Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2015, ended November 30, 2014; results are presented for the three and nine months ended that date. Sono-Tek develops, manufactures, sells, installs, and services ultrasonic spray-coating systems, with a smaller real-estate rental operation. The filing is unaudited.
Financial performance
| Metric | Nine months 2014 | Prior year | Three months 2014 | Prior year |
|---|---|---|---|---|
| Net sales | $7.906 million | $7.562 million | $2.852 million | $2.650 million |
| Gross profit | $3.850 million | $3.599 million | $1.400 million | $1.215 million |
| Operating income | $575,000 | $619,000 | $288,000 | $274,000 |
| Net income | $384,000 | $350,000 | $202,000 | $171,000 |
| Operating cash flow | $600,000 | $1.166 million | Not provided | Not provided |
- Nine-month revenue rose 4.6%; third-quarter revenue rose 7.6%. Net income increased about 9.6% and 18.2%, respectively.
- Calculated consolidated gross margins were approximately 48.7% for the nine months (47.6% prior year) and 49.1% for the quarter (45.9% prior year). Nine-month operating income declined despite higher sales as operating expenses increased.
- Basic and diluted EPS were $0.03 for the nine months versus $0.02 a year earlier; quarterly EPS was $0.01 in both periods.
Liquidity, cash flow, and debt
- At November 30, cash and equivalents were $2.451 million and marketable securities were $1.638 million. Current assets were $7.252 million against current liabilities of $2.140 million; reported working capital was approximately $5.113 million and the current ratio was 3.4:1.
- Cash declined $781,000 over the nine months, to $2.451 million. Operating activities provided $600,000, investing activities used $1.237 million (including $1.007 million invested in marketable securities and $230,000 for equipment and other assets), and financing activities used $144,000 for debt repayments.
- Operating cash flow fell $567,000 year over year. Management attributed the decline principally to higher inventory, increased receivables, lower customer deposits, and lower income taxes payable. Net inventory increased $478,000 from February 28, 2014, to $2.152 million; the inventory reserve rose to $285,000 from $195,000.
- Total long-term debt was $1.527 million, down from $1.671 million at fiscal year-end. The $750,000 revolving credit facility had no balance outstanding; it is payable on demand and requires an annual 30-day paydown.
Changes, outlook, and risks
- Ultrasonic-spraying sales increased 4% for the nine months and 7% for the quarter. Management cited higher sales of stent coaters, XYZ platforms, and fluxing units, partly offset by declines in several other product categories. Product demand and certain system sales vary by quarter and depend on market conditions.
- Research and product development expense increased, principally reflecting salaries, depreciation, and materials for development of food- and electronics-sector systems. Marketing and selling costs also rose, including international commissions, salaries, and travel.
- Real-estate operations recorded a nine-month net loss of $99,000, improved from a $141,000 loss, helped in part by lower interest expense following a December 2013 refinancing.
- No formal revenue or earnings guidance is provided. Management said increased work-in-process inventory reflected shipments planned for the fourth fiscal quarter and raw-material and finished-goods purchases reflected forecast sales for the rest of the fiscal year.
- Management describes growth opportunities in diversified industries and international markets, while noting risks including economic, competitive, regulatory, and technological changes; product-development and market-acceptance uncertainty; financing adequacy; and the ability to grow sales and sustain profitability. The company was reviewing the potential effect of the forthcoming revenue-recognition standard.
- The filing reports effective disclosure controls, no material change in internal control over financial reporting during the quarter, and no legal proceedings. The filing text does not describe a material contingency.
Investor verification points
- Whether planned fourth-quarter shipments convert the elevated work-in-process inventory into sales and cash, and whether inventory reserves remain adequate.
- Whether revenue growth and gross-margin improvement persist as product mix and quarterly demand fluctuate.
- Why operating cash generation weakened relative to earnings, including trends in receivables, customer deposits, and working capital.
- Debt repayment terms, the on-demand revolving line, and liquidity needs if sales or collections weaken.
- Any eventual effect of the new revenue-recognition standard; management had not yet determined the impact.