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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2008
COMMISSION FILE NUMBER: 0-12227
SUTRON CORPORATION
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(Exact name of registrant 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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(Registrant's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Check whether the registrant: (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 [_] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer [_] Accelerated Filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
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 4,570,632 outstanding shares of the registrant's only class of common
equity, Common Stock, $0.01 par value, on November 13, 2008.
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SUTRON CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheet as of
September 30, 2008 and December 31, 2007 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2008 and 2007 4
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2008 and 2007 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2008 and 2007 6
Financial Footnotes 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4T. Controls and Procedures 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits 16
Signatures 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
SUTRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,106,823 $ 5,299,904
Restricted cash and cash equivalents 1,069,483 134,241
Accounts receivable, net 3,694,392 3,614,532
Inventory 3,711,353 4,114,014
Prepaid items and other assets 898,244 477,754
Deferred income taxes 307,000 312,000
------------ ------------
TOTAL CURRENT ASSETS 14,787,295 13,952,445
PROPERTY AND EQUIPMENT, AT COST 2,458,339 2,424,768
Accumulated depreciation and amortization (2,005,866) (1,845,486)
------------ ------------
Property and equipment, net 452,473 579,282
OTHER ASSETS 83,591 99,308
------------ ------------
TOTAL ASSETS $ 15,323,359 $ 14,631,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,316,854 $ 823,114
Accrued payroll 193,641 285,829
Other accrued expenses 632,925 995,123
Notes payable - current 8,592 38,381
Billings in excess of costs and estimated earnings 251,709 246,448
------------ ------------
TOTAL CURRENT LIABILITIES 2,403,721 2,388,895
LONG-TERM LIABILITIES
Notes payable, net of current maturities -- 2,075
Deferred income taxes 51,000 84,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 51,000 86,075
------------ ------------
TOTAL LIABILITIES 2,454,721 2,474,970
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 45,707 45,257
Additional paid-in capital 2,764,119 2,694,416
Retained earnings 10,177,478 9,484,811
Accumulated other comprehensive loss (118,666) (68,419)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,868,638 12,156,065
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,323,359 $ 14,631,035
============ ============
See accompanying notes.
3
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
2008 2007
------------ ------------
Net sales and revenues $ 4,395,775 $ 6,607,220
Cost of sales and revenues 2,856,044 3,498,248
------------ ------------
Gross profit 1,539,731 3,108,972
------------ ------------
Operating expenses:
Selling, general and administrative expenses 892,955 824,463
Research and development expenses 332,133 355,842
------------ ------------
Total operating expenses 1,225,088 1,180,305
------------ ------------
Operating income 314,643 1,928,667
Interest income (expense), net 22,224 24,668
------------ ------------
Income before income taxes 336,867 1,953,335
Income tax expense (benefit) 150,000 735,000
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Net income $ 186,867 $ 1,218,335
============ ============
Net income per share:
Basic income per share $ .04 $ .27
============ ============
Diluted income per share $ .04 $ .24
============ ============
See accompanying notes.
4
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
------------ ------------
Net sales and revenues $ 12,239,838 $ 13,971,836
Cost of sales and revenues 7,865,910 8,041,655
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Gross profit 4,373,928 5,930,181
------------ ------------
Operating expenses:
Selling, general and administrative expenses 2,497,538 2,477,581
Research and development expenses 908,376 940,704
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Total operating expenses 3,405,914 3,418,285
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Operating income 968,014 2,511,896
Interest income (expense), net 88,653 73,816
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Income before income taxes 1,056,667 2,585,712
Income taxes 364,000 934,000
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Net income $ 692,667 $ 1,651,712
============ ============
Net income per share:
Basic income per share $ .15 $ .37
============ ============
Diluted income per share $ .14 $ .33
============ ============
See accompanying notes.
