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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 June 30, 2008
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 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 4,555,632 outstanding shares of the issuer's only class of common
equity, Common Stock, $0.01 par value, on August 13, 2008.
Transitional Small Business Disclosure Format (check one): Yes Yes [_] No [X]
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SUTRON CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2008
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheet as of June 30, 2008
and December 31, 2007 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2008 and 2007 4
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2008 and 2007 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2008 and 2007 6
Financial Footnotes 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 4T. Controls and Procedures 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUTRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2008 2007
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,633,235 $ 5,299,904
Restricted cash and cash equivalents 998,715 134,241
Accounts receivable, net 3,847,923 3,614,532
Inventory 4,243,773 4,114,014
Prepaid items and other assets 914,493 477,754
Deferred income taxes 327,000 312,000
------------ ------------
TOTAL CURRENT ASSETS 13,965,139 13,952,445
PROPERTY AND EQUIPMENT, AT COST 2,436,271 2,424,768
Accumulated depreciation and amortization (1,952,406) (1,845,486)
------------ ------------
Property and equipment, net 483,865 579,282
OTHER ASSETS 85,535 99,308
------------ ------------
TOTAL ASSETS $ 14,534,539 $ 14,631,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 896,213 $ 823,114
Accrued payroll 97,330 285,829
Other accrued expenses 593,890 995,123
Notes payable - current 11,053 38,381
Billings in excess of costs and estimated earnings 230,203 246,448
------------ ------------
TOTAL CURRENT LIABILITIES 1,828,689 2,388,895
LONG-TERM LIABILITIES
Notes payable, net of current maturities 2,073 2,075
Deferred income taxes 61,000 84,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 63,073 86,075
------------ ------------
TOTAL LIABILITIES 1,891,762 2,474,970
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 45,557 45,257
Additional paid-in capital 2,741,362 2,694,416
Retained earnings 9,990,611 9,484,811
Accumulated other comprehensive loss (134,753) (68,419)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,642,777 12,156,065
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,534,539 $ 14,631,035
============ ============
See accompanying notes.
3
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2008 2007
------------ ------------
Net sales and revenues $ 4,025,016 $ 4,217,871
Cost of sales and revenues 2,685,418 2,572,703
------------ ------------
Gross profit 1,339,598 1,645,168
------------ ------------
Operating expenses:
Selling, general and administrative expenses 723,335 776,005
Research and development expenses 285,487 291,509
------------ ------------
Total operating expenses 1,008,822 1,067,514
------------ ------------
Operating income 330,776 577,654
Interest income (expense), net 26,107 26,752
------------ ------------
Income before income taxes 356,883 604,406
Income tax expense (benefit) 98,000 210,000
------------ ------------
Net income $ 258,883 $ 394,406
============ ============
Net income per share:
Basic income per share $ .06 $ .09
============ ============
Diluted income per share $ .05 $ .08
============ ============
See accompanying notes.
4
SUTRON CORPORTION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2008 2007
------------ ------------
Net sales and revenues $ 7,844,063 $ 7,364,615
Cost of sales and revenues 5,009,866 4,579,407
------------ ------------
Gross profit 2,834,197 2,785,208
------------ ------------
Operating expenses:
Selling, general and administrative expenses 1,604,583 1,617,118
Research and development expenses 576,243 584,861
------------ ------------
Total operating expenses 2,180,826 2,201,979
------------ ------------
Operating income 653,371 583,229
Interest income (expense), net 66,429 49,148
------------ ------------
Income before income taxes 719,800 632,377
Income taxes 214,000 199,000
------------ ------------
Net income $ 505,800 $ 433,377
============ ============
Net income per share:
Basic income per share $ .11 $ .10
============ ============
Diluted income per share $ .10 $ .09
============ ============
See accompanying notes.
