Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the financial statements and the related notes that appear elsewhere in this document. This section of this Form 10-K generally discusses fiscal 2025 and 2024 items and year-to-year comparisons between fiscal 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between fiscal 2024 and 2023 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 as filed with the SEC on August 22, 2024.
Executive Summary
The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, including a brief discussion of our business and products, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with our consolidated financial statements included in Part II, Item 8 of this Annual Report. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Unless otherwise noted, the following information and discussion relates to our continuing operations.
Recent Events
Restructuring Support Agreement
On June 22, 2025, the Debtors entered into the Restructuring Support Agreement with (i) the Consenting Senior Secured Noteholders; (ii) the Consenting Convertible Noteholders; and (iii) Renesas.
We intend to substantially de-lever our capital structure on the terms set forth in the Restructuring Support Agreement through the Plan filed by the Debtors in the Chapter 11 Cases. The specific terms underlying the Restructuring Support Agreement are further detailed in the Plan.
The following is a summary of the material terms of the transactions contemplated by the Restructuring Support Agreement and the Plan:
• Senior Secured Notes. Holders of Senior Secured Notes are expected to receive their pro rata share of (i) New Senior Secured Notes, which will have substantially similar terms to the existing Senior Secured Notes with certain modifications to reduce go-forward cash interest and minimum liquidity requirements, (ii) a payment from the redemption of $250 million in principal amount of existing Senior Secured Notes at a redemption price of 109.875% of the principal amount being redeemed (to be paid with the proceeds of the Rights Offering described below), and (iii) certain commitment fees, subject to certain conditions.
• Convertible Notes. Holders of Convertible Notes are expected to receive their pro rata share of (i) rights to participate in the rights offering of New 2L Convertible Notes in the principal amount of $301.13 million, to be fully backstopped by certain holders of Wolfspeed’s existing Convertible Notes, and the issuance of additional New 2L Convertible Notes in the principal amount of $30.25 million pursuant to a premium, as discussed in more detail below under the section titled “Backstop Commitment Agreement,” (ii) the New 2L Takeback Notes in the principal amount of $296 million and (iii) 56.3% of the New Common Stock to be issued on the Plan Effective Date, subject to dilution from other equity issuances, including the conversion of the New 2L Convertible Notes, and the convertible notes and warrants provided to Renesas. Wolfspeed is expected to provide certain registration rights with respect to certain shares of the New Common Stock underlying the New 2L Convertible Notes to certain holders of the existing Convertible Notes.
• Renesas. Subject to certain regulatory approvals and conditions set forth in the Plan, Renesas is expected to receive or be entitled to certain economic benefits associated with (i) new second-lien convertible notes in the principal amount of $204 million, (ii) 38.7% (subject to claims reconciliation in the Chapter 11 Cases) of the New Common Stock as of the Plan Effective Date, subject to dilution from certain equity incentive plans expected to be adopted upon emergence from Chapter 11 and certain other equity issuances, including the conversion of the New 2L Convertible Notes, and the convertible notes and warrants provided to Renesas, (iii) warrants to purchase 5% of the New Common Stock as of the Plan Effective Date (assuming conversion of convertible notes issued to Renesas and all New 2L Convertible Notes), and (iv) if certain regulatory approvals have not been obtained prior to the deadline described in the
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Restructuring Support Agreement, certain contingent consideration, including the Reserve Cash, $15 million in the Additional New 2L Takeback Notes, 2.0% of the New Common Stock as of the Plan Effective Date, subject to dilution from certain equity incentive plans expected to be adopted upon emergence from Chapter 11 and certain other equity issuances, including the conversion of the New 2L Convertible Notes, and the convertible notes and warrants provided to Renesas, and the right to a one-year extension of the exercise period of the warrants. If certain regulatory approvals are obtained prior to the deadline described in the Restructuring Support Agreement and set forth in the Plan, Renesas will not be entitled to the Contingent Consideration and $10 million of the Reserve Cash will be remitted to or retained by Wolfspeed, $5 million of the Reserve Cash will be remitted to the holders of the Senior Secured Notes (on account of certain claims for commitment fees), the Additional New 2L Takeback Notes will not be issued, the 2.0% of the New Common Stock as of the Plan Effective Date will be distributed to the holders of existing equity interests (as discussed below), and the term of the warrants granted to Renesas will not be extended. Similar to the holders of existing Convertible Notes, Renesas will also be entitled to certain registration rights as set forth in the Restructuring Support Agreement.
• Unsecured Creditors. All other unsecured creditors are expected to be unimpaired and paid on the Plan Effective Date or in the ordinary course of business.
• Existing Equity Holders. Our existing equity interests will be cancelled, and existing equity holders are expected to receive their pro rata share of 3.0% or 5.0% of the New Common Stock as of the Plan Effective Date (depending on whether Renesas obtains certain regulatory approvals), subject to dilution from certain equity incentive plans expected to be adopted upon emergence from Chapter 11 and certain other equity issuances, including the conversion of the New 2L Convertible Notes, and the convertible notes and warrants provided to Renesas.
Consummation of the transactions contemplated by the Restructuring Support Agreement is subject to, among other things, approval of the Plan by the Bankruptcy Court. Accordingly, no assurance can be given that the transactions described therein will be consummated. Renesas’s receipt of regulatory approvals is not a condition precedent to the Plan Effective Date.
Backstop Commitment Agreement
On June 22, 2025, Wolfspeed entered into the Backstop Commitment Agreement with the Backstop Parties and the Holdback Parties. Pursuant to the Backstop Commitment Agreement (and subject to the terms and conditions therein), Wolfspeed initiated a rights offering on August 14, 2025 as contemplated under the Restructuring Support Agreement through the issuance of the New 2L Convertible Notes in an aggregate principal amount of $301.13 million, which were or are being offered at a purchase price of 91.3242% of the principal amount thereof. Sixty percent of the Rights Offering is being offered pro rata to all holders of Convertible Notes and the Backstop Parties have committed to purchase any unsubscribed portion of the Non-Holdback Rights Offering. The remaining 40% of the Rights Offering has been reserved for the Holdback Parties that have committed to purchasing their respective portions set forth in the Backstop Commitment Agreement. As consideration for the commitments by the Backstop Parties and Holdback Parties, the Backstop Parties and the Holdback Parties will be issued on the Plan Effective Date additional New 2L Convertible Notes in an aggregate principal amount of $30.25 million (the “Backstop Premium"), allocated ratably. If the Backstop Commitment Agreement is terminated under certain circumstances as set forth therein, the Backstop Commitment Agreement provides for a cash payment of the Backstop Premium to the Backstop Parties and Holdback Parties on the earlier of the four months following the Petition Date or the effective date of an “Alternative Transaction” (as defined in the Backstop Commitment Agreement).
