Allegro MicroSystems(ALGM) - 2022 Q3 - Quarterly Report

FORM 10-Q Filing Information Filing Details The report provides basic filing information for Allegro MicroSystems' Q3 FY2022 Form 10-Q, confirming compliance and filer status - The registrant, Allegro MicroSystems, Inc, filed its Quarterly Report on Form 10-Q for the period ended December 24, 2021[1] - The company has filed all required reports during the preceding 12 months and has been subject to filing requirements for the past 90 days[1] - As of January 19, 2022, Allegro MicroSystems, Inc had 189,913,804 shares of common stock outstanding[1] Filer Status | Filer Status | Mark | | :--- | :--- | | Large accelerated filer | ☐ | | Accelerated filer | ☐ | | Non-accelerated filer | ☒ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ | Forward-Looking Statements Forward-Looking Statements Disclaimer The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements covered by safe harbor provisions, which are not guarantees of future results and are based on management's beliefs and assumptions[6] - Key risk factors include economic volatility, competition, cyclicality of the semiconductor industry, and supply chain disruptions[6] - Other risks involve reliance on third-party fabrication, manufacturing concentration in the Philippines, and regulatory changes[6][8] PART I. Financial Information Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements and detailed explanatory notes Condensed Consolidated Balance Sheets The balance sheet reflects growth in total assets and equity, alongside a reduction in current liabilities Condensed Consolidated Balance Sheets (in thousands) | Item | December 24, 2021 (Unaudited) | March 26, 2021 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $469,192 | $430,564 | | Property, plant and equipment, net | $207,705 | $192,393 | | Total assets | $851,417 | $747,678 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $100,841 | $116,674 | | Total liabilities | $155,578 | $160,807 | | Total stockholders' equity | $695,839 | $586,871 | - Total assets increased by $103.7 million (13.9%) from March 26, 2021, to December 24, 2021, driven by increases in cash and cash equivalents and property, plant and equipment[10] - Total current liabilities decreased by $15.8 million (13.6%) over the same period, while total stockholders' equity increased by $109.0 million (18.6%)[10] Condensed Consolidated Statements of Operations The company's statements of operations show significant year-over-year growth in net sales, gross profit, and net income Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $186,629 | $164,449 | $568,381 | $416,099 | | Gross profit | $101,165 | $74,425 | $297,857 | $191,896 | | Operating income (loss) | $35,605 | $(24,224) | $106,401 | $(7,290) | | Net income (loss) attributable to Allegro | $32,936 | $(5,095) | $93,791 | $9,309 | | Basic EPS | $0.17 | $(0.04) | $0.49 | $0.19 | | Diluted EPS | $0.17 | $(0.04) | $0.49 | $0.05 | - Total net sales increased by 13.5% YoY for the three-month period and 36.6% YoY for the nine-month period[12] - Gross profit increased by 35.9% YoY for the three-month period and 55.2% YoY for the nine-month period[12] - The company swung from a net loss of $(5,095) thousand in Q3 FY2021 to a net income of $32,936 thousand in Q3 FY2022, and from $9,309 thousand to $93,791 thousand for the nine-month periods[12] Condensed Consolidated Statements of Comprehensive Income Comprehensive income improved significantly, though it was negatively impacted by foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (in thousands) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to Allegro MicroSystems, Inc | $32,936 | $(5,095) | $93,791 | $9,309 | | Foreign currency translation adjustment | $(1,306) | $3,972 | $(4,873) | $10,152 | | Comprehensive income (loss) attributable to Allegro MicroSystems, Inc | $31,627 | $(1,133) | $88,979 | $19,114 | - Comprehensive income attributable to Allegro MicroSystems, Inc significantly improved from a loss of $(1,133) thousand in Q3 FY2021 to an income of $31,627 thousand in Q3 FY2022[15] - Foreign currency translation adjustment shifted from a gain of $3,972 thousand in Q3 FY2021 to a loss of $(1,306) thousand in Q3 FY2022[15] Condensed Consolidated Statements of Changes in Equity Total equity increased substantially, driven primarily by strong net income and stock-based compensation activity Condensed Consolidated Statements of Changes in Equity (in thousands) | Item | Balance at March 26, 2021 | Balance at December 24, 2021 | | :--- | :--- | :--- | | Common Stock, Amount | $1,896 | $1,898 | | Additional Paid-In Capital | $592,170 | $612,106 | | Retained Earnings | $3,551 | $97,342 | | Accumulated Other Comprehensive Loss | $(11,865) | $(16,677) | | Non-controlling Interests | $1,119 | $1,170 | | Total Equity | $586,871 | $695,839 | - Total equity increased by $108,968 thousand from March 26, 2021, to December 24, 2021, primarily due to net income and stock-based compensation[26] - Retained earnings saw a significant increase from $3,551 thousand to $97,342 thousand during the nine-month period[26] Condensed Consolidated Statements of Cash Flows Cash flow from operations increased significantly, while cash used in financing activities decreased sharply year-over-year Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $118,558 | $63,534 | | Net cash used in investing activities | $(50,123) | $(50,401) | | Net cash used in financing activities | $(6,209) | $(72,186) | | Net increase (decrease) in Cash and cash equivalents and Restricted cash | $62,830 | $(55,703) | | Cash and cash equivalents and Restricted cash at end of period | $266,705 | $164,173 | - Net cash provided by operating activities increased by $55,024 thousand (86.6%) YoY for the nine-month period[29] - Net cash used in financing activities significantly decreased from $(72,186) thousand in the prior nine-month period to $(6,209) thousand in the current nine-month period[29] - The company experienced a net increase in cash and cash equivalents and restricted cash of $62,830 thousand, a reversal from a net decrease of $(55,703) thousand in the prior year[29] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies and specific financial line items in the statements 1. Nature of the Business and Basis of Presentation Allegro MicroSystems is a global leader in sensing and power solutions for automotive and industrial markets - Allegro MicroSystems, Inc is a global leader in designing, developing, and manufacturing sensing and power solutions for automotive and industrial markets[34] - The company's third quarter of fiscal 2022 ended on December 24, 2021, and the third quarter of fiscal 2021 ended on December 25, 2020[35] 2. Summary of Significant Accounting Policies This note details key accounting policies, including the early adoption of new standards and concentrations of credit risk - The company early adopted ASU 2016-02 (Leases) effective March 27, 2021, recognizing ROU assets of $18,403 thousand and lease liabilities of $18,759 thousand, with no material impact on net income or cash flows[41][43] - ASU 2016-13 (CECL model) was adopted effective March 27, 2021, resulting in an immaterial increase in the provision for expected credit losses[43] - Sanken Electric Co, Ltd accounted for 27.0% of outstanding trade accounts receivable and 21.1% of total net sales for the three-month period ended December 24, 2021[38][40] - Sales from customers outside the United States accounted for 85.9% of total net sales for the three-month period ended December 24, 2021, with Greater China (26.1%), Japan (21.1%), and South Korea (10.7%) being the largest contributors[40] 3. Revenue from Contracts with Customers This note disaggregates net sales by application, product, and geography, highlighting key revenue streams Net Sales by Application (in thousands) | Application | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Automotive | $130,797 | $113,902 | $390,351 | $279,759 | | Industrial | $31,903 | $23,654 | $98,533 | $65,710 | | Other | $23,929 | $26,893 | $79,497 | $70,630 | | Total | $186,629 | $164,449 | $568,381 | $416,099 | Net Sales by Product (in thousands) | Product | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Power integrated circuits | $62,859 | $54,406 | $195,054 | $146,276 | | Magnetic sensors | $123,543 | $109,457 | $371,806 | $268,956 | | Photonics | $227 | $586 | $1,521 | $867 | | Total | $186,629 | $164,449 | $568,381 | $416,099 | Net Sales by Geography (in thousands) | Geography | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | United States | $26,228 | $23,934 | $80,854 | $57,892 | | Other Americas | $4,921 | $5,620 | $16,697 | $10,797 | | Europe | $29,891 | $28,239 | $97,108 | $70,459 | | Japan | $39,461 | $26,439 | $112,079 | $72,570 | | Greater China | $48,696 | $46,172 | $142,158 | $116,178 | | South Korea | $19,935 | $17,606 | $61,614 | $43,733 | | Other Asia | $17,497 | $16,439 | $57,871 | $44,470 | | Total | $186,629 | $164,449 | $568,381 | $416,099 | 4. Fair Value Measurements This note details financial