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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2007
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
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(Name of small business issuer as specified in its charter)
VIRGINIA 54-1006352
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
21300 RIDGETOP CIRCLE, STERLING, VIRGINIA 20166
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(Address of principal executive offices)
703-406-2800
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(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days. Yes |X|
No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
There were 4,515,632 outstanding shares of the issuer's only class of common
equity, Common Stock, $0.01 par value, on September 30, 2007.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheet as of September 30,
2007 and December 31, 2006 2
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2007 and 2006 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2007 and 2006 5
Financial Footnotes 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Controls and Procedures 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits 14
Signatures 15
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUTRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2007 2006
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,583,293 $ 1,539,032
Restricted cash and cash equivalents 57,251 138,233
Accounts receivable 6,371,583 6,835,751
Inventory 4,517,455 3,402,017
Prepaid items and other assets 619,180 530,720
Deferred income taxes 314,000 333,000
----------- -----------
Total current assets 14,462,762 12,778,753
PROPERTY AND EQUIPMENT, AT COST 3,449,411 3,361,159
Less: Accumulated depreciation and amortization (2,909,691) (2,740,941)
----------- -----------
Property and equipment, net 539,720 620,218
OTHER ASSETS 102,024 50,576
----------- -----------
TOTAL ASSETS $15,104,506 $13,449,547
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,764,201 $ 1,398,285
Accrued payroll 257,911 317,974
Other accrued expenses 1,165,225 1,506,950
Notes payable - current 41,209 50,722
----------- -----------
Total current liabilities 3,228,546 3,273,931
LONG-TERM LIABILITIES
Notes payable, net of current maturities 6,232 37,678
Deferred income taxes 101,000 129,000
----------- -----------
TOTAL LONG-TERM LIABILITIES 107,232 166,678
----------- -----------
TOTAL LIABILITIES 3,335,778 3,440,609
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 45,157 44,946
Additional paid-in capital 2,697,141 2,559,281
Retained earnings 9,069,590 7,417,878
Accumulated other comprehensive (loss) income (43,160) (13,167)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,768,728 10,008,938
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,104,506 $13,449,547
=========== ===========
See accompanying notes.
2
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2007 2006
---------- ----------
NET SALES AND REVENUES $6,607,220 $4,783,365
Cost of sales and revenues 3,516,248 3,271,071
---------- ----------
GROSS PROFIT 3,090,972 1,512,294
---------- ----------
Operating expenses:
Selling, general and administrative expenses 806,463 668,572
Research and development expenses 355,842 286,497
---------- ----------
Total operating expenses 1,162,305 955,069
---------- ----------
OPERATING INCOME 1,928,667 557,225
Interest income (expense), net 24,668 26,466
---------- ----------
INCOME BEFORE INCOME TAXES 1,953,335 583,691
Income tax expense (benefit) 735,000 213,000
---------- ----------
NET INCOME $1,218,335 $ 370,691
========== ==========
NET INCOME PER SHARE:
Basic income per share $ .27 $ .09
========== ==========
Diluted income per share $ .24 $ .07
========== ==========
See accompanying notes.
3
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2007 2006
----------- -----------
NET SALES AND REVENUES $13,971,836 $13,280,647
Cost of sales and revenues 8,095,655 8,287,681
----------- -----------
GROSS PROFIT 5,876,181 4,992,966
----------- -----------
Operating expenses:
Selling, general and administrative expenses 2,423,581 2,168,943
Research and development expenses 940,704 1,018,226
----------- -----------
Total operating expenses 3,364,285 3,187,169
----------- -----------
OPERATING INCOME 2,511,896 1,805,797
Interest income (expense), net 73,816 52,065
----------- -----------
INCOME BEFORE INCOME TAXES 2,585,712 1,857,862
Income taxes 934,000 619,000
----------- -----------
NET INCOME $ 1,651,712 $ 1,238,862
=========== ===========
NET INCOME PER SHARE:
Basic income per share $ .37 $ .29
=========== ===========
Diluted income per share $ .33 $ .25
=========== ===========
See accompanying notes.
