Sono-Tek Corporation — Form 10-Q Summary
Business and period: Sono-Tek designs and manufactures ultrasonic coating systems for electronics, medical, alternative-energy, industrial, and other markets. This unaudited report covers the first quarter of fiscal 2023, the three months ended May 31, 2022, compared with the three months ended May 31, 2021.
Financial performance
- Revenue: $4.052 million, up 11% from $3.644 million. Growth was led by medical, alternative-energy, and emerging R&D markets. Medical sales rose 133% to $1.675 million; electronics/microelectronics sales fell 43% to $1.287 million.
- Gross profit and margin: Gross profit increased 16% to $2.107 million; gross margin expanded to 52.0% from 50.0%, primarily on favorable product mix and stronger OEM sales, partly offset by higher service travel and installation costs.
- Operating expenses and income: Operating expenses rose 16% to $1.726 million, including higher research and product development costs and general and administrative expenses. Operating income increased to $381,000 from $343,000.
- Net income and EPS: Net income was $306,000, or $0.02 per diluted share, versus $1.267 million, or $0.08 per diluted share. The prior-year quarter included a $1.005 million gain from forgiveness of a Paycheck Protection Program loan; excluding the effect of that unusual item, the reported net-income comparison is not like-for-like.
- Cash flow: Operating activities provided $432,000, down from $722,000, with higher receivables and inventory among the factors. Investing activities provided $2.403 million, mainly from $2.457 million of marketable-security sales, while equipment purchases used $54,000. Cash and cash equivalents increased by $2.835 million during the quarter.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $11.074 million at May 31, 2022, versus $10.709 million at February 28, 2022. Working capital was $11.194 million. The company reported no outstanding borrowings under its $1.5 million revolving credit line; $21,000 of capacity supported customer letters of credit.
- Balance sheet: Total assets were $18.750 million and total liabilities were $4.633 million at May 31, 2022. Inventory was $2.893 million, up from $2.373 million at fiscal year-end; customer deposits increased to $1.665 million from $1.168 million.
Material changes and operating developments
- Revenue mix shifted: medical, OEM systems, and spare parts/services grew, while multi-axis coating systems and electronics/microelectronics declined. Foreign sales were 52% of revenue, compared with 66% a year earlier.
- Backlog declined to $4.230 million at May 31, 2022, from $5.325 million at February 28, 2022. The company shipped $2.226 million of orders that had been in beginning backlog. Management said orders and shipments can vary substantially between quarters.
- Management said higher raw-material and work-in-process inventory supported backlog and helped address longer supplier lead times. A seven-machine industrial order began shipping during the quarter; the remaining six machines were planned for the second half of fiscal 2023.
Outlook, risks, and other items
- The filing provides no specific new revenue or earnings guidance. Management described growth initiatives in medical, clean energy, advanced energy, and high-precision semiconductor applications, and continued development of its Roll-to-Roll coating initiative.
- Risks discussed include COVID-related supply-chain disruption and travel restrictions, inflation and higher energy costs linked in part to the war in Ukraine, customer and supplier conditions, order and backlog variability, execution of large orders, and market acceptance of new products. Management cautioned that these factors could materially affect results, cash flow, and liquidity.
- Seven customers accounted for 40% of first-quarter sales; four customers represented 46% of accounts receivable at May 31, 2022. The company also disclosed no legal proceedings and no material changes to previously reported risk factors.
- Management concluded that disclosure controls were effective as of May 31, 2022 and reported no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the lower backlog converts to revenue on expected timing, including shipment of the six remaining industrial machines.
- Whether inventory growth, supplier lead times, inflation, and customer deposits affect margins, working capital, and cash generation.
- Whether sales growth in medical and alternative energy can offset continued weakness or volatility in electronics and other markets.
- How much of future earnings comparisons reflect underlying operations versus the prior-year PPP loan-forgiveness gain.
- Whether customer concentration and the decline in foreign-sales share create meaningful revenue or collection risk.