5
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 692,667 $ 1,651,712
Noncash items included in net income:
Depreciation and amortization 160,380 168,750
Deferred income taxes (28,000) (9,000)
Stock option compensation 41,503 59,620
Changes in current assets and liabilities:
Accounts receivable (79,860) 464,168
Inventory 402,661 (1,115,438)
Prepaid items and other assets (404,773) (139,908)
Accounts payable 493,740 365,916
Accrued expenses (449,125) (401,788)
------------ ------------
Net Cash Provided (Used) by Operating Activities 829,193 1,044,032
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents (935,242) 80,982
Purchase of property and equipment (33,571) (88,252)
------------ ------------
Net Cash Provided (Used) by Investing Activities (968,813) (7,270)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (31,864) (40,959)
Proceeds from stock options exercised 28,650 78,451
------------ ------------
Net Cash Provided (Used) by Financing Activities (3,214) 37,492
------------ ------------
Effect of exchange rate changes on cash
(50,247) (29,993)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (193,081) 1,044,261
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,299,904 1,539,032
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,106,823 $ 2,583,293
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ -- $ 40
============ ============
See accompanying notes.
6
SUTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. We operate from our
headquarters located in Sterling, Virginia. We have several branch offices
located throughout the United States, a branch office in India and a wholly
owned subsidiary in India. We are a leading provider of real-time data
collection and control products, systems software and professional services in
the hydrological, meteorological and oceanic monitoring markets. Our principal
products include data loggers, satellite transmitters/loggers, water level and
meteorological sensors, tides systems and application software. Our 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 our Annual Report
filed on Form 10-KSB for the year ended December 31, 2007. The condensed
consolidated balance sheet as of December 31, 2007 was derived from the audited
financial statements for the year then ended.
In the opinion of the Company, all adjustments necessary to present fairly our
financial position and the results of our operations and 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.
Our significant accounting policies are disclosed in our Annual Report on Form
10-KSB for the year ended December 31, 2007 filed with the Securities and
Exchange Commission.
STOCK COMPENSATION
Our 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, performance measures and other provisions of the award. See
Note 13 of our financial statements in our Annual Report on Form 10-KSB for the
year ended December 31, 2007 for additional information related to the stock
option plans.
7
Effective January 1, 2007, we 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 we
have not restated results for prior periods. The financial statements for the
three months and nine months ended September 30, 2008, recognize compensation
cost for the portion of outstanding awards that have vested during the period.
We recognize 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 months and nine months ended September 30, 2008, total
stock-based compensation expense of $14,656 and $41,503 was included in
operating expenses as compared to stock-based compensation of $18,811 and
$59,620 for the three months and nine months ended September 30, 2007.
The weighted average fair value of options granted during the three months and
nine months ended September 30, 2008 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, 2008
--------------------------------
Three Months Nine Months
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Weighted average fair value of grants -- $7.41
Expected volatility -- 30%
Dividend yield -- 0
Risk-free interest rate -- 3.92 - 5.16%
Expected term in years -- 10.00
The volatility factor is based on our historical stock price fluctuations. We
have not, and do not intend to, issue dividends; therefore, the dividend yield
assumption is 0. We 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
We have granted stock options under the Stock Option Plans to key employees and
directors for valuable services provided to the Company. Under the 1996 Plan, we
authorized 260,000 shares, 259,000 of which have been granted. As of December
31, 2004, we 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, 509,333 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. We 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, 2008:
8
Number
Number of Weighted Avg. of Options
Shares Exercise Price Exercisable
------------- ------------- -------------
Balance - December 31, 2007 583,252 $1.65 583,252
=============
Granted 16,000 7.41
Exercised 45,000 .64
Canceled 10,000 7.63
------------- ------------- -------------
Balance - September 30, 2008 544,252 $1.80 544,252
============= ============= =============
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,
2008 2007
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Net income $ 186,867 $ 1,218,335
============ ============
Shares used in calculation of income per share:
Basic 4,556,447 4,515,632
Effect of dilutive options 408,831 554,367
============ ============
Diluted 4,965,278 5,069,999
============ ============
Net income per share:
Basic $ .04 $ .27
============ ============
Diluted $ .04 $ .24
============ ============
Nine Months Ended September 30,
2008 2007
------------ ------------
Net income $ 692,667 $ 1,651,712
============ ============
Shares used in calculation of income per share:
Basic 4,542,793 4,509,864
Effect of dilutive options 435,948 554,367
============ ============
Diluted 4,978,741 5,064,231
============ ============
Net income per share:
Basic $ .15 $ .37
============ ============
Diluted $ .14 $ .33
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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. 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 QUARTERLY FORM 10-Q TO CONFORM THESE STATEMENTS
TO ACTUAL RESULTS.
