Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Three months ended May 31, 2014, the company’s first fiscal quarter of 2015. The comparable period is the three months ended May 31, 2013. Sono-Tek develops, manufactures, sells, installs and services ultrasonic spray-coating systems, and also operates a rental real-estate segment.
Key financial metrics
| Metric | Three months ended May 31, 2014 | Three months ended May 31, 2013 |
|---|---|---|
| Net sales | $2.421 million | $2.374 million |
| Gross profit / margin | $1.148 million / 47% | $1.141 million / 48% |
| Operating income | $87,527 | $123,239 |
| Income before taxes | $81,791 | $93,936 |
| Net income | $66,642 | $73,748 |
| Basic and diluted EPS | $0.00 | $0.01 |
| Net cash from operating activities | $(360,530) | $557,178 |
Balance sheet and liquidity at May 31, 2014: Cash and cash equivalents were $2.209 million, and marketable securities were $1.137 million. Current assets were $6.130 million versus current liabilities of $1.363 million; management reported working capital of $4.767 million and a 4.5-to-1 current ratio. Total debt was $1.623 million, including $194,451 due within one year. The $750,000 revolving credit line had no balance outstanding.
Changes versus the prior-year quarter
- Sales rose about 2%, while net income fell about 10%. Gross margin declined to 47% from 48%, and operating income decreased.
- Management attributed sales growth in ultrasonic spraying to higher sales of stent-coating and XYZ-platform units, partly offset by lower WideTrack sales. Demand and sales of several system types can vary by quarter.
- Gross margin was pressured by higher installation and personnel costs and a higher inventory-obsolescence allowance. Marketing and selling expense increased $55,000, including higher international commissions and travel; research and development expense increased $10,000. General and administrative expense decreased $27,000.
- Interest expense declined to $16,035 from $27,775, which management attributed to the December 2013 refinancing of the industrial park.
- Operating cash flow shifted from a $557,178 inflow to a $360,530 outflow. The filing cites increases in inventory and receivables and decreases in accounts payable/accruals, customer deposits and income taxes payable as cash uses. Investing activities used $614,135, including $505,903 for marketable securities, $90,682 for equipment and furnishings, and $17,550 for patent costs. Cash declined by $1.023 million; some of the decline reflects purchases of marketable securities rather than operating use.
Outlook, risks and other disclosures
The filing provides no quantified revenue or earnings guidance. Management describes product and geographic diversification across electronics, advanced energy, medical devices, glass, textiles and food as a foundation for future growth and profitability. It also notes that demand is affected by market conditions and that results for an interim period may not indicate full-year results.
Forward-looking risks identified include general economic and business conditions; political, regulatory, competitive and technological developments; timely product development and market acceptance; financing adequacy; capacity additions; patent enforcement; and the ability to increase sales and sustain profitability. The company reported working to lease vacant warehouse space. It reported no legal proceedings and no material changes to internal control over financial reporting during the quarter; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales growth in stent-coating and XYZ-platform systems continues and offsets variable WideTrack and other system sales.
- Whether gross margin recovers as installation costs, personnel costs and inventory-obsolescence reserves change.
- Whether operating cash flow improves, particularly as customer deposits and other working-capital balances fluctuate.
- Occupancy and leasing progress for vacant industrial-park space, and the effect of real-estate operations on results.
- Debt repayment, refinancing terms and continued availability of the unused revolving credit line.