ACM Research, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2023. ACM develops, manufactures, and sells semiconductor manufacturing equipment; most product development, manufacturing, support, and services are conducted in China through ACM Shanghai, in which ACM Research held an 82.1% interest at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $144.6 million | $104.4 million | $218.8 million | $146.6 million |
| Gross margin | 47.5% | 42.3% | 49.6% | 43.6% |
| Operating income | $30.4 million | $20.0 million | $39.3 million | $10.7 million |
| Consolidated net income | $33.6 million | $16.7 million | $42.6 million | $9.3 million |
| Net income attributable to ACM Research | $26.8 million | $12.2 million | $34.0 million | $6.5 million |
| Diluted EPS attributable to ACM Research | $0.41 | $0.18 | $0.52 | $0.10 |
- Revenue mix and growth: Q2 revenue rose 38.5% year over year, led by single-wafer cleaning and other front-end tools, up 53.9%. For the six months, revenue rose 49.3%; front-end tools increased 60.7%. Mainland China generated $134.8 million, or about 93% of Q2 revenue.
- Margins and expenses: Q2 gross margin expanded 5.2 percentage points; management attributed improvement to product mix, product-line margins, and currency effects, partly offset by a $2.9 million inventory write-down. Q2 operating expenses increased 58.4%, including higher R&D spending. Management expects gross margin of 40%–45% for the foreseeable future and expects sales, marketing, R&D, and G&A expenses to rise in dollars.
- Cash flow: Six-month operating cash flow was negative $24.2 million, versus negative $61.3 million a year earlier. Company-reported non-GAAP free cash flow was negative $47.3 million, versus negative $66.6 million. Working-capital uses included inventory growth of $96.7 million and receivables growth of $28.6 million; customer advances provided $46.6 million.
- Liquidity and debt: Cash, restricted cash, and short- and long-term time deposits totaled $376.1 million at June 30, down from $420.9 million at year-end 2022. Total borrowings were $73.1 million, including $54.0 million short-term and $19.1 million long-term. Current assets were $996.8 million and current liabilities $456.3 million. The company stated that available funds, operating cash flow, and bank borrowing should meet anticipated cash needs within its planning horizon.
- Other financial items: Q2 included a $3.9 million realized gain from sales of trading securities, a $2.5 million unrealized securities loss, and $3.9 million of equity income from affiliates. Six-month results included a $7.9 million realized gain and $3.9 million of equity income. Foreign-currency translation reduced six-month comprehensive income by $25.8 million.
Material changes versus the prior comparable period
- Revenue, operating income, and ACM-attributable net income increased substantially year over year. Gross margin also improved in both the quarter and first half.
- Sales of front-end processing tools were the principal growth driver. Q2 advanced packaging, other processing tools, services, and spares revenue declined 10.8% year over year, although the six-month category increased 13.3%.
- Inventories rose to $471.1 million from $393.2 million at December 31, 2022. The company cited purchases to support expected shipments and reduce supply-delay risk; finished goods also increased.
- Property, plant, and equipment increased to $159.0 million from $82.9 million, mainly reflecting the transfer of the new Shanghai headquarters into fixed assets and Lingang facility construction.
Outlook, risks, and unusual items
- Export controls: U.S. restrictions had adversely affected shipments and sales in the first half, and management expects continued adverse effects. New Japanese controls took effect July 23, 2023, and Dutch licensing controls were scheduled to take effect September 1, 2023. Further restrictions could constrain component sourcing, customer spending, and shipments to PRC facilities.
- Customer acceptance and shipment risk: First-tool shipments were $92.0 million in Q2 and $142.3 million in the first half. These tools may not produce revenue unless customers accept them or otherwise commit to purchase. Finished-goods inventory included $119.7 million of first tools at customer sites subject to acceptance.
- Capital commitments and Lingang milestones: Open capital commitments were $94.8 million. The Lingang construction-completion deadline was extended to January 9, 2024, and the production-start deadline to January 9, 2025. Failure to meet milestones or other land-grant requirements could result in penalties or loss of land-use rights and facilities.
- Accounting and governance: Management concluded disclosure controls were ineffective as of June 30, 2023, due to material weaknesses in risk assessment and monitoring, and IT access, operations, and reporting controls. Remediation efforts are underway. The company also recorded a $1.6 million net correction to opening retained earnings for an immaterial prior-year error and adopted expected-credit-loss accounting, recording a $2.6 million receivables allowance at quarter-end.
- Auditor and subsequent financing: Armanino LLP informed the company on July 21, 2023 that it would resign as auditor because it was exiting public-company audit services; the audit committee began a replacement search. On July 25, the company entered a RMB 200 million (approximately $28 million) working-capital credit facility, expiring December 21, 2025.
- Other matters: The company reported no outstanding legal proceedings. It disclosed $8.4 million in unrecognized tax benefits and ongoing tax examination exposure. Most cash is held outside the United States, including in China and Hong Kong; transfers from mainland China are subject to foreign-exchange procedures, and the company does not expect to pay U.S. shareholder dividends in the foreseeable future.
Important facts for investors to verify
- Whether export-control changes, customer restrictions, or supply-chain constraints further affect shipments, revenue, and component availability.
- Customer acceptance and collection outcomes for first tools, and whether elevated inventory can be converted into recognized revenue without further write-downs.
- Operating cash flow, working-capital needs, capital spending, and the availability and terms of short-term borrowing as debt maturities approach.
- Progress against Lingang construction and production deadlines, the associated investment and tax requirements, and the $94.8 million of open capital commitments.
- Remediation and independent validation of the material weaknesses, appointment of a new auditor, and the implications of the auditor transition for upcoming reporting.
- The durability of reported earnings, including the contribution from securities gains, affiliate income, government subsidies, and foreign-exchange movements; management’s stated gross-margin outlook is below the first-half result.