Allegro MicroSystems, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2021 third quarter and first nine months ended December 25, 2020; comparisons are to periods ended December 27, 2019. Amounts are in U.S. dollars.
Business context
Allegro designs and sells magnetic sensor ICs, application-specific analog power ICs, and photonics products, primarily for automotive and industrial markets. During the period it completed its November 2020 IPO, divested majority ownership of Polar Semiconductor (PSL), and acquired photonics company Voxtel.
Financial performance
| Metric | Three months ended Dec. 25, 2020 | Nine months ended Dec. 25, 2020 |
|---|---|---|
| Total net sales | $164.4 million; up 2.9% | $416.1 million; down 12.5% |
| Gross profit / margin | $74.4 million / 45.3% | $191.9 million / 46.1% |
| Operating income (loss) | $(24.2) million | $(7.3) million |
| Net income (loss), consolidated | $(5.1) million | $9.4 million |
| Operating cash flow | Nine months: $63.5 million, versus $48.8 million in the prior-year period | |
| Adjusted EBITDA (non-GAAP) | $39.6 million | $98.6 million |
Quarterly gross margin rose from 38.5% in the prior-year quarter; nine-month gross margin rose from 39.9%. Adjusted EBITDA increased from $30.8 million and $89.4 million, respectively. These non-GAAP measures are supplemental and exclude specified expenses.
Cash and cash equivalents were $157.7 million at December 25, 2020, down from $214.5 million at March 27, 2020; working capital was $289.4 million, versus $298.1 million. Debt was $25.0 million, with a $50.0 million revolving facility undrawn; term-loan borrowings bore 4.5% interest. Nine-month investing cash use was $50.4 million and financing cash use was $72.2 million. Financing included a $400.0 million dividend, $321.4 million of net IPO proceeds, and repayment of $300.0 million of term debt.
Material changes and unusual items
- Quarterly sales grew as automotive production recovered and industrial demand strengthened. Core-market sales rose 21.4%; reported growth was partly offset by the exit of PSL foundry and Sanken product distribution sales.
- Nine-month sales declined largely because $76.3 million of prior-year foundry and distribution sales were no longer consolidated. Core-market sales increased 4.2%; automotive sales were down 3.4%, while industrial sales rose 17.1%.
- IPO-related stock compensation materially affected results: total stock-based compensation was $45.9 million in the quarter and $46.9 million for the nine months, including a $40.4 million one-time charge associated with vesting. SG&A rose to $67.7 million for the quarter, versus $24.9 million a year earlier.
- The company recorded a $9.1 million loss on extinguishment of debt after repaying $300.0 million of its term loan. The nine-month income-tax benefit was $27.9 million, including discrete tax benefits; the effective tax rate was unusually high at 150.9%.
- Voxtel was acquired for a preliminary purchase price of $35.1 million, including $7.8 million fair value for contingent consideration. Purchase accounting remains preliminary.
- PSL became a 70%-owned Sanken subsidiary; Allegro retained 30%. PSL supplied 40.9% of Allegro’s wafer requirements in the quarter and 37.1% year to date. Sanken represented 16.1% of quarterly sales.
Outlook, commentary, and risks
Management expects the PSL divestiture, exit from Sanken distribution, and planned Thailand assembly-and-test facility closure and transition to the Philippines to reduce costs and capital expenditures over time. The transition was expected to be substantially complete by the end of March 2021. Management anticipated increased public-company costs and stated that cash resources, IPO proceeds, and capital-market access should fund operations and plans for at least 12 months. No specific revenue or earnings guidance was provided.
Risks include COVID-19 uncertainty and automotive cyclicality; customer demand and forecast changes; dependence on a limited supplier base and continued reliance on PSL for a substantial share of wafers; customer and geographic concentration; product mix, pricing, yields, and manufacturing transitions; and variable-rate secured debt and its covenants. The company reported no material legal proceedings, no material change in internal control over financial reporting, and effective disclosure controls at period end.
Important facts for investors to verify
- Whether core-market demand and margins remain strong after separating organic performance from divestiture effects and one-time adjustments.
- The timing, costs, and expected savings from the Thailand facility transition and the company’s ongoing wafer-supply dependence on PSL.
- The sustainability of reported earnings and non-GAAP results after IPO-related stock compensation, debt-extinguishment costs, and discrete tax benefits.
- Voxtel’s final purchase-price allocation, contingent consideration, and contribution to revenue and earnings.
- Liquidity, cash usage, debt terms and covenants, and the effect of the $400 million dividend and public-company costs.
- Exposure to COVID-19, automotive demand, Sanken-related transactions, and international markets.