Allegro Microsystems, Inc.: Form 10-Q for the period ended Jun 27, 2025

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other information included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the year ended March 28, 2025, filed with the SEC on May 22, 2025 (the “2025 Annual Report”).

In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled “Forward-Looking Statements” and in Part I, Item 1A. “Risk Factors” of our 2025 Annual Report, and Part II, Item 1A. “Risk Factors” of this Quarterly Report. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

We operate on a 52- or 53-week fiscal year ending on the last Friday of March. Each fiscal quarter has 13 weeks, except in a 53-week year, when the fourth fiscal quarter has 14 weeks. All references to the three-month periods ended June 27, 2025

and June 28, 2024 relate to the 13-week periods ended June 27, 2025 and June 28, 2024, respectively. All references to “2026,” “fiscal year 2026” or similar references relate to the 52-week period ending March 27, 2026. All references to “2025,” “fiscal year 2025” or similar references relate to the 52-week period ended March 28, 2025.

Overview

We are a leading global designer, developer, fabless manufacturer and marketer of sensor integrated circuits (“ICs”) and application-specific power ICs enabling the most important emerging technologies in the automotive and industrial markets. With the broadest portfolio of magnetic sensor IC solutions available, underpinned by our strong position in the automotive market, we are the leading magnetic sensor supplier worldwide based on market share. Our products are foundational to automotive and industrial electronic systems. Our sensor ICs enable our customers to precisely measure motion, speed, position and current, while our power ICs include high-temperature and high-voltage capable motor drivers, power management ICs, light emitting diode driver ICs and isolated gate drivers. We believe that our technology expertise, combined with our deep applications knowledge and strong customer relationships, enable us to develop solutions that provide more value to customers than typical ICs. Compared to a typical IC, our solutions are more integrated, intelligent and sophisticated for complex applications and easier for customers to use.

We are headquartered in Manchester, New Hampshire and have a global footprint across multiple continents. Our portfolio includes more than 1,500 products, and we ship over 1.5 billion units annually to more than 10,000 customers worldwide. During the three-month periods ended June 27, 2025 and June 28, 2024, we generated $203.4 million and $166.9 million in total net sales, respectively, with $13.2 million and $17.6 million in net loss, respectively.

Other Key Factors and Trends Affecting Our Operating Results

Our financial condition and results of operations have been, and will continue to be, affected by numerous other factors and trends, including the following:

Inflation

Although inflation has moderated in recent periods, inflation rates in the markets in which we operate have increased and may continue to rise as a result of cost increases attributable to global tariff policies. Inflation in recent quarters has led us to experience higher costs, including higher labor costs, wafer and other costs for materials from suppliers, and transportation and energy costs. Our suppliers have raised their prices and may continue to raise prices, and in the competitive markets in which we operate, we may not be able to make corresponding price increases to preserve our gross margins and profitability. If inflation rates continue to rise or remain elevated for a sustained period of time, they could have a material adverse effect on our business, financial condition, results of operations and liquidity. While we have attempted to offset increases in these costs through various productivity and cost reduction initiatives, as well as adjusting our selling prices and releasing new products with improved gross margins, our ability to increase our average selling prices depends on market conditions and competitive dynamics. Given the timing of our actions compared to the timing of these inflationary pressures, there may be periods during which we are unable to fully recover the increases in our costs.

Design Wins with New and Existing Customers

Our end customers continually develop new products in existing and new application areas, and we work closely with our significant original equipment manufacturer customers in most of our target markets to understand their product roadmaps and strategies. For new products, the time from design initiation and manufacturing until we generate sales can be lengthy, typically between two and four years. As a result, our future sales are highly dependent on our continued success at winning design mandates from our customers. Further, because we expect the average sales prices (“ASPs”) of our products to decline over time, we consider design wins to be critical to our future success as they help mitigate declines in ASPs. We anticipate being increasingly dependent on revenue from newer design wins for our newer products. The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win, with no assurance that our solutions will be selected. As a result, the loss of any key design win or any significant delay in the ramp-up of volume production of a customer’s products into which our product is designed could adversely affect our business. In addition, volume production is contingent upon the successful introduction and market acceptance of our customers’ end products, which may be affected by several factors beyond our control.

