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STRN > SEC Filings for STRN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for SUTRON CORP


14-Nov-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, oceanic and aviation 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, commercial entities, 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 and for aviation.

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. Our LEADS software provides integrated weather reporting and forecasting capabilities.


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We began 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. As of September 30, 2012, our backlog totaled approximately $12,167,000. We have historically experienced significant fluctuations in our quarterly sales and revenues and 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 significantly in 2012 as compared to 2011 due to planned spending on sales and marketing activities and on the development of new products and applications and to reflect the expanded operations due to the acquisition of IPSM.

On May 23, 2012, we completed the acquisition of substantially all of the commercial and operating assets of IPSM. With this acquisition, we accomplished the expansion of our existing product and service portfolio into new global markets; assumption of ongoing contracts with significant governmental and commercial customers; retention of an extremely talented pool of over 30 engineers, software developers, research and development and technical staff; and acceleration of Sutron's revenue growth by an estimated 25%-30% on an annual run rate basis. In combination, we present a broader, deeper and stronger enterprise. We will continue to seek other acquisitions that are compatible with our strategic focus.

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 third quarter of 2012.


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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 September 30,
                                                2012                     2011

  Net sales and revenues                             100.0 %                  100.0 %
  Cost of sales and revenues                          56.1                     57.2
  Gross profit                                        43.9                     42.8

  Selling, general and administrative
  expenses                                            17.2                     18.1
  Research and Development expenses                   14.1                      9.4
  Operating income                                    12.7                     15.3
  Interest and other income                            0.2                      0.4
  Income before income taxes                          12.9                     15.7
  Income taxes (benefit)                               4.3                      5.7
  Net income                                           8.6 %                   10.0 %

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

Net Sales and Revenues

Net sales and revenues for the third quarter ended September 30, 2012 increased 34% to $7,278,999 from $5,415,230 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 increase of 16% to $2,210,001 in 2012 from $1,907,764 in 2011 due to increased sales of SatLink2 dataloggers/transmitters. Net sales and revenues for systems and services increased 45% to $5,068,998 in the third quarter of 2012 from $3,507,466 in 2011. The increase is attributed to an increased project backlog and activity in 2012 as compared to 2011 and to approximately $1,177,000 of third quarter revenues relating to our new MeteoStar Division.

Overall domestic revenues increased 37% to $3,648,848 in the third quarter of 2012 versus $2,669,381 in 2011 while international revenues increased 32% to $3,630,151 in the third quarter of 2012 versus $2,745,849 in the same period in 2011. The increase in domestic revenues is due to increased sales of the SatLink2 datalogger/transmitter and to revenues of approximately $684,000 relating to our new MeteoStar Division. The increase in international revenues is due to increased project activity and to revenues of approximately $493,000 relating to our new MeteoStar division.

Customer orders or bookings in the third quarter of 2012 decreased 3% to approximately $6,296,000 as compared to approximately $6,500,000 in the third quarter of 2011.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 56% and 57%, respectively, for the third quarter of 2012 and 2011. Standard product cost of sales was approximately 58% in the third quarter of 2012 as compared to 55% in 2011. The increase in cost of sales is attributed to changes in the mix of products sold. Cost of sales for systems and services was 55% in the third quarter of 2012 as compared to 59% in the third quarter of 2011. The decrease was primarily due to the shipment of higher margin systems.


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Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses increased to $1,250,138 for the third quarter of 2012 from $982,893 for the same period in 2011. The increase in SG&A expenses for the quarter was primarily due to increased expenses of approximately $405,000 due in connection with MeteoStar. This increase in SG&A due to MeteoStar was partially offset by decreased SG&A expenses in certain of the Company's other divisions.

Research and Development Expenses

Research and development expenses increased to $1,026,573 for the third quarter of 2012 from $506,618 for the same period in 2011. The MeteoStar Division research and development activities accounted for approximately $506,000 of the increase and development efforts were focused on LEADS6 software development. Other development efforts were focused on an FCC approved version of our Radar Level Recorder. 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

Given our cash position, we did not need to access our line of credit during the third quarter of 2012. We had interest income for the quarter ended September 30, 2012 of $17,228 as compared to net interest income of $21,270 for the quarter ended September 30, 2011.

Income Taxes

We recorded an income tax expense of $314,000 for the quarter ended September 30, 2012 as compared to an income tax expense of $307,000 for the quarter ended September 30, 2011. The provision for income taxes in 2012 represents an effective income tax rate of 33%. The income tax benefit in 2011 represents an effective tax benefit rate of 36%.

