Sono-Tek Corporation Common Stock 2027 Q2 Earnings Call

Please go ahead. Thank you, Jamie, and thank you everyone for joining us today.

Sono-Tek released their second quarter and first half fiscal 2027 results this morning. If you do not have a copy of the release, please visit the company's website at www.sono-tek.com and navigate to the investors section. The product market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Dr. Chris Coccio, Executive Chairman, Steve Harshbarger, CEO and President, and Steve Bagley, Chief Financial Officer. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans, and prospects for the company constitute forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call. As a reminder, this is our second quarter and first half call for the period ended August 31, 2026. Our next call will be our full year fiscal 2027 update for the period ended February 28, 2027, and will be held in May 2027. I would now like to turn the call over to Chris Coccio, Executive Chairman of Sono-Tek.

Chris, please go ahead. Thank you, Kieran, and good morning, everyone.

Thank you for joining us today to review Sono-Tek's fiscal second quarter and the first half 2027 results. Steve Harshbarger will review the operational performance and business trends, and then Steve Bagley will provide more detail on the financial results. The first half of fiscal 2027 represented solid progress for Sono-Tek, with revenue growth, meaningful gross margin expansion, and improved operating profitability. Our balance sheet also remains very strong with no debt. Our results also reflect an important shift in the composition of our business, with particularly strong growth in the medical market and increasing demand for higher value production systems. For the first half, revenue increased 6% to approximately $10.9 million. Gross margin expanded to 55%, compared to 51% in the prior year period. Operating income increased 41% to approximately $1.28 million, and net income increased 22% to approximately $1.1 million.

The medical market sales increased 289% to approximately $7.1 million. The medical market continues to be an important growth driver for the company. We are seeing customers increasingly move from process development and qualification towards commercial manufacturing, where Sono-Tek's precision ultrasonic coating technology can play a critical role. At the same time, we continue to see opportunities to expand our install base and our relationships with customers as their production requirements grow. I also want to highlight the significance of the recent orders we announced from an existing alternative energy customer. We recently announced three orders totaling approximately $7.2 million, which cover 10 production scale systems and represent the largest aggregate customer order in Sono-Tek's history. What is particularly important about this order is that it represents an expansion of an established customer relationship.

The customer has successfully deployed our technology in an alternative energy manufacturing process and is now expanding its use of Sono-Tek production systems across three geographic locations. This is a good example of the long-term opportunity we see across our business, supporting customers as they move from development into higher volume manufacturing and then expanding our relationships as their processes scale. Together with the more than $3.6 million medical diagnostic production line order announced in August, these programs alone now represent more than $10.79 million of backlog, with the majority currently expected to be delivered in FY 2028. Importantly, these opportunities involve different customers and two distinct growth markets, medical devices and alternative energy. While the timing of individual production system orders can result in variability from quarter to quarter, we believe the increasing scale of these opportunities demonstrates the long-term potential of our technology and our customer relationships.

With that overview, I'll turn the call over to Steve Harshbarger, our CEO and President.

Steve? Thank you, Chris, and good morning, everybody.

As Chris highlighted, we had a solid first half with continued progress across several important areas of the business. Our results reflected strong medical sector demand, a higher value production systems, improved gross margins, and disciplined execution across the whole organization.

For the first half, revenue increased 6% to $10.9 million, while gross profit increased 14% to approximately $6 million. Gross margin expanded to 55%, and operating income increased 41%. Perhaps, and most importantly, we continue to see our encouraging demand for our technology in applications where customers are moving beyond development and into production. The medical market was the largest contributor to our first half growth. Medical sales increased 289% to approximately $7.1 million, and demand was driven by continued activity in drug-eluting balloon coating systems, specialty stent applications, and other medical device coating applications. We are seeing increasing adoption of our technologies as customers move from development and qualification into commercial manufacturing. That transition is really important because production applications involve larger, more sophisticated systems, and they can create opportunities for follow-on equipment, services, and additional production lines as customers' volumes increase.

From a production perspective, Multi-Axis Coating Systems were a significant contributor to our first half growth, increasing approximately 50%, and that was driven primarily by specialty medical coating systems. OEM Systems also increased approximately 67%, and that was supported by demand from our European fluxing OEM partner and a China-based semiconductor OEM customer. In-Line Coating Systems declined 14% for the first half, and that's primarily reflecting the difficult comparison with the prior year, when we had six high ASP systems that were totaling about $4.4 million that were shipped. While product line results can vary significantly based on the timing of these larger, high ASP system shipments, the underlying demand for high-value production platforms remains very encouraging. We also saw continued improvement in our industrial business, which increased approximately 156% during the first half, and that was influenced by an optics-related shipment to the defense sector.

This defense sector is going to be an area that we will continue to put increased focus on in the coming years. Alternative energy in the first half reflected reduced demand associated with changes in government policy and spending, and that was related to green hydrogen, electrolysis in fuel cell applications. However, we continue to view alternative energy as a meaningful long-term opportunity, and our recent $7.19 million order announcement that Dr. Coccio just touched upon earlier is a very good example of why we continue to believe in the long-term potential in this market. These orders are from an existing customer that has successfully deployed Sono-Tek technology in an advanced clean energy manufacturing process. The customer continues to expand that deployment into additional production lines across three geographic locations. The 10 systems are currently expected to ship primarily during fiscal 2028.