ACM Research, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report.
Business context
ACM Research develops, manufactures and sells semiconductor wafer-cleaning equipment and advanced packaging tools, primarily through its Shanghai subsidiary. Its core technologies include SAPS, TEBO and Tahoe. Substantially all development, manufacturing and service operations are in China; all 2019 sales were to customers in Asia.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $107.5 million | $74.6 million |
| Gross profit / margin | $50.7 million / 47.1% | $34.4 million / 46.2% |
| Operating income | $17.8 million | $6.5 million |
| Net income | $19.5 million | $6.6 million |
| Net income attributable to ACM Research | $18.9 million | $6.6 million |
| Diluted earnings per share | $0.99 | $0.37 |
| Operating cash flow | $9.4 million | $6.9 million |
| Free cash flow (company-defined) | $8.3 million | $4.8 million |
- Revenue grew 44.1%; front-end wet-cleaning revenue increased $22.4 million and back-end equipment revenue increased $10.5 million. Wet-cleaning tools generated $90.9 million, or 84.6% of revenue.
- Operating expenses rose 17.5% to $32.9 million, slower than revenue growth. R&D expense was $12.9 million, or 12.0% of revenue.
- Management cited product mix for the 96-basis-point gross-margin increase. It expects gross margin of 40%–45% and R&D expense of 12%–15% of revenue for the foreseeable future.
- At year-end, cash and cash equivalents were $58.3 million, plus $59.6 million of restricted cash held in reserve for ACM Shanghai share placements. Short-term borrowings were $13.8 million; operating lease liabilities were $3.9 million. Current assets were $198.4 million and current liabilities $53.5 million.
- 2019 financing included $26.4 million net proceeds from a Class A share offering. ACM Shanghai also received $59.7 million from minority share placements; those proceeds were restricted and not freely available for operations. ACM Shanghai’s short-term loans were due in 2020 and had rates of approximately 4.9%–5.7%.
Material changes and unusual items
- Net income included a $4.0 million one-time tax benefit from reducing the U.S. deferred-tax valuation allowance. The full-year income-tax line was a $0.5 million benefit, versus $0.8 million expense in 2018.
- PRC government subsidies reduced expenses by $3.2 million in 2019, compared with $1.5 million in 2018; $3.4 million of grant cash was received in 2019. Grant amounts and timing are uncertain.
- Three customers accounted for 73.8% of revenue, down from 87.6% in 2018. Yangtze Memory Technologies and a subsidiary contributed 27.5%; Huali/Huahong operations 26.5%; and SK Hynix 19.8%.
- ACM Shanghai sold minority stakes to investors in connection with a planned STAR Market listing and IPO. ACM Research held 91.7% of ACM Shanghai at March 2020. The filing describes potential investor put/repurchase rights if listing milestones are not met.
Outlook, risks and contingencies
- Management said COVID-19 had not affected 2019 results but delayed some expected first-quarter 2020 deliveries and revenue. As of the filing, management expected operations to return toward previously anticipated levels in Q2 2020 and aimed to recover deferred deliveries in Q2 and Q3; these were assumptions, not guaranteed outcomes. The duration and financial impact remained uncertain.
- Management believed available cash, operating cash flow and short-term borrowing capacity would cover anticipated needs for at least 12 months. It expects continued investment in R&D, sales, service and capacity.
- Key risks include customer and geographic concentration, semiconductor spending cycles, lengthy qualification and sales cycles, cancellation or deferral of orders, reliance on limited and single-source suppliers, competition, foreign-exchange exposure, and PRC regulatory and fund-repatriation restrictions.
- The planned STAR listing and IPO, and a proposed Lingang research and production facility, were subject to approvals and completion risk. The filing provides no assured completion date or outcome.
- The company reported no legal proceedings at year-end and management did not expect ordinary-course claims to have a material effect. Warranty accruals were $2.8 million; open capital commitments were $0.4 million.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2019. The auditor gave an unqualified opinion on the financial statements but did not attest to internal controls; the filing notes the auditor was not then subject to PCAOB inspection in China.
Important facts for investors to verify
- Whether deferred COVID-related shipments were delivered and revenue recognized, and how customer and supplier operations developed after the filing date.
- Revenue growth, gross margins and cash conversion excluding the effects of government subsidies and the one-time tax benefit.
- Customer concentration, order cancellations or deferrals, and the acceptance status of delivered evaluation tools.
- Use and availability of restricted placement proceeds, short-term borrowing renewals or repayments, and any cash needs for the STAR process or facility expansion.
- Progress and terms of the STAR listing/IPO, including repurchase rights, dilution and restrictions on upstreaming ACM Shanghai cash.