Allegro MicroSystems, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2023, ended September 23, 2022; comparisons are to the corresponding periods ended September 24, 2021. Dollar amounts are in millions unless noted. Allegro designs and sells magnetic sensor and application-specific analog power ICs, principally for automotive and industrial markets.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Total net sales | $237.7 | $193.6 | $455.4 | $381.8 |
| Gross profit | $132.0 | $102.5 | $250.4 | $196.7 |
| Gross margin | 55.5% | 53.0% | 55.0% | 51.5% |
| Operating income | $59.8 | $38.6 | $74.6 | $70.8 |
| Operating margin | 25.1% | 19.9% | 16.4% | 18.5% |
| Net income attributable to Allegro | $50.6 | $33.2 | $60.9 | $60.9 |
| Diluted earnings per share | $0.26 | $0.17 | $0.32 | $0.32 |
Q2 sales increased 22.8% year over year, led by automotive sales (+24.9%) and industrial sales (+32.6%). Power integrated circuit sales rose 48.5%; magnetic sensors and other sales increased 9.6%. Management attributed growth to higher shipments across applications including ADAS, electrified vehicles, data centers, and Industry 4.0. Sales to the United States declined 9.6% in the quarter.
For the first half, sales rose 19.3% and gross margin expanded 3.5 percentage points. Operating income increased only 5.3%, while net income was essentially unchanged. SG&A rose 64.9%, including approximately $26.3 million of accelerated stock-based compensation tied to the former CEO’s retirement. First-half other expense also included $3.5 million of losses on equity securities and a $1.9 million loss from the PSL equity investment.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $91.8 million, versus $69.9 million a year earlier. The period included a $17.3 million inventory build and $42.3 million of stock-based compensation expense.
- Investing cash outflow was $54.9 million, including $35.2 million of capital expenditures and $19.7 million for the Heyday acquisition. Financing cash outflow was $14.6 million; cash, cash equivalents, and restricted cash increased by $13.5 million after an $8.8 million adverse foreign-exchange effect.
- At September 23, cash and cash equivalents were $293.6 million, restricted cash was $9.7 million, and working capital was $432.7 million. Total assets were $979.8 million and total liabilities were $163.9 million.
- Debt under the senior secured facilities was $25.0 million, unchanged from March 25; the $50.0 million revolving facility was undrawn. The reported interest rate on outstanding borrowings was 6.27%.
- Inventory was $98.4 million, up from $86.2 million at fiscal year-end. Management said the increase primarily supported anticipated fiscal 2023 sales growth.
Material developments, outlook, and risks
- Heyday acquisition: Allegro completed its acquisition of Heyday Integrated Circuits on September 1 for preliminary consideration of $20.8 million. The acquisition adds isolated gate-driver technology; its preliminary allocation includes $8.2 million of goodwill. Heyday’s reported contribution to revenue and pretax income was immaterial. Purchase accounting remains subject to change.
- Sanken distribution transition: Sanken, which held approximately 51.5% of Allegro’s common stock, accounted for 18.9% of Q2 sales and 27.2% of receivables at quarter-end. A September 29 agreement, after quarter-end, starts a 12-month transition of Japan marketing and sales from Sanken to Allegro; orders are expected to transfer by June 30, 2023. Allegro expects the change to move sales to direct customers and other distributors and eliminate Sanken’s historical distributor discount, but says Japan investment will increase operating expenses and cost of goods sold. Management expects longer-term gross-margin benefits; the agreement did not affect Q2 results.
- Management commentary: Management reported demand exceeding supply and cited improved product mix, pricing, manufacturing efficiency, and higher-volume fixed-cost absorption as contributors to gross-margin gains. It said it expects to maintain lower cost of goods and operating-income improvements in the immediate future, while cautioning that the trends may not continue long term. No numerical revenue or earnings guidance is provided in the filing.
- Risks: The filing highlights inflation and supplier cost increases, constrained supply and reliance on third-party manufacturers, potential demand or semiconductor-cycle downturns, inventory and forecast risk, long design-win timelines, and expected long-term average selling-price declines. Foreign exchange and international exposure are also relevant; 89.4% of Q2 sales were to customers outside the United States.
- Contingencies and controls: Allegro reported no current legal matters believed likely to materially harm its financial position or results, and no significant environmental accruals. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Investor facts to verify
- Whether demand, supply constraints, pricing, and gross-margin improvements persist, and whether inventory growth is aligned with realized customer demand.
- The final Heyday purchase-price allocation and the acquisition’s subsequent contribution to growth and profitability.
- The financial and customer effects of the Sanken Japan transition, including transition costs, inventory arrangements, and the timing of transferred orders.
- How much of first-half operating cash flow reflects sustainable earnings versus noncash stock compensation and working-capital movements.
- The impact of the former CEO’s retirement-related compensation and other unusual items on comparisons of operating expenses and earnings.