UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2005
Commission file number 0-12227
Sutron Corporation
(Exact name of registrant as specified in its charter.)
Virginia 54-1006352
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
21300 Ridgetop Circle, Sterling Virginia 20166
(Address of principal executive offices) (Zip Code)
(703) 406-2800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common Stock, $.01 Par Value - 4,289,551 shares of as of March 31, 2005.
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SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
Part I
Financial Statement Item............................2
Financial Statements................................2
Balance Sheet.......................................2
Income Statement....................................3
Cashflow Statement..................................4
Financial Footnotes.................................5
Management Discussion...............................6
Controls and Procedures.............................8
Part II
Legal Proceedings...................................9
Submission to a Vote................................9
Reports on Form 8-K.................................9
Signatures..........................................9
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
SUTRON CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
___________ ___________
ASSETS
Current Assets
Cash and cash equivalents $ 873,777 $1,419,171
Accounts receivable 4,559,493 3,755,439
Inventory 2,388,583 2,371,476
Prepaid items and other 403,760 270,014
Deferred income taxes 179,000 179,000
____________ ___________
Total Current Assets 8,404,613 7,995,100
Property and equipment, at cost 3,073,943 3,038,168
Less - Accumulated depreciation and
amortization (2,388,497) (2,328,496)
____________ ___________
Net property, plant and equipment 685,446 709,672
Other assets 36,905 51,133
____________ ____________
Total Assets $9,126,964 $8,755,905
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 800,587 $ 943,616
Accrued payroll 170,444 272,601
Other accrued expenses 1,247,008 1,400,779
Accrued income taxes 386,866 -
Notes payable - current 25,613 25,613
____________ ____________
Total Current Liabilities 2,630,518 2,642,609
Long-Term Liabilities
Notes payable, net of current maturities 55,681 89,666
Deferred income taxes 172,000 111,000
____________ ____________
Total Liabilities 2,858,199 2,904,275
Stockholders' Equity
Common stock 42,896 42,896
Additional paid-in capital 2,306,655 2,306,655
Retained earnings 3,890,221 3,497,930
Accumulated other comprehensive income 28,993 4,149
____________ ____________
Total Stockholders' Equity 6,268,765 5,851,630
____________ ____________
Total Liabilities and Stockholders' Equity $9,126,964 $8,755,905
============ ============
See Accompanying Notes to Financial Statements
2
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SUTRON CORPORTION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2005 2004
___________ ___________
Revenues $3,893,933 $3,727,228
Cost of Goods Sold 2,239,270 2,362,101
___________ __________
Gross Profit 1,654,663 1,365,127
Research and Development Expenses 309,494 247,895
Selling, General, and
Administrative Expenses 730,738 546,743
___________ ___________
Income (Loss) from Operations 614,431 570,489
Interest income (expense) 3,860 (15,210)
Income (Loss) before Provision ____________ ___________
for Income Taxes 618,291 555,279
Provisions for Income Taxes 226,000 190,000
____________ ___________
Net Income $ 392,291 $ 365,279
Net Income per Common Share $ .09 $ .09
Weighted Average Number
of Common Shares 4,289,551 4,289,551
See Accompanying Notes to Financial Statements
3
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SUTRON CORPORTION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
___________ __________
Cash Flows from Operating Activities:
Net income (loss) $ 392,291 $ 365,279
Depreciation and amortization 60,001 53,903
(Increase) Decrease in:
Accounts receivables (804,054) (399,038)
Inventory (17,107) (49,092)
Prepaid items and other (133,746) 83,982
Deferred income taxes 0 (91,658)
Other assets 14,228 (700)
Increase (Decrease) in:
Accounts payable (143,029) (221,953)
Accrued expenses 130,938 517,015
__________ ________
Net Cash Provided by Operating Activities (500,478) 257,738
Cash Flows from Investing Activities:
Capital expenditures (35,775) (88,419)
__________ ________
Net Cash Used in Investing Activities (35,775) (88,419)
Cash Flows from Financing Activities:
Payments on line of credit - (399,454)
Payments on Term notes payable (33,985) 27,435
____________ _________
Net Cash (Used) by Financing Activities (33,985) (372,019)
Currency adjustments
Effect of exchange rate changes on cash 24,844 -
____________ _________
Net Increase (Decrease) in Cash (545,394) (202,700)
Cash and Cash Equivalents, January 1 1,419,171 388,612
___________ _________
Cash and Cash Equivalents, March 31 $ 873,777 $ 185,912
See Accompanying Notes to Financial Statements
4
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SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2005
1. Basis of Presentation
The accompanying financial statements, which should be read in conjunction
with the financial statements of Sutron Corporation ("the Company") included
in the 2004 Annual Report filed on Form 10-KSB, are unaudited but have
been prepared in the ordinary course of business for the purpose of providing
information with respect to the interim period. The Company believes that all
adjustments (none of which were other than normal recurring accruals)
necessary for a fair presentation for such periods have been included.
