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: September 30, 2004
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 [ ] No [ X ]
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 September 30, 2004.
----------------------------------------------------------------------
SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Part I
Financial Statement Item............................2
Financial Statements................................2
Balance Sheet.......................................2
Income Statement....................................3
Income Statement....................................4
Cashflow Statement..................................5
Financial Footnotes.................................6
Management Discussion...............................7
Controls and Procedures.............................10
Part II
Legal Proceedings...................................11
Reports on Form 8-K.................................11
Signatures..........................................12
-------------------------------------------------------------------
PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
SUTRON CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
___________ ___________
Assets
Current Assets:
Cash $1,212,341 $ 388,612
Accounts receivables 3,900,490 3,062,205
Inventory 2,279,386 2,438,275
Prepaid items and other 53,650 122,150
Deferred income taxes 211,658 120,000
___________ ___________
Total Current Asset $7,657,525 $6,131,242
Property, Plant, and Equipment Cost 2,912,654 2,723,107
Accumulated depreciation (2,287,624) (2,125,624)
___________ ___________
Net Property, Plant and Equipment 625,030 597,483
Income taxes receivable 0 129,000
Other 23,986 22,986
___________ __________
TOTAL ASSETS $8,306,541 $6,880,711
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,022,495 $1,043,805
Accrued payroll 236,640 50,142
Accrued expenses 1,099,443 850,726
Accrued income taxes 179,726 -
Current maturities of long-term notes:
Line of credit - 399,454
Notes payable-stockholders - 330,000
Notes payable 105,121 49,936
__________ __________
Total Current Liabilities $2,643,425 $2,724,063
Long-term liabilities:
Long-term notes payable 40,362 100,129
Deferred income taxes 142,000 111,000
__________ __________
Total liabilities 2,825,787 2,935,192
Stockholders' Equity:
Common stock, $.01 par value, 42,896 42,896
Additional paid in capital 2,306,655 2,306,655
Retained Earnings 3,131,203 1,595,968
___________ __________
Total Stockholders' Equity 5,480,754 3,945,519
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $8,306,541 $6,880,711
See Accompanying Notes to Financial Statements
2
------------------------------------------------------------------------
SUTRON CORPORTION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2004 2003
___________ ___________
Revenues $4,813,906 $2,230,638
Cost of Goods Sold 2,984,614 1,654,141
___________ __________
Gross Profit 1,829,292 576,497
Research and Development Expenses 241,871 276,463
Selling, General, and
Administrative Expenses 596,308 480,574
___________ ___________
Income (Loss) from Operations 991,113 (180,540)
Interest Expense 4,154 4,976
Income (Loss) before Provision ____________ ___________
for Income Taxes 986,959 (185,516)
Provisions for Income Taxes 354,000 (82,000)
____________ ___________
Net Income $ 632,959 $(103,516)
Net Income per Common Share $ .15 $(.02)
Weighted Average Number
of Common Shares 4,289,551 4,289,551
See Accompanying Notes to Financial Statements
3
-------------------------------------------------------------------------
SUTRON CORPORTION
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
2004 2003
___________ ___________
Revenues $12,614,975 $7,309,235
Cost of Goods Sold 7,739,421 5,247,548
___________ __________
Gross Profit 4,875,554 2,061,687
Research and Development Expenses 741,769 860,477
Selling, General, and
Administrative Expenses 1,717,217 1,673,724
___________ ___________
Income (Loss) from Operations 2,416,568 (472,514)
Interest Expense 28,333 13,599
Income (Loss) before Provision ____________ ___________
for Income Taxes 2,388,235 (486,113)
Provisions for Income Taxes 853,000 (228,000)
____________ ___________
Net Income $1,535,235 $(258,113)
Net Income per Common Share $ .36 $(.06)
Weighted Average Number
of Common Shares 4,289,551 4,289,551
See Accompanying Notes to Financial Statements
4
-------------------------------------------------------------------------
SUTRON CORPORTION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2004 2003
___________ __________
Cash Flows from Operating Activities:
Net income (loss) $1,535,235 $(258,113)
Depreciation and amortization 162,000 161,100
(Increase) Decrease in:
Accounts receivables (838,285) (477,567)
Inventory 158,889 (352,600)
Prepaid items and other 67,500 56,151
Deferred income taxes (91,658) (206,173)
Income tax receivable 129,000 -
Increase (Decrease) in:
Accounts payable (21,310) 290,210
Accrued expenses 435,215 381,904
Accrued income taxes 179,726 -
Deferred income taxes 31,000 -
__________ _______
Net Cash Provided by Operating Activities 1,747,312 (405,090)
Cash Flows from Investing Activities:
Capital expenditures (189,547) (111,918)
__________ _______
Net Cash Used in Investing Activities (189,547) (111,918)
Cash Flows from Financing Activities:
Proceeds from advances on line of credit - 424,454
Proceeds from shareholder notes - 330,000
Payments on line of credit (399,454) -
Payments on term notes payable (4,582) (47,242)
Payments on shareholder notes payable (330,000) -
