This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following words: "ability," "anticipate," "attempt," "believe," "can be," "continue," "could," "depend," "enable," "estimate," "expect," "extend," "grow," "if," "intend," "likely," "may," "objective," "ongoing," "plan," "possible," "potential," "predict," "project," "propose," "rely," "should," "target," "will," "would" or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. 17
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Forward-looking statements include, but are not limited to, statements about: the size of our market opportunity; our ability to compete effectively against other providers of similar products and services, as well as competing technologies; applications and processes that will use lasers, including the suitability of our products; our ability to develop new technology, designs and applications for our lasers; the reduction in cost per brilliant watt and increase in power of semiconductor lasers going forward; the implementation of our business model and strategic plans, including estimates regarding future sales, revenues, expenses, acquisitions, investments, capital requirements and stock performance; our future financial performance; fluctuations in our quarterly results of operations and other operating measures, particularly as a result of seasonality; the regulatory regime for our products and services, domestically and internationally; the adoption of our products or lasers generally and the growth of the laser market broadly and within specific industries; our utilization of vertical integration; our ability to adequately protect our intellectual property rights; our ability to maintain and grow our relationships with our foreign customers; the impact on our sales and operations of public health crises inChina ,the United States or internationally, including the current COVID-19 pandemic and our response to it; the effect on our business of litigation to which we are or may become a party; our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; future macroeconomic conditions and the effect of trade restrictions and new or increased tariffs on our products; the sufficiency of our existing liquidity sources to meet our cash needs; and our ability to sustain and manage growth in our business. You should refer to the "Risk Factors" section of this report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, which although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
nLIGHT, Inc. , headquartered inVancouver, Washington , is a leading provider of highpower semiconductor and fiber lasers. Revolutionizing laser technology, we are making the impossible possible. We design, develop and manufacture the critical elements of our lasers, and we believe our vertically integrated business model enables us to rapidly introduce innovative products, control our costs and protect our intellectual property. InNovember 2019 , we acquiredNutronics, Inc. (Nutronics), based inLongmont, Colorado , a leading developer of coherently combined lasers and beam control systems (BCS) for high-energy laser (HEL) systems serving the defense market. Our consolidated financial results for the three and six months endedJune 30, 2020 include the results of Nutronics, and therefore may not be directly comparable to the corresponding period of 2019, which does not include the results of Nutronics. Since the acquisition of Nutronics, we operate in two reportable segments consisting of the Laser Products segment andAdvanced Development segment. Sales of our semiconductor lasers, fiber lasers and optical fibers are included in the Laser Products segment, while revenue earned from research and development contracts are included in theAdvanced Development segment. Revenues increased to$95.4 million in the six months endedJune 30, 2020 compared to$89.9 million in the same period of 2019 as a result of higher revenue from the Aerospace and Defense market, including the acquisition of Nutronics, offset partially by lower revenues from the Microfabrication market. We generated a net loss of$14.3 million for the six months endedJune 30, 2020 as compared to a net loss of$1.4 million for the same period of 2019. The higher net loss in 2020 was driven by a decrease in gross margins on product sales, increased stock-based compensation, and amortization of intangible assets from the Nutronics acquisition.
