Business context and reporting period
Sono-Tek Corporation designs and manufactures ultrasonic coating systems for electronics, medical, alternative energy, industrial and other markets. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2021, the third quarter and first nine months of fiscal 2022. Sono-Tek’s fiscal year ends February 28.
Financial performance and position
| Metric | Three months ended Nov. 30, 2021 | Nine months ended Nov. 30, 2021 |
|---|---|---|
| Net sales | $4.419 million; up 15% | $12.134 million; up 13% |
| Gross profit and margin | $2.159 million; 48.9% (50.5% prior year) | $6.057 million; 49.9% (47.6% prior year) |
| Operating income and margin | $491,000; 11.1% (up 10%) | $1.282 million; 10.6% (up 54%) |
| Net income | $376,000, versus $320,000 | $1.987 million, versus $666,000 |
| Basic and diluted EPS | $0.02 | $0.13 |
Nine-month reported net income includes a $1.005 million non-taxable gain from forgiveness of the Paycheck Protection Program (PPP) loan. Excluding that benefit, the filing reports pretax income of approximately $1.295 million, versus $866,000 in the prior-year period. Reported nine-month pretax income, including the forgiveness gain, was $2.301 million.
- Cash flow: Nine-month operating cash flow was $1.812 million, versus $713,000. Investing activities provided $929,000, including $1.214 million from sales of marketable securities, partly offset by $285,000 of equipment purchases. Financing activities provided $9,000.
- Liquidity: At November 30, cash and cash equivalents were $6.834 million and marketable securities were $3.350 million. Working capital was $10.039 million, up from $8.902 million at fiscal year-end. Customer deposits were $1.896 million.
- Debt and credit: No debt was outstanding; the PPP loan was fully forgiven. Of a $1.5 million revolving credit line, $738,000 supported customer letters of credit, leaving $762,000 unused. The line is payable on demand and secured by receivables and inventory.
- Balance sheet: Total assets were $17.870 million and stockholders’ equity was $13.039 million at November 30, 2021.
Material changes versus the prior comparable period
- Quarterly sales growth was led by multi-axis coating systems, up 118%, and medical and alternative energy markets, up 93% and 86%, respectively. Integrated coating systems fell 94%, partly because two large prior-year shipments did not recur.
- For the first nine months, multi-axis systems grew 61%, OEM systems 54%, medical sales 38%, and alternative energy sales 42%. Integrated coating systems declined 73%.
- Gross margin declined year over year in the quarter because of product mix and higher international distributor sales; nine-month margin improved with favorable mix and lower-than-expected warranty and installation costs.
- Nine-month operating expenses rose 12%, including higher marketing and selling costs and general and administrative costs. Management attributed some administrative expense increases to the Nasdaq Capital Market listing approved in August 2021.
- Foreign sales represented 78% of quarterly revenue and 69% of nine-month revenue, compared with 70% and 62%, respectively, in the prior-year periods. Asia-Pacific was a principal growth contributor.
Outlook, commentary, and risks
- Backlog reached a record $6.505 million at November 30, up 3% from August 31 and 69% from February 28, 2021.
- Management expected strong fourth-quarter fiscal 2022 multi-axis sales, including a planned shipment of a six-axis robot machine valued at over $1.5 million. It also expected integrated coating system weakness to continue, with multi-axis sales anticipated to more than offset the decline. These are expectations, not a quantified full-year revenue forecast in the supplied filing text.
- Management cautioned that shipment and order patterns can vary substantially from quarter to quarter. Forward-looking risks include COVID-19 impacts, supply-chain delays and costs, customer cancellations, travel restrictions, tariffs, customer demand, execution of large orders, and successful development and market acceptance of products.
- Customer concentration was notable: three customers represented 27% of nine-month sales, six represented 48% of quarterly sales, and four customers held 60% of receivables at November 30. The company also relies significantly on international sales.
- The filing reported no legal proceedings. Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the record backlog converts to revenue on schedule, particularly the planned fourth-quarter shipment exceeding $1.5 million.
- Whether growth in multi-axis, medical, alternative energy and OEM sales can offset continued weakness in integrated coating systems.
- Whether gross margins recover or remain affected by product mix and international distributor pricing.
- How much operating cash generation depends on customer deposits and other working-capital timing, and whether supply-chain constraints affect delivery costs or timing.
- The concentration and collectability risks associated with key customers, foreign markets, and receivables.
- The treatment of the $1.005 million PPP forgiveness gain when assessing recurring earnings; reported nine-month net income includes this unusual item.