Allegro MicroSystems, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2024, the 13 weeks ended September 29, 2023; the six-month comparison is with the period ended September 23, 2022. Amounts are in U.S. dollars; financial statements are unaudited. Allegro designs and markets sensing and power ICs for automotive and industrial applications.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Total net sales | $275.5m | $237.7m | $553.8m | $455.4m |
| Gross profit / margin | $159.5m / 57.9% | $132.0m / 55.5% | $317.5m / 57.3% | $250.4m / 55.0% |
| Operating income / margin | $72.9m / 26.5% | $59.8m / 25.2% | $143.7m / 25.9% | $74.6m / 16.4% |
| Net income attributable to Allegro | $65.6m | $50.6m | $126.5m | $60.9m |
| Diluted earnings per share | $0.34 | $0.26 | $0.65 | $0.32 |
| Effective tax rate | 10.1% | 14.3% | 10.4% | 14.6% |
Q2 sales increased 15.9% year over year and six-month sales increased 21.6%. Automotive sales rose 30.8% in Q2, led by ADAS, EV, and safety, comfort and convenience applications. Industrial sales grew 6.1%; “Other” sales fell 42.5%, mainly from weaker consumer and smart-home demand. Magnetic sensor sales rose 25.2% in Q2, while power IC sales increased 2.5%.
Cash flow and investment: Six-month operating cash flow was $96.4m, versus $91.8m a year earlier. Capital expenditures were $76.1m versus $35.2m; operating cash flow less capital expenditures was approximately $20.3m versus $56.6m. Cash and cash equivalents were $370.0m at September 29, 2023, and working capital was $580.7m. Cash, cash equivalents and restricted cash totaled $378.4m at period end.
Debt and liquidity: At September 29, $25.0m remained outstanding under the senior secured term loan, due in fiscal 2028; the $224m revolving facility had no borrowings. The company reported total liabilities of $186.6m. These period-end figures precede the subsequent acquisition financing described below.
Material changes and unusual items
- Q2 gross margin improved 2.4 percentage points year over year. Management attributed the higher gross profit primarily to increased sales, volume and product mix; cost of goods sold also rose with production and inventory provisions.
- Six-month SG&A declined 17.9% to $87.4m. The prior-year period included $26.3m of accelerated stock compensation tied to the former CEO’s retirement and $3.8m of severance. By contrast, Q2 SG&A increased 17.9% year over year, reflecting personnel, outside-service and other operating costs.
- Six-month R&D increased 24.5% to $86.4m, largely from personnel, stock compensation and outside services. Inventory provisions were $9.4m for the six months, compared with $5.1m in the prior-year period.
- Related-party sales to Sanken were $3.6m in both Q2 and the first six months, versus $45.0m in Q2 and $86.7m in the first six months of the prior year. Allegro’s exclusive Japan distribution agreement with Sanken ended effective March 31, 2023; the filing also describes a transition arrangement and a one-time $5m payment to terminate exclusivity.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said existing cash was expected to support operations, growth plans and capital spending over the next 12 months, while noting that additional borrowing or financing might be needed if circumstances changed. This statement should be considered alongside the subsequent acquisition and financing.
- On October 31, 2023, after quarter end, Allegro completed its acquisition of Crocus for $420m in cash, subject to adjustments. On the same date it entered into a $250m term loan maturing in 2030, used to refinance the prior $25m term-loan balance and finance part of the transaction. The filing says purchase accounting was not complete.
- Management identified inflation-driven labor, materials, wafer, transportation and energy costs as potential pressures on margins and liquidity. Other stated risks include semiconductor cyclicality, changing customer forecasts and cancellations, product pricing and mix, and the long lead time and uncertainty associated with design wins.
- Management estimated fiscal 2024 cash taxes would rise by approximately $20m due to required R&D capitalization, partly offset by an estimated $9m FDII benefit.
- Two customers represented 26.2% of trade receivables at September 29; one customer accounted for 11.6% of Q2 sales and 12.0% of six-month sales. Management reported no current legal matter it believed would materially affect the company. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How Crocus’s $420m purchase price was ultimately funded, and the resulting debt, interest expense and liquidity after closing.
- Whether growth in automotive and industrial markets offsets continued weakness in consumer, smart-home and data-center demand, and whether customer concentration changes.
- Whether inventory builds and elevated capital spending convert into sales and cash flow; monitor inventory provisions, receivables and working capital.
- How the shift away from Sanken distribution affects Japan sales, customer transitions and related-party activity.
- Whether gross-margin gains persist amid inflation, product-mix changes and pricing pressure, and how the estimated tax-cash impact develops.