ACM Research, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results; amounts below are U.S. dollars. ACM develops and sells semiconductor manufacturing equipment, with most operations and revenue in mainland China.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $168.6m | $133.7m | $387.4m | $280.3m |
| Gross profit / margin | $88.5m / 52.5% | $66.0m / 49.3% | $197.1m / 50.9% | $129.8m / 46.3% |
| Operating income | $33.2m | $31.6m | $72.5m | $42.4m |
| Net income attributable to ACM | $25.7m | $21.0m | $59.6m | $27.5m |
| Diluted EPS | $0.39 | $0.32 | $0.90 | $0.41 |
- Revenue grew 26.1% in Q3 and 38.2% for the nine-month period. Single-wafer cleaning, Tahoe and semi-critical cleaning products generated 78.6% of Q3 revenue and 72.7% year to date.
- Gross margin improved year over year, which management attributed mainly to product mix and improved margins on certain products. Operating expenses rose 61.2% in Q3 and 42.6% year to date; Q3 R&D and general and administrative expense increased substantially, including higher stock-based compensation.
- Other results included investment valuation movements and currency effects. Nine-month results included $8.6m in realized gains and $4.4m in unrealized losses on short-term investments.
Cash, liquidity and debt
- At September 30, cash, cash equivalents and restricted cash totaled $207.7m; short- and long-term time deposits totaled $118.8m. Combined, these were $326.5m, down from $420.9m at December 31, 2022. ACM also reported $21.8m of short-term investments.
- Current assets were $1,115.9m and current liabilities $482.0m. Total borrowings were approximately $80.4m: $33.9m short-term and $46.5m long-term.
- Nine-month operating cash flow was negative $42.1m, versus negative $61.4m a year earlier. Cash use reflected increases in inventory ($135.9m) and accounts receivable ($76.2m), partly offset by customer advances and higher payables. Capital expenditures for property and equipment were $49.5m.
- The filing-reported free cash flow measure was negative $98.1m for the nine months; its reconciliation also deducts $6.5m of long-term investment purchases.
Changes, outlook and material risks
- Compared with the prior-year periods, revenue and profit increased, and gross margin expanded. At the same time, inventory rose to $507.4m from $393.2m at year-end, including more completed tools awaiting shipment or customer acceptance. Accounts receivable increased to $248.5m from $182.9m.
- Management expects gross margin of 40%–45% for the foreseeable future, below the reported Q3 and year-to-date levels. It expects sales and marketing, R&D, and general and administrative expenses to increase in dollars. No revenue or earnings guidance is provided in the supplied filing text.
- U.S. export controls, including October 2023 revisions, and new Japanese and Dutch controls may constrain component sourcing, production and customer spending. The company says these restrictions and related supply-chain challenges already adversely affected shipments and sales and are expected to continue to do so. Nearly all Q3 revenue was from mainland China.
- First-tool revenue depends on customer acceptance; first-tool shipments were $81.7m in Q3 and $224.0m year to date. The company cautions that customers may decline acceptance or purchase, potentially preventing revenue recognition.
- ACM reported material weaknesses in risk assessment/monitoring and IT controls; management concluded disclosure controls were not effective as of September 30, 2023. Remediation is ongoing. The company also changed its independent auditor: Ernst & Young Hua Ming LLP was engaged in September 2023 for the 2023 audit after Armanino’s announced resignation.
- The Lingang project has construction and production milestones extended to January 9, 2024 and January 9, 2025, respectively. Failure to meet requirements could result in penalties or loss of land-use rights. Open capital commitments were $41.2m.
- Management believes available liquidity, operating cash flow and borrowing capacity are sufficient for anticipated needs. However, mainland China currency controls and other restrictions may limit cash transfers; the company does not anticipate paying ACM Research shareholders dividends in the foreseeable future.
Important facts for investors to verify
- Whether export-control developments affect customer orders, component availability, shipments and the company’s production plans.
- Customer acceptance and conversion to revenue of first tools, and collection of the growing accounts receivable balance; assess inventory valuation and obsolescence risk.
- Progress against Lingang construction and production milestones and the related investment, tax and sales requirements.
- Remediation and testing of the disclosed material weaknesses, and the audit firm’s ability to complete the 2023 audit amid HFCA Act and PCAOB inspection uncertainty.
- Cash accessibility across jurisdictions, debt repayment and borrowing terms, and the effects of further investment, capital spending and foreign-exchange movements.