Customer Demand, Orders and Forecasts

Demand for our products is highly dependent on market conditions in the end markets in which our customers operate, which are generally subject to seasonality, cyclicality, tariffs and other pricing increases and competitive conditions. In addition, a substantial portion of our total net sales is derived from sales to customers that purchase large volumes of our products. These customers generally provide periodic forecasts of their requirements. However, these forecasts do not commit such customers to minimum purchases, and customers can revise these forecasts without penalty. In addition, as is customary in the semiconductor industry, customers are generally permitted to cancel orders for our products within a specified period. Cancellations of orders could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. In addition, changes in forecasts or the timing of orders from customers expose us to the risks of inventory shortages or excess inventory. We are currently operating in an inflationary environment for our products as a result of global tariff policies, which also have the potential to reduce end market demand in certain markets. Over the past several quarters, we and other semiconductor companies have experienced a downturn in market demand, primarily driven by softening demand from customers across various markets and digestion of excess accumulated inventory. In addition, factors that cause a reduction in demand from the end users of our OEMs’ or other customers’ products, including as a result of increased prices resulting from global trade policies, tariffs or a recessionary environment in the markets in which we operate, may in the future continue to cause our direct customers to significantly reduce the number of products ordered from us.

Manufacturing Costs and Product Mix

Gross margin has been, and will continue to be, affected by a variety of factors, including the ASPs of our products, product mix in a given period, material costs, yields, manufacturing costs and efficiencies. We believe the primary driver of gross margin is the ASP negotiated between us and our customers relative to material costs and yields. Our pricing and margins depend on the volumes and the features of the products we produce and sell to our customers. As our products mature and unit volumes increase, we expect their ASPs to decline in the long term. We continually monitor and work to reduce the cost of our products and improve the potential value our solutions provide to our customers, as we target new design win opportunities and manage the product life cycles of our existing customer designs. We also maintain a close relationship with our suppliers and subcontractors to improve quality, increase yields and lower manufacturing costs. As a result, these declines often coincide with improvements in manufacturing yields and lower wafer, assembly, and testing costs, which offset some or all of the margin reduction that results from declining ASPs. However, we expect our gross margin to fluctuate on a quarterly basis as a result of changes in ASPs due to product mix, new product introductions, transitions into volume manufacturing and manufacturing costs. Gross margin generally decreases if production volumes are lower as a result of decreased demand as it did throughout fiscal year 2025, which leads to a reduced absorption of our fixed manufacturing costs. Gross margin generally increases when the opposite occurs.

Cyclical Nature of the Semiconductor Industry

The semiconductor industry has historically been highly cyclical and is characterized by increasingly rapid technological change, product obsolescence, competitive pricing pressures, evolving standards, short product life cycles in consumer and other rapidly changing markets and fluctuations in product supply and demand. New technology may result in sudden changes in system designs or platform changes that may render some of our products obsolete and require us to devote significant research and development resources to compete effectively. Periods of rapid growth and capacity expansion are occasionally followed by significant market corrections in which sales decline, inventories accumulate, and facilities go underutilized. During periods of expansion, our margins generally improve as fixed costs are spread over higher manufacturing volumes and unit sales. In addition, we may build inventory to meet increasing market demand for our products during these times, which serves to absorb fixed costs further and increase our gross margins. During an expansion cycle, we may increase capital spending and hiring to add to our production capacity. During periods of slower growth or industry contractions, our sales, production and productivity and margins generally decline.

Results of Operations

Three-Month Period Ended June 27, 2025 Compared to Three-Month Period Ended June 28, 2024

The following table summarizes our results of operations and our results of operations as a percentage of total net sales for the three-month periods ended June 27, 2025 and June 28, 2024.

