ALLEGRO MICROSYSTEMS INC

1. Nature of the Business and Basis of Presentation

Allegro MicroSystems, Inc., together with its consolidated subsidiaries (the “Company”), is a leading global designer, developer, fabless manufacturer and marketer of sensing and power solutions for motion control and energy-efficient systems in the automotive and industrial markets. The Company is headquartered in Manchester, New Hampshire and has a global footprint across multiple continents.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. 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 for the year ended March 31, 2023. In the opinion of the Company’s management, the financial statements for the interim periods presented reflect all adjustments necessary for a fair statement of the Company’s financial position, results of operations and cash flows. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year.

Financial Periods

The Company’s third quarter three-month period is a 13-week period. The Company’s third quarter of fiscal 2024 ended December 29, 2023, and the Company’s third quarter of fiscal 2023 ended December 23, 2022.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of unaudited condensed 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 condensed 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, provisions for expected credit losses and customer returns and sales allowances. Such estimates also relate to accrued liabilities, the valuation of stock-based awards, deferred tax valuation allowances, the net realizable value of inventory, 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.

Concentrations of Credit Risk

As of December 29, 2023, two customers accounted for 24.3% of the Company’s outstanding trade accounts receivable, net. No other customers accounted for 10% or more of outstanding trade accounts receivable, net as of such dates. As of March 31, 2023, Sanken Electric Co., Ltd. (“Sanken”) and another customer accounted for 10.6% and 17.3%, respectively, of the Company’s outstanding trade accounts receivable, net, including related party trade accounts receivable.

For the nine-month period ended December 29, 2023, one customer accounted for 11.0% of total net sales. For the three- and nine-month periods ended December 23, 2022, Sanken accounted for 18.1% and 18.7% of total net sales, respectively. No other customers accounted for 10% or more of total net sales for either of the three- or nine-month periods ended December 23, 2022 or for the three-month period ended December 29, 2023.

Recent Accounting Pronouncements

In December 2023, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. ASU 2023-09 requires entities to provide additional information of the Company’s tax rate reconciliation, as well as additional disclosures about income taxes paid by jurisdictions. ASU 2023-09 is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted. The ASU 2023-09 should be applied prospectively, but entities have the option to apply it retrospectively for each period presented. The Company is currently evaluating the impact of adopting this guidance.

In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided temporary relief when transitioning from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) or another applicable rate during the original transition period ending on December 31, 2022. In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of U.S. dollar LIBOR would be June 30, 2023, which was beyond the current sunset date of Topic 848. In light of this development, the FASB issued this update to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The adoption of this new guidance did not have a material impact on the Company’s financial position, results of operations, cash flows, or related disclosures.

All other recent accounting pronouncements were determined to not have a material impact on the Company’s financial position, results of operations, cash flows, or related disclosures.

3. Revenue from Contracts with Customers

The following tables summarize net sales disaggregated by application, by product and by geography for the three- and nine-month periods ended December 29, 2023 and December 23, 2022. The categorization of net sales by application is determined using various characteristics of the product and the application into which the Company’s product will be incorporated. The categorization of net sales by geography is determined based on the location to which the products are shipped.

Net sales by application:

During the preparation of the third quarter fiscal year 2024 interim condensed consolidated financial statements, the Company identified an immaterial error in the classification of net sales by application, whereby customer returns and sales allowances were incorrectly classified by application between Automotive, Industrial and Other in the prior periods. There was no impact to previously reported total net sales or net income 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 2024, annual fiscal year 2023, and annual fiscal year 2022 consolidated financial statements. All prior period amounts have been revised in the tables below.

Net sales by product:

Net sales by geography:

The Company recognizes sales net of returns and sales allowances, which are comprised of credits issued, price protection adjustments and stock rotation rights. At December 29, 2023 and March 31, 2023, the liability associated with returns and sales allowances, inclusive of related party adjustments, was$35,342 and$30,571, respectively, and was netted against trade accounts receivable in the unaudited condensed consolidated balance sheets.

Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. The Company elected not to disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year.

