ALLEGRO MICROSYSTEMS INC

1. Nature of the Business and Basis of Presentation

Allegro MicroSystems, Inc., together with its consolidated subsidiaries (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 across multiple continents.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. These unaudited condensed consolidated financial statements include the Company’s accounts and those of its subsidiaries. All intercompany transactions and 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 29, 2024. The March 29, 2024 condensed consolidated balance sheet included herein is derived from the Company’s audited consolidated financial statements. 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 first quarter three-month period is a 13-week period. The Company’s first quarter of fiscal year 2025 ended June 28, 2024, and the Company’s first quarter of fiscal year 2024 ended June 30, 2023.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated 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 consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, assumptions and judgments, including those related to the valuation of acquired intangible assets, impairment assessment and valuation of goodwill, intangible assets and tangible long-lived assets, the net realizable value of inventory, income taxes, stock-based compensation, and sales allowances. Actual results could differ from those estimates, and such differences may be material to the 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 June 28, 2024, one distributor customer accounted for 10.4% of the Company’s outstanding trade accounts receivable, net. As of March 29, 2024, no distributors or customers accounted for 10% or more of the Company’s outstanding trade accounts receivable, net.

For the three-month period ended June 28, 2024, no distributor or customer accounted for 10% or more of total net sales. For the three-month period ended June 30, 2023, one distributor customer accounted for 12.2% of total net sales.

Recent Accounting Pronouncements

In December 2023, the 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”). 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. ASU 2023-09 should be applied prospectively, but entities have the option to apply it retrospectively for each period presented. The Company does not anticipate this guidance will have an adverse impact on the results of operations, cash flows, or financial condition, but it will result in expanded disclosure within the financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires incremental disclosures in annual and interim periods related to a public entity’s reportable segments (particularly on segment expenses) but does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. The Company is evaluating the impact this update will have on its 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-month periods ended June 28, 2024 and June 30, 2023. 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 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 table below.

Net sales by product:

Net sales by geography:

The Company recognizes sales net of returns and sales allowances, which comprises credits issued, price protection adjustments and stock rotation rights. At June 28, 2024 and March 29, 2024, the liability associated with returns and sales allowances, was$39,174 and$44,797, 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. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities as of June 28, 2024 and March 29, 2024, 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. Fair value information for those assets and liabilities, including their classification in the fair value hierarchy, is included in Note 15, “Retirement Plans” within the Company’s Annual Report on Form 10-K for the year ended March 29, 2024.

During the three-month periods ended June 28, 2024 and June 30, 2023, there were no transfers among Level 1, Level 2 and Level 3 assets or liabilities.

The fair value of the Company’s long-term debt was$197,880 as of June 28, 2024. The fair value was determined based on the quoted price of the debt in an inactive market on the last trading date of the reporting period and has been classified as Level 2 within the fair value hierarchy.

5. Trade Accounts Receivable, net

Trade accounts receivable, net, consisted of the following:

The provisions for expected credit losses and the changes in the provisions for expected credit losses were not material for any of the periods presented.

6. Inventories

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

The Company recorded inventory provisions totaling$2,377 and$5,076 for the three-month periods ended June 28, 2024 and June 30, 2023, respectively.

7. Property, Plant and Equipment, net

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

Total depreciation expense amounted to$9,797 and$12,767 for the three-month periods ended June 28, 2024 and June 30, 2023, respectively. Total amortization expense for the right-of-use asset amounted to$349 for the three-month period ended June 28, 2024.

Property, plant and equipment, net, including improvements that significantly add to productive capacity or extend useful life, are stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives of property, plant and equipment. Changes to estimated useful lives are recorded prospectively from the date of the change. Maintenance and repairs expenditures are charged to expense as incurred.

The Company continues to expand and optimize its global manufacturing capacities, such as by its recent expansion of operations at its Philippines location, as well as its recent acquisition of Crocus Technology International Corp. (“Crocus”). Through its expansion efforts, newly acquired machinery and equipment and continuous maintenance and evaluation of on-hand equipment, the Company recognized advancements in equipment quality indicating increased estimated useful lives. During its first quarter, periodic review of the estimated useful lives of long-lived assets, the Company determined that the useful lives of its machinery and equipment should be increased. Effective March 30, 2024, the Company increased the useful lives of a significant portion of its machinery and equipment from seven years toten years. These changes decreased depreciation expense by$4,455, decreased interim income tax expense by$3,608 and increased net income by$8,063, or$0.04 per share, for the three months ended June 28, 2024.

