ACM Research, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. ACM Research develops, manufactures and sells semiconductor capital equipment, principally wafer-cleaning and other front-end processing tools, plus advanced-packaging and related equipment. This unaudited report covers the three and six months ended June 30, 2022; financial figures below are in U.S. dollars and millions unless stated otherwise. Most operations are conducted in China through ACM Shanghai, in which ACM Research held an 82.5% interest. Share and per-share comparisons reflect the March 2022 three-for-one stock split.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $104.4 | $53.9 | $146.6 | $97.6 |
| Gross profit / margin | $44.2 / 42.3% | $21.7 / 40.2% | $63.8 / 43.6% | $39.7 / 40.7% |
| Operating income / margin | $20.0 / 19.2% | $4.3 / 8.0% | $10.7 / 7.3% | $7.8 / 8.0% |
| Net income | $16.7 | $7.3 | $9.3 | $13.2 |
| Net income attributable to ACM Research | $12.2 | $6.6 | $6.5 | $12.0 |
| Diluted EPS attributable to ACM Research | $0.18 | $0.10 | $0.10 | $0.19 |
| Operating cash flow | $(33.6) | $(10.5) | $(61.3) | $0.2 |
- Q2 revenue rose 93.8% year over year; six-month revenue rose 50.2%. Q2 growth reflected higher demand from existing and new customers, growth in cleaning and advanced-packaging products, newer ECP sales, and shipments delayed by Shanghai COVID restrictions. Deferred shipments contributed about $12.9 million of Q2 revenue.
- For the first half, wet-cleaning and other front-end tools generated $111.3 million, up 42.9%; advanced packaging and other processing tools, services and spares generated $35.3 million, up 79.1%. ECP, furnace and other technologies contributed $32.7 million versus $5.6 million a year earlier.
- Q2 gross margin improved 2.0 percentage points, which management attributed mainly to product mix. Six-month operating expenses increased 66.3% to $53.1 million, including R&D expense of $28.7 million, more than double the prior-year level. Consequently, first-half operating margin declined to 7.3% despite higher revenue and gross profit.
- First-half net income attributable to ACM fell to $6.5 million from $12.0 million. Results included a $4.3 million unrealized loss on trading securities, versus a $2.7 million gain a year earlier, and a $3.7 million income tax expense versus a $2.8 million benefit. The tax change was primarily associated with U.S. tax rules requiring capitalization and amortization of certain R&D expenses and lower discrete stock-compensation tax benefits.
- At June 30, cash and cash equivalents were $323.7 million; short- and long-term time deposits totaled $144.5 million. Current assets were $900.6 million and current liabilities $252.7 million. Total borrowings were approximately $27.9 million, including $7.2 million current and $20.6 million long-term. Working capital was $766.4 million.
- First-half operating cash use was $61.3 million and free cash flow, as defined by the company, was negative $66.6 million. Cash use reflected working-capital investment, notably increases in accounts receivable and inventory. Receivables rose $49.1 million to $154.6 million; inventory rose $70.0 million to $288.1 million. Customer advances increased $41.6 million to $94.4 million.
- Total assets were $1.072 billion and total equity $787.1 million at June 30. A $37.9 million first-half foreign-currency translation loss reduced accumulated other comprehensive income; the translation adjustment is not the same as operating cash flow.
Material changes, outlook and risks
- Shanghai COVID restrictions constrained production, employee access and shipments during the first half and also disrupted some customers’ ability to receive and install tools. ACM Shanghai resumed substantially all Chuansha production by quarter-end and moved to more normal operations on July 1; management cautioned that restrictions could recur or continue to affect operations and logistics.
- Management expects gross margin of 40%–45% for the foreseeable future. This is the filing’s stated margin outlook, not a revenue or earnings forecast. The company said available cash, time deposits, operating cash flow and bank borrowings should cover anticipated needs for at least 12 months.
- The Lingang expansion is a major execution and contingency item. COVID-related delays mean ACM Shengwei does not expect to meet the construction-completion milestone due before January 9, 2023 and plans to request an extension; it also plans to seek an extension for the production-start milestone due before January 9, 2024. Extensions are not assured, and delay could lead to forfeited deposits, penalties or loss of land-use rights.
- A related $19.6 million China Merchants Bank property loan is secured by Lingang housing. The required property-right certificate and formal mortgage registration remained incomplete because of administrative delays. The bank acknowledged the delay and had not acted as of the filing, but could assert a breach and seek acceleration.
- Other material risks include dependence on China-based operations and customers, PRC regulatory and overseas-listing uncertainty, export restrictions affecting Chinese customers, customer and receivables concentration, supplier and logistics constraints, RMB currency movements, and limits on moving funds out of China. Four customers accounted for 59.7% of Q2 revenue and 70.4% of receivables at June 30.
- ACM Research was placed on the SEC’s HFCA Act conclusive issuer list on March 30, 2022 after the PCAOB’s inspection determination concerning the company’s former PRC-based auditor. The company appointed U.S.-based Armanino LLP for 2022. The filing also states the company does not use a VIE structure and did not believe PRC central-government approval was then required for its U.S. listing.
- The filing reports no outstanding legal proceedings and no material changes to market risks. It identifies $2.9 million of open capital commitments. Disclosure controls were assessed as effective as of June 30, 2022.
Important facts for investors to verify
- Whether deferred shipments and the post-lockdown production recovery translated into timely customer acceptance, collections and revenue recognition.
- Whether receivables, inventory and customer advances convert to cash as expected, and whether operating cash use moderates as shipments and collections normalize.
- Whether the Lingang construction and production milestone extensions are granted, and whether the required property certificate and mortgage registration are completed without loan acceleration or other penalties.
- How customer concentration, potential U.S. export restrictions, PRC regulatory developments and HFCA Act audit-inspection requirements affect sales, operations and the U.S. listing.
- How product mix, elevated R&D spending, tax treatment of overseas R&D, trading-security valuations and RMB movements affect future margins and earnings.