Business context and reporting period
Allegro MicroSystems designs and sells magnetic sensor ICs, application-specific analog power ICs and photonics products for automotive and industrial applications. This Form 10-Q covers the second quarter and first six months of fiscal 2022, each ended September 24, 2021; comparisons are with periods ended September 25, 2020. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $193.6 million | $136.6 million | $381.8 million | $251.7 million |
| Gross profit / margin | $102.5 million / 53.0% | $61.8 million / 45.2% | $196.7 million / 51.5% | $117.5 million / 46.7% |
| Operating income / margin | $38.6 million / 19.9% | $12.4 million / 9.1% | $70.8 million / 18.5% | $16.9 million / 6.7% |
| Net income | $33.2 million | $9.6 million | $60.9 million | $14.5 million |
| Adjusted EBITDA (non-GAAP) | $59.0 million; 30.5% margin | $32.7 million; 24.0% margin | $112.7 million; 29.5% margin | $59.0 million; 23.4% margin |
- Q2 sales increased 41.7% year over year; six-month sales increased 51.7%. Automotive sales grew 40.8% in Q2 and 56.5% year to date; industrial sales grew 67.8% and 58.4%, respectively.
- Q2 diluted EPS attributable to Allegro was $0.17. Prior-year EPS of $0.96 is not directly comparable: the prior period reflected the pre-IPO share structure, with 10 million weighted-average shares versus approximately 191.7 million diluted shares in Q2 FY2022.
- Six-month operating cash flow was $69.9 million, compared with $28.6 million; investing cash flow was negative $23.3 million, including $33.8 million of property and equipment purchases, acquisition payments of $12.5 million and $27.4 million proceeds from the Thailand facility sale. Cash and cash equivalents were $248.6 million at quarter-end; working capital was $357.5 million.
- Debt outstanding was $25.0 million under the term loan, bearing 4.25% interest at quarter-end. The $50 million revolving facility was undrawn. Restricted cash was an additional $7.1 million.
Material changes versus the prior comparable period
Revenue growth reflected recovering end-market demand, content and market-share gains, particularly in ADAS and electrified vehicles, as well as industrial automation, data centers, renewable energy and gaming. Magnetic sensor sales were the largest product contributor to growth. Gross margin expanded to 53.0% from 45.2% in Q2, while operating expenses rose more slowly than sales, supporting higher operating and net income. Results also benefited from a $1.0 million unrealized gain on equity securities in Q2. The company’s related-party sales to Sanken represented 19.2% of Q2 sales, up from 16.5% a year earlier.
Outlook, management commentary, risks and unusual items
- Management said cash resources and access to capital markets should fund operations, growth plans and planned capital expenditures for at least the next 12 months. The company plans to use excess cash to support selected growth initiatives and capital spending; no numerical revenue or earnings guidance was provided.
- Management expects the Thailand facility closure and production consolidation in the Philippines to reduce future cost of goods sold. However, it cautioned that shutdowns at third-party factories, including those related to COVID-19 or other factors, could affect sales in the next fiscal quarter.
- Supply-chain dependence is a key risk: Allegro relies on a limited number of third-party wafer fabrication facilities and suppliers, and on manufacturing operations in the Philippines. Customer forecasts are generally non-binding and orders may be cancellable; demand shifts can create shortages or excess inventory. The semiconductor industry is cyclical, and product mix, pricing, yields and manufacturing utilization affect margins.
- Other material exposures include customer concentration (Sanken accounted for 24.3% of trade receivables, including related-party receivables), international sales and foreign exchange, design-win timing, and execution of new-product and growth plans. Allegro reported no material changes to its previously disclosed risk factors.
- Unusual items included $3.1 million of six-month inventory impairment related largely to discontinuation of a Voxtel product line, and a $0.6 million increase in the fair value of Voxtel contingent consideration. The Thailand facility sale generated $27.4 million cash proceeds and a $0.37 million gain. Adjusted EBITDA and other non-GAAP measures exclude selected costs and gains and should be considered alongside GAAP results.
- The company reported no current material legal proceedings and no environmental accruals. It stated that disclosure controls were effective as of September 24, 2021.
Important facts for investors to verify
- Whether demand growth, particularly in automotive, ADAS and electrified-vehicle applications, continues and converts to sustained revenue.
- Whether third-party manufacturing capacity and supply disruptions constrain shipments, and whether the company’s concentration in Sanken and international markets changes.
- Whether gross-margin improvement persists after considering product mix, pricing, inventory provisions and the expected savings from facility consolidation.
- How capital expenditures, acquisition-related payments and operating cash flow affect liquidity, and whether the term loan, covenants or future financing needs change.
- The comparability and exclusions in non-GAAP measures, including the impact of Voxtel inventory charges, stock-based compensation and other adjustments.