Allegro MicroSystems, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months ended December 24, 2021; comparable periods ended December 25, 2020. Amounts below are in U.S. dollars. Allegro designs and sells magnetic sensor, analog power and photonics ICs, primarily for automotive and industrial applications.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Total net sales | $186.6 million | $164.4 million | $568.4 million | $416.1 million |
| Gross profit / margin | $101.2 million / 54.2% | $74.4 million / 45.3% | $297.9 million / 52.4% | $191.9 million / 46.1% |
| Operating income (loss) | $35.6 million | ($24.2 million) | $106.4 million | ($7.3 million) |
| Net income (loss) attributable to Allegro | $32.9 million | ($5.1 million) | $93.8 million | $9.3 million |
| GAAP diluted earnings per share | $0.17 | ($0.04) | $0.49 | $0.05 |
- Q3 sales grew 13.5% year over year; nine-month sales rose 36.6%. Automotive sales increased 14.8% in the quarter and 39.5% year to date; industrial sales increased 34.9% and 50.0%, respectively.
- Nine-month operating cash flow was $118.6 million, compared with $63.5 million. Investing cash flow used $50.1 million, including $55.8 million of property and equipment purchases; financing cash flow used $6.2 million. Cash and restricted cash increased $62.8 million.
- At December 24, cash and cash equivalents were $259.2 million, working capital was $368.4 million, and total assets were $851.4 million. The balance sheet reports $25 million of senior secured debt; the $50 million revolving facility was undrawn. Management reported $25 million of aggregate principal outstanding.
- Q3 Adjusted EBITDA was $54.9 million, or 29.4% of sales; nine-month Adjusted EBITDA was $167.7 million, or 29.5%. These are non-GAAP measures, not substitutes for GAAP results.
Changes and notable items
- Profitability improved substantially, with Q3 operating income replacing a year-earlier operating loss and gross margin rising 8.9 percentage points. For the nine-month comparison, sales growth and higher gross profit were major drivers of the swing to operating income.
- Comparability is affected by the prior-year IPO period, which included elevated stock-based compensation and IPO-related costs, a $9.1 million debt-extinguishment loss, and significant discrete tax benefits. Q3 FY2022 SG&A also included a $2.7 million gain from remeasuring Voxtel contingent consideration.
- Other income included unrealized gains on equity investments of approximately $3.5 million in Q3 and $4.5 million year to date. The company also recorded $3.1 million of year-to-date inventory impairment related largely to discontinuing a Voxtel product line.
- The Thailand manufacturing facility sale closed in August 2021 for $27.4 million in cash and generated a $0.4 million gain. The company says it expects the consolidation of assembly and test operations in the Philippines to reduce costs in subsequent periods.
- Allegro loaned $7.5 million to related party Polar Semiconductor, LLC, at 1.26% interest, to support wafer capacity and manufacturing tools. The loan is repayable over four years; Polar may borrow an additional $7.5 million in 2023 under the stated terms.
Outlook, commentary and risks
- The filing gives no specific quarterly or annual revenue or earnings guidance. Management said demand continued to exceed supply and described an inflationary environment; it also noted that third-party factory disruptions, including COVID-related disruptions, could affect sales in the next quarter.
- Management’s stated priorities include investing in R&D and growth markets such as electrified vehicles, ADAS, industrial automation, data centers and green energy, while improving margins through product innovation and cost optimization. It expects R&D spending to increase over time.
- Management believed existing cash, operating cash flow, access to capital markets and available credit facilities would fund operations and planned investment for at least the next 12 months. It cautioned that additional funding may be sought and could dilute shareholders or impose restrictive debt terms.
- Customer and related-party concentration is material: Sanken accounted for 21.1% of Q3 sales and 19.7% of nine-month sales, and 27.0% of trade receivables, including related-party receivables, at quarter end. Allegro also relies on third-party manufacturing and its Philippines operations.
- Other disclosed risks include semiconductor cyclicality, customer forecast changes and order cancellations, pricing and product-mix pressure, supply-chain constraints, design-win execution, and international, currency and tax exposures. The company reported no material changes to its previously disclosed risk factors and no material pending legal proceedings.
Key facts for investors to verify
- Whether supply constraints and factory disruptions ease, and whether customer demand remains above available supply.
- How much of the gross-margin improvement is sustainable versus attributable to mix, volume, cost changes or one-time items.
- The degree to which reported earnings and Adjusted EBITDA depend on exclusions, investment gains, stock-based compensation adjustments and other unusual items.
- Exposure to Sanken and other related-party arrangements, including the Polar loan, and the collectability and terms of related-party balances.
- Execution and costs of the Philippines manufacturing consolidation, planned capital spending, and the remaining debt and revolving-facility terms.