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: June 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 [ 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 June 30, 2004.
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SUTRON CORPORATION
FORM 10-QSB QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 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.............................9
Part II
Legal Proceedings...................................11
Submission to a Vote................................11
Reports on Form 8-K.................................12
Signatures..........................................12
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
SUTRON CORPORATION
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
___________ ___________
Assets
Current Assets:
Cash $ 270,809 $ 388,612
Accounts receivables 4,308,209 3,062,205
Inventory 2,297,919 2,438,275
Prepaid items and other 85,040 122,150
Deferred income taxes 180,658 120,000
___________ ___________
Total Current Asset $7,142,635 $6,131,242
Property, Plant, and Equipment Cost 2,860,156 2,723,107
Accumulated depreciation (2,233,624) (2,125,624)
___________ ___________
Net Property, Plant and Equipment 626,532 597,483
Income taxes receivable 0 129,000
Other 23,986 22,986
___________ __________
TOTAL ASSETS $7,793,153 $6,880,711
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 663,323 $1,043,805
Accrued payroll 255,896 50,142
Accrued expenses 912,457 850,726
Accrued income taxes 430,712 -
Current maturities of long-term notes:
Line of credit 279,153 399,454
Notes payable-stockholders 130,000 330,000
Notes payable 105,121 49,936
__________ __________
Total Current Liabilities $2,776,662 $2,724,063
Long-term liabilities:
Long-term notes payable 57,696 100,129
Deferred income taxes 111,000 111,000
__________ __________
Total liabilities 2,945,358 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 2,498,244 1,595,968
___________ __________
Total Stockholders' Equity 4,847,795 3,945,519
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $7,793,153 $6,880,711
See Accompanying Notes to Financial Statements
2
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SUTRON CORPORTION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
2004 2003
___________ ___________
Revenues $4,073,841 $2,818,796
Cost of Goods Sold 2,392,705 1,826,539
___________ __________
Gross Profit 1,681,136 992,257
Research and Development Expenses 252,003 267,077
Selling, General, and
Administrative Expenses 574,167 542,255
___________ ___________
Income (Loss) from Operations 854,966 182,925
Interest Expense 8,968 4,233
Income (Loss) before Provision ____________ ___________
for Income Taxes 845,998 178,692
Provisions for Income Taxes 309,000 (50,000)
____________ ___________
Net Income $ 536,998 $ 128,692
Net Income per Common Share $ .13 $ .03
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 OPERATIONS
(Unaudited)
Six Months Ended
June 30,
2004 2003
___________ ___________
Revenues $7,801,069 $5,078,597
Cost of Goods Sold 4,754,806 3,593,408
___________ __________
Gross Profit 3,046,263 1,485,190
Research and Development Expenses 499,898 584,014
Selling, General, and
Administrative Expenses 1,120,910 1,193,150
___________ ___________
Income (Loss) from Operations 1,425,455 (291,974)
Interest Expense 24,179 8,522
Income (Loss) before Provision ____________ ___________
for Income Taxes 1,401,276 (300,496)
Provisions for Income Taxes 499,000 (146,000)
____________ ___________
Net Income $ 902,276 $(154,496)
Net Income per Common Share $ .21 $(.04)
Weighted Average Number
of Common Shares 4,289,551 4,289,551
See Accompanying Notes to Financial Statements
4
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SUTRON CORPORTION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2004 2003
___________ __________
Cash Flows from Operating Activities:
Net income (loss) $ 902,276 $(154,496)
Depreciation and amortization 108,000 107,400
(Increase) Decrease in:
Accounts receivables (1,246,004) (468,177)
Inventory 140,356 (381,209)
Prepaid items and other 37,110 24,443
Deferred income taxes (60,658) (124,199)
Income tax receivable 129,000 -
Other assets (1,000) -
Increase (Decrease) in:
Accounts payable (380,482) 410,034
Accrued expenses 267,485 430,197
Accrued income taxes 430,712 -
__________ _______
Net Cash Provided by Operating Activities 326,795 (156,007)