4. Business Combination

On August 7, 2023, the Company entered into an Agreement and Plan of Merger with Crocus Technology International Corp., (“Crocus”). Pursuant to the terms and conditions of the Merger Agreement, on October 31, 2023 (the “Closing Date”), the Company acquired all of the outstanding equity interests of Crocus for $412,274 in cash, subject to a working capital adjustment. The acquisition of Crocus is expected to complement and accelerate the Company’s tunnel magnetoresistance sensors roadmap and strengthen its position in the magnetic sensing market.

Notes Receivable from Crocus

On September 11, 2023, to fund the ongoing operations of Crocus prior to the closing of the merger, the Company entered into a note purchase agreement with Crocus, wherein the Company agreed to purchase promissory notes up to $7,000. An initial promissory note of $4,000 was issued on September 11, 2023, and an additional promissory note was issued on October 2, 2023 for $3,000. The promissory notes were repaid in full in connection with the closing of the merger and included within the estimated fair value of consideration paid.

Allocation of Purchase Price

The acquisition of Crocus has been accounted for as a business combination. The purchase price for the acquisition is allocated based upon a valuation of the fair values of assets acquired and liabilities assumed. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. Management applied the multi-period excess earnings method under the income approach to estimate the fair value of the completed technology asset and the distributor method under the income approach to estimate the fair value of the customer relationships asset. The fair value of intangible assets was based on estimates and assumptions developed by management. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill for the acquisition. The Company’s estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regards to facts and circumstances that existed as of the acquisition date.

The preliminary purchase price allocation is as follows:

*Primarily included in Property, plant and equipment in the unaudited condensed consolidated balance sheets.

**Included in Intangible assets, net in the unaudited condensed consolidated balance sheets.

***Primarily included in Long-term debt in the unaudited condensed consolidated balance sheets.

As of December 29, 2023, the purchase price allocation is preliminary, pending the finalization of the fair value of the intangible assets acquired, certain income tax matters, and the net working capital adjustment.

The goodwill acquired is not deductible for U.S. income tax purposes. The amortization period for the intangible assets acquired is 12 years for completed technology and 15 years for customer relationships. The goodwill recorded represents the anticipated incremental value of future cash flows potentially attributable to: (i) Crocus’ ability to grow the business with existing and new customers, including leveraging the Company’s customer base; (ii) Crocus’ ability to grow the business through new product introductions; and (iii) cost improvements due to the integration of Crocus’ operations into the Company’s existing infrastructure.

The operating results of Crocus were included in the Company’s statements of operations beginning on October 31, 2023. Revenue and earnings attributable to Crocus since the date of acquisition are not material.

Acquisition-Related Costs

Acquisition-related costs were $8,799 for the three- and nine-month periods ended December 29, 2023, and are included in the selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. Acquisition-related costs for the Crocus acquisition relate to professional fees as well as deal fees.

5. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities as of December 29, 2023 and March 31, 2023, measured at fair value on a recurring basis:

Assets and liabilities measured at fair value on a recurring basis also consist of marketable securities, unit investment trust funds, loans, bonds, stock and other investments, which constitute the Company’s defined benefit plan assets.

During the nine-month periods ended December 29, 2023 and December 23, 2022, there were no transfers among Level 1, Level 2 and Level 3 assets or liabilities.

6. Trade Accounts Receivable, net

Trade accounts receivable, net (including related party trade accounts receivable) consisted of the following:

Changes in the Company’s expected credit losses and returns and sales allowances, exclusive of related party adjustments, were as follows:

7. Inventories

Inventories include material, labor and overhead and consisted of the following:

The Company recorded inventory provisions totaling$429 and$9,865 for the three- and nine-month periods ended December 29, 2023, respectively, and$654 and$5,716 for the three- and nine-month periods ended December 23, 2022, respectively.

8. Property, Plant and Equipment, net

Property, plant and equipment, net, is stated at cost and consisted of the following:

Total depreciation expense amounted to$15,124 and$41,472 for the three- and nine-month periods ended December 29, 2023, respectively, and$11,128 and$32,958 for the three- and nine-month periods ended December 23, 2022, respectively.

9. Goodwill and Intangible Assets

The table below summarizes the changes in the carrying amount of goodwill as follows:

Intangible assets, net were as follows:

Intangible assets amortization expense was$5,071 and$8,076 for the three- and nine-month periods ended December 29, 2023, respectively, and$1,420 and$3,650 for the three- and nine-month periods ended December 23, 2022, respectively.

