ACM Research, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The company develops and sells semiconductor manufacturing equipment, principally wafer-cleaning tools, and conducts most of its operations in China through its 82.5%-owned subsidiary, ACM Shanghai.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $133.7 | $67.0 | $280.3 | $164.6 |
| Gross profit / margin | $66.0 / 49.3% | $29.7 / 44.3% | $129.8 / 46.3% | $69.4 / 42.2% |
| Operating income | $31.6 | $11.8 | $42.4 | $19.6 |
| Net income | $27.1 | $11.2 | $36.4 | $24.3 |
| Net income attributable to ACM Research | $21.0 | $10.2 | $27.5 | $22.2 |
| Diluted earnings per share | $0.32 | $0.15 | $0.41 | $0.34 |
Q3 revenue increased 99.5% year over year; nine-month revenue increased 70.3%. Wet-cleaning and other front-end processing tools represented 88.2% of Q3 revenue and 81.8% of nine-month revenue. Mainland China generated $131.2 million, or nearly all Q3 revenue, and $273.6 million of nine-month revenue.
Operating cash flow was negative $63.5 million for the first nine months, versus negative $3.8 million a year earlier. Capital expenditures were $18.4 million, resulting in company-defined free cash flow of negative $81.9 million. Cash and cash equivalents were $336.3 million at quarter-end; adding $136.6 million of time deposits gives $472.9 million, compared with $562.5 million of cash and equivalents at year-end 2021. Total borrowings were approximately $71.8 million, including current and long-term debt, versus approximately $35.0 million at year-end.
Current assets were $971.2 million and current liabilities were $345.6 million. Accounts receivable rose to $188.3 million from $105.6 million at year-end; inventory rose to $327.8 million from $218.1 million. Customer advances increased to $136.6 million from $52.8 million.
Material changes and unusual items
- Q3 gross margin improved by 5.0 percentage points year over year; nine-month margin improved by 4.2 points. Management attributed improvement mainly to product mix and currency effects.
- Operating expenses rose substantially: 91.9% in Q3 and 75.5% for the first nine months, with higher sales and marketing, R&D, and administrative spending. Nine-month R&D expense increased 108.5%.
- Reported earnings included volatile non-operating items. Q3 included $7.2 million of other income, including $6.4 million of foreign-exchange gains, and a $5.3 million unrealized loss on trading securities. For nine months, other income was $9.9 million, including $8.8 million of foreign-exchange gains, while unrealized trading-security losses were $9.6 million.
- Foreign-currency translation reduced comprehensive income by $42.4 million in Q3 and $80.3 million for nine months, primarily reflecting RMB depreciation against the U.S. dollar.
- Nine-month operating cash use reflected increases in accounts receivable of $96.8 million and inventory of $132.0 million, partly offset by $88.9 million of additional customer advances. Management cited shipment timing and inventory purchases to support expected shipments and mitigate supply delays.
Outlook, risks, and contingencies
- Management expects gross margin of 40%–45% for the foreseeable future and expects sales and marketing, R&D, and general and administrative expenses to increase in dollars. The filing does not provide a specific revenue or earnings forecast.
- COVID-related restrictions had disrupted Shanghai production, shipping, and customer operations earlier in 2022. Operations had returned closer to normal by the third quarter, but management warned that quarantine requirements or renewed restrictions could disrupt the company or customers.
- U.S. export-control rules announced in October 2022, including new restrictions affecting semiconductor equipment and certain PRC end users, may affect sourcing, production, and customer demand. The company was evaluating the impact; the ultimate effects were uncertain.
- Customer and geographic concentration remain significant: three customers accounted for 61.4% of Q3 revenue and 50.1% of nine-month revenue; two customers represented 56.1% of quarter-end receivables. Most revenue and operations are in China.
- Cash held in mainland China is subject to foreign-exchange approval requirements and banking risk controls; cash there exceeds applicable deposit insurance limits. The company does not expect to pay dividends in the foreseeable future.
- Lingang construction and production milestones were subject to COVID-related delays. The company expected to seek extensions; failure to meet milestones could result in liquidated damages or loss of land-use rights. A separate property certificate needed for a secured loan remained outstanding, although the lender had acknowledged the delay and had not taken action as of the filing.
- The company had been identified under the HFCA Act after using an auditor that the PCAOB could not inspect. It appointed Armanino LLP for 2022 and said it did not expect to appear on the list a second time after its 2022 annual report, but regulatory uncertainty remained. Management stated disclosure controls were effective as of September 30, 2022.
- The company reported no outstanding legal proceedings and no material change to other previously disclosed risk factors. It had $2.3 million of open capital commitments.
Important facts for investors to verify
- Whether the October 2022 export controls affect product eligibility, supply-chain access, or spending by major PRC customers.
- Whether accounts receivable and inventory convert to cash as expected, and whether customer advances remain supportive of operating cash flow.
- Whether the Lingang project meets extended construction and production milestones, and whether the property certificate is obtained without triggering loan remedies.
- How much of reported earnings and margin reflects recurring operations versus foreign-exchange gains, trading-security movements, and tax effects.
- Whether audit-inspection developments, PRC regulatory requirements, or cash-transfer restrictions change the company’s U.S. listing or ability to access subsidiary funds.