Factors Affecting Our Performance
Impact of the COVID-19 Pandemic on Our Business
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughoutthe United States and the world, including in geographies in which we and our customers operate. Our first priority is the health and safety of our employees and our communities. As of the date of this report, all ourU.S. operating locations have 18
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been deemed essential and all of our global manufacturing facilities are fully operational. OurShanghai manufacturing facility was closed for an additional week following theChinese New Year , due to COVID-19, but has since re-opened. All of our facilities have implemented a variety of policies and procedures, including additional cleaning, social distancing, wearing masks, staggered shifts and prohibiting or significantly restricting on-site visitors, to minimize the risk to our employees. The impact from the rapidly changingU.S. and global market and economic conditions due to the COVID-19 pandemic is uncertain, with disruptions to the business of our customers and suppliers, which may materially adversely impact our business, operations, demand for our products and coincidentally our consolidated results of operations and financial condition in the future. In response to mandates ordered by global government authorities, our non-manufacturing and technical service personnel outside ofChina have been primarily working from home sinceMarch 2020 . While we have not incurred significant disruptions to our manufacturing or to our supply chain thus far from the COVID-19 pandemic, we may experience decreased demand from certain customers. We are unable to accurately predict the impact COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, potential resurgence of outbreaks in locations where outbreaks have previously been contained, actions that may be taken by governmental authorities, the impact to our customers' and suppliers' businesses and other factors identified in the "Risk Factors" section of this report. We are continuing to evaluate closely the nature and extent of the impact to our business, consolidated results of operations, and financial condition. Demand for our Semiconductor and Fiber Laser Solutions In order to continue to grow our revenues, we must continue to achieve design wins for our semiconductor and fiber lasers. We consider a design win to occur when a customer notifies us that it has selected one of our products to be incorporated into a product or system under development by such customer. For the foreseeable future, our operations will continue to depend upon capital expenditures by customers in the Industrial and Microfabrication markets, which, in turn, depend upon the demand for these customers' products or services. In addition, in the Aerospace and Defense market, our business depends in large part on continued investment in laser technology by theU.S. government and its allies, and our ability to continue to successfully develop leading technology in this area. Erosion of average selling prices, or ASPs, of established products is typical in our industry, and the ASPs of our products generally decrease as our products mature. We may also negotiate discounted selling prices from time to time with certain customers that purchase higher volumes, or to penetrate new markets or applications. Historically, we have been able to offset decreasing ASPs by introducing new and higher value products, increasing the sales of our existing products, expanding into new applications and reducing our manufacturing costs. However, recent ASP pressure has been more pronounced, and as a result, we have only been able to partially offset the impact of the lower selling prices. Certain of our competitors have continued to reduce the price of their fiber lasers sold in the China Industrial market. Although we anticipate further increases in product volumes and the continued introduction of new and higher value products, we expect further ASP reduction that may cause our revenues to decline or grow at a slower rate. Technology and New Product Development We invest heavily in the development of our semiconductor and fiber laser technologies to provide solutions to our current and future customers. We anticipate that we will continue to invest in research and development to achieve our technology and product roadmap. Our product development is targeted to specific sectors of the market where we believe the power and performance requirements of our products can provide the most benefit. We believe our close coordination with our customers regarding their future product requirements enhances the efficiency of our research and development expenditures. Manufacturing Costs and Gross Margins Our gross profit, in absolute dollars and as a percentage of revenues, is impacted by our product sales mix, sales volumes, changes in ASPs, production volumes, the corresponding absorption of manufacturing overhead expenses, production costs and manufacturing yields. Our product sales mix can affect gross profits due to variations in profitability related to product- configurations and cost profiles, customer volume pricing, availability of competitive products in various markets, and new product introductions, among other factors. Capacity utilization affects our gross margin because we have a high fixed cost base due to our vertically integrated business model. Increases in sales and production volumes drive favorable absorption of fixed costs, improved manufacturing efficiencies and lower production costs. Gross margins may fluctuate from period to period depending on product mix and the level of capacity utilization. Given the fixed nature of our facilities and equipment costs, we expect gross margin to increase as revenues and volumes increase. Historically, gross margins have fluctuated from period to period depending on product mix and the level of capacity utilization. However, in recent periods, gross margins have been negatively affected by increased tariff costs as a result of the trade war 19
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between
Our quarterly revenues can fluctuate with general economic trends, holidays in foreign countries such asChinese New Year in the first quarter of our fiscal year, the timing of capital expenditures by our customers, and general economic trends. In addition, as is typical in our industry, we tend to recognize a larger percentage of our quarterly revenues in the last month of the quarter, which may impact our working capital trends.