5
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 505,800 $ 433,377
Noncash items included in net income:
Depreciation and amortization 106,920 112,500
Deferred income taxes (38,000) --
Stock option compensation 26,846 40,809
Changes in current assets and liabilities:
Accounts receivable (233,391) 2,309,146
Inventory (129,759) (1,190,130)
Prepaid items and other assets (422,966) (200,679)
Accounts payable 73,099 (392,144)
Accrued expenses (605,977) (1,214,563)
------------ ------------
Net Cash Provided (Used) by Operating Activities (717,428) (101,684)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash and cash equivalents (864,474) (811,690)
Purchase of property and equipment (11,503) (41,351)
------------ ------------
Net Cash Provided (Used) by Investing Activities (875,977) (853,041)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (27,330) (28,264)
Proceeds from stock options exercised 20,400 78,451
------------ ------------
Net Cash Provided (Used) by Financing Activities (6,930) 50,187
------------ ------------
Effect of exchange rate changes on cash (66,334) (6,247)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,666,669) (910,785)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,299,904 1,539,032
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,633,235 $ 628,247
============ ============
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. The Company operates from its
headquarters located in Sterling, Virginia. The Company has several branch
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
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, 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 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, 2007 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, 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, 2007 for additional information related
to the stock option plans.
7
Effective January 1, 2007, 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 six months ended June 30, 2008, 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 months and six months ended
June 30, 2008, total stock-based compensation expense of $12,228 and $26,846 was
included in operating expenses as compared to stock-based compensation of
$22,424 and $40,809 for the three months and six months ended June 30, 2007. The
weighted average fair value of options granted during the three months and six
months ended June 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 June 30, 2008
-------------------------------
Three Months Six Months
------------ ------------
Weighted average fair value of grants $7.50 $7.41
Expected volatility 30% 30%
Dividend yield 0 0
Risk-free interest rate 3.92% 3.92 - 5.16%
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, 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. 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 three months ended June 30, 2008:
Number of
Number of Weighted Avg. Options
Shares Exercise Price Exercisable
-------------------------------------------
Balance - December 31, 2007 583,252 $1.65 583,252
===========
Granted 16,000 7.41
Exercised 30,000 .68
Canceled 10,000 7.63
-------------------------------------------
Balance - June 30, 2008 559,252 $1.76 559,252
===========================================
8
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 June 30,
-----------------------------
2008 2007
------------ ------------
Net income $ 258,883 $ 394,406
============ ============
Shares used in calculation of income per share:
Basic 4,546,676 4,513,005
Effect of dilutive options 425,375 550,530
============ ============
Diluted 4,972,051 5,063,535
============ ============
Net income per share:
Basic $ .06 $ .09
============ ============
Diluted $ .05 $ .08
============ ============
Six Months Ended June 30,
-----------------------------
2008 2007
------------ ------------
Net income $ 505,800 $ 433,377
============ ============
Shares used in calculation of income per share:
Basic 4,539,168 4,506,932
Effect of dilutive options 434,206 554,264
============ ============
Diluted 4,973,374 5,061,196
============ ============
Net income per share:
Basic $ .11 $ .10
============ ============
Diluted $ .10 $ .09
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q,, INCLUDING WITHOUT
LIMITATION THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS, OTHER THAN STATEMENTS OF HISTORICAL INFORMATION, ARE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
THESE FORWARD-LOOKING STATEMENTS MAY SOMETIMES BE IDENTIFIED BY SUCH WORDS AS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR
SIMILAR WORDS. WE BELIEVE THAT IT IS IMPORTANT TO COMMUNICATE OUR FUTURE
EXPECTATIONS TO INVESTORS. HOWEVER, THESE FORWARD-LOOKING STATEMENTS INVOLVE
MANY RISKS AND UNCERTAINTIES. 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.