Nine months ended September 30, 2012 Compared to Nine Months Ended September 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:

                                               Nine Months Ended September 30,
                                                2012                     2011

  Net sales and revenues                             100.0 %                  100.0 %
  Cost of sales and revenues                          58.5                     60.8
  Gross profit                                        41.5                     39.2

  Selling, general and administrative
  expenses                                            20.2                     20.0
  Research and Development expenses                   12.4                     10.7
  Operating income                                     8.9                      8.5
  Interest and other income                            0.2                      0.5
  Income before income taxes                           9.2                      9.0
  Income taxes                                         3.0                      3.2
  Net income                                           6.2 %                    5.8 %


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Net Sales and Revenues

Net sales and revenues for the nine months ended September 30, 2012 increased 26% to $17,820,348 from $14,144,357 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 increase in 2012 of 4% to $6,234,380 from $5,995,092 in 2011. Net sales and revenues for systems and services increased 42% to $11,585,968 from $8,149,265 in 2011 primarily due to increased backlog and project activity and due to MeteoStar revenues of approximately $1,688,000.

Overall domestic revenues increased 16% to $7,803,764 for the nine months ended September 30, 2012 versus $6,704,002 in 2011 due primarily to new MeteoStar revenues of approximately $1,104,000. International revenues increased 35% to $10,016,584 for the nine months ended September 30, 2012 versus $7,440,356 in 2011. The increase is attributed primarily to increased backlog and project activity and as well as to new MeteoStar revenues of approximately $584,000.

Customer orders or bookings for the nine months ended September 30, 2012 were approximately $20,397,000 as compared to approximately $12,879,000 in 2011, an increase of 58%. Several large project awards were received in the nine months ended September 30, 2012 while no similarly sized awards were received in the nine months ended September 30, 2011.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 59% and 61%, respectively, for the nine months ended September 30, 2012 and 2011. Standard product cost of sales as a percentage of standard product revenues was approximately 54% and 55%, respectively, for the nine months ended September 30, 2012 and 2011. The decrease was due to changes in the product mix. Cost of sales for systems and services as a percentage of systems and services revenues was 61% for the nine months ended September 30, 2012 as compared to 65% for the nine months ended September 30, 2011. The decrease was primarily due to the shipment of higher margin systems.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3,602,498 in 2012 as compared to $2,831,590 in 2011, an increase of $770,908 or 27%. SG&A expenses as a percentage of revenues was 20% for the nine months ended September 30, 2012 and the nine months ended December 31, 2011. The increase in expenses is primarily attributed to $180,000 of acquisition related expenses and increased expenses of approximately $638,000 related to the operations of MeteoStar.

Research and Development Expenses

Research and development expenses increased to $2,207,475 for the nine months ended September 30, 2012 from $1,505,394 in 2011, an increase of $702,081 or 47%. MeteoStar Division research and development activities accounted for approximately $621,000 of the increase. MeteoStar development efforts were focused on LEADS6 software development. Efforts were also expended on the Iridium-Link and GPRS-Link products. 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.


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Interest and Other Income, Net

Given the Company's cash position, the Company did not need to access its line of credit during the nine months ended September 30, 2012. The Company had net interest income in 2012 of $43,957 during the first nine months of 2012 as compared to net interest income of $64,237 during the comparable period in 2011.

Income Taxes

Income taxes increased 19% in the first nine months of 2012 to $535,000 from $451,000 in the comparable period in 2011. The provisions for income taxes represent an effective income tax rate during these periods of 33% in 2012 and 36% in 2011.

Liquidity and Capital Resources

Cash and cash equivalents were $5,497,568 at September 30, 2012 compared to $8,737,543 at December 31, 2011. Working capital decreased to $16,273,255 at September 30, 2012 compared with $18,973,156 at December 31, 2011.

Net cash provided by operating activities was $819,015 for the nine months ended September 30, 2012 as compared to net cash used by operating activities of $517,584 for the nine months ended September 30, 2011. The increase was primarily due to an increase in net income and an increase in billings in excess of costs and estimated earnings.

Net cash used by investing activities was $4,525,868 for the nine months ended September 30, 2012 as compared to net cash used by investing activities of $83,330 for the nine months ended September 30, 2011. The increase is primarily due to the acquisition of MeteoStar.

Net cash provided by financing activities was $475,663 for the nine months ended September 30, 2012 as compared to net cash provided by financing activities of $246,560 for the nine months ended September 30, 2011. The increase in cash provided in 2012 was primarily due to the tax benefit from the exercise of stock options and proceeds from the exercise of 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 third quarter and during the first nine months 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 September 30, 2012 and December 31, 2011, a commercial bank had issued standby letters of credit in the amount of $1,022,661 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 available short-term borrowing capacity on the existing credit line provides 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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