4
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,651,712 $ 1,238,862
Noncash items included in net income:
Depreciation and amortization 168,750 180,000
Stock option compensation 59,620 21,316
Deferred income taxes (9,000) (29,000)
Changes in current assets and liabilities:
Accounts receivable 464,168 (2,256,029)
Inventory (1,115,438) (879,441)
Prepaid items and other assets (139,908) 227,438
Accounts payable 365,916 451,653
Accrued expenses (401,788) 486,561
----------- -----------
Net Cash Provided (Used) by Operating Activities 1,044,032 (558,640)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents 80,982 106,817
Purchase of property and equipment (88,252) (117,843)
----------- -----------
Net Cash Provided (Used) by Investing Activities (7,270) (11,026)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (40,959) (38,082)
Proceeds from stock options exercised 78,451 16,570
----------- -----------
Net Cash Provided (Used) by Financing Activities 37,492 (21,512)
----------- -----------
Effect of exchange rate changes on cash (29,993) 3,168
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,044,261 (588,010)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,539,032 1,861,627
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,583,293 $ 1,273,617
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 40 $ 2,210
=========== ===========
Income taxes paid (received) $ 479,963 $ 474,566
=========== ===========
See accompanying notes
5
SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2007
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Sutron Corporation (the "Company") was incorporated on December 30, 1975, under
the General Laws of the Commonwealth of Virginia. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several sales
offices located throughout the United States, a branch office in India and a
wholly owned subsidiary in India. The Company is a leading provider of real-time
data collection and control products, systems software and professional services
in the hydrological, meteorological and oceanic monitoring markets. The
Company's principal products include data loggers, satellite
transmitters/loggers, water level and meteorological sensors, tides systems and
systems application software. Customers consist of a diversified base of
Federal, state, local and foreign government agencies, universities and
engineering and hydropower companies.
The financial statements included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report filed on Form 10-KSB for the year ended December 31, 2006. The condensed
consolidated balance sheet as of December 31, 2006 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments necessary to present fairly the
financial position of the Company and the results of its operations and its cash
flows have been included in the accompanying financial statements. The results
of operations for interim periods are not necessarily indicative of the expected
results for the full year.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
These judgments are difficult as matters that are inherently uncertain directly
impact their valuation and accounting. Actual results may vary from management's
estimates and assumptions.
The Company's significant accounting policies are disclosed in the Company's
Annual report on Form 10-KSB for the year ended December 31, 2006 filed with the
Securities and Exchange Commission.
STOCK COMPENSATION
The Company's Amended and Restated 1996, 1997 and 2002 Stock Option Plans (the
"Stock Option Plans") provide for the issuance of non-qualified stock options to
employees, officers and directors. The plans are administered by the
compensation committee of the Board of Directors, which selects persons to
receive awards and determines the number of shares subject to each award and the
terms, conditions,
6
performance measures and other provisions of the award. See Note 13 of the
Company's financial statements in its Annual Report on Form 10-KSB for the year
ended December 31, 2006 for additional information related to the stock option
plans.
Effective January 1, 2006, the Company adopted SFAS No. 123R ACCOUNTING FOR
STOCK BASED COMPENSATION (SFAS 123R), which requires companies to measure and
recognize compensation expense for all stock-based payments at fair value. SFAS
123R is being applied on the modified prospective transition method and
therefore the Company has not restated results for prior periods. The financial
statements for the three months and nine months ended September 30, 2007
recognize compensation cost for the portion of outstanding awards which have
vested during the period. The Company recognizes stock-based compensation costs
on a straight-line basis over the requisite service period of the award, which
is generally the option vesting term. For the three and nine months ended
September 30, 2007, total stock-based compensation expense of $18,811 and
$59,620 was included in operating expenses as compared to stock-based
compensation of $11,006 and $21,316 for the three and nine months ended
September 30, 2006. The weighted average fair value of options granted during
the three months and nine months ended September 30, 2007 was calculated using
the Black-Scholes option pricing model with the following valuation assumptions
and weighted average fair value as follows:
Periods Ended
September 30, 2007
---------------------------
Three Months Nine Months
------------ -----------
Weighted average fair value of grants $7.60 $7.06
Expected volatility 30% 30%
Dividend yield 0 0
Risk-free interest rate 5.16% 4.50%
Expected term in years 10.00 10.00
The volatility factor is based on the Company's historical stock price
fluctuations. The Company has not, and does not intend to, issue dividends;
therefore, the dividend yield assumption is 0. The Company applied the risk-free
interest rate based on the U.S. Treasury yield in effect at the time of the
grant. The expected term of the option is based on the contractual period of the
options granted.
