Sono-Tek Corp. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2023, the first quarter of fiscal 2024. Comparative period: three months ended May 31, 2022. Sono-Tek designs and manufactures ultrasonic coating systems for electronics, alternative energy, medical, industrial, and other markets. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $3.603 million | $4.052 million | Down 11% |
| Gross profit / margin | $1.777 million / 49.3% | $2.107 million / 52.0% | Profit down 16%; margin down 2.7 percentage points |
| Operating income (loss) | ($92,000) | $381,000 | Down $473,000 |
| Net income | $53,000 | $306,000 | Down $253,000 |
| Operating cash flow | $828,000 | $432,000 | Up $396,000 |
Basic and diluted EPS were reported as $0.00 versus $0.02. Interest and dividend income plus net unrealized gains on marketable securities totaled approximately $124,000, up from approximately $7,000 in the prior-year quarter. The income tax provision was a $21,000 benefit, compared with $70,000 of expense, reflecting use of research and development tax credits, partly offset by permanent timing differences.
Liquidity, balance sheet, and cash flow
- Cash, cash equivalents, and marketable securities totaled $12.141 million at May 31, 2023, compared with $11.445 million at February 28, 2023. Cash and cash equivalents alone were $4.294 million; marketable securities were $7.847 million.
- Working capital was $11.081 million, versus $11.117 million at fiscal year-end. Total assets were $20.900 million and stockholders’ equity was $14.736 million.
- The company reported no outstanding borrowings. Its $1.5 million revolving credit line had $1.36 million unused; $140,000 was reserved to collateralize a customer letter of credit. The line is payable on demand, bears interest at prime (8.25% at quarter-end), and is secured by receivables and inventory.
- Operating cash generation benefited from lower receivables and higher customer deposits, partly offset by a $502,000 inventory increase. Investing activities provided $112,000, including $261,000 from marketable securities, offset by $149,000 of equipment and facility purchases. Cash and cash equivalents increased by $940,000.
Changes and operating commentary
- Sales weakness primarily reflected delayed shipments of multi-axis systems to medical customers amid supply-chain constraints. Management said several delayed systems were scheduled for shipment in fiscal Q2 and Q3.
- Medical sales fell 77% to $383,000; alternative energy sales rose 37% to $833,000, and industrial sales rose 219% to $886,000. Electronics/microelectronics sales increased 7% to $1.375 million.
- By product, OEM system sales declined 51%, multi-axis sales declined 11%, and integrated coating system sales rose 84%. Lower OEM and multi-axis sales weighed on gross margin; increased research and product development spending also contributed to the operating loss.
- Research and product development expense rose 27% to $656,000, mainly due to higher personnel and materials costs supporting growth initiatives. Total operating expenses rose 8% to $1.869 million.
- Backlog reached a record $9.96 million at May 31, up 17% from February 28. Management attributed the increase to clean-energy machine orders and longer manufacturing cycles for multi-axis platforms.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management expects quarter-to-quarter variation in order flow and shipments and noted that delayed multi-axis orders were planned for shipment in Q2 and Q3 of fiscal 2024. It cited supply-chain shortages, variable component lead times, and reliance on a limited number of sources for some components. Other forward-looking risks include economic and market conditions, order backlog and cancellations, timely completion of large orders, new-product acceptance, and continued growth in medical and alternative-energy markets.
COVID-19 had no significant reported effect on the quarter’s results or financial condition, apart from lingering supply-chain issues; the company said future effects could not be estimated. There were no pending legal actions or other material commitments and contingencies reported, apart from the customer letter of credit. The company noted that $3.287 million of bank deposits exceeded FDIC-insured limits. Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the delayed medical and multi-axis system shipments were completed as expected in fiscal Q2 and Q3, and whether they convert to revenue.
- Whether the record backlog is sustained and delivered on schedule despite component shortages and extended manufacturing cycles.
- Whether sales and gross margins recover, given the quarter’s 11% revenue decline, 270-basis-point margin contraction, and operating loss.
- Whether customer deposits, inventory growth, customer concentration, and the $140,000 letter-of-credit commitment change materially.
- How much of investment income reflects prevailing interest rates and unrealized marketable-security gains rather than operating performance.