nLIGHT, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. nLIGHT designs and manufactures high-power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense markets.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $41.9 million | $42.5 million |
| Gross profit / margin | $13.5 million / 32.3% | $14.7 million / 34.7% |
| Operating income (loss) | $(1.1) million | $4.2 million |
| Net income (loss) | $(1.2) million | $2.9 million |
| Adjusted EBITDA (non-GAAP) | $3.1 million | $6.3 million |
| Operating cash flow | $(4.9) million | $(4.2) million |
| Investing cash flow | $(2.7) million | $(3.4) million |
Revenue declined 1.4% year over year. Industrial revenue was $18.1 million, microfabrication $14.5 million, and aerospace and defense $9.2 million. By customer location, North America generated $15.8 million, China $13.7 million, and the rest of the world $12.4 million. The largest end-market changes were lower industrial revenue, particularly in China, and lower microfabrication sales; aerospace and defense revenue rose on existing government contracts.
Gross margin fell 2.4 percentage points, reflecting price declines in some industrial products and tariff costs, partly offset by product cost improvements and better mix. Operating expenses increased to $14.6 million: R&D rose 49.9% to $6.4 million, and sales, general and administrative expense rose 30.6% to $8.1 million. Increases included higher headcount, product-development spending, and stock-based compensation. Net interest income was $0.8 million, compared with net interest expense of $0.2 million, primarily due to interest earned on offering proceeds and reduced debt-related interest expense. Other income was $0.8 million, mainly from foreign-exchange gains.
Financial position and liquidity
Cash and cash equivalents were $142.4 million at March 31, down from $149.5 million at year-end. Current assets were $219.2 million and current liabilities $24.1 million. Total liabilities were $32.9 million; total debt was $0.1 million, with no outstanding term-loan or revolving-loan principal. The company reported compliance with its loan covenants. Inventory increased to $40.8 million from $35.3 million, and accounts receivable increased to $30.2 million from $26.5 million.
Cash decreased by $7.1 million during the quarter. Operating cash use included working-capital investment, notably $6.1 million of inventory and $3.6 million of receivables. Capital expenditures and purchases of intangibles used $2.7 million. Management stated that existing liquidity should be sufficient for working capital and capital expenditures for at least the next 12 months, while noting that additional capital could be needed to support expansion, operations, and R&D.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance was provided. Management expects revenue to grow through higher volumes and new, higher-value products, and anticipates continued R&D investment. It expects gross margin to benefit from higher revenues and volumes, but cautions that margins may fluctuate with mix and capacity utilization.
- Key exposures include price competition and declining selling prices, tariffs and trade tensions involving China, customer capital-spending cycles, seasonality including Chinese New Year, foreign-exchange movements, and dependence on a limited number of customers. The top ten customers represented about 56% of Q1 revenue; Raytheon represented 11%.
- Two customers represented 20.2% and 11.2% of gross receivables at quarter-end. International sales represented approximately 63% of revenue; China accounted for about 33%.
- The company maintains a full valuation allowance against U.S. deferred tax assets. Management said sustained U.S. profitability could provide evidence to reverse a significant portion by year-end 2019, which would create an income tax benefit; the timing and amount are uncertain. Q1 tax expense was $1.8 million despite a pre-tax profit of $0.5 million.
- ASC 606 was adopted January 1, 2019; the reported adoption impact was immaterial. The company expected to adopt lease accounting standard ASC 842 on January 1, 2020 and anticipated recognition of right-of-use assets and lease liabilities, but could not estimate the amount.
- Management reported no material changes to previously disclosed legal proceedings or contractual obligations and said routine legal matters were not expected to have a material adverse effect. The filing also describes a potentially ongoing U.S. Attorney’s Office inquiry concerning historical SBIR eligibility; the company had not received further inquiries from the Criminal Division since 2015, though former employees were contacted as recently as 2017.
Investor verification points
- Track whether industrial pricing pressure and tariffs continue to weigh on gross margin, and whether volume or cost improvements offset them.
- Assess whether elevated R&D and administrative spending translates into product adoption, revenue growth, and improved operating profitability.
- Monitor inventory, receivables, and operating cash use, including the conversion of working capital into cash.
- Review customer concentration, China exposure, and developments in tariffs, trade restrictions, and foreign-exchange rates.
- Verify any change in the U.S. deferred-tax valuation allowance and the eventual balance-sheet impact of ASC 842 lease adoption.