8. 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$6,312 and$1,506 for the three-month periods ended June 28, 2024 and June 30, 2023, respectively.

9. Debt and Other Borrowings

The Company’s debt obligations consisted of the following:

2023 Revolving Credit Facility

On June 21, 2023, the Company entered into a revolving facility 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 June 28, 2024, 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 Company is in compliance with its loan debt covenants as of June 28, 2024.

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 (the “2023 Term Loan Facility”) the proceeds of which were used to refinance the$25,000 outstanding balance under the 2020 Term Loan Facility (as defined below) and to finance, in part, the acquisition of Crocus. The 2023 Term Loan Facility was executed as an incremental amendment to the 2023 Revolving Credit Agreement. The 2023 Term Loan Facility amortizes at a rate of 0.25% per quarter 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.

A payment of $50,000 was applied to the term loan balance on April 30, 2024, which has eliminated future required minimum quarterly payments. The balance of the loan is required to be paid upon the expected maturity date of October 31, 2030.

For a description of the potential modifications to be made to the 2023 Revolving Credit Facility and the 2023 Term Loan Facility in connection with the equity offering and initial share repurchase that the Company completed on July 26, 2024 and July 29,2024, respectively, please see Note 15, “Subsequent Events.”

10. 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 current matters that could have a material adverse effect on its financial position, results of operations or cash flows.

11. Net (Loss) income per Share

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

The computed net (loss) income per share for the three-month periods ended June 28, 2024 and June 30, 2023 does not assume conversion of securities that would have an antidilutive effect on (loss) 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 (loss) income per share, as such securities would have an antidilutive effect on net (loss) income per share:

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

12. Common Stock and Stock-Based Compensation

Restricted Stock Units

The following table summarizes the Company’s RSU activity for the three-month period ended June 28, 2024:

As of June 28, 2024, total unrecognized compensation expense for awards issued was$72,114, which is expected to be recognized over a weighted-average period of 2.38 years. The total grant date fair value of RSUs vested was$21,696 for the three-month period ended June 28, 2024.

Performance Stock Units

The following table summarizes the Company’s PSU activity for the three-month period ended June 28, 2024:

Included in the outstanding shares are 76,306 shares as of March 29, 2024, that have vested but were issued during three-month period ended June 28, 2024. PSUs are included at 0% -200% of target goals. The total compensation cost related to unvested awards not yet recorded at June 28, 2024 was$28,809, which is expected to be recognized over a weighted average period of 2.33 years. The total grant date fair value of PSUs vested was$8,601 for the three-month period ended June 28, 2024.

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

13. 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 composed 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 (“174 Capitalization”), and research credits; offset by non-deductible stock-based compensation charges.

The decline in the effective tax rate (“ETR”) year-over-year relates primarily to the change in (Loss) Income before income taxes, the impact of FDII benefits and research credits; offset by non-deductible stock-based compensation charges and tax expense from discrete transactions.

14. Related Party Transactions

Transactions involving Sanken Electric Co., Ltd. (“Sanken”)

As of June 28, 2024, Sanken held approximately 50.8% of the Company’s outstanding common stock. On July 23, 2024, the Company entered into a share repurchase agreement with Sanken. See Note 15, “Subsequent Events” for further details related to this agreement.

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. There wereno trade accounts receivables, net, from Sanken as of June 28, 2024 or March 29, 2024. Other accounts receivable from Sanken totaled$160 as of March 29, 2024. There wereno other accounts receivable from Sanken as of June 28, 2024. Accounts payable to Sanken totaled$3 as of June 28, 2024. There wereno accounts payable as of March 29, 2024.

Transactions involving Polar Semiconductor, LLC (“PSL”)

The Company purchases in-process products from PSL, an entity that is 70% owned by Sanken and 30% owned by the Company.

Purchases of various products from PSL totaled$14,956 and$16,102 for the three-month periods ended June 28, 2024, and June 30, 2023, respectively. Accounts payable to PSL included in amounts due to related party totaled$4,892 and$1,621 as of June 28, 2024 and March 29, 2024, respectively.