The transactions contemplated by the Backstop Commitment Agreement are conditioned upon the satisfaction or waiver of certain conditions, including, among other things, that (i) the Bankruptcy Court will have entered an order approving the Backstop Commitment Agreement and the Disclosure Statement and confirming the Plan, (ii) the Plan Effective Date will have occurred, and (iii) the Restructuring Support Agreement remains in full force and effect.
Senior Secured Notes Amendment
On June 23, 2025, Wolfspeed, the Subsidiary Guarantors (as defined under the A&R Indenture (as defined below)), the Trustee and the Collateral Agent, entered into the Second Supplemental Indenture to the A&R Indenture, pursuant to which the parties thereto agreed to (i) release Wolfspeed Germany GmbH, a Subsidiary Guarantor, from its obligations under the Notes Documents (as defined under the A&R Indenture) and any related liens and (ii) exclude net proceeds of the sale of “Building 21” from the offer to repurchase requirement under the A&R Indenture.
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Voluntary Petition
Subsequent to fiscal 2025 year-end, on the Petition Date, the Debtors filed the Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court to implement the Plan. On the Petition Date, the Debtors filed the Plan with the Bankruptcy Court. The Plan embodies the terms of, and transactions contemplated by, the Restructuring Support Agreement. On June 27, 2025, prior to commencing the Chapter 11 Cases, the Debtors commenced solicitation for approval of the Plan by eligible claimholders by transmitting its Disclosure Statement and related solicitation materials. The deadline for eligible claimholders to submit votes on the Plan was August 22, 2025. On July 1, 2025, the Bankruptcy Court entered an order approving Wolfspeed's request to administer the Chapter 11 Cases jointly for administrative purposes only under the caption In re Wolfspeed, Inc., et al. Wolfspeed continues to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
The Debtors filed and received approval for customary first day motions with the Bankruptcy Court to ensure their ability to continue operating in the ordinary course of business, including authority to pay employees, vendors, and customers. The treatment under the Plan and the Bankruptcy Court-approved relief sought and received in Wolfspeed's “first day” motions collectively contemplate that vendors and other unsecured creditors will be paid in full and in the ordinary course of business.
See the section titled “Risk Factors – Risks related to our Chapter 11 Cases” for a discussion of the risks related to the Restructuring Support Agreement, the Plan and the Chapter 11 Cases.
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
• Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices . Our potential for growth depends significantly on the continued adoption of silicon carbide materials and device products in the power market, and our ability to win new designs for these applications. Demand also fluctuates based on various domestic and global economic and market cycles, continuously evolving industry supply chains, trade and tariff terms, and inflationary impacts, as well as evolving competitive dynamics in each of our respective markets. These uncertainties make demand difficult to forecast for us and our customers. Recently, we have been experiencing softening demand for our products. We continue to experience increased mid and long-term demand for our power products designed for electrical vehicle applications, though at a slower pace than initially expected. We believe that this reflects the value that the industry places on a transition to silicon carbide materials and devices while also evidencing a global focus on adopting higher efficiency energy solutions, including electric vehicle and related technologies. We believe these trends could have a significant positive impact on revenues in future periods.
• Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. In addition, market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power markets we serve. To address these competitive pressures, we have invested in new production facilities, as well as research and development activities to support new product development, lower product costs and increase levels of product performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers.
• Governmental Trade and Regulatory Conditions . Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, geopolitical, economic and regulatory environment in the countries where we do business. We continue to monitor the recent changes in global trade policy, including tariffs and related trade actions announced by the United States, China and other countries. The degree to which such tariffs and other related actions impact our business, financial condition and results of operations will depend on future developments, which are uncertain. Changes in trade policy, such as the imposition or expansion of tariffs or export bans to specific customers or countries, could reduce or limit demand for, or increase the cost of production of, our products in certain markets.
• Technological Innovation and Advancement. Innovations and advancements in materials and power technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.
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• Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information associated with product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common.
Fiscal 2025 Overview
The following is a summary of our financial results for the year ended June 29, 2025:
• Our year-over-year revenue decreased by $49.6 million to $757.6 million primarily driven by weaker demand for applications serving the industrial and energy end markets, partially offset by continued growth from our automotive products.
• Gross margin decreased to (16.1)% in fiscal 2025 from 9.6% in fiscal 2024. Gross profit decreased to $(121.6) million in fiscal 2025 from $77.4 million in fiscal 2024. The decrease in gross margin is primarily due to the impact of our 2025 Restructuring Plan and changes in our product mix. Gross margin and gross profit for fiscal 2025 and 2024 include the impacts of $105.2 million and $124.4 million, respectively, of underutilization costs in connection with the start of production at the Mohawk Valley Fab, which began revenue production in late fiscal 2023.
• Operating loss from continuing operations was $1,329.2 million in fiscal 2025 as compared to $445.3 million in fiscal 2024. Operating loss for fiscal 2025 includes approximately $402.2 million of restructuring and related costs, $359.2 million of goodwill impairment charges, and $55.8 million of pre-petition charges relating to the Chapter 11 Cases.
• Combined cash, cash equivalents and short-term investments decreased to $955.4 million at June 29, 2025 from $2,174.6 million at June 30, 2024.
◦ Net cash used in operating activities of continuing operations was $711.7 million in fiscal 2025 as compared to $671.3 million in fiscal 2024. The primary drivers of the increase in cash outflows during fiscal 2025 include cash costs related to the implementation of the 2025 Restructuring Plan and higher professional services spending related to our Chapter 11 Cases.
◦ Purchases of property and equipment, net were $1,031.0 million (net of $240.4 million in reimbursements) in fiscal 2025 as compared to $2,095.5 million (net of $178.5 million in reimbursements) in fiscal 2024.
◦ Debt, net, including convertible notes, was $6,538.0 million at June 29, 2025 and $6,161.1 million at June 30, 2024. The increase was due to the additional borrowings in the form of Senior Secured Notes and additions from paid-in-kind interest accrued to the principal balance during the fiscal year.
• Design-wins and design-ins decreased for fiscal 2025 compared to fiscal 2024. Design-wins for fiscal 2025 and the fourth quarter of fiscal 2025 were the second highest design-wins for a fiscal year and fiscal fourth quarter in company history, respectively.
Business Outlook
We believe we are uniquely positioned as an innovator in the global semiconductor industry. We are currently focused on three key priorities designed to put us on a path toward long-term growth and profitability:
• strengthening our balance sheet by optimizing our capital structure for sustainable growth
• improving the financial performance of the company
• deploying cost-efficient capital to support our growth plan and accelerate product innovation.