____________ _________
Net Cash (Used) by Financing Activities (734,036) 707,212
____________ _________
Net Increase (Decrease) in Cash 823,729 190,204
Cash and Cash Equivalents, January 1 388,612 401,740
___________ _________
Cash and Cash Equivalents, September 30 $1,212,341 $ 591,944
See Accompanying Notes to Financial Statements
5
---------------------------------------------------------------------------
SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
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 2003 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
September 30,
2004 2003
__________ _________
Basic EPS
Average shares outstanding 4,289,551 4,289,551
Net Income $ 632,959 $(103,516)
Net Income per common share $.15 $(.02)
Dilutive EPS
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 582,256 142,750
Total average shares outstanding 4,871,807 4,432,301
Net earnings $ 632,959 $(103,516)
Net income per diluted share $.13 $(.02)
Nine Months Ended
September 30,
2004 2003
__________ _________
Basic EPS
Average shares outstanding 4,289,551 4,289,551
Net Income $1,535,235 $(258,113)
Net Income per common share $.36 $(.06)
Dilutive EPS
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 582,256 286,688
Total average shares outstanding 4,871,807 4,576,239
Net earnings $1,535,235 $(258,113)
Net income per diluted share $.33 $(.06)
3. Cash and Cash Equivalents
The Company has entered into certain international
contracts that require provision of letters of guarantee
to the customer until acceptance of the system by the
customer. Standby irrevocable letters of credit were
issued by the Companys previous bank that do not expire
until March 2005. As of September 30, 2004, $277,454 of
the cash and cash equivalents balance is restricted and
is held as security by M&T Bank for these standby letters
of credit.
6
-----------------------------------------------------------------
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 equipment 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
and from services upon completion of services and billing.
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
and anticipated losses on contracts 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
based upon the size and the complexity of the project. Our
gross margins are affected by the product mix and can vary
substantially based on quantities, project requirements and the
amount and type of services provided.
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.
7
--------------------------------------------------------------------
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, 2004 Compared to 2003
2004 2003
---- ----
Revenues 100.0% 100.0%
Cost of sales 62.0 74.2
Gross profit 38.0 25.8
Research and
Development expenses 5.0 12.4
Selling, general and
administrative expenses 12.4 21.5
Operating income 20.6 (8.1)
Interest expense .1 .2
Income before income taxes 20.5 (8.3)
Income taxes (benefit) 7.4 (3.7)
Net income 13.1% (4.6)%
Net Revenues. The Company's revenues for the three months
ended September 30, 2004 increased 115% to $4,813,906 from $2,230,638
in 2003. Domestic revenues increased to $3,661,670 in the third
quarter of 2004 versus $1,784,172 in 2003. International revenues
were $1,152,236 in 2004 versus $446,466 in 2003. Revenues from domestic
sales of standard products and systems increased significantly
in the third quarter due to shipments to Hanscom Air Force Base
of FMQ-13(v)2 Wind Sensor Systems. The Hydrological
Services Division also contributed significantly to the increase
in domestic revenues as hydrological and engineering services revenues
were approximately $446,000 higher than 2003 revenues. The
international sales increase was primarily due to the shipment
of XLite dataloggers and bubblers and water level sensors to a
Canadian consortium for the Emergency Flood Recovery Project
in Poland.
Bookings for the third quarter of 2004 were $6,112,134 as
compared to $4,593,124 in the third quarter of 2003.
Gross Profit. Gross profit for 2004 increased to $1,829,292 from
$576,497 in 2003. Gross margin as a percentage of revenues
for 2004 increased to 38% as compared to 25.8% in 2003. The
increase in the Company's gross margin is due to increased
sales volume and to the product mix. Sales of 9210 XLites for
the Emergency Flood Recovery Project in Poland significantly
improved margins as well as FMQ-13(v)2 Wind Sensor Systems
that shipped to Hanscom Air Force Base.
Selling, General And Administrative. Selling, general
and administrative expenses increased to $596,308 in 2004
from $480,574 in 2003, an increase of $115,734 or 24%. The
increase is due to increases in international agent
commissions, sales and marketing expenses related to
Sutron's new Airport Weather Systems division and
increased audit and tax fees.
Research And Development. Research and development expenses
decreased to $241,871 in 2004 from $276,463 in 2003, a
decrease of $34,592 or 13%. This decrease is due to work
performed on the Emergency Flood Recovery Project of Poland and
work performed on a contract with the Hydrologic Instrumentation
Facility of the US Geological Survey to develop a GOES DCP Test Set.
These projects required significant engineering effort
which was direct billable work versus indirect engineering work.
Interest Expenses. Interest expenses decreased to $4,154 in 2004
from $4,976 in 2003 due to less borrowings on the bank line of credit
and the repayment of shareholder notes in the amount of $330,000.
