Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended November 30, 2020; comparisons are with the corresponding 2019 periods unless otherwise noted. Sono-Tek designs and manufactures ultrasonic coating systems and related components for electronics, alternative energy, medical, industrial, and other markets.
Financial performance
| Metric | Three months ended Nov. 30, 2020 | Year-over-year | Nine months ended Nov. 30, 2020 | Year-over-year |
|---|---|---|---|---|
| Net sales | $3.827 million | Up 4% | $10.736 million | Up 9% |
| Gross profit | $1.931 million | Up 7% | $5.112 million | Up 10% |
| Gross margin | 50.5% | 48.9% prior year | 47.6% | 47.2% prior year |
| Operating income | $447,000 | $270,000 prior year | $832,000 | $367,000 prior year |
| Operating margin | 11.7% | 7.4% prior year | 7.8% | 3.7% prior year |
| Net income | $320,000 | $280,000 prior year | $666,000 | $420,000 prior year |
| Diluted EPS | $0.02 | $0.02 prior year | $0.04 | $0.03 prior year |
Quarterly sales growth was driven primarily by integrated coating systems and OEM systems; gross-margin improvement reflected product mix. For the nine months, integrated coating systems rose 103% and industrial-market sales rose 111%. Medical sales declined 14% and emerging R&D and other sales declined 23%.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $713,000, down from $1.023 million. Investing activities provided $767,000, including $994,000 net proceeds from marketable securities and a $100,000 energy-efficiency grant; equipment purchases were $327,000. Financing activities provided $875,000, including $1.002 million of PPP loan proceeds, partly offset by $127,000 of debt repayments.
- Cash and cash equivalents were $6.014 million at November 30, 2020, versus $3.660 million at February 29, 2020. Marketable securities were $3.226 million, down from $4.219 million. Combined cash and securities increased by $1.361 million to $9.240 million.
- Working capital was $8.048 million, up from $7.173 million at February 29, 2020. Total assets were $16.810 million and total stockholders’ equity was $10.476 million.
- Reported debt totaled $1.583 million, including a $1.002 million PPP loan and a $581,000 bank mortgage. The company disclosed that it paid the mortgage’s remaining principal and a $14,000 prepayment penalty in December 2020, after quarter-end.
- The $1.5 million revolving line of credit had no outstanding borrowings; $941,000 supported customer letters of credit, leaving $559,000 unused at November 30. Customer deposits were $1.782 million.
Outlook, risks, and notable items
- Management gave no specific revenue or earnings guidance. It noted that order flow and shipments can vary significantly from quarter to quarter as the business shifts toward larger, more complex systems.
- Backlog was $4.549 million at November 30, up 29% from $3.517 million at February 29, 2020. The increase included a $1.1 million textile-industry order expected to ship in the fourth quarter of fiscal 2021 or first quarter of fiscal 2022.
- Management expected COVID-19 to continue to affect the business in the near term. Risks cited include delayed or canceled orders, travel limits, facility or supplier disruptions, supply shortages and increased costs, and reduced customer demand. Medical and emerging R&D orders had been put on hold; management said it expected activity to improve as markets reopened.
- The company applied for forgiveness of its $1.002 million PPP loan and said it believed proceeds had been used for qualifying expenses, but cautioned that forgiveness was not assured. Any unforgiven balance and accrued interest would remain payable under the loan terms.
- Customer and receivables concentration is material: three customers accounted for 30% of quarterly sales; four accounted for 30% of nine-month sales; and three customers represented 45% of receivables at November 30.
- No material commitments or contingencies were reported other than letters of credit; the company reported no legal proceedings and no off-balance-sheet arrangements. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Investor verification points
- Confirm PPP loan forgiveness status and the impact of the December mortgage payoff on subsequent-period debt and cash.
- Track conversion of the textile order and the reported backlog into shipments and revenue, including any cancellations or schedule changes.
- Assess whether growth in integrated systems and industrial sales can offset weakness in medical, emerging R&D, and certain international markets.
- Monitor operating cash generation, accounts receivable, inventory, customer deposits, and availability under the revolving credit facility.
- Evaluate continued COVID-19 effects on customer demand, supply-chain reliability, and the company’s concentrated customer and receivables exposure.