(Dollars in thousands)

Total net sales

Total net sales increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024. The increase was primarily driven by data center applications, industrial automation and robotics, medical and other broad-based industrial applications, and e-Mobility products, which includes our advanced driver assistance systems (“ADAS”) and components for electrified vehicles (“EV”).

Sales Trends by Market

In the fourth quarter of fiscal year 2025 during the preparation of the consolidated financial statements, the Company identified an immaterial misclassification of net sales by market, whereby customer returns and sales allowances were incorrectly classified by market between Automotive and Industrial and Other in prior periods. There was no impact to previously reported total net sales or net loss in any of the periods.

The Company assessed the materiality of the revision qualitatively and quantitatively and determined the revisions to be immaterial to the prior period interim fiscal year 2025 condensed consolidated financial statements. All prior period amounts have been revised in the table below.

The following table summarizes total net sales by market. The categorization of net sales by market is based on the characteristics of the end product and application into which our product will be designed.

(Dollars in thousands)

Automotive net sales increased in the three-month period ended June 27, 2025 compared to the three-month period

ended June 28, 2024, primarily due to an increase in e-Mobility products, which includes ADAS and EV.

Industrial and other net sales increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily due to an increase in demand for data center applications, industrial automation and robotics, medical and other broad-based industrial applications.

Sales Trends by Product

The following table summarizes net sales by product.

(Dollars in thousands)

The increase in MS sales was primarily due to an increase in demand for our magnetic speed, tunneling magnetoresistance (“TMR”) sensor solutions and our current and isolator products. The increase in PIC sales was primarily driven by an increase in demand for our motor products and high performance power products.

Sales Trends by Geographic Location

The following table summarizes net sales by geographic location based on ship-to location.

(Dollars in thousands)

Greater China net sales increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily driven by an increase in net sales of ADAS and EV and distributors currently managing inventory levels. Other Asia net sales increased in both automotive and industrial and other, primarily in internal combustion engine and data center applications. Americas net sales increased in both automotive and industrial and other applications. Europe net sales increased primarily in automotive markets. Japan net sales declined in automotive, primarily in safety, comfort and convenience applications. South Korea net sales declined in automotive primarily in ADAS and EV.

Cost of goods sold

Cost of goods sold increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily due to higher production volume in support of higher product sales and foreign currency impact.

Cost of goods sold as a percentage of our total net sales was 55.1% and 55.2% for the three-month periods ended June 27, 2025 and June 28, 2024, respectively. The decrease was primarily due to the increase in production volume.

Gross profit and gross margin

Gross profit increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily due to the increase in net sales and a change in product mix.

Gross margin was 44.9% and 44.8% for the three-month periods ended June 27, 2025 and June 28, 2024, respectively. The increase was primarily due to the increase in net sales and a change in product mix.

Research and development expenses

Research and development (“R&D”) expenses increased in the three-month period ended June 27, 2025 compared to the comparable period in fiscal year 2025, primarily due to the increase of R&D personnel costs.

R&D expenses as a percentage of our total net sales was 22.9% and 27.1% for the three-month periods ended June 27, 2025 and June 28, 2024, respectively. The decrease was primarily due to the increase in net sales.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily due to an increase in outside service and personnel costs.

SG&A expenses as a percentage of our total net sales was 23.4% and 24.1% in the three-month periods ended June 27, 2025 and June 28, 2024, respectively. The decrease as a percentage of total net sales was primarily due to the increase in net sales, partially offset by an increase in outside service, personnel costs and the funding of the annual incentive program.

Interest expense

Interest expense increased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, due to higher interest payments on the Refinanced 2023 Term Loan Facility (as defined in Note 9, “Debt and Other Borrowings” to the unaudited condensed consolidated financial statements included in this Quarterly Report), which increased our total outstanding debt balance.

Interest income

Interest income decreased in the three-month period ended June 27, 2025 compared to the three-month period ended June 28, 2024, primarily due to lower cash and cash equivalent balances.

Other expense, net

The foreign currency loss recorded in the three-month period ended June 27, 2025 was primarily due to U.S. Dollar weakening against the Euro. The foreign currency loss recorded in the three-month period ended June 28, 2024 was primarily due to realized and unrealized losses from our Philippine location.

