nLIGHT, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. nLIGHT designs and manufactures high-power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense markets. This is the company’s first quarter as a public company following its April 30, 2018 IPO.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $51.7 million | $34.7 million | $94.2 million | $64.6 million |
| Gross profit | $17.7 million | $10.7 million | $32.4 million | $19.6 million |
| Gross margin | 34.2% | 30.8% | 34.4% | 30.4% |
| Operating income | $5.5 million | $1.9 million | $9.8 million | $2.5 million |
| Net income (loss) | $4.7 million | $(0.3) million | $7.6 million | $(1.5) million |
| Diluted EPS attributable to common stockholders | $0.11 | $(0.11) | $0.17 | $(0.57) |
| Adjusted EBITDA (non-GAAP) | $8.5 million | $3.9 million | $14.8 million | $6.6 million |
Q2 revenue rose 49.2% year over year; first-half revenue rose 45.9%. Industrial was the largest growth contributor, with first-half sales up approximately 77%; microfabrication grew 20% and aerospace and defense grew 44%. Management attributed margin improvement to higher production volumes and fixed-cost absorption, product mix, and manufacturing cost reductions.
Q2 net income was $4.7 million, but $1.5 million was allocated to participating securities; income attributable to common stockholders was $3.2 million. For the six-month period, $4.4 million was allocated to participating securities, leaving $3.2 million attributable to common stockholders. The preferred shares converted to common stock at the IPO, so the two-class allocation affects period EPS comparisons.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $129.7 million at June 30, 2018, compared with $36.7 million at year-end 2017. The IPO provided approximately $100.2 million of estimated net proceeds as described in the notes; the cash flow statement reports $101.5 million of net proceeds from the public offering.
- First-half operating cash flow was negative $2.3 million, versus positive $1.3 million a year earlier. Higher receivables, inventory, and prepaid/other current assets were principal uses of cash.
- First-half investing cash outflow was $5.8 million, primarily for manufacturing capacity and equipment. Financing cash inflow was $101.5 million.
- Total debt was $17.4 million, including $4.6 million current and $12.8 million long-term. The facility is secured by substantially all assets and bears interest at prime plus 0.50%, subject to a 5.00% floor. The company reported covenant compliance at June 30.
- Management said existing liquidity should meet working-capital and capital-expenditure needs for at least 12 months, while noting future capital needs could vary and additional financing may be considered.
Changes, outlook, and key risks
- SG&A increased 51.5% in Q2 and 43.3% in the first half, reflecting higher headcount, stock compensation, IPO-related professional services and travel, and public-company costs. R&D increased 22.1% in Q2 and 18.7% in the first half as staffing grew.
- Interest expense declined materially from 2017, mainly following refinancing and repayment of higher-cost Multiplier debt in 2017; IPO cash also generated interest income.
- No specific quarterly or annual revenue or earnings guidance is provided. Management expects revenue growth from higher volumes and new, higher-value products, and expects continued investment in R&D, manufacturing capacity, and infrastructure. Gross margins remain sensitive to product mix, pricing, production volume, and capacity utilization.
- China represented approximately 41% of first-half revenue by customer location; elsewhere the filing reports approximately 46% of revenue derived from China. The filing does not reconcile these different geographic measures. The top ten customers accounted for 56% of first-half revenue, and Suzhou Quick Laser accounted for 16%.
- Risks highlighted include customer and market concentration, cyclical industrial and semiconductor demand, competition and declining selling prices, fixed manufacturing costs and inventory exposure, international operations and currency movements, and U.S.-China tariffs and trade restrictions. A hypothetical 10% adverse foreign-exchange move could reduce the fair value of the net investment in foreign subsidiaries by approximately $2.5 million.
- The company maintains a full valuation allowance on U.S. deferred tax assets; management noted a significant release may become possible within 12 months if sufficient positive evidence develops. Accounting for certain effects of the 2017 Tax Act was still incomplete at June 30.
- A vendor quality dispute liability of $196,000 remained outstanding. The filing also describes the historical SBIR matter: a 2015 civil settlement was paid, while the company notes that a related criminal inquiry may be ongoing. Management said other legal matters were not expected to have a material adverse effect. Disclosure controls were reported effective.
- The filing lists a July 18, 2018 amendment to the bank loan agreement as an exhibit; its detailed terms are not provided in the supplied filing text.
Investor verification priorities
- Reconcile the IPO net-proceeds figures: approximately $100.2 million in the narrative versus $101.5 million in the cash flow statement.
- Clarify the different China revenue percentages and the basis used for each disclosure.
- Track receivables, inventory, and operating cash flow to assess whether revenue growth converts into cash.
- Review customer concentration, particularly Suzhou Quick Laser, and the durability of demand across the three end markets.
- Examine the July 2018 loan amendment, subsequent debt service, and compliance with revenue and capital-expenditure covenants.
- Monitor gross margin and capacity utilization, tariff effects, tax-valuation-allowance developments, and the status of the SBIR-related inquiry.