Sono-Tek Corporation — Q3 FY2017 Form 10-Q
Business and period: Sono-Tek develops, manufactures, sells, installs, and services ultrasonic spray-coating equipment used across industries including electronics, advanced energy, medical devices, glass, textiles, and food. The quarter ended November 30, 2016; comparisons are with the corresponding 2015 periods. Year-to-date figures cover the nine months ended November 30.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $2.599 million | $3.032 million | $7.150 million | $8.890 million |
| Gross profit | $1.239 million | $1.466 million | $3.288 million | $4.329 million |
| Operating income (loss) | $54,206 | $279,565 | ($175,737) | $741,041 |
| Net income | $62,342 | $243,565 | $28,460 | $541,176 |
| Basic and diluted EPS | $0.00 | $0.02 | $0.00 | $0.04 |
- Sales declined 14% in the quarter and 20% year to date. Consolidated gross margin was approximately 47.7% for the quarter and 46.0% year to date, versus approximately 48.4% and 48.7%, respectively, in the prior-year periods.
- Year-to-date operating results weakened materially as lower sales reduced gross profit; operating expenses fell only modestly. Net income included $208,015 of other income, primarily a $200,000 life-insurance payout related to a former employee’s death.
- Operating cash flow was $976,764 for the nine months, compared with $528,442 a year earlier. Cash and cash equivalents increased $379,358 to $2.768 million. Marketable securities were $2.068 million, bringing cash and securities combined to $4.836 million.
- At November 30, working capital was approximately $6.067 million and the current ratio was 4.4:1. Total debt was $1.213 million, including $137,642 current; the $750,000 revolving credit line was undrawn.
Changes, outlook, and risks
- The principal sales decline was in WideTrack glass-coating units: nine-month sales fell $1.417 million. XYZ platform sales increased $716,000 year to date, partly offsetting declines in other products. Management notes that demand and sales of several product lines can fluctuate from quarter to quarter.
- Management cited market conditions, competition, economic and regulatory developments, product-development and market-acceptance timing, financing adequacy, capacity additions, patent enforcement, and the ability to increase sales and sustain profitability as forward-looking risks. The filing provides no specific revenue or earnings guidance.
- The real-estate segment reported a nine-month net loss of $85,000, improving from a $94,000 loss. The company reported no legal proceedings and stated disclosure controls were effective; no material changes in internal controls were reported.
Important facts for investors to verify
- Whether the decline in WideTrack and other product sales persists, and whether growth in XYZ platforms and other products can offset it.
- How much of reported year-to-date net income depended on the one-time insurance proceeds.
- The sustainability and composition of operating cash flow, including the contribution from increased customer deposits and reduced inventory.
- Debt repayment terms, liquidity needs, and the continued availability of the undrawn revolving credit facility.