Allegro MicroSystems, Inc. — Q1 FY2024 10-Q
Reporting period: Three months ended June 30, 2023 (13 weeks), compared with the three months ended June 24, 2022. Allegro designs and sells sensing and power ICs, primarily for automotive and industrial applications. Financial figures below are in U.S. dollars; “$m” means millions.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $278.3m | $217.8m | Up 27.8% |
| Gross profit / margin | $158.0m / 56.8% | $118.4m / 54.4% | Margin up 2.4 percentage points |
| Operating income / margin | $70.7m / 25.4% | $14.7m / 6.9% | |
| Net income attributable to Allegro | $60.9m | $10.2m | |
| Diluted earnings per share | $0.31 | $0.05 | |
| Operating cash flow | $49.7m | $36.6m | |
| Capital expenditures | $44.9m | $14.4m |
Automotive sales rose 26.8% to $189.7m; industrial sales rose 69.9% to $68.2m; and other sales fell 27.0% to $20.4m. Magnetic sensor sales grew 27.1% to $174.3m and power IC sales grew 28.9% to $104.0m. Management attributed growth principally to e-mobility, ADAS, automotive safety and industrial clean-energy and automation demand; consumer and smart-home weakness weighed on “other” sales.
Gross margin improved with higher sales and production volumes. Operating expenses declined 15.9% to $87.2m: R&D increased 26.9% to $43.0m, while SG&A fell 36.6% to $44.2m. The SG&A comparison benefited from $26.3m of accelerated stock compensation and $3.8m of severance associated with leadership changes recorded in the prior-year quarter. The effective tax rate was 10.6%, versus 16.0%, with the year-over-year change affected by discrete tax benefits and other tax factors.
Financial position, liquidity and debt
- Cash and cash equivalents were $353.4m at June 30, 2023; restricted cash was an additional $8.9m. Working capital was $546.8m.
- Total liabilities were $206.3m. Debt under the term loan was $25.0m, due in fiscal 2028; the $224m secured revolving facility had no borrowings at quarter-end.
- Operating cash flow of $49.7m less $44.9m of capital expenditures implies approximately $4.8m of cash flow after capital expenditures. Cash and restricted cash increased $3.6m during the quarter.
- Inventory rose to $174.2m from $151.3m, including builds management said were intended to support anticipated fiscal 2024 sales growth. Inventory reserves were $5.1m for the quarter.
Material changes, outlook and risks
- Related-party and channel transition: Sanken, which held approximately 51.2% of Allegro’s common stock, generated no sales in the quarter, versus $41.7m in the prior-year quarter. Allegro ended Sanken’s exclusive Japan distribution rights effective March 31, 2023, paid $5.0m under the termination agreement, and allowed a one-time $4.2m return of resalable inventory. A short-term distribution agreement and transition-services arrangement began April 1, 2023. Allegro reported that Japan sales were continuing to transition.
- Credit facilities: Allegro replaced its former $50m revolver with a $224m facility maturing June 21, 2028, and amended its term loan benchmark from LIBOR to Term SOFR. The new facility includes customary covenants and a quarterly maximum net leverage ratio of 4.00 to 1.00, subject to specified acquisition-related provisions.
- Management outlook: No quantitative revenue or earnings guidance is provided in the filing. Management said existing cash should fund operations, growth plans and planned capital expenditures for at least the next 12 months, and described potential acquisitions as part of its capital deployment strategy. The company expects to invest in operations in China, Europe and Japan.
- Risks and contingencies: Management highlighted inflation in labor, materials, wafer, transportation and energy costs; semiconductor cyclicality; long design-win lead times; customer forecast revisions and cancellations; and possible inventory shortages or excesses. One customer represented 12.2% of quarterly sales and 14.8% of trade receivables at June 30. Management expects fiscal 2024 cash taxes to increase approximately $20m from required R&D capitalization, partly offset by an estimated $9m FDII benefit.
- Operating cash flow was partly offset by working-capital investment, notably increased inventories and receivables. Marketable securities generated $3.7m of net unrealized losses and $5.2m of realized gains associated with those investments; Allegro said it sold all such investments in July 2023. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
Investor facts to verify
- How much of reported sales growth reflects underlying end-market demand versus the absence of $41.7m of prior-year Sanken sales and the channel transition in Japan.
- Whether inventory builds convert into sales as anticipated, and how inventory reserves, customer orders and cancellations evolve.
- Whether gross-margin gains persist amid inflation, pricing pressure, product-mix changes and manufacturing-cost fluctuations.
- Capital-spending plans and cash generation after the quarter’s elevated $44.9m of capital expenditures, alongside the expected tax cash outflow.
- Related-party purchases from Polar Semiconductor, supply commitments under the wafer foundry agreement, and compliance with the new revolving-credit covenants.