We believe these efforts will support our goals of delivering long-term growth and profitability, while enabling us to continue to invest in our business to further develop the technologies and accelerate the growth opportunities of silicon carbide materials and silicon carbide power devices and modules.
Strengthening Our Balance Sheet
Under the terms and transactions contemplated by the Restructuring Support Agreement and the Plan, upon successful emergence from Chapter 11, we expect to reduce our overall funded debt by approximately 70%, representing a debt reduction of approximately $4.6 billion and a reduction of its annual total cash interest payments by approximately 60%.
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Improving Financial Performance
During the first quarter of fiscal 2025, we initiated a headcount reduction that upon its anticipated completion in fiscal 2026, is expected to result in a cumulative total headcount reduction of approximately 25%, and a facility consolidation plan, which is ultimately expected to result in the closure of our 150mm device fabrication facility in Durham, North Carolina as well as a realignment of related activities across the geographic regions in which we operate. We intend to optimize our cost structure as we focus on the acceleration of our transition from 150mm to 200mm silicon carbide devices. We have made targeted adjustments to the 2025 Restructuring Plan as we identify additional opportunities to optimize our cost structure while continuing to support future growth and meet long-term demand. Refer to Note 16, "Restructuring," to our consolidated financial statements in Part II, Item 8 of this Annual Report for additional discussion of the financial impact of these activities.
In addition, we are focused on continuous improvement in the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex. We have significantly improved yields and expect to continue to improve yields as we transition additional device production to the Mohawk Valley Fab, where we continued to realize ongoing yield improvements during fiscal 2025.
Deploying Cost-Efficient Capital
We incurred approximately $1 billion of net capital investment for the fiscal year ended June 29, 2025. Our net capital investment during fiscal 2025 includes approximately $0.2 billion of government incentives received for eligible expenditures, primarily under the AMIC refundable tax credits, as further discussed in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" to our consolidated financial statements in Item 8 of this Annual Report. The buildings and critical infrastructure at our major expansion projects at the Mohawk Valley Fab and Siler City, North Carolina facility were substantially completed as of the end of fiscal 2025. We believe our installed capacity at our production facilities is able to support our current demand and we intend to scale our capacity at these new facilities with future demand for 200mm offerings. Consequently, we expect gross capital investment to decrease significantly to approximately $0.2 billion in fiscal 2026. We also expect to receive an additional $0.7 billion of incentives primarily related to the AMIC refundable tax credits during fiscal 2026.
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Results of Operations
Selected consolidated statement of operations data for the years ended June 29, 2025, June 30, 2024 and June 25, 2023 is as follows:
Fiscal Years Ended
June 29, 2025 June 30, 2024 June 25, 2023
(in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue Amount % of Revenue
Revenue, net $757.6 100.0 % $807.2 100.0 % $758.5 100.0 %
Cost of revenue, net 879.2 116.1 % 729.8 90.4 % 515.6 68.0 %
Gross (loss) profit (121.6) (16.1) % 77.4 9.6 % 242.9 32.0 %
Research and development 175.1 23.1 % 201.9 25.0 % 165.7 21.8 %
Sales, general and administrative 190.5 25.1 % 246.4 30.5 % 214.3 28.3 %
Factory start-up costs 85.2 11.2 % 53.8 6.7 % 160.2 21.1 %
Gain on disposal of property and equipment (20.0) -2.6 % — — % — — %
Goodwill impairment 359.2 47.4 % — — % — — %
Restructuring and other expenses 417.6 55.1 % 20.6 2.6 % 14.5 1.9 %
Operating loss (1,329.2) (175.4) % (445.3) (55.2) % (311.8) (41.1) %
Interest expense, net of capitalized interest 315.2 41.6 % 246.3 30.5 % 42.6 5.6 %
Non-operating income, net (25.5) (3.4) % (119.1) (14.8) % (94.6) (12.5) %
Loss before income taxes (1,618.9) (213.7) % (572.5) (70.9) % (259.8) (34.3) %
Income tax (benefit) expense (9.7) (1.3) % 1.1 0.1 % 0.7 0.1 %
Net loss from continuing operations (1,609.2) (212.4) % (573.6) (71.1) % (260.5) (34.3) %
Net loss from discontinued operations — — % (290.6) (36.0) % (69.4) (9.1) %
Net loss ($1,609.2) (212.4) % ($864.2) (107.1) % ($329.9) (43.5) %
Basic and diluted loss per share
Continuing operations ($11.39) ($4.56) ($2.09)
Net loss ($11.39) ($6.88) ($2.65)
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Revenue
Revenue was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Power Products $414.0 $415.6 $409.2 ($1.6) — % $6.4 2 %
Materials Products $343.6 $391.6 $349.3 ($48.0) (12) % $42.3 12 %
Revenue $757.6 $807.2 $758.5 ($49.6) (6) % $48.7 6 %
Net sales for fiscal 2025 as compared to fiscal 2024 were down 6% primarily driven by the following:
• Net sales of our Power Product offerings were primarily impacted by ongoing weakness in the industrial and energy end markets. This decrease has been partially offset by growth in demand for automotive applications, though we are continuing to experience slower growth for automotive applications than we previously expected.
• Net sales of our Materials Product offerings were primarily impacted by weaker end market demand, which has resulted in some of our customers adjusting the timing and size of their orders.
The slower than expected growth for electric vehicle applications and increase in global production capacity, particularly in China, has resulted in a supply imbalance and challenging competitive landscape for silicon carbide wafers and devices, particularly for 150mm offerings.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Gross (loss) profit ($121.6) $77.4 $242.9 ($199.0) (257) % ($165.5) (68) %
Gross margin (16) % 10 % 32 %
The primary drivers of the decrease in gross profit and gross margin for fiscal 2025 compared to fiscal 2024 included :
• $97.1 million of costs incurred in connection with the 2025 Restructuring Plan, as discussed further in Note 16, "Restructuring" to our consolidated financial statements in Part II, Item 8 of this Annual Report, including $33.6M of accelerated depreciation on 150mm tooling and improvements and $63.5 million of manufacturing transition charges primarily related to planned excess capacity while we wind down operations at the Durham fab.
• Unfavorable changes in product mix driven by (1) a decrease in the percent of total net sales attributable to our higher-margin Materials Products offerings and (2) an increase in the percent of Power Product net sales attributable to lower margin automotive applications due to ongoing weakness in the industrial and energy end market. Production capacity in the Durham fab has shifted from industrial and energy products to automotive products, which have a higher production cost in that fab.
• $8.4 million of additional stock-based compensation charges primarily due to acceleration of unvested awards related to our 2025 Restructuring Plan and awarded grants during fiscal 2025.
