SOTK — Q2 FY2027 (Aug 2026 Quarter) Financial Report Analysis

Medical orders carried a flat quarter while clean-energy sales collapsed

Sono-Tek makes ultrasonic spray-coating machines. They lay down very thin, even layers of material, such as a drug coating on a heart stent or a catalyst layer on a fuel-cell part. In its fiscal second quarter (the three months to August 31, 2026; Sono-Tek's fiscal year 2027 ends February 28, 2027), net sales were almost unchanged at $5.23 million, up 1.3%. That flat total hides a big shift in who is buying. Medical-device sales tripled to $3.11 million. Sales to the "Alternative/Clean Energy" market fell 78%, to $0.54 million. Gross margin improved, but faster growth in operating costs and a higher tax rate cut net income 13.5% to $366,000.

This is the first Sono-Tek report on this site.

At a glance

• Medical was 59% of sales ($3.11M of $5.23M), up from 19% a year ago. Shipments of balloon-coating and stent-coating systems drove it, and they replaced an energy business that shrank from $2.43M to $0.54M in a year.
• Gross margin rose to 52.9% from 50.2%. More systems were sold directly to U.S. customers, which avoids distributor discounts and commissions. Management says the half-year's mix was "unusually favorable" and should not be expected to last.
• The order backlog was $9.51M, up 23% from three months earlier but down 15% from a year ago. After the quarter ended, Sono-Tek announced a $7.19M order for ten clean-energy production systems, most of which will ship in fiscal 2028.

The numbers

Gross margin is the share of sales left after the direct cost of building the machines. Operating margin is the share left after also paying for R&D, sales and administration, before interest income and tax. The EPS change looks large because the reported figures are rounded to the cent: unrounded, EPS fell about 14%, in line with net income.

The first half is stronger than the quarter. Six-month sales rose 5.8% to $10.89M, operating income rose 41% to $1.28M, and the operating margin was 11.7% against 8.8%. The first quarter (implied from the half-year less the second quarter) had $5.66M of sales, a 56.8% gross margin and $0.90M of operating income. So the second quarter was weaker than the first on every line, not just weaker than a year ago.

Where the sales came from

By end market, the change was large:

The filing attributes the medical gain to "shipments of balloon coating systems and specialty stent-coating systems." Industrial sales rose because of a system sold to the defense sector for an optics application. Clean energy (which the filing also calls Advanced Energy) was the company's largest market a year ago. Management now says the "lower level of underlying demand" in that market will continue "through the remainder of fiscal 2027 and into fiscal 2028."

By product, In-Line Coating Systems rose 16% to $1.78M on U.S. medical demand, and OEM systems (subsystems sold to other machine builders) rose 63% to $0.64M. OEM sales came from a European fluxing-system partner and a semiconductor OEM in China. Spare parts and service fell 22% to $0.81M. That matters because parts and service is normally the steadier, repeat part of an equipment maker's revenue.

By region, U.S. and Canada sales rose 35% to $3.68M. Asia Pacific fell 45% (lower sales in South Korea, Taiwan and Japan) and Europe/Middle East/Africa fell 33% (softer clean-energy demand). Foreign customers were 30% of sales, down from 47%. This is the main reason gross margin improved: a U.S. sale made by Sono-Tek's own salespeople carries no distributor discount.

Why profit fell when gross profit rose

Gross profit rose $177K, but operating expenses rose $217K:

• Marketing and selling: +15% to $1.00M. The increase came from salaries for the sales application lab, more salespeople and "forward deployed" engineers who work on site with customers, health insurance and trade shows.
• R&D: +8% to $0.68M, from health insurance, materials and engineering costs.
• General and administrative: +5% to $0.71M.

Management says it expects marketing and sales spending to increase further in the second half as it hires to win large, high-price production-system orders. Operating costs are therefore rising ahead of the revenue they are meant to bring in.

Below operating income, interest income on the company's cash nearly doubled to $154K from $82K. A $37K unrealized loss on its Treasury holdings, against a $23K gain a year ago, offset part of that. Pre-tax income fell 5.4% to $498K. Net income fell more, by 13.5%, because the effective tax rate rose to 26.5% from 19.5%. The filing cites higher state franchise taxes. At last year's tax rate, net income would have been roughly $400K.

What the headline numbers hide

• Cash conversion looks very strong, but mostly because of collections. Operating cash flow for the half was $3.10M, against $1.11M of net income and an outflow of $1.10M a year earlier. Most of the gap is a $2.12M fall in accounts receivable (money customers owed). That included about $884K from one customer that had been given extended payment terms last year and has now paid in full. Customer deposits, which Sono-Tek collects upfront on orders, fell $745K as orders shipped. This is a one-time catch-up in collections, not a new level of cash generation.
• Customer concentration is high. Two customers accounted for 34% and 18% of second-quarter sales, and 37% and 16% of first-half sales. Two customers make up 51% of receivables. At this size, a single delayed shipment to one of those customers could move a quarter's sales by a third.
• Management says margins are flattered. In its own words, "the product and geographic mix during the first half of fiscal 2027 was unusually favorable" and the gross margins achieved "should not necessarily be viewed as indicative" of the future. If gross margin returns to around 50% while operating costs keep rising, operating income in the second half could be below this quarter's $382K.
• No buyback boost. Sono-Tek repurchased no shares this half (it spent $151K a year ago). Diluted share count rose slightly to 15.81M from 15.73M. The EPS decline comes entirely from lower earnings.
• The balance sheet is a strength. Cash and Treasury securities total $17.76M, with no debt, compared with total assets of $26.4M. About two-thirds of the company's assets are cash, so interest income is now 40% the size of operating income.
• No guidance. Sono-Tek does not give numerical revenue or earnings guidance. The forward-looking statements in the filing are qualitative: lower clean-energy demand, higher sales spending and less favorable margins ahead.

Takeaway: Sono-Tek has replaced a clean-energy business that fell 85% in the first half with medical-device demand, and sales held up overall. But the result depends on a few large U.S. medical customers and a margin mix that management itself calls unusually favorable. Spending is rising ahead of the next wave of orders. The $7.19M clean-energy order announced after the quarter mostly ships after February 2027, so it supports fiscal 2028 more than the rest of this year.

Outlook: what to watch

• Backlog turned up in the quarter. It rose to $9.51M from $7.73M at the end of May. Adding second-quarter shipments ($5.23M) to that $1.78M increase implies roughly $7M of new orders, about 1.3 times what shipped. That figure is our calculation from the reported numbers, and the backlog includes service work. A book-to-bill ratio above 1 (more orders in than shipments out) means the backlog is growing.
• The $7.19M order. One existing clean-energy customer ordered ten production systems after the quarter ended. That is larger than any quarter's total sales so far this year, but most of it will be recognized in fiscal 2028. Next quarter's backlog should show it. Investors should then watch whether it ships on schedule and whether customer deposits rebuild from the current $2.32M.
• Whether medical demand repeats. First-half medical sales were $7.05M against $1.81M a year ago, mostly from a small number of customers buying stent and balloon-coating lines. The third quarter (to November 30, 2026) will show whether this is a sustained wave of adoption or a cluster of orders.
• Operating leverage. With sales roughly flat and operating costs up 10%, operating margin fell to 7.3%. For second-half profit to grow, sales need to rise faster than the spending increase management has signalled. Shipments from the current backlog alone may not be enough to do that.

Figures from Sono-Tek's Form 10-Q for the quarter ended August 31, 2026, filed October 14, 2026. Q1 FY2027, implied book-to-bill and tax-rate comparisons are our calculations from the reported figures.