ACM Research, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Unless otherwise noted, amounts below are U.S. dollars in millions. ACM develops and sells semiconductor manufacturing equipment, principally through its 91.7%-owned Shanghai subsidiary. Revenue remains heavily concentrated in China and a small number of customers.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $53.9 | $39.0 | $97.6 | $63.4 |
| Gross profit / margin | $21.7 / 40.2% | $19.4 / 49.6% | $39.7 / 40.7% | $29.6 / 46.7% |
| Operating income | $4.3 | $7.3 | $7.8 | $8.6 |
| Net income attributable to ACM | $6.6 | $(0.1) | $12.0 | $1.6 |
| Diluted EPS | $0.30 | $(0.00) | $0.56 | $0.08 |
- Q2 revenue grew 37.9% year over year; six-month revenue grew 53.9%. Front-end wet-cleaning and other processing tools generated $46.0 million in Q2 and $77.9 million in the first half. Advanced packaging, other tools, services and spares contributed $7.9 million and $19.7 million, respectively.
- Gross margin fell 9.4 percentage points in Q2 and 6.0 points for the first half, which management attributed principally to product mix. Operating expenses increased 44.3% in Q2 and 51.9% in the first half, reflecting higher sales resources, product development, testing, personnel and administrative costs.
- Q2 attributable earnings included a $3.8 million unrealized gain on trading securities; the first-half gain was $2.7 million. First-half income also included a $2.8 million tax benefit, primarily related to stock-option exercise deductions. These items helped lift reported net income and are not measures of core operating performance.
- Cash and cash equivalents were $70.2 million at June 30, 2021, versus $71.8 million at year-end 2020. Trading securities were $31.3 million. Current assets were $329.4 million and current liabilities $162.1 million.
- First-half operating cash flow was $0.2 million, versus cash used of $10.7 million a year earlier. Management-defined free cash flow was negative $2.5 million, compared with negative $41.8 million; the prior-period measure included substantial land/property prepayments and long-term investment purchases.
- Borrowings totaled $42.7 million at quarter-end, including short-term debt and current and long-term borrowings; operating lease liabilities were separate. Inventory rose to $136.9 million from $88.6 million at year-end, and accounts receivable rose to $71.4 million from $56.4 million.
Material changes and management outlook
- Revenue growth broadened beyond front-end equipment: advanced packaging and other processing tools, services and spares increased sharply from the prior-year comparison. Mainland China generated $97.4 million, or nearly all first-half revenue.
- Three customers accounted for 81.2% of Q2 revenue and 67.1% of first-half revenue. The same three customers represented 67.1% of accounts receivable at June 30, 2021.
- Management expects gross margin of 40%–45% for the foreseeable future. It said existing cash, operating cash flow and short-term bank borrowing capacity should cover anticipated needs for at least 12 months. The filing gives no specific revenue or earnings guidance.
- The STAR Market listing and IPO of ACM Shanghai remained subject to China Securities Regulatory Commission review and approval. The Shanghai Stock Exchange submitted the registration application on June 10, 2021. Proposed proceeds are intended for the Lingang facility, product development and working capital.
- ACM is building a planned 1-million-square-foot Lingang development and production center. The land agreement includes construction, investment, sales and tax milestones, with possible penalties for failure to meet specified conditions. Open capital commitments were $2.9 million.
- PRC government grants reduced relevant expenses: $4.2 million was recognized against expenses in the first half of 2021, compared with $0.3 million a year earlier. Grant cash receipts were $0.6 million versus $2.8 million. Management notes that grant amounts and timing are uncertain.
Risks, contingencies and other notable matters
- U.S. export controls affecting PRC customers are a material risk. SMIC, a customer, was placed on the U.S. Entity List in December 2020; in July 2021 members of Congress urged the Commerce Department to consider adding YMTC, which represented 26.8% of 2020 revenue.
- A securities class action against ACM and three officers alleges violations of federal securities laws. Defendants’ motion to dismiss was pending, with a hearing scheduled for September 9, 2021. Management disputes the claims; the company said it could not estimate the likelihood or range of loss.
- The company identified risks from customer concentration, PRC business exposure, uncertainty around the STAR IPO, COVID-19 disruption, and limits on PCAOB inspection of its PRC-based auditor. It also disclosed potential implications of the Holding Foreign Companies Accountable Act and proposed Nasdaq requirements.
- Management reported disclosure controls effective as of June 30, 2021 and no material changes to internal control over financial reporting during the quarter. It noted remote-work and cybersecurity challenges related to the pandemic.
- On July 13, 2021, ACM amended its charter to increase authorized Class A and Class B shares, with specified additional authorized shares reserved for stock dividends. This was a subsequent event, not a June 30 balance-sheet change.
Key facts investors should verify
- Whether revenue growth converts to operating profit and cash generation, given lower gross margins, rising expenses and inventory.
- How sustainable earnings are after separating operating results from the unrealized securities gain, tax benefit and government-grant effects.
- Customer concentration, collection timing, and the potential effects of U.S. export restrictions on major PRC customers.
- Progress and approvals for the STAR IPO and Lingang project, including compliance with land-agreement milestones and related financial commitments.
- Developments in the securities lawsuit and regulatory or audit-inspection requirements that could affect the company or its U.S. listing.