SONO TEK CORP annual report, FY2012

Business context and reporting period

Sono-Tek Corporation develops, manufactures, sells and services ultrasonic spray-coating systems for electronics, advanced energy, medical devices, glass, textiles and food applications. This Form 10-K covers the fiscal year ended February 29, 2012, with comparison to the year ended February 28, 2011; it does not provide standalone fourth-quarter results.

Financial performance and position

• Sales increased 22%. Gross margin was approximately 51.2% versus 48.1%, calculated from reported sales and cost of goods sold; management described margins as 50% and 48%. Operating margin was approximately 10.5% versus 6.1%.
• Net income included a $291,000 income tax benefit, compared with $14,500 of tax expense in FY2011. The benefit included state tax credits and recognition of deferred tax assets; no net operating loss carryforwards remained at year-end.
• Cash and cash equivalents were $2.532 million, with $254,000 of marketable securities. Working capital was $4.655 million, up $1.333 million; the current ratio was 4.0 versus 3.1.
• Total debt was $2.234 million, including a $2.036 million mortgage and $199,000 equipment loan. No borrowings were outstanding on the $750,000 revolving credit line; a separate $250,000 equipment facility was also disclosed.
• Total assets were $9.478 million and stockholders’ equity was $5.808 million. Basic and diluted EPS were $0.10 and $0.09, respectively. The company reported no cash dividends.

Changes versus prior year

• Sales growth reflected increased stent-coater, fluxer and related-accessory, and FlexiCoat/ExactaCoat platform sales. WideTrack sales declined with lower demand from float-glass manufacturers.
• European sales rose $1.580 million, or 126%; Asian sales rose $212,000, or 6%; and U.S. sales rose $272,000, or 6%. Foreign sales were 62% of revenue, up from 57%.
• Research and product development expense increased $305,000 to $1.129 million. Selling and marketing expense rose $218,000 to $2.398 million; general and administrative expense rose $83,000 to $1.249 million.
• Interest expense increased to $118,000 from $8,000, primarily reflecting the mortgage on the industrial park. Inventory increased $691,000; management said it had ended its accelerated purchasing strategy by year-end.
• Cash increased $848,000, compared with a $104,000 decrease in FY2011. Operating cash flow was broadly similar, while FY2011 investing cash use included the industrial-park acquisition.

Outlook, risks and unusual items

Management presented product and geographic diversification, expanded engineering and sales resources, and new applications as a foundation for future growth and improved profitability, but gave no quantified guidance. Forward-looking results depend on economic conditions, competition, technology and regulation, new-product acceptance, financing, production capacity, patent protection and the ability to grow sales and sustain profitability.

• The textiles market remained weak after the downturn in housing, automotive and clothing markets; food-industry adoption of new technology was described as slow.
• International customers generated a majority of revenue. One customer represented 6.7% of annual sales; three customers represented 26.6% of year-end receivables.
• Management reported no material commitments or contingencies, legal proceedings, or off-balance-sheet arrangements. The independent auditor issued an unqualified opinion. Management concluded disclosure controls and internal control over financial reporting were effective.
• The filing states the company had no critical accounting policies involving significant judgments or uncertainties, while also noting estimates in areas including stock-based compensation and warranty reserves.

Important facts for investors to verify

• Confirm the fiscal-year figures are not being interpreted as fourth-quarter results; this annual filing does not give standalone Q4 financials.
• Assess earnings quality and repeatability, particularly the tax benefit, and reconcile net income growth with operating cash flow and the inventory build.
• Review debt-service obligations, the mortgage and equipment-loan terms, and availability and conditions of the demand credit line.
• Evaluate the sustainability of overseas growth, customer concentration, and demand in glass, textiles and food markets.
• Reconcile a segment-information table that reports consolidated net income of $1.383 million, which differs from the audited consolidated statement’s $1.432 million; the filing text does not clearly explain the difference.