Sono-Tek Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended February 28, 2018, compared with the year ended February 28, 2017. Although the request metadata says “2017 Q4,” this filing reports full fiscal years, not a standalone quarter.
Business context
Sono-Tek designs and manufactures ultrasonic coating systems, nozzles and related equipment for electronics, medical, alternative-energy, industrial and research applications. It reported 64 full-time employees and said no customer represented more than 10% of revenue; its largest customer contributed 8% in FY2018. The company trades on OTCQX under SOTK.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $11.008 million | $9.635 million |
| Gross profit and margin | $5.296 million; 48.1% | $4.363 million; 45.3% |
| Operating income (loss) and margin | $382,000; 3.5% | ($179,000); (1.9%) |
| Net income | $368,000 | $96,000 |
| Basic and diluted EPS | $0.02 | $0.01 |
| Cash provided by operating activities | $1.802 million | $1.029 million |
| Cash and marketable securities at year-end | $6.422 million | $4.899 million |
Sales rose 14%; gross profit increased 21%. Management attributed the stronger gross margin principally to a greater mix of higher-margin Multi-Axis and Integrated Coating Systems and slightly lower fixed overhead. Operating expenses rose to $4.915 million, but declined as a share of sales. Net income improved despite higher operating expenses and a move from a tax benefit to tax expense.
FY2018 cash declined by $541,000: $1.802 million from operations was more than offset by $2.194 million used in investing and $149,000 used in financing. Investing included $2.004 million of net purchases of marketable securities and $189,000 of equipment and facility purchases. Working capital was $6.560 million, and the current ratio was 4.08:1, versus 5.19:1 a year earlier.
Year-end total debt was approximately $1.027 million, comprising a 4.15% mortgage note secured by land and buildings; $156,000 was current. The company had no borrowings on its $750,000 revolving credit line. Management reported debt at 13% of total capitalization. No dividends have been paid, and management said it intends to retain any earnings.
Material changes and operating trends
- Medical sales increased 92% to $3.073 million, and alternative-energy sales increased 139% to $1.808 million. Management linked growth to medical-device coating demand in North America and fuel-cell development programs in China.
- Electronics/microelectronics sales decreased 16% to $4.088 million; emerging R&D and other sales fell 14%, and industrial sales fell 17%.
- Integrated Coating Systems sales rose 78% to $2.330 million and Multi-Axis Systems sales rose 20% to $4.168 million. Fluxing Systems sales declined 6% to $2.175 million.
- Backlog was $1.238 million at year-end, up 64% from $754,000 a year earlier. The filing does not provide a specific sales or earnings forecast.
- Foreign sales were reported as $6.303 million, or 57% of revenue, compared with $6.052 million, or 63%, in FY2017. The filing also describes the FY2018 foreign share as approximately 56% in other passages.
Outlook, risks and unusual items
Management’s stated priorities include global growth, deeper penetration of current markets, new product development, lean manufacturing and improved earnings power. It cited expanded sales and application-engineering resources and a larger process-development laboratory as growth investments. No quantified guidance was provided.
Forward-looking statements identify risks including economic and business conditions; political, regulatory, competitive and technological developments; timely development and market acceptance of new products; financing adequacy; capacity additions; patent enforcement; and the ability to grow sales while remaining profitable. The company did not file a separate Item 1A risk-factor section because it was a smaller reporting company. It reported no material commitments or contingencies, no legal proceedings and no off-balance-sheet arrangements. Bank guarantees of $72,318, collateralized by cash, supported customer deposits and expired at various dates in 2018.
FY2017 other income included a $200,000 life-insurance payout related to a former employee; FY2018 did not include that item. The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% effective March 1, 2018; the company recorded a $92,000 income-tax expense in FY2018 versus a $19,000 benefit in FY2017. Management was evaluating the impact of new revenue-recognition guidance and said it then expected no material effect, subject to completion of its evaluation.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of February 28, 2018; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the $1.238 million backlog converts to revenue on schedule and sustains the FY2018 growth and margin improvement.
- How sustainable demand is in China fuel-cell programs and the medical-device market, given the declines in electronics, industrial and other markets.
- The foreign-sales percentage: the reported $6.303 million implies approximately 57% of $11.008 million revenue, while another passage says 56%.
- The composition, liquidity and valuation of the $4.406 million marketable-securities portfolio, and the company’s exposure under its mortgage and demand credit line.
- The effect of the tax-rate change and deferred-tax valuation allowance, and the eventual impact of adopting the new revenue-recognition standard.
- Ownership concentration: Emancipation Management LLC was reported to beneficially own 44.54% of outstanding shares as of May 10, 2018.