10. Debt and Other Borrowings

2023 Revolving Credit Facility

On June 21, 2023, the Company entered into a revolving credit agreement (the “2023 Revolving Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent, collateral agent, a letter of credit issuer and a lender, and other agents, lenders and letter of credit issuers parties. The agreement provides for a $224,000 secured revolving credit facility (the “2023 Revolving Credit Facility”), which includes a $20,000 letter of credit subfacility. The 2023 Revolving Credit Facility is available until, and loans made thereunder will mature on, June 21, 2028. Under the terms of the 2023 Revolving Credit Agreement, interest is calculated at a rate equal to (i) Term SOFR (as defined in the agreement) in effect, plus the applicable spread (ranging from 1.50% to 1.75%) or (ii) the highest of (x) the Federal funds rate, as published by the Federal Reserve Bank of New York, plus 0.50%, (y) the prime lending rate, or (z) the one-month Term SOFR plus 1.0% in effect, plus the applicable spread (ranging from 0.50% to 0.75%). The applicable spreads are based on the Company’s Total Net Leverage Ratio (as defined in the agreement) at the time of the applicable borrowing. As of December 29, 2023, there wereno outstanding borrowings under the 2023 Revolving Credit Facility.

The Company will also pay a quarterly commitment fee of 0.20% to 0.25% on the daily amount by which the commitments under the 2023 Revolving Credit Facility exceed the outstanding loans and letters of credit under the 2023 Revolving Credit Facility. The agreement contains certain covenants applicable to the Company and its subsidiaries, including, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions, investments (including acquisitions), transactions with affiliates, asset sales, prepayment of junior financing, changes in business and other limitations customary in senior secured credit facilities. In addition, the Company is required to maintain a Total Net Leverage Ratio of no more than 4.00 to 1.00 at the end of each fiscal quarter, which may, subject to certain limitations, be increased to 4.50 to 1.00 for four fiscal quarters subsequent to the Company completing an acquisition in excess of $500,000.

The 2023 Revolving Credit Agreement provides for customary events of default. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments, may terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies.

2023 Term Loan Facility

On October 31, 2023, the Company entered into a $250,000 term loan maturing in 2030 with Morgan Stanley Senior Funding, Inc. as administrative agent and collateral agent, and other agents, arrangers and lenders party thereto (the “2023 Term Loan Facility”). The proceeds of the 2023 Term Loan Facility were usedto repay the $25,000 outstanding balance under the 2020 Term Loan Facility (as defined below) and to finance, in part, the merger with Crocus. The 2023 Term Loan Facility was executed as an incremental amendment to the 2023 Revolving Credit Agreement, and accordingly is subject to the same covenants and limitations. The 2023 Term Loan Facility amortizes and is payable at a rate of 0.25% per quarter, with the remainder payable at maturity, and the initial margin applicable to the 2023 Term Loan Facility is 2.75% for SOFR-based loans and 1.75% for base rate loans.

2020 Term Loan Facility

On September 30, 2020, the Company entered into a term loan credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and other agents, arrangers and lenders party thereto, providing for a $325,000 senior secured term loan facility due in fiscal 2028 (the “2020 Term Loan Facility”). On June 28, 2023, the Company amended the 2020 Term Loan Facility to replace the LIBOR rate with a Term SOFR-based rate as the applicable interest rate benchmark. On October 31, 2023, the 2020 Term Loan Facility was paid in full in connection with the 2023 Term Loan Facility.

2020 Revolving Credit Facility

On September 30, 2020, the Company entered into a revolving facility credit agreement with Mizuho Bank, Ltd., as administrative agent and collateral agent, and the other agents, arrangers and lenders party thereto, providing for a $50,000 senior secured revolving credit facility expiring in 2023 (the “2020 Revolving Credit Facility”). The 2020 Revolving Credit Facility was secured by a lien on the same collateral and on the same basis as the 2020 Term Loan Facility. Interest on the 2020 Revolving Credit Facility was calculated at LIBOR plus 3.75% to 4.00% based on the Company’s net leverage ratio, and LIBOR was subject to a 0.5% floor. Following the entry into the 2023 Revolving Credit Agreement on June 21, 2023, the Company terminated all commitments and obligations under the 2020 Revolving Credit Facility, there wereno outstanding borrowings at the time of termination. The 2020 Revolving Credit Facility was replaced by the 2023 Revolving Credit Facility.