assets and liabilities measured at fair value, categorized by the fair value hierarchy Fair Value Measurement at December 24, 2021 (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents (money market) | $16,348 | $— | $— | $16,348 | | Restricted cash (money market) | $7,497 | $— | $— | $7,497 | | Investments in marketable securities | $13,393 | $— | $— | $13,393 | | Total assets | $37,238 | $— | $— | $37,238 | | Contingent consideration | $— | $— | $2,700 | $2,700 | | Total liabilities | $— | $— | $2,700 | $2,700 | - Unrealized gains on marketable securities recognized during the nine-month period ended December 24, 2021, totaled $4,482 thousand[56] - The fair value of Level 3 contingent consideration decreased by $2,100 thousand, from $4,800 thousand at March 26, 2021, to $2,700 thousand at December 24, 2021[57] 5. Trade Accounts Receivable, net This note details the composition of trade accounts receivable and changes in related provisions and allowances Trade Accounts Receivable, net (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Trade accounts receivable | $120,500 | $108,546 | | Less: Provision for expected credit losses / allowance for doubtful accounts | $(70) | $(138) | | Less: Returns and sales allowances | $(15,944) | $(15,274) | | Less: Related party trade accounts receivable | $(28,251) | $(23,634) | | Total | $76,235 | $69,500 | - Total trade accounts receivable, net, increased by $6,735 thousand (9.7%) from March 26, 2021, to December 24, 2021[61] - The provision for expected credit losses decreased from $138 thousand to $70 thousand, while returns and sales allowances increased from $15,274 thousand to $15,944 thousand[61][62] 6. Inventories This note provides a breakdown of inventories by category and details inventory provisions recorded during the period Inventories (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Raw materials and supplies | $11,751 | $9,629 | | Work in process | $45,089 | $50,095 | | Finished goods | $22,018 | $27,774 | | Total | $78,858 | $87,498 | - Total inventories decreased by $8,640 thousand (9.9%) from March 26, 2021, to December 24, 2021[63] - Inventory provisions totaled $5,389 thousand for the nine-month period ended December 24, 2021, including $3,106 thousand related to the discontinuation of a Voxtel product line[63] 7. Assets Held for Sale This note describes the completed sale of the Thailand-based AMTC Facility in August 2021 - The sale of the AMTC Facility was completed on August 3, 2021, generating cash proceeds of $27,405 thousand and a gain on final disposition of $370 thousand[66] - Assets held for sale, which were $25,969 thousand at March 26, 2021, were reduced to $0 at December 24, 2021, following the sale[10] 8. Property, Plant and Equipment, net This note provides a detailed breakdown of property, plant, and equipment by category and geographic location Property, Plant and Equipment, net (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Land | $16,257 | $16,602 | | Buildings, building improvements and leasehold improvements | $57,282 | $56,911 | | Machinery and equipment | $528,786 | $491,025 | | Office equipment | $6,252 | $6,281 | | Construction in progress | $27,971 | $29,201 | | Total gross | $636,548 | $600,020 | | Less accumulated depreciation | $(428,843) | $(407,627) | | Total net | $207,705 | $192,393 | - Total property, plant and equipment, net, increased by $15,312 thousand (8.0%) from March 26, 2021, to December 24, 2021[67] - Depreciation expense for the nine-month period ended December 24, 2021, was $33,235 thousand[67] Long-Lived Assets by Geographic Location (in thousands) | Location | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | United States | $34,793 | $36,529 | | Philippines | $166,087 | $148,374 | | Thailand | $— | $1,698 | | Other | $7,328 | $7,190 | | Total | $208,208 | $193,791 | 9. Goodwill and Intangible Assets This note details goodwill and intangible assets, including carrying amounts, amortization, and projected future expense Goodwill (in thousands) | Item | Total | | :--- | :--- | | Balance at March 26, 2021 | $20,106 | | Currency translation | $(63) | | Balance at December 24, 2021 | $20,043 | Intangible Assets, net (in thousands) | Description | Gross | Accumulated Amortization | Net Carrying Amount (Dec 24, 2021) | Weighted-Average Lives | | :--- | :--- | :--- | :--- | :--- | | Patents | $35,558 | $14,580 | $20,978 | 10 years | | Customer relationships | $6,899 | $6,640 | $259 | 9 years | | Process technology | $13,100 | $1,470 | $11,630 | 12 years | | Indefinite-lived and legacy process technology | $4,050 | $1,650 | $2,400 | | | Trademarks | $200 | $54 | $146 | 5 years | | Legacy trademarks | $629 | $57 | $572 | | | Other | $32 | $32 | $— | | | Total | $60,468 | $24,483 | $35,985 | | - Intangible assets amortization expense was $3,190 thousand for the nine-month period ended December 24, 2021[72] Annual Amortization Expense of Intangible Assets (in thousands) | Fiscal Year | Amortization Expense | | :--- | :--- | | Remainder of 2022 | $935 | | 2023 | $3,612 | | 2024 | $3,480 | | 2025 | $3,260 | | 2026 | $3,032 | | Thereafter | $21,666 | | Total | $35,985 | 10. Other Assets, net This note summarizes other assets, which increased significantly due to new investments in marketable securities Other Assets, net (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Prepaid expenses | $10,659 | $8,177 | | Marketable securities | $13,393 | $— | | Other long-term assets | $9,680 | $3,573 | | Total | $48,078 | $14,613 | - Total other assets, net, significantly increased by $33,465 thousand (229.0%) from March 26, 2021, to December 24, 2021, primarily due to new investments in marketable securities[76] 11. Accrued Expenses and Other Current Liabilities This note details the composition of accrued expenses, which decreased due to acquisition-related payments Accrued Expenses and Other Current Liabilities (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Accrued management incentives | $24,927 | $21,538 | | Accrued salaries and wages | $16,639 | $15,060 | | Base acquisition purchase price due | $2,000 | $14,588 | | Deposits on AMTC Facility | $— | $14,531 | | Total | $59,262 | $78,932 | - Total accrued expenses and other current liabilities decreased by $19,670 thousand (24.9%) from March 26, 2021, to December 24, 2021, largely due to the payment of acquisition purchase price and release of AMTC Facility deposits[77] 12. Leases This note outlines the company's operating lease agreements, costs, and future obligations Lease Costs and Other Information (in thousands) | Item | Three-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 24, 2021 | | :--- | :--- | :--- | | Operating lease expense | $1,075 | $3,378 | | Short term lease expense | $190 | $332 | | Operating cash flows from operating leases | $1,259 | $3,733 | | Weighted-average remaining lease term | 5.53 years | 5.53 years | | Weighted-average discount rate | 4.5% | 4.5% | Expirations of Lease Obligations (in thousands) | Fiscal Year | Amount | | :--- | :--- | | Remainder of 2022 | $1,056 | | 2023 | $3,886 | | 2024 | $3,503 | | 2025 | $3,070 | | 2026 | $2,597 | | Thereafter | $4,406 | | Total undiscounted lease payments | $18,518 | | Less: present value adjustment | $(2,272) | | Total operating lease liabilities | $16,246 | 13. Debt and Other Borrowings This note details the company's debt obligations, including its Term Loan and Revolving Credit Facilities - As of December 24, 2021, the company had $25,000 thousand outstanding under the Term Loan Facility, bearing an interest rate of 4.25%[86] - The Revolving Credit Facility had no outstanding borrowings as of December 24, 2021, with unamortized deferred financing costs of $174 thousand[86] - Two lines of credit in the Philippines, totaling approximately $2,691 thousand in maximum borrowing capacity, were extended to expire in August 2022 and June 2022, respectively, with no outstanding borrowings[86] 14. Other Long-Term Liabilities This note provides a breakdown of other long-term liabilities, which decreased due to a reduction in contingent consideration Other Long-Term Liabilities (in thousands) | Item | December 24, 2021 | March 26, 2021 | | :--- | :--- | :--- | | Accrued management incentives | $734 | $628 | | Accrued retirement | $10,655 | $10,656 | | Accrued contingent consideration | $2,700 | $4,800 | | Provision for uncertain tax positions (net) | $2,741 | $2,774 | | Other | $— | $275 | | Total | $16,830 | $19,133 | - Total other long-term liabilities decreased by $2,303 thousand (12.0%) from March 26, 2021, to December 24, 2021, primarily due to a reduction in accrued contingent consideration[87] 15. Retirement Plans This note describes the company's defined benefit and defined contribution retirement plans and related expenses - The company operates a non-U.S defined benefit pension plan in the Philippines, covering substantially all employees of Allegro MicroSystems Philippines, Inc (AMPI)[90] Net Periodic Pension Expense (in thousands) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net periodic pension