9
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
monitoring and control, meteorological monitoring including airport weather
systems, oceanic monitoring and hydrological services. 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 datalogger,
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 as a transmitter and
logger. Because of its transmitter/logger functionality, it is a cost-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 more logging capability and more communications options than the
SatLink2. Our Tides Systems are used by the National Ocean Survey in their
network of approximately 225 stations in operation in the United States and its
territories.
We anticipate that we will experience significant quarterly fluctuations in our
sales and revenues which is not a fiscal year 2008 issue but historically
reflective of our business. Operating results will depend upon the product mix
and upon the timing of project awards. International sales, which totaled 40% of
revenues for fiscal year 2007, continue to constitute a significant portion of
our revenues. We are aware of many significant international opportunities and
we expect international revenues to grow as a percentage of our total business.
International sales are, however, difficult to forecast and international awards
are frequently delayed due to the governmental approval process. We are
committed to expanding our airport weather systems although we are relatively
new in this market and compete against established firms with more experience.
We are also committed to growing our hydrological services business, however,
our primary customer in Florida has expanded the pool of qualified contractors
on all major contracts. We therefore might receive lower contract amounts in
2008 due to the expanded list of qualified contractors. 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 2008 as compared to 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our 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 our Form 10-KSB for the year ended December 31, 2007.
There were no significant changes in critical accounting estimates.
10
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,
2008 2008 2007 2007
---------- ------ ---------- ------
Net sales and revenues $4,395,775 100.0% $6,607,220 100.0%
Cost of sales and revenues 2,856,044 65.0 3,498,248 52.9
---------- ------ ---------- ------
Gross profit 1,539,731 35.0 3,108,972 47.1
Selling, general and administrative expenses 892,955 20.3 824,463 12.5
Research and development expenses 332,133 7.6 355,842 5.4
---------- ------ ---------- ------
Operating income 314,643 7.1 1,928,667 29.2
---------- ------ ---------- ------
Interest (income) expense 22,224 .5 24,668 .4
---------- ------ ---------- ------
Income before income taxes 336,867 7.6 1,953,335 29.5
Income taxes (benefit) 150,000 3.4 735,000 11.1
---------- ------ ---------- ------
Net income $ 186,867 4.2% $1,218,335 18.4%
========== ====== ========== ======
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2007
NET SALES AND REVENUES
Our net sales and revenues for the three months ended September 30, 2008
decreased 34% to $4,395,775 from $6,607,220 in 2007 due primarily to a decrease
in project revenues. Overall domestic revenues decreased 12% to $2,546,070 in
the third quarter of 2008 versus $2,903,386 in 2007 while international revenues
decreased 50% to $1,849,705 in 2008 versus $3,703,834 in 2007. Record revenues
were achieved in the third quarter of 2007 due to shipments of water level
monitoring equipment totaling approximately $956,000 to customers in China for
the Three Gorges Dam project and shipments 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 our 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 decrease of 28% to $2,278,103 from
$3,183,025 in 2007. Standard product revenues were lower in 2008 due to prior
year project shipments to China for the Three Gorges Dam project. Integrated
Systems Division net sales and revenues decreased 38% to $1,604,501 from
$2,592,340 in 2007 due primarily to the project shipment of equipment to
Washington International Group for the Iraq Ministry of Water Resources in 2007.
Net sales and revenues from the Hydrological Services Division decreased 39% to
$393,640 from $644,861 in 2007 due to a decrease in project deliveries. Airport
Weather Systems Division net sales and revenues were $162,030 for the third
quarter of 2008 as compared to $0 in 2007 due to an AWOS shipment to Kenya.
Sutron India Operations had a net sales and revenue decrease to $(42,499) from
$186,994 in 2007 due to higher than expected costs to complete for the Central
Water Commission (CWC) of India contract that is now in its warranty period.
Customer orders for the third quarter of 2008 were approximately $5,505,000 as
compared to approximately $4,886,000 in 2007, a 13% increase.
11
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 65% for the quarter ended
September 30, 2008 as compared to 52.9% for the quarter ended September 30,
2007. The increase in cost of sales is attributed to changes in the product mix
that resulted in lower equipment sales and increased project work. The shipments
to China for the Three Gorges Dam project and to Washington International Group
for the Iraq Ministry of Water Resources had high content of standard products.