Cash Flows from Investing Activities:
Capital expenditures (137,049) (79,151)
__________ _______
Net Cash Used in Investing Activities (137,049) (79,151)
Cash Flows from Financing Activities:
Payments on line of credit (120,301) -
Payments on term notes payable - (46,602)
Payments on shareholder notes payable (200,000) -
Proceeds from term notes payable 12,752 -
____________ _________
Net Cash (Used) by Financing Activities (307,549) (46,602)
____________ _________
Net Increase (Decrease) in Cash (117,803) (281,760)
Cash and Cash Equivalents, January 1 388,612 401,740
___________ _________
Cash and Cash Equivalents, June 30 $ 270,809 $ 119,980
See Accompanying Notes to Financial Statements
5
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SUTRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 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
June 30,
2004 2003
__________ _________
Basic EPS
Average shares outstanding 4,289,551 4,289,551
Net Income $ 536,998 $128,692
Net Income per common share $.13 $ .03
Dilutive EPS
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 535,783 59,403
Total average shares outstanding 4,825,334 4,348,954
Net earnings $ 536,998 $(283,188)
Net income per diluted share $.11 $(.07)
Six Months Ended
June 30,
2004 2003
__________ _________
Basic EPS
Average shares outstanding 4,289,551 4,289,551
Net Income $ 902,276 $(154,496)
Net Income per common share $.21 $(.04)
Dilutive EPS
Average shares outstanding 4,289,551 4,289,551
Effect of dilutive securities 535,783 98,769
Total average shares outstanding 4,825,334 4,383,320
Net earnings $ 902,276 $(154,496)
Net income per diluted share $.19 $(.04)
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 June 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
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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 real-time 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
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.
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.
7
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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:
Three months ended June 30, 2004 Compared to 2003
2004 2003
---- ----
Revenues 100.0% 100.0%
Cost of sales 58.7 64.8
Gross profit 41.3 35.2
Selling, general and
administrative expenses 14.1 19.3
Research and
Development expenses 6.2 9.5
Operating income 21.0 6.5
Interest expense .2 .2
Income before income taxes 20.8 6.3
Income taxes (benefit) 7.6 1.8
Net income 13.2% 4.5%
Net Revenues. The Company's revenues for the three months
ended June 30, 2004 increased 45% to $4,073,841 from $2,818,796
in 2003. Domestic sales decreased to $2,242,380 in the second
quarter of 2004 versus $2,252,954 in 2003. International sales
were $1,831,461 in 2004 versus $565,842 in 2003. Domestic
sales of standard products and systems declined but were
offset by increased revenues from hydrological services and
engineering services totalling approximately $443,000. The
international sales increase was primarily due to the shipment
of XLite dataloggers and bubblers, a water level sensor, to a
Canadian consortium for the Emergency Flood Recovery Project
in Poland.
Bookings for the second quarter of 2004 were $4,763,775 as
compared to $3,072,970 in the second quarter of 2003.
Gross Profit. Gross profit for 2004 increased to $1,681,136 from
$992,257 in 2003. Gross margin as a percentage of revenues
for 2004 increased to 41% as compared to 35% 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 $574,167 in 2004
from $542,255 in 2003, an increase of $31,912 or 6%. The
primary cause of the increase was sales and marketing
expenses related to Sutron's new Airport Weather Systems
division.
Research And Development. Research and development expenses
decreased to $252,003 in 2004 from $267,077 in 2003, a
decrease of $15,074 or 6%. This decrease is due to work
performed on the Hanscom Air Force Base FMQ-13(V)2 Wind Sensor
Replacement contract that required significant engineering effort
which is direct billable work versus indirect engineering work.
Interest Expenses. Interest expenses increased to $8,968 in 2004
from $4,233 in 2003 due to borrowings from shareholders to
supplement the bank line of credit in order to finance inventory
growth and project requirements.