We recorded a gain of $0.8 million related to our investment in marketable securities and earnings in our money market fund deposits in the three-month period ended June 27, 2025, compared to investment income of $0.5 million related to our money market fund deposits in the three-month period ended June 28, 2024.

Income tax provision

Income tax provision and the effective income tax rate were approximately $3.2 million and (31.7)%, respectively, in the three-month period ended June 27, 2025, compared to income tax provision and effective income tax rate of approximately $1.0 million and (6.3)%, respectively, in the three-month period ended June 28, 2024. The change in the effective tax rate for the three-month period ended June 27, 2025, compared to the three-month period ended June 28, 2024 results mainly from a decrease in GAAP loss before taxes and increased non-deductible share-based compensation, offset by increased foreign-derived intangible income tax benefit and the quarterly impact of discrete transaction benefits.

Liquidity and Capital Resources

As of June 27, 2025, we had $129.1 million of cash and cash equivalents and $326.4 million of working capital, compared to $121.3 million of cash and cash equivalents and $370.8 million of working capital as of March 28, 2025. Working capital is impacted by the timing and extent of our business needs. A payment of $25.0 million was applied to the outstanding balance of the 2025 Refinanced Loans (as defined in Note 9, “Debt and Other Borrowings” to the unaudited condensed consolidated financial statements included in this Quarterly Report) on July 31, 2025.

Our primary requirements for liquidity and capital resources besides our growth initiatives are working capital, capital expenditures, principal and interest payments on our outstanding debt, and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. Our current capital deployment strategy for fiscal year 2026 is to utilize cash on hand and capacity under our revolving credit facility to support our continued growth initiatives into select markets and planned capital expenditures, as well as consider potential acquisitions. As of June 27, 2025, the Company was not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. The cash requirements for the upcoming fiscal year relate to our operating leases, operating and capital purchase commitments, and expected contributions to our defined benefit and contribution plans. Additionally, we expect to continue to strategically invest in expanding our operations in China, Europe, Japan and India in order to directly manage and service our customers in these markets, which could result in increases in our total net sales, cost of goods sold and operating expenses. For information regarding the Company’s expected cash requirements and timing of payments related to leases, noncancellable purchase commitments and pension and defined contribution plans, see Note 12, “Leases,” Note 15, “Retirement Plans,” and Note 16, “Commitments and Contingencies” to the audited consolidated financial statements in the Company’s 2025 Annual Report.

We believe that our existing cash will be sufficient to finance our continued operations, growth strategy, planned capital expenditures and the additional expenses that we expect to incur during the next 12 months. In order to support and achieve our future growth plans, we may need or advantageously seek to obtain additional funding through equity or debt financing. We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next 12 months. If these resources are not sufficient to satisfy our liquidity requirements due to changes in circumstances, we may be required to borrow under our revolving credit facility or seek additional financing. If we raise additional funds by issuing equity securities that are not used to repurchase existing shares outstanding, our stockholders will experience dilution. Debt financing, if available, may contain covenants that significantly restrict our operations or our ability to obtain additional debt financing in the future. Any additional financing that we raise may contain terms that are not favorable to us or our stockholders. We cannot assure you that we would be able to obtain additional financing on terms favorable to us or our existing stockholders, or at all.

Cash Flows from Operating, Investing and Financing Activities

The following table summarizes our cash flows for the three-month periods ended June 27, 2025 and June 28, 2024:

(dollars in thousands)

