Sono-Tek Corporation — Form 10-Q Summary
Business context and reporting period. Sono-Tek designs and manufactures ultrasonic coating systems for electronics, medical, alternative energy, industrial and other markets. This report covers the three months ended May 31, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended May 31, 2017.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $2.701 million | $2.501 million | +8% |
| Gross profit / margin | $1.271 million / 47.1% | $1.181 million / 47.2% | Profit +8%; margin nearly flat |
| Operating income / margin | $32,151 / 1.2% | $21,079 / 0.8% | Income +53% |
| Net income | $21,430 | $15,869 | +35% |
| Basic and diluted EPS | $0.00 | $0.00 | Rounded as reported |
| Operating cash flow | $(374,493) | $358,084 | Turned negative |
Operating expenses rose 7% to $1.239 million, including higher research and product development, selling, and administrative costs. Management attributed the improved operating result to sales growth and cost management; product mix and higher direct labor and service costs partly offset volume benefits.
Cash and cash equivalents were $1.542 million at May 31, 2018, and marketable securities were $4.317 million, totaling $5.859 million, down $563,000 from February 28, 2018. Working capital was $6.529 million, down $31,000; the current ratio was 4.5:1. Management cited timing of working-capital needs, including higher receivables and lower payables and accrued expenses. Operating cash use reflected increases in receivables and inventory and decreases in accounts payable and accrued expenses. Investing cash use was $61,541, including $101,634 for equipment and furnishings; financing cash use was $38,678 for debt repayments.
Total debt was $987,973, down from $1.027 million at February 28, 2018. The company had no borrowings on its $750,000 revolving credit line, which was payable on demand. The bank note is secured by land and buildings, bears 4.15% interest, and is payable through January 2024.
Material changes and management commentary
- Sales growth was led by electronics/microelectronics (+50%) and medical (+46%); alternative energy sales fell 66%, and industrial sales fell 63%. By product, OEM systems rose 40% and fluxing systems rose 22%, while integrated coating systems declined 42%.
- Approximately 63% of sales came from outside the United States and Canada, compared with 67% in the prior-year quarter. Management said paid coating services helped develop customer applications and contributed to equipment shipments.
- Backlog was $1.448 million at May 31, 2018, 17% above the $1.238 million reported at February 28, 2018. Management expected alternative energy sales to increase significantly during the remainder of the fiscal year, based on current backlog and forecasts.
- Management expects continued growth to support operating leverage and improved margins, while continuing investment in product development and sales. The filing provides no quantified full-year revenue or earnings guidance.
Risks, contingencies, and unusual items
- Adoption of ASU 2016-01 required fair-value changes in equity investments to be recognized in net income. The quarter included a $49,061 unrealized loss and a $29,392 realized gain on marketable securities; investment-related income and losses affected reported net income.
- Forward-looking results depend on general economic and business conditions, competition, regulatory and technological developments, product development and market acceptance, financing, capacity, patent enforcement, sales growth, and continued profitability. Interim results are not necessarily indicative of full-year results.
- The filing reports no legal proceedings. Management assessed disclosure controls and procedures as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the backlog converts to sales as expected, particularly in alternative energy, and whether sales growth remains concentrated in electronics and medical markets.
- Whether receivables, inventory, and payables trends improve enough to restore positive operating cash flow.
- How marketable-security valuations and realized or unrealized investment results affect earnings under the new accounting treatment.
- Whether operating expense growth, ongoing hiring and investment, and product mix allow the company to achieve the operating leverage and margin improvement management anticipates.