11. Commitments and Contingencies

Legal proceedings

The Company is subject to various legal proceedings, claims, and regulatory examinations or investigations arising in the normal course of business, the outcomes of which are subject to significant uncertainty, and the Company’s ultimate liability, if any, is difficult to predict. The Company records an accrual for legal contingencies when it is determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, the ability to make a reasonable estimate of the loss. If the occurrence of liability is probable and estimable, the Company will disclose the nature of the contingency and, if estimable, will provide the likely amount of such loss or range of loss. The Company does not believe there are any such current matters that could have a material adverse effect on its financial position, results of operations or cash flows.

12. Net Income per Share

The following table sets forth the basic and diluted net income per common share attributable to Allegro MicroSystems, Inc.

The computed net income per share for the three- and nine-month periods ended December 29, 2023 and December 23, 2022 does not assume conversion of securities that would have an antidilutive effect on income per share. The following represents contingently issuable shares under the restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) excluded from the computation of net income per share, as such securities would have an antidilutive effect on net income per share:

The following table represents issued and issuable weighted average share information underlying our outstanding RSUs, PSUs and participation in our employee stock purchase plan for the respective periods:

13. Common Stock and Stock-Based Compensation

Restricted Stock Units

The following table summarizes the Company’s RSU activity for the nine-months ended December 29, 2023:

As of December 29, 2023, total unrecognized compensation expense for awards issued was$51,039, which is expected to be recognized over a weighted-average period of 2.25 years. The total grant date fair value of RSUs vested was$20,696 for the nine-months ended December 29, 2023.

Performance Stock Units

The following table summarizes the Company’s PSU activity for the nine-months ended December 29, 2023:

Included in the outstanding shares are 396,171 and 76,306 shares as of March 31, 2023 and December 29, 2023, respectively, that have vested but have not been issued. PSUs are included at 0% -200% of target goals. The total compensation cost related to unvested awards not yet recorded at December 29, 2023 was$19,537, which is expected to be recognized over a weighted average period of 2.07 years. The total grant date fair value of PSUs vested was$22,777 for the nine-months ended December 29, 2023.

The Company recorded stock-based compensation expense in the following expense categories of its unaudited condensed consolidated statements of operations:

14. Income Taxes

The Company recorded the following tax provision in its unaudited condensed consolidated statements of operations:

The Company’s provision for income taxes is comprised of the year-to-date taxes based on an estimate of the annual effective tax rate plus the tax impact of discrete items.

The Company is subject to tax in the U.S. and various foreign jurisdictions. The Company’s effective income tax rate fluctuates primarily because of the change in the mix of its U.S. and foreign income, the impact of discrete transactions and law changes, state tax impacts and tax benefits generated by the foreign derived intangible income (“FDII”) deduction, including permanent impacts of Internal Revenue Code Section 174 Capitalization, and research credits; offset by non-deductible stock-based compensation charges.

The effective tax rate (“ETR”) year-over-year was primarily impacted by reductions in global intangible low-tax income (“GILTI”) and non-deductible stock-based compensation charges, offset by a decrease in FDII benefits. The ETR year-over-year was also reduced by discrete tax benefits related to stock-based compensation windfalls realized in the period ended December 29, 2023.

15. Related Party Transactions

Transactions involving Sanken

The Company sells products to, and purchases in-process products from Sanken. As of December 29, 2023, Sanken held approximately 51.0% of the Company’s outstanding common stock.

Net sales of the Company’s products to Sanken totaled$6,161 in the nine-month period ended December 29, 2023, and$45,117 and$131,852 during the three- and nine-month periods ended December 23, 2022, respectively. There wereno sales to Sanken in the three-month period ended December 29, 2023. Although certain costs are shared or allocated, cost of goods sold and gross margins attributable to related party sales are consistent with those of third-party customers. Trade accounts receivables, net of allowances of$4,200 from Sanken, totaled$13,253 as of March 31, 2023. There wereno trade accounts receivables, net from Sanken as of December 29, 2023. Other accounts receivable from Sanken totaled$102 and$241 as of December 29, 2023 and March 31, 2023, respectively. There wereno accounts payable to Sanken as of December 29, 2023 or March 31, 2023.

