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 six months ended August 31, 2021 (fiscal 2022 Q2 and first half), compared with the corresponding 2020 periods.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $4.070 million | $3.481 million | $7.715 million | $6.909 million |
| Gross profit | $2.074 million | $1.621 million | $3.898 million | $3.182 million |
| Gross margin | 51.0% | 46.6% | 50.5% | 46.1% |
| Operating income | $449,000 | $201,000 | $791,000 | $386,000 |
| Net income | $344,000 | $178,000 | $1.611 million | $346,000 |
| Diluted EPS | $0.02 | $0.01 | $0.10 | $0.02 |
First-half net income includes a $1.005 million gain from forgiveness of the Paycheck Protection Program (PPP) loan; excluding that gain, pretax income was approximately $802,000. The loan was fully forgiven in April 2021.
- Cash flow: First-half operating cash flow was $1.197 million, versus cash used of $782,000 a year earlier. Investing activities provided $862,000, including $1.009 million from net marketable-security sales and $147,000 of equipment purchases. Cash and cash equivalents increased $2.059 million to $6.143 million.
- Liquidity and debt: Working capital was $9.630 million, up from $8.902 million at February 28, 2021. Cash plus marketable securities totaled $9.697 million. Long-term debt was zero after PPP forgiveness. The $1.5 million revolving credit line had no borrowings; $618,000 was committed to customer letters of credit, leaving $882,000 unused.
- Balance sheet: Total assets were $17.383 million and stockholders’ equity was $12.602 million at August 31, 2021. Customer deposits increased to $1.917 million from $1.167 million at fiscal year-end.
Material changes and management commentary
- Q2 sales rose 17%; first-half sales rose 12%. Management attributed growth to electronics and semiconductor demand, coating systems for electronic diagnostic devices, and OEM systems. Q2 OEM Systems sales increased 264% year over year; first-half Multi-Axis Systems sales rose 37%.
- Electronics/Microelectronics sales increased 79% in Q2 and 22% in the first half. Alternative Energy sales increased 14% for the first half; Industrial and Emerging R&D/Other sales declined.
- International sales represented 62% of Q2 revenue and 64% of first-half revenue, versus 38% and 58% in the comparable prior-year periods. APAC was a major source of Q2 growth; U.S. and Canada sales declined 28% in Q2.
- Management reported record backlog of $6.332 million at August 31, up 45% from May 31 and 64% from February 28, 2021, while cautioning that order flow and shipments can vary significantly by quarter.
- Operating expenses increased 14% in Q2 and 11% in the first half, including higher selling commissions and general and administrative costs. Q2 G&A included $75,000 in Nasdaq Capital Market listing application and entry fees.
Outlook, risks, and contingencies
The filing provides no specific numeric revenue or earnings guidance. Management describes demand opportunities in electronics, medical, and alternative energy, but notes that results depend on order timing, backlog conversion, and completion of large orders. COVID-19-related restrictions, customer and supplier disruptions, raw-material shortages or delays, and additional costs could adversely affect operations and financial results. Other identified risks include customer demand and cancellations, market recovery, tariffs, product acceptance, competition, and the company’s ability to execute its shift toward complete systems and higher-value subsystems. Two customers accounted for 26% of first-half sales; five accounted for 47% of Q2 sales, and two customers represented 55% of receivables at quarter-end. Letters of credit securing customer deposits totaled $618,000. The filing reports no legal proceedings.
Important facts for investors to verify
- Assess underlying earnings and cash generation separately from the one-time $1.005 million PPP forgiveness gain.
- Track whether the record backlog converts into shipments and revenue, and whether gross margins remain elevated.
- Monitor customer and geographic concentration, including receivables exposure and reliance on international markets.
- Review the effect of COVID-19 and supply-chain conditions on production, delivery schedules, costs, and future orders.
- Confirm the availability and terms of the revolving credit line, including its annual 30-day paydown requirement and letters-of-credit usage.