UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-Q
_________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 25, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-39675
_________________
(Exact Name of Registrant as Specified in its Charter)
_________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(603 ) 626-2300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| ☒ | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 21, 2021, the registrant had 189,646,542 shares of common stock, $0.01 par value per share, outstanding.
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TABLE OF CONTENTS
| Page | ||||||||
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, the impact of the ongoing and global COVID-19 pandemic on our business, prospective products and the plans and objectives of management for future operations, may be forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding the liquidity, growth and profitability strategies and factors and trends affecting our business are forward-looking statements. Without limiting the foregoing, in some cases, you can identify forward-looking statements by terms such as “aim,” “may,” “will,” “should,” “expect,” “exploring,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “seek,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue reliance on such statements.
Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs and assumptions may or may not prove to be correct. Additionally, such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report and Part II, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended March 26, 2021 (the “2021 Annual Report”). These risks and uncertainties include, but are not limited to:
•downturns or volatility in general economic conditions, including as a result of the COVID-19 pandemic, particularly in the automotive market;
•our ability to compete effectively, expand our market share and increase our net sales and profitability;
•our ability to compensate for decreases in average selling prices of our products;
•the cyclical nature of the analog semiconductor industry;
•shifts in our product mix or customer mix, which could negatively impact our gross margin;
•our ability to manage any sustained yield problems or other delays at our third-party wafer fabrication facilities or in the final assembly and test of our products;
•any disruptions at our primary third-party wafer fabrication facilities;
•our ability to fully realize the benefits of past and potential future initiatives designed to improve our competitiveness, growth and profitability;
•our ability to accurately predict our quarterly net sales and operating results;
•our ability to adjust our supply chain volume to account for changing market conditions and customer demand;
•our reliance on a limited number of third-party wafer fabrication facilities and suppliers of other materials;
•our dependence on manufacturing operations in the Philippines;
•our reliance on distributors to generate sales;
•our indebtedness may limit our flexibility to operate our business;
•the loss of one or more significant end customers;
•our ability to develop new product features or new products in a timely and cost-effective manner;
•our ability to meet customers’ quality requirements;
•uncertainties related to the design win process and our ability to recover design and development expenses and to generate timely or sufficient net sales or margins;
•changes in government trade policies, including the imposition of tariffs and export restrictions;
•our exposures to warranty claims, product liability claims and product recalls;
•our ability to protect our proprietary technology and inventions through patents or trade secrets;
•our ability to commercialize our products without infringing third-party intellectual property rights;
•disruptions or breaches of our information technology systems;
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•risks related to governmental regulation and other legal obligations, including privacy, data protection, information security, consumer protection, environmental and occupational health and safety, anti-corruption and anti-bribery, and trade controls;
•our dependence on international customers and operations;
•the availability of rebates, tax credits and other financial incentives on end-user demands for certain products;
•the volatility of currency exchange rates;
•risks related to acquisitions of and investments in new businesses, products or technologies, joint ventures and other strategic transactions;
•our ability to raise capital to support our growth strategy;
•our ability to effectively manage our growth and to retain key and highly skilled personnel;
•changes in tax rates or the adoption of new tax legislation;
•risks related to litigation, including securities class action litigation; and
•our ability to accurately estimate market opportunity and growth forecasts.
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of any new information, future events or otherwise.
Unless the context otherwise requires, references to “we,” “us,” “our,” the “Company” and “Allegro” refer to the operations of Allegro MicroSystems, Inc. and its consolidated subsidiaries.
