AXT, Inc. 2021 Form 10-K Summary
Business context and reporting period
AXT develops and manufactures compound and single-element semiconductor substrates, primarily indium phosphide, gallium arsenide and germanium wafers, plus related raw materials including purified gallium and pyrolytic boron nitride crucibles. All products are manufactured in China. The filing covers the fiscal year ended December 31, 2021; fourth-quarter figures are also presented.
- Substrates represented 75% of 2021 revenue; raw materials represented 25%.
- Demand was driven primarily by InP applications in 5G, fiber optics, data centers and silicon photonics, and by GaAs applications in LEDs, industrial lasers and other low-defect-density uses.
- Approximately 90% of revenue came from customers outside North America.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $137.4 million | $95.4 million | +44.1% |
| Gross profit | $47.4 million | $30.3 million | +56.6% |
| Gross margin | 34.5% | 31.7% | +2.8 percentage points |
| Operating income | $12.9 million | $3.9 million | +227.3% |
| Net income | $16.5 million | $5.0 million | +227.5% |
| Net income attributable to AXT | $14.6 million | $3.2 million | +350.1% |
| Diluted EPS | $0.34 | $0.07 | + $0.27 |
| Operating cash flow | $(3.3) million | $5.9 million | Decrease of $9.2 million |
- Approximate 2021 operating margin was 9.4%; net margin attributable to AXT was approximately 10.6%.
- Substrate revenue increased 36.3% to $103.0 million. Raw-material revenue increased 73.8% to $34.4 million, reflecting higher purified-gallium shipments and pricing and increased pBN demand.
- Equity income from unconsolidated joint ventures increased to $4.4 million from $0.1 million in 2020.
- Research and development expense increased 44.8% to $10.3 million, principally for 8-inch GaAs, 6-inch InP and related product development.
- SG&A increased 26.0% to $24.2 million, but declined to 17.6% of revenue from 20.1%.
- Fourth-quarter 2021 revenue was $37.7 million, gross profit was $12.1 million and net income attributable to AXT was $3.0 million, compared with $27.0 million, $9.2 million and $2.1 million, respectively, in fourth-quarter 2020.
Liquidity, cash flow and debt
- Cash and cash equivalents were $36.8 million at December 31, 2021, compared with $72.6 million at year-end 2020.
- Cash, cash equivalents and investments totaled $51.8 million, down from $78.6 million.
- Operating cash flow was negative $3.3 million, primarily because accounts receivable, inventories and other operating assets increased with business growth.
- Investing cash outflow was $38.8 million, including $29.6 million for property, plant and equipment and $9.6 million for marketable securities.
- Financing cash inflow was $5.7 million, including $20.5 million of bank-loan proceeds, partially offset by $19.1 million of repayments.
- Current bank loans were $12.2 million, and a $1.9 million short-term loan from a noncontrolling interest holder was outstanding. Total liabilities were $52.2 million.
- Management stated that available cash and investments were adequate for operating needs and capital expenditures over the next 12 months, subject to sales and other business risks.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, led by stronger InP, GaAs and raw-material demand.
- Gross margin expanded because higher volume spread fixed manufacturing costs over more units and product mix improved.
- Profitability improved materially, supported by operating leverage and a $4.3 million increase in equity income from unconsolidated joint ventures.
- Cash declined by $35.8 million as capital expenditures and working-capital investment exceeded internally generated cash.
- Inventories increased to $65.9 million from $51.5 million, including a $19.6 million reserve for excess and obsolete inventory. Accounts receivable increased to $34.8 million from $24.6 million.
- Property, plant and equipment increased to $142.4 million from $115.8 million as AXT continued investments in Dingxing, Kazuo and Beijing facilities.
- AXT completed the gallium-arsenide manufacturing relocation and remained in volume production at the new sites, although some customer qualifications were still in process.
Guidance, outlook, commentary and risks
- The filing does not provide a specific numerical 2022 revenue or earnings outlook. Management expects demand opportunities in InP, 5G, data-center connectivity, silicon photonics, low-defect-density GaAs, industrial lasers and potential micro-LED applications.
- Tongmei’s application to list on the Shanghai Stock Exchange STAR Market was accepted for review on January 10, 2022. Management expected the IPO to be completed in the second half of 2022, but completion remained uncertain.
- Tongmei investors hold redemption rights at their original purchase price if a material adverse change occurs or the IPO is not achieved by December 31, 2022, subject to the contractual suspension and deferral provisions. Redeemable noncontrolling interests totaled $50.4 million at year-end.
- Key operational risks include manufacturing yields, product quality, customer requalification at the new GaAs sites, capacity utilization, inventory obsolescence and dependence on limited suppliers.
- All manufacturing is concentrated in China, exposing AXT to environmental shutdowns, changing regulations, power and transportation disruptions, COVID-19 effects, tariffs, trade restrictions and U.S.-China geopolitical tensions. U.S. tariffs on imported wafers were 25%; AXT paid approximately $1.3 million in tariffs in 2021.
- Foreign-exchange losses were $434,000 in 2021. The company uses hedging for certain Japanese-yen exposure but not all currency risk.
- Preferred-stock dividends of approximately $2.9 million remained accrued. AXT has not paid or declared cash dividends and did not repurchase common stock in 2021.
- The auditor identified the reserve for excess and obsolete inventory as a critical audit matter because of the judgment required in forecasting product demand.
Most important facts for investors to verify
- Whether the Tongmei STAR Market IPO proceeds through regulatory review and is completed before redemption rights could become exercisable.
- Whether strong InP and GaAs demand converts into sustained operating cash flow rather than continued working-capital consumption.
- Inventory aging, reserve adequacy and future write-down exposure, particularly given the $19.6 million excess-and-obsolete inventory reserve.
- Customer qualification and yield performance at the relocated GaAs facilities, including the ability to add capacity without depressing utilization or margins.
- The effect of tariffs, China-related regulations, environmental shutdowns and U.S.-China trade restrictions on revenue, costs and supply-chain continuity.
- Debt maturities, access to Chinese credit facilities and the potential cash requirement if Tongmei investors exercise redemption rights.