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STRN > SEC Filings for STRN > Form 10-Q on 13-Aug-2012All Recent SEC Filings

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Form 10-Q for SUTRON CORP


13-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statements made in this Quarterly Report on Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may sometimes be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties including those identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results.

Overview

Our primary focus is to provide real-time systems solutions, including equipment and software, and services to our customers in the areas of hydrological, meteorological and oceanic monitoring. We design, manufacture, market and sell these products and services to a diversified customer base consisting of federal, state, local and foreign governments, engineering firms, universities and hydropower companies. Our products, systems and services enable these entities to monitor and collect hydrological, meteorological and oceanic data for the management of critical water resources, for early warning of potentially disastrous floods, storms or tsunamis, for the optimization of hydropower plants and for providing real-time weather conditions at airports.

Our key products are the SatLink2 Transmitter/Logger, the Xpert/XLite dataloggers, the Accububble Self-Contained Bubbler, the Accubar Pressure Sensor, and Tempest and XConnect systems software. These are the essential components of most systems and are provided to customers as off-the-shelf equipment or as part of a custom system. The SatLink2 is a key product because it functions both as a transmitter and logger. The Xpert and XLite are more powerful dataloggers that have significant more logging capability and communications options than the SatLink2. Our Tempest and XConnect systems software allow us to provide turn-key systems solutions to our customers.

We are beginning fiscal year 2012 with a backlog of approximately $9,599,000 as compared to beginning fiscal year 2011 with a backlog of approximately $11,748,000. We estimate that approximately 85% of our December 31, 2011 backlog will convert to revenue in 2012. We anticipate that we will continue to experience significant quarterly fluctuations in our sales and revenues in 2012. Operating results will depend upon the product mix and upon the timing and execution of project awards.

International sales, which totaled 53% of revenues for 2011, are a significant portion of our revenues. We believe that international revenues will grow as a percentage of our total business as we plan to develop stronger international partnerships and expand our international sales opportunities. International sales are however difficult to forecast because they are frequently delayed due to the different governmental procurement and approval processes. Our domestic business is highly dependent upon government business. Contracts and purchase orders with Federal, state and local government agencies represented approximately 34% of our 2011 revenues.

We are committed in our ongoing sales, marketing and research and development activities to sustain and grow our sales and revenues from our products and services. We expect our sales and marketing, research and development and general and administrative expenses to increase moderately in 2012 as compared to 2011 due to planned spending on sales and marketing activities and on the development of new products and applications.


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Critical Accounting Policies and Estimates

The Company's discussion and analysis of financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, the valuation of inventory, and valuation of deferred tax assets and liabilities, warranty obligations and accruals. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For a complete description of accounting policies, see Note 2 to our financial statements included in the Company's Form 10-K for the year ended December 31, 2011. There were no significant changes in critical accounting estimates in the first quarter of 2012.

Results of Operations

The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:

                                                    Three Months Ended June 30,
                                                     2012                2011

  Net sales and revenues                                 100.0 %             100.0 %
  Cost of sales and revenues                              59.2                64.1
  Gross profit                                            40.8                35.9

  Selling, general and administrative expenses            19.8                24.2
  Research and Development expenses                        9.2                13.6
  Operating income                                        11.8                (1.9 )
  Interest and other income                                0.2                 0.6
  Income before income taxes                              12.0                (1.3 )
  Income taxes (benefit)                                   3.9                (0.7 )
  Net income                                               8.1 %              (0.6 ) %

Three months ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net Sales and Revenues

Revenues for the second quarter ended June 30, 2012 increased 77% to $6,804,168 from $3,848,508 in 2011. Net sales and revenues are broken down between sales of standard products and sales of systems and services. Standard products had a net sales and revenue decrease of 11% to $1,607,404 in 2012 from $1,798,705 in 2011 due to decreased sales to federal agencies. Net sales and revenues for systems and services increased 154% to $5,196,764 in the second quarter of 2012 from $2,049,803 in 2011. The increase is attributed to an increased project backlog and activity in 2012 as compared to 2011 and to approximately $511,000 of post-acquisition revenues relating to our new MeteoStar Division.