2. Earnings Per Share
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 which establishes standards for
computing and presenting earnings per share (EPS) for entities
with publicly held common stock. The standard requires
presentation of two categories of earning per share, basic EPS
and diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for
the year. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings
of the Company.
Computation of Per Share Earnings
Three Months Ended
March 31,
2005 2004
__________ _________
Basic EPS
Average shares outstanding 4,289,551 4,289,551
Net Income $ 392,291 $ 365,279
Net Income per common share $.09 $.09
Dilutive EPS
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 653,992 391,760
Total average shares outstanding 4,943,543 4,681,311
Net earnings $ 392,291 $ 365,279
Net income per diluted share $.08 $.08
5
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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.
Sutron Corporation (the Company) was incorporated on
December 30, 1975 under the General Laws of the Commonwealth
of Virginia. The Company's headquarters is located at 21300
Ridgetop Circle, Sterling, Virginia 20166, and the Company's
telephone number at that location is (703) 406-2800. The Company
maintains a worldwide web address at www.sutron.com. The Company
designs, manufactures and markets products and solutions that
enable government and commercial entities to monitor and collect
hydrological and meteorological data for the management of critical
water resources, for early warning of potentially disasterous floods
or storms and for the optimization of hydropower plants.
The Company is focused on providing real-time solutions and
services to our customers in three areas of the hydrological
and meteorological markets. First, we provide realtime data
collection and control products consisting primarily of
dataloggers, satellite transmitters and sensors. Second,
we provide turnkey integrated systems for hydrological and
meteorological networks and airport weather systems.
Third, we provide services consisting of installation,
maintenance of hydrological and meteorological systems, and
other related engineering services. The Companys customers
include a diversified base of federal, state, local and foreign
governments, engineering companies, universities, and hydropower
companies.
The Company utilizes the accrual method of accounting for
both financial statement and tax return reporting purposes.
The Company recognizes revenue from product sales upon shipment.
Selling, general, and administrative expenses are charged
against periodic income as incurred. Revenue from fixed-price
contracts is recognized on the percentage-of-completion method
based on costs incurred in relation to total estimated costs.
Revenue from time-and-materials contracts is recognized to the
extent of billable rates, times hours delivered, plus materials
costs incurred. Contract costs include allocated indirect costs.
Anticipated losses are recognized as soon as they become known.
Our revenue and operating results are subject to substantial
variations based on our customers' expenditures and the frequency
with which we are chosen to perform services for our customers.
Revenue from any given customer will vary from period to period.
Our gross margins are affected by the product mix and can vary
substantially based on quantities and contract requirements.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
financial statements and notes thereto and the other financial
information included elsewhere in this Report on Form 10-QSB.
