AXT, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020, with fourth-quarter results for the three months ended December 31, 2020. The filing was dated March 23, 2021. AXT develops and manufactures compound and single-element semiconductor substrates, including indium phosphide, gallium arsenide and germanium wafers, and sells related raw materials. Manufacturing is conducted in China, while approximately 90% of revenue is generated outside North America.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|
| Revenue | $95.4 million | $83.3 million | Up 14.5% |
| Gross profit | $30.3 million | $24.8 million | Up 22.0% |
| Gross margin | 31.7% | 29.8% | Up 1.9 percentage points |
| Operating income (loss) | $3.9 million | $(0.3) million | Improved |
| Net income (loss) | $5.0 million | $(1.6) million | Returned to profitability |
| Net income (loss) attributable to AXT | $3.2 million | $(2.6) million | Improved |
| Diluted EPS | $0.07 | $(0.07) | Improved |
| Operating cash flow | $5.9 million | $12.7 million | Down $6.8 million |
- Substrate revenue increased 11.4% to $75.6 million; raw-material revenue increased 28.3% to $19.8 million.
- Management attributed growth to stronger GaAs demand in automotive and industrial sensors and wireless applications, higher InP demand from 5G infrastructure and data-center upgrades, higher Ge demand in China, and increased purified gallium and pBN shipments.
- Research and development expense increased 22.3% to $7.1 million. Selling, general and administrative expense was broadly stable at $19.2 million.
- Other income increased to $3.2 million, principally due to $3.8 million of compensation and subsidies from Chinese local governments related to facility relocations.
- Equity income from unconsolidated joint ventures improved to $0.1 million from a $1.9 million loss in 2019, which included a $1.1 million investment impairment.
- A change in estimated useful lives of certain equipment and buildings reduced 2020 manufacturing costs by approximately $1.4 million and increased basic and diluted EPS by approximately $0.03.
Fourth-quarter 2020
| Metric | Q4 2020 | Q4 2019 |
|---|
| Revenue | $27.0 million | $18.4 million |
| Gross profit | $9.2 million | $3.9 million |
| Operating income (loss) | $1.9 million | $(2.8) million |
| Net income (loss) attributable to AXT | $2.1 million | $(2.0) million |
| Diluted EPS | $0.05 | $(0.05) |
Liquidity, debt and capital resources
- Cash and cash equivalents were $72.6 million at December 31, 2020, compared with $26.9 million at year-end 2019.
- Cash, cash equivalents and investments totaled $78.6 million, versus $36.3 million at year-end 2019.
- Working capital increased to $125.4 million from $85.7 million.
- Net cash used in investing activities was $16.4 million, including $19.9 million of capital expenditures for new manufacturing sites, equipment and facilities.
- Financing cash flow was $52.7 million, primarily reflecting approximately $47.6 million from issuance of Tongmei shares to noncontrolling investors and $10.4 million of short-term borrowings, partly offset by $6.0 million of loan repayments.
- Current bank loans totaled $10.4 million at year-end, including approximately $8.9 million at Tongmei and $1.5 million at BoYu. The filing states that the Company had no outstanding U.S. revolving credit facility borrowings at year-end.
- Management stated that existing cash and investments were adequate for operating needs and capital expenditures over the next 12 months, subject to sales and other business risks.
- Inventory was $51.5 million, net of a $17.7 million excess and obsolete inventory reserve. Accounts receivable were $24.6 million, net of a $0.2 million allowance.
Material changes and strategic developments
- The relocation of GaAs production from Beijing to Kazuo and Dingxing was largely completed, and volume production began in 2020. Some major customers qualified wafers from the new facilities, while several customers remained in the qualification process.
- AXT began a process to list Beijing Tongmei Xtal Technology Co., Ltd. on the Shanghai Stock Exchange STAR Market. Private equity investors committed approximately $49 million for a minority interest; Chinese government approval was obtained on January 25, 2021.
- Investors have redemption rights at the original purchase price if Tongmei experiences a material adverse change or fails to complete the IPO by December 31, 2022, subject to the suspension and deferral provisions described in the filing. This creates a potential future liquidity obligation.
- JinMei and BoYu were transferred under Tongmei in December 2020 as part of the proposed IPO reorganization. The filing states that the reorganization did not change AXT’s consolidated financial statements.
- The company entered into a fixed-cost cross-license agreement expiring December 31, 2029; royalty expense was $0.2 million in 2020 and contractual payments total $1.7 million.
- AXT paid approximately $1.3 million in U.S. tariffs in 2020, compared with $0.7 million in 2019. Approximately 10% of revenue was generated from importing wafers into the United States.
Outlook, commentary and principal risks
- Management expressed a positive outlook for InP, GaAs and Ge substrates, citing data-center connectivity, silicon photonics, 5G, sensors, wireless applications, industrial lasers and space solar applications.
- AXT intends to expand InP capacity, improve six-inch low-defect-density GaAs yields and use its new facilities to add capacity as demand develops. The filing does not provide quantified revenue or earnings guidance.
- COVID-19 affected operations, logistics, employee travel and customer collections. Renewed outbreaks, factory closures, shipping disruptions or customer defaults could reduce revenue and cash flow.
- Key operating risks include customer qualification delays at the new GaAs sites, manufacturing yields and product quality, capacity utilization, cyclical semiconductor demand, average selling price erosion and dependence on a limited number of customers and suppliers.
- China-related risks include environmental shutdowns, hazardous-material regulations, tax and regulatory changes, foreign-exchange volatility, government policies, and geopolitical and trade tensions between China and the United States.
- The company relies heavily on China for manufacturing and supply-chain operations and has significant international sales exposure. A 2020 foreign-exchange loss of $0.4 million was included in other income, net.
- Customer concentration remains material: one customer represented 11% of 2020 revenue and the top five customers represented 32%. Warranty accruals increased to $0.6 million, primarily due to claims that wafers did not meet specifications.
- AXT had $57.0 million of U.S. federal net operating loss carryforwards, but recorded a full valuation allowance against its U.S. deferred tax assets. The filing also reports $14.6 million of unrecognized tax benefits.
- Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2020. The independent auditor issued an unqualified opinion; inventory reserves were identified as the critical audit matter.
Investor verification checklist
- Verify the sustainability of 2020 revenue growth and gross-margin improvement after excluding the $3.8 million of Chinese government relocation compensation and the $1.4 million depreciation benefit.
- Track customer qualification and production ramp progress at the Kazuo and Dingxing GaAs facilities.
- Assess whether the proposed Tongmei STAR Market IPO remains on schedule and quantify AXT’s potential redemption obligation if the IPO is delayed or not completed.
- Review inventory aging, the $17.7 million excess and obsolete reserve, warranty claims and customer receivable collectibility.
- Monitor China-U.S. tariffs, export restrictions, environmental rules, factory-shutdown risk and foreign-exchange effects.
- Reconcile capital expenditures, construction commitments and targeted investments of approximately $90 million in Dingxing and $15 million in Kazuo against expected demand and liquidity.
- Confirm the maturity and renewal status of the approximately $10.4 million of current bank loans and the terms of the preferred-stock dividend obligation.
