Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2015. Sono-Tek develops and sells ultrasonic spray-coating systems across electronics, advanced energy, medical device, glass, textiles, and food markets, and operates a rental-real-estate segment.
Financial performance
| Metric | Three months ended Aug. 31, 2015 | Three months ended Aug. 31, 2014 | Six months ended Aug. 31, 2015 | Six months ended Aug. 31, 2014 |
|---|---|---|---|---|
| Net sales | $2.975 million | $2.634 million | $5.858 million | $5.054 million |
| Gross profit | $1.490 million | $1.302 million | $2.863 million | $2.450 million |
| Gross margin | 50.1% | 49.4% | 48.9% | 48.5% |
| Operating income | $238,434 | $199,164 | $461,477 | $286,691 |
| Net income | $143,590 | $115,024 | $297,612 | $181,667 |
| Basic and diluted EPS | $0.01 | $0.01 | $0.02 | $0.01 |
For the six-month period, sales rose 16%, operating income rose about 61%, and net income rose about 64% year over year. Quarterly sales increased 13% and net income increased about 25%. Operating expenses increased 11% for the six months, including higher research and development, selling, and administrative costs. Other expense included a $54,460 unrealized loss on marketable securities, versus other income of $6,257 a year earlier.
Cash, liquidity, and debt
- Cash and cash equivalents were $2.185 million at August 31, 2015, down from $2.563 million at February 28, 2015. Marketable securities were $1.620 million.
- Six-month operating cash flow was negative $26,990, compared with negative $283,458 in the prior-year period. Investing cash outflow was $264,351, including $236,021 for equipment; financing cash outflow was $86,211, mainly debt repayments. Cash declined $377,552.
- Working capital was $5.498 million, up from $5.271 million; the current ratio was 3.9, versus 3.5. The company reported no balance drawn on its $750,000 revolving credit line.
- Total debt was $1.389 million, down from $1.478 million at fiscal year-end. The remaining bank note is secured by land and buildings, bears 4.15% interest, and is payable through January 2024.
- Inventory increased $375,438 on the balance sheet since February 28, to $2.435 million net. Management attributed higher finished-goods and work-in-process inventory to forecast sales and reported approximately $278,000 of those inventories sold after August 31.
Business changes, outlook, and risks
Ultrasonic-spraying segment sales increased 16% for the six months and 13% for the quarter. Management cited higher sales of WideTrack glass-coating and Servo PCB-fluxing systems, partly offset by declines in nozzles, generators, stent coaters, XYZ platforms, and solder-recovery systems. A $360,000 WideTrack sale to a global food manufacturer was the company’s largest food-industry sale to date; the customer could purchase additional systems every 12 to 18 months as part of a planned rollout, but this was not presented as firm guidance.
Management gave no specific financial guidance. It described product and market diversification as a basis for future growth, while noting that product demand and sales can fluctuate with market conditions and from quarter to quarter. R&D spending rose as the company developed systems for food and electronics applications. The real-estate segment generated $47,000 in third-party rental income and recorded a $61,000 net loss excluding intercompany rent.
Forward-looking risks cited include general economic and business conditions, competition, political and regulatory or technological developments, timely product development and market acceptance, financing adequacy, capacity additions, patent enforcement, and the ability to grow sales and remain profitable. Management said it did not expect a material loss when current investments mature. The filing reported no legal proceedings and stated that disclosure controls were effective; it also reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the WideTrack food-industry customer proceeds with the potential multi-year rollout and whether it generates repeat revenue.
- Whether inventory converts to sales as anticipated, given the increase in finished goods and work in process.
- Whether operating cash flow turns positive; despite higher earnings, operations used cash in the first half.
- The performance and valuation of marketable securities after the reported unrealized loss.
- Whether sales growth and margins continue as product demand fluctuates and operating expenses, particularly R&D, rise.