Operating Activities

Net cash provided by operating activities was $61.6 million in the three-month period ended June 27, 2025, resulting primarily from a net loss of $13.2 million and noncash charges of $26.2 million, further adjusted by a net increase in cash from a decrease in net operating assets and liabilities of $48.5 million. Noncash charges primarily included increases of $16.2 million for depreciation and amortization, $10.8 million of stock-based compensation, and $3.5 million for provisions for inventory and expected credit losses, partially offset by $5.1 million of deferred income taxes. The net decrease in operating assets and liabilities consisted of a $36.0 million decrease in prepaid expenses and other assets, a $7.2 million decrease in inventories, an $8.0 million increase in accrued expenses and other current and long-term liabilities, and a $6.3 million increase in trade accounts payable, partially offset by a $5.3 million increase in trade accounts receivable, net and a $3.6 million decrease in net amounts due to related party. The increase in trade accounts receivable, net was primarily a result of increased sales year-over-year. Trade accounts payable increased primarily due to the timing of payments to suppliers and vendors, including unpaid capital expenditures of $2.8 million. The decrease in prepaid expenses and other assets was mostly due to the timing of tax payments. The decrease in inventories was primarily the result of the increase in net sales. The decrease in net amounts due to related party was primarily due to variations in the timing of such payments in the ordinary course of business. The increase in accrued expenses and other current and long-term liabilities was primarily the result of higher accrued income taxes and accrued personnel costs.

Net cash provided by operating activities was $34.2 million in the three-month period ended June 28, 2024, resulting primarily from net loss of $17.6 million and noncash charges of $24.7 million, partially offset by a net increase in cash from a decrease in net operating assets and liabilities of $27.1 million. The net decrease in operating assets and liabilities consisted of a $55.1 million decrease in trade accounts receivable, net, a $16.0 million increase in inventories, a $14.0 million decrease in accrued expenses and other current and long-term liabilities, and a $1.7 million increase in prepaid expenses and other assets, partially offset by a $3.4 million increase in net amounts due to related party and a $0.2 million increase in trade accounts payable. The increase in inventories was primarily the result of inventory builds to support anticipated sales growth for the remainder of fiscal year 2025. The decrease in accrued expenses and other current and long-term liabilities was primarily the result of a reduction in accrued personnel costs due to the timing of payments pursuant to our annual incentive compensation plan. The increase in prepaid expenses and other assets was mostly due to higher long-term deposits and the timing of tax payments. The decrease in trade accounts receivable, net, was primarily a result of decreased sales year-over-year. Trade accounts payable decreased primarily due to the timing of payments to suppliers and vendors, including unpaid capital expenditures of $5.5 million. The increase in net amounts due to related party was primarily due to variations in the timing of such payments in the ordinary course of business.

Investing Activities

Net cash used in investing activities was $10.6 million in the three-month period ended June 27, 2025, consisting of purchases of property, plant and equipment.

Net cash used in investing activities was $11.0 million in the three-month period ended June 28, 2024, consisting of purchases of property, plant and equipment.

Financing Activities

Net cash used in financing activities was $44.2 million in the three-month period ended June 27, 2025, primarily consisting of $35.0 million of payments on our 2025 Refinanced Loans and $9.0 million of taxes related to the net settlement of equity awards.

Net cash used in financing activities was $60.4 million in the three-month period ended June 28, 2024, consisting of a $50.0 million payment on our 2023 Term Loan Facility and $11.2 million of taxes related to the net settlement of equity awards.

Debt Obligations

See Note 9, “Debt and Other Borrowings” to the unaudited condensed consolidated financial statements included in this Quarterly Report for information regarding our debt obligations.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies” to the unaudited condensed consolidated financial statements included in this Quarterly Report for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our condensed consolidated financial statements contained in Item 1 of this Quarterly Report.

Critical Accounting Estimates

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Our significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in our 2025 Annual Report. There have been no material changes in our critical accounting policies and estimates since March 28, 2025.

There have not been any material changes in our exposures to market risk since March 28, 2025. For details on the Company’s interest rate, foreign currency exchange rate, and inflation risks, see Part I, Item 7A. “Quantitative and Qualitative Information About Market Risks” in our 2025 Annual Report.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 27, 2025. Based on the evaluation of our disclosure controls and procedures as of June 27, 2025, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Various risk factors associated with our business are included in our 2025 Annual Report, as filed with the SEC on May 22, 2025. There have been no material changes to those risk factors previously disclosed in our 2025 Annual Report.