Sono-Tek Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended August 31, 2019; fiscal year ends February 29, 2020. Sono-Tek designs and manufactures ultrasonic coating systems and related components for electronics, alternative energy, medical, industrial, and other markets. Results are unaudited.
Financial performance
- Quarter revenue: $3.346 million, up 19% year over year. Gross profit was $1.547 million, with a 46.2% margin versus 47.7%. Operating income was $92,000 versus $14,000; net income was $115,000 versus $59,000. Diluted EPS was $0.01 versus $0.00.
- First-half revenue: $6.168 million, up 12%. Gross profit was $2.852 million, with a 46.2% margin versus 47.4%. Operating income was $97,000 versus $46,000; net income was $140,000 versus $81,000. Diluted EPS was $0.01 in both periods.
- Drivers and costs: Electronics/Microelectronics sales rose 100% in the quarter and 45% for the half, while multi-axis coating system sales increased 43% and 35%, respectively. Growth in complex, higher-priced systems was partly offset by lower OEM sales. Management attributed lower gross margins to product mix, outsourced components, and higher service costs. Operating expenses increased 9% for the quarter and 7% for the half.
- Cash flow: First-half operating activities generated $589,000, versus $308,000 used in the prior-year period. Investing activities used $1.371 million, including $1.052 million for marketable securities and $319,000 for equipment. Financing used $81,000 for debt repayment. Cash and cash equivalents fell $863,000 to $2.281 million; marketable securities rose to $3.418 million, leaving combined cash and securities of $5.699 million, up $189,000 from February 28.
- Liquidity and debt: Working capital was $6.396 million, compared with $6.424 million at February 28. Long-term debt was $790,000, including $166,000 current maturities; no revolving-line borrowings were outstanding. Of the $1.5 million credit line, $659,000 supported customer letters of credit, leaving $841,000 unused.
- Balance sheet: Total assets were $13.099 million and stockholders’ equity was $8.768 million at August 31. Inventories increased to $2.579 million from $1.658 million, principally reflecting contracts in process and inventory to support orders.
Outlook, risks, and other notable items
- Management expected the $4.175 million August 31 backlog to ship during FY2020 and forecast sales growth of 15%–25%, with increased volume expected to expand margins and strengthen earnings. The filing provides no quantified earnings or margin guidance.
- A $1.65 million order for a newly introduced Robotic Coating Platform was identified as a growth opportunity, including potential six-axis robotic coating applications.
- Management cautioned that order flow and shipments may vary widely from quarter to quarter. Forward-looking risks include economic and business conditions, political/regulatory/competitive and trade developments, new-product acceptance, financing and capacity, patent enforcement, and completing backlog and achieving expected sales and profitability.
- Approximately 65% of first-half sales originated outside the United States and Canada. Sales are denominated in U.S. dollars; management reported no material foreign-exchange or interest-rate market risk.
- Prior-year results included realized gains and unrealized losses on marketable securities; the company recorded no such gains or losses in the current-year periods. The filing reported no material commitments or contingencies other than customer letters of credit, and no legal proceedings. Management said disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $4.175 million backlog ships as expected and supports the 15%–25% FY2020 sales-growth outlook.
- Whether the robotic-platform order and strength in electronics and alternative energy translate into repeatable demand, given quarter-to-quarter variability and lower OEM sales.
- Whether gross margins stabilize or improve despite the shift toward complex systems, outsourced components, and higher service costs.
- How inventory growth, customer deposits, and the $659,000 in letters of credit evolve as orders are completed; the credit line is payable on demand.
- Whether operating cash generation remains positive while the company continues capital spending and investment in sales, marketing, and product development.