Sono-Tek Corporation — Q1 FY2021 Form 10-Q
Reporting period: Three months ended May 31, 2020; comparative period ended May 31, 2019. Sono-Tek designs and manufactures ultrasonic coating systems for electronics, medical, alternative energy, industrial and other markets.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $3.429 million | $2.822 million | +22% |
| Gross profit / margin | $1.561 million / 45.5% | $1.305 million / 46.2% | Profit +20%; margin down 0.7 percentage point |
| Operating income | $184,190 | $4,537 | Up $179,653 |
| Net income | $167,928 | $25,213 | Up $142,715 |
| Diluted EPS | $0.01 | $0.00 | — |
| Operating cash flow | $(395,749) | $361,686 | Declined |
Gross margin eased primarily because of product mix. Operating expenses rose 6% to $1.377 million, led by higher research and development salaries and selling costs; lower travel and trade-show spending partly offset increases. Sales growth was driven by integrated coating systems and demand in Electronics/Microelectronics and Medical. Electronics/Microelectronics sales increased 46% to $2.240 million; Medical sales rose 27% to $692,000. APAC sales increased 297% to $1.923 million, while U.S./Canada sales fell 38% to $756,000. One electronics customer took delivery of a system valued at more than $700,000.
Liquidity, cash flow and debt
At May 31, 2020, cash and cash equivalents were $4.382 million and marketable securities were $3.908 million, a combined $8.290 million. Working capital was $7.880 million, versus $7.173 million at February 29, 2020. Cash increased $722,396 during the quarter, but operating activities used $395,749, mainly reflecting higher receivables and inventory and lower customer deposits. Investing activities provided $158,384, including $310,786 from net sales of marketable securities; equipment purchases were $152,402. Financing activities provided $959,761, including proceeds from the PPP loan.
Total debt was $1.667 million, up from $707,716 at February 29, 2020, including a $1.002 million unsecured PPP loan at 1% interest. The existing secured bank note had a 4.15% rate. There were no outstanding revolving-line borrowings; $1.128 million remained unused after $372,000 of capacity was used to support customer letters of credit. Current liabilities were $4.411 million and current assets were $12.291 million.
Changes, outlook and risks
- Backlog was $3.202 million at May 31, 2020 and management described it as strong. The filing gives no formal revenue or earnings guidance; management cautions that order flow and shipments can vary significantly between quarters.
- Management said Q1 remained profitable during COVID-19, but much of the growth came from orders secured before the pandemic reached the Americas. APAC shipments benefited as manufacturing operations in China resumed. The company shifted customer lab demonstrations to virtual visits and implemented safety protocols, flexible staffing and spending reductions.
- Management expects COVID-19 may adversely affect near-term demand, customer and supplier operations, supply-chain availability and costs, facility operations, cash flow and liquidity. The duration and magnitude of the effects are uncertain; prolonged disruption could materially harm results and financial condition. Remote work also creates potential operational and cybersecurity risks.
- The company intends to use PPP proceeds for qualifying expenses and apply for forgiveness; it had incurred approximately $795,000 in qualifying expenses as of the report date. Forgiveness is not assured. The loan’s scheduled monthly payments begin after the initial deferral period.
- Three customers accounted for 46% of quarterly sales and three customers represented 45% of accounts receivable at May 31. Deposits from customers were $1.326 million. Cash deposits may be supported by letters of credit; an additional $323,000 of standby letters of credit was issued on June 4, 2020.
- The filing reported no material commitments or contingencies other than disclosed letters of credit, and no legal proceedings. Management stated that disclosure controls were effective and reported no material change in internal controls during the quarter.
Key facts for investors to verify
- Whether the $3.202 million backlog converts to shipments and revenue, and how concentrated orders remain by customer and market.
- Subsequent sales, cancellations, customer collections and supply-chain conditions as COVID-19 effects evolve.
- PPP loan forgiveness status, qualifying use of proceeds and repayment obligations for any unforgiven balance.
- Cash generation and working-capital trends, especially receivables, inventory and customer deposits.
- Whether the lower gross margin persists as product and geographic sales mix changes.