Results of Operations
The following table sets forth our operating results as a percentage of revenues for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue: Products 86.5 % 100.0 % 86.0 % 100.0 % Development 13.5 % - 14.0 - Total revenue 100.0 % 100.0 100.0 100.0 Cost of revenue: Products 62.5 67.0 63.4 67.3 Development 12.5 - 12.9 - Total cost of revenue 75.0 67.0 76.3 67.3 Gross profit 25.0 33.0 23.7 32.7 Operating expenses: Research and development 18.1 13.5 18.9 14.4 Sales, general, and administrative 18.5 17.8 18.2 18.6 Total operating expenses 36.6 31.3 37.1 33.0 Loss from operations (11.6 ) 1.7 (13.4 ) (0.3 ) Other income (expense): Interest income (expense), net (0.1 ) 1.6 0.2 1.7 Other income (expense), net (0.6 ) (1.9 ) (0.4 ) (0.1 ) Income (loss) before income taxes (12.3 ) 1.4 (13.6 ) 1.3 Income tax expense 0.8 1.7 1.4 2.8 Net loss (13.1 )% (0.3 )% (15.0 )% (1.5 )% Revenues by Segment Our revenues by segment were as follows for the periods presented (dollars in thousands): Three Months Ended June 30, Change 2020 % of Revenue 2019 % of Revenue $ % Laser Products$ 45,104 86.5 %$ 48,048 100.0 %$ (2,944 ) (6.1 )% Advanced Development 7,034 13.5 - - 7,034 NM$ 52,138 100.0 %$ 48,048 100.0 %$ 4,090 8.5 % 20
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Table of Contents Six Months Ended June 30, Change 2020 % of Revenue 2019 % of Revenue $ % Laser Products$ 82,034 86.0 %$ 89,909 100.0 % (7,875 ) (8.8 )% Advanced Development 13,319 14.0 - - 13,319 NM$ 95,353 100.0 %$ 89,909 100.0 % 5,444 6.1 % The decrease in Laser Products revenue for the three and six months endedJune 30, 2020 , compared to the same periods of 2019, was driven by decreased revenue in the Microfabrication market, offset partially by increased revenue in the Aerospace and Defense market. Prior to the acquisition of Nutronics inNovember 2019 , we operated only in the Laser Products segment. The Laser Products segment for the three and six months endedJune 30, 2019 includes approximately$1.2 million and$2.4 million , respectively, of revenue earned from non-Nutronics research and development contracts.
Revenues by End Market
Our revenues by end market were as follows for the periods presented (dollars in thousands): Three Months Ended June 30, Change 2020 % of Revenue 2019 % of Revenue $ % Industrial$ 22,630 43.4 %$ 20,920 43.5 %$ 1,710 8.2 % Microfabrication 14,300 27.4$ 18,094 37.7 (3,794 ) (21.0 ) Aerospace and Defense 15,208 29.2$ 9,034 18.8 6,174 0.8259452412 68.3$ 52,138 100.0 %$ 48,048 100.0 %$ 4,090 0.03234514226 8.5 % Six Months Ended June 30, Change 2020 % of Revenue 2019 % of Revenue $ % Industrial$ 38,620 40.5 %$ 39,044 43.4 %$ (424 ) (1.1 )% Microfabrication 24,719 25.9 32,627 36.3 (7,908 ) (24.2 ) Aerospace and Defense 32,014 33.6 18,238 20.3 13,776 75.5$ 95,353 100.0 %$ 89,909 100.0 %$ 5,444 6.1 % The increase in revenue from the Industrial market for the three months endedJune 30, 2020 , compared to the same period of 2019, was driven by an increase in unit sales offset partially by a decrease in average selling price (ASP), while the decrease in revenue from the Industrial market for the six months endedJune 30, 2020 , compared to the same period of 2019, was driven by a decrease in ASP offset partially by increased unit sales. The decrease in revenue from the Microfabrication market for the three and six months endedJune 30, 2020 , compared to the same periods of 2019, was driven primarily by lower unit sales to customers for consumer electronics and semiconductors. The increase in revenue from the Aerospace and Defense end market for the three and six months endedJune 30, 2020 , compared to the same periods of 2019, was primarily attributable to the acquisition of Nutronics, and an increase in unit sales to new and existing customers for defense applications.
Revenues by
Our revenues by geographic region were as follows for the periods presented (dollars in thousands):
Three Months EndedJune 30 ,
Change
2020 % of Revenue 2019 % of Revenue $ % North America$ 20,494 39.3 %$ 18,142 37.8 %$ 2,352 13.0 % China 21,495 41.2 18,201 37.9 3,294 18.1 Rest of World 10,149 19.5 11,705 24.3 (1,556 ) (13.3 )$ 52,138 100.0 % 48,048 100.0 %$ 4,090 8.5 % 21
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Table of Contents Six Months Ended June 30, Change 2020 % of Revenue 2019 % of Revenue $ % North America$ 41,540 43.6 %$ 33,912 37.7 %$ 7,628 22.5 % China 33,537 35.2 31,854 35.4 1,683 5.3 Rest of World 20,276 21.2 24,143 26.9 (3,867 ) (16.0 )$ 95,353 100.0 %$ 89,909 100.0 %$ 5,444 6.1 % Geographic revenue information is based on the location to which we ship our products. The increase inNorth America revenue for the three and six months endedJune 30, 2020 compared to the same periods of 2019 was primarily driven by the acquisition of Nutronics and increased sales in the Aerospace and Defense market, partially offset by decreased sales in the Microfabrication market. The increase inChina revenue for the three and six months endedJune 30, 2020 compared to the same periods of 2019 was primarily due to increased sales in the Industrial market. The decrease in Rest of World revenue for the three and six months endedJune 30, 2020 compared to the same periods of 2019 was primarily driven by decreased sales in the Microfabrication and Industrial markets.