3. STOCK OPTIONS
The Company has granted stock options under the Stock Option Plans to key
employees and directors for valuable services provided to the Company. Under the
1996 Plan, the Company authorized 260,000 shares, 259,000 of which have been
granted. As of December 31, 2004, the Company authorized 60,000 shares and
400,000 shares under the 1997 and 2002 Stock Option Plans, respectively, all of
which have been granted. During 2005, the 2002 Stock Option Plan was amended to
authorize 650,000 shares, 503,333 of which have been granted. In addition, all
three plans were amended in 2005 to allow Directors to participate in the plan
and to provide that vesting schedules will be determined by the Board at the
time each individual option is granted.
Shares under all of the plans may be granted at not less than 100 percent of the
fair market value at the grant date. All options have a ten-year term from the
date of grant. Prior to the 2005 amendments, options vested ratably over five
years on each anniversary date the option was granted. The Company elected to
accelerate vesting of all outstanding options as of December 31, 2005, as
permitted under the plans. Cancelled or expired options are able to be reissued.
The following table summarizes stock option activity under the Stock Option
Plans for the nine months ended September 30, 2007:
7
Number of Weighted Avg. Number of Options
Shares Exercise Price Exercisable
--------------------------------------------
Balance - December 31, 2006 554,333 $1.13 554,333
=========
Granted 65,000 7.06
Exercised 21,081 3.72
Canceled 5,000 7.60
--------------------------------------------
Balance - September 30, 2007 593,252 $1.51 593,252
============================================
4. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of potential dilutive common stock.
Three Months Ended September 30,
2007 2006
------------------------------
Net income $1,218,335 $370,691
==============================
Shares used in calculation of income per share:
Basic 4,515,632 4,319,551
Effect of dilutive options 554,367 654,925
==============================
Diluted 5,069,999 4,974,476
==============================
Net income per share:
Basic $.27 $.09
==============================
Diluted $.24 $.07
==============================
Nine Months Ended September 30,
2007 2006
------------------------------
Net income $1,651,712 $1,238,862
==============================
Shares used in calculation of income per share:
Basic 4,509,864 4,309,002
Effect of dilutive options 554,367 654,925
==============================
Diluted 5,064,231 4,963,927
==============================
Net income per share:
Basic $.37 $.29
==============================
Diluted $.33 $.25
==============================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS MADE IN THIS REPORT ON FORM 10-QSB, 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. 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
REPORT ON FORM 10-QSB TO CONFORM THESE STATEMENTS TO ACTUAL RESULTS.
8
Overview
Our primary focus is to provide real-time systems solutions, including
equipment, software, and services, to our customers in the areas of hydrological
monitoring and control, meteorological monitoring including airport weather
systems and oceanic monitoring. We design, manufacture and market these products
and services to a diversified customer base consisting of federal, state, local
and foreign governments, universities and engineering and hydropower companies.
Our products 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, Xpert/XLite dataloggers,
Accububble Self-Contained Bubbler, Accubar Pressure Sensor, Tides Systems 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. It is a price-effective solution for small systems that do not
require a significant number of sensors or communications options. The Xpert and
XLite are more powerful dataloggers that have significantly more logging
capability and communications options than the SatLink2. Our Tides Systems are
the only National Ocean Survey approved tides monitoring system in the United
States.
We are a project driven company and our operating results vary significantly by
quarter. We anticipate that we will continue to experience significant quarterly
fluctuations in our revenues due to the timing of significant project awards
that are difficult to project. Operating results will depend not only upon the
timing of project awards but also upon the mix of products and services.
