Sono-Tek Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2011. The company develops and sells ultrasonic spray-coating systems and also operates rental real estate. Comparisons are with the periods ended November 30, 2010; balance-sheet comparisons are with February 28, 2011.
Key financial results
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2.945 million | $2.588 million | $9.084 million | $7.304 million |
| Gross profit | $1.506 million | $1.291 million | $4.618 million | $3.525 million |
| Gross margin | 51% | 50% | 51% | 48% |
| Operating income | $224,405 | $214,111 | $956,925 | $439,582 |
| Net income | $195,803 | $213,922 | $871,923 | $434,562 |
| Basic EPS | $0.01 | $0.02 | $0.06 | $0.03 |
Nine-month sales rose 24%, while third-quarter sales increased 14%. Management attributed the nine-month gross-margin improvement to increased sales of stent coaters, programmable XYZ units and fluxers; quarterly margin gains were attributed to programmable XYZ units. Third-quarter sales increased across product lines except nozzles and WideTrack units.
Cash flow and liquidity: Operating activities generated $515,664 for the nine months, down from $960,080 a year earlier. The principal working-capital use was a $984,566 inventory increase. Investing activities used $158,736, mainly for equipment and patent costs; financing activities provided $166,854, including $237,000 of equipment financing. Cash rose $523,782 to $2.208 million. Working capital was $4.424 million and the current ratio was 3.76:1 at November 30.
Debt and equity: Total debt was $2.264 million, including $120,303 due within one year; debt was $2.098 million at February 28. The company had no balance on its $750,000 revolving credit line, which was available and payable on demand. Stockholders’ equity increased to $5.226 million from $4.317 million.
Material changes and management commentary
- Nine-month net income approximately doubled year over year, supported by higher sales and gross profit. Third-quarter net income declined despite sales growth; interest expense rose to $29,528 from $570, and research, selling and administrative expenses also increased.
- Research and product-development costs increased to $817,212 for nine months, principally due to added engineering staff and materials. Selling and marketing costs rose to $1.814 million, reflecting commissions, staffing, travel and trade-show costs.
- Inventory increased by approximately $985,000, including higher raw materials, work in process, finished goods, demonstration units and rental units. Management linked the increase to sales growth and higher inventory levels.
- International sales were approximately 60% of revenue, according to management. The company cited electronics, medical devices, advanced energy and WideTrack coating applications as its diversified markets, and described newer markets as potential sources of future growth without guaranteeing success.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management’s forward-looking statements identify risks including economic and business conditions; political, regulatory, competitive and technological changes; new-product development and market acceptance; financing adequacy; capacity additions; patent enforcement; and the ability to grow sales and maintain profitability. Management said interim results are not necessarily indicative of full-year results.
The company began rental real estate operations in December 2010 after acquiring the property. The filing’s rental-operations discussion reports a nine-month net loss of $120,416, while the segment table reports a rental real estate net loss of $18,610; the presented figures are not clearly reconciled. Interest expense for the nine-month period was $88,895, compared with $6,405 a year earlier, primarily reflecting the property mortgage and new equipment financing. The filing reports no legal proceedings, defaults upon senior securities, or unregistered sales of equity securities. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the substantial inventory increase converts into sales and cash, and whether inventory allowances remain adequate.
- The source and durability of improved nine-month gross margins, and the reasons third-quarter net income fell despite sales growth.
- The rental real estate results: reconcile the $120,416 loss in the MD&A with the $18,610 loss in the segment table.
- Debt service obligations, including the mortgage, equipment loan and demand nature of the unused revolving credit line.
- Progress and profitability in newer markets and international sales, given management’s stated product-acceptance, financing and growth risks.