Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2015. The filing describes this as the third quarter of fiscal 2016. Sono-Tek develops, manufactures, sells, installs and services ultrasonic spray-coating equipment across electronics, advanced energy, medical device, glass, textile and food markets; it also operates a real-estate segment.
Financial results
| Metric | Three months ended Nov. 30, 2015 | Three months ended Nov. 30, 2014 | Nine months ended Nov. 30, 2015 | Nine months ended Nov. 30, 2014 |
|---|---|---|---|---|
| Net sales | $3.032 million | $2.852 million | $8.890 million | $7.906 million |
| Gross profit | $1.466 million | $1.400 million | $4.329 million | $3.850 million |
| Operating income | $280,000 | $288,000 | $741,000 | $575,000 |
| Net income | $244,000 | $202,000 | $541,000 | $384,000 |
| Diluted EPS | $0.02 | $0.01 | $0.04 | $0.03 |
- Growth and margins: Nine-month sales rose 12% and net income rose 41% year over year. Third-quarter sales rose 6% and net income rose 20%, while operating income declined about 3%. Consolidated gross margin was approximately 48.7% for the nine-month period, roughly unchanged year over year; quarterly margin was approximately 48.4%, versus 49.1%.
- Cash flow: Nine-month operating cash flow was $528,000, compared with $600,000 in the prior-year period. Investing used $468,000, including $419,000 for equipment and furnishings; financing used $121,000, primarily for debt repayments. Cash decreased $60,000 to $2.503 million.
- Liquidity: Current assets were $7.552 million and current liabilities $1.895 million at November 30. Working capital was $5.657 million and the current ratio 3.9:1. Cash and marketable securities totaled $4.133 million, down $82,000 from February 28, 2015.
- Debt: Total debt was $1.355 million, down from $1.478 million at February 28; $138,000 was current. The $750,000 revolving credit facility was undrawn, at a stated prime rate of 3.25%.
- Balance sheet: Total assets were $10.834 million and stockholders’ equity $7.722 million. Inventories rose to $2.394 million from $2.059 million at fiscal year-end.
Changes, outlook and risks
- Ultrasonic spraying sales increased 13% for nine months and 6% for the quarter. Management attributed the nine-month increase mainly to fluxing and WideTrack coating units; declines in stent coaters, XYZ platforms and solder recovery systems partly offset growth. Segment gross margin held at 48% for nine months, but was 48% for the quarter versus 49% a year earlier.
- Research and product development expense increased $178,000 to $918,000 for nine months, reflecting higher salaries, depreciation and materials and continued development for food and electronics applications. Selling and marketing expense rose $91,000 to $1.738 million, including higher international commissions, salaries, trade-show costs and distributor training.
- Management said inventory increases reflected forecast sales and shipments planned for the fourth fiscal quarter; approximately $224,000 of the inventory had been sold after November 30. Demand and sales for several product categories fluctuate by quarter and depend on market conditions.
- The real-estate segment reported a nine-month net loss of $94,000, compared with a $99,000 loss. Its net cash used was $142,000.
- The company recorded a $56,000 unrealized loss on marketable securities, which management attributed to a decline in their values; it said it did not expect a material loss upon maturity based on the portfolio structure. Interest and investment income increased to $41,000 from $18,000.
- No specific financial guidance or quantified forecast was provided. Management described product, market and geographic diversification as a platform for future growth and profitability. Forward-looking risks include economic and competitive conditions, regulation and technology changes, new-product development and acceptance, financing adequacy, capacity additions, patent enforcement, sales growth and sustained profitability.
- The filing reported no legal proceedings, defaults or material changes to internal controls; management said disclosure controls were effective. It cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether planned fourth-quarter shipments and inventory growth convert into sales, and whether inventory levels normalize.
- Whether growth in fluxing and WideTrack products offsets variable or declining demand in other product lines, and whether gross margins stabilize.
- The cause and potential future effect of marketable-security valuation changes and the $56,000 unrealized loss.
- The real-estate segment’s ongoing cash use and the company’s debt-service obligations, despite the undrawn credit facility.
- Management’s forward-looking assumptions, since the filing provides no explicit revenue or earnings guidance.