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
9
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 both as a transmitter
and logger. Because of its logger/transmitter 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
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, 2007. There were no significant changes in critical
accounting estimates
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:
10
Three Months Ended
June 30,
------------------
2008 2007
------ ------
Net sales and revenues 100.0% 100.0%
Cost of sales and revenues 66.7 61.0
------ ------
Gross profit 33.3 39.0
Selling, general and administrative expenses 18.0 18.4
Research and Development expenses 7.1 6.9
------ ------
Operating income 8.2 13.7
Interest income .6 .6
------ ------
Income before income taxes 8.8 14.3
Income taxes (benefit) 2.4 5.0
------ ------
Net income 6.4% 9.3
====== ======
THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007
NET SALES AND REVENUES
Consolidated revenues for the three months ended June 30, 2008 decreased 5% to
$4,025,016 from $4,217,871 in 2007 due to decreased domestic revenues. 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 net sales and revenue of $2,260,159 as compared to $2,248,410 in
2007. Integrated Systems net sales and revenues increased 28% to $1,223,639 from
$955,239 in 2007 primarily due to increased contract revenue from the Company's
project with the Afghanistan Ministry of Energy and Water to provide 174
hydrological monitoring stations. Net sales and revenues from Hydrological
Services decreased 14% to $486,266 from $568,437 in 2007 due a decrease in
project work orders from the South Florida Water Management District. Airport
Weather Systems did not have sales and revenue in the second quarter of 2008 as
compared to $75,425 in 2007. Sutron India Operations net sales and revenue
decreased to $54,952 in 2008 from $370,360 in 2007 due to decreased project
revenues as a contract with the Central Water Commission of India for the
installation of 168 Hydro-Met stations and 12 Modeling Centers has been
installed and commissioned and is now in its warranty period.
Overall domestic revenues decreased 13% to $2,892,415 in the second quarter of
2008 versus $3,316,025 in 2007 due to decreased sales of standard products and
to decreased Integrated Systems and Hydrological Services project activity.
International revenues increased 25% to $1,132,601 in 2008 versus $901,846 in
2007 due to increased sales of standard products and to increased revenue from
our contract with the Ministry of Energy and Water in Afghanistan.
Customer orders or bookings in the second quarter of 2008 were $2,389,000 as
compared to $12,742,000 in the second quarter of 2007.
11
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 66.7% for the quarter ended June
30, 2008 as compared to 61.0% for the quarter ended June 30, 2007. The increase
in cost of sales was primarily due to lower margins on projects in 2008 as
compared to 2007.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $723,335 for the
quarter ended June 30, 2008 from $776,005 for the quarter ended June 30, 2007.
Selling, general and administrative expenses as a percentage of revenues
decreased to 18% for the quarter ended June 30, 2008 from 18.4%. The decrease is
primarily due to lower legal fees relating to our lawsuit against our former
Vice President to recover revenue that we believe was improperly diverted.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $285,487 for the quarter ended
June 30, 2008 from $291,509 for the quarter ended June 30, 2007. Our product
development continues to focus on enhancements to our current principal products
including our Satlink2 satellite transmitter/logger, our Xpert and XLite
dataloggers and our sensors including our radar water level sensor. These are
the primary components of hydrometeorological and oceanic monitoring systems. We
also began production of the Company's first datalogger under $1,000, the
Monitor. We expect the Monitor to assist the Company is winning new projects due
to its functionality and low cost.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the second quarter of 2008. The Company had interest income for the
quarter ended June 30, 2008 of $26,107 as compared to interest income of $26,752
for the quarter ended June 30, 2007.
INCOME TAXES
Income tax expense for the quarter ended June 30, 2008 was $98,000 as compared
to income taxes of $210,000 for the quarter ended June 30, 2007. The provisions
for income taxes represent an effective income tax rate of 27% in 2008 and 35%
in 2007. The lower effective tax rate in 2008 is due to the exercise of
non-qualified stock options that were fully vested prior to 2006 resulting in
tax deductible compensation.
SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 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:
Six Months Ended
June 30,
------------------
2008 2007
------ ------
Net sales and revenues 100.0% 100.0%
Cost of sales and revenues 63.9 62.2
------ ------
Gross profit 36.1 37.8
Selling, general and administrative expenses 20.5 22.0
12
Research and Development expenses 7.3 7.9
------ ------
Operating income 8.3 7.9
------ ------
Interest (income) expense .9 .7
------ ------
Income before income taxes 9.2 8.6
Income taxes (benefit) 2.7 2.7
------ ------
Net income 6.5% 5.9%
====== ======
NET SALES AND REVENUES
The Company's net sales and revenues for the six months ended June 30, 2008
increased 6.5% to $7,844,063 from $7,364,615 in 2007. 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 2% to $4,390,980 in
2008 from $4,298,659 in 2007. Integrated Systems Division revenues increased 36%
to $2,218,340 from $1,630,136 in 2007 due to increased international project
revenues. Revenues from the Hydrological Services Division decreased 18% to
$801,842 in 2008 from $980,198 in 2007 due to decreased project activity.
Airport Weather Systems Division revenues increased to $265,511 in 2008 as
compared to $75,425 in 2007 as the division shipped four systems to the Southern
Airport Authority of Vietnam as compared to one system shipped in 2007 to the
Netherlands Antilles. Sutron India Operations had a net sales and revenue
decrease of 56% to $167,390 in 2008 from $380,197 in 2007 due to the Central
Water Commission (CWC) of India contract being near completion.
Overall domestic revenues decreased 12% to $5,011,098 in 2008 versus $5,687,038
in 2007 due to decreased sales of standard products and to decreased Integrated
Systems and Hydrological Services project activity. International revenues
increased 69% to $2,832,965 in 2008 versus $1,677,577 in 2007 due to increased
sales of standard products and to increased revenue from our contract with the
Ministry of Energy and Water in Afghanistan.
Customer orders or bookings for the six months ended June 30, 2008 were
approximately $4,886,000 as compared to approximately $15,804,000 in the first
six months of 2007. The Company's backlog of orders at June 30, 2008 was
approximately $7,737,000 as compared with approximately $15,708,000 as of June
30, 2007. The Company anticipates that approximately 55% of its backlog as of
June 30, 2008 will be shipped in 2008.
COST OF SALES AND REVENUES
Cost of sales as a percentage of revenues was 63.9% in 2008 as compared to 62.2%
in 2007. Project and services activity increased in 2008 over project and
services activity in 2007. Due to projects normally carrying smaller margins
than standard product sales, cost of sales increased in 2008 as compared to
2007. We continue to focus on improving operations and seeking manufacturing
efficiencies. Management has focused in particular on improving the operations
of its Hydrological Services Division and Sutron India Operations. The
Hydrological Services Division has reduced its headcount by two employees and is
moving into smaller and less costly office and warehouse space effective
September 1, 2008. Sutron India Operations has reduced its headcount by 11
employees as a result of the CWC contract being near completion.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1,604,583 in 2008 as compared
to $1,617,118 in 2007, a decrease of $12,535 or 1%. Selling, general and
administrative expenses as a percentage of revenues decreased to 20.5% for the
six months ended June 30, 2008 from 22%.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $576,243 in 2008 from $584,861 in
2007. Research and development expenses as a percentage of revenues decreased to
7.3% for the six months ended June 30, 2008 from 7.9%. Product development is
focused on enhancements to our current principal products including our Satlink2
satellite transmitter/logger, our Xpert and XLite dataloggers and our sensors
including our radar water level sensor.
INTEREST INCOME AND EXPENSE, NET
Due to the Company's cash position, the Company did not use its line of credit
during the six months ended June 30, 2008. The Company had net interest income
in 2008 of $66,429 as compared to net interest income of $49,148 in 2007.
