AXT, Inc. 10-Q Summary
Business Context and Reporting Period
AXT develops and manufactures 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 in China, with significant international sales. This unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Amounts are in thousands except per-share data.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $31,350 | $20,723 | +51.3% |
| Gross profit | $11,536 | $5,522 | +108.9% |
| Gross margin | 36.8% | 26.6% | +10.2 percentage points |
| Income (loss) from operations | $3,561 | $(634) | Improved |
| Net income | $3,765 | $217 | Improved |
| Net income (loss) attributable to AXT | $3,425 | $(178) | Improved |
| Diluted EPS | $0.08 | $(0.01) | Improved |
| Net cash used in operating activities | $(8,309) | $(6,104) | Higher use |
| Capital expenditures | $5,776 | $2,139 | Higher investment |
- Revenue from substrates was $23,373, up 38.5%, driven primarily by stronger demand for InP used in 5G and data-center connectivity and increased GaAs demand, including automotive LED applications.
- Raw-material revenue was $7,977, up 107.6%, reflecting higher refined gallium and pBN crucible sales and higher purified-gallium pricing.
- Operating expenses were $7,975, including $5,570 of SG&A and $2,405 of R&D. R&D increased primarily for 8-inch GaAs development, product enhancements and testing.
- Equity income from unconsolidated ventures was $1,111 versus a $120 loss, primarily from stronger results at two raw-gallium companies.
- Other income declined to a $111 expense from $1,366 of income because the prior-year period included a $1.4 million Chinese government relocation grant. Q1 2021 included a $0.1 million grant and $173,000 of foreign-exchange losses.
- Cash and cash equivalents were $61,206 at March 31, 2021, compared with $72,602 at December 31, 2020. Cash and investments totaled $66,909, including approximately $44.4 million held in foreign bank accounts.
- Total assets were $301,906. Accounts receivable increased to $28,423 and inventories increased to $54,681. Inventory reserves totaled approximately $18.6 million.
- Bank loans totaled $10,376, consisting primarily of Tongmei and BoYu borrowings. The Wells Fargo revolving facility had expired with no outstanding borrowings or letters of credit.
- Total stockholders’ equity was $210,462. Redeemable noncontrolling interests were $48,212, primarily related to Tongmei’s private-equity funding.
Material Changes Versus the Prior Comparable Period
- Revenue increased 51.3%, while gross margin expanded from 26.6% to 36.8%, reflecting higher volume and favorable product mix.
- China revenue increased 229.1% to $15,546, while Taiwan revenue decreased 41.8% and Europe revenue decreased 12.5%.
- Customer concentration declined: no customer represented at least 10% of Q1 2021 revenue, compared with two customers representing 17% and 15% in Q1 2020.
- Operating results turned profitable, despite higher SG&A, R&D and income-tax expense.
- Operating cash flow remained negative and worsened as accounts receivable, inventories, prepaid assets and accrued liabilities consumed cash.
- Capital expenditures increased substantially, and property, plant and equipment rose to $119,878. Construction in progress was $28,597, including facilities in Dingxing and Kazuo.
- In February 2021, Tongmei formed ChaoYang XinMei, with Tongmei funding approximately $0.9 million for a 58.5% interest in the new entity.
- The Chinese government approved approximately $49 million of Tongmei private-equity investment on January 25, 2021. Investors held a 7.28% redeemable interest, while total Tongmei noncontrolling and redeemable interests were approximately 14.5% at quarter-end.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that it believes cash and investments are sufficient for operating needs and capital expenditures over the next 12 months, but declining sales could accelerate cash usage and require additional capital.
- Tongmei plans to submit its STAR Market IPO application to the China Securities Regulatory Commission in the third quarter of 2021 and expects completion around mid-2022. There is no assurance that the IPO will be completed.
- If Tongmei does not achieve the IPO by December 31, 2022, or experiences a material adverse change, investors may require AXT to redeem their shares at the original purchase price. Potential redemption could materially affect liquidity and may require additional financing.
- All manufacturing is in China, exposing AXT to COVID-19 disruptions, government shutdowns, environmental and hazardous-material regulations, power interruptions, labor issues, transportation restrictions, tariffs and China-U.S. geopolitical tensions.
- AXT paid approximately $273,000 in U.S. tariffs during Q1 2021; approximately 10% of revenue is associated with wafers imported into the United States.
- The company remains exposed to semiconductor-industry cyclicality, customer order delays or cancellations, pricing pressure, product qualification requirements, manufacturing yields, inventory obsolescence and reliance on limited suppliers.
- Strategic investments in Chinese raw-material companies provide supply-chain benefits but may generate volatile equity-method earnings or future impairment charges.
- Accrued preferred-stock dividends were $2,901. The company has never declared or paid dividends on the Series A preferred stock.
- Management concluded that disclosure controls and procedures were effective, and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue growth in InP, GaAs and raw materials is sustained and whether the 36.8% gross margin is repeatable.
- Whether working-capital growth and capital expenditures continue to produce negative operating cash flow.
- The timing, regulatory approval status and ultimate completion of Tongmei’s STAR Market IPO.
- The potential amount and funding sources for any Tongmei investor redemption obligations.
- Renewal and repayment status of the approximately $8.8 million Tongmei borrowing and the $1.5 million BoYu borrowing.
- Customer qualification progress at the Dingxing and Kazuo facilities and utilization of expanded manufacturing capacity.
- Exposure to Chinese regulatory actions, environmental shutdowns, tariffs, foreign-exchange movements and COVID-19-related disruptions.
- The adequacy of inventory reserves, particularly given total inventory of $54.7 million and reserves of approximately $18.6 million.