cash, debt, and investment
- Cash, cash equivalents, and short-term investments totaled $1.197 billion at September 25, 2022, approximately unchanged from $1.199 billion at June 26, 2022. Cash and equivalents were $521.6 million and short-term investments $675.6 million.
- Convertible notes had $1.325 billion principal and a $1.301 billion net carrying value. The company had no borrowings on its $125 million revolving credit facility; the full amount was available.
- Operating cash outflow was $12.7 million. Property and equipment purchases were $111.1 million, partly offset by $46.7 million in reimbursements; management reported net purchases of $64.4 million, versus $208.5 million in the prior-year quarter.
- Cash from investing activities was $102.8 million, including $101.8 million collected on an LED-business earnout note. Cash and equivalents increased $72.1 million during the quarter.
- Available-for-sale investments had $29.9 million of unrealized losses. The company said the securities were investment grade, attributed losses to market factors including interest-rate changes, and recorded no credit-loss allowance.
Material changes and unusual items
- A $49.4 million net gain from an arbitration award related to a former customer’s purchase obligations was recognized in non-operating income. This substantially reduced reported net loss and contributed to improved operating cash flow; it is not an operating revenue item.
- Factory start-up costs increased to $38.4 million from $8.6 million, primarily reflecting the ramp of the new SiC device facility in Marcy, New York. Total other operating expense rose to $42.4 million from $12.8 million.
- Wolfspeed adopted ASU 2020-06 for convertible debt accounting on June 27, 2022. The change increased the notes’ carrying value and eliminated the separately recorded equity component; it reduced additional paid-in capital by $333.0 million and affected opening accumulated deficit and property and equipment. Comparisons of debt and equity balances are affected by this accounting change.
- Customer design-ins were $3.5 billion versus $0.6 billion. The company cautions that design-ins are not firm revenue forecasts and may not convert to sales.
Outlook, risks, and contingencies
- Management expects available working capital, credit availability, and anticipated operating cash flows to cover daily operations and capital expenditures for at least 12 months, but says additional funding may be needed to complete planned capacity expansions.
- For fiscal 2023, management targets approximately $1.0 billion in net capital investment, including an expected $275 million in New York grant reimbursements. It targets approximately $100 million in start-up and underutilization costs, primarily for the Marcy facility.
- The company expects to invest approximately $2.0 billion through fiscal 2024 in the Marcy facility, with about $500 million expected in state reimbursements. It also expects approximately $1.3 billion of initial investment in a planned Siler City, North Carolina materials facility from late fiscal 2023 through fiscal 2024. Funding plans include potential customer deposits, private or public capital, government reimbursements, and transferable tax credits.
- Management cited strong demand, especially for power products, but noted semiconductor supply constraints may limit near-term shipments. Key execution risks include factory ramp-up, production yields, equipment and materials availability, capacity utilization, and obtaining funding for expansion.
- Other disclosed risks include macroeconomic and inflationary pressures, trade restrictions and geopolitical developments, customer and distributor concentration, competition, COVID-19-related disruption, cybersecurity, and litigation. The company said it had no significant Russia, Belarus, or Ukraine customer or supplier concentrations and did not then expect material financial-statement impacts from the conflict, while noting uncertainty remains.
- Various legal proceedings are pending; management said outcomes are not reasonably estimable and unfavorable outcomes could materially affect the business. The company also has a potential New York grant of up to $500 million, conditioned on meeting agreement objectives. As of September 25, $307.2 million in reimbursements had reduced property and equipment, including $110.8 million recorded as receivables.
Important facts for investors to verify
- Whether revenue growth, design-ins, and stated demand translate into realized orders and shipments, given supply constraints and the company’s caveat that design-ins are not assured revenue.
- Progress on Marcy qualification, production yields, utilization, start-up costs, and the planned Siler City build-out.
- How the company funds its substantial capital program, achieves expected reimbursements and incentives, and maintains liquidity beyond the stated 12-month operating horizon.
- The sustainability of results excluding the $49.4 million arbitration gain, and the trajectory of operating losses and factory start-up costs.
- Convertible-note conversion exposure, potential dilution, and the effects of the ASU 2020-06 accounting change on reported comparisons.