On April 25, 2024, the Company, Sanken, PSL and PS Investment Aggregator, L.P. (“Subscriber”) entered into a Sale and Subscription Agreement pursuant to which Subscriber and an affiliate of Subscriber will make capital contributions to PSL of, in the aggregate, $175,000 in exchange for equity interest in PSL (the “PSL Transaction”). The PSL Transaction is subject to a number of conditions to closing, including the contribution of outstanding PSL indebtedness held by each of the Company (the PSL Promissory Notes described below) and Sanken in exchange for new PSL equity units to recapitalize PSL prior to Closing and PSL receiving confirmation from the United States Department of Commerce, the United States Department of the Treasury and/or the State of Minnesota that it or they have awarded at least $310,700 in aggregate direct funding and tax credits pursuant to the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 or other grant-based funding program on terms and conditions acceptable to the Subscriber as well as other customary closing conditions. The PSL Agreement also contemplates that following closing, the Company, Sanken and Subscriber shall engage in a series of reorganization transactions after which the Company will no longer directly own PSL and will instead own approximately 10.2% of PSL’s ultimate parent entity (“Polar Parent”). In connection with this reorganization, it is contemplated that the Company, Sanken and Subscriber shall enter into a new partnership agreement for Polar Parent to account for the reorganization into a limited partnership structure.

Notes Receivable from PSL

On December 2, 2021, Allegro MicroSystems, LLC (“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 June 28, 2024, the outstanding balance of the PSL Promissory Notes was$7,500. During the three-month period ended June 28, 2024, PSL made required quarterly payments to AML totaling$984, which included$46 of interest.

15. Subsequent Events

On July 23, 2024, the Company entered into a share repurchase agreement with Sanken (the “Share Repurchase Agreement”) pursuant to which the Company agreed to repurchase 38,767,315 shares of the Company’s common stock from Sanken in a privately negotiated transaction. Pursuant to the terms of the Share Repurchase Agreement, Sanken agreed to reimburse the Company for the expenses incurred by the Company in connection with the transactions contemplated by the Share Repurchase Agreement, including a facilitation fee to the Company of $35,000. On July 29, 2024, the Company completed the first closing under the Share Repurchase Agreement, repurchasing 28,750,000 shares of the Company’s common stock for $621,456, which was the public offering price in the Equity Offering that closed on July 26, 2024 (as described below), minus the discount to the underwriters and transaction expenses and fees, including the $35,000 facilitation fee paid to the Company described above (the “First Closing”). The Company used the net proceeds of the Equity Offering to fund the purchase price payable to Sanken at the First Closing, and the shares repurchased in the First Closing were retired. The repurchase of the remainder of the shares of the Company’s common stock that we expect to repurchase from Sanken is expected to occur substantially concurrently with the receipt by the Company of borrowings under the 2023 Revolving Credit Agreement or, otherwise, on another date of our choosing (the “Second Closing”). The Company expects to fund the purchase price payable to Sanken at the Second Closing with cash on hand or additional borrowings under the 2023 Revolving Credit Agreement.

On July 26, 2024, the Company completed an underwritten equity offering of 28,750,000 shares of its common stock at a public offering price of $24.00 per share (the “Equity Offering”) resulting in net proceeds to the Company of approximately $665,850, after deducting $24,150 of underwriting discounts. As described above, Sanken reimbursed the Company for its offering fees and expenses, including the facilitation fee described above. The Equity Offering completed on July 26, 2024 included the exercise of the underwriters’ option to purchase 3,750,000 additional shares of the Company’s common stock. As described above, the Company used the net proceeds of the Equity Offering to complete the First Closing under the Share Repurchase Agreement.

The Company expects to amend the 2023 Revolving Credit Agreement dated as of June 21, 2023, by and among the Company, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and each lender from time to time party thereto to (i) incur new incremental term loans pursuant to the 2023 Term Loan Facility to finance a portion of the repurchase of shares of common stock from Sanken at the Second Closing pursuant to the terms of the Share Repurchase Agreement, (ii) increase the amount of revolving commitments available under the 2023 Revolving Credit Facility by $32,000,(iii) permit under the 2023 Revolving Credit Agreement the repurchase contemplated by the Share Repurchase Agreement with debt proceeds and (iv) make certain other changes. There can be no assurance that the incremental term loans under the 2023 Term Loan Facility or the increase to revolving commitments under the 2023 Revolving Credit Facility (or the aforementioned amendments) will be completed on the terms described herein, or at all.