Cost of Revenues and Gross Margin
Cost of revenues consists primarily of manufacturing materials, payroll, shipping and handling costs, tariffs and manufacturing-related overhead. We order materials and supplies based on backlog and forecasted customer orders. We expense all warranty costs and inventory provisions as cost of revenues.
Our gross profit and gross margin were as follows for the periods presented (dollars in thousands):
Three Months Ended June 30, Change Laser Products Advanced Development Corporate and Other 2020 2019 $ % Gross profit$ 12,846 $ 549 $ (339 )$ 13,056 $ 15,871 $ (2,815 ) (17.7 )% Gross margin 28.5 % 7.8 % NM 25.0 % 33.0 % - (8.0 )% Six Months Ended June 30, Change Advanced Laser Products Development Corporate and Other 2020 2019 $ % Gross profit$ 22,221 $ 1,020 $ (684 )$ 22,557 $ 29,385 $ (6,828 ) (23.2 )% Gross margin 27.1 % 7.7 % NM 23.7 % 32.7 % - (9.0 )% The decrease in Laser Products gross margin for the three and six months endedJune 30, 2020 , compared to the same periods of 2019, was driven primarily by price reductions in the industrial market and increased reserve charges, offset partially by lower product costs. Since we operated only in the Laser Products segment prior to the acquisition of Nutronics in 2019, no segment breakout is presented for the comparative periods in 2019.
Operating Expenses
Our operating expenses were as follows for the periods presented (dollars in thousands): Research and Development Three Months Ended June 30, Change 2020 2019 $ % Research and development $ 9,472$ 6,494 $ 2,978 45.9 % Six Months Ended June 30, Change 2020 2019 $ % Research and development$ 18,010 $ 12,916 $ 5,094 39.4 % 22
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The increase in research and development expense for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, was primarily due to increases in stock-based compensation of$1.6 million and$2.8 million , respectively; increases in purchased intangible amortization from the Nutronics acquisition of$0.7 million and$1.3 million , respectively; and increased project-related costs to support our development efforts.
Sales, General and Administrative
Three Months EndedJune 30 ,
Change
2020 2019 $ %
Sales, general, and administrative $ 9,633
1,061 12.4 % Six Months Ended June 30, Change 2020 2019 $ % Sales, general, and administrative$ 17,333 $ 16,716 $
617 3.7 %
The increase in sales, general and administrative expense for the three and six months endedJune 30, 2020 , compared to the same periods in 2019 was primarily due to increases in stock-based compensation of$2.0 million and$2.5 million , respectively, offset partially by decreases in marketing costs, travel and entertainment, and professional service fees.
Interest Income (Expense), net
Three Months EndedJune 30 ,
Change
2020 2019 $
%
Interest income (expense), net $ (65 ) $ 740$ (805 ) (108.8)% Six Months Ended June 30, Change 2020 2019 $ % Interest income (expense), net$ 218 $ 1,490 $
(1,272 ) (85.4)%
The decrease in interest income (expense), net, for the three and six months endedJune 30, 2020 , compared to the same periods in 2019 was primarily attributable to lower balances in our money market funds coupled with a decrease in the market rates on those funds. In addition, during the three months endedJune 30, 2020 , we incurred approximately$0.1 million interest on the$15.0 million outstanding balance on our credit revolver, as compared to zero in the comparable period of 2019.
Other Income (Expense), net
Three Months EndedJune 30 ,
Change
2020 2019 $
%
Other income (expense), net
67.1% Six Months Ended June 30, Change 2020 2019 $ %
Other income (expense), net
The changes in other income (expense), net for the three and six months endedJune 30, 2020 , compared to the same periods in 2019 was primarily attributable to changes in net unrealized and realized foreign exchange transactions resulting from currency rate fluctuations. Income Tax Expense Three Months Ended June 30, Change 2020 2019 $ % Income tax expense $ 418$ 793 $ (375 ) (47.3 )% 23
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Table of Contents Six Months Ended June 30, Change 2020 2019 $ % Income tax expense$ 1,323 $ 2,546 $ (1,223 ) (48.0 )% We record income tax expense for taxes in our foreign jurisdictions includingFinland andKorea . We also record tax expense for uncertain tax positions taken and associated penalties and taxes. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Due to the uncertainty with respect to their ultimate realizability in theU.S. andChina , we continue to maintain a full valuation allowance in both jurisdictions as ofJune 30, 2020 . The decrease in income tax expense for the three and six months endedJune 30, 2020 , compared to the same periods in 2019 was driven by a decrease in income from ourFinland operations and a valuation allowance against ourChina deferred tax assets recorded during the fourth quarter of 2019. Our tax expense is dependent on the geographic mix of earnings and primarily related to our foreign operations.
