AXT, Inc. 2021 Q2 Form 10-Q Summary
Business context and reporting period
AXT develops and manufactures high-performance compound and single-element semiconductor substrates, including indium phosphide, gallium arsenide and germanium wafers. Consolidated subsidiaries also sell purified gallium and pyrolytic boron nitride crucibles. The company manufactures products in China and operates one reportable segment.
This unaudited report covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The filing was signed August 12, 2021. AXT had 42.5 million common shares outstanding as of August 1, 2021.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $33.7 million | $22.1 million | $65.1 million | $42.9 million |
| Gross profit | $12.2 million | $6.8 million | $23.8 million | $12.3 million |
| Gross margin | 36.3% | 30.6% | 36.5% | 28.7% |
| Operating income | $3.9 million | $0.5 million | $7.5 million | $(0.2) million |
| Net income attributable to AXT | $4.4 million | $0.4 million | $7.8 million | $0.2 million |
| Diluted EPS | $0.10 | $0.01 | $0.18 | $0.00 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $(10.6) million | $2.0 million |
Q2 revenue increased 52.4%, led by higher demand for InP wafers used in 5G and data-center connectivity, GaAs wafers used in LED and automotive applications, and stronger sales and pricing for refined gallium and pBN crucibles. Six-month revenue increased 51.9%.
Substrate revenue increased 47.6% in Q2 and 43.0% year to date; raw-material revenue increased 67.9% in Q2 and 84.7% year to date. China represented 46% of Q2 revenue and 48% of six-month revenue. No customer represented 10% or more of Q2 or six-month 2021 revenue, although one customer represented 14% of accounts receivable at June 30, 2021.
Operating expenses increased with growth: Q2 SG&A rose 22.1% to $5.8 million and research and development rose 64.4% to $2.5 million. R&D spending supported development of 8-inch GaAs and 6-inch InP wafers and other product enhancements. Equity income from unconsolidated joint ventures was $1.5 million in Q2 and $2.6 million for the first six months, compared with losses in the prior-year periods.
Balance sheet, cash flow, debt and liquidity
- Cash and cash equivalents were $52.8 million at June 30, 2021, down from $72.6 million at December 31, 2020.
- Cash, cash equivalents and investments totaled $58.5 million, compared with $78.6 million at year-end 2020. Approximately $34.5 million was held in foreign bank accounts.
- Accounts receivable increased to $33.5 million from $24.6 million, and inventories increased to $58.9 million from $51.5 million.
- Property, plant and equipment increased to $127.2 million from $115.8 million. Capital expenditures were $13.0 million for the first six months, including construction and equipment at the Dingxing and Kazuo locations.
- Operating cash flow was negative $10.6 million, primarily because of increases in accounts receivable and inventory and decreases in accrued liabilities. Investing cash outflow was $12.8 million, principally capital expenditures.
- Bank loans totaled $10.5 million, consisting of approximately $9.0 million at Tongmei and $1.5 million at BoYu. The U.S. Wells Fargo credit facility had expired and was undrawn.
- Management stated that existing cash and investments were adequate for operating needs and capital expenditures over the next twelve months, while noting that lower sales could require additional capital.
Material changes versus the prior comparable period
- Revenue, gross profit and operating income improved substantially, with gross margin expanding 570 basis points in Q2 and 780 basis points for the six-month period.
- Net income attributable to AXT increased from $0.4 million to $4.4 million in Q2 and from $0.2 million to $7.8 million year to date.
- Results benefited from stronger demand, favorable product mix, higher gallium pricing and improved results from equity-method raw-material investments.
- Operating cash flow deteriorated from $2.0 million provided in the first six months of 2020 to $10.6 million used in the first six months of 2021, while capital expenditures more than doubled from $6.5 million to $13.0 million.
- Other income declined because the company received no comparable Chinese relocation grant in 2021; Q2 2020 included a $1.6 million grant and the first six months of 2020 included $3.0 million.
- AXT completed additional China entity restructuring, including transferring AXT-Tongmei to Beijing Tongmei. Tongmei’s noncontrolling and redeemable noncontrolling interests totaled approximately 14.5% at June 30, 2021.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical revenue or earnings guidance range. Management highlighted continued demand for InP in 5G and data-center applications, GaAs in LED and sensing-related markets, and raw materials. AXT is pursuing an initial public offering of Tongmei on the Shanghai STAR Market and planned to submit the formal application in the third or fourth quarter of 2021, with completion expected no earlier than mid-2022.
Tongmei investors have redemption rights at their original investment price if a material adverse change occurs or the IPO is not achieved by December 31, 2022, subject to provisions relating to submission and review of the IPO application. The redeemable noncontrolling interest was $50.1 million at June 30, 2021. If investors exercise redemption rights, AXT may need additional capital, which could materially affect liquidity and results.
- COVID-19 could disrupt manufacturing, transportation, employee mobility, customer demand and collections.
- All manufacturing is in China, exposing AXT to Chinese regulatory, environmental, air-pollution, power, labor and geopolitical risks.
- U.S. tariffs on imported wafer substrates were 25%; AXT paid approximately $554,000 in tariffs during the first six months of 2021. Approximately 10% of revenue derives from importing wafers into the United States.
- Gross margin remains sensitive to product mix, yields, capacity utilization, raw-material prices, tariffs and manufacturing efficiency.
- Customer qualification and ramping of relocated GaAs and germanium production lines could affect shipments and market share.
- Inventory reserves for excess and obsolete inventory were $19.3 million, and the product warranty accrual was $0.8 million, both higher than at year-end 2020.
- AXT faces cyclical semiconductor demand, customer concentration and cancellation risk, foreign-exchange exposure, supply-chain disruption, competition from silicon and other technologies, and environmental compliance risks.
Most important facts for investors to verify
- Whether InP, GaAs and raw-material demand remains strong and supports the reported revenue and gross-margin expansion.
- Whether operating cash flow improves as receivables and inventory normalize.
- The pace and required spending of Dingxing and Kazuo capacity expansions.
- Progress, regulatory acceptance and ultimate completion of the Tongmei STAR Market IPO.
- The potential timing and funding requirements of any Tongmei investor redemption.
- Customer qualification status and production yields at the relocated manufacturing sites.
- Exposure to China-U.S. tariffs, trade restrictions, COVID-19 disruptions and Chinese environmental regulations.