INCOME TAXES
Income taxes increased 8% in 2008 to $214,000 from $199,000 in 2007. The
provisions for income taxes represent an effective income tax rate of 30% in
2008 and 31% in 2007.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents were $3,633,235 at June 30, 2008 compared to
$5,299,904 at December 31, 2007. Working capital increased to $12,136,450 at
June 30, 2008 compared with $11,563,550 at December 31, 2007.
Net cash used by operating activities was $717,428 for the six months ended June
30, 2008 as compared to cash used by operating activities of $101,684 for the
six months ended June 30, 2007.
Net cash used by investing activities was $875,977 for the six months ended June
30, 2008 as compared to cash used by investing activities of $853,041 for the
six months ended June 30, 2007. Restricted cash in 2008 is related to a
performance bond issued to the Ministry of Energy and Water in Afghanistan. In
2007, restricted cash was related to a bank guarantee for the Central Water
Commission of India.
Net cash used by financing activities was $6,930 for the six months ended June
30, 2008 as compared to net cash provided by financing activities of $50,187 for
the six months ended June 30, 2007. The decrease is due to employee stock
options proceeds 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 assets of the Company. Borrowings bear interest at
the bank's prime rate. During the first six 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 June 30, 2008 and December 31, 2007, a commercial bank had
issued standby letters of credit in the
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amounts of $1,057,080 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.
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 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 June 30, 2008, the
end of the fiscal period covered by this report on Form 10-Q. 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 six months ended June 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, 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 was filed in 2005 and is still pending before The
Monopolies and Restrictive Trade Practices Commission in New Delhi, India.
Management believes that the case is without foundation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 14, 2008, an Annual Meeting of Shareholders of Sutron Corporation was
held. Directors elected at the meeting were Raul S. McQuivey, Daniel W. Farrell,
Robert F. Roberts, Jr., Andrew D. Lipman and Leland R. Phipps. Thompson,
Greenspon & Co., P.C. was appointed as independent accountants for 2008. The
election of directors and the appointment of the independent accountants were
the only matters
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voted upon at the meeting. The number of shares eligible to vote at the meeting
was 4,530,632. The results of the voting on these matters are shown below.
1. Election of Directors
Name Votes For Votes Withheld
Raul S. McQuivey 3,870,259 255,434
Daniel W. Farrell 3,871,389 254,304
Robert F. Roberts, Jr. 4,086,700 38,993
Andrew D. Lipman 4,086,700 38,993
Leland R. Phipps 4,086,700 38,993
2. Appointment of Thompson, Greenspon & Co., P.C. as Independent Accountants.
For Against Abstain
4,114,365 2,530 8,800
ITEM 5. OTHER INFORMATION
On July 19, 2008, Thomas N. Keefer, Ph.D., age 63, resigned as Secretary of
Sutron Corporation and as an employee of the Company. He joined the Company in
January 1977, as a Project Engineer and served as the Vice President of the
Water Resources Division and the Integrated Systems Division from 1981 to 1997.
Dr. Keefer served as Vice President of Software Support Services since 1997. He
will continue to work for the Company on a part-time basis as a consultant.
On July 31, 2008, the Board approved Mr. Sidney C. Hooper, age 50, as Secretary.
Mr. Hooper currently serves as the Company's Chief Financial Officer and
Treasurer. Mr. Hooper's bio is contained in the Company's Definitive Proxy
Statement as filed on April 15, 2008.
ITEM 6. EXHIBITS
10.2 Stock Option Agreement between The Company and Andrew D. Lipman dated
May 14, 2008
10.3 Stock Option Agreement between The Company and Robert F. Roberts, Jr.
dated May 14, 2008
10.4 Stock Option Agreement between The Company and Leland R. Phipps dated
May 14, 2008
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.
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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)
August 14, 2008 /s/ Raul S. McQuivey
--------------- ----------------------------------
Date Raul S. McQuivey
President and Chief Executive Officer
(Principal Executive Officer)
August 14, 2008 /s/ Sidney C. Hooper
--------------- ----------------------------------
Date Sidney C. Hooper
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
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