International sales constitute a significant portion of our revenues, but are
difficult to project. We are aware of many significant international
opportunities. We expect international revenues to grow as a percentage of our
total business. We expect our sales and marketing, research and development and
general and administrative expenses to increase moderately in 2007 as compared
to 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and results of
operations are based upon the condensed 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, useful lives of intangible assets, 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 1 to our financial statements included in the Company's Form 10-KSB for
the year ended December 31, 2006. There were no significant changes in critical
accounting estimates
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
9
Three Months Ended September 30,
2007 2007 2006 2006
---------- ------ ---------- ------
Net sales and revenues $6,607,220 100.0% $4,783,365 100.0%
Cost of sales and revenues 3,516,248 53.2 3,271,071 68.4
---------- ----- ---------- -----
Gross profit 3,090,972 46.8 1,512,294 31.6
Selling, general and administrative expenses 806,463 12.2 668,572 14.0
Research and development expenses 355,842 5.4 286,497 6.0
---------- ----- ---------- -----
Operating income 1,928,667 29.2 557,225 11.6
---------- ----- ---------- -----
Interest (income) expense 24,668 .4 26,466 .6
---------- ----- ---------- -----
Income before income taxes 1,953,335 29.5 583,691 12.2
Income taxes (benefit) 735,000 11.1 213,000 4.4
---------- ----- ---------- -----
Net income $1,218,335 18.4% $ 370,691 7.8%
========== ===== ========== =====
NET SALES AND REVENUES
The Company's net sales and revenues for the three months ended September 30,
2007 increased 38% to $6,607,220 from $4,783,365 in 2006 due to increased
international revenues. Overall domestic revenues decreased 19% to $2,903,386 in
the third quarter of 2007 versus $3,598,055 in 2006 while international revenues
increased 212% to $3,703,834 in 2007 versus $1,185,310 in 2006, primarily due to
increased revenue from shipments of water level monitoring equipment totaling
approximately $956,000 to customers in China for the Three Gorges Dam project
and from shipments of water level, snow, rainfall and water quality monitoring
equipment totaling approximately $2,223,000 to Washington International Group
for to the Iraq Ministry of Water Resources. Net sales and revenues are broken
down between the Company's operating divisions or profit centers which include
the HydroMet Products Division, the Integrated Services Division which includes
Special Projects, the Hydrological Services Division, Airport Weather Systems
Division and Sutron India Operations.
The HydroMet Products Division, which is responsible for sales of standard
products, had a net sales and revenue increase of 40% to $3,183,025 from
$2,281,695 in 2006. Standard product revenues were higher in 2007 due to the
shipments to China for the Three Gorges Dam project. Integrated Systems Division
net sales and revenues increased 60% to $2,592,340 from $1,615,343 in 2006 due
primarily to the supply of equipment to Washington International Group for the
Iraq Ministry of Water Resources. Net sales and revenues from the Hydrological
Services Division increased 39% to $644,861 from $463,254 in 2006 due to an
increase in project deliveries. Airport Weather Systems Division net sales and
revenues were $0 for the third quarters of both 2007 and 2006. Sutron India
Operations had a net sales and revenue decrease of 56% to $186,994 from $423,073
in 2006 due to the Central Water Commission (CWC) of India contract being near
completion.
Customer orders for the third quarter of 2007 were approximately $4,886,000 as
compared to approximately $6,187,000 in 2006.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 53.2% for the quarter ended
September 30, 2007 as compared to 68.4% for the quarter ended September 30,
2006. The decrease in cost of sales is attributed to changes in the product mix
that resulted in higher equipment sales and decreased project work. The
shipments to China for the Three Gorges Dam project and to Washington
International Group had high
10
content of standard products. In 2006, the Company had higher costs of sales due
to project work with higher labor content including contracts with the Central
Water Commission of India and Prime Controls. Cost of sales for both 2007 and
2006 include provisions for inventory obsolescence, physical inventory
adjustments and inventory valuation adjustments. The Company continually pursues
product cost reductions through continual review of procurement sourcing,
product value engineering and improvements in manufacturing processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $806,463 in 2007 from
$668,572 in 2006, an increase of $137,891 or 21%. The Company experienced
increases in selling and marketing activities due to the addition of two new
domestic salesmen who were not with the Company in the prior year, in legal
costs due to a lawsuit which the Company has filed against its former Vice
President of the Hydrological Services Division and another former employee and
in letter of credit costs due to a performance bond that was provided to the
Afghanistan Ministry of Energy and Water as a performance security on the
contract.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $355,842 in 2007 from $286,497 in
2006, an increase of $69,345 or 24%. Product development expenses increased in
2007 due to higher costs relating to the development of several new products and
the release of the new Radar Level Recorder and Continuous Flow Bubbler.
Dataloggers and water level sensors are the primary components of
hydro-meteorological systems and we are continuously improving these products as
well as developing new products in order to maintain and improve our competitive
position.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the third quarter of 2007. The Company had net interest income in 2007 of
$24,668 as compared to net interest income of $26,466 in 2006.