Overall domestic revenues increased 18% to $2,246,134 in the second quarter of 2012 versus $1,898,335 in 2011 while international revenues increased 134% to $4,558,034 in the second quarter of 2012 versus $1,950,173 in the same period in 2011. The increase in domestic revenues is primarily due to post-acquisition revenues relating to our new MeteoStar Division. The Company recognized revenues of approximately $1,433,000 on its contract to provide dam safety monitoring to the Nuozhadu Hydropower Station in Yunnan Province, China. This contract was the main driver of international revenues for the quarter.


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Customer orders or bookings in the second quarter of 2012 increased 161% to approximately $7,557,000 as compared to approximately $2,900,000 in the second quarter of 2011. Several large project awards were received in the second quarter of 2012 while no similarly sized awards were received in the second quarter of 2011 and bookings relating to the new MeteoStar Division totaled approximately $2,639,000 in the second quarter.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 59% and 64%, respectively, for the second quarter of 2012 and 2011. Standard product cost of sales was approximately 55% in the second quarter of 2012 as compared to 63% in 2011. The decrease in cost of sales is attributed to increased sales volume that resulted in higher absorption of fixed manufacturing costs and changes in the mix of products sold. Cost of sales for systems and services was 61% in the second quarter of 2012 as compared to 66% in the second quarter of 2011. The decrease was primarily due to shipment of higher margin systems.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $1,347,544 for the second quarter of 2012 from $929,092 for the same period in 2011. The increase in selling, general and administrative expenses for the quarter was primarily due to acquisition related fees totaling approximately $160,000, an increase of $163,000 in agent commissions and increased expenses of approximately $100,000 due to the addition of MeteoStar.

Research and Development Expenses

Research and development expenses increased to $627,633 for the second quarter of 2012 from $524,208 for the same period in 2011. MeteoStar Division research and development activities accounted for approximately $116,000 of the increase. Our development efforts were focused on IridiumLink and GPRSLink. These are integrated logger/telemetry products that provide low cost, two-way communication. Significant effort was spent on the 8310 datalogger for enhancements to perform dam safety monitoring. We continued our development of SUTRONWIN which provides a complete system software package including webhosting, real-time data storage for one year, data analysis and complete data management.

Interest and Other Income, Net

Due to our cash position, we did not use our line of credit during the second quarter of 2012. We had interest income for the quarter ended June 30, 2012 of $15,345 as compared to net interest income of $24,842 for the quarter ended June 30, 2011.

Income Taxes

We recorded an income tax expense of $265,000 for the quarter ended June 30, 2012. We received an income tax benefit of $27,000 for the quarter ended June 30, 2011. The provision for income taxes in 2012 represents an effective income tax rate of 32%. The income tax benefit in 2011 represents an effective tax benefit rate of 56% due to several tax credits.


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Six months ended June 30, 2012 Compared to Six Months Ended June 30, 2011

The following table sets forth for the periods indicated the percentage of total revenues represented by certain items reflected in our statements of operations:

                                                      Six Months Ended June 30,
                                                       2012               2011

    Net sales and revenues                                100.0 %            100.0 %
    Cost of sales and revenues                             60.1               63.0
    Gross profit                                           39.9               37.0

    Selling, general and administrative expenses           22.3               21.2
    Research and Development expenses                      11.2               11.4
    Operating income                                        6.4                4.4
    Interest and other income                               0.2                0.5
    Income before income taxes                              6.6                4.9
    Income taxes (benefit)                                  2.1                1.6
    Net income                                              4.5 %              3.3 %

Net Sales and Revenues

Revenues for the six months ended June 30, 2012 increased 21% to $10,541,349 from $8,729,127 in 2011. Net sales and revenues are broken down between sales of standard products and sales of systems and services. Standard products had a net sales and revenue decrease in 2012 of 2% to $4,024,379 from $4,087,328 in 2011 due to decreased sales to federal customers. Net sales and revenues for systems and services increased 40% to $6,516,970 from $4,641,799 in 2011 primarily due to increased backlog and project activity.

Overall domestic revenues increased 3% to $4,154,916 for the six months ended June 30, 2012 versus $4,034,621 in 2011 due primarily to increased project activity from the MeteoStar acquisition. International revenues increased 36% to $6,386,433 for the six months ended June 30, 2012 versus $4,694,506 in 2011. The increase is attributed to an increase in the backlog and increased project activity.