6
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Results of Operations
The following table sets forth for the periods indicated the
percentage of total revenues represented by certain items
reflected in our statements of operations:
2005 2004
---- ----
Revenues 100.0% 100.0%
Cost of sales 58.5 63.4
Gross profit 42.5 36.6
Selling, general and
administrative expenses 18.7 14.7
Research and
Development expenses 8.0 6.7
Operating income 15.8 15.2
Interest income (expense) .1 (.3)
Income before income taxes 15.9 14.9
Income taxes (benefit) 5.8 5.1
Net income 10.1% 9.8%
Net Revenues
The Company's revenues for the three months
ended March 31, 2005 increased 4.5% to $3,893,933 from $3,727,228
in 2004. The Company derives its revenues from the sale of products
consisting primarily of dataloggers, satellite transmitters/loggers
and sensors, integrated systems, hydrological services consisting
primarily of equipment installation and maintenance and engineering
services and airport weather systems.
Company 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 and the Company's India Branch Office, the Hydrological
Services Division and the Airport Weather Systems Division.
The HydroMet Products Division, which is responsible for sales
of standard products, had a revenue decrease of 19.3% to $1,782,780
from $2,209,608 in 2004. In 2004, the Company shipped approximately
$500,000 of standard product to a Canadian consortium for a project
in Poland. There was no similiar sized shipment in 2005. Integrated
Systems revenues increased 9.5% to $1,244,294 from $1,136,360 in 2004.
Revenues from the Hydrological Services Division increased 37.4% to
$512,171 from $372,860 in 2004 due to increased contract awards
primarily from the South Florida Water Management District. Airport
Weather Systems revenues increased to $354,688 from $8,400 in 2004
due to shipments to the Meteorological Service of the Netherlands
Antilles and Aruba. The Airport Weather Systems Division was
established in July 2003 and services a market that the Company
previously was not able to compete in due to a lack of expertise.
The Company hired a manager with over 20 years experience in
the aiport weather monitoring market and this hiring is viewed as
critical to the success of this division.
Overall domestic sales increased 9.7% to $2,265,596 in the first
quarter of 2005 versus $2,053,056 in 2004 while international sales
decreased 2.7% to $1,628,337 in 2005 versus $1,674,172 in 2004.
Bookings for the first quarter of 2005 were $3,025,257 as
compared to $4,147,838 in the first quarter of 2004. The
Company's backlog of orders at March 31, 2005 was $4,752,292
as compared with $4,771,481 as of March 31, 2004. The Company
anticipates that 70% of its backlog as of March 31, 2005 will
be shipped in 2005.
Cost of Sales
Cost of sales as a percentage of revenues was 57.5% for the
quarter ended March 31, 2005 as compared to 63.4% for the quarter
ended March 31, 2004. Although Company revenues increased 4.5%,
cost of sales decreased $122,831 in 2005 as compared to 2004 due
primarily to the SatLink2. The SatLink2 was certified in January
2004 but units were not delivered until May 2004. The SatLink2
redesign was done in order to reduce parts, improve manufacturability
and to add increased functionality. Cost of goods sold on this
product was reduced significantly due to the redesign. Also
contributing to the lower cost of sales was improved margins
on Integrated Systems projects and on Airport Weather Systems
projects. Both divisions had revenue increases and performed
projects in line with cost and margin expectations.
Gross Profit
Gross profit for 2005 increased 21.2% to $1,654,663
from $1,365,127 in 2004. Gross margin as a percentage of revenues
for 2005 increased to 42.5% as compared to 36.6% in 2004. The
increase in the Company's gross margin is due to increased
sales volume, to the product mix and to the effect of the SatLink2
on gross margins in 2005. The SatLink2 was certified in January
2004 but units were not delivered until May 2004. The SatLink2
redesign was done in order to reduce parts, improve manufacturability
and to add increased functionality. Gross margin on this product
has improved significantly for the reasons stated above.
Selling, General And Administrative
Selling, general and administrative expenses increased to $730,738
in 2005 from $546,743 in 2004, an increase of $183,995 or 34%. The
Company experienced increases in legal fees, banking fees,
bad debt writeoffs, marketing activities and international agent
commissions. The Company also has made an accrual for
the estimated profit sharing contribution for 2005 that is
reflected in selling, general and administrative expenses.
