Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2020 (fiscal 2021); unaudited. Sono-Tek designs and manufactures ultrasonic coating systems and related components for electronics, alternative energy, medical, industrial, and other markets.
Financial performance
| Metric | Three months ended Aug. 31, 2020 | Six months ended Aug. 31, 2020 |
|---|---|---|
| Net sales | $3.481 million, up 4% | $6.909 million, up 12% |
| Gross profit / margin | $1.621 million / 46.6% (46.2% prior year) | $3.182 million / 46.1% (46.2% prior year) |
| Operating income / margin | $201,000 / 5.8% (prior year: $92,000 / 2.8%) | $386,000 / 5.6% (prior year: $97,000 / 1.6%) |
| Net income | $178,000, versus $115,000 | $346,000, versus $140,000 |
| Basic and diluted EPS | $0.01 | $0.02 (prior year: $0.01) |
Quarterly sales growth reflected higher sales of multi-axis and integrated coating systems. For the first half, integrated systems and alternative-energy demand were key contributors. Quarterly sales declined in electronics/microelectronics and medical, while alternative energy and industrial sales rose sharply.
Cash flow, liquidity, and debt
- First-half operating cash flow was a use of $782,000, compared with $589,000 provided in the prior-year period. Receivables, inventory, lower customer deposits, and lower accounts payable were significant cash uses.
- Cash and cash equivalents were $3.972 million and marketable securities were $3.853 million at August 31, 2020, totaling approximately $7.825 million. Working capital was $7.920 million, up from $7.173 million at February 29, 2020.
- Total debt was $1.625 million, including a $1.002 million Paycheck Protection Program (PPP) loan; $726,000 was classified as current. The company had no outstanding revolver borrowings, but $1.271 million of its $1.5 million line of credit supported customer letters of credit, leaving $229,000 unused.
- Cash increased $312,000 during the first half, aided by PPP proceeds and a $100,000 energy-efficiency grant. Capital expenditures were $290,000.
Material changes and management commentary
- First-half revenue increased 12%; operating income rose to $386,000 from $97,000. Gross margin remained broadly stable.
- Backlog was $5.106 million at August 31, up 45% from $3.517 million at February 29, 2020, primarily due to two major orders.
- Approximately 58% of first-half sales came from outside the U.S. and Canada, versus 65% a year earlier; the comparable second-quarter mix was 38% versus 72%. Management attributed geographic shifts partly to pandemic-related disruptions.
- Management provided no specific revenue or earnings guidance. It said it remained optimistic that delayed electronics and medical orders could increase as countries reopened, while warning that near-term COVID-19 impacts could continue.
Risks, contingencies, and unusual items
- COVID-19 may weaken demand, delay or cancel orders, restrict travel and facility access, disrupt suppliers, increase costs, and affect operations, cash flow, and liquidity. Management stated that prolonged effects could materially adversely affect the business.
- The $1.002 million PPP loan bears 1% interest. The company intended to use proceeds for qualifying expenses and apply for forgiveness, but forgiveness was not assured; approximately $776,000 of qualifying costs had been incurred by the report date, and the lender indicated the SBA had not begun processing applications.
- Three customers represented 30% of first-half sales, and three customers accounted for 47% of receivables at period-end. Customer deposits fell to $988,000 from $1.649 million as orders shipped.
- The company received a $100,000 utility grant in the second quarter and applied it against the cost of capitalized improvements. Other than disclosed letters of credit, the company reported no material commitments or contingencies and no legal proceedings.
Investor verification priorities
- Track conversion and timing of the $5.106 million backlog, including exposure to the two major orders and potential COVID-related delays or cancellations.
- Verify PPP loan forgiveness status and repayment obligations for any unforgiven balance.
- Monitor operating cash flow, receivable collections, inventory, customer deposits, and remaining revolver availability.
- Assess customer concentration and the effects of continued weakness in electronics/microelectronics and medical markets.
- Confirm that supply-chain, workforce, and international-market disruptions do not materially impair delivery or margins.