Sono-Tek Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended February 28, 2021, compared with fiscal year ended February 29, 2020. This is an annual report, not a standalone fourth-quarter filing.
Business context
Sono-Tek designs and manufactures ultrasonic coating systems and related components for electronics, medical, alternative energy, industrial, and research markets. Sales are global: 65% came from outside the U.S. and Canada, down from 71% in FY2020. One customer represented 12% of FY2021 revenue; three customers together represented 28%.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $14.833 million | $15.355 million | Down 3% |
| Gross profit | $6.997 million | $7.313 million | Down 4% |
| Gross margin | 47.2% | 47.6% | Down 0.4 percentage points |
| Operating income / margin | $1.340 million / 9.0% | $1.115 million / 7.3% | Income up $225,000 |
| Net income | $1.121 million | $1.107 million | Up $14,000 |
| Basic and diluted EPS | $0.07 | $0.07 | No change |
| Cash from operating activities | $725,000 | $3.254 million | Down $2.529 million |
| Cash and marketable securities | $8.648 million | $7.879 million | Up $769,000 |
| Working capital | $8.902 million | $7.173 million | Up $1.729 million |
Operating cash flow fell mainly because of higher receivables and inventory and lower customer deposits, partly offset by higher payables and accrued expenses. Capital spending was $344,000. The company reported no borrowings on its $1.5 million revolving line, though $849,000 of capacity secured customer letters of credit; $651,000 remained unused.
The mortgage was repaid in December 2020. The balance sheet nevertheless included a $1.002 million Paycheck Protection Program (PPP) loan at year-end; the SBA approved full forgiveness on April 1, 2021, after the reporting date. Total assets were $16.423 million and stockholders’ equity was $10.951 million at year-end.
Material changes and management commentary
- Sales declined only modestly despite management’s estimate that COVID-related delays and cancellations reduced potential business by 20% or more. Labs, travel, customer visits, and trade shows were disrupted; the company shifted to virtual demonstrations and installations.
- Operating expenses fell 9%, chiefly from lower travel, trade-show, and commission costs. Management expects some sales and marketing expenses to rise as those activities resume.
- Research and product development spending rose 15% to $1.645 million, or 11.1% of revenue.
- Electronics/microelectronics sales fell 29% to $5.997 million. Industrial sales rose 402% to $2.268 million, largely on a large textile-system order; alternative-energy sales increased 12%.
- Year-end backlog was up 9.5% from the prior year, but the filing does not provide a clear backlog amount. An order for a multi-axis robot of similar value to one shipped in FY2020 was scheduled for FY2022.
- COVID-related diagnostic coating equipment sales were approximately $770,000. Management said the pandemic was expected to continue adversely affecting business in FY2022; it gave no quantified revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management identified ongoing uncertainty around the pandemic, customer demand and order cancellations, supply-chain disruption, staffing and travel restrictions, and the ability to deliver large customized orders on time and within budget.
- Customer and receivables concentration warrant attention: two customers accounted for 64% of year-end receivables. Foreign sales exposure was 65% of revenue.
- Revenue recognition was identified as a critical audit matter because customized contracts require judgments about distinct obligations, delivery timing, and customer terms. The auditor issued an unqualified opinion on the financial statements.
- The company reported no material legal proceedings or other material commitments and contingencies apart from disclosed letters of credit. Management stated disclosure controls and internal control over financial reporting were effective; the external auditor was not engaged to audit internal controls.
- Interest expense included a $14,000 mortgage prepayment penalty. Income tax expense increased to $227,000, primarily due to fewer available research and development credits.
Important facts for investors to verify
- Whether the FY2022 robot shipment and the reported 9.5% backlog increase converted into revenue, and whether backlog quality or cancellations changed.
- Whether operating cash flow recovers as receivables, inventory, and customer deposits normalize.
- Customer concentration and collection risk, including the two customers representing 64% of receivables.
- The effect of renewed travel, trade-show, and other operating costs on margins as pandemic restrictions ease.
- Confirmation that PPP forgiveness was completed and the loan liability was removed in subsequent-period reporting.
- Progress in diversifying revenue beyond electronics/microelectronics and in sustaining the industrial and alternative-energy growth reported for FY2021.