ACM Research, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited figures below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted. ACM develops and sells semiconductor manufacturing equipment, principally single-wafer wet-cleaning tools, with substantially all manufacturing and product development conducted in China.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $47.7 | $33.4 | $111.1 | $82.9 |
| Gross profit / margin | $20.3 / 42.7% | $16.3 / 48.6% | $49.9 / 45.0% | $38.2 / 46.1% |
| Operating income | $7.5 | $7.0 | $16.1 | $13.9 |
| Net income | $10.0 | $9.1 | $12.5 | $15.3 |
| Net income attributable to ACM | $8.6 | $8.8 | $10.3 | $15.0 |
| Diluted EPS attributable to ACM | $0.40 | $0.45 | $0.48 | $0.80 |
- Q3 revenue rose 42.6% year over year, led by $10.0 million growth in front-end equipment and $4.2 million growth in back-end equipment and spares. Nine-month revenue rose 33.9%, driven by $28.9 million growth in front-end equipment, partly offset by a $0.8 million decline in back-end equipment and spares.
- Q3 gross margin fell 6.0 percentage points year over year, which management attributed primarily to product mix. Nine-month gross margin declined 1.1 points for the same stated reason. Operating expenses increased 39% in Q3, including a 147% increase in general and administrative expense; management attributed G&A growth to higher business and public-company costs and noted a substantial increase in stock-based compensation.
- Reported earnings included significant non-operating valuation items: a $9.0 million unrealized gain on an indirect SMIC share investment and a $6.5 million expense from remeasurement of a financial liability in Q3. For the nine months, the respective amounts were $9.0 million gain and $12.0 million expense. These items contributed to reported net income differing from operating performance; nine-month adjusted EBITDA, a company-defined non-GAAP measure, was $20.8 million versus $19.8 million.
- Cash and cash equivalents were $92.2 million at September 30, 2020, versus $58.3 million at year-end 2019; the prior-year-end balance also included $59.6 million of restricted cash, subsequently released after termination of investor redemption rights. Trading securities were $23.9 million. Working capital was $216.2 million.
- Short-term borrowings were $28.3 million, up from $13.8 million at year-end; the filing reports no long-term borrowings. Current assets were $251.8 million and current liabilities $96.3 million. The company said available cash, operating cash flows and short-term bank borrowing capacity should meet anticipated needs for at least 12 months.
- Operating cash flow was negative $8.0 million for the first nine months, compared with negative $4.8 million a year earlier. Company-defined free cash flow was negative $35.7 million versus negative $5.7 million; the 2020 figure includes spending on land-use rights and trading securities as well as capital and intangible assets. Investing cash outflow was $34.7 million and financing cash inflow $14.6 million.
Material changes and business developments
- Shipments were $59 million in Q3, compared with $43 million a year earlier and $45 million in Q2; nine-month shipments totaled $116 million versus $90 million. Shipments include first tools awaiting customer acceptance and are not equivalent to recognized revenue.
- ACM expanded its second Shanghai facility by 50,000 square feet in Q2. In July it began a multi-year project for a planned 1,000,000-square-foot development and production center in Lingang; it acquired the land-use right for $9.3 million and prepaid $7.0 million toward potential housing properties.
- The STAR Market listing committee approved ACM Shanghai’s application on September 30, subject to formal registration and China Securities Regulatory Commission review and approval. ACM Shanghai proposed to offer up to 10% of its shares. ACM Research held 91.7% of ACM Shanghai at quarter end; investors held 8.3%. Proceeds were expected to support the Lingang facility, product development and working capital.
Outlook, risks and contingencies
- Management expected gross margin of 40%–45% for the foreseeable future and said G&A expense would likely rise in absolute dollars. The filing provides no company revenue or earnings guidance.
- Management reported no significant negative COVID-19 impact on operations, capital resources or liquidity through September 30, although earlier restrictions postponed some Q1 shipments into Q2. The duration and financial effect of future disruption remain uncertain.
- Risks include dependence on a small number of customers (the three largest represented 72.1% of Q3 revenue and 76.9% of receivables at quarter end), foreign-exchange losses, and potential U.S. export restrictions affecting PRC customers, including SMIC. The company also faces execution and funding demands from its capacity expansion and uncertainty around STAR IPO approval.
- The Lingang land-use agreement requires specified investment and, within six years, minimum sales or tax outcomes; failure may trigger liquidated damages. Open capital commitments were $1.4 million. The company reported no legal proceedings as of quarter end and no significant off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of September 30, 2020; no material change in internal control was reported for the quarter.
Important facts for investors to verify
- Whether the STAR listing and proposed IPO receive regulatory approval, and the resulting dilution, proceeds and use of funds.
- How much of reported earnings reflects recurring operating results versus the SMIC valuation gain and SMC-related liability remeasurement, and how the non-GAAP adjustments are defined.
- Customer acceptance and collection of first-tool shipments, receivables and inventory, given customer concentration and negative operating cash flow.
- Gross-margin trajectory, product mix, and whether capacity expansion proceeds on schedule and satisfies the Lingang land-use agreement requirements.
- Availability and cost of short-term credit, and the impact of export controls, COVID-19 developments and RMB exchange-rate movements on customers and operations.