In 2008, we had higher costs of sales due to project work with less standard
product content. Cost of sales was also impacted by foreign currency losses of
approximately $106,000 in the third quarter of 2008 as compared to foreign
currency gains of approximately $70,000 in the third quarter of 2007. Cost of
sales for both 2008 and 2007 include provisions for inventory obsolescence,
physical inventory adjustments and inventory valuation adjustments. We
continually pursue 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 $892,955 in 2008 from
$824,463 in 2007, an increase of $68,312 or 8%. We experienced increases in
selling costs in India, in Sarbanes Oxley 404 compliance costs and in Board of
Director compensation as compared to the same quarter in the prior year.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $332,133 in 2008 from $355,842 in
2007, a decrease of $23,709 or 7.5%. Product development expenses decreased in
2008 due to lower costs relating to the development of several new products.
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 our cash position, we did not use its line of credit during the third
quarter of 2008. We had net interest income of $22,224 in 2008 as compared to
net interest income of $24,668 in 2007.
INCOME TAXES
Income taxes decreased 80% in 2008 to $150,000 from $735,000 in 2007. Taxes as a
percentage of revenue were 3.4% in 2008 as compared to 11.1% in 2007. The
provisions for income taxes represent effective tax rates of approximately 44.5%
in 2008 and 37.6% in 2007, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2007
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our statements of operations:
12
Nine Months Ended September 30,
2008 2008 2007 2007
------------ ------ ------------ ------
Net sales and revenues $ 12,239,838 100.0% $ 13,971,836 100.0%
Cost of sales and revenues 7,865,910 64.3 8,041,655 57.6
------------ ------ ------------ ------
Gross profit 4,373,928 35.7 5,930,181 42.4
Selling, general and administrative expenses 2,497,538 20.4 2,477,581 17.7
Research and Development expenses 908,376 7.4 940,704 6.7
------------ ------ ------------ ------
Operating income 968,014 7.9 2,511,896 18.0
------------ ------ ------------ ------
Interest (income) expense 88,653 .7 73,816 .5
------------ ------ ------------ ------
Income before income taxes 1,056,667 8.6 2,585,712 18.5
Income taxes (benefit) 364,000 3.0 934,000 6.7
------------ ------ ------------ ------
Net income $ 692,667 5.6% $ 1,651,712 11.8%
============ ====== ============ ======
NET SALES AND REVENUES
Our net sales and revenues for the nine months ended September 30, 2008
decreased 12% to $12,239,838 from $13,971,836 in 2007. Overall domestic revenues
decreased 12% to $7,557,168 in 2008 versus $8,590,425 in 2007 while
international revenues decreased 13% to $4,682,670 in 2008 versus $5,381,411 in
2007, primarily due to decreased project work both domestically and
internationally. Net sales and revenues are broken down between our 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 decrease of 11% to $6,669,084 from
$7,481,684 in 2008 due to decreased international shipments. Integrated Systems
Division revenues decreased 9.5% to $3,822,842 from $4,222,476 in 2007 due to
decreased domestic project revenues. Revenues from the Hydrological Services
Division decreased 26% to $1,195,480 from $1,625,059 in 2007 due to decreased
project activity. Airport Weather Systems Division revenues increased to
$427,541 in 2008 as compared to $75,425 in 2007 due to AWOS project shipments to
Vietnam and Kenya. Sutron India Operations had a net sales and revenue decrease
of 78% to $124,891 in 2008 from $567,193 in 2007 due to the Central Water
Commission (CWC) of India contract being in the warranty period and near
completion.
Customer orders or bookings for the first nine months of 2008 were approximately
$10,401,000 as compared to approximately $20,689,000 for the first nine months
of 2007, a 50% decrease. Our backlog of orders at September 30, 2008 was
approximately $8,700,000. The backlog total as of September 30, 2007 was
approximately $10,275,000. We anticipate that approximately 40% of our backlog
as of September 30, 2008 will be shipped in 2008.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 64.3% in 2008 as compared to 57.6%
in 2007. The increase in cost of sales is attributed to changes in the product
mix that resulted in projects with lower standard product content. Projects that
do not have high standard product content do not carry as high margins as those
consisting primarily of standard products. In 2008, we had higher costs of sales
due to project work that had lower standard product content and lower margins.