Customer orders or bookings for the six months ended June 30, 2012 were approximately $14,092,000 as compared to approximately $6,379,000 in 2011, an increase of 121%. Several large project awards were received in the six months ended June 30, 2012 while no similarly sized awards were received in the six months ended June 30, 2011.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 60% and 63%, respectively, for the six months ended June 30, 2012 and 2011. Standard product cost of sales as a percentage of standard product revenues was approximately 53% and 56%, respectively, for the six months ended June 30, 2012 and 2011. Cost of sales for systems and services as a percentage of systems and services revenues was 65% for the six months ended June 30, 2012 as compared to 69% for the six months ended June 30, 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,352,360 in 2012 as compared to $1,848,697 in 2011, an increase of $503,663 or 27%. Selling, general and administrative expenses as a percentage of revenues increased to 22% for the six months ended June 30, 2012 from 21% in 2011. The increase in expenses is primarily attributed to $180,000 of acquisition related expenses, increased agent commissions of $155,000 and increased expenses of approximately $100,000 due to the addition of MeteoStar.


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Research and Development Expenses

Research and development expenses increased to $1,180,901 for the six months ended June 30, 2012 from $998,776 in 2011, an increase of $182,125 or 18%. MeteoStar Division research and development activities accounted for approximately $116,000 of the increase. Our development efforts were focused on IridiumLink and GPRSLink. These are integrated logger/telemetry products that provide low cost, two-way communication. Significant effort was spent on the 8310 datalogger for enhancements to perform dam safety monitoring. We continued our development of SUTRONWIN which provides a complete system software package including webhosting, real-time data storage for one year, data analysis and complete data management.

Interest and Other Income, Net

Due to the Company's cash position, the Company did not use its line of credit during the six months ended June 30, 2012. The Company had net interest income in 2012 of $26,728 as compared to net interest income of $42,967 in 2011.

Income Taxes

Income taxes increased 53% in 2012 to $221,000 from $144,000 in 2011. The provisions for income taxes represent an effective income tax rate of 32% in 2012 and 34% in 2011.

Liquidity and Capital Resources

Cash and cash equivalents were $4,813,154 at June 30, 2012 compared to $8,737,543 at December 31, 2011. Working capital decreased to $15,229,615 at June 30, 2012 compared with $18,973,156 at December 31, 2011.

Net cash provided by operating activities was $394,908 for the six months ended June 30, 2012 as compared to net cash used by operating activities of $144,747 for the six months ended June 30, 2011. The increase was primarily due to an increase in net income, a reduction in accounts receivable and an increase in billings in excess of costs and estimated earnings.

Net cash used by investing activities was $4,400,569 for the six months ended June 30, 2012 as compared to net cash used by investing activities of $316,776 for the six months ended June 30, 2011. The increase is primarily due to the acquisition of MeteoStar.

Net cash provided by financing activities was $98,873 for the six months ended June 30, 2012 as compared to net cash provided by financing activities of $46,388 for the six months ended June 30, 2011. The increase in cash provided in 2012 was primarily due to proceeds from the exercise of employee stock options.

We have a revolving credit facility of $3,000,000 with Branch Banking & Trust. We are permitted to borrow based on accounts receivable and inventory according to pre-established criteria. The credit facility expires on September 5, 2013 and is secured by substantially all assets of the Company. Borrowings bear interest at the bank's prime rate. During the second quarter of 2012, there were no borrowings on the line of credit.

We frequently bid on and enter into international contracts that require bid and performance bonds. At June 30, 2012 and December 31, 2011, a commercial bank had issued standby letters of credit in the amount of $1,017,409 and $898,013 that served as either a bid or performance bond. The amount available to borrow under the line of credit was reduced by this amount.

Management believes that its existing cash resources, cash flow from operations and short-term borrowings on the existing credit line will provide adequate resources for supporting operations during fiscal 2012. Although there can be no assurance that our revolving credit facility will be renewed, management believes that, if needed, it would be able under current circumstances to find alternative sources of funds on commercially acceptable terms.


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