Allegro MicroSystems, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended September 25, 2020 (the company’s fiscal second quarter of fiscal 2021; comparable periods ended September 27, 2019). Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Allegro designs and sells magnetic sensor ICs, power ICs and photonics for automotive and industrial applications. During the period it divested majority ownership of Polar Semiconductor (PSL), retaining 30%, and ended its distribution of Sanken products. These changes reduce reported sales versus the prior year and shift the company toward a fabless, asset-light model. The company also acquired photonics developer Voxtel in August 2020.
Financial performance
| Metric | Quarter ended Sep. 25, 2020 | Prior-year quarter | Six months ended Sep. 25, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $136.6 | $163.2 | $251.7 | $315.7 |
| Gross profit / margin | $61.8 / 45.2% | $68.6 / 42.0% | $117.5 / 46.7% | $128.0 / 40.5% |
| Operating income / margin | $12.4 / 9.1% | $15.1 / 9.2% | $16.9 / 6.7% | $22.8 / 7.2% |
| Net income | $9.6 | $11.6 | $14.5 | $14.8 |
| Adjusted EBITDA / margin (non-GAAP) | $32.7 / 24.0% | $34.6 / 21.2% | $59.0 / 23.4% | $58.6 / 18.6% |
Quarterly GAAP diluted EPS was $0.96 versus $1.16. Six-month EPS was $1.44 versus $1.47. Quarter revenue fell 16.3%; six-month revenue fell 20.3%. The company attributed most of the reported decline to the PSL divestiture and discontinued Sanken distribution. Excluding divested activities, core-market sales declined 0.1% in the quarter and 4.6% for six months. Automotive weakness was partly offset by growth in industrial and other markets, including data centers. Six-month GAAP net income was comparatively stable in part because the prior-year period included a $5.5 million discrete tax expense related to IRS transfer-pricing audit settlements.
Six-month operating cash flow was $28.6, compared with $27.7 in the prior year. Capital expenditures were $18.1; investing cash outflow was $42.6, including $8.5 for the Voxtel acquisition and $16.3 of cash removed with the PSL divestiture. Cash and cash equivalents were $202.0 at quarter-end ($208.4 including restricted cash), versus $214.5 and $219.9, respectively, at fiscal year-end. Working capital was $298.1, unchanged from March 27, 2020.
At September 25, 2020, current liabilities were $122.9, including $33.0 of bank-line borrowings; total liabilities were $144.2 and equity was $635.5. The company reported $779.7 of total assets. The $33.0 borrowing was repaid after quarter-end. Cash-flow and liquidity comparisons reflect the divestiture and other significant transactions described below.
Material changes and unusual items
- PSL divestiture and distribution transition: Allegro retained a 30% PSL interest and recorded a $51.4 related-party note receivable; PSL repaid the note plus accrued interest on October 14, 2020. PSL supplied 35.5% of Allegro’s wafer requirements in the six-month period, creating continuing supplier exposure.
- Voxtel acquisition: preliminary consideration was $35.1, including $7.8 fair value of contingent consideration (potential earn-outs up to $15.0); the purchase-price allocation included $18.9 goodwill and $13.6 finite-lived intangible assets. Acquired revenue and pretax loss were immaterial in the quarter.
- Post-quarter IPO: on November 2, 2020 Allegro issued 25.0 million primary shares at $14 per share and received approximately $320.8 net proceeds; selling stockholders sold a further 3.75 million shares. Class A and Class L shares converted into common stock. The IPO triggered approximately $42.0 of one-time stock-based compensation, expected in the following quarter.
- Post-quarter financing and distribution: Allegro entered a $325.0 senior secured term-loan facility and a $50.0 secured revolving facility on September 30, then paid a $400.0 cash dividend to Class A holders in October using term-loan proceeds and cash. On November 20 it gave notice to repay $300.0 of the term loan using IPO proceeds; repayment was expected in fiscal Q3.
- Foreign-currency transaction losses were $1.3 for the quarter and $1.2 for six months, versus gains of $0.6 and $3.4 in the respective prior-year periods. Non-GAAP measures exclude specified costs and gains/losses; the filing cautions they are supplemental and not substitutes for GAAP results.
Outlook, commentary and risks
Management expects the PSL divestiture and transfer of Sanken distribution to improve gross profit, operating income and net income over the fiscal year, reduce capital expenditures and increase operating cash flow. It expects further cost-of-goods-sold reductions as assembly and test operations consolidate at the Philippines facility, with the Thailand facility transition expected to be substantially complete by March 2021. Management also expects R&D spending and public-company compliance costs to rise. The filing provides no specific revenue or earnings guidance.
Risks include ongoing COVID-19 effects—particularly automotive demand and customer inventory adjustments—semiconductor cyclicality, customer forecast and cancellation variability, pricing and margin pressure, manufacturing yields and supplier concentration, and reliance on operations in the Philippines. The company warned that prolonged disruption could lead to impairment of goodwill or long-lived assets. It reported no material legal proceedings, no environmental accruals and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Separate the underlying operating trend from the PSL and Sanken divestiture effects when assessing revenue and margins; compare core automotive, industrial and other-market demand.
- Review the post-IPO capital position after the $400.0 dividend, the $300.0 term-loan repayment notice, and the remaining secured debt, including facility terms and covenants.
- Track the final Voxtel purchase-price allocation, earn-out exposure, integration costs and progress in commercializing photonics products.
- Assess ongoing dependence on PSL for wafers, Sanken-related sales and receivables, and the company’s manufacturing footprint in the Philippines.
- Monitor the expected IPO-related compensation charge, facility-consolidation costs, COVID-19 demand effects and any impairment indicators.