Business context and reporting period
Sono-Tek Corporation designs and manufactures ultrasonic coating systems and related components for electronics, medical, alternative energy, industrial, and research markets. This unaudited Form 10-Q covers the three months ended May 31, 2021 (the first quarter of fiscal 2022), compared with the three months ended May 31, 2020.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $3.644 million | $3.429 million | +6% |
| Gross profit / margin | $1.824 million / 50.0% | $1.561 million / 45.5% | Profit +17%; margin +4.5 points |
| Operating expenses | $1.481 million | $1.377 million | +8% |
| Operating income | $343,000 | $184,000 | +86% |
| Net income | $1.267 million | $168,000 | Includes $1.005 million PPP forgiveness gain |
| Basic and diluted EPS | $0.08 | $0.01 | — |
| Operating cash flow | $722,000 provided | $396,000 used | Improved |
Reported pretax income was $1.352 million, including the non-taxable PPP loan forgiveness gain; pretax income excluding that gain was approximately $346,000. Gross margin benefited primarily from product mix and lower warranty and installation costs, partly offset by higher service labor and travel costs.
Financial position and liquidity
At May 31, 2021, cash and cash equivalents were $5.794 million and marketable securities were $3.490 million, totaling $9.283 million. Working capital was $9.212 million, up $310,000 from February 28, 2021. Total assets were $16.383 million and stockholders’ equity was $12.239 million. Long-term debt was zero after the PPP loan was forgiven in April 2021. The company had a $1.5 million revolving credit facility, with no borrowings outstanding; $618,000 supported customer letters of credit and $882,000 remained unused. Cash and cash equivalents increased $1.710 million during the quarter, including $1.073 million of proceeds from sales of marketable securities.
Material changes and operating trends
- Sales growth was led by multi-axis coating systems, up 128% to $2.079 million, supported by semiconductor and electronic diagnostic coating demand. Integrated coating systems fell 87% after a large prior-year China order did not recur.
- Electronics/microelectronics accounted for 62% of sales; medical sales were $717,000 and alternative energy sales were $432,000.
- Foreign sales were $2.416 million, or 66% of revenue, versus $2.673 million, or 78%, a year earlier. U.S. and Canada sales rose 62%; APAC sales declined 36%.
- Backlog was $4.380 million at May 31, 2021, up $529,000, or 13.7%, from fiscal year-end.
- Operating expenses rose 8%, including higher marketing and selling costs, professional fees, compensation, and health insurance.
Outlook, risks, and unusual items
The filing provides no specific numerical sales or earnings guidance. Management expects COVID-19 to continue adversely affecting the business in fiscal 2022 and said it expects other market categories to contribute a larger share of revenue in the remaining quarters. It cautions that orders and shipments can vary significantly quarter to quarter.
Risks discussed include pandemic-related demand, travel and operating restrictions, supply-chain delays and costs, customer or supplier disruptions, backlog cancellations, timely completion of large orders, and acceptance of new products. Customer concentration is notable: three customers represented 33% of quarterly sales, and four customers represented 54% of accounts receivable at May 31. The company reported no material commitments or contingencies other than disclosed letters of credit, and no legal proceedings.
The $1.005 million PPP loan and accrued interest forgiveness was a material, nonrecurring benefit to reported earnings. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to revenue on schedule and whether order timing causes further quarter-to-quarter volatility.
- How much future earnings and margin performance depends on favorable product mix and lower warranty and installation costs.
- Whether COVID-19, supply constraints, or changes in customer demand affect sales, fulfillment, and costs during fiscal 2022.
- Customer concentration, foreign-market exposure, and the status or expiration of the $618,000 in customer letters of credit.
- Underlying operating profitability separate from the one-time PPP forgiveness gain.