Sono-Tek Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2013. Sono-Tek develops and sells ultrasonic spray-coating systems across electronics, energy, medical-device, glass, textile, and food markets; it also reports rental real estate operations. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended Nov. 30, 2013 | Three months ended Nov. 30, 2012 | Nine months ended Nov. 30, 2013 | Nine months ended Nov. 30, 2012 |
|---|---|---|---|---|
| Net sales | $2.650 million | $2.202 million | $7.562 million | $7.433 million |
| Gross profit | $1.215 million | $1.082 million | $3.599 million | $3.597 million |
| Operating income | $274,000 | $47,000 | $619,000 | $138,000 |
| Net income | $171,000 | $25,000 | $350,000 | $96,000 |
| Basic and diluted EPS | $0.01 | $0.00 | $0.02 | $0.01 |
- Quarterly sales rose 20% year over year; nine-month sales rose 2%. Quarterly operating income and net income increased substantially from the prior-year quarter.
- Consolidated gross margin was approximately 45.9% for the quarter versus 49.1% a year earlier, and 47.6% for the nine months versus 48.4%. Management attributed lower ultrasonic-spraying margins to product mix, including lower stent-coating sales.
- Nine-month operating expenses declined to $2.980 million from $3.459 million, including lower marketing and selling costs and general and administrative costs. Nine-month income tax expense was $181,000, compared with a $26,000 tax benefit in the prior-year period.
- Operating cash flow was $1.166 million for the nine months, versus $167,000. Cash increased $1.035 million to $2.976 million. The cash-flow improvement included higher customer deposits ($322,000 increase) and higher accounts payable/accruals and taxes payable; inventory absorbed $281,000.
- Investing activities used $37,000 and financing activities used $94,000, principally for debt repayments. Cash and marketable securities totaled approximately $3.932 million at November 30.
- Working capital was approximately $5.150 million, up from $4.680 million at February 28, 2013; the reported current ratio fell to 3.8 from 5.3.
- Total debt was $2.019 million, including $129,000 due within one year. The $750,000 revolving credit line was undrawn. Total assets were $10.078 million and stockholders’ equity was $6.357 million.
Business trends and material changes
- Nine-month ultrasonic-spraying sales increased 2%; sales of nozzles/generators, WideTrack, and servo units rose, while fluxer and stent-coating unit sales declined. In the quarter, higher XYZ, WideTrack, and EVS sales offset lower stent-coating sales.
- The ultrasonic-spraying segment generated $7.504 million of nine-month sales and $390,000 of net income. Management describes the company’s products, geographic reach, and market diversification as a foundation for future growth, but provides no quantified sales or earnings guidance.
- Rental real estate operations reported $58,000 of external rental income for the nine months; management said vacant warehouse space was being marketed through a broker.
- On December 16, 2013, after quarter-end, the company paid $323,000 toward its property mortgage and refinanced approximately $1.6 million with M&T Bank at 4.15% for ten years. This replaced seller financing at 5.5% with about 17 years remaining.
Outlook, risks, and other disclosures
Management says customer deposits increased to $391,000 from $69,000 and relates the increase to sales expected to be completed in the current fiscal year. The filing gives no formal financial outlook. Forward-looking statements are subject to economic, competitive, regulatory, technological, product-acceptance, financing, capacity, patent-enforcement, and sales-growth risks. The company identifies estimation uncertainty in income taxes and stock-based compensation. It reported no legal proceedings, no defaults, and effective disclosure controls; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Reconcile the rental-segment results: the segment table reports a nine-month net loss of about $40,000, while MD&A describes a $141,000 loss and cites rental income, operating costs, interest, and an impairment write-off. The filing does not clearly explain this difference.
- Assess the sustainability of operating cash flow, given the material contribution from customer deposits, accrued liabilities, and income taxes payable, and the inventory build.
- Review the quarter’s lower gross margin and product mix, especially declining stent-coating sales, alongside the strong year-over-year sales increase.
- Confirm the post-quarter $323,000 mortgage payment and refinancing terms, including the effect on cash, debt maturities, and future interest expense.
- Monitor the vacant rental space, expected conversion of customer deposits into completed sales, and the company’s progress in newer markets; no quantified guidance is provided.