The gross margin impact of the above items was partially offset by lower underutilization costs due to the timing of the Mohawk Valley Fab ramp. We incurred $105.2 million of underutilization costs at our Mohawk Valley Fab during fiscal 2025, compared to $124.4 million of underutilization costs during fiscal 2024.
As explained further below in Factory Start-up Costs, the operating costs of each of our new facilities will largely be reflected in cost of revenue, net once such facility reaches revenue generating production. During the period when revenue production begins, but before the facility is at its expected utilization level, we expect some of the costs to operate the facility will not be absorbed into the cost of inventory. We expect that these costs will continue to be substantial as we ramp up the facility to the expected or normal utilization level. The costs incurred to operate the new facilities in excess of the costs absorbed into inventory are referred to as underutilization costs and are expensed as incurred to cost of revenue, net.
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Research and Development
Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development costs also include developing supporting technologies for the expansion of the Mohawk Valley Fab.
Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.
Research and development expenses were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Research and development $175.1 $201.9 $165.7 ($26.8) (13) % $36.2 22 %
Percent of revenue 23 % 25 % 22 %
The decreases in research and development expenses in fiscal 2025 compared to fiscal 2024 were primarily due to (i) lower people costs due to a planned decrease in salary and benefits costs related to lower headcount and (ii) lower material costs from a planned decrease in research and development wafer starts associated with product transfers and technology qualifications related to the Mohawk Valley Fab ramp.
Sales, General & Administrative
Sales, general and administrative ("SG&A") expenses are comprised of costs primarily associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and substantially consist of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, pre-petition legal fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel costs.
SG&A expenses were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Sales, general & administrative $190.5 $246.4 $214.3 ($55.9) (23) % $32.1 15 %
Percent of revenue 25 % 31 % 28 %
The decrease in SG&A expenses during fiscal 2025 compared to the prior fiscal year was primarily driven by:
• $19.7 million reduction in salaries and other people costs related to planned reductions in headcount associated with our 2025 Restructuring Plan;
• $20.2 million reduction in stock-based compensation expense due to forfeitures and a decrease in fair value per share for new grants; and
• $8.9 million reduction related to travel and outside services expenditures (excluding pre-petition charges presented separately).
Factory Start-up Costs
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Factory start-up costs $85.2 $53.8 $160.2 $31.4 58 % ($106.4) (66) %
Factory start-up costs relate to facilities that have not yet started revenue generating production. When a new facility begins revenue generating production, the operating costs of that facility previously expensed as start-up costs will instead be primarily expensed as part of the cost of the production within the cost of revenue, net line item in our statement of operations.
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Factory startup costs in fiscal 2025 increased as compared to fiscal 2024 due to increased costs incurred in connection with the construction of our materials manufacturing facility in Siler City, North Carolina.
Gain on Disposal of Property and Equipment
Disposal gains on property and equipment were as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Gain on disposal of property and equipment ($20.0) $— $— ($20.0) (100) % $— 0 %
Gain on disposal of property and equipment is primarily due to the sale of our Farmer's Branch and Research Triangle Park locations.
Goodwill Impairment
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Goodwill impairment $359.2 $— $— $359.2 100 % $— 0 %
The increase in goodwill impairment during fiscal 2025 compared to fiscal 2024 is due to the determination that our goodwill was impaired due to a triggering event during the fourth quarter of fiscal 2025. Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" in Part II, Item 8 of this Annual Report for more information on our goodwill impairment.
Restructuring and Other Expenses
Restructuring and other expenses consisted of the following amounts:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Impairment losses on abandoned property and equipment $ 176.5 $ 1.2 $ 2.0 $ 175.3 14,608 % $ (0.8) (40) %
Restructuring and other exit costs 134.9 — — 134.9 100 % — — %
Pre-petition charges 55.8 — — 55.8 100 % — — %
Project, transformation and transaction costs 29.5 18.3 7.4 11.2 61 % 10.9 147 %
Legal settlements 17.0 — — 17.0 100 % — — %
Executive severance costs 1.4 — 3.4 1.4 100 % (3.4) (100) %
Other 2.5 1.1 1.7 1.4 127 % (0.6) (35) %
Restructuring and other expenses $417.6 $20.6 $14.5 $397.0 1,927 % $6.1 42 %
The increase in Restructuring and other expenses during fiscal 2025 compared to fiscal 2024 was primarily driven by costs related to the 2025 Restructuring Plan, including associated losses on impairment of other assets and the pre-petition charges incurred prior to the filing of the Chapter 11 Cases. Additionally, during the third quarter of fiscal 2025, we agreed to settle several ongoing legal matters and recognized the associated financial statement impact of those settlements in other operating expense.
Refer to Note 16, "Restructuring," in Part II, Item 8 of this Annual Report for more information on Restructuring and Other Exit Costs. Refer to Note 14, "Commitments and Contingencies," in Part II, Item 8 of this Annual Report for more information on our accounting for contingent losses.
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Interest Expense, net of Capitalized Interest
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Interest expense, net of capitalized interest $315.2 $246.3 $42.6 $68.9 28 % $203.7 478 %
Interest expense, net of capitalized interest. The increase in interest expense in fiscal 2025 as compared to fiscal 2024 was primarily due to higher average debt outstanding and higher average borrowing rate, partially offset, by a corresponding increase in capitalized interest during fiscal 2025, due to our significant expansion projects under construction. As we near substantial completion of the initial phase of these initiatives, we expect the amount of interest expense eligible for capitalization to decrease in future periods.
Non-Operating Income, net
Non-operating income, net was comprised of the following:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Interest income ($67.6) ($135.0) ($58.2) $67.4 50 % ($76.8) (132) %
Gain on legal proceedings — — (50.3) — — % 50.3 100 %
Loss on customs matter — 7.7 — (7.7) (100) % 7.7 100 %
Unrealized gain on equity investment (22.6) (18.5) — (4.1) (22) % (18.5) (100) %
Loss on Wafer Supply Agreement 9.2 25.3 13.6 (16.1) (64) % 11.7 86 %
Write-off of deferred financing costs 54.7 — — 54.7 100 % — — %
Other expense, net 0.8 1.4 0.3 (0.6) (43) % 1.1 367 %
Non-operating income, net ($25.5) ($119.1) ($94.6) $93.6 79 % ($24.5) (26) %
Interest income. The decrease in interest income in fiscal 2025 compared to fiscal 2024 was primarily due to the lower short-term investment balances and a lower interest rate environment.