Research and Development
Research and development expenses increased to $309,494 in 2005
from $247,895 in 2004, an increase of $61,599 or 25%. In 2004,
significant engineeringlabor was performed on the Hanscom Air Force
Base FMQ-13(V)2 Wind Sensor Replacement contract which was direct
billable work versus R&D engineering work. This resulted in lower
R&D expenses. The Company also has accrued a prorata share of
the estimated profit sharing contribution for 2005 that is
reflected in R&D expenses.
Interest Income/Expense
Due to the Company's cash position, the Company did not use its
line of credit during the first quarter of 2005. The Company
had interest income in 2005 of $3,860 as compared with interest
expenses of $15,210 in 2004.
Income Taxes
The Company's first quarter profits resulted in an increase in
income taxes. Taxes increased 18.9% in 2005 to $226,000 from
$190,000 in 2004. Taxes as a percentage of revenue were 5.8% in
2005 as compared to 5.1% in 2004.
Net Income
The Company's net income in 2005 increased 7.4% to $392,291 from
$365,279 in 2004. Net income as a percentage of revenue was 10.1%
in 2005 as compared to 9.8% in 2004.
7
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Liquidity and Capital Resources
The Companys working capital was $5.77 million at March 31, 2005
compared with $5.35 million at December 31, 2004. Cash on hand was
$873,777 at March 31, 2005 compared to $1,419,171 at December 31, 2004.
Of the cash balance on hand at March 31, 2005, $85,813 was restricted and
served as bid bonds on international tenders. Of the cash balance on hand
at December 31, 2004, $277,454 was restricted and served as collateral
for international standby letters of credit and $108,568 was restricted
and served as bid bonds on international tenders.
Net cash used by operating activities was $500,478 for the quarter ended
March 31, 2005 as compared to cash provided by operating activities of
$257,738 for the quarter ended March 31, 2004.
Net cash used by investing activities was $35,775 for the quarter ended
March 31, 2005 as compared to cash used by investing activities of
$88,419 for the quarter ended March 31, 2004, and was primarily due to
purchases of property and equipment.
Net cash used by financing activities was $33,985 for the quarter ended
March 31, 2005 due to payments on installment notes. Net cash used by
financing activities was $372,019 for the quarter ended March 31, 2004 due to
payments on the line of credit and on term and installment notes.
The Company has a $1,625,000 line of credit with a commercial bank.
The line of credit is collateralized by substantially all of the
assets of the Company and guaranteed by the primary stockholders
of the Company and expires August 2005. Under the terms of the
line of credit, the Company is required to maintain certain financial
covenants. Interest is charged at the banks prime rate plus one-half
percent and is payable monthly. There was no balance outstanding at
March 31, 2005 and at December 31, 2004.
The Company frequently bids on and enters into international contracts
that require bid and performance bonds. At March 31, 2005 and December
31, 2004, the bank had issued standby letters of credit in the amount
of $346,962 and $186,354, respectively, that served as either bid or
performance bonds. The amount available 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 2005.
Item 3. Controls and Procedures
a) Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on this evaluation, our principal
executive officer and our principal financial officer concluded that our
disclosure controls and procedures were not effective to enable us to
record, process, summarize and report information required to be included
in the Companys periodic SEC filings and annual proxy statement within
the required time period.
Specifically, during the quarter ended March 31, 2005, we discovered that
we failed to timely file a Current Report on Form 8-K relating to our
quarterly earnings press release. In addition, in connection with outside
counsels review of our definitive proxy statement on Schedule 14A, we
identified control weaknesses relating to our non-compliance with certain
disclosure requirements in the SECs rules relating to proxy statements.
After discovering such weaknesses, and in an effort to address and
remedy the weaknesses, we promptly filed a Current Report on Form 8-K
and amended our definitive proxy materials to ensure appropriate public
disclosures.
