form10q_17216.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
Commission file number: 0-12227
 

 
SUTRON CORPORATION

(Name of small business issuer as specified in its charter)
 
 
VIRGINIA 54-1006352
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification Number)
 
22400 Davis Drive, Sterling, Virginia 20164

(Address of principal executive offices)
 
703-406-2800

(Issuers 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  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o
 
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  o Accelerated filer   o
Non-accelerated filer    o 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 o   No x
 
There were 4,673,632 outstanding shares of the issuer's only class of common equity, Common Stock, $0.01 par value, on November 11, 2011.


 
 
 
 
SUTRON CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS
 
 
Part I
Financial Information
 
     
Item 1.
Financial Statements
3
     
 
Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
3
     
 
Consolidated Statements of Operations for the Three Months Ended September 30, 2011 and 2010
4
     
 
Consolidated Statements of Operations for the Nine Months Ended September 30, 2011 and 2010
5
     
 
Consolidated Statements of Cash Flows for the  Nine Months Ended September 30, 2011 and 2010
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16
     
Item 4T.
Controls and Procedures
16
     
     
Part II
Other Information
 
     
Item 1.
Legal Proceedings
17
     
Item 6.
Exhibits
17
     
Signatures
 
18



 
 
- 2 -

 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUTRON CORPORATION
CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
   
(Audited)
 
   
September 30,
   
December 31,
 
 
2011
   
2010
 
             
ASSETS
           
Current Assets:
           
   Cash and cash equivalents
  $ 9,211,321     $ 9,627,961  
   Restricted cash and cash equivalents
    806,907       796,189  
   Accounts receivable, net
    5,995,211       5,380,975  
   Inventory
    3,878,876       3,758,702  
   Prepaid items and other assets
    944,884       560,460  
   Deferred income taxes
    535,000       477,000  
          Total Current Assets
    21,372,199       20,601,287  
                 
Property and Equipment, Net
    1,569,817       1,706,971  
Other Assets
               
     Goodwill
    570,150       570,150  
      Other Assets
    102,919       108,769  
         Total Assets
  $ 23,615,085     $ 22,987,177  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
   Accounts payable
  $ 1,062,429     $ 1,119,684  
   Accrued payroll
    99,550       490,197  
   Other accrued expenses
    1,766,282       1,543,086  
   Billings in excess of costs and estimated earnings
    205,387       361,699  
          Total Current Liabilities
    3,133,648       3,514,666  
Long-Term Liabilities
               
   Deferred rent
    1,130,071       1,234,385  
   Deferred income taxes
    138,000       99,000  
          Total Long-term Liabilities
    1,268,071       1,333,385  
          Total Liabilities
    4,401,719       4,848,051  
Stockholders’ Equity
               
   Common stock, 12,000,000 shares authorized;
               
    4,673,632 and 4,575,632 issued and outstanding
    46,737       45,757  
   Additional paid-in capital
    4,050,647       3,732,184  
   Retained earnings
    15,231,082       14,409,877  
   Accumulated other comprehensive loss
    (115,100 )     (48,692 )
         Total Stockholders’ Equity
    19,213,366       18,139,126  
         Total Liabilities and Stockholders’ Equity
  $ 23,615,085     $ 22,987,177  

See accompanying notes.

 
- 3 -

 
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
September 30,
 
   
2011
   
2010
 
             
Net sales and revenues
  $ 5,415,230     $ 5,833,904  
                 
Cost of sales and revenues
    3,098,989       3,268,035  
                 
     Gross profit
    2,316,241       2,565,869  
                 
Operating expenses:
               
  Selling, general and administrative expenses
    982,893       912,216  
  Research and development expenses
    506,618       495,784  
     Total operating expenses
    1,489,511       1,408,000  
                 
     Operating income
    826,730       1,157,869  
                 
Financing income, net
    21,270       19,426  
                 
     Income before income taxes
    848,000       1,177,295  
                 
Income tax expense
    307,000       395,000  
                 
Net income
  $ 541,000     $ 782,295  
                 
Net income per share:
               
                 
     Basic income per share
  $ 0.12     $ 0.17  
                 
     Diluted income per share
  $ 0.11     $ 0.16  

See accompanying notes.
 
 
- 4 -

 
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
             
Net sales and revenues
  $ 14,144,357     $ 16,206,680  
                 
Cost of sales and revenues
    8,599,405       9,385,520  
                 
     Gross profit
    5,544,952       6,821,160  
                 
Operating expenses:
               
  Selling, general and administrative expenses
    2,831,590       2,835,950  
  Research and development expenses
    1,505,394       1,414,536  
     Total operating expenses
    4,336,984       4,250,486  
                 
     Operating income
    1,207,968       2,570,674  
                 
Financing income, net
    64,237       47,101  
                 
     Income before income taxes
    1,272,205       2,617,775  
                 
Income tax expense
    451,000       915,000  
                 
Net income
  $ 821,205     $ 1,702,775  
                 
Net income per share:
               
                 
     Basic income per share
  $ 0.18     $ 0.37  
                 
     Diluted income per share
  $ 0.17     $ 0.34  


See accompanying notes.
 