Write-off of Deferred Financing Costs. We recognized charges of $54.7 million related to commitment fee assets and liabilities on undrawn tranches of our Senior Secured Notes and the portion of debt issuance costs allocated to those tranches. Due to the Restructuring Support Agreement and Chapter 11 Cases, the undrawn borrowing capacity under the Senior Secured Notes is no longer available.
Unrealized gain on equity investment . The loss (gain) on equity investment for fiscal 2025 and 2024, respectively, relates to changes in fair value of the shares of MACOM's common stock received as partial consideration for the sale of the RF Business (the "MACOM Shares").
Loss on Wafer Supply Agreement . In connection with the completed sale of our former LED Business to SGH and its wholly owned subsidiary CreeLED, Inc. ("CreeLED" and collectively with SGH, "SMART") in fiscal 2021, we entered into a Wafer Supply and Fabrication Services Agreement (the "Wafer Supply Agreement"), pursuant to which we supplied CreeLED with certain silicon carbide materials and fabrication services for up to four years. We recognized a supply agreement liability in connection with this agreement, which reached full amortization in the second quarter of fiscal 2023. We terminated the Wafer Supply Agreement effective as of September 30, 2024.
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Income Tax Expense
Income tax expense and our effective tax rate was as follows:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Income tax expense ($9.7) $1.1 $0.7 (10.8) (982) % 0.4 57 %
Effective tax rate 1 % — % — %
The change in the effective tax rate for fiscal 2025 compared to fiscal 2024 was primarily driven by the reversal of the deferred tax liability associated with our goodwill upon the impairment recognized during fiscal 2025.
In general, the variation between our effective income tax rate and the current United States statutory rate of 21.0% is primarily due to: (i) changes in our valuation allowances against deferred tax assets, (ii) income derived from international locations with differing tax rates than the United States, and (iii) tax credits generated.
Net Loss from Discontinued Operations
We have classified the results of our former RF Business as discontinued operations in our consolidated statements of operations for all periods presented. We ceased recording depreciation and amortization of long-lived assets of the RF Business upon classification as discontinued operations in August 2023.
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Net loss from discontinued operations $— ($290.6) $ (69.4) $290.6 100 % ($221.2) (319) %
Net loss from discontinued operations in fiscal 2024 included a $204.0 million loss on sale of our former RF Business.
Liquidity and Capital Resources
Chapter 11 Cases and 2025 Restructuring Plan
As a result of our financial condition and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists that we will be able to continue as a going concern for one year from the date of this Annual Report. The consolidated financial statements in Part II, Item 8 of this Annual Report were prepared on a going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Our liquidity requirements, and the availability to us of adequate capital resources are difficult to predict at this time. In addition, we have incurred, and continue to incur, material reorganization and administrative expenses in connection with the Chapter 11 Cases and the 2025 Restructuring Plan. Notwithstanding the protections available to us under the Bankruptcy Code, if our future sources of liquidity are insufficient, we will face substantial liquidity constraints and will likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, seek other financing alternatives or cease operations as a going concern and liquidate. While operating as debtors-in-possession during the Chapter 11 Cases, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in these consolidated financial statements.
Our ability to continue as a going concern is contingent upon our ability to receive approval of the Plan from the Bankruptcy Court, successfully implement the Plan, and successfully emerge from Chapter 11 and generate sufficient liquidity to meet our obligations and operating needs, among other factors. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. Further, any plan of reorganization could materially change the amounts of assets and liabilities reported in the accompanying consolidated financial statements. There are substantial risks and uncertainties related to (i) our ability to successfully emerge from the Chapter 11 Cases, and (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships. See the section titled “Risk Factors – Risks related to our Chapter 11 Cases” for a discussion of the risk and uncertainties related to the Chapter 11 Cases. For a detailed discussion about the Chapter 11 Cases, refer to “Note 2— Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements in Part II, Item 8 of this Annual Report for additional information.
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Overview
The following table sets forth our cash, cash equivalents and short-term investments:
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 Change
Cash and cash equivalents $467.2 $1,045.9 ($578.7)
Short-term investments 488.2 1,128.7 (640.5)
Total cash, cash equivalents and short-term investments $955.4 $2,174.6 ($1,219.2)
The following table summarizes our cash flows for the periods presented:
Fiscal Years Ended Year-Over-Year Change
(in millions of U.S. Dollars) June 29, 2025 June 30, 2024 June 25, 2023 2024 to 2025 2023 to 2024
Cash used in operating activities of continuing operations ($711.7) ($671.3) ($102.2) ($40.4) ($569.1)
Cash used in investing activities of continuing operations (268.1) (1,940.2) (1,139.2) 1,672.1 (801.0)
Cash provided by financing activities of continuing operations 400.1 1,958.0 2,597.1 (1,557.9) (639.1)
Effect of foreign exchange changes 1.0 (0.2) — 1.2 (0.2)
Cash used in discontinued operations — (57.4) (48.2) 57.4 (9.2)
Net increase (decrease) in cash and cash equivalents ($578.7) ($711.1) $1,307.5 $132.4 ($2,018.6)
Our principal sources of liquidity in fiscal 2025 included:
• cash on hand from prior period debt financing, including the CRD Agreement;
• receipts from customers and other operating activities;
• proceeds from the sale of our Farmer's Branch and RTP facilities;
• reimbursements received under the AMIC refundable tax credit and other government incentives;
• proceeds from debt issuances under our Senior Secured Notes and cash interest savings from paid-in-kind interest under our Senior Secured Notes and the CRD Agreement; and
• proceeds from our at-the-market offering program.
Cash on hand during the fiscal 2025 was primarily used for the following:
• capital expenditures related to our significant expansion projects;
• normal recurring operating expenses;
• professional service fees associated with our debt restructuring initiatives including preparing for the Chapter 11 Cases; and
• implementation of the 2025 Restructuring Plan.
Our currently anticipated cash flow needs, both in the short-term and long-term, may include the following:
• normal recurring operating expenses;
• planned and discretionary capital expenditures;
• professional service fees associated with our Chapter 11 Cases; and
• repayments of debt and interest.
We expect that our current operating forecast over the next 12 months will allow us to maintain operations and meet our obligations to customers, vendors and employees in the ordinary course of business. However, due to the inherent uncertainty of our ongoing Chapter 11 Cases and the events of default on all outstanding debt triggered by the filing of the Chapter 11 Cases, management has concluded that there is substantial doubt about our ability to continue as a going concern as of the issuance date of the consolidated financial statements included in this Annual Report, in accordance with the requirements of Accounting Standards Codification ("ASC") 205-40, “Presentation of Financial Statements – Going Concern.”