expense | $500 | $432 | $1,531 | $1,218 | Non-U.S. Defined Benefit Plan Assets (in thousands) | Asset Category | Fair Value at Dec 24, 2021 | Fair Value at Mar 26, 2021 | | :--- | :--- | :--- | | Government securities | $2,005 | $1,646 | | Unit investment trust fund | $1,217 | $1,221 | | Loans | $578 | $584 | | Bonds | $706 | $1,112 | | Stocks and other investments | $2,338 | $3,081 | | Total | $6,844 | $7,644 | - Company contributions to the non-U.S pension plan for the nine-month period ended December 24, 2021, were $1,040 thousand, with an expectation to contribute approximately $1,425 thousand in fiscal year 2022[95] - Matching contributions to the 401(k) plan for AML U.S employees totaled $3,000 thousand for the nine-month period ended December 24, 2021[97] 16. Commitments and Contingencies This note addresses various commitments and contingencies, none of which are expected to have a material adverse effect - The accrued liability for self-insured employee health programs was $863 thousand as of December 24, 2021[100] - The company is not currently party to any material legal proceedings and has not incurred any costs in connection with indemnification arrangements to date[101][102] - No significant environmental accruals were established at December 24, 2021[103] 17. Net Income per Share This note provides the calculation of basic and diluted net income per share, detailing the impact of the IPO and dilutive securities Net Income per Share (in thousands, except per share amounts) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to Allegro MicroSystems, Inc | $32,936 | $(5,095) | $93,791 | $9,309 | | Basic weighted average shares outstanding | 189,736,901 | 124,363,078 | 189,665,324 | 48,121,026 | | Diluted weighted average shares outstanding | 192,068,222 | 124,363,078 | 191,678,951 | 171,638,787 | | Basic net income per share | $0.17 | $(0.04) | $0.49 | $0.19 | | Diluted net income per share | $0.17 | $(0.04) | $0.49 | $0.05 | - The IPO on November 2, 2020, resulted in the conversion of all outstanding Class A and Class L common stock into 166,500,000 shares of common stock[104] Dilutive Common Stock Equivalents (Weighted Average Shares) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Restricted stock units | 1,199,816 | 377,767 | 1,046,229 | 125,922 | | Performance stock units | 1,117,532 | 422,768 | 959,084 | 140,923 | | Employee stock purchase plan | 13,973 | — | 8,314 | — | | Shares related to Common Stock Conversion | — | 56,752,747 | — | 123,250,916 | | Total | 2,331,321 | 57,553,282 | 2,013,627 | 123,517,761 | 18. Common Stock and Stock-Based Compensation This note details the accounting for stock-based compensation and the related expense recognized in operations - During the nine months ended December 24, 2021, the company granted 1,030,887 RSUs with an estimated grant date fair value of $25.47[109] - Stock-based compensation expense related to non-vested awards not yet recorded was $25,133 thousand for RSUs and $13,765 thousand for PSUs as of December 24, 2021[109] Total Stock-Based Compensation Expense (in thousands) | Category | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Cost of sales | $742 | $4,694 | $1,992 | $4,844 | | Research and development | $1,019 | $2,984 | $2,814 | $3,037 | | Selling, general and administrative | $5,859 | $38,198 | $13,841 | $39,020 | | Total | $7,620 | $45,876 | $18,647 | $46,901 | 19. Income Taxes This note presents the income tax provision and effective tax rates, explaining fluctuations due to income mix and discrete events Income Tax Provision (Benefit) (in thousands) | Item | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Provision (benefit) for income taxes | $6,281 | $(30,523) | $16,687 | $(27,913) | | Annual operating tax rate | 16.6% | 34.2% | 16.1% | 52.8% | | Effective tax rate | 16.0% | 85.8% | 15.1% | 150.9% | - The increase in income tax expense was primarily due to the tax impacts of the IPO transaction in the prior period, which resulted in excess tax deductions and a tax loss on the divestiture of PSL[113] 20. Related Party Transactions This note details transactions with related parties, including Sanken Electric, Polar Semiconductor, and Sanken Electric Europe - Net sales to Sanken totaled $39,461 thousand and $112,079 thousand for the three- and nine-month periods ended December 24, 2021, respectively[116] - Purchases of products from Polar Semiconductor, LLC (PSL) totaled $38,346 thousand for the nine-month period ended December 24, 2021[117] - On December 2, 2021, AML entered into a loan