Sono-Tek Corporation — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended November 30, 2022. Sono-Tek designs and manufactures ultrasonic coating systems for electronics, medical, alternative energy, industrial, and other markets. The interim financial statements are unaudited.
Financial performance
| Metric | Three months ended Nov. 30, 2022 | Year-over-year change | Nine months ended Nov. 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $3.586 million | Down 19% | $11.401 million | Down 6% |
| Gross profit / margin | $1.824 million / 51% | Down 16%; margin up 2 percentage points | $5.827 million / 51% | Down 4%; margin up 1 percentage point |
| Operating income / margin | $103,000 / 2.8% | Down 79%; margin was 11.1% | $662,000 / 5.8% | Down 48%; margin was 10.6% |
| Net income | $105,000 | Down 72% | $573,000 | Down 71% |
| Diluted earnings per share | $0.01 | Prior year: $0.02 | $0.04 | Prior year: $0.13 |
For the nine-month period, operating cash flow was $995,000, versus $1.812 million a year earlier. Investing activities used $2.659 million, including $2.246 million invested in marketable securities and $414,000 in equipment and facility purchases. Cash and cash equivalents declined by $1.665 million to $3.176 million; marketable securities rose to $8.073 million. Combined cash and marketable securities were $11.249 million.
At November 30, 2022, working capital was $11.303 million. Total liabilities were $4.997 million, with no outstanding borrowings. The company had a $1.5 million revolving credit line, of which $1.495 million was unused; $5,000 supported customer-deposit letters of credit.
Changes and business drivers
- Quarterly sales fell mainly because of supply-chain delays, including five delayed machines valued at $487,000. Sales were down 5% sequentially from fiscal Q2.
- Multi-axis coating system sales declined 45% in the quarter and 26% for nine months, primarily due to shortages of electronic components. Management expected these constraints to continue through the rest of fiscal 2023.
- For nine months, Asia-Pacific sales fell 50%; management cited the strong U.S. dollar and China COVID-19 lockdowns. U.S. and Canada sales rose 37%, and Latin American sales rose 47%, supported in part by manufacturing shifts from China and U.S. onshoring.
- Industrial-market sales grew 142% for nine months, while alternative-energy sales declined 29% and emerging R&D and other sales declined 53%.
- Gross margin improved despite lower sales, reflecting favorable product mix and, for the nine-month period, lower shipment-related accruals and favorable installation costs. Operating expenses rose 8% for nine months, led by a 24% increase in research and product development spending.
- Prior-year nine-month results included a $1.005 million gain from forgiveness of a Paycheck Protection Program loan; there was no comparable gain in fiscal 2023. The company recorded a $40,000 unrealized loss on marketable securities in the current nine-month period.
Outlook, risks, and other matters
Backlog was $6.223 million at November 30, up 14% from February 28 and 23% from August 31. Management attributed the increase to new orders and delayed shipments. Three additional industrial machines, each valued at $216,000, were in backlog and projected to ship in fiscal Q4. The filing provides no clear numerical sales or earnings guidance.
Management cited supply constraints and extended lead times, especially for electronic components, as risks to shipments and production; some components have limited sources. The filing also identifies inflationary pressures, higher energy costs, COVID-related disruption, foreign-exchange effects on customers, order variability, and execution of large orders as risks. Management stated that continued supply-chain and pandemic disruption could materially adversely affect results, cash flow, liquidity, and financial condition. No material changes to previously disclosed risk factors or legal proceedings were reported.
The company reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. The filing’s controls discussion refers to an evaluation date of November 30, 2021, although the reporting period ended November 30, 2022; investors may wish to verify this apparent date discrepancy.
Important facts for investors to verify
- Whether delayed component deliveries and the five delayed machines ship as expected, and how backlog converts into revenue.
- Whether the $6.223 million backlog is maintained or changes materially, given management’s warning that orders and shipments can vary by quarter.
- Whether the decline in multi-axis systems and Asia-Pacific demand persists, and whether growth in industrial, fluxing, U.S., and Latin American sales offsets it.
- How inventory growth, receivables, customer deposits, and operating cash flow develop; inventory increased to $3.260 million from $2.373 million at fiscal year-end.
- The effect of customer concentration: two customers represented 14% of nine-month sales and 21% of quarterly sales; five customers represented 41% of receivables at period-end.
- The apparent disclosure-controls evaluation-date discrepancy and the status of supply-chain, inflation, and China-related disruptions.