ACM Research, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Amounts 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 systems, through operations centered in Shanghai. Front-end cleaning and other front-end equipment generated $22.8 million, or 94% of Q1 revenue, versus $12.8 million, or 63%, a year earlier. ACM Shanghai is 91.7%-owned; outside investors hold redeemable interests.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $24.35 | $20.48 | Up 18.9%; front-end equipment revenue rose $10.0 million, partly offset by a $6.1 million decline in back-end packaging equipment. |
| Gross profit / margin | $10.23 / 42.0% | $8.83 / 43.1% | Gross profit up 15.9%; margin down 1.1 percentage points, attributed to product mix. |
| Operating expenses | $9.01 | $6.58 | Up 37.0%, led by sales and marketing and R&D. |
| Operating income | $1.22 | $2.25 | Down about 45.9%; operating margin fell to 5.0% from 11.0%. |
| Consolidated net income | $1.96 | $1.86 | Up about 5.7%. |
| Net income attributable to ACM Research | $1.71; $0.09 basic, $0.08 diluted per share | $1.86; $0.12 basic, $0.10 diluted per share | Down about 8.2%; Q1 2020 includes $0.26 million attributable to redeemable non-controlling interests. |
| Operating cash flow / free cash flow | $3.83 / $3.71 | $(3.18) / $(3.30) | Improved year over year; working-capital movements were significant. |
Q1 2020 other income, net was $0.68 million, compared with a $0.26 million expense in Q1 2019, primarily reflecting foreign-exchange gains and losses. Interest income, net, was $0.22 million versus a $0.13 million expense, reflecting larger cash balances and lower borrowings. Adjusted EBITDA, a non-GAAP measure, was $2.94 million versus $3.04 million.
Balance sheet and liquidity
- At March 31, 2020, cash and cash equivalents were $52.28 million and restricted cash was $58.73 million; combined cash, cash equivalents and restricted cash totaled $111.01 million. The restricted funds relate to proceeds held in reserve in connection with the planned STAR Market listing process.
- Working capital was $134.53 million. Current assets were $198.48 million and current liabilities $50.77 million.
- Short-term borrowings declined to $3.89 million from $13.75 million at December 31, 2019. Total liabilities were $58.80 million. Operating lease liabilities totaled approximately $3.55 million.
- Cash, cash equivalents and restricted cash decreased by $6.85 million during the quarter, primarily reflecting net repayments of short-term borrowings and foreign-exchange effects.
- Management stated existing cash, operating cash flow and short-term borrowing capacity should meet anticipated cash needs for at least the next 12 months. ACM reported no significant off-balance-sheet arrangements.
Material changes and management outlook
- Shipments totaled $12 million, compared with $14 million in Q1 2019 and $25 million in Q4 2019. Management said some Q1 deliveries were postponed amid COVID-19 restrictions and expected these to be deferred rather than lost, with efforts to recover shipments by increasing output in Q2 and Q3. This is an expectation, not a quantified revenue forecast.
- Management expected gross margin of 40%–45% for the foreseeable future. It also expected G&A expense to rise in absolute dollars as the company grows and incurs costs of operating as a public company in the U.S. and China.
- COVID-19 disrupted operations, customer access, deliveries and travel. The Shanghai headquarters closed six additional days beyond the Lunar New Year holiday; more than 95% of staff had returned by the filing’s reporting. Management could not estimate the duration or financial impact of disruption. It reported no material supply-chain issues to date and said key customers’ fabrication facilities continued operating, though access and logistics were restricted.
- ACM continued to pursue a STAR Market listing and IPO for ACM Shanghai and planned a new Lingang development and production center. Management reported no COVID-related delay to these projects as of the filing, but their timing remained uncertain. Investors should note the contractual repurchase rights attached to minority investments if specified listing milestones are not met.
- Revenue concentration increased: the three largest customers accounted for 97.4% of Q1 2020 revenue, versus 62.7% in Q1 2019; they represented 76.1% of receivables at quarter-end. Management said it believed collection risk was not significant based on past experience.
- ACM received $1.9 million in government-grant cash payments in Q1 2020, versus $22,000 a year earlier; grant amounts and timing are variable. Grant-related reductions to current expenses were $0.2 million versus $1.3 million.
- There were no legal proceedings reported as of March 31, 2020 and no material changes to previously disclosed risk factors. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Key facts investors should verify
- Whether postponed Q1 shipments were recovered in Q2–Q3 and whether customer acceptance converted first-tool shipments into recognized revenue.
- Whether the concentrated customer base, COVID-19 restrictions and customer access limitations affected collections, deliveries or subsequent-period demand.
- How much of reported liquidity is restricted and available for operations, and whether operating cash flow remains positive without unusual working-capital movements or grant receipts.
- Progress, funding and deadlines for ACM Shanghai’s STAR listing/IPO, including potential repurchase obligations to minority investors.
- Whether gross margins remain within management’s 40%–45% expectation as equipment and customer mix change.