ACM Research, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial figures are in U.S. dollars; statements are unaudited. ACM develops and sells semiconductor wafer-cleaning equipment, primarily through its Shanghai operations. Single-wafer cleaning equipment represented 98.0% of first-half revenue.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $20.9 million | $8.8 million | $30.6 million | $14.4 million |
| Gross profit / margin | $8.7 million / 41.8% | $3.5 million / 39.4% | $13.8 million / 45.2% | $5.9 million / 40.6% |
| Operating income (loss) | $2.3 million | $(0.2) million | $0.4 million | $(1.8) million |
| Net income (loss) attributable to ACM | $3.2 million | $(0.7) million | $0.4 million | $(2.7) million |
| Diluted earnings (loss) per share | $0.18 | $(0.13) | $0.02 | $(0.56) |
Q2 revenue increased 138.2% year over year; first-half revenue rose 112.3%. Management attributed growth mainly to greater shipment volume and higher selling prices to existing customers. Gross-margin improvement reflected a higher proportion of higher-margin SAPS tools, better manufacturing efficiency, and improved fixed-cost absorption.
For the six months, operating cash flow was negative $4.1 million, versus positive $3.0 million in 2017; free cash flow was negative $5.2 million versus positive $2.9 million. Working-capital use included a $12.3 million inventory increase and higher receivables, partly offset by increased accounts payable and customer advances. Cash and equivalents were $17.4 million at June 30, down from $17.7 million at year-end.
At June 30, current assets were $81.9 million and current liabilities $36.4 million. Short-term borrowings totaled $9.9 million, up from $5.1 million at December 31, 2017. Total liabilities were $42.2 million. The filing reports no allowance against receivables or inventory reserve.
Material changes and unusual items
- Q2 other income, net, was $1.1 million, compared with a $0.2 million expense in Q2 2017; first-half other income was $0.3 million versus a $0.3 million expense. Management says this line primarily reflects foreign-exchange effects and depreciation of grant-funded assets; the filing does not clearly quantify the specific Q2 drivers.
- First-half stock-based compensation was $2.36 million, including $2.10 million for nonemployee awards. It is a material noncash expense and is excluded from certain company-presented non-GAAP measures.
- SMC exercised its warrant in March 2018 for 397,502 Class A shares; the warrant liability was no longer outstanding at June 30.
- PRC government grants reduced current expenses by $0.424 million in the first half, compared with $2.1 million in the prior-year period. No PRC research and development grants were received during the first half of 2018.
- ACM adopted the new revenue recognition standard effective January 1, 2018; management reported no material effect on revenue or the financial statements.
Outlook, risks and contingencies
- Management expects gross margin of 40%–45% for the foreseeable future and estimates 2018 capital expenditures of $2.5 million. It believes available cash, operating cash flows and short-term borrowing capacity will cover anticipated needs for at least 12 months; additional financing may be sought if needs exceed available resources.
- Customer concentration is significant, and substantially all sales in 2017 and the first half of 2018 were to customers in Asia. Management expects the region to remain the primary source of revenue near term.
- Risks include foreign-exchange exposure, particularly to the Renminbi; the company had no currency hedges. ACM also cites working-capital needs and dependence on a limited number of customers. It reported no material changes to annual-report risk factors.
- Management and the interim CFO concluded disclosure controls were not effective because of a previously identified material weakness: insufficient qualified financial-reporting personnel to handle complex GAAP matters and prepare and review filings. ACM hired additional finance staff and engaged consultants, but remediation was ongoing.
- Outstanding construction and equipment contract commitments were $0.759 million, expected to be paid within a year. Future minimum operating lease payments were $6.166 million. ACM reported no legal proceedings at June 30, 2018.
- The U.S. valuation allowance, tax examinations, and completion of accounting for the Tax Act could affect future tax results. ACM said Tax Act accounting was expected to be completed later in 2018.
Most important facts for investors to verify
- Whether rapid revenue growth and improved gross margins persist, particularly given reliance on existing customers and Asian markets.
- Receivables collection, inventory growth, and the sustainability of operating cash flow and liquidity.
- Borrowing availability, maturities, collateral and CEO guarantees supporting the $9.9 million of short-term debt.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- The composition and repeatability of other income, government-grant benefits, and stock-based compensation.