agreement with PSL for an initial promissory note of $7,500 thousand to procure manufacturing tools[120] - The company made aggregate payments of $166 thousand to Sanken under a sublease agreement for office space in Japan for the nine-month period ended December 24, 2021[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, growth strategies, and key business trends Overview Allegro MicroSystems is a leading global supplier of sensor and application-specific analog power ICs for key growth markets - Allegro MicroSystems, Inc is a leading global designer, developer, manufacturer, and marketer of sensor ICs and application-specific analog power ICs for automotive and industrial markets[125] - The company is the number one supplier of magnetic sensor IC solutions worldwide, with over 1,000 products and shipping over one billion units annually[125] Key Financial Highlights (in millions) | Metric | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $186.6 | $164.4 | $568.4 | $416.1 | | Net income (loss) | $33.0 | $(5.1) | $93.9 | $9.4 | | Adjusted EBITDA | $54.9 | $39.6 | $167.7 | $98.6 | - The company completed its IPO on November 2, 2020, raising approximately $321.4 million in net proceeds[125] Our Growth Strategies and Outlook The company's growth strategy focuses on market-aligned R&D, an 'automotive first' philosophy, and selective acquisitions - The company plans to invest in market-aligned R&D, focusing on product design, automotive-grade wafer fabrication, and IC packaging for high-growth opportunities like xEVs, ADAS, Industry 4.0, data centers, and green energy[126][128] - Emphasis on an 'automotive first' philosophy to align product development with stringent automotive standards, leveraging this expertise for industrial customers seeking ruggedized solutions[128] - Strategies include expanding sales channels, enhancing customer relationships, improving gross margins through product innovation and cost optimization, and pursuing selective acquisitions (e.g, Voxtel for LiDAR technology)[128] - Commitment to sustainability by innovating energy-efficient products and operating in a socially responsible and environmentally sustainable manner[128][130] Recent Initiatives to Improve Results of Operations Recent initiatives include the acquisition of Voxtel and the consolidation of assembly and test facilities - Acquired Voxtel, Inc in August 2020, specializing in components for eye-safe LiDAR used in ADAS and industrial automation, bringing laser and imaging expertise[132] - Consolidated assembly and test facilities into a single site in the Philippines (AMPI Facility) and closed the Thailand facility (AMTC Facility) in March 2021, with the sale completed in August 2021, expecting significant cost of goods sold reduction[132] Other Key Factors and Trends Affecting our Operating Results Operating results are affected by design wins, customer demand fluctuations, gross margin pressures, and industry cyclicality - Future revenue is highly dependent on successful design wins with new and existing customers, despite expected declines in average selling prices (ASPs) over time[134] - Customer demand is influenced by market conditions, seasonality, cyclicality, and competitive pressures, with customers providing non-binding forecasts and having cancellation rights[135] - Gross margin is affected by ASPs, product mix, material costs, yields, and manufacturing efficiencies, with fixed costs making adjustments to demand changes difficult[136][138] - The semiconductor industry's cyclical nature, rapid technological change, and competitive pricing pressures can lead to fluctuations in product supply and demand, impacting sales and margins[139] Components of Our Results of Operations This section breaks down the key components of the company's income statement, from net sales to income tax - Total net sales are derived from product sales to direct customers and distributors globally, with revenue recognized upon shipment or delivery[140] - Cost of goods sold includes raw materials, probe, assembly, test, shipping, personnel, depreciation, amortization, and other manufacturing-related costs, expected to decrease due to AMTC Facility closure and PSL distribution transfer[141][143] - R&D expenses consist of personnel costs, wafer and mask development, software licenses, and testing, with expected increases due to new product offerings and headcount growth[144] - SG&A expenses include personnel costs, sales commissions, professional fees, advertising, and corporate marketing, anticipated