AXT, Inc. Form 10-Q Summary
Business Context and Reporting Period
AXT, Inc. develops and manufactures high-performance compound and single-element semiconductor substrates, including indium phosphide, gallium arsenide and germanium wafers, and sells related raw materials such as purified gallium and pyrolytic boron nitride crucibles. Manufacturing is conducted by subsidiaries and joint ventures in China. The filing covers the unaudited quarter ended March 31, 2022, compared with the quarter ended March 31, 2021. AXT operates as one reportable segment.
Key Financial Metrics
Amounts are in thousands, except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $39,653 | $31,350 | +26.5% |
| Gross profit | $13,308 | $11,536 | +15.4% |
| Gross margin | 33.6% | 36.8% | Down 3.2 points |
| Income from operations | $3,699 | $3,561 | +3.9% |
| Net income | $3,972 | $3,765 | +5.5% |
| Net income attributable to AXT | $3,165 | $3,425 | -7.6% |
| Diluted EPS | $0.07 | $0.08 | Down $0.01 |
| Net cash used in operating activities | $(8,906) | $(8,309) | Higher use of $597 |
| Capital expenditures | $6,294 | $5,776 | +9.0% |
| Net cash provided by financing activities | $7,919 | $2,614 | +203.0% |
Revenue from substrates increased 35.8% to $31.7 million, driven primarily by InP demand associated with 5G, data-center connectivity and related applications, together with higher GaAs and germanium demand. Raw-material revenue decreased 0.9% to $7.9 million. China represented 44% of revenue, Taiwan 17%, Europe 16%, North America 11% and Japan 7%.
Operating expenses were $9.6 million, including $6.5 million of selling, general and administrative expense and $3.2 million of research and development expense. Equity income from unconsolidated joint ventures was $1.1 million. The effective tax rate was approximately 14.2% based on income before taxes of $4.6 million.
At March 31, 2022, cash and cash equivalents were $29.5 million, short- and long-term investments totaled $14.8 million, and total liquidity was approximately $44.3 million. Accounts receivable were $39.8 million and inventories were $68.8 million, including $20.6 million of excess and obsolete inventory reserves. Total assets were $338.4 million.
Bank loans totaled $20.2 million, all classified as current, compared with $12.2 million at December 31, 2021. Total liabilities were $50.9 million. Redeemable noncontrolling interests were $51.0 million, and total stockholders’ equity was $236.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $8.3 million, primarily from higher substrate demand, while raw-material sales were essentially flat.
- Gross margin declined from 36.8% to 33.6%, principally because of increased manufacturing-material costs and product-mix effects.
- SG&A increased 15.8%, primarily due to higher personnel-related costs; research and development increased 31.4% due to personnel, travel and development of larger-diameter GaAs and InP substrates.
- Net income attributable to AXT declined despite higher consolidated net income because income attributable to noncontrolling and redeemable noncontrolling interests increased to $807,000 from $340,000.
- Operating cash flow remained negative as accounts receivable, inventories, accounts payable and accrued liabilities used cash. Accounts receivable increased approximately $5.0 million and inventories increased approximately $2.9 million from year-end.
- Property, plant and equipment increased to $147.3 million from $142.4 million. Construction in progress was $37.5 million, including projects at the Dingxing and Kazuo locations.
- Financing included $10.7 million of bank-loan proceeds and $2.8 million of repayments. No common shares were repurchased.
Guidance, Outlook, Risks and Unusual Items
The filing states that management believes existing cash and investments are adequate for operating needs and capital expenditures over the next twelve months, but warns that lower sales could accelerate cash usage and require additional capital. The filing text provided does not include a specific numerical revenue or earnings outlook for subsequent quarters.
- Tongmei’s proposed IPO on the Shanghai Stock Exchange STAR Market remained under review. The amended application was accepted for review in April 2022, but approval had not been received as of the filing. Management expected completion in the second half of 2022.
- Private-equity investors in Tongmei have redemption rights totaling approximately $49 million if a material adverse change occurs or the IPO is not achieved under the applicable terms. The redemption right is suspended while the application is under review, subject to the contractual provisions described in the filing.
- COVID-19-related lockdowns, transportation disruptions and possible factory closures in China could affect production, shipments, customer demand and margins. The filing specifically noted Shanghai lockdowns in late March 2022 and potential effects in Beijing.
- All products are manufactured in China, exposing AXT to Chinese regulatory, environmental, hazardous-material, permitting, currency, trade and geopolitical risks. U.S. tariffs on imported wafer substrates resulted in approximately $675,000 of tariff expense in Q1 2022.
- Customer concentration increased: one customer represented 10% of Q1 revenue, and the top five customers represented 29% versus 26% in the prior-year quarter. Two customers represented 12% and 10% of accounts receivable at March 31, 2022.
- Warranty accruals increased to $832,000 from $743,000, primarily due to increased claims for quality issues. Inventory reserves for excess and obsolete inventory increased to $20.6 million from $19.6 million.
- A $0.2 million Chinese government relocation grant partly offset foreign-currency transaction losses of $228,000. No impairment charges were recorded for equity investments during the quarter.
- In April 2022, Tongmei agreed to a further $4.5 million capital increase for ChaoYang XinMei; approximately $1.1 million from Tongmei and $0.7 million from noncontrolling investors had been paid in April.
Investor Verification Priorities
- Verify the timing, approval status and completion conditions of Tongmei’s STAR Market IPO and the potential $49 million redemption exposure.
- Monitor gross-margin recovery, manufacturing-material costs, product mix, yields and utilization at the Dingxing and Kazuo facilities.
- Reconcile negative operating cash flow with rising receivables and inventories, and assess the sustainability of capital expenditures.
- Review the maturity, collateral and refinancing requirements for the $20.2 million of current bank loans.
- Assess the effect of China COVID-19 restrictions, environmental shutdowns, tariffs and U.S.-China trade policies on production and shipments.
- Track customer concentration, warranty claims and the adequacy of the $20.6 million excess-and-obsolete inventory reserve.
- Consider the availability of cash held in China, foreign-exchange restrictions and the ability to transfer funds within the corporate structure.