nLIGHT, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. nLIGHT designs and manufactures high-power semiconductor and fiber lasers. Following its November 2019 Nutronics acquisition, it reports Laser Products and Advanced Development segments; 2020 results include Nutronics, unlike 2019 comparatives.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $52.1 million | $48.0 million | $95.4 million | $89.9 million |
| Gross profit | $13.1 million | $15.9 million | $22.6 million | $29.4 million |
| Gross margin | 25.0% | 33.0% | 23.7% | 32.7% |
| Operating income (loss) | $(6.0) million | $0.8 million | $(12.8) million | $(0.2) million |
| Net income (loss) | $(6.8) million | $(0.2) million | $(14.3) million | $(1.4) million |
| Diluted loss per share | $(0.18) | $0.00 | $(0.38) | $(0.04) |
- Revenue increased 8.5% in Q2 and 6.1% year to date. Aerospace and Defense growth, including Nutronics, offset lower Microfabrication sales. Q2 Aerospace and Defense revenue rose 68.3% to $15.2 million; Microfabrication fell 21.0% to $14.3 million.
- Q2 Laser Products revenue declined 6.1% to $45.1 million, while Advanced Development contributed $7.0 million. Six-month Advanced Development revenue was $13.3 million. Q2 gross margins were 28.5% for Laser Products and 7.8% for Advanced Development.
- Management attributed lower Laser Products margins primarily to industrial-market price reductions and higher reserve charges, partly offset by lower product costs. Increased stock-based compensation and Nutronics-related intangible amortization also contributed to higher expenses and losses.
- Six-month operating cash flow was $7.0 million, versus cash use of $1.2 million in 2019. Investing used $17.7 million, including $17.0 million of property and equipment purchases, primarily the Camas property and manufacturing equipment. Financing provided $14.3 million, including $15.0 million of revolver proceeds.
- Cash and cash equivalents were $120.9 million at June 30, 2020, versus $117.3 million at year-end 2019. Current assets were $205.3 million and current liabilities $37.2 million. Inventory was $50.6 million, up from $46.1 million at year-end.
- At June 30, debt was $15.0 million under a $40.0 million secured revolving facility; $24.5 million was available and the company was in covenant compliance. On July 24, it repaid the outstanding balance, with $39.5 million then available. Management said liquidity should meet working capital and capital expenditure needs for at least 12 months.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management expects continued investment in research and development and notes further average selling price pressure could slow revenue growth or reduce revenue. It expects margins to benefit from higher volume, but tariffs, product mix, utilization and pricing remain important variables.
- COVID-19’s future effects were uncertain. Manufacturing facilities were operating at filing time, but disruptions to customers, suppliers and demand could adversely affect results.
- Customer and market concentration are material: the top ten customers accounted for about 60% of six-month revenue; Quick Laser, the U.S. Government and Raytheon Technologies each represented at least 10% in specified periods. China accounted for about 35% of six-month revenue.
- Other principal risks include sustained losses, industrial and microfabrication cyclicality, competition and price reductions, U.S.-China tariffs and trade restrictions, reliance on international operations and limited-source suppliers, and government-budget dependence in Aerospace and Defense. The company reported no material legal proceedings.
- Subsequent events: the July 24 revolver repayment; a July 1 Longmont lease amendment adding approximately $2.0 million each to lease assets and liabilities; and the July 30 OPI Photonics acquisition for €1.55 million cash, subject to earn-out and hold-back adjustments.
- The company adopted lease accounting on January 1, 2020, recognizing operating lease assets and liabilities. Management reported disclosure controls effective and no material change in internal controls, while noting Nutronics controls integration was not complete.
Investor verification points
- Assess whether revenue growth can offset declining product sales and the sharp gross-margin contraction, particularly with ongoing industrial pricing pressure.
- Verify the sustainability and cash quality of operating cash flow, including the effects of inventory growth and vendor-payment timing.
- Review post-quarter liquidity and revolver terms after repayment, alongside capital spending, lease commitments and the OPI acquisition.
- Track customer concentration, China exposure, COVID-19 effects, tariffs, and defense-contract and government-budget risks.
- Monitor Nutronics integration and internal controls, acquisition-related amortization, stock-based compensation and the company’s path to profitability.