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PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ALLEGRO MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
June 25, 2021 (Unaudited) | March 26, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Trade accounts receivable, net of provision for expected credit losses of $ | |||||||||||
| Trade and other accounts receivable due from related party | |||||||||||
Accounts receivable – other | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred income tax assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Equity investment in related party | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities, Non-Controlling Interest and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Amounts due to related party | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Obligations due under Senior Secured Credit Facilities | |||||||||||
| Operating lease liabilities, less current portion | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Stockholders' Equity: | |||||||||||
Preferred Stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Equity attributable to Allegro MicroSystems, Inc. | |||||||||||
| Non-controlling interests | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities, non-controlling interest and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ALLEGRO MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| Net sales | $ | $ | |||||||||
| Net sales to related party | |||||||||||
| Total net sales | |||||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Change in fair value of contingent consideration | |||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Other (expense) income: | |||||||||||
| Interest (expense) income, net | ( | ||||||||||
| Foreign currency transaction (loss) gain | ( | ||||||||||
| Income in earnings of equity investment | |||||||||||
| Other, net | |||||||||||
| Income before income tax provision | |||||||||||
| Income tax provision | |||||||||||
| Net income | |||||||||||
| Net income attributable to non-controlling interests | |||||||||||
| Net income attributable to Allegro MicroSystems, Inc. | $ | $ | |||||||||
| Net income attributable to Allegro MicroSystems, Inc. per share (Note 16): | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ALLEGRO MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Net income attributable to non-controlling interest | |||||||||||
| Net income attributable to Allegro MicroSystems, Inc. | |||||||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation adjustment | ( | ||||||||||
| Net actuarial loss amortization of net transition obligation and prior service costs related to defined benefit plans, net of tax | ( | ||||||||||
| Comprehensive income | |||||||||||
| Other comprehensive loss attributable to non-controlling interest | |||||||||||
| Comprehensive income attributable to Allegro MicroSystems, Inc. | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ALLEGRO MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share amounts)
(Unaudited)
| Common Stock, Class A | Common Stock, Class L | Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 27, 2020 | $ | $ | — | $ | — | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class L shares, net of forfeitures | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capitalization changes related to organizational structure of affiliates and direct and indirect interests in subsidiaries | — | — | — | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of certain class L shares | — | — | — | — | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial loss and amortization of net transition obligation and prior service costs related to defined benefit plans, net of tax | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 26, 2020 | — | $ | $ | — | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-Controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 26, 2021 | — | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net of forfeitures | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 25, 2021 | — | $ | — | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ALLEGRO MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Stock-based compensation | |||||||||||
| Gain on disposal of assets | ( | ( | |||||||||
| Loss on contingent consideration change in fair value | |||||||||||
| Provisions for inventory and credit losses/bad debt | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable | ( | ||||||||||
| Accounts receivable - other | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | |||||||||||
| Trade accounts payable | ( | ||||||||||
| Due to/from related parties | |||||||||||
| Accrued expenses and other current and long-term liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
Contribution of cash balances due to divestiture of subsidiary | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on Cash and cash equivalents and Restricted cash | ( | ||||||||||
| Net increase in Cash and cash equivalents and Restricted cash | |||||||||||
| Cash and cash equivalents and Restricted cash at beginning of period | |||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD: | $ | $ | |||||||||
| RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | |||||||||||
| Cash and cash equivalents at beginning of period | $ | $ | |||||||||
| Restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and Restricted cash at beginning of period | $ | $ | |||||||||
| Cash and cash equivalents at end of period | |||||||||||
| Restricted cash at end of period | |||||||||||
| Cash and cash equivalents and Restricted cash at end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | ( | ||||||||||
| Noncash transactions: | |||||||||||
| Changes in Trade accounts payable related to Property, plant and equipment, net | $ | ( | $ | ( | |||||||
| Loans to cover purchase of common stock under employee stock plan | |||||||||||
| Recognition of right of use assets and lease liability upon adoption of new accounting standard | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
1. Nature of the Business and Basis of Presentation
Allegro MicroSystems, Inc., together with its consolidated subsidiaries (“AMI” or the “Company”), is a global leader in designing, developing and manufacturing sensing and power solutions for motion control and energy-efficient systems in automotive and industrial markets. The Company is headquartered in Manchester, New Hampshire and has a global footprint with 16 locations across four continents.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the Company's accounts and those of its subsidiaries. All intercompany balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on May 19, 2021 (the “2021 Annual Report”). In the opinion of the Company's management, the financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.
On November 2, 2020, the Company completed its initial public offering (“IPO”). Refer to Note 1, “Nature of Business and Basis of Presentation” to the Company’s 2021 Annual Report for details.
Financial Periods
The Company’s first quarter three-month period is a 13-week period ending on the Friday closest to the last day in June. The Company’s first quarter of fiscal 2022 ended June 25, 2021, and the Company’s first quarter of fiscal 2021 ended June 26, 2020.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingencies at the date of the unaudited consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Such estimates relate to useful lives of fixed and intangible assets, allowances for doubtful accounts and customer returns and sales allowances. Such estimates could also relate to the fair value of acquired assets and liabilities, including goodwill and intangible assets, net realizable value of inventory, accrued liabilities, the valuation of stock-based awards, deferred tax valuation allowances, and other reserves. On an ongoing basis, management evaluates its estimates. Actual results could differ from those estimates, and such differences may be material to the unaudited condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior-period amounts to conform to current-period reporting classifications.
As of June 25, 2021 and March 26, 2021, Sanken Electric Co., Ltd. (“Sanken”) accounted for 23.2 % and 22.7 % of the Company’s outstanding trade accounts receivable, net, respectively, including related party trade accounts receivable. No other customers accounted for 10% or more of outstanding trade accounts receivable, net during those periods.
