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STRN > SEC Filings for STRN > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for SUTRON CORP


13-Aug-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, air quality 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 air quality, 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, for the monitoring of emissions 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, ambient air instrumentation and continuous emissions control monitoring systems 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 ambient air instrumentation and continuous emissions control monitoring systems allow us to collect critical air quality data. 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 June 30, 2013, our backlog totaled approximately $14,562,000. We have historically experienced significant fluctuations in our quarterly sales and revenue and anticipate that we will continue to experience significant quarterly fluctuations in our sales and revenue 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 revenue for 2012 and 49% of revenue for the first six months of 2013, are a significant portion of our revenue. We believe that international revenue 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 revenue and 33% of our revenue for the first six months of 2013.

We are committed in our ongoing sales, marketing and research and development activities to sustain and grow our sales and revenue from our existing and new 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 in our new MeteoStar and Sabio divisions as well as our legacy business..

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 broadened our line of environmental monitoring instrumentation into the expected growth market of air quality monitoring and we are currently developingan expanded set of monitoring and warning solutions. We will continue to seek other acquisitions that are compatible with our strategic focus.


Table of Contents

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 six months ended June 30, 2013.

Results of Operations

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

                                                     Three Months Ended June 30,
                                                     2013                   2012

  Net sales and revenues                                100.0 %                100.0 %
  Cost of sales and revenues                             62.9                   59.2
  Gross profit                                           37.1                   40.8
  Selling, general and administrative expenses           23.1                   19.8
  Research and development expenses                      15.4                    9.2
  Operating income (loss)                                (1.4 )                 11.8
  Interest and other income                               0.1                    0.2
  Income (loss) before income taxes                      (1.3 )                 12.0
  Income taxes (benefit)                                 (0.5 )                  3.9
  Net income (loss)                                      (0.8 ) %                8.1 %

Three Months ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Net Sales and Revenues

Revenues for the second quarter ended June 30, 2013 decreased 7% to $6,343,240 from $6,804,168 in 2012. 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 52% to $2,444,229 in 2013 from $1,607,404 in 2012. Sales of Sabio air quality systems accounted for $391,631 of the increase. Net sales and revenues for systems and services decreased 25% to $3,899,011 in the second quarter of 2013 from $5,196,764 in 2012. Sales of MeteoStar systems and services were $1,153,244 in the second quarter of 2013 as compared to $511,320 in the second quarter of 2012. The overall decrease is attributed to decreased project activity in 2013.

Overall domestic revenues increased 40% to $3,134,182 in the second quarter of 2013 versus $2,246,134 in 2012 due primarily to increased non-federal revenues. International revenues decreased 30% to $3,209,058 in the second quarter of 2013 versus $4,558,034 in the same period in 2012 due primarily to decreased project activity.

Customer orders or bookings in the second quarter of 2013 increased 3% to approximately $7,765,000 as compared to approximately $7,557,000 in the second quarter of 2012.


Table of Contents

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 63% and 59%, respectively, for the second quarter of 2013 and 2012. Standard product cost of sales was approximately 56% in the second quarter of 2013 as compared to 55% in 2012. Cost of sales for systems and services was 67% in the second quarter of 2013 as compared to 61% in the second quarter of 2012. The increase was primarily due to shipment of lower margin systems.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $1,467,134 for the second quarter of 2013 from $1,347,544 for the same period in 2012. The increase in selling, general and administrative expenses for the quarter was primarily due to the additions of MeteoStar and Sabio for the full quarter in 2013 as compared to the second quarter of 2012 which only included one month of MeteoStar selling, general and administrative expenses.

Research and Development Expenses

Research and development expenses increased to $976,254 for the second quarter of 2013 from $627,633 for the same period in 2012. MeteoStar and Sabio research and development activities accounted for the increase. MeteoStar development efforts were focused on LEADS6 software development and Sabio development efforts were focused on expanding their product line of air quality sensors.

Interest and Other Income, Net

Due to our cash position, we did not use our line of credit during the second quarter of 2013 or 2012. We had interest income for the quarter ended June 30, 2013 of $6,047 as compared to net interest income of $15,345 for the quarter ended June 30, 2012.

