nLIGHT, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. nLIGHT designs and manufactures high-power semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense markets. It operates as one segment.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $42.5 million | $29.9 million |
| Gross profit / margin | $14.7 million / 34.7% | $9.0 million / 30.0% |
| Operating income | $4.2 million | $0.6 million |
| Net income (loss) | $2.9 million | $(1.2) million |
| Adjusted EBITDA (non-GAAP) | $6.3 million | $2.6 million |
| Operating cash flow | $(4.2) million | $(3.7) million |
| Cash and cash equivalents, at period end | $28.6 million | $8.9 million |
Revenue grew 42.1%, with growth across all three end markets. Industrial revenue increased about 70% to $19.1 million, microfabrication rose 18% to $15.7 million, and aerospace and defense grew about 43% to $7.7 million. Management attributed gross-margin improvement to favorable mix, higher-value products, production cost reductions, and better absorption of fixed manufacturing overhead. Higher inventory capitalization also contributed.
Net income attributable to common stockholders was zero, or $0.00 per share, because the quarter’s income was allocated to participating preferred stockholders under the two-class method. The company recorded $1.1 million of income tax expense; its effective rate was approximately 28%.
Cash used in operations reflected working-capital needs, including increases of $5.1 million in inventory and $4.7 million in accounts receivable. Investing activities used $3.4 million, primarily for manufacturing capacity and equipment, versus $0.7 million a year earlier. Cash declined $8.1 million during the quarter.
At March 31, cash was $28.6 million, current assets were $88.3 million, and current liabilities were $32.2 million. Total debt was approximately $17.4 million, including $13.5 million under the term loan and $3.7 million under the revolving facility. The amended bank facility bears interest at prime plus 0.50%, subject to a 5.00% floor; the company reported covenant compliance. Term-loan installments begin July 2018, and revolving-loan principal and interest are due July 2019.
Material changes and subsequent events
- Compared with Q1 2017, revenue increased 42.1%, gross margin expanded 4.7 percentage points, and the company moved from a net loss to net income. Net operating cash use increased by $0.4 million.
- On April 30, 2018, after quarter-end, nLIGHT completed its IPO of 6.9 million shares at $16.00 per share and reported estimated net proceeds of $100.3 million. The proceeds were intended for working capital, capital expenditures, and general corporate purposes.
- Immediately before the IPO, all outstanding preferred shares converted into approximately 24.6 million common shares. A one-for-five reverse stock split took effect April 13, 2018; presented share and per-share figures reflect the split.
- A May 2018 lease extension for a Vancouver facility runs through July 2025, with an additional five-year renewal option and approximately $1.9 million in commitments.
Outlook, risks, and contingencies
No specific numerical quarterly or annual guidance is provided. Management expects revenue to increase with higher volumes and new, higher-value products, and expects continued investment in research and development and manufacturing capacity. It also cautions that margins depend on product mix, utilization, and fixed-cost absorption; quarterly results can be seasonal and volatile.
- Customer and geographic concentration: the top ten customers represented approximately 58% of Q1 revenue; Suzhou Quick Laser Technology represented 13%. China accounted for approximately 36% of revenue, and customers outside North America accounted for approximately 62%.
- Business risks include exposure to industrial and semiconductor-market cycles, customer order volatility and short-term purchasing commitments, price erosion, fixed manufacturing costs, inventory obsolescence, supply constraints, and international, foreign-exchange, and trade-policy risks. Management notes that Chinese New Year can affect first-quarter demand.
- The company has a $196,000 accrued liability for a vendor quality dispute involving alleged future non-cancelable orders; it believes a partial settlement is probable. The filing also describes a prior SBIR eligibility settlement that was paid, while noting uncertainty around a related U.S. Attorney’s Office inquiry.
- The company maintains a full valuation allowance against U.S. deferred tax assets. Its accounting for certain 2017 Tax Act effects was not complete at March 31, with completion expected during 2018.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The company is an emerging growth company; it expects to adopt the new revenue standard in 2019 and the lease standard in 2020, with quantitative impacts not yet estimated.
Important facts for investors to verify
- Whether revenue growth and gross-margin gains persist, particularly as product mix, utilization, inventory levels, and manufacturing capacity change.
- How working-capital investment affects cash generation, and how the IPO proceeds are deployed against stated purposes.
- Customer concentration, China exposure, and the status of significant customer orders and defense contracts.
- Compliance with bank covenants, debt repayment requirements, and the facility’s capital-expenditure limit.
- Resolution of the vendor dispute and any developments in the SBIR-related inquiry.
- The eventual impact of adopting revenue-recognition and lease accounting standards.