9
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
For the three months ended June 25, 2021 and June 26, 2020, Sanken accounted for 18.8 % and 20.5 % of total net sales, respectively. No other customers accounted for 10% or more of total net sales for either of the three months ended June 25, 2021 or June 26, 2020.
During the three months ended June 25, 2021, sales from customers located outside of the United States accounted for, in the aggregate, 85.7 % of the Company’s total net sales, with Greater China accounting for 22.7 %, Japan accounting for 18.8 % and South Korea accounting for 11.7 %. No other countries accounted for greater than 10% of total net sales for the three months ended June 25, 2021.
During the three months ended June 26, 2020, sales from customers located outside of the United States, in the aggregate, accounted for 88.7 % of the Company’s total net sales, with Greater China accounting for 27.9 %, Japan accounting for 20.5 % and South Korea accounting for 11.8 %. No other countries accounted for greater than 10% of total net sales for the three months ended June 26, 2020.
Recently Adopted Accounting Standards
The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for nonpublic companies.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued its new lease accounting guidance in Accounting Standards Update (“ASU”) 2016‑02, “Leases (Topic 842)” (“ASU 2016-02”), which is codified as Accounting Standard Codification (“ASC”) Topic 842 (“ASC 842”) and replaces ASC Topic 840, Leases (“ASC 840”). ASU 2016-02 and all subsequent amendments amends various aspects of existing guidance for leases and requires significant additional quantitative and qualitative disclosures about lease arrangements. ASU 2016-02 requires lessees to recognize lease assets representing the right to use an underlying asset and lease liabilities representing the obligation to make lease payments over the lease term, measured on a discounted basis, for substantially all leases. ASU 2016-02 retains a distinction between finance leases and operating leases using classification criteria that is substantially similar to the previous lease guidance. Although the Company has elected to opt-in to the extended transition dates for new or revised accounting standards to align with nonpublic companies, the Company elected to early adopt ASU 2016-02 effective March 27, 2021. The Company used the optional transition method to the modified retrospective approach, which eliminates the requirement to restate the prior period financial statements. Under this transition provision, the Company has applied ASU 2016-02 to reporting periods beginning on March 27, 2021, while prior periods continue to be reported and disclosed in accordance with the legacy guidance under ASC 840.
A number of practical expedients and policy elections are available under the new guidance to reduce the burden of adoption and ongoing compliance with ASC 842. The Company elected the “package of practical expedients”, which permitted the Company to retain lease classification and initial direct costs for any identified leases that existed prior to adoption of ASC 842. Under this transition guidance, the Company also did not reassess whether any existing contracts at March 27, 2021 are or contain leases and carried forward its initial determination under legacy lease guidance. The Company has elected not to adopt the “hindsight” practical expedient and, therefore, will measure the right-of-use (“ROU”) asset and lease liability using the remaining portion of the lease term at adoption on March 27, 2021.
The Company made an accounting policy election available under the new lease standard to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. For all other leases, the initial measurement of the lease liability is based on the present value of future lease payments over the lease term at the application date or the commencement date of the lease. Lease payments may include fixed rent escalation clauses or payments that depend on an index or a rate (such as the consumer price index) measured using the index or applicable rate at lease commencement. Subsequent changes in the index or rate and any other variable payments, such as market-rate base rent adjustments, are recognized as variable lease expense in the period incurred. Payments for terminating a lease are included in lease payments only when it is probable they will be incurred. To determine the present value of lease payments, the Company uses its incremental borrowing rate, as the leases generally do not have a readily determinable implicit discount rate. The Company applies judgment in assessing factors such as Company-specific credit risk, lease term, nature and quality of the underlying collateral, currency and economic environment in determining the lease-specific incremental borrowing rate. The carrying value of the ROU assets at the application date equals the lease liability adjusted for any initial direct costs incurred and lease payments made at or before the commencement date and for any lease incentives.
10
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
The Company’s leases generally include a non-lease component representing additional services transferred to the Company. The Company has made an accounting policy election to account for lease and non-lease components in its contacts as a single lease component for all asset classes. The non-lease components are usually variable in nature and recorded in variable lease expense in the period incurred.
Adoption of ASC 842 resulted in ROU assets of $18,403 and lease liabilities of $18,759 related to the Company’s operating leases at March 27, 2021. The Company does not have any leases classified as finance leases. The adoption of ASC 842 did not materially impact the Company’s consolidated net income or consolidated cash flows and did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which adds an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity by decreasing the number of credit impairment models that entities use to account for debt instruments. The Company adopted ASU 2016-13 effective March 27, 2021 and concluded that the standard update did not have a material impact on either the financial position, results of operations, cash flows, or related disclosures. There was no impact on beginning balance retained earnings upon adoption of this ASU.