Liquidity
Expected Liquidity after Chapter 11 Cases
Under the terms contemplated by the Restructuring Support Agreement and the Plan, upon successful emergence from the Chapter 11 Cases, the Company expects to have reduced its overall funded debt by approximately 70%, representing a reduction of approximately $4.6 billion and a reduction of its annual total cash interest payments by approximately 60%.
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Key terms of the Restructuring Support Agreement are as follows:
• Pursuant to the transactions contemplated by the Restructuring Support Agreement, the Company expects to receive an aggregate of $301 million of new financing in the form of the New 2L Convertible Notes, fully backstopped by certain holders of our existing Convertible Notes.
• The Restructuring Support Agreement contemplates a paydown of $250 million in principal amount of existing Senior Secured Notes at a redemption price of 109.875% of the principal amount being redeemed, with certain modifications to reduce go-forward cash interest and minimum liquidity requirements.
• The Restructuring Support Agreement also contemplates an exchange of $5.2 billion in principal amount of existing Convertible Notes and Renesas’ existing loan for new notes with a principal amount of $500 million and 95% of the New Common Stock, subject to dilution from other equity issuances, with Renesas' loan claims entitled to additional incremental consideration to the extent certain regulatory approvals are not obtained by an agreed upon deadline.
• Pursuant to the transactions, existing equity interests in Wolfspeed will be cancelled and existing equity holders will receive their pro rata share of 3.0% or 5.0% of the New Common Stock (depending on whether Renesas receives certain regulatory approvals), subject to dilution from other equity issuances and potential reduction from certain events.
• All other unsecured creditors are expected to be unimpaired and paid on the Plan Effective Date or in the ordinary course of business. The Plan is expected to become effective by the end of the third quarter of calendar year 2025.
The Chapter 11 Cases will likely limit our ability to utilize our net operating loss carryforwards (and/or certain other tax attributes, excluding certain refundable tax credits such as the AMIC) that are generated before the Plan Effective Date.
There are substantial risks and uncertainties related to our ability to successfully emerge from Chapter 11 and the effects of disruption from the Chapter 11 Cases which may make it more difficult to maintain business, financing and operational relationships. Refer to Part I, Item 1A "Risk Factors - Risks related to our Chapter 11 Cases" of this Annual Report.
The filing of the Chapter 11 Cases constituted events of default that accelerated our obligations under the Indentures. As a result, the principal and interest due under our outstanding Senior Secured Notes, Convertible Notes, and CRD Agreement became immediately due and payable. However, any efforts to enforce such payment obligations are automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. We do not have sufficient cash on hand or available liquidity to repay such outstanding debt.
In addition to ordinary operating expenses, our estimated future obligations consist of leases, debt, and interest on long-term debt. For a description of contractual obligations, including lease and debt obligations, see Note 5, "Leases," Note 9, "Debt," and Note 14, "Commitments and Contingencies," in our consolidated financial statements included in Part II, Item 8 of this Annual Report.
We will continue to have take-or-pay inventory supplier agreements that require a minimum of $202.1 million of purchases over the next four years and a commitment to provide quarterly capacity reservation deposits with a remaining total of $3.5 million over the next 3 months, as outlined further in Note 14, "Commitments and Contingencies," to our consolidated financial statements in Part II, Item 8 of this Annual Report. We will also be required to purchase electricity for our facility in Siler City, North Carolina and Durham, North Carolina under a long-term electricity supply agreement with minimum volume and spend requirements of approximately $62.4 million over the next 5 years and approximately $25.7 million over the next 8 years, respectively.
From time to time, we evaluate strategic opportunities, including potential acquisitions, joint ventures, divestitures, spin-offs or investments in complementary businesses, and we have continued to make such evaluations. We may also access capital markets through the issuance of debt or equity, which we may use in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities or general corporate purposes.
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We also expect to receive an additional $0.7 billion of incentives primarily related to the AMIC refundable tax credits during fiscal 2026. We also continue to actively pursue opportunities for federal funding, including but not limited to awards that may be made available through the CHIPS Act or other programs, including the recently established United States Investment Accelerator Office ("federal funding opportunities"). On July 4, 2025, the U.S. government enacted the One Big Beautiful Bill Act (“OBBBA”). The OBBBA includes changes to U.S. tax law including increasing the AMIC to 35 percent from 25 percent for property placed in service after December 31, 2025 and providing for the immediate expensing of U.S. research expenditures and eligible capital expenditures. The effects of the OBBBA become effective to the Company beginning in fiscal 2026. We are currently evaluating the effect of the legislation on our financial statements.
Liquidity Prior to and During Chapter 11 Cases
In the first quarter of fiscal 2025, we initiated the 2025 Restructuring Plan, which includes a headcount reduction that is currently on-going and facility closure and consolidation plan intended to optimize our cost structure as we focus on the acceleration of our transition from 150mm to 200mm silicon carbide devices. We expect to realize approximately $250 million of annualized cost savings upon completion of these initiatives. Please refer to Part II, Item 8, Note 16 - "Restructuring" for additional information.
In the second quarter of fiscal 2025, we issued an additional $250.0 million aggregate principal amount of Senior Secured Notes. The 2030 Senior Notes Indenture permitted us to issue additional tranches up to $500.0 million subject to certain conditions. Pursuant to the terms of the Restructuring Support Agreement and the subsequent filing of the Chapter 11 Cases, we are no longer able to borrow the $500 million undrawn commitment under the Senior Secured Notes.
In the second quarter of fiscal 2025, we filed a shelf registration statement on Form S-3 to register for possible future sale shares of our common stock. The registration statement became automatically effective upon filing with the SEC on December 9, 2024. Under this shelf registration statement, we implemented an at-the-market offering program (the “ATM Program”) as described in the prospectus supplement filed with the SEC on December 9, 2024. As discussed further in Note 10, “Shareholders” Equity” to our consolidated financial statements in Part II, Item 8 of this Annual Report, the ATM Program was conducted pursuant to an equity distribution agreement with J.P. Morgan Securities LLC and Wells Fargo Securities, LLC (the “Managers”). The ATM Program concluded on January 14, 2025, and we completed the sale of approximately 27.8 million additional shares of common stock for total gross proceeds of approximately $200.0 million and net proceeds of approximately $195.2 million, after $4 million in commissions to the Managers and $0.8 million in other offering costs.
In the first quarter of fiscal 2024, we entered into the CRD Agreement with Renesas, pursuant to which Renesas agreed to provide us up to $2.0 billion in unsecured deposits, which we received during fiscal 2024. As discussed in Note 9, "Debt," to our consolidated financial statements in Part II, Item 8 of this Annual Report, we entered into an amendment to the CRD Agreement in October 2024 to permit us to pay the accrued interest on the outstanding loans payable on the last business day of each of December 2024 and June 2025 by adding those amounts to the outstanding principal amount of the loans rather than in cash, reducing our expected cash interest payments in fiscal 2025 by approximately $120.0 million.