In 2007, the shipments to China for the Three Gorges Dam project and to
Washington International Group had high content of standard products and higher
margins. Foreign currency losses for the nine months ended September 30, 2008
were approximately $145,000 as compared to a gain of approximately $159,000 in
same period of 2007.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $2,497,538 in 2008
from $2,477,581in 2007, an increase of $19,957 or 1%. The increase is primarily
due to increased sales and marketing activities in India.
13
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $908,376 in 2008 from $940,704 in
2007, a decrease of $32,328 or 3%. 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 our cash position, we did not use our line of credit during the nine
months ended September 30, 2008. We had net interest income in 2008 of $88,653
as compared to net interest income of $73,816 in 2007.
INCOME TAXES
Income taxes decreased 61% in 2008 to $364,000 from $934,000 in 2007 due to the
decrease in operating income. Taxes as a percentage of revenue were 3% in 2008
as compared to 6.7% in 2007. The provisions for income taxes represent effective
tax rates of approximately 34.4% in 2008 and 36.1% in 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents were $5,106,823 at September 30, 2008 compared to
$5,299,904 at December 31, 2007. Working capital increased to $12,383,574 at
September 30, 2008 compared with $11,563,550 at December 31, 2007.
Net cash provided by operating activities was $829,193 for the nine months ended
September 30, 2008 as compared to cash provided by operating activities of
$1,044,032 for the nine months ended September 30, 2007. The decrease is
primarily due to the decrease in operating income.
Net cash used by investing activities was $968,813 for the nine months ended
September 30, 2008 as compared to cash used by investing activities of $7,270
for the nine months ended September 30, 2007. The increase is due to an increase
in restricted cash in 2008 related to a performance bond issued to the Ministry
of Energy and Water in Afghanistan.
Net cash used by financing activities was $3,214 for the nine months ended
September 30, 2008 as compared to net cash provided by financing activities of
$37,492 for the nine months ended September 30, 2007. The decrease is due to
proceeds from the exercise of employee stock options being down in 2008 as
compared to 2007.
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 August 5, 2009 and is
secured by substantially all or our assets. Borrowings bear interest at the
bank's prime rate. During the first nine months ended of 2008, 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,
2008 and December 31, 2007, a commercial bank had issued standby letters of
credit in the amounts of $1,053,580 and $1,652,818, respectively that served as
either bid or performance bonds. The amount available to borrow under the line
of credit was reduced by these amounts.
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Management believes that our 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 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4T. 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,
2008, the end of the fiscal period covered by this report on Form 10-Q. We
maintain 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 our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission ("SEC") 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 nine months ended September 30, 2008 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 claims, in the opinion of management, will have no material
effect on our financial statements.
ITEM 5. OTHER INFORMATION
On July 31, 2008, the Board of Directors, based on the recommendation of the
compensation committee, approved independent director's compensation as follows:
1. Annual Retainer: $10,000
2. Annual Stock Option: 5,000 shares of non-qualified stock that vest
over one year from date of election with stock option being dated as
of date of election. Option exercise price is closing sales price of a
share of stock reported on the NASDAQ in accordance with Sutron
Amended and Restated 2002 Stock Plan as filed with SEC
3. Board Meeting Attendance: $1,500 in person and$1,000 by telephone
participation
4. Committee Meeting Attendance: $1,500 in person and $1,000 by telephone
participation
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5. Audit Committee Chair Retainer: $5,000 per year
6. Other Committee Chair Retainer: $3,000 per year
7. Out of pocket expenses: Reimbursed at actual cost relative to
performance as members of the Board of Directors
Independent Directors receiving stock options as of their election date of May
14, 2008 are Mr. Andrew Lipman, Mr. Leland Phipps and Mr. Robert Roberts, Jr.
ITEM 6. EXHIBITS
31.1 Certification of the President and Chief Executive Officer pursuant to
Rule 13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
32 Certification of the President and Chief Executive Officer and Chief
Financial Officer 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 14, 2008 /s/ Raul S. McQuivey
---------------------- ----------------------------
Date Raul S. McQuivey
President and Chief Executive Officer
(Principal Executive Officer)
November 14, 2008 /s/ Sidney C. Hooper
---------------------- ----------------------------
Date Sidney C. Hooper
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
16