Liquidity and Capital Resources
We had cash and cash equivalents of
For the six months endedJune 30, 2020 , our principal uses of liquidity were to acquire a commercial property inCamas, Washington and to fund our working capital needs. Our principal sources of liquidity for the six months endedJune 30, 2020 included$15.0 million in proceeds from our revolving line of credit and also optimizing vendor payments for inventory and other purchases. We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. Our future capital requirements may vary materially from period to period and will depend on many factors, including the timing and extent of spending on research and development efforts, the expansion of sales and marketing activities, the continuing market acceptance of our products and ongoing investments to support the growth of our business. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies and intellectual property rights. From time to time, we may explore additional financing sources which could include equity, equitylinked and debt financing arrangements. The following table summarizes our cash flows for the periods presented (in thousands): Six Months EndedJune 30, 2020 2019
Net cash provided by (used in) operating activities
(1,183 ) Net cash used in investing activities (17,668 ) (6,916 ) Net cash provided by financing activities 14,340
1,147
Effect of exchange rate changes on cash (27 )
135
Net increase (decrease) in cash$ 3,647 $ (6,817 ) 24
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Net Cash Provided by (Used in) Operating Activities
During the six months endedJune 30, 2020 , net cash provided by operating activities was$7.0 million , which was primarily driven by$14.3 million of net loss reported for the period, and noncash adjustments of$17.7 million related to depreciation and amortization, stock-based compensation, and other items. These items were partially offset by increases of$4.5 million in inventory and$7.4 million in accounts payable. The increase in inventory supported new product introductions, decreased customer lead times and increased safety stock. The increase in accounts payable was primarily driven by timing of vendor payments. During the six months endedJune 30, 2019 , net cash used in operating activities was$1.2 million , which was driven by$1.4 million of net loss reported in the period, and non-cash adjustments of$8.8 million related to depreciation and amortization, stock-based compensation, and other items. These items were offset by increases of$4.3 million in accounts receivable,$7.0 million in inventory, and$1.1 million in accounts payable. The reasons for the increases were as follows: in accounts receivable, due to the timing of sales and customer collections; in inventory, primarily to support new product introductions; and in accounts payable, due to timing of vendor payments.
During the six months ended
During the six months endedJune 30, 2019 , net cash used in investing activities was$6.9 million , which was primarily due to capital expenditures related to investments in manufacturing equipment and facilities.
Net Cash Provided by Financing Activities
During the six months endedJune 30, 2020 , net cash provided by financing activities was$14.3 million , which was primarily driven by proceeds from our revolving line of credit of$15.0 million to acquire commercial property, and$1.5 million of proceeds from stock options exercises and employee stock program purchases, offset by$2.2 million of withholding tax payments related to vesting of restricted stock awards.
During the six months ended
Credit Facilities We have a$40.0 million revolving line of credit withPacific Western Bank which is secured by our assets and expires inSeptember 2021 . Interest on the line of credit is based primarily on the London Interbank Offered Rate (LIBOR), or an alternative rate such as the Prime rate, plus or minus, respectively, a margin based on certain liquidity levels. The loan agreement contains restrictive and financial covenants and bears an unused credit fee of 0.20% on an annualized basis. As ofJune 30, 2020 ,$15.0 million was outstanding under the line of credit and is classified in our consolidated balance sheet as long-term debt as no payments are due currently. We were in compliance with all covenants under the loan agreement, and$24.5 million was available for borrowing under the line of credit as ofJune 30, 2020 .
Contractual Obligations
For the six months endedJune 30, 2020 , there have been no material changes to our significant contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Off-Balance Sheet Arrangements Since inception, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for another contractually narrow or limited purpose.
Inflation
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We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could materially adversely affect our business, financial condition and results of operations.
Recent Accounting Pronouncements
See Note 1 to Consolidated Financial Statements.
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