We expect that our current operating forecast over the next 12 months will allow us to maintain operations and meet our obligations to customers, vendors and employees in the ordinary course of business. However, due to the inherent uncertainty of our ongoing Chapter 11 Cases and the events of default on all outstanding debt triggered by the filing of the Chapter 11 Cases, management has concluded that there is substantial doubt about our ability to continue as a going concern as of the issuance date of the consolidated financial statements included in this Annual Report, in accordance with the requirements of ASC 205-40, “Presentation of Financial Statements – Going Concern.”
Capital Expenditures
We believe that upon the successful implementation of our debt restructuring contemplated by the terms of the Restructuring Support Agreement and our ongoing Chapter 11 Cases , we will have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth to meet long-term demand. The initial phases of our major expansion projects at the Mohawk Valley Fab and Siler City, North Carolina facility was substantially completed as of late fiscal 2025. Consequently, we expect gross capital investment to decrease significantly, to approximately $0.2 billion in fiscal 2026. We also believe our ability to modulate capital investment up or down in response to expected production capacity demand requirements will continue to increase.
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Cash Flows
Refer to the "Overview" section for a summary of our cash flows for the periods presented. A narrative discussion of the drivers for the changes in our cash flows between fiscal 2024 and fiscal 2025 is included below.
Cash Flows from Operating Activities
Net cash used in operating activities increased in fiscal 2025 as compared to fiscal 2024 primarily due to severance and other cash charges related to the 2025 Restructuring Plan, lower revenues, and higher interest payments, partially offset by benefits realized from our restructuring and cost savings initiatives.
Cash Flows from Investing Activities
Our investing activities primarily relate to short-term investment transactions, purchases of property and equipment, and property and equipment related reimbursements.
The decrease in net cash used in investing activities in fiscal 2025 as compared to fiscal 2024 was primarily due to a decrease in net property and equipment purchases of $1,064.5 million, a decrease in purchases of short term investments and a decrease in net proceeds from maturities and sales of short-term investments.
Cash Flows from Financing Activities
Net cash provided by financing activities in fiscal 2025 primarily consisted of $0.2 billion in net proceeds from the issuance of additional long term debt borrowings and $0.2 billion proceeds from our ATM Program.
Financial and Market Risks
We are exposed to financial and market risks, including changes in interest rates, equity prices, currency exchange rates and commodities risk. We have entered, and may in the future enter, into foreign currency derivative financial instruments in an effort to manage or hedge some of our foreign exchange rate risk. We may not be able to engage in hedging transactions in the future, and even if we do, foreign currency fluctuations may still have a material adverse effect on our results of operations and financial performance. All of the potential changes noted below are based on sensitivity analysis performed on our financial positions at June 29, 2025 and June 30, 2024. Actual results may differ materially.
Interest Rate Risk
We maintain an investment portfolio principally composed of money market funds, municipal bonds, corporate bonds, United States agency securities, United States treasury securities, commercial paper, certificates of deposit, and variable rate demand notes. In order to minimize risk, our cash management policy permits us to acquire investments rated “A” grade or better. As of June 29, 2025 and June 30, 2024, our cash equivalents and short-term investments had a fair value of $595.7 million and $1,226.0 million, respectively. If interest rates were to hypothetically increase by 100 basis points, the fair value of our short-term investments would decrease by $6.0 million at June 29, 2025 and $12.3 million at June 30, 2024.
Equity Prices
In connection with the RF Business Divestiture, we received the MACOM Shares which had a market value of approximately $102.0 million as of June 29, 2025, based on the closing price of MACOM common stock on June 27, 2025, the last trading day of our fourth fiscal quarter. If quoted market values on MACOM's common stock were to hypothetically decrease 10%, the fair value of the MACOM Shares would decrease by $10.2 million at June 29, 2025.
Currency Rate and Price Risk
All of our operations have a functional currency of the United States Dollar. However, we operate internationally and have transactions denominated in foreign currencies, and therefore we are exposed to currency exchange rate risks. Fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities.
Commodities
We utilize significant amounts of precious metals, gases and other commodities in our manufacturing processes. General economic conditions, market specific or trade policy changes or other factors outside of our control may affect the pricing of these commodities. We do not use financial instruments to hedge commodity prices.
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Off-Balance Sheet Arrangements
We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use any other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 29, 2025, we did not have any off-balance sheet arrangements, as defined in Item 303(b) of SEC Regulation S-K.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In the application of U.S. GAAP, we are required to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.
We evaluate our estimates on an ongoing basis, including those related to revenue recognition, valuation of inventories, tax-related contingencies, valuation of stock-based compensation, valuation of long-lived and intangible assets, other contingencies and litigation, among others. We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our significant accounting policies and a description of recent accounting pronouncements are discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting estimates and the related disclosures with the audit committee of our board of directors.
Revenue Recognition
For the year ended June 29, 2025, approximately a third of our revenue was from sales to distributors. Distributors stock inventory and sell our products to their own customer base, which may include value added resellers, manufacturers who incorporate our products into their own manufactured goods, or ultimate end users of our products. We recognize revenue upon shipment of our products to our distributors.
Our distributors may be provided limited rights that allow them to return or scrap a portion of inventory (product exchange rights or stock rotation rights) and receive credits for changes in selling prices (price protection rights) or customer pricing arrangements under our “ship and debit” program or other targeted sales incentives. When determining our net revenue, we make significant judgments and estimates corresponding with product shipments. We recognize a reserve for estimated future returns, changes in selling prices, and other targeted sales incentives when product ships. We also recognize an asset for the estimated value of product returns that we believe will be returned to inventory in the future and resold, and these estimates are based upon historical data, current economic trends, distributor inventory levels and other related factors. Our financial condition and operating results are dependent upon our ability to make reliable estimates. Actual results may vary and could have a significant impact on our operating results.
Under the ship and debit program, products are sold to distributors at negotiated prices and the distributors are required to pay for the products purchased within our standard commercial terms. Subsequent to the initial product purchase, a distributor may request a price allowance for a particular part number(s) for certain target customers, prior to the distributor reselling that particular part to the customer. If we approve an allowance and the distributor resells the product to the target customer, we credit the distributor according to the allowance we approved. These credits are applied against a reserve we establish upon initial shipment of product to the distributor.