Our control weaknesses relate to our failure to devote sufficient resources
to keep abreast of changing disclosure requirements, including those
requirements that were imposed after the passage of the Sarbanes-Oxley
Act of 2002. We are in the process of correcting the identified weakness
by, among other things, allocating additional personnel to the disclosure
process, adopting written disclosure controls and procedures, forming a
disclosure controls committee that will consider the materiality of
information and determine disclosure obligations on a timely basis, and
engaging outside counsel to review prior SEC filings in addition to future
filings. These actions should be completed during the second quarter.
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 March 31, 2005 that have
materially affected, or are likely to materially effect, our internal
control over financial reporting.
8
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in litigation with
customers, vendors, suppliers and others in the ordinary course
of business, and a number of such claims may exist at any given time.
All such existing proceedings are not expected to have a material
adverse impact on the Company's results of operations or financial
condition. The Company is a party to the proceedings discussed below.
In 2003, the Company filed a claim with the Advance Tax Court
of India seeking a ruling on a decision by the Government of
Andhra Pradesh (GoAP) of India to assess a 48% income tax on the
Company's contract of approximately $1,606,000. The GoAP believed
that the Company had established a branch office in India and was
therefore subject to Indian income tax. Although the Company did
file an application for branch office status and received approval
to open a branch office, the Company did not complete the
registration and approval process with the Government of India
and had not opened a branch office in India. The income tax
amount that is at issue was approximatly $770,000.
The Advance Tax Court of India heard the case in September 2004 and
ruled that Sutron Corporation has a Permanent Establishment in
India by virtue of its Country Manager who maintains an office
in New Delhi. The Country Manager has the authority to sign
contracts and perform other duties on behalf of the Company that
fulfills the requirements of Indian tax law and as defined in
Double Taxation Avoidance Agreement with the United States of
America.
As a result of this ruling, Sutron Corporation entered into
an agreement with Ernst & Young, New Delhi, India to file tax
returns for the tax periods April 1, 2002 to March 31, 2003
and April 1, 2003 to March 31, 2004. The returns for both
tax periods were filed in October 2004. A refund in the
amount of approximately $137,000 will be issued to Sutron for the
tax period ending March 31, 2003 resulting from excess withholdings
by the Government of Andhra Pradesh in excess of the tax amount of
approximately $5,250. A tax payment of approximately
$5,600 was made for the tax period ending March 31, 2004. All taxes
paid in India will be applied as income tax credits on the
Company's U.S. tax returns in accordance with the Double
Taxation Avoidance Agreement with the United States of America
and will therefore offset federal taxes.
The Company is currently awaiting acceptance on two systems that
were provided to the Government of Andhra Pradesh in 2002. All
contractual items on the systems have been accepted with the
exception of four water level monitoring sites that are located at
reservoirs. The Government of Andhra Pradesh believes that
the sites should go down approximately 100 meters at the sites.
The Company does not believe that it is required to provide
monitoring at 100 meters due to lack of specification in the
Request for Proposal (RFP) and the Company's proposal that
specified 10 meters at each site. This matter has not yet been
but will most likely be referred to an arbitrator as per provisions
of the contract. In the event that the Company loses the arbitration
hearing, additional costs of approximately $120,000 will be
incurred to install the sites down to 100 meters.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K
The Company filed two Reports on Form 8-K during this quarter.
A Form 8-K was filed on January 28, 2005 in regards to the
Company's 2004 Third Quarter earnings news release and a Form
8-K was filed on March 15, 2005 in regards to the Company's
2004 Fourth Quarter earnings news release. Both filings were done
in accordance with SEC Release No. 33-8255.
SUTRON CORPORATION
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)
May 16, 2005 /s/Raul S. McQuivey
Date Raul S. McQuviey
Principal Executive Officer
May 16, 2005 /s/Sidney C. Hooper
Date Sidney C. Hooper
Principal Accounting Officer
9
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