to increase due to sales force expansion and public company costs[145] - Other income/expense items include changes in fair value of contingent consideration, interest expense/income, foreign currency transaction gains/losses, income from equity investments, and income tax provision/benefit[146][147][148][149][150][152] Results of Operations The section compares financial performance for the recent three- and nine-month periods, highlighting significant growth Three-Month Period Ended December 24, 2021 Compared to Three-Month Period Ended December 25, 2020 Net sales grew 13.5% YoY, driven by strong automotive and industrial demand, resulting in a significant profit increase Three-Month Period Financial Performance (in thousands) | Item | Dec 24, 2021 | Dec 25, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $186,629 | $164,449 | $22,180 | 13.5% | | Cost of goods sold | $85,464 | $90,024 | $(4,560) | (5.1)% | | Gross profit | $101,165 | $74,425 | $26,740 | 35.9% | | Operating income (loss) | $35,605 | $(24,224) | $59,829 | 247.0% | | Net income (loss) attributable to Allegro | $32,936 | $(5,095) | $38,031 | 746.4% | - Automotive net sales increased by $16.9 million (14.8%), and industrial net sales increased by $8.2 million (34.9%), driven by economic recovery and higher demand for ADAS, xEV, data center, and factory automation applications[158][160] - SG&A expenses decreased by $29.7 million (43.9%), primarily due to lower stock-based compensation expense and reduced facilities/personnel costs, partially offset by higher variable compensation and professional fees[167] - Income tax provision shifted from a benefit of $30.5 million to an expense of $6.3 million, largely due to the tax impacts of the prior year's IPO transaction[175] Nine-Month Period Ended December 24, 2021 Compared to Nine-Month Period Ended December 25, 2020 Net sales surged 36.6% YoY, with significant growth across all segments, driving a 907.5% increase in net income Nine-Month Period Financial Performance (in thousands) | Item | Dec 24, 2021 | Dec 25, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $568,381 | $416,099 | $152,282 | 36.6% | | Cost of goods sold | $270,524 | $224,203 | $46,321 | 20.7% | | Gross profit | $297,857 | $191,896 | $105,961 | 55.2% | | Operating income (loss) | $106,401 | $(7,290) | $113,691 | 1559.5% | | Net income attributable to Allegro | $93,791 | $9,309 | $84,482 | 907.5% | - Automotive net sales increased by $110.6 million (39.5%), and industrial net sales increased by $32.8 million (50.0%), driven by continued higher demand for ADAS, xEV, gaming, industrial automation, and wireless infrastructure applications[182][184] - Magnetic sensor IC product sales increased by $102.9 million (38.2%), and power IC product sales increased by $48.8 million (33.3%)[185] - SG&A expenses decreased by $14.6 million (12.3%), primarily due to a $25.2 million decrease in stock-based compensation expense, partially offset by increases in employee-related variable compensation and professional fees[191] Non-GAAP Financial Measures This section presents non-GAAP financial measures and reconciles them to their most comparable GAAP counterparts - The company uses non-GAAP financial measures (e.g, non-GAAP Gross Profit, Adjusted EBITDA) to evaluate business performance, identify trends, and make strategic decisions, excluding non-cash or infrequent charges unrelated to core operations[201] - Non-GAAP adjustments include Voxtel inventory impairment, stock-based compensation, AMTC Facility consolidation costs, amortization of acquisition-related intangible assets, COVID-19 related expenses, transaction fees, severance, and unrealized gains on investments[203][204][206][207][208] Non-GAAP Gross Profit and Margin (in thousands) | Metric | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | GAAP Gross Profit | $101,165 | $74,425 | $297,857 | $191,896 | | Total Non-GAAP Adjustments | $1,152 | $7,139 | $6,857 | $14,617 | | Non-GAAP Gross Profit | $102,317 | $81,564 | $304,714 | $206,513 | | Non-GAAP Gross Margin | 54.8% | 49.6% | 53.6% | 49.6% | Adjusted EBITDA and Margin (in thousands) | Metric | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | GAAP Net Income (Loss) | $32,973 | $(5,060) | $93,903 | $9,412 | | EBITDA | $51,534 | $(20,786) | $148,876 | $19,659 | | Total Non-GAAP Adjustments | $3,383 | $60,405 | $18,777 | $78,916 | | Adjusted EBITDA | $54,917 | $39,619 | $167,653 | $98,575 | | Adjusted EBITDA Margin | 29.4% | 24.1% | 29.5% | 23.7% | Non-GAAP Net Income and EPS (in thousands, except