Business context and reporting period
Sono-Tek Corporation develops, manufactures, sells, installs, and services ultrasonic spray-coating systems for industries including electronics, advanced energy, medical devices, glass, textiles, and food. It also operates a rental real-estate segment. This Form 10-Q covers the quarter and six months ended August 31, 2017, the second quarter of fiscal 2018.
Financial results and position
| Metric | Three months ended Aug. 31, 2017 | Six months ended Aug. 31, 2017 |
|---|---|---|
| Net sales | $2.674 million, up 16% year over year | $5.187 million, up 14% |
| Gross profit and margin | $1.359 million; 50.8% (44.4% prior year) | $2.561 million; 49.4% (45.0% prior year) |
| Operating income (loss) | $99,000 (prior-year loss: $90,000) | $118,000 (prior-year loss: $230,000) |
| Net income (loss) | $55,000 (prior-year loss: $90,000) | $71,000 (prior-year loss: $34,000) |
| Operating cash flow | $1.062 million for six months, versus $589,000 |
- Six-month diluted EPS was reported as $0.00, rounded; basic EPS was also $0.00. Prior-year six-month diluted EPS was reported as $(0.00).
- Cash and cash equivalents were $2.360 million and marketable securities $3.547 million at August 31, totaling $5.907 million, up from $4.899 million at February 28. Cash alone decreased $197,000 during the six months, chiefly as the company invested $1.142 million in marketable securities.
- Working capital increased to $6.305 million from $6.070 million, while the current ratio declined to 3.86 from 5.19. Inventory rose to $1.566 million from $1.341 million.
- Total debt was $1.102 million, down from $1.176 million at fiscal year-end. The company reported no borrowings on its $750,000 revolving credit line, available at prime (4.25% at August 31).
- Operating cash flow improved year over year. Customer deposits increased $533,000 and accounts payable and accrued expenses increased $221,000; inventory growth used $276,000 of cash. Investing activities used $1.185 million, including securities purchases and $43,000 of equipment spending. Financing activities used $74,000 for debt repayments.
Material changes and management commentary
- Ultrasonic spraying sales increased 14% for the six months and 16% for the quarter. Management cited stronger sales of nozzles and generators, stent-coating units, and Universal ALIGN systems; product-level increases and offsets varied by period. Stent-coating unit sales rose $742,000 for the six-month period and $382,000 for the quarter.
- Higher sales and relatively steady fixed overhead helped lift gross margin. Six-month operating expenses increased $164,000, led by marketing and selling costs (up $127,000) and general and administrative costs (up $56,000); research and development costs declined $12,000.
- The prior-year six-month results included $200,000 of life-insurance proceeds from the death of a former employee. The current six-month period included an $8,500 realized loss on the sale of available-for-sale investments. These unusual items affect year-over-year comparisons.
- Real-estate operations generated $32,000 of third-party rental income and reported a $66,000 net loss for the six months, excluding intercompany rent.
- Management noted that demand and sales for certain product lines can fluctuate from quarter to quarter with market conditions. The filing provides no quantified revenue, earnings, or cash-flow guidance.
Risks, contingencies, and other disclosures
- Forward-looking statements are subject to general economic conditions, political and regulatory developments, competition, technology changes, product-development and market-acceptance risks, financing adequacy, capacity additions, patent enforcement, and the ability to grow sales and sustain profitability.
- The company reported no legal proceedings and no defaults upon senior securities. Management concluded disclosure controls were effective as of August 31, 2017 and reported no material change in internal control over financial reporting during the quarter.
- The company adopted ASU 2015-17 retrospectively, reclassifying deferred taxes as noncurrent; it reported no effect on operating results. Management said other issued but not-yet-effective accounting standards were not expected to have a material impact.
Important facts for investors to verify
- Whether recent sales growth, particularly in stent-coating products, is sustained given management’s warning about quarterly demand fluctuations.
- How much operating cash flow depends on customer deposits and changes in payables, and whether inventory growth converts to sales.
- The quality and liquidity of the $3.547 million marketable-securities portfolio and the impact of future investment gains or losses.
- Debt repayment obligations and continued availability of the demand line of credit, including its annual 30-day paydown requirement.
- The effect of the prior-year $200,000 insurance proceeds and current investment loss when assessing underlying earnings trends.