ACM Research, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited and consolidated. Dollar amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
ACM develops and sells semiconductor manufacturing equipment, principally single-wafer wet-cleaning tools using SAPS, TEBO and Tahoe technologies. Manufacturing and most product development are conducted in China through ACM Shanghai. Single-wafer cleaning tools generated $41.7 million, or 84% of revenue, in the first half of 2019.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $29.0 | $20.9 | $49.5 | $30.6 |
| Gross profit | $13.1 | $8.7 | $22.0 | $13.8 |
| Gross margin | 45.3% | 41.8% | 44.4% | 45.2% |
| Operating income | $4.7 | $2.3 | $6.9 | $0.4 |
| Net income | $4.3 | $3.2 | $6.2 | $0.4 |
| Diluted EPS | $0.23 | $0.18 | $0.33 | $0.02 |
- Q2 revenue rose 39.0% year over year; first-half revenue rose 61.6%. Management attributed growth mainly to more tools shipped, higher selling prices and acceptance of tools shipped in prior periods.
- First-half operating cash flow was negative $4.6 million, versus negative $4.1 million a year earlier. Free cash flow, as defined by the company, was negative $5.0 million versus negative $5.2 million. Financing provided $5.8 million, primarily from net short-term borrowing; cash increased $0.5 million to $27.6 million.
- At June 30, cash was $27.6 million, accounts receivable $31.4 million, inventory $45.5 million and current assets $108.4 million. Current liabilities were $53.4 million.
- Short-term borrowings were $15.1 million, up from $9.4 million at December 31, 2018. Operating lease liabilities totaled $4.6 million. Total liabilities were $60.6 million and stockholders’ equity $59.7 million.
- First-half PRC government subsidies reduced expenses by $2.0 million, compared with $0.4 million in the prior-year period. The filing notes that grant timing and amounts are outside company control.
Material changes versus comparable periods
- Q2 gross margin improved 3.5 percentage points, with management citing favorable SAPS-V and SAPS-II product mix. First-half gross margin declined 0.9 percentage point year over year.
- First-half operating income increased substantially as higher sales and lower general and administrative expense more than offset higher research and development costs. R&D expense rose 54% to $6.1 million, principally due to testing fees and personnel costs.
- Q2 net income increased year over year, but net margin declined to 14.9% from 15.5%, reflecting higher tax expense and lower other income. First-half net income increased to $6.2 million from $0.4 million.
- Inventory rose to $45.5 million from $38.8 million at year-end; accounts receivable rose to $31.4 million from $24.6 million. The company recorded no doubtful-account or inventory reserve at June 30.
Outlook, risks and unusual items
- Management expects gross margin of 40%–45% for the foreseeable future. It estimated 2019 capital expenditures of approximately $2.4 million; $0.5 million was spent in the first half. No revenue guidance was provided.
- Management believes cash, operating cash flows and short-term bank borrowing will cover anticipated needs for at least 12 months. It says future funding needs depend on growth, customer payment timing and investment plans; additional financing may be needed and may not be available on acceptable terms.
- ACM Shanghai is pursuing a STAR Market listing and concurrent IPO within three years. Seven investors agreed to buy 4.2% of ACM Shanghai for RMB 187.9 million (about $27.3 million). By the filing date, approximately $24.4 million had been paid; the remaining $2.9 million was expected by September 2019. Proceeds are to be held in segregated accounts and are not available for operations while reserved. If the listing and IPO are not completed within the agreed period, investors may require ACM Shanghai to repurchase their shares at the original purchase price, without interest.
- The proposed transaction is subject to PRC regulatory and exchange approvals and may be delayed or fail. ACM Research expects to retain majority ownership, but ACM Shanghai’s proceeds may not be distributable to the parent; separate governance, dilution and intellectual-property licensing could also create conflicts or constrain global expansion.
- Other key risks include concentration of operations and customers in the PRC, foreign-exchange exposure (the company had no currency hedges), protection and enforcement of intellectual property in China, customer acceptance conditions for first-time tools, and working-capital demands. More than 65 wet-cleaning tools had been delivered; more than 55 had been accepted, while the remainder awaited acceptance subject to contractual conditions.
- U.S. deferred tax assets remain subject to a valuation allowance; the filing cites historical losses and a U.S. pre-tax loss for the first half. There were no reported legal proceedings or capital commitments at June 30. The company adopted the new lease standard on January 1, 2019, recording $5.1 million of right-of-use assets and lease liabilities at adoption, with no profit or cash-flow impact.
Most important facts for investors to verify
- Progress of STAR Market approvals, completion of the share issuance, receipt of the remaining investor funds and restrictions on use of reserved proceeds.
- Customer acceptance and collection of receivables, especially given the increase in receivables and inventory and negative operating cash flow.
- Whether reported revenue growth and gross margins can be sustained, including the effects of product mix, tool acceptance and PRC government subsidies.
- Availability, cost, maturity and guarantees for short-term bank facilities, and the funding required for planned capacity expansion and capital expenditures.
- Implications of ACM Shanghai’s partial ownership and separate governance for ACM Research’s access to cash, intellectual property and future growth outside China.