The Company is exposed to credit losses primarily through trade and other financing receivables arising from revenue transactions. The Company uses an aging schedule method to estimate current expected credit losses based on days of delinquency, including information about past events and current economic conditions. The Company’s accounts receivable is separated into two categories using a portfolio methodology to evaluate the allowance under the CECL impairment model based on sales categorization and similar credit quality and worthiness of the customers: original equipment manufacturers (“OEMs”) and distributors. The receivables in each category share similar risk characteristics. The change to the CECL impairment model resulted in an immaterial increase in the provision for expected credit losses compared to the allowance for doubtful accounts under the previous incurred loss method.
The Company increases the allowance for expected credits losses when the Company determines all or a portion of a receivable is uncollectible. The Company recognizes recoveries as a decrease to the allowance for expected credit losses. For the three-month period ended June 25, 2021, no material changes in the allowance occurred.
Recently Issued Accounting Standards Not Yet Adopted
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”). ASU 2021-04 outlines how an entity should account for modifications made to equity-classified written call options, including stock options and warrants to purchase the entity’s own common stock. The guidance in the ASU requires an entity to treat a modification of an equity-classified written call options that does not cause the option to become liability-classified as an exchange of the original option for a new option. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the equity-classified written call option or as termination of the original option and issuance of a new option. The guidance is effective prospectively for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period as of the beginning of the fiscal year that includes that interim period. The Company is currently in the process of evaluating the impact of this new guidance on the consolidated financial statements and the related disclosures.
3. Revenue from Contracts with Customers
11
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
Net sales by application:
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| Automotive | $ | $ | |||||||||
| Industrial | |||||||||||
| Other | |||||||||||
| Total net sales | $ | $ | |||||||||
Net sales by product:
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| Power integrated circuits | $ | $ | |||||||||
| Magnetic sensors | |||||||||||
| Photonics | |||||||||||
| Total net sales | $ | $ | |||||||||
Net sales by geography:
| Three-Month Period Ended | |||||||||||
| June 25, 2021 | June 26, 2020 | ||||||||||
| Americas: | |||||||||||
| United States | $ | $ | |||||||||
| Other Americas | |||||||||||
| EMEA: | |||||||||||
| Europe | |||||||||||
| Asia: | |||||||||||
| Japan | |||||||||||
| Greater China | |||||||||||
| South Korea | |||||||||||
| Other Asia | |||||||||||
| Total net sales | $ | $ | |||||||||
The Company recognizes sales net of returns, credits issued, price protection adjustments and stock rotation rights. At June 25, 2021 and March 26, 2021, these adjustments were $13,799 and $15,412 , respectively, and were netted against trade accounts receivable in the unaudited consolidated balance sheets. These amounts represent activity of income and charges of $1,613 and $1,740 , respectively, for the three months ended June 25, 2021 and June 26, 2020, respectively.
Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. The Company elected to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year.
12
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
4. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities as of June 25, 2021 and March 26, 2021 measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
| Fair Value Measurement at June 25, 2021 Using: | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market fund deposits | $ | $ | $ | $ | |||||||||||||||||||
| Restricted cash: | |||||||||||||||||||||||
| Money market fund deposits | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Fair Value Measurement at March 26, 2021 Using: | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market fund deposits | $ | $ | $ | $ | |||||||||||||||||||
| Restricted cash: | |||||||||||||||||||||||
| Money market fund deposits | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
The following table shows the change in fair value of Level 3 contingent consideration in connection with the fiscal year 2021 purchase of Voxtel, Inc. (“Voxtel”), a privately-held technology company located in Beaverton, Oregon that develops, manufactures and supplies photonic and advanced 3D imaging technologies (the “Voxtel Acquisition”), for the three-month period ended June 25, 2021:
| Level 3 Contingent Consideration | |||||
| Balance at March 26, 2021 | $ | ||||
| Change in fair value of contingent consideration | |||||
| Balance at June 25, 2021 | $ | ||||
Assets and liabilities measured at fair value on a recurring basis also consist of marketable securities, unit investment trust fund, loans, bonds, stock and other investments which are the Company’s defined benefit plan assets. Fair value information for those assets and liabilities, including their classification in the fair value hierarchy, is included in Note 14, “Retirement Plans.”
During the three months ended June 25, 2021 and June 26, 2020, there were no transfers among Level 1, Level 2 and Level 3 asset or liabilities.