On March 30, 2023, the Company entered into a termination of the distribution agreement with Sanken (the “Termination Agreement”). The Termination Agreement formally terminated the distribution agreement dated as of July 5, 2007, by and between the Company and Sanken (the “Distribution Agreement”), effective March 31, 2023. The Distribution Agreement provided Sanken the exclusive right to distribute the Company’s products in Japan. In connection with the termination of the Distribution Agreement, and, as provided for in the Termination Agreement, the Company made a one-time payment of $5,000 to Sanken in exchange for the cancellation of Sanken’s exclusive distribution rights in Japan, which was recorded in selling, general and administrative expenses in the condensed consolidated statements of operations. Concurrent with the Termination Agreement, Allegro MicroSystems LLC (“AML”) and Sanken also entered into a short-term, nonexclusive distribution agreement (the “Short-Term Distribution Agreement”) and a consulting agreement (the “Consulting Agreement”), each of which were effective April 1, 2023. In addition, the Company allowed a one-time sales return from Sanken of resalable inventory of $4,200. The Short-Term Distribution Agreement provides for the management and sale of Company product inventory for a period of 24 months. Under the terms of the Consulting Agreement, Sanken agreed to continue to provide transition services for a period of six months to a strategic customer as orders for the customer are transitioned from Sanken to the Company, and the Company agreed to pay Sanken for providing these transition services.

Transactions involving Polar Semiconductor, LLC (“PSL”)

The Company purchases in-process products from PSL. PSL is a subsidiary of Sanken,70% owned by Sanken and 30% owned by the Company.

Purchases of various products from PSL totaled$14,982 and$45,714 for the three- and nine-month periods ended December 29, 2023, respectively, and$15,995 and$45,145 for the three- and nine-month periods ended December 23, 2022, respectively. Accounts payable to PSL included in amounts due to a related party totaled$3,128 and$4,682 as of December 29, 2023 and March 31, 2023, respectively.

Effective January 26, 2023, the Company and PSL entered into a new Wafer Foundry Agreement (“WFA”) for the fabrication of wafers. The WFA replaces the previous Wafer Foundry Agreement with PSL, dated April 12, 2013, which was due to expire on March 31, 2023. The WFA has a three-year term and auto renews for subsequentone-year terms, unless terminated by either party providingtwo years notice. If the Company fails to purchase the forecasted number of wafers for either of the first two years, it will pay a penalty for any shortfall for the given year. Pursuant to the WFA, the Company will provide a rolling annual forecast forthree years, the firsttwo years of which will be binding. If the Company fails to purchase the forecasted number of wafers for either of the firsttwo years, it will pay a penalty for any shortfall for the given year. The parties also agreed upon production lead-times, as well as wafer, alignment, and mask pricing for the first two years of the term. Any changes to such pricing are subject to mutual agreement.

Notes Receivable from PSL

On December 2, 2021, AML entered into a loan agreement with PSL wherein PSL provided an initial promissory note to AML for a principal amount of $7,500 (the “Initial PSL Loan”). The Initial PSL Loan will be repaid in equal installments, comprising principal and interest accrued at 1.26% per annum, over a term offour years, with payments due on the first day of each calendar year quarter (April 1, July 1, October 1, and January 1). On July 1, 2022, PSL borrowed an additional $7,500 under the same terms of the PSL Loan (the “Secondary PSL Loan” and, together with the Initial PSL Loan, the “PSL Promissory Notes”). The Secondary PSL Loan will be repaid in equal installments, comprising of principal and interest accrued at 2.99% per annum, over a term offour years, with payments due on the first day of each calendar year quarter (April 1, July 1, October 1, and January 1). The loan funds were used by PSL to procure a deep ultraviolet scanner and other associated manufacturing tools necessary to increase wafer fabrication capacity in support of the Company’s increasing wafer demand. As of December 29, 2023, the outstanding balance of the PSL Promissory Notes was$9,375. During the nine-months ended December 29, 2023, PSL made required quarterly payments to AML totaling$2,998, which included$185 of interest.