Sono-Tek Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended May 31, 2019. The unaudited filing covers Sono-Tek’s ultrasonic coating systems business, serving electronics, alternative energy, medical, industrial, and other markets.
Financial performance and position
| Metric | Quarter ended May 31, 2019 | Comparable 2018 period |
|---|---|---|
| Net sales | $2.822 million | $2.701 million |
| Gross profit / margin | $1.305 million / 46.2% | $1.271 million / 47.1% |
| Operating income | $4,537 | $32,151 |
| Net income | $25,213 | $21,430 |
| Cash flow from operations | $361,686 provided | $374,493 used |
- Sales increased 4.5%; gross margin declined about 0.9 percentage point, which management attributed primarily to product mix. Operating expenses rose 5% to $1.300 million, reducing operating income despite higher gross profit.
- Net income increased despite lower operating income. The prior-year quarter included a $49,000 unrealized investment loss; the current quarter had no unrealized gain or loss. Income tax expense was $6,303 versus $17,564.
- Cash and cash equivalents were $1.923 million and marketable securities were $3.779 million at May 31, totaling $5.702 million, up $192,000 from February 28. Working capital was $6.378 million, down $46,000.
- Total debt was $830,248, down about $40,000 during the quarter. The $1.5 million revolving line had no outstanding borrowings; $808,000 supported customer letters of credit, leaving $692,000 unused. The line is payable on demand and requires an annual 30-day paydown.
- Investing activities used $1.543 million, including $1.413 million for marketable securities and $129,159 for equipment. Cash declined $1.221 million, largely reflecting the securities purchases.
Material changes and business developments
- Growth was led by multi-axis coating systems, up 24% to $1.073 million, and electronics/microelectronics sales, up 16% to $1.538 million. Alternative energy sales rose 118% to $386,000; emerging R&D and other sales rose 68% to $285,000.
- Medical sales fell 40% to $543,000, primarily due to lower stent-coating sales in China. OEM systems sales fell 29% to $319,000. Asia Pacific sales declined 40%; U.S. and Canada sales increased 23%, and Latin America increased 78%.
- Backlog was $4.024 million at May 31, up 32% from $3.038 million at February 28. Inventory increased to $2.379 million, including about $600,000 tied to contracts in process. Customer deposits were $1.334 million.
- Approximately 56% of sales originated outside the U.S. and Canada, compared with 63% in the prior-year quarter. Management noted that order flow and shipments can vary widely from quarter to quarter.
Outlook, risks, and other items
- Management expected the May 31 backlog to ship during fiscal 2020 and forecast full-year sales growth of 15% to 20%, with higher volume expected to expand margins and strengthen earnings. The outlook partly depends on a $1.650 million order for a newly introduced Robotic Coating Platform.
- Management said it continues investing in research and product development and sales and marketing, and expects growth to produce operating leverage and improved margins. These are forward-looking expectations, not guarantees.
- Risks identified include economic and competitive conditions, political, regulatory and trade developments, new-product development and acceptance, financing adequacy, patent enforcement, backlog completion, and achieving projected sales and continued profitability. Management also cited variable order timing and demand across markets.
- The filing reported no material commitments or contingencies other than customer-related letters of credit, and no legal proceedings. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the $4.024 million backlog ships as expected and supports the 15%–20% fiscal-year sales-growth outlook, including the $1.650 million robotic-platform order.
- Whether product mix and higher operating expenses continue to pressure gross and operating margins, and whether anticipated operating leverage materializes.
- Whether customer deposits, inventory growth, and accounts payable convert into timely shipments and cash collections; also monitor the letters of credit and available revolver capacity.
- Whether market and geographic demand remains diversified, given the quarter’s sharp contrasts among medical, electronics, alternative-energy, and regional sales.