ACM Research, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where noted. ACM develops and sells semiconductor manufacturing equipment, with most product development, manufacturing, support and services conducted in China through ACM Shanghai, which ACM owns 82.5% of.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $74.3 million | $42.2 million | Up 76.0% |
| Gross profit / margin | $40.0 million / 53.8% | $19.7 million / 46.7% | Margin up 7.1 percentage points, primarily from product mix |
| Operating income (loss) | $8.9 million | $(9.3) million | Returned to operating profit |
| Net income (loss) | $9.0 million | $(7.4) million | Includes $4.0 million realized gain on trading securities and $0.7 million unrealized loss |
| Net income (loss) attributable to ACM Research | $7.1 million; $0.12 basic EPS | $(5.8) million; $(0.10) basic EPS | Q1 2023 diluted EPS was $0.11 |
| Operating cash flow | $(30.5) million | $(27.7) million | Cash use was driven largely by a $79.9 million increase in inventory |
| Free cash flow, as defined by the company | $(46.1) million | $(30.9) million | Reflects operating cash use and capital spending |
Revenue growth spanned product categories: wet-cleaning and other front-end tools generated $56.4 million, up 77.8%; advanced packaging, other back-end tools, services and spares generated $17.9 million, up 70.5%. Mainland China accounted for $72.5 million, or approximately 97.6%, of revenue. Management attributed growth to higher sales across existing and newer product lines and demand from PRC customers.
Operating expenses rose 7.4% to $31.1 million: sales and marketing increased 39.4%, R&D declined 19.1%, and general and administrative increased 56.8%. The effective tax result shifted from a $4.0 million benefit in Q1 2022 to $2.9 million of expense in Q1 2023.
Balance sheet and liquidity
- Cash and cash equivalents were $260.4 million at March 31, 2023, versus $248.0 million at year-end. Cash plus short- and long-term time deposits totaled $381.7 million, down from $420.9 million.
- Current assets were $993.8 million and current liabilities $450.2 million, implying working capital of approximately $543.6 million.
- Total borrowings were $77.4 million: $56.7 million short-term and $20.6 million long-term. Total liabilities were $480.0 million.
- Inventory increased to $473.3 million from $393.2 million, including finished goods of $195.7 million. Management cited preparation for expected shipments and completed tools not yet shipped, as well as first tools under evaluation.
- Customer advances rose to $180.5 million from $153.8 million. The company reported $95.4 million of open capital commitments.
Outlook, risks and unusual items
- Management expects gross margin of 40%–45% “for the foreseeable future”; Q1 margin was above that range. It expects sales and marketing, R&D, and general and administrative expenses to increase in dollars. The filing provides no specific revenue or earnings guidance.
- U.S. export controls introduced in 2022 have affected shipments and sales to certain PRC customers and complicated sourcing of controlled components. The company expects these effects to continue; Japan and the Netherlands also announced plans for semiconductor-related export controls.
- COVID-related illness and absenteeism caused operational inefficiencies in China during the quarter. Customer and revenue concentration remain significant: four customers represented 59.7% of Q1 revenue and 66.1% of receivables at quarter-end.
- Construction and production milestones for the Lingang project have been delayed. ACM Lingang does not expect to meet the extended July 2023 construction-completion deadline or July 2024 production-start deadline and planned to seek further extensions. Failure to obtain extensions or meet requirements could result in penalties or loss of land-use rights.
- Disclosure controls were deemed ineffective as of March 31, 2023 because of previously identified material weaknesses in risk assessment/monitoring and IT controls. Management said remediation is underway and that the financial statements are fairly presented in all material respects.
- Other notable items: a $9.4 million foreign-currency translation gain in comprehensive income; adoption of the expected-credit-loss standard with a $1.8 million cumulative retained-earnings reduction; and correction of an immaterial prior-period error. No outstanding legal proceedings were reported.
Important facts for investors to verify
- Whether export-control developments further constrain customer demand, component sourcing, or shipments, and how much revenue is exposed to affected customers and facilities.
- Whether the elevated inventory converts into accepted deliveries and revenue, particularly the first tools under evaluation, and whether inventory requires further write-downs.
- Whether operating cash use and capital commitments remain manageable as the company expands production capacity.
- Whether Lingang deadline extensions are granted and whether the project meets its contractual investment, construction, production, sales and tax requirements.
- Progress and independent validation of remediation of the disclosed material weaknesses in internal controls.
- How reported profitability is affected by non-operating securities gains and losses, tax-rate changes, foreign-exchange movements, and non-controlling interests.