ACM Research, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts below are in U.S. dollars; figures are unaudited. ACM develops and sells semiconductor manufacturing equipment, principally single-wafer wet-cleaning systems, with operations centered in China.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $33.4 million | $23.2 million | $82.9 million | $53.8 million |
| Gross profit / margin | $16.3 million / 48.6% | $10.3 million / 44.4% | $38.2 million / 46.1% | $24.1 million / 44.9% |
| Operating income | $7.0 million | $3.4 million | $13.9 million | $3.8 million |
| Net income attributable to ACM | $8.8 million | $3.9 million | $15.0 million | $4.3 million |
| Diluted EPS | $0.45 | $0.21 | $0.80 | $0.24 |
| Operating cash flow | Not provided separately for Q3 | Not provided separately for Q3 | $(4.8) million | $(2.7) million |
Q3 revenue grew 44.2% year over year, while nine-month revenue grew 54.1%. Management attributed nine-month growth to higher tool shipments and selling prices, and increased customer acceptance of previously shipped equipment. Single-wafer cleaning tools generated $69.5 million, or 84% of nine-month revenue, versus $51.4 million, or 96%, a year earlier. Q3 gross margin improved with favorable product mix.
Nine-month adjusted EBITDA was $19.8 million versus $8.4 million; adjusted operating income was $16.9 million versus $6.6 million. These are non-GAAP measures. Nine-month free cash flow was negative $5.7 million versus negative $4.7 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $47.3 million, with a further $26.6 million classified as restricted cash. Combined cash, cash equivalents and restricted cash were $73.8 million.
- Working capital was $133.9 million; accounts receivable was $43.1 million and inventory was $43.5 million.
- Short-term borrowings were $15.7 million, up from $9.4 million at December 31, 2018. Borrowings were under bank lines with stated annual rates of 4.94%–5.66%, generally maturing in 2020. Lease liabilities totaled $4.2 million.
- Operating cash use reflected, among other items, a $19.6 million increase in accounts receivable and a $5.9 million increase in inventory. Cash provided by financing included the August public offering and ACM Shanghai’s share issuance.
Material changes, outlook and unusual items
- ACM Shanghai STAR Market plan: Seven investors acquired shares representing 4.2% of ACM Shanghai for approximately $27.3 million. ACM Research retained 95.8%. The proceeds are held in segregated accounts and are not available for general operations. If the listing and concurrent IPO are not completed within three years and regulatory approval is not otherwise obtained, investors may require repurchase at their original purchase price, without interest. The planned IPO valuation is at least RMB 5.15 billion. The company said it might pursue additional ACM Shanghai share sales of approximately $32 million.
- Equity financing and repurchases: The August 2019 Class A offering produced $26.5 million in net proceeds. ACM also agreed to repurchase shares and cancel options from certain directors, employees and an officer affiliate; the total consideration was $3.4 million, with further purchases expected in Q4 2019.
- Tax and other income: Q3 net income included a favorable foreign-exchange-related contribution to other income and a reported income tax benefit of $0.3 million. The filing also describes a $1.44 million one-time benefit from partially reversing the U.S. deferred-tax valuation allowance; the relationship between that disclosed amount and the reported quarterly tax line is not clearly reconciled in the supplied text.
- Costs and guidance: Management expects gross margin of 40%–45% for the foreseeable future, compared with Q3’s 48.6%. It estimated 2019 capital expenditures of approximately $2.4 million and was evaluating a possible land purchase for future production and R&D capacity. No revenue or earnings forecast is provided.
- Management stated existing resources, operating cash flow and short-term borrowing capacity should meet anticipated needs for at least 12 months, while noting that operating cash flow was negative for the first nine months. It does not expect to require PRC government subsidies for its anticipated near-term cash needs.
Risks and contingencies
Revenue recognition on first-time tool shipments depends on contractual conditions and customer acceptance; delivered tools not accepted may not generate revenue. The filing also highlights working-capital variability, reliance on customer payment timing, foreign-exchange effects, and the uncertainty of the planned STAR Market listing and potential repurchase obligation. PRC operating and distribution restrictions apply to ACM Shanghai. The company reported no legal proceedings as of September 30 and no material changes to the risk factors in its prior annual report. Disclosure controls were assessed as effective.
Investor verification priorities
- Confirm the status and terms of the STAR Market listing, restricted proceeds, and any potential investor repurchase rights or additional share placements.
- Assess receivables, collections, customer acceptance of first tools, inventory levels, and the conversion of reported earnings into operating cash.
- Verify the composition and sustainability of Q3 earnings, particularly foreign-exchange-related other income and the deferred-tax valuation-allowance benefit.
- Review short-term debt maturities, guarantees and collateral, and the planned repurchases and option cancellations involving insiders and affiliates.
- Compare future gross margins with management’s 40%–45% expectation and monitor capital spending and any facility expansion plans.