8
-----------------------------------------------------------------------
The following table sets forth for the periods indicated the
percentage of total revenues represented by certain items
reflected in our statements of operations:
Nine months ended September 30, 2004 Compared to 2003
2004 2003
---- ----
Revenues 100.0% 100.0%
Cost of sales 61.4 71.8
Gross profit 38.6 28.2
Research and
Development expenses 5.9 11.8
Selling, general and
administrative expenses 13.6 22.9
Operating income 19.2 (6.5)
Interest expense .2 .2
Income before income taxes 19.0 (6.7)
Income taxes (benefit) 6.8 (3.1)
Net income 12.2% (3.6)%
Net Revenues. The Company's revenues for the nine months
ended September 30, 2004 increased 72% to $12,614,975 from $7,309,235
in 2003. Domestic revenues increased to $8,196,668 in the first
nine months of 2004 versus $5,051,492 in 2003. International revenues
were $4,418,308 in 2004 versus $2,257,743 in 2003. The domestic
revenues increase was primarily due to approximately $1,189,000 of
sales of FMQ-13(v)2 Wind Sensor Systems to Hanscom Air Force
Base and increased services revenues of approximately $1,095,000
by the Hydrological Services Division on contracts with the
South Florida Water Management District. The international
sales increase was primarily due to the shipment of XLite
dataloggers and bubblers and water level sensors to a Canadian
consortium for the Emergency Flood Recovery Project in Poland.
Bookings for the first nine months of 2004 were $15,023,747 as
compared to $9,805,317 in 2003. As a result to the Company's
strong bookings, the Company's backlog of orders at September 30,
2004 was $6,837,725 as compared to $5,200,614 as of September 30,
2003. The Company anticipates that 60% of its backlog as of September
30, 2004 will be shipped in 2004.
Gross Profit. Gross profit for 2004 increased to $4,875,554 from
$2,061,687 in 2003. Gross margin as a percentage of revenues
for 2004 increased to 39% as compared to 28% in 2003. The
increase in the Company's gross margin is due to increased
sales volume and to the product mix. Sales of 9210 XLites for
the Emergency Flood Recovery Project in Poland significantly
improved margins as well as FMQ-13(v)2 Wind Sensor Systems
that shipped to Hanscom Air Force Base.
Selling, General And Administrative. Selling, general
and administrative expenses increased to $1,717,218 in 2004
from $1,673,724 in 2003, an increase of $43,494 or 3%. The
primary cause of the increase was increased sales and
marketing activity by Sutron's new Airport Weather Systems division.
Research And Development. Research and development expenses
decreased to $741,769 in 2004 from $860,477 in 2003, a
decrease of $118,708 or 14%. This decrease is due to engineering
services provided on the Hanscom Air Force Base FMQ-13(V)2 Wind Sensor
System contract and work performed on a contract with the
Hydrologic Instrumentation Facility of the US Geological Survey
to develop a GOES DCP Test Set that required significant engineering effort
which is direct billable work versus indirect engineering work.
Interest Expenses. Interest expenses increased to $28,333 in 2004
from $13,599 in 2003 due to borrowings from shareholders to
supplement the bank line of credit in order to finance inventory
and project requirements.
9
-----------------------------------------------------------------------
Liquidity and Capital Resources
Cash and cash equivalents increased to $1,212,341 at September 30, 2004,
compared to $388,612 at December 31, 2003.
The ratio of current assets to current liabilities was 2.9:1 as of
September 30, 2004, compared to 2.25:1 as of December 31, 2003. Working
capital at September 30, 2004 increased to $5,014,101 compared to
$3,407,179 at the end of fiscal 2003. Free cash flow, which is
the net of cash provided or used by operations and capital
expenditures, improved to $1,557,765 in 2004 compared with a loss
of $235,158 in 2003.
The Company has a revolving credit facility of $1,625,000 with BB&T
Bank that expires on August 5, 2005. Borrowings on the line of credit
are based on a percentage of billed receivables and finished goods
inventory. In addition to the revolving credit facility, the
Company borrowed $330,000 from three shareholders in 2003 in order
to finance inventory growth and project requirements. In April 2004,
the Company paid one of these notes in full in the amount of $200,000.
The remaining notes were due and payable to Raul S. McQuivey,
President, and Thomas N. Keefer, Vice President and were paid in
full in August and September 2004.
Management believes that its existing cash resources, cash flow
from operations and short-term borrowings on the existing
line of credit will provide adequate financial resources for
supporting operations during the remainder of fiscal 2004.
Item 3. Controls and Procedures
Based on their evaluation of the Companys disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this Quarterly Report on Form 10-QSB the
Companys chief executive officer and chief financial officer have
concluded that the Companys disclosure controls and procedures are
designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in
an effective manner.
There were no significant changes in the Companys internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their most recent evaluation.
10
-------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 on October 29, 2004. A refund in the
amount of approximately $141,500 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
$5,400 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.
Item 6. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K
No reports have been filed on Form 8-K during this quarter.
11
-------------------------------------------------------------------
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)
November 12, 2004 /s/Raul S. McQuivey
Date Raul S. McQuviey
Principal Executive Officer
November 12, 2004 /s/Sidney C. Hooper
Date Sidney C. Hooper
Principal Accounting Officer
12
------------------------------------------------------------------------