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STRN > SEC Filings for STRN > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for SUTRON CORP


15-May-2013

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, 2012. 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, hydropower companies and aviation firms. Our products, systems, software 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 the supply of critical aviation information.

Our key products are the SatLink2 Transmitter/Logger, the Xpert/XLite dataloggers, the Accububble Self-Contained Bubbler, the Accubar Pressure Sensor, and Tempest, XConnect and LEADS 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, XConnect and LEADS systems software allow us to provide turn-key systems solutions to our customers.

We began fiscal year 2013 with a backlog of approximately $13,354,000 as compared to beginning fiscal year 2012 with a backlog of approximately $9,599,000. As of March 31, 2013, our backlog totaled approximately $13,161,000. 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 2013. Operating results will depend upon the product mix and upon the timing and execution of project awards.

International sales, which totaled 57% of revenues for 2012, 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 28% of our 2012 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 in 2013 as compared to 2012 due to planned spending on sales and marketing activities and on the development of new products and applications.

On March 6, 2013, we completed the acquisition of substantially all of the commercial and operating assets of Sabio Instruments ("Sabio"). With this acquisition, we expanded our line of environmental monitoring instrumentation into the expected growth market of air quality monitoring and we are positioned to provide a comprehensive set of monitoring and warning solutions. 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, 2012. There were no significant changes in critical accounting estimates in the first quarter of 2013.

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 March 31,
                                                     2013                2012

  Revenue                                                100.0 %             100.0 %
  Cost of goods sold                                      59.0                61.8
  Gross profit                                            41.0                38.2

  Selling, general and administrative expenses            25.3                26.9
  Research and Development expenses                       15.0                14.8
  Operating income                                         0.7                (3.5 )
  Interest and other income                                0.0                 0.3
  Income before income taxes                               0.7                (3.2 )
  Income tax expense (benefit)                             0.2                (1.2 )
  Net income (loss)                                        0.5 %              (2.0 ) %

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue

Revenue for the first quarter ended March 31, 2013 was $6,455,110 as compared to revenue of $3,737,181 in the first quarter of 2012. Revenue is broken down between standard products and systems, software and services. Standard products had a revenue increase of 16% to $2,841,190 from $2,416,975 in 2012. Revenue for systems, software and services increased 174% to $3,613,920 from $1,320,206 in 2012. The increase is attributed to an increased project backlog and activity in 2013 as compared to 2012 and to approximately $1,727,000 of revenue relating to the MeteoStar Division.

Overall domestic revenue increased 75% to $3,348,827 in the first quarter of 2013 versus $1,908,782 in 2012 while international revenues increased 70% to $3,106,283 in the first quarter of 2013 versus $1,828,399 in the same period in 2012. The increase in domestic revenue is due to increased revenue of approximately $1,279,000 relating to the MeteoStar Division which constituted $0 in domestic revenue in the first quarter of 2012. The increase in international revenue is due to increased project activity and to revenue of approximately $448,000 relating to the MeteoStar division which constituted $0 in international revenue in the first quarter of 2012.

Customer orders or bookings in the first quarter of 2013 decreased 4% to $6,262,217 as compared to $6,535,036 in the first quarter of 2012.

Cost of Goods Sold

Cost of goods sold as a percentage of revenue was 59% for the first quarter of 2013 as compared to 62% for the first quarter of 2012. Standard product cost of goods sold was approximately 57% in the first quarter of 2013 as compared to 51% in 2012. The increase was due to a change in the mix of products sold. Cost of goods sold for systems, software and services was 61% in the first quarter of 2013 as compared to 81% in the first quarter of 2012. The decrease was due to improved project activity which resulted in higher absorption of fixed costs.


Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $1,634,003 for the first quarter of 2013 from $1,004,816 for the same period in 2012. Selling, general and administrative expenses as a percentage of revenues decreased to 25% for the first quarter of 2013 from 27% for the same period in 2012. The increase in SG&A expenses for the quarter was due to increased expenses of approximately $376,000 relating to MeteoStar operations, increased legal expenses of approximately $98,000 relating to the Sabio acquisition, increased personnel costs of approximately $50,000 and increased amortization expenses of approximately $33,000 relating to Meteostar intangible assets.

Research and Development Expenses

Research and development expenses increased to $970,139 for the first quarter of 2013 from $553,269 for the same period in 2012. The MeteoStar Division research and development activities accounted for approximately $441,000 of the increase. MeteoStar development efforts were focused on LEADS6 software development.

Interest and Other Income, Net

Due to our cash position, we did not use our line of credit during the first quarter of 2013. We had interest income for the quarter ended March 31, 2013 of $3,203 as compared to interest income of $11,384 for the quarter ended March 31, 2012.

Income Taxes

Income tax expense was $15,000 for the quarter ended March 31, 2013 as compared to an income tax benefit of $44,000 for the quarter ended March 31, 2012.

Liquidity and Capital Resources

Cash and cash equivalents were $4,293,399 at March 31, 2013 compared to $7,576,374 at December 31, 2012. Working capital decreased to approximately $16 million at March 31, 2013 compared with approximately $17 million at December 31, 2012.

Net cash used by operating activities was $2,058,639 for the first quarter ended March 31, 2013 as compared to net cash provided by operating activities of $1,873,248 for the quarter ended March 31, 2012. Net cash used by operating activities in the first quarter of 2013 was primarily due to a significant increase in accounts receivable and in prepaid expenses.

Net cash used by investing activities was $1,246,279 for the quarter ended March 31, 2013 as compared to net cash provided by investing activities was $39,007 for the quarter ended March 31, 2012. Net cash used by investing activities in the first quarter of 2013 was primarily for the acquisition of Sabio.

Net cash provided by financing activities was $17,926 for the quarter ended March 31, 2013 as compared to net cash provided by financing activities of $25,343 for the quarter ended March 31, 2012. Net cash provided in 2013 was primarily due to proceeds from the exercise of employee stock options and the tax benefits related to the exercise.

We have a revolving credit facility of $3,000,000 with Branch Banking and Trust (BB&T). 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 first quarter of 2013, there was no borrowing on the line of credit. We frequently bid on and enter into contracts that require bid and performance bonds. At March 31, 2013 and December 31, 2012, BB&T had issued standby letters of credit in the amount of $1,424,803 and $1,094,162 that served as either bid or performance bonds. The amount available to borrow under the line of credit was reduced by these amounts.

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 2013.


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