8
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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, 2004 Compared to 2003
2004 2003
---- ----
Revenues 100.0% 100.0%
Cost of sales 61.0 70.8
Gross profit 39.0 29.2
Selling, general and
administrative expenses 14.4 23.4
Research and
Development expenses 6.4 11.5
Operating income 18.3 (5.7)
Interest expense .3 .2
Income before income taxes 18.0 (5.9)
Income taxes (benefit) 6.4 (2.9)
Net income 11.6% (3.0)%
Net Revenues. The Company's revenues for the six months
ended June 30, 2004 increased 54% to $7,801,069 from $5,078,597
in 2003. Domestic sales increased to $4,255,476 in the first
six months of 2004 versus $3,267,320 in 2003. International sales
were $3,545,593 in 2004 versus $1,811,277 in 2003. The domestic
sales increase was primarily due to approximately $489,000 of
sales of FMQ-13(v)2 Wind Sensor systems to Hanscom Air Force
Base and increased services revenues of approximately $650,00
by the Hydrological Services Division on contracts with the
South Florida Water Management District. These increases offset
a decrease in domestic standard products and systems which
were down by approximately $151,000. The international
sales increase was primarily due to the shipment of XLite
dataloggers to a Canadian consortium for the Emergency
Flood Recovery Project in Poland.
Bookings for the first six months of 2004 were $8,911,613 as
compared to $5,212,193 in 2003. As a result to the Company's
strong bookings, the Company's backlog of orders at June 30,
2004 was $5,503,328 as compared to $2,933,052 as of June 30,
2003. The Company anticipates that 75% of its backlog as of June
30, 2004 will be shipped in 2004.
Gross Profit. Gross profit for 2004 increased to $3,046,263 from
$1,485,190 in 2003. Gross margin as a percentage of revenues
for 2004 increased to 39% as compared to 29% 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 decreased to $1,120,910 in 2004
from $1,193,150 in 2003, a decrease of $72,240 or 6%. The
primary cause of the decrease was a reduction in international
agent commissions.
Research And Development. Research and development expenses
decreased to $499,898 in 2004 from $584,014 in 2003, a
decrease of $84,116 or 14%. This decrease is due to work
performed on the Hanscom Air Force Base FMQ-13(V)2 Wind Sensor
Replacement contract that required significant engineering effort
which is direct billable work versus indirect engineering work.
Interest Expenses. Interest expenses increased to $24,179 in 2004
from $8,522 in 2003 due to borrowings from shareholders to
supplement the bank line of credit in order to finance inventory
growth and project requirements.
9
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Liquidity and Capital Resources
Cash and cash equivalents decreased to $270,809 at June 30, 2004,
compared to $388,612 at December 31, 2003.
The ratio of current assets to current liabilities was 2.57:1 as of
June 30, 2004, compared to 2.25 as of December 31, 2003. Working
capital at June 30, 2004 increased to $4,366,278 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 $189,746 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 are due and payable on demand to Raul S. McQuivey,
President, and Thomas N. Keefer, Vice President.
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
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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 believes
that the Company has established a branch office in India and is
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 has not opened a branch office in India. The income tax
amount that is at issue is approximatly $770,000.
The Advance Tax Court of India heard the case in June 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 has entered into
an agreement with Ernst & Young, New Delhi, India to file prior
year tax returns. Taxes that will be paid for business
activities in India are not known at this time but are
anticipated to be significantly less than $770,000. All taxes
paid in India will be applied as income tax credits on the
Company's 2004 U.S. tax return in accordance with the Double
Taxation Avoidance Agreement with the United States of America
and will therefore offset federal taxes in 2004.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 12, 2004, an Annual Meeting of Shareholders
of Sutron Corporation was held. Directors elected at the
meeting were Raul S. McQuivey, Thomas N. Keefer,
Daniel W. Farrell, Sidney C. Hooper and Robert F. Robrts, Jr.
11
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Thompson, Greenspon & Co., P.C. were appointed as
independent accountants for 2004. The election of directors
and the appointment of the independent accountants were
the only matters voted upon at the meeting. The number of
shares eligible to vote at the meeting were 4,289,551. The
results of the voting on these three matters are shown below.
1. Election of Directors
Name Votes For Votes Withheld
Raul S. McQuivey 2,657,962 300
Thomas N. Keefer 2,657,962 300
Daniel W. Farrell 2,657,962 300
Sidney C. Hooper 2,657,962 300
Robert F. Roberts,Jr. 2,657,962 300
2. Appointment of Thompson, Greenspon & Co., P.C.
as Independent Accountants.
For Against Abstain
2,657,582 580 100
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.
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)
August 6, 2004 /s/Raul S. McQuivey
Date Raul S. McQuviey
Principal Executive Officer
August 6, 2004 /s/Sidney C. Hooper
Date Sidney C. Hooper
Principal Accounting Officer
12
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