ACM Research, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited; monetary amounts below are U.S. dollars in millions unless noted.
Business context
ACM develops, manufactures and sells semiconductor wafer-cleaning equipment, principally its SAPS- and TEBO-based Ultra C tools, and also supplies custom equipment for wafer assembly and packaging. Operations are centered in Shanghai; substantially all sales in 2017 and the first nine months of 2018 were to customers in Asia. In August 2018, ACM introduced its Ultra-C Tahoe tool, designed to provide high cleaning performance with less sulfuric acid. The company opened a second Shanghai factory in September, adding 50,000 square feet to its existing 36,000-square-foot facility.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $23.2 | $4.9 | $53.8 | $19.3 |
| Gross profit / margin | $10.3 / 44.4% | $2.2 / 45.0% | $24.1 / 44.9% | $8.1 / 41.7% |
| Operating income (loss) | $3.4 | $(1.3) | $3.8 | $(3.1) |
| Net income (loss) attributable to ACM | $3.9 | $(1.0) | $4.3 | $(3.7) |
| Diluted earnings (loss) per share | $0.21 | $(0.17) | $0.24 | $(0.72) |
- Revenue rose 374% year over year in Q3 and 179% for the first nine months. Nine-month wet-cleaning equipment revenue was $51.6 million, 96% of total revenue, versus $14.8 million, or 76.6%, a year earlier.
- Q3 gross margin was broadly stable year over year; nine-month margin improved, which management attributed primarily to higher-margin SAPS tools and manufacturing efficiency.
- Operating expenses rose 96% in Q3 and 83% for the nine-month period. Sales and marketing and R&D spending increased with personnel, commissions and testing activity. G&A growth included higher stock compensation and public-company costs.
- Nine-month adjusted EBITDA, a non-GAAP measure, was $8.4 million versus a loss of $1.2 million. Free cash flow, as defined by ACM, was negative $4.7 million versus negative $4.8 million.
Cash flow, debt and liquidity
- At September 30, cash and cash equivalents were $18.2 million; current assets were $82.8 million and current liabilities were $34.9 million. Short-term borrowings were $10.2 million, up from $5.1 million at year-end 2017. The filing lists no long-term borrowings in the balance sheet.
- For the first nine months, operating cash flow was negative $2.7 million, investing cash flow negative $1.9 million, and financing cash flow positive $5.6 million. Working-capital uses included a $15.2 million inventory increase and a $5.5 million increase in accounts receivable; customer advances and payables partly offset these uses.
- Inventory increased to $29.8 million from $15.4 million at year-end; finished goods were $10.1 million. Management said the increase reflected first-tool deliveries awaiting customer acceptance, which can delay revenue recognition.
- Management believes cash, operating cash flow and short-term bank borrowing capacity will meet anticipated needs for at least 12 months, and does not expect to need PRC government subsidies to do so. ACM estimated 2018 capital expenditures of $2.8 million; $1.9 million had been incurred through September and $0.264 million of commitments remained outstanding.
Material changes, outlook and risks
- Shipments were $32 million in Q3 and $63 million for the first nine months, compared with $11 million and $27 million, respectively, in the comparable 2017 periods. Shipments include tools delivered subject to customer acceptance and are not equivalent to recognized revenue.
- Management expects gross margin of 40%–45% for the foreseeable future. It expects G&A expense to increase in absolute dollars as the business grows and incurs public-company costs. No specific revenue or earnings guidance was provided.
- Q3 other income was $0.9 million, compared with a $0.2 million expense in Q3 2017; management attributed the current-period result principally to foreign-exchange effects from a weaker RMB against the U.S. dollar. ACM does not hedge its foreign-exchange exposure.
- PRC government subsidies reduced current expenses by $0.82 million in the first nine months of 2018, versus $2.8 million a year earlier. Management cautions that grant amounts and timing can be difficult to predict.
- Key risks include dependence on a limited number of customers, concentration of sales in Asia, customer acceptance requirements, and U.S.–China trade tensions and tariffs that could affect demand, supply costs or margins. The company also reported a prior material weakness in financial-reporting controls; management considered it remediated by September 30 after hiring accounting personnel and engaging consultants. Management concluded disclosure controls were effective as of that date.
- There were no legal proceedings reported at September 30. Outstanding commitments for equipment and facility construction were $0.264 million, expected to be paid within a year. Operating lease commitments totaled $5.8 million.
Important facts for investors to verify
- Whether customer acceptance converts the substantial shipments and finished-goods inventory into recognized revenue, and the timing of those conversions.
- Customer concentration, repeat orders, and the sustainability of rapid revenue growth, particularly given the company’s Asia-heavy sales base.
- Cash conversion and working-capital trends, including inventory, receivables, customer advances and reliance on short-term bank lines.
- Gross-margin performance against management’s 40%–45% expectation, and the effects of product mix, factory utilization and tariffs.
- Foreign-exchange exposure, PRC subsidy assumptions, and continued remediation and monitoring of financial-reporting controls.
- Non-GAAP adjusted EBITDA and free cash flow reconciliations; these measures are not substitutes for GAAP results and exclude or do not capture certain costs and cash requirements.