ACM Research, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The company develops, manufactures and sells semiconductor wafer-cleaning and advanced packaging equipment, operating primarily through its Shanghai subsidiary. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $20.5 million | $9.7 million |
| Gross profit / gross margin | $8.8 million / 43.1% | $5.1 million / 52.6% |
| Operating income (loss) | $2.3 million | $(1.9) million |
| Net income (loss) | $1.9 million; diluted EPS $0.10 | $(2.8) million; diluted EPS $(0.18) |
| Adjusted EBITDA, non-GAAP | $3.0 million | $(0.4) million |
| Cash used in operating activities | $3.2 million | $7.4 million |
| Free cash flow, non-GAAP | $(3.3) million | $(7.8) million |
- Gross margin fell 9.5 percentage points year over year. Management attributed the prior-year comparison partly to three higher-margin SAPS tools.
- At March 31, 2019, cash was $27.4 million; current assets were $99.5 million and current liabilities $49.0 million, with reported working capital of $94.7 million.
- Short-term borrowings were $12.8 million, up from $9.4 million at December 31, 2018. Borrowings are from PRC banks, carry stated rates of approximately 4.94%–5.66%, and include CEO guarantees and certain collateral. Operating lease liabilities totaled $4.8 million.
- Inventory was $42.3 million, up from $38.8 million at year-end; accounts receivable was $25.1 million. No inventory reserve or allowance for doubtful accounts was recorded.
Material changes versus the prior comparable period
- Revenue increased 110.2%, with management citing more tools shipped, higher selling prices, and acceptance of tools delivered in prior periods. Single-wafer cleaning equipment revenue rose $3.3 million; back-end equipment and spares revenue rose $7.4 million.
- Single-wafer cleaning tools accounted for $13.0 million, or 63% of revenue, versus $9.5 million, or 98%, a year earlier.
- Cost of revenue rose faster than sales, increasing 152.2%; gross margin declined from 52.6% to 43.1%.
- Research and development expense increased 79.4% to $2.8 million, principally due to testing fees and personnel costs. General and administrative expense fell 46.5% to $1.9 million; Q1 2018 included IPO-related costs.
- Net cash used in operations improved by $4.2 million, but operating cash flow remained negative. Cash increased by $0.2 million during the quarter, supported by $3.3 million of net financing cash flow, including short-term borrowing activity.
Outlook, management commentary and risks
- Management expects gross margin of 40%–45% for the foreseeable future, subject to production utilization, purchase-order timing and product mix. The filing provides no specific revenue or earnings guidance.
- Management believes cash, operating cash flow and short-term bank borrowings will meet anticipated needs for at least the next 12 months, and does not expect to require PRC government subsidies for that period. It may seek additional financing if resources prove insufficient.
- Estimated 2019 capital expenditures are approximately $2.4 million; $0.1 million was spent in Q1, and no unpaid capital commitment was reported at quarter-end.
- PRC government subsidies reduced current expenses by $1.3 million in Q1 2019 versus $0.2 million in Q1 2018. Management cautions that grant amounts and timing are difficult to predict and are outside its control; reported non-GAAP measures include grant-related effects.
- The company conducts substantially all product development and manufacturing in the PRC. It identifies foreign-exchange exposure, particularly to the Renminbi, and reports no hedging transactions. PRC restrictions apply to distributions from its Shanghai subsidiary.
- Customer acceptance is important: some first-tool shipments remain subject to acceptance before revenue can be recognized. Management reported more than 60 wet-cleaning tools delivered since 2009, with more than 50 accepted.
- Operating lease accounting was adopted on January 1, 2019, adding $5.1 million of right-of-use assets and lease liabilities at adoption; management said adoption did not affect Q1 profit or cash flows. No material changes to the previously reported risk factors were identified. No legal proceedings or capital commitments were reported at March 31.
Most important facts for investors to verify
- Whether revenue growth and the change in mix, particularly the increase in back-end equipment and spares, are sustainable, and whether delivered first tools achieve customer acceptance.
- Whether gross margin remains within management’s 40%–45% expectation as product mix and manufacturing utilization change.
- Working-capital and cash conversion trends, especially inventory growth and continued operating cash outflow, as well as the availability and terms of short-term PRC bank credit.
- The scale, timing and accounting effects of PRC government subsidies, including the reported $1.3 million reduction of Q1 expenses.
- Exposure to Renminbi movements, PRC operating and cash-distribution restrictions, and the guarantees or collateral supporting bank borrowings.