INCOME TAXES
Income taxes increased 245% in 2007 to $735,000 from $213,000 in 2006. Taxes as
a percentage of revenue were 11.1% in 2007 as compared to 4.4% in 2006. The
provisions for income taxes represent effective tax rates of approximately 37.6%
in 2007 and 36.5% in 2006, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006
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,
2007 2007 2006 2006
----------- ------ ----------- ------
Net sales and revenues $13,971,836 100.0% $13,280,647 100.0%
Cost of sales and revenues 8,095,655 57.9 8,287,681 62.4
----------- ----- ----------- -----
Gross profit 5,876,181 42.1 4,992,996 37.6
Selling, general and administrative expenses 2,423,581 17.4 2,168,943 16.3
Research and Development expenses 940,704 6.7 1,018,226 7.7
----------- ----- ----------- -----
Operating income 2,511,896 18.0 1,805,797 13.6
----------- ----- ----------- -----
Interest (income) expense 73,816 .5 52,065 .4
----------- ----- ----------- -----
Income before income taxes 2,585,712 18.5 1,857,862 14.0
Income taxes (benefit) 934,000 6.7 619,000 4.7
----------- ----- ----------- -----
Net income $ 1,651,712 11.8% $ 1,238,862 9.3%
=========== ===== =========== =====
11
NET SALES AND REVENUES
The Company's net sales and revenues for the nine months ended September 30,
2007 increased 5% to $13,971,836 from $13,280,647 in 2006. Overall domestic
revenues increased 2% to $8,590,425 in 2007 versus $8,396,937 in 2006 while
international revenues increased 10% to $5,381,411 in 2007 versus $4,883,710 in
2006. Net sales and revenues are broken down between the Company's operating
divisions or profit centers which include the HydroMet Products Division, the
Integrated Services Division which includes Special Projects, the Hydrological
Services Division, Airport Weather Systems Division and Sutron India Operations.
The HydroMet Products Division had a revenue increase of 32% to $7,450,797 from
$5,647,001 in 2007 due to an increase due to increased domestic shipments of
SatLink2 Transmitter/Loggers, Water Level Sensors and Accessories and due to the
shipment of water level monitoring stations to China for the Three Gorges Dam
project. Integrated Systems Division revenues decreased 3% to $4,222,476 from
$4,342,294 in 2006 due to decreased domestic project revenues that were
partially offset by higher international project revenues. Revenues from the
Hydrological Services Division decreased 12.8% to $1,625,059 from $1,864,540 in
2006 due to decreased project activity. Airport Weather Systems Division
revenues decreased to $75,425 in 2007 as compared to $114,985 in 2006. Sutron
India Operations had a net sales and revenue decrease of 54% to $598,080 from
$1,311,826 in 2006 due to the Central Water Commission (CWC) of India contract
being near completion and major contract expenditures being completed in prior
periods.
Customer orders or bookings for 2007 were approximately $20,689,000 as compared
to approximately $14,389,000 in 2006. The Company's backlog of orders at
September 30, 2007 was approximately $10,275,000 which includes the modification
of work orders and cancellation of contract funding that was not realized for
Hydrological Systems Division contracts issued in prior years that totaled
approximately $1,379,000. The backlog total as of September 30, 2006 was
approximately $11,948,000. The Company anticipates that approximately 50% of its
backlog as of September 30, 2007 will be shipped in 2007.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 57.9% in 2007 as compared to 62.4%
in 2006. The decrease in cost of sales is attributed to changes in the product
mix that resulted in higher product sales and decreased project work. Projects
do not normally carry as high margins as stand-alone products. The shipments to
China for the Three Gorges Dam project and to Washington International Group had
high content of standard products. In 2006, the Company had higher costs of
sales due to project work with higher labor content including contracts with the
Central Water Commission of India and Prime Controls.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $2,423,581 in 2007
from $2,168,943 in 2006, an increase of $254,638 or 12%. The Company experienced
increases in selling and marketing activities
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due to the addition of two new domestic salesmen who were not with the Company
in the prior year, in legal costs due to a lawsuit which the Company has filed
against its former Vice President of the Hydrological Services Division and a
former HSD employee and in letter of credit costs due to a performance bond that
was provided to the Afghanistan Ministry of Energy and Water as security on the
contract.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $940,704 in 2007 from $1,018,226
in 2006, a decrease of $77,522 or 9%. Significant subcontractor expenses were
incurred in 2006 relating to the development of our next generation Xpert/XLite
Dataloggers which were released to production in the third quarter of 2007. Our
SatLink2 Transmitter/Logger, our Xpert/XLite Dataloggers, our Water Level
Sensors and our Tides Systems are the primary components of our
hydro-meteorological systems and we are continuously improving these products as
well as developing new products in order to maintain and improve our competitive
position.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the nine months ended September 30, 2007 except on one occasion. The
Company had net interest income in 2007 of $73,816 as compared to net interest
income of $52,065 in 2006.
