Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 31, 2011; comparative periods ended August 31, 2010. The company develops ultrasonic spray coating systems and reports ultrasonic spraying and rental real estate operations.
Financial performance
| Metric | Six months 2011 | Six months 2010 | Three months 2011 | Three months 2010 |
|---|---|---|---|---|
| Net sales | $6.139 million | $4.716 million | $3.150 million | $2.432 million |
| Gross profit / margin | $3.112 million / 51% | $2.233 million / 47% | $1.678 million / 53% | $1.116 million / 46% |
| Operating income | $733,000 | $225,000 | $465,000 | $128,000 |
| Net income | $676,000 | $221,000 | $438,000 | $126,000 |
| Basic and diluted EPS | $0.05 | $0.02 | $0.03 | $0.01 |
Six-month sales increased 30% year over year. Management attributed higher sales to nozzles and generators, fluxer spare parts, stent coating units, XYZ units and Hypersonic units. Gross-margin improvement was attributed to product mix. Research and development, selling and marketing, and general and administrative expenses all increased.
- Cash flow: Operating activities provided $303,000, versus $92,000 a year earlier. Net income was partly offset by a $799,000 inventory increase. Investing activities used $117,000; financing activities provided $196,000, including $237,000 in equipment financing.
- Liquidity: Cash and equivalents were $2.066 million and marketable securities $252,000 at August 31. Working capital was $4.203 million versus $3.322 million at February 28; the reported current ratio was 3.2 to 1. The $750,000 revolving credit line was undrawn.
- Debt and equity: Total debt was $2.294 million, including $119,000 current, versus $2.098 million at February 28. Stockholders’ equity rose to $5.019 million from $4.317 million.
Business changes, outlook and risks
The company identifies electronics, medical devices, advanced energy and WideTrack coating applications as core markets, and says international sales are approximately 60% of revenue. The rental real estate subsidiary began operating in December 2010. The filing describes continued investment in newer markets as a potential basis for future growth, but provides no quantitative forecast or formal guidance.
Management cautions that future results are uncertain, citing economic and business conditions, competition, regulatory and technological developments, product acceptance, financing adequacy, capacity additions, patent enforcement, and the ability to increase sales and sustain profitability. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No legal proceedings were reported.
The real estate operation reported a loss in the MD&A; its segment presentation in the notes reports a different net loss figure. The filing text does not clearly reconcile these presentations. The MD&A also appears to attribute the $799,000 inventory increase to the six months ended August 31, 2010, while the balance sheet and cash flow statements indicate the increase occurred in the 2011 period.
Important facts for investors to verify
- Whether the higher inventory reflects committed orders and converts to sales and cash as expected.
- The reconciliation of the rental real estate segment’s reported results and the impact of its debt and interest costs.
- Terms and repayment schedule for the new equipment financing, alongside the mortgage and undrawn demand credit line.
- Whether improved product mix and margins persist as research, sales and marketing spending rises.
- The period labeling of the inventory discussion and the differing rental-operation loss presentations.