nLIGHT, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. nLIGHT designs and manufactures high-power semiconductor and fiber lasers, serving industrial, microfabrication, and aerospace and defense markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $48.0m | $51.7m | $89.9m | $94.2m |
| Gross profit / margin | $15.9m / 33.0% | $17.7m / 34.2% | $29.4m / 32.7% | $32.4m / 34.4% |
| Operating income (loss) | $0.8m | $5.5m | $(0.2)m | $9.8m |
| Net income (loss) | $(0.2)m | $4.7m | $(1.4)m | $7.6m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.2)m | $(2.3)m |
| Capital expenditures and patent purchases | Not provided for quarter | Not provided for quarter | $6.9m | $5.8m |
- At June 30, cash and cash equivalents were $142.7m, versus $149.5m at December 31, 2018. Current assets were $219.8m and current liabilities $24.7m.
- Total debt was approximately $0.1m; the company reported no outstanding principal on its revolving loan facility. It reported compliance with loan covenants.
- Six-month cash declined $6.8m. Operating cash use reflected working-capital investment, including a $4.3m rise in receivables and a $7.0m rise in inventory. Financing provided $1.1m, compared with $101.5m in the prior-year period, which included IPO proceeds.
Changes versus the prior comparable period
- Q2 revenue declined 7.1%; six-month revenue declined 4.5%. China revenue fell 23.1% in Q2 and 17.9% year to date.
- Industrial revenue decreased 17.2% in Q2 and 12.1% for the first six months, driven by China price reductions and foreign-exchange movements. Microfabrication revenue fell 7.2% in both periods, primarily on lower unit sales in consumer electronics and semiconductor markets.
- Aerospace and defense revenue increased 29.9% in Q2 and 24.4% year to date, attributed to higher volumes on existing government contracts.
- Gross margin contracted 1.2 percentage points in Q2 and 1.7 points year to date. Price declines and tariffs weighed on margin, partly offset by product cost improvements and mix.
- Operating expenses increased: R&D rose 32.6% in Q2 and 40.7% year to date; SG&A rose 18.5% and 24.1%, respectively. Higher stock compensation, headcount, development spending, and public-company costs were cited.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said near-term average selling price reductions may continue to pressure revenue and that tariffs could continue to reduce gross margins.
- Management expected existing liquidity to cover working-capital and capital-expenditure needs for at least 12 months, while noting that additional capital might be needed for commercialization, operations, or R&D.
- Management said a sustained level of U.S. profitability might be established by year-end 2019; if so, it may reverse a significant portion of the valuation allowance on U.S. deferred tax assets, generating an income-tax benefit. This outcome was not assured.
- Key exposures include China market and customer concentration, U.S.–China tariffs and trade restrictions, foreign exchange, competitive price pressure, customer capital spending, fixed manufacturing costs, and inventory obsolescence. One customer represented 22% of gross receivables at June 30; the top ten customers generated approximately 53% of six-month revenue.
- Other notable items: Q2 other expense included $0.9m, primarily from foreign-exchange losses. The company reported no material legal proceedings, but its risk disclosures describe a U.S. Attorney’s Office inquiry related to historical SBIR eligibility; the filing says the inquiry may be ongoing and its outcome is uncertain.
- ASC 606 was adopted January 1, 2019; management said its impact was immaterial. The company expects to adopt lease accounting guidance on January 1, 2020, with the balance-sheet impact not yet quantified.
Important facts for investors to verify
- Whether China pricing pressure, tariffs, and currency movements persist and how they affect revenue and gross margin.
- Whether inventory growth supports future demand or creates excess and obsolescence risk; inventory reached $42.3m from $35.3m at year-end.
- Whether operating cash generation improves as receivables and inventory are managed, given six-month operating cash use and capital spending.
- Whether U.S. profitability becomes sustained and any deferred-tax valuation allowance is reversed.
- Developments in the SBIR-related inquiry, government-contract audits, and customer concentration, including the significant receivables exposure.