per share amounts) | Metric | Three-Month Period Ended Dec 24, 2021 | Three-Month Period Ended Dec 25, 2020 | Nine-Month Period Ended Dec 24, 2021 | Nine-Month Period Ended Dec 25, 2020 | | :--- | :--- | :--- | :--- | :--- | | GAAP Net Income (Loss) | $32,973 | $(5,060) | $93,903 | $9,412 | | Non-GAAP Net Income | $36,091 | $22,980 | $109,969 | $53,410 | | Non-GAAP Basic EPS | $0.19 | $0.18 | $0.58 | $1.11 | | Non-GAAP Diluted EPS | $0.19 | $0.13 | $0.57 | $0.31 | Liquidity and Capital Resources The company maintains a strong liquidity position with increased cash and working capital, supported by robust operating cash flow - As of December 24, 2021, the company had $259.2 million in cash and cash equivalents and $368.4 million in working capital, an increase from March 26, 2021[225] - Primary liquidity requirements include working capital, capital expenditures, debt payments, and general corporate needs, historically met by operating activities and existing cash[225] - Net cash provided by operating activities was $118.6 million for the nine months ended December 24, 2021, a significant increase from $63.5 million in the prior year[227] - Net cash used in investing activities was $50.1 million, including $55.8 million for property, plant and equipment, partially offset by $27.4 million from the sale of the AMTC Facility[230] - Net cash used in financing activities decreased significantly to $6.2 million, primarily due to a $7.5 million loan to PSL, compared to $72.2 million used in the prior year (which included $400 million in dividends and $300 million in debt repayment)[231] - The company had $25.0 million in aggregate principal amount of debt outstanding under its Senior Secured Credit Facilities as of December 24, 2021[234] Recent Accounting Pronouncements This section refers to Note 2 for a full description of recent accounting pronouncements and their effects - The company refers to Note 2 for a full description of recent accounting pronouncements, including adoption dates and effects on financial statements[239] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates since the last fiscal year-end - There have been no material changes in the company's critical accounting policies and estimates since March 26, 2021[240] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states there have been no material changes to the company's market risk exposures since March 26, 2021 - No material changes in exposures to market risk (interest rate, foreign currency exchange, inflation) have occurred since March 26, 2021[241] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of December 24, 2021[244] - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report[245] PART II. Other Information Item 1. Legal Proceedings The company is not currently party to any material legal proceedings that could have a significant adverse effect - The company is not currently involved in any material legal proceedings[247] - No pending or threatened legal proceedings are believed to have a material adverse effect on the company's financial condition or results of operations[247] Item 1A. Risk Factors This section indicates no material changes to the risk factors previously disclosed in the 2021 Annual Report - There have been no material changes to the 'Risk Factors' disclosed in Item 1A of the 2021 Annual Report[248] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities and use of proceeds to report[248] Item 3. Defaults Upon Senior Securities This section indicates no defaults upon senior securities to report for the period - No defaults upon senior securities to report[248] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[248] Item 5. Other Information This section reports no other information to disclose for the period - No other information to report[248] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including legal agreements and certifications - Exhibits include various legal agreements (e.g, Loan Agreement with Polar Semiconductor, LLC), offer and severance letters for executives, and certifications (e.g, Section 302 and 906 of Sarbanes-Oxley Act)[250] - XBRL (eXtensible Business Reporting Language) documents are also included for interactive data filing[250] Signatures Signatures This section contains the certifying signatures of the company's principal executive and financial officers - The report is signed by Ravi Vig, President and Chief Executive Officer, and Derek P D'Antilio, Senior Vice President, Chief Financial Officer and Treasurer, on February 2, 2022[252]