AXT, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013; filed August 9, 2013. AXT develops and manufactures compound semiconductor substrates, including GaAs, InP and Ge, and sells related raw materials. Manufacturing is conducted in China, with China-based joint ventures supplying strategic materials.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2013 | 2012 | 2013 | 2012 | |
| Revenue | $23.8 million | $25.2 million | $46.2 million | $48.6 million |
| Gross profit | $3.1 million | $7.5 million | $6.6 million | $15.7 million |
| Gross margin | 12.9% | 29.8% | 14.2% | 32.3% |
| Operating income (loss) | $(2.2) million | $2.6 million | $(3.4) million | $6.2 million |
| Net income (loss) attributable to AXT | $(2.0) million | $1.3 million | $(4.4) million | $2.9 million |
| EPS, basic and diluted | $(0.06) | $0.04 | $(0.14) | $0.09 |
- Revenue mix: Second-quarter GaAs revenue declined 28.4% to $10.6 million, while InP increased 51.3% to $2.0 million and Ge increased 119.0% to $5.3 million. Raw materials and other revenue declined 10.6% to $5.8 million.
- Operating expenses: Second-quarter selling, general and administrative expense increased 5.9% to $4.2 million; research and development increased 13.7% to $1.0 million. The increases included higher accounts-receivable provisions and product-testing consulting costs.
- Other items: Second-quarter results included $471,000 of equity-method earnings and an $811,000 gain from selling 35% of an investment in a Taiwan pre-IPO placement. Foreign-exchange transaction losses were $304,000 in the quarter and $897,000 for the six-month period.
- Cash flow: Six-month operating cash flow was $(407,000), versus $12.6 million provided in the prior-year period. Investing cash flow was $(6.8) million, including $2.5 million of capital expenditures and net investment purchases. Financing cash flow was $(1.7) million, primarily reflecting $1.7 million of joint-venture dividends and $285,000 of share repurchases.
- Liquidity: At June 30, cash and cash equivalents were $22.0 million, short-term investments were $6.6 million and long-term investments were $16.9 million, totaling approximately $45.4 million. Management stated that available cash and investments should meet needs for the next 12 months.
- Debt and obligations: No borrowings were outstanding under the $10.0 million secured line of credit. Total liabilities were $17.6 million, including $2.9 million of long-term royalty payments. Contractual obligations totaled $3.9 million, consisting principally of royalty payments and operating leases.
Material Changes Versus the Prior Comparable Period
- Revenue declined 5.3% in the second quarter and 5.0% for the first six months, primarily because of weaker GaAs demand in LED and wireless-device markets.
- Gross margin fell sharply because of higher-cost raw materials in inventory, lower substrate average selling prices and lower 4N gallium selling prices.
- The company moved from operating and net profitability in the prior-year periods to operating and net losses in 2013.
- Operating cash generation deteriorated substantially, driven by the net loss, higher accounts receivable and prepaid expenses, and lower accounts payable.
- Customer concentration moderated: the top five customers represented 32% of second-quarter revenue and 30% of six-month revenue, compared with 39% in both comparable 2012 periods. No customer exceeded 10% of revenue in 2013.
- Cash and cash equivalents declined by $8.7 million from December 31, 2012, while investments increased by approximately $4.0 million.
Outlook, Risks and Unusual Items
- Management expected next-quarter declines in semi-conducting and semi-insulating GaAs revenue, lower InP revenue because of a major customer’s excess inventory, and a moderate decline in Ge revenue due to customer mix. Third-party raw-material revenue was expected to remain flat.
- The planned second manufacturing facility in Tianjin was delayed because of volatility in the substrate business. The proposed first phase would require approximately $12.5 million from AXT, while a joint venture could fund approximately $5.0 million for crystal-support operations.
- On August 2, 2013, AXT signed a new two-year Fremont lease for reduced space. Management estimated savings of approximately $382,000 during 2014 and 2015, subject to a $142,000 early-termination penalty on the prior lease.
- Key risks include semiconductor-industry cyclicality and oversupply, declining average selling prices, underutilized manufacturing capacity, customer order delays or cancellations, product-quality and yield issues, dependence on China-based manufacturing and joint ventures, foreign-exchange losses, customer credit risk, raw-material supply constraints, regulatory and tax changes in China, and potential environmental or intellectual-property liabilities.
- Inventory was $36.8 million and included a $9.8 million reserve for excess and obsolete inventory. Accounts receivable were $20.1 million, net of $583,000 in allowances.
- The company had no material purchase obligations, no off-balance-sheet financing arrangements and no legal proceedings expected to have a material adverse effect, according to the filing.
- The company repurchased approximately 103,000 shares for $285,000 under a $6.0 million authorization; approximately $5.7 million remained available at June 30, 2013.
Important Facts for Investors to Verify
- Whether GaAs demand and average selling prices stabilize, particularly in LED and wireless-device markets.
- Whether gross margins recover from the 12.9% second-quarter level and whether inventory reserves require further increases.
- Whether operating cash flow returns to positive levels and supports planned capital expenditures and potential China expansion.
- The collectability of accounts receivable and exposure to customer concentration despite improved concentration metrics.
- The impact of foreign-exchange losses, China tax or regulatory changes, and the company’s dependence on China-based joint ventures and suppliers.
- The timing and economics of any future Tianjin manufacturing expansion and continued share repurchases.
- The effect of the $811,000 investment-sale gain and other nonrecurring items when assessing underlying earnings.