Luna Innovations, Inc. :LUNA-US: Earnings Analysis: Q4, 2016 By the Numbers : March 22, 2017

Luna Innovations, Inc. reports financial results for the quarter ended December 31, 2016.

We analyze the earnings along side the following peers of Luna Innovations, Inc. – Coherent, Inc., Agilent Technologies, Inc., Viavi Solutions Inc., Accelerate Diagnostics, Inc., Danaher Corporation, Intuitive Surgical, Inc., Analog Devices, Inc., Honeywell International Inc. and Royal Philips NV Sponsored ADR (COHR-US, A-US, VIAV-US, AXDX-US, DHR-US, ISRG-US, ADI-US, HON-US and PHG-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 15.96 million, Net Earnings of USD 0.31 million.
  • Gross margins widened from 32.59% to 38.29% compared to the same period last year, operating (EBITDA) margins now 8.65% from 10.96%.
  • Year-on-year change in operating cash flow of -68.48% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-12-31 2016-09-30 2016-06-30 2016-03-31 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 15.96 14.62 14.65 13.99 15.45
Revenue Growth (%YOY) 3.29 10.71 46.09 161.97 149.63
Earnings (mil) 0.31 -0.45 -0.77 -1.46 -0.41
Earnings Growth (%YOY) 173.9 44.48 64.45 44.44 64.52
Net Margin (%) 1.92 -3.04 -5.26 -10.44 -2.68
EPS 0.01 -0.02 -0.03 -0.05 -0.02
Return on Equity (%) 3.16 -5.45 -9 -16.31 -5.32
Return on Assets (%) 2.26 -3.3 -5.59 -10.23 -3.15

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Market Share Versus Profits

Revenues History
Earnings History

LUNA-US‘s change in revenue this period compared to the same period last year of 3.29% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that LUNA-US is holding onto its market share. Also, for comparison purposes, revenues changed by 9.16% and earnings by 168.79% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 32.59% to 38.29%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

LUNA-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 118.63, compared to last year’s level of 113.36 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

LUNA-US‘s change in operating cash flow of -68.48% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s operating (EBIT) margins contracted from 5.08% to 2.67%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from -5.85% to 2.17%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Luna Innovations, Inc. develops and manufactures fiber optic test and measurement, sensing and instrumentation products for the healthcare, telecommunications, energy and defense markets. It operates through two segments: Products and Licensing, and Technology Development. The Products and Licensing segment conducts applied research in the fiber optic sensing area for both corporate and government customers. The Technology Development segment performs applied research for government funded projects and includes secure computing and communications group. The company was founded by Kent A. Murphy in July 1990 and is headquartered in Roanoke, VA.

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