INCOME TAXES
Income taxes increased 51% in 2007 to $934,000 from $619,000 in 2006 due to the
increase in operating income. Taxes as a percentage of revenue were 6.7% in 2007
as compared to 4.7% in 2006. The provisions for income taxes represent effective
tax rates of approximately 36.1% in 2007 and 33.3% in 2006, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $2,583,293 at September 30, 2007 compared to
$1,539,032 at December 31, 2006. Working capital increased to $11,234,216 at
September 30, 2007 compared with $9,504,822 at December 31, 2006.
Net cash provided by operating activities was $1,044,032 for the nine months
ended September 30, 2007 as compared to cash used by operating activities of
$558,640 for the nine months ended September 30, 2006. The increase is due
primarily to the increase in net income and reduction in accounts receivable.
Net cash used by investing activities was $7,270 for the nine months ended
September 30, 2007 as compared to cash used by investing activities of $11,026
for the nine months ended September 30, 2006, and was primarily due to a
decrease in restricted cash that secured a bank guarantee to the Central Water
Commission of India for the delivery of contract equipment.
Net cash provided by financing activities was $37,492 for the nine months ended
September 30, 2007 as compared to net cash used by financing activities of
$21,512 for the nine months ended September 30, 2006 due to the exercise of
employee stock options.
We have a revolving credit facility of $3,000,000 with BB&T Bank. We are
permitted to borrow based on accounts receivable and inventory according to
pre-established criteria. The credit facility expires on
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August 5, 2008 and is secured by substantially all assets of the Company.
Borrowings bear interest at the bank's prime rate. During the first nine months
of 2007, there was one borrowing on the line of credit.
We frequently bid on and enter into international contracts that require bid and
performance bonds. At September 30, 2007 and December 31, 2006, a commercial
bank had issued standby letters of credit in the amount of $1,730,618 and
$532,300 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 2007. Although there can be no
assurance that our revolving credit facility will be renewed, management
believes that, if needed, it would be able to find alternative sources of funds
on commercially acceptable terms.
ITEM 3. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer) evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of September 30,
2007, the end of the fiscal period covered by this report on Form 10-QSB. The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
reports are recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, the chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(B) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal claims can arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
our financial statements. We have been named in a compensation claim under the
Indian Anti-Trust Law that is pending before The Monopolies and Restrictive
Trade Practices Commission in New Delhi, India. Management believes that the
case is unsubstantiated and intends to vigorously defend itself.
On May 22, 2007, we filed a lawsuit in the United States District Court,
Alexandria, Virginia Division, against Stephen Tarte, the former Vice President
of the Hydrological Services Division, and Patricia Diaz, a former HSD employee
for violation of their Conflict of Interest and Non-Competition agreements.
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Damages sought in the lawsuit are $3,000,000. We believe that an award from this
lawsuit is possible however we are unable to estimate the amount or the ability
to collect upon any such award.
ITEM 6. EXHIBITS
31.1 Certification of the President and Chief Executive Officer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer and Treasurer pursuant to
ss.302 of the Sarbanes-Oxley Act of 2002.
32 Certification of the President and Chief Executive Officer and Chief
Financial Officer and Treasurer pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Sutron Corporation
(Registrant)
November 13, 2007 /s/ Raul S. McQuivey
----------------- ---------------------------
Date Raul S. McQuivey
President and Chief Executive Officer
(Principal Executive Officer)
November 13, 2007 /s/ Sidney C. Hooper
----------------- ---------------------------
Date Sidney C. Hooper
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
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