Sono-Tek Corporation — Q2 FY2019 Form 10-Q
Business and period: Sono-Tek designs and manufactures ultrasonic coating systems, nozzles and related subsystems for electronics, medical, alternative energy, industrial and other markets. This unaudited report covers the quarter and six months ended August 31, 2018; the company’s fiscal year ends February 28.
Financial performance
| Metric | Three months ended Aug. 31, 2018 | Six months ended Aug. 31, 2018 |
|---|---|---|
| Net sales | $2.818 million, up 6% year over year | $5.519 million, up 7% |
| Gross profit / margin | $1.344 million / 47.7%; prior-year margin 50.1% | $2.616 million / 47.4%; prior-year margin 48.7% |
| Operating income / margin | $13,826; prior year $90,321 | $45,977; prior year $111,401; reported margin 0.8% versus 2.1% |
| Net income | $59,124; prior year $54,645 | $80,554; prior year $70,514 |
| Basic and diluted EPS | $0.00 as reported | $0.01 as reported |
| Operating cash flow | Not separately reported for the quarter | $(308,108), versus $1.062 million provided in prior-year period |
Quarterly sales growth reflected stronger multi-axis systems and OEM systems, while integrated coating systems declined. For the first half, medical sales rose 47% and alternative-energy sales rose 2%; industrial and emerging R&D/other sales fell 16% and 45%, respectively. Sales outside the U.S. and Canada represented approximately 62% of first-half sales, compared with 56% a year earlier.
Operating expenses increased 7% for the first half, including higher research and development and marketing and selling costs. Management attributed lower gross margins primarily to product mix shifting toward more complex systems with greater outsourced hardware content, as well as increased direct labor and service costs.
Liquidity, debt and cash flow
At August 31, cash was $1.655 million and marketable securities were $4.092 million, totaling $5.747 million, down $675,000 from February 28. Working capital was $6.590 million, and the current ratio was 4.0:1. The company had $949,240 of long-term debt, including $159,404 due within one year, at a stated 4.15% interest rate. Its $750,000 revolving credit facility was undrawn.
First-half operating cash use was driven principally by a $519,000 increase in accounts receivable and a $333,000 increase in inventory. Management said approximately 61% of quarter shipments occurred in August due to customer scheduling requests, while inventory was built to support backlog. Investing activities provided $24,459, including $184,249 from net sales of marketable securities, partly offset by $159,790 of equipment purchases. Debt repayments used $77,410; cash declined by $361,059.
Changes, outlook and risks
- Backlog was $2.015 million at August 31, up 63% from February 28 and 39% from May 31. Management cautioned that orders and backlog fluctuate substantially between quarters and shipments are scheduled around customer timing and staffing.
- Management said alternative-energy demand strengthened in Q2, was a principal contributor to the backlog increase, and was expected to grow for fiscal 2019. It also expects continued growth and higher volume to support operating leverage and improved margins. The filing gives no numerical full-year revenue or earnings guidance.
- Management described record use of its development laboratory and attributed medical-market growth partly to application-engineering work that can lead to equipment sales. It cited expansion of complex, higher-value systems and OEM subsystems as part of its growth strategy.
- ASU 2016-01 caused marketable-security fair-value changes to be recorded in earnings rather than other comprehensive income. For the first half, a $119,075 realized gain was more than offset by a $129,657 unrealized loss; the quarter included a $89,683 realized gain and an $80,596 unrealized loss. This accounting and investment volatility affected reported net income.
- Forward-looking results are subject to economic, competitive, regulatory and technology developments, product acceptance, financing adequacy, capacity, patent enforcement and the ability to grow sales while remaining profitable. The filing notes that customized equipment orders can vary materially by quarter. No legal proceedings were reported; disclosure controls were assessed as effective, with no material quarterly change in internal financial-reporting controls.
Important facts for investors to verify
- Whether the elevated receivables and inventory convert to collections and shipments, and whether customer scheduling supports the backlog.
- Whether backlog converts to revenue, particularly in alternative energy, and how variable order timing affects quarterly results.
- Whether growth in complex systems and outsourced hardware content continues to pressure gross margins, and whether expense growth yields the operating leverage management anticipates.
- The performance and valuation of marketable securities and the resulting effect of fair-value changes on earnings.
- The filing reports quarterly gross margin as 47.7% and prior-year margin as 50.1% in its detailed discussion; the highlights section rounds the prior-year figure to 50.0%.