Business context and reporting period
nLIGHT, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The company designs and manufactures high-power semiconductor and fiber lasers. Results include Nutronics, acquired in November 2019, and OPI Photonics, acquired July 30, 2020; comparisons with 2019 are therefore not fully like-for-like, particularly for Advanced Development revenue.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $61.7 | $43.8 | $157.1 | $133.7 |
| Gross profit / margin | $17.2 / 27.8% | $13.0 / 29.6% | $39.7 / 25.3% | $42.3 / 31.7% |
| Operating loss | $4.0 | $0.7 | $16.8 | $0.9 |
| Net loss | $2.1 | $0.8 | $16.4 | $2.2 |
| Diluted loss per share | $0.05 | $0.02 | $0.43 | $0.06 |
Q3 revenue increased 40.9% year over year; nine-month revenue rose 17.5%. Q3 product revenue was $51.1 million and development revenue was $10.6 million. The nine-month increase reflected stronger Aerospace and Defense sales, including Nutronics, partly offset by weaker Microfabrication revenue. Nine-month revenue by end market was Industrial $60.5 million, Microfabrication $38.8 million, and Aerospace and Defense $57.8 million.
Gross margin declined year over year in both periods. Q3 improvement in Laser Products margin, which management attributed to product cost improvements, higher production volume and factory utilization, and sales mix, was more than offset in the consolidated result by lower-margin development revenue and corporate stock compensation. For the nine months, lower Industrial-market pricing and increased reserve charges contributed to lower Laser Products margin.
Research and development expense was $11.1 million in Q3 and $29.1 million year to date; selling, general and administrative expense was $10.0 million and $27.3 million, respectively. Increases included higher stock-based compensation and acquired-intangible amortization. Stock-based compensation totaled $6.7 million in Q3 and $16.5 million year to date, versus $1.1 million and $5.4 million in the comparable 2019 periods.
Cash, debt and liquidity
Cash and cash equivalents were $110.2 million at September 30, 2020, down from $117.3 million at December 31, 2019. For the first nine months, operating cash flow was $14.7 million, compared with cash used of $1.9 million in 2019; investing cash outflow was $20.3 million and financing cash outflow was $1.6 million. Capital expenditures were $19.4 million, primarily for the Camas, Washington property and manufacturing equipment. Operating cash flow included substantial noncash adjustments and working-capital movements, including higher accounts payable and inventory.
The company drew and repaid $15.0 million on its revolving credit facility during the period. At September 30, no amount was outstanding under the $40.0 million asset-secured facility, which expires in September 2021; the company reported compliance with its covenants. Balance-sheet current and long-term debt totaled approximately $0.3 million. Management stated that existing liquidity should cover working-capital and capital expenditure needs for at least 12 months, while noting that additional capital could be needed for growth, operations, or R&D.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance was provided. Management anticipated further product-price declines, particularly in China’s Industrial market, which could slow revenue growth or reduce revenue if not offset by volumes, new products or cost improvements.
- COVID-19 had not materially disrupted manufacturing or supply chains as of the filing, but its effect on customer demand, suppliers and future results remained uncertain. Manufacturing facilities were operating, with health and safety measures in place.
- China accounted for approximately 34% of nine-month revenue. The company cited exposure to Chinese economic, regulatory and political conditions and U.S.-China tariffs. Tariffs had already pressured margins.
- Revenue and customer concentration warrant attention: Quick Laser Technology, the U.S. Government and Raytheon Technologies each accounted for at least 10% of Q3 revenue. Two customers represented approximately 44% of accounts receivable at quarter end.
- Other notable items include a $1.7 million prior-year tax benefit true-up related to Nutronics purchase accounting; $19.4 million of capital spending; OPI contingent/holdback consideration of about $1.4 million; and adoption of lease accounting, which added right-of-use assets and lease liabilities. No material legal proceedings were reported.
- Management said disclosure controls were effective, but integration of acquired companies’ internal controls was not complete. A Longmont lease amendment signed November 3, 2020, after quarter end, added about $1.1 million each to right-of-use assets and lease liabilities.
Important facts for investors to verify
- Whether Aerospace and Defense growth and acquired-company contributions are sustainable, and how results compare excluding acquisitions.
- Whether price pressure, tariffs, product mix and reserve charges continue to weigh on gross margins.
- How Microfabrication demand, COVID-19 effects and China exposure affect future orders and revenue.
- Whether operating cash generation is repeatable given working-capital changes and elevated capital spending.
- Liquidity needs, credit-facility renewal or replacement before its September 2021 expiry, and integration of Nutronics and OPI.
- The potential dilution and expense from stock-based compensation; unrecognized compensation cost was $64.9 million at September 30, 2020.