ACM Research, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise stated. Dollar figures below are in U.S. dollars. The company develops, manufactures, and sells semiconductor capital equipment; most operations and revenue are in mainland China. ACM Research owns 82.1% of operating subsidiary ACM Shanghai.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 / prior balance |
|---|---|---|
| Revenue | $152.2 million | $74.3 million; up 105.0% |
| Gross profit / margin | $79.1 million / 52.0% | $40.0 million / 53.8% |
| Operating income / margin | $25.2 million / 16.6% | $8.9 million / 11.9% |
| Net income, consolidated | $22.1 million | $9.0 million |
| Net income attributable to ACM Research | $17.4 million; diluted EPS $0.26 | $7.1 million; diluted EPS $0.11 |
| Operating cash flow | $(9.6) million | $(30.5) million |
| Free cash flow, company-defined non-GAAP | $(42.5) million | $(46.1) million |
| Cash, restricted cash, and time deposits | $288.3 million | $304.5 million at December 31, 2023 |
| Total short- and long-term borrowings | $114.7 million | $92.1 million at December 31, 2023 |
Current assets were $1.229 billion and current liabilities $533.2 million at March 31, 2024, for working capital of approximately $696.1 million and a current ratio of about 2.3. Cash and time deposits include funds held in mainland China and deposits subject to maturity and regulatory transfer procedures. Operating cash use reflected higher inventory, receivables, and other assets. Investing included $25.4 million of property and equipment purchases and $6.0 million of long-term investments. Financing provided $26.8 million, principally from short-term borrowing.
Material changes and operating drivers
- Single-wafer cleaning, Tahoe, and semi-critical cleaning revenue rose 199% to $109.5 million. Advanced packaging (excluding ECP), services, and spares rose 53.2% to $16.9 million; ECP, furnace, and other technologies declined 3.0% to $25.8 million.
- Revenue was $152.1 million in mainland China and $56,000 in other regions. Two customers represented 55.9% of revenue; four customers represented 56.2% of accounts receivable.
- Gross margin fell 1.9 percentage points, which management attributed primarily to product mix, partly offset by favorable RMB/U.S. dollar movements. Operating expenses rose 73.1% to $53.9 million, including substantially higher stock-based compensation.
- Stock-based compensation increased to $14.6 million from $2.1 million, including $12.2 million related to ACM Shanghai option grants. Unrealized losses on short-term investments were $2.6 million; the prior-year period included a $4.0 million realized gain versus $0.3 million this quarter.
- Inventory increased to $581.1 million. Finished goods included $163.5 million of first tools at customer locations awaiting acceptance, versus $123.4 million at year-end. Shipments, a non-GAAP operating metric, were $245.6 million, including $127.0 million of first-tool shipments; shipments do not necessarily result in recognized revenue.
Outlook, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects gross margin of 40%–45% for the foreseeable future and expects sales and marketing, R&D, and G&A expenses to increase in dollars. The Lingang development and production center was scheduled to begin production in the second half of 2024.
- Capital and cash: Management believes existing cash, deposits, operating cash flow, and bank borrowing capacity will meet anticipated needs within its planning horizon, while noting that future needs depend on growth, collections, capital spending, and R&D. Mainland China rules and loan agreements can limit transfers of subsidiary funds.
- Lingang commitments: Construction completion required by January 9, 2024 was missed. Management expected to meet an extended milestone before July 9, 2024 and seek a refund, but cannot guarantee completion or recovery of the approximately $0.4 million deposit portion. Production-start deadline is January 9, 2025; failure may lead to penalties or loss of land-use rights. Open construction commitments were $24.3 million, with an additional $1.4 million of investment commitments.
- Potential transactions: ACM Shanghai proposed a dividend of approximately $38.5 million, subject to shareholder approval; approval, payment, and any amount or timing repatriated to ACM Research are uncertain. A proposed private offering of up to 43.6 million ACM Shanghai shares, potentially raising up to $625 million for ACM Shanghai and reducing ACM Research’s ownership to approximately 74.6%, had not been completed as of the filing.
- Financial reporting controls: A new mainland China ERP implementation led to a material weakness in IT general controls, involving inadequate pre-approval of system changes and incomplete change logs. Management said remediation had begun; disclosure controls and internal control over financial reporting were not effective as of March 31, 2024. Management reported no resulting material misstatement in the filed financial statements.
- Other risks: The filing highlights mainland China regulatory, currency-transfer, and operational risks, as well as customer concentration and first-tool acceptance risk. The company reported no outstanding legal proceedings and no material change in market risks during the quarter.
Important facts for investors to verify
- Progress in remediating the ERP-related material weakness and whether controls are tested and deemed effective.
- Customer acceptance and conversion to revenue of first tools, collections on receivables, and inventory levels; first-tool shipments are not guaranteed sales.
- Gross-margin trajectory against management’s 40%–45% outlook and the effect of product mix, operating expenses, and stock-based compensation.
- Lingang construction and production milestones, potential deposit penalties, and execution of the new facility’s planned production start.
- Approval and payment of the proposed ACM Shanghai dividend, status and dilution effects of the proposed private offering, and practical ability to transfer funds from mainland China.
- Cash generation, rising borrowings, concentrated customer exposure, and the market value of short-term investments.