13
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
5. Trade Accounts Receivable, net
Trade accounts receivable, net (including related party trade accounts receivable) consisted of the following:
| June 25, 2021 | March 26, 2021 | ||||||||||
| Trade accounts receivable | $ | $ | |||||||||
| Less: | |||||||||||
| Provision for expected credit losses and allowance for doubtful accounts | ( | ( | |||||||||
| Returns and sales allowances | ( | ( | |||||||||
| Related party trade accounts receivable | ( | ( | |||||||||
| Total | $ | $ | |||||||||
Changes in the Company’s allowance for doubtful accounts and returns and sales allowances were as follows:
| Description | Allowance for Doubtful Accounts | Returns and Sales Allowances | Total | |||||||||||||||||
| Balance at March 26, 2021 | $ | $ | $ | |||||||||||||||||
| Charged to costs and expenses or revenue | ||||||||||||||||||||
| Write-offs, net of recoveries | ( | ( | ||||||||||||||||||
| Balance at June 25, 2021 | $ | $ | $ | |||||||||||||||||
| Description | Allowance for Doubtful Accounts | Returns and Sales Allowances | Total | |||||||||||||||||
| Balance at March 27, 2020 | $ | $ | $ | |||||||||||||||||
| Charged to costs and expenses or revenue | ||||||||||||||||||||
| Write-offs, net of recoveries | ( | ( | ||||||||||||||||||
| Balance at June 26, 2020 | $ | $ | $ | |||||||||||||||||
6. Inventories
Inventories include material, labor and overhead and consisted of the following:
| June 25, 2021 | March 26, 2021 | ||||||||||
| Raw materials and supplies | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
The Company recorded inventory provisions totaling $3,189 and $1,583 for the three months ended June 25, 2021 and June 26, 2020, respectively. During the three months ended June 25, 2021, the Company discontinued a product line manufactured by Voxtel and subsequently recognized impairment charges for the related inventory, which represented most of the increase in inventory provisions.
7. Assets Held for Sale
14
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
8. Property, Plant and Equipment, net
Property, plant and equipment, net is stated at cost, and consisted of the following:
| June 25, 2021 | March 26, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings, building improvements and leasehold improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Office equipment | |||||||||||
| Construction in progress | |||||||||||
| Total | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Total | $ | $ | |||||||||
Total depreciation expense amounted to $11,120 and $10,809 for the three months ended June 25, 2021 and June 26, 2020, respectively.
Long-lived assets include property, plant and equipment and related deposits on such assets, and capitalized tooling costs. The geographic locations of the Company's long-lived assets, net, based on physical location of the assets, as of June 25, 2021 and March 26, 2021 are as follows:
| June 25, 2021 | March 26, 2021 | ||||||||||
| United States | $ | $ | |||||||||
| Philippines | |||||||||||
| Thailand | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
Amortization of prepaid tooling costs amounted to $33 and $17 for the three months ended June 25, 2021 and June 26, 2020, respectively.
9. Goodwill and Intangible Assets
The table below summarizes the changes in the carrying amount of goodwill as follows:
| Total | |||||
| Balance at March 26, 2021 | $ | ||||
| Currency translation | |||||
| Balance at June 25, 2021 | $ | ||||
Intangible assets, net is as follows:
| June 25, 2021 | ||||||||||||||||||||||||||
| Description | Gross | Accumulated Amortization | Net Carrying Amount | Weighted- Average Lives | ||||||||||||||||||||||
| Patents | $ | $ | $ | |||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||
| Process technology | ||||||||||||||||||||||||||
| Indefinite-lived and legacy process technology | ||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||
| Legacy trademarks | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
15
ALLEGRO MICROSYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements – (continued)
(Amounts in thousands, except share and per share amounts)
| March 26, 2021 | ||||||||||||||||||||||||||
| Description | Gross | Accumulated Amortization | Net Carrying Amount | Weighted- Average Lives | ||||||||||||||||||||||
| Patents | $ | $ | $ | |||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||
| Process technology | ||||||||||||||||||||||||||
| Indefinite-lived and legacy process technology | ||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||
| Legacy trademarks | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
Intangible assets amortization expense was $1,019 and $713 for the three months ended June 25, 2021 and June 26, 2020, respectively. The majority of the Company’s intangible assets are related to patents as noted above. The Company capitalizes external legal costs incurred in the defense of its patents when it believes that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When the Company capitalizes patent defense costs, it amortizes these costs over the remaining estimated useful life of the patent, which is generally 10 years. There were no such costs capitalized during either of the first three months of fiscal years 2022 or 2021.
As of June 25, 2021, annual amortization expense of intangible assets for the next five fiscal years is expected to be as follows:
| Remainder of 2022 | $ | ||||