nLIGHT, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. nLIGHT designs and manufactures high-power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense markets. It operates as one segment and has manufacturing sites in the United States, China, and Finland. Financial statements are unaudited.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $51.0m | $36.5m | $145.2m | $101.1m |
| Gross profit / margin | $18.0m / 35.4% | $12.3m / 33.8% | $50.5m / 34.7% | $32.0m / 31.6% |
| Operating income | $5.1m | $4.6m | $14.8m | $7.1m |
| Net income | $4.0m | $2.2m | $11.6m | $0.7m |
| Diluted EPS | $0.10 | $0.00 | $0.27 | $0.00 |
| Adjusted EBITDA (non-GAAP) | $9.2m | $6.6m | $24.0m | $13.2m |
Q3 revenue increased 39.6% year over year; nine-month revenue increased 43.6%. Growth spanned all three end markets. For the first nine months, industrial revenue rose 62%, microfabrication 20%, and aerospace and defense 65%. Management attributed margin improvement to higher production volumes and, year to date, lower production costs.
Operating expenses increased: Q3 R&D rose 42% to $5.5m and SG&A rose 92% to $7.5m. The filing cites higher compensation, headcount and stock-based compensation; nine-month SG&A also included IPO-related professional fees and public-company costs. Q3 SG&A comparison was also affected by a $1.0m recovery of a previously reserved receivable in Q3 2017.
Cash flow, balance sheet and financing
- Cash and cash equivalents were $168.2m at September 30, 2018, versus $36.7m at December 31, 2017. Current assets were $233.5m and current liabilities $25.6m.
- Nine-month operating cash flow was $2.1m, compared with $0.2m in 2017. Increased receivables ($8.4m) and inventory ($7.1m) absorbed cash as the business grew. Investing cash outflow was $8.6m, mainly for manufacturing equipment, facilities, and intangibles.
- Financing cash inflow was $138.0m, chiefly from public offerings. The IPO and follow-on offering generated approximately $138m in estimated net proceeds; cash-flow statements report $139.1m of net offering proceeds. The follow-on also included 3.7m secondary shares sold by existing holders, for which the company received no proceeds.
- Total debt was approximately $16.3m, including $16.1m outstanding under a $40m revolving facility, due September 2021 and secured by substantially all company assets. The company reported covenant compliance. The facility requires at least $50m of cash; certain covenants apply if cash falls below that threshold.
- Stockholders’ equity was $213.4m. Common shares outstanding were 36.4m at quarter-end; 36.6m were outstanding as of November 6, 2018.
Outlook, risks and unusual items
- Management said existing liquidity should meet working-capital and capital-expenditure needs for at least 12 months, while noting possible future capital needs. It expects revenue growth from higher volumes and new, higher-value products, and plans continued investment in R&D, manufacturing capacity, and infrastructure. No specific earnings or revenue guidance was provided.
- Management warned that competitors substantially cut fiber-laser prices in China during the second half of 2018. nLIGHT had reduced some prices and said further price pressure could affect margins. Its vertically integrated model also leaves gross margin sensitive to volume, product mix, capacity utilization, and fixed-cost absorption.
- China represented approximately 38% of nine-month revenue. The filing warns that U.S.-China tariffs, possible escalation in trade restrictions, and RMB movements could raise costs or weaken demand. The company reported that new tariffs were expected to directly affect operations, though the ultimate impact and duration were uncertain.
- Customer concentration is significant: the top ten customers represented approximately 58% of nine-month revenue, and Suzhou Quick Laser accounted for 14%. Sales are generally based on short-term purchase orders, not long-term purchase commitments.
- The company continued to maintain a full valuation allowance against U.S. deferred tax assets. Management said sustained U.S. profitability could provide grounds to reverse a significant portion by year-end 2018, creating an income tax benefit; timing and amount were uncertain.
- Contingencies include a $196,000 recorded liability for a vendor quality dispute involving future non-cancelable orders. The company also disclosed a prior SBIR eligibility matter: a 2015 civil settlement was paid, but the U.S. Attorney’s Criminal Division inquiry may be ongoing; the company said it could not predict the outcome.
- Other notable items: the company completed its IPO in April and follow-on offering in September; its preferred shares converted to common stock at the IPO. Foreign-currency translation was a $1.3m loss for the nine months. Management assessed disclosure controls as effective at period-end.
Important facts for investors to verify
- Whether China price competition and tariffs are reducing realized selling prices, demand, or gross margins, and the extent to which costs can be passed through or mitigated.
- Whether growth and profitability translate into stronger operating cash generation as receivables and inventory rise; review working-capital trends and planned capital spending.
- Customer concentration and the stability of major customer orders, particularly Suzhou Quick Laser and the short-term, noncontractual nature of sales.
- The status and potential tax impact of any U.S. deferred-tax valuation allowance reversal, as well as finalization of estimates under the 2017 Tax Act.
- Developments in the SBIR-related criminal inquiry and vendor dispute, and any changes in recorded liabilities or disclosures.
- Available borrowing capacity and compliance with the $50m cash threshold and other revolving-credit covenants.