nLIGHT, Inc. — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020. nLIGHT designs and manufactures high-power semiconductor and fiber lasers. Its Laser Products and Advanced Development segments include results from Nutronics, acquired in November 2019; Q1 2019 excludes that acquisition.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $43.2 million | $41.9 million |
| Gross profit / margin | $9.5 million / 22.0% | $13.5 million / 32.3% |
| Operating loss | $6.7 million | $1.1 million |
| Net loss / diluted loss per share | $7.5 million / $0.20 | $1.2 million / $0.03 |
| Net cash used in operations | $1.1 million | $4.9 million |
| Capital expenditures and other investing cash outflow | $15.5 million | $2.7 million |
- Revenue increased 3.2%. Aerospace and Defense revenue rose 82.6% to $16.8 million, while Industrial revenue fell 11.8% to $16.0 million and Microfabrication fell 28.3% to $10.4 million. Advanced Development contributed $6.3 million.
- Gross margin fell 10.3 percentage points. Management cited Industrial price reductions, unfavorable product mix, higher inventory reserves, and lower factory utilization.
- Research and development expense increased 32.9% to $8.5 million; SG&A decreased 5.5% to $7.7 million. Higher R&D costs included increased stock compensation, Nutronics-related intangible amortization, and project expenses.
- Cash and cash equivalents were $116.3 million at March 31, 2020, versus $117.3 million at December 31, 2019. Cash decreased $1.0 million during the quarter. Operating cash use improved year over year, while investing outflows increased chiefly with the Camas property purchase and manufacturing equipment spending.
- Debt: $15.0 million outstanding on a $40.0 million asset-secured revolving credit facility, with $24.5 million available at quarter-end. The facility expires September 2021; the company reported covenant compliance. Total liabilities were $58.8 million and stockholders’ equity was $212.9 million.
Changes, outlook, and risks
- Management said COVID-19 had not yet caused significant manufacturing or supply-chain disruption: U.S. facilities were operating as essential businesses, and the Shanghai facility reopened after an additional week’s closure. However, it expected the pandemic to adversely affect 2020 results and said the magnitude and duration were uncertain.
- No quantified revenue or earnings guidance was provided. Management expected existing liquidity to cover working capital and capital expenditure needs for at least 12 months, while noting that future capital needs could vary and additional financing might be pursued.
- Price competition, tariffs, product mix, customer capital spending, and fixed manufacturing costs may pressure margins. Management noted recent selling-price pressure, particularly in China, and said further price reductions could slow revenue growth or reduce revenue.
- Customer concentration is significant: the top ten customers represented about 62% of quarterly revenue; Raytheon Technologies represented 16% and the U.S. Government 10%. One customer represented about 24% of accounts receivable at quarter-end.
- Other notable items: the company purchased a roughly 21-acre Camas, Washington property with two buildings for intended use as its future headquarters; purchase-price allocation and useful lives were not finalized. Adoption of lease accounting added approximately $7.6 million of right-of-use assets and $7.9 million of lease liabilities at transition. Nutronics-related goodwill was $8.6 million.
- Management reported effective disclosure controls. Integration of Nutronics’ internal financial controls was not complete. The filing disclosed no material legal proceedings, but also described a historical DOJ inquiry concerning SBIR eligibility that may remain ongoing, and unaudited, unsettled government-contract incurred-cost claims.
Important facts for investors to verify
- Confirm the cash comparison: the MD&A states $117.3 million for the comparison period, but the cash flow statement reports $142.4 million at March 31, 2019; the balance sheet comparison is December 31, 2019.
- Track whether COVID-19 affected customer demand, suppliers, manufacturing, and full-year financial performance after the reporting date.
- Assess whether Aerospace and Defense growth can offset continued weakness in Industrial and Microfabrication, and whether product margins recover from Q1 levels.
- Monitor the Camas property’s final cost allocation, renovation spending, and effect on capital needs, as well as debt availability and covenant compliance.
- Review customer concentration, inventory levels and reserves, Nutronics integration and performance, and developments in the SBIR inquiry and government-contract claims.