Allegro MicroSystems, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Third quarter ended December 23, 2022 (13 weeks); comparative quarter ended December 24, 2021. Nine-month comparisons cover the respective 39-week periods. Financial statements are unaudited. Allegro designs and supplies magnetic sensor ICs and application-specific analog power ICs, principally for automotive and industrial markets.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Total net sales | $248.8m | $186.6m | $704.2m | $568.4m |
| Gross profit / margin | $142.6m / 57.3% | $101.2m / 54.2% | $393.0m / 55.8% | $297.9m / 52.4% |
| Operating income / margin | $65.6m / 26.4% | $35.6m / 19.1% | $140.2m / 19.9% | $106.4m / 18.8% |
| Net income attributable to Allegro | $64.5m | $32.9m | $125.4m | $93.8m |
| Diluted EPS | $0.33 | $0.17 | $0.65 | $0.49 |
| Operating cash flow | Not reported by quarter in this filing | $145.7m | $118.6m |
Q3 revenue increased 33.3% year over year; nine-month revenue rose 23.9%. Growth spanned automotive, industrial and other markets. Q3 automotive sales rose 30.1% and industrial sales 59.9%; power IC sales rose 50.4%. Management attributed growth to higher shipments, customer demand, content and market-share gains. Gross-margin gains reflected product mix, higher average selling prices, volume leverage and manufacturing efficiencies.
Nine-month operating cash flow increased by $27.1m year over year. It included a $39.1m inventory build and $17.8m increase in prepaid expenses and other assets, partly offset by higher payables and accrued liabilities. Investing cash outflow was $69.3m, including $49.6m of capital expenditures and $19.7m for Heyday. Financing cash outflow was $16.7m, including $12.6m of taxes on net-settled equity awards and additional related-party lending.
Financial position and liquidity
- At December 23, 2022, cash and cash equivalents were $334.3m; restricted cash was $9.8m. Working capital was $482.7m.
- Total assets were $1.084bn and total liabilities $189.5m. Inventory was $119.6m, up from $86.2m at March 25, 2022.
- Debt under the senior secured term loan was $25.0m, unchanged from fiscal year-end; the reported interest rate was 7.82%. The $50m revolving facility had no borrowings. No borrowings were outstanding under two Philippine-peso credit lines.
- Management said existing cash should fund operations, growth plans, planned capital expenditures and expected additional costs for at least the next 12 months. It noted additional financing could be sought if circumstances change, with potential dilution or restrictive debt covenants.
Material changes, outlook and risks
- Heyday acquisition: Completed September 1, 2022, for preliminary consideration of $20.5m. Heyday develops isolated gate drivers for wide-bandgap semiconductor designs. Its contribution to reported revenue and pretax income was immaterial; purchase-price allocation remained preliminary.
- Sanken distribution transition: Allegro began a 12-month transition on September 29, 2022 to take over marketing and sales in Japan from Sanken; orders were expected to transfer by June 30, 2023. Management expects the change to eliminate Sanken’s historical distributor discount and improve gross margin over time, while Japan operating costs are expected to rise. Sanken accounted for 18.1% of Q3 sales and 18.7% of nine-month sales; it held approximately 51.5% of Allegro’s shares.
- Foundry agreement: Effective January 26, 2023, Allegro entered a three-year wafer foundry agreement with related party Polar Semiconductor (PSL). The first two years of rolling forecasts are binding; failure to purchase forecasted wafer volumes may trigger shortfall penalties.
- Unusual expense: Nine-month SG&A included $26.3m of stock-compensation expense associated with the former CEO’s retirement and award modifications. This helped drive nine-month SG&A up 40.7%, despite revenue growth.
- Outlook: The filing provides no specific quarterly or annual revenue or earnings guidance. Management reported demand exceeding supply, planned investment in growth markets and Japan operations, and continued focus on pricing and efficiency to offset higher input costs. Management cautioned that these trends may not continue.
- Key risks: Inflation and supplier cost increases; semiconductor cyclicality and changing customer demand; inventory and forecast uncertainty; reliance on a limited number of suppliers and manufacturing in the Philippines; customer and Sanken concentration; long design-win cycles; and foreign-exchange, trade-policy and COVID-related disruptions. Allegro reported no material change in previously disclosed risk factors and no material legal proceedings.
- Tax: U.S. R&D capitalization under Section 174 increased taxable income and cash taxes. If the law is not changed retroactively, management estimated an approximately $23m increase in annual cash taxes; actual impact depends on legislation, R&D spending and tax guidance.
Most important facts for investors to verify
- Whether the strong sales growth and margin improvement persist as supply, demand, product mix and pricing conditions change.
- Inventory levels and conversion to cash after the $39.1m nine-month inventory build, alongside order cancellations and customer forecasts.
- Execution and economics of the Japan transition, including the expected distributor-discount benefit, added operating costs and transfer of Sanken orders.
- Compliance with binding wafer-volume forecasts and potential shortfall penalties under the PSL agreement, given supplier concentration.
- The sustainability of earnings after the CEO-related stock-compensation charge, and the final Heyday purchase-price allocation.
- Cash-tax effects of Section 174 and continued concentration in Sanken-related sales, receivables and ownership.