Inventories
Inventories are stated at the lower of cost or net realizable value. We write-down our inventories for estimated obsolescence equal to the difference between the cost of the inventory and its net realizable value based upon an aging analysis of the inventory on hand utilizing specific reserve percentages, specifically known inventory-related risks (such as technological obsolescence), and assumptions about future demand. We also analyze sales levels by product type, including historical and estimated future customer demand for those products to determine if any additional reserves are appropriate. For example, we
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adjust for items that are considered obsolete based upon changes in customer demand, manufacturing process changes or new product introductions that may eliminate demand for the product. In addition, our international sales and purchases are subject to numerous United States and foreign laws and regulations which may limit or restrict our sales and shipments to foreign customers. Any adjustment to our inventories as a result of an estimated obsolescence or net realizable condition is reflected as a component of our cost of revenue.
In order to determine what costs can be included in the valuation of inventories, we determine normal capacity for our manufacturing facilities based on historical patterns. If our estimates regarding customer demand are inaccurate, or market conditions or technology change in ways that are less favorable than those projected by management, we may be required to take excess capacity charges in accordance with U.S. GAAP, which could have an adverse effect on our operating results.
Deferred Tax Asset Valuation Allowances
In accordance with Financial Accounting Standards Board ("FASB") ASC 740, “Income Taxes” ("ASC 740"), we evaluate all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a deferred tax asset is more likely than not to be realized. In assessing the adequacy of a recognized valuation allowance, we consider all available positive and negative evidence to estimate if sufficient future taxable income of the right character will be generated to utilize the existing deferred tax assets by jurisdiction. This consideration includes a variety of factors such as historical and projected future taxable income and prudent and feasible tax planning strategies. When we establish or increase a valuation allowance, our income tax expense increases in the period such a determination is made; conversely, if we decrease a valuation allowance, our income tax expense decreases in the period such a determination is made.
Tax Contingencies
We are subject to periodic audits of our income tax returns by federal, state, local and foreign agencies. These audits typically include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In accordance with ASC 740, we regularly evaluate the exposures associated with our various tax filing positions. ASC 740 states that a tax benefit should not be recognized for financial statement purposes for an uncertain tax filing position where it is not more likely than not (likelihood of greater than 50%) of being sustained by the taxing authorities based on the technical merits of the position.
In accordance with the provisions of ASC 740, we establish unrecognized tax benefits (as a reduction to the deferred tax asset or as an increase to other liabilities) to reduce some or all of the tax benefit of any of our tax positions at such time that we determine the position has become uncertain based upon one of the following conditions: the tax position is not “more likely than not” to be sustained; the tax position is “more likely than not” to be sustained, but for a lesser amount; or the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We adjust these unrecognized tax benefits, including any impact on related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have established an unrecognized benefit or are required to pay amounts in excess of what we have recognized, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash, existing deferred tax assets, and/or result in an increase in our effective tax rate in the year of resolution, whereas a favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
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Stock-Based Compensation
We account for awards of stock-based compensation under our employee stock-based compensation plans using the fair value method. Accordingly, we estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term. We currently use the Black-Scholes option-pricing model to estimate the fair value of our Employee Stock Purchase Plan ("ESPP") awards. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.
Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in our financial statements. For restricted stock and stock unit awards, grant date fair value is based upon the market price of our common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term. As of June 29, 2025, we have $74.6 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 2.48 years.
We estimate expected forfeitures at the time of grant and revise this estimate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Our determination of an estimated forfeiture rate is primarily based upon a review of historical experience but may also include consideration of other facts and circumstances we believe are indicative of future activity. The assessment of an estimated forfeiture rate will not alter the total compensation expense to be recognized, only the timing of this recognition as compensation expense is adjusted to reflect instruments that vest.
Long-Lived Assets
We evaluate long-lived assets such as property, equipment and finite-lived intangible assets, such as patents, for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change in the way an asset is being used, or a significant change, delay or departure in our strategy for that asset. Our assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our assumptions, which we believe are consistent with the assumptions hypothetical marketplace participants use. Factors that we must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales volumes, prices, the cost of capital, tax rates, and capital spending. These factors are often interdependent and therefore do not change in isolation. If an impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets; if so, an impairment loss is measured and recognized. Our impairment loss calculations require that we apply judgment in estimating future cash flows and asset fair values, including estimating useful lives of the assets. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to recognize additional impairment losses which could be material to our results of operations.
After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts and circumstances do not result in the reversal of a previously recognized impairment loss.
Goodwill
We test goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. We conduct impairment testing for goodwill at the reporting unit level. Reporting units, as defined by FASB ASC 350, “Intangibles - Goodwill and Other,” may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. We have determined that we have one reporting unit.
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We may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reporting unit’s carrying value is greater than its fair value. Such factors may include the following, among others: a significant decline in the reporting unit’s expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate, such as, unanticipated competition or slower growth rates; as well as changes in management, key personnel, strategy, and customers. If our qualitative assessment indicates that goodwill impairment is more likely than not, we determine the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
We compare the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit ’ s goodwill. Once an impairment loss is recognized, the adjusted carrying value of the goodwill becomes the new accounting basis of the goodwill for the reporting unit.
Historically, we derived a reporting unit’s fair value through a combination of the market approach and the income approach (a discounted cash flow analysis). The market and income approaches require significant judgment, including (i) the estimation of future revenues, gross margins, and operating expenses, all of which are dependent on internal forecasts, current and anticipated economic conditions and trends, (ii) the selection of market multiples through an assessment of the reporting unit’s performance relative to peer competitors, (iii) the estimation of the long-term revenue growth rate and discount rate from the capital asset pricing model and (iv) the determination of our weighted average cost of capital.
During the fourth quarter of fiscal 2025, we identified the existence of potential indicators of impairment, performed an interim goodwill impairment assessment, and determined the $359.2 million goodwill balance was fully impaired. As part of the interim assessment completed in the fourth quarter of fiscal 2025, the Company determined a market approach based on overall business enterprise value (determined by the fair value of equity plus the fair value of debt) was a more appropriate method of estimating the reporting unit's fair value, given the sustained decrease in the Company's market capitalization and observable market prices of the Company's long-term debt obligations, where available.
Under the market approach, the fair value of the reporting unit was calculated based on the implied equity value of the reporting unit (market capitalization, including consideration of how a reasonable range of control premiums, would impact the measurement of any goodwill impairment loss, if applicable) plus the implied fair value of the interest-bearing debt (based on market prices for its debt, if available, and/or observable inputs for certain debt instruments where market prices were not available). The indicated carrying value of the reporting unit, represented by the negative equity of the reporting unit adjusted for the book value of interest-bearing debt was compared to the calculated fair value of the reporting unit. The goodwill of the reporting unit was determined to be fully impaired.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Financial and Market Risks” included in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report.
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