Income Taxes

We received an income tax benefit of $28,000 for the quarter ended June 30, 2013. We recorded an income tax expense of $265,000 for the quarter ended June 30, 2012. The income tax benefit in 2013 represents an effective tax benefit rate of 34%. The income tax provision in 2012 represents an effective income tax rate of 32%.

Six months ended June 30, 2013 Compared to Six Months Ended June 30, 2012

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,
                                                     2013                 2012

   Net sales and revenues                               100.0 %              100.0 %
   Cost of sales and revenues                            60.9                 60.1
   Gross profit                                          39.1                 39.9

   Selling, general and administrative expenses          24.2                 22.3
   Research and development expenses                     15.2                 11.2
   Operating income (loss)                               (0.3 )                6.4
   Interest and other income                              0.0                  0.3
   Income (loss) before income taxes                     (0.3 )                6.6
   Income taxes (benefit)                                (0.1 )                2.1
   Net income (loss)                                     (0.2 ) %              4.5 %


Table of Contents

Net Sales and Revenues

Revenues for the six months ended June 30, 2013 increased 21% to $12,798,350 from $10,541,349 in 2012. 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 2013 of 31% to $5,285,419 from $4,024,379 in 2012. Sales of Sabio air quality systems accounted for $465,597 of the increase. Net sales and revenues for systems and services increased 14% to $7,512,931 from $6,516,970 in 2012. The increase was primarily due to our MeteoStar Division sales and revenue of $2,880,407 in 2013 as compared to $511,320 in 2012 that reflected only one month's sales and revenues.The increase in Meteostar sales and revenues offset decreased project activity in 2013.

Overall domestic revenues increased 56% to $6,483,009 for the six months ended June 30, 2013 versus $4,154,916 in 2012 due primarily to increased non-federal revenues. International revenues decreased 1% to $6,315,340 for the six months ended June 30, 2013 versus $6,386,433 in 2012 due to decreased project activity.

Customer orders or bookings for the six months ended June 30, 2013 were approximately $14,028,000 as compared to approximately $14,092,000 in 2012.

Cost of Sales and Revenues

Cost of sales as a percentage of revenues was 61% and 60%, respectively, for the six months ended June 30, 2013 and 2012. Standard product cost of sales as a percentage of standard product revenues was approximately 56% and 53%, respectively, for the six months ended June 30, 2013 and 2012. Cost of sales for systems and services as a percentage of systems and services revenues was 64% for the six months ended June 30, 2013 as compared to 65% for the six months ended June 30, 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3,101,137 in 2013 as compared to $2,352,360 in 2012, an increase of $748,777 or 32%. Selling, general and administrative expenses as a percentage of revenues increased to 24% for the six months ended June 30, 2013 from 22% in 2012. The increase in SG&A expenses was primarily due to increased expenses of approximately $563,000 relating to MeteoStar operations and increased amortization expenses of approximately $67,000 relating to Meteostar intangible assets.

Research and Development Expenses

Research and development expenses increased to $1,946,393 for the six months ended June 30, 2013 from $1,180,901 in 2012, an increase of $765,492 or 65%. Increased MeteoStar and Sabio research and development expenses of approximately $827,000 were partially offset by decreases in other research and development activities.

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, 2013 and 2012. The Company had net interest income in 2013 of $9,249 as compared to net interest income of $26,728 in 2012.

Income Taxes

We received an income tax benefit of $13,000 for the six months ended June 30, 2013. We recorded an income tax expense of $221,000 for the six months ended June 30, 2012. The income tax benefit in 2013 represents an effective tax benefit rate of 36%. The income tax provision in 2012 represents an effective income tax rate of 32%.


Table of Contents

Liquidity and Capital Resources

Cash and cash equivalents were $6,322,489 at June 30, 2013 compared to $7,576,374 at December 31, 2012. Working capital decreased to approximately $16 million at June 30, 2013 compared with approximately $17 million at December 31, 2012.

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 the assets of the Company. Borrowings bear interest at the bank's prime rate. During the first six months 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 June 30, 2013 and December 31, 2012, BB&T had issued standby letters of credit in the amount of $1,717,376 and $1,094,162, respectively, 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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