AXT, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 12, 2020. The filing also reports unaudited fourth-quarter results. AXT develops and manufactures compound and single-element semiconductor substrates, primarily indium phosphide (InP), gallium arsenide (GaAs), and germanium (Ge), plus related raw materials. All products are manufactured in China, and approximately 90% of revenue is generated outside North America.
Financial Results and Liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $83.3 million | $102.4 million | Down 18.7% |
| Gross profit | $24.8 million | $37.0 million | Down 33.0% |
| Gross margin | 29.8% | 36.2% | Down 6.4 percentage points |
| Operating income (loss) | $(0.3) million | $12.1 million | Declined substantially |
| Net income (loss) | $(1.6) million | $11.0 million | Turned to loss |
| Net loss attributable to AXT | $(2.6) million | $9.7 million | Turned to loss |
| Diluted loss per share | $(0.07) | $0.24 | Declined |
| Cash flow from operations | $12.7 million | $3.2 million | Improved |
| Capital expenditures | $21.8 million | $40.5 million | Down 46.3% |
Revenue mix: Substrate revenue was $67.8 million, down 16.2%, and represented 81% of total revenue. Raw-material revenue was $15.4 million, down 28.0%, and represented 19% of total revenue. InP revenue increased, but this was more than offset by weaker GaAs demand in LED, automotive, industrial-sensor, wireless, and other applications, lower Ge demand, and reduced raw-gallium revenue following the deconsolidation of JiYa.
Fourth quarter: Revenue was $18.4 million, gross profit was $3.9 million, and gross margin was 21.0%. AXT reported a $2.0 million net loss attributable to the Company, or $(0.05) per diluted share. Management attributed the weak quarter to lower demand, underutilized capacity, and manufacturing and relocation-related cost pressures.
Liquidity and debt: At December 31, 2019, cash and cash equivalents were $26.9 million, investments were $9.4 million, and working capital was $85.7 million. Total cash, cash equivalents, and investments were $36.3 million, down from $39.4 million at year-end 2018. Current liabilities were $27.5 million. Bank loans totaled $5.7 million, consisting primarily of borrowings secured by the Dingxing facility and due in 2020. A separate Wells Fargo revolving facility had no borrowings or letters of credit outstanding at year-end.
Material Changes Versus 2018
- Revenue declined $19.1 million, primarily from weaker GaAs and Ge demand and the absence of consolidated JiYa raw-gallium revenue.
- Gross margin fell from 36.2% to 29.8% because revenue volume declined while manufacturing costs, particularly for GaAs, did not decline proportionately.
- Operating results moved from $12.1 million of operating income to a $0.3 million operating loss; AXT moved from $9.7 million of attributable profit to a $2.6 million attributable loss.
- Operating cash flow improved to $12.7 million, supported in part by an $8.9 million reduction in inventories and other working-capital changes despite the net loss.
- Property, plant and equipment increased to $97.4 million from $82.3 million. Construction in progress was $61.8 million, including $48.8 million related to the Dingxing and Kazuo facilities.
- AXT sold part of its JiYa ownership in March 2019, reduced its ownership from 46% to 39%, ceased consolidating JiYa, and recognized a $0.2 million gain on deconsolidation. JiYa is now accounted for under the equity method.
- AXT acquired the remaining minority interest in JinMei, increasing ownership to 100% in 2019.
- Equity-method losses increased to $1.9 million from $1.1 million, including a $1.1 million impairment of a 25%-owned germanium materials company, whose investment was written down to zero.
- U.S. tariffs on imported wafer substrates reached 25%; AXT paid approximately $735,000 in tariffs during 2019.
Outlook, Commentary, Risks, and Unusual Items
AXT completed the transfer of all GaAs crystal-growth production from Beijing to Kazuo by year-end 2019 and moved GaAs wafer-processing equipment to Dingxing. Volume production at Dingxing remained subject to customer site qualifications and production ramp-up. Management expects to spend approximately $5 million on GaAs capital expenditures in 2020 and is considering additional InP investment. JinMei expects to invest approximately $3.0 million to $3.5 million in its new facilities, while BoYu expects to invest approximately $4.0 million to $4.5 million.
Management believes long-term demand opportunities include InP for fiber-optic, data-center, silicon-photonics, and 5G applications, and low-defect-density GaAs for 3-D sensing and VCSEL applications. However, the filing does not provide formal quantitative revenue or earnings guidance for 2020.
- Relocation and qualification risk: Delays, quality problems, employee attrition, or failed customer qualifications at Dingxing or Kazuo could disrupt production, reduce revenue, and impair margins.
- China and COVID-19 risk: The filing, dated March 2020, warns that coronavirus-related government shutdowns, travel restrictions, supplier closures, and customer disruptions could materially affect operations and financial performance.
- Demand cyclicality: Semiconductor and optoelectronic markets are cyclical, with exposure to overcapacity, customer inventory reductions, price erosion, and alternative technologies such as silicon-on-insulator.
- Trade and regulatory risk: Tariffs, export restrictions, Chinese environmental rules, hazardous-material regulations, and mandatory factory shutdowns may increase costs or limit production.
- Supply-chain and investment risk: AXT depends on limited suppliers and strategically invested raw-material companies. Equity-method entities generated a combined loss in 2019, and additional impairments are possible.
- Working-capital and accounting items: Inventory reserves totaled $16.4 million for excess and obsolete inventory plus $0.1 million for lower of cost or net realizable value. Accrued product warranties increased to $0.4 million from $0.2 million.
- Subsequent events: In January 2020, AXT agreed to a fixed-cost Sumitomo cross-license and covenant agreement requiring aggregate payments of $2.0 million over ten years. In February 2020, the Wells Fargo revolver was reduced from $10 million to $7 million.
Management stated that it believes available cash and investments are adequate to meet operating needs for the next twelve months, subject to sales, capital spending, relocation costs, and broader economic conditions.
Key Facts for Investors to Verify
- Whether Dingxing achieves customer qualifications and sustained volume production for GaAs wafer processing.
- Whether GaAs, Ge, and raw-material demand recovers and whether InP growth offsets weakness in other product lines.
- Quarterly gross margin, manufacturing utilization, product yields, inventory reserves, and warranty claims.
- 2020 capital expenditures for Dingxing, Kazuo, JinMei, BoYu, and any additional InP capacity.
- Cash usage, repayment or renewal of the $5.7 million Bank of China borrowings due in 2020, and availability of the amended $7 million Wells Fargo facility.
- Effects of COVID-19-related shutdowns, supply interruptions, customer delays, tariffs, and evolving Chinese environmental regulations.
- Performance and carrying values of equity-method raw-material investments, including the potential for further impairment charges.
- Customer concentration: one customer represented 15% of 2019 revenue and the top five customers represented 40%.
- Unpaid cumulative Series A preferred-stock dividends of approximately $2.9 million and the related restriction on common-stock repurchases until accrued dividends are paid.