 
- 5 -

 
SUTRON CORPORTION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net income
  $ 821,205     $ 1,702,775  
Noncash items included in net income:
               
    Depreciation and amortization
    213,394       224,343  
    Deferred income taxes
    (19,000 )     (94,000 )
    Stock based compensation
    72,883       59,779  
    (Gain) loss on disposal of property
    (1,900 )      
    Tax benefit from stock options exercised
    (161,460 )     (12,000 )
Change in current assets and liabilities:
               
    Accounts receivable
    (614,236 )     3,777,332  
    Inventory
    (120,174 )     (735,095 )
    Prepaid items and other assets
    (384,424 )     (506,406 )
    Income taxes receivable
    161,460       82,695  
   Accounts payable
    (57,255 )     402,665  
   Accrued expenses
    (167,451 )     (470,869 )
   Billings in excess of costs and estimated earnings
    (156,312 )     370,943  
   Deferred rent
    (104,314 )     (104,313 )
Net Cash (Used) Provided by Operating Activities
    (517,584 )     4,697,849  
                 
Cash Flows from Investing Activities:
               
   Restricted cash and cash equivalents
    (10,718 )     143,273  
   Purchase of property and equipment
    (76,240 )     (75,583 )
   Other assets
    5,850        
   Proceeds from the sale of property and equipment
    1,900        
Net Cash (Used) Provided by Investing Activities
    (79,208 )     67,690  
                 
Cash Flows from Financing Activities:
               
   Tax benefit from stock options exercised
    161,460       12,000  
   Proceeds from stock options exercised
    85,100       3,400  
Net Cash Provided by Financing Activities
    246,560       15,400  
                 
Effect of exchange rate changes on cash and cash equivalents
    (66,408 )     31,452  
Net increase (decrease) in cash and cash equivalents
    (416,640 )     4,812,391  
Cash and Cash Equivalents, beginning of year
    9,627,961       4,666,983  
Cash and Cash Equivalents, end of year
  $ 9,211,321     $ 9,479,374  
 
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 system and application software.  Customers consist of a diversified base of Federal, state, local and foreign government agencies, universities, engineering firms 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 (“GAAP”) have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report  on Form 10-K for the year ended December 31, 2010. The consolidated balance sheet as of December 31, 2010 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.

We recommend that you read the unaudited consolidated financial statements included herein in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on March 31, 2011.

2.       Significant Accounting Policies

The preparation of 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 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-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission.

Certificates of Deposit
 
Certificates of deposit are carried at cost, which approximates fair value based upon observable market prices of similar instruments.  If observable market prices are not available, fair values are estimated by discounting expected future cash flows applying interest rates currently being offered.  All certificates of deposit are valued using Level 2 inputs.
 
- 7 -

 
Recent Accounting Standards

The FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force. This ASU addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  The ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010.   The adoption of ASU No. 2009-13 did not have a material impact on the Company’s financial statements.

The FASB issued ASU No. 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force.  The amendments in this ASU change the accounting model for revenue arrangements that include both tangible products and software elements.  The ASU is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010. The adoption of ASU No. 2009-14 did not have a material impact on the Company’s financial statements.

The FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. This ASU affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements under FASB ASC Topic 820, originally issued as FASB Statement No. 157, Fair Value Measurements.  The ASU requires certain new disclosures and clarifies two existing disclosure requirements.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU No. 2010-06 did not have a material impact on the Company’s financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”  The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period.  If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period.  ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted.  The adoption of the new guidance did not have a material impact on the Company’s financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.”  The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.  The adoption of the new guidance did not have a material impact on the Company’s financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule.  Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after September 15, 2010.  All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after September 15, 2011.
 
 
- 8 -

 
In May 2011, the FASB issued ASU 2011-4 to amend the guidance in the ASC on Fair Value Measurements and Disclosures. This ASU is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning the first day of our 2012 fiscal year. The Company is currently evaluating the impact, if any, of adopting this ASU to the Company’s financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-5 to amend guidance in the Accounting Standards Codification ("ASC") related to the Presentation of Comprehensive Income. This ASU will require the Company to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning the first day of our 2012 fiscal year, with earlier adoption permitted. This ASU impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.

In September, 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment (the revised standard).” The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing both public and nonpublic entities with the option of performing a “qualitative” assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt the revised standard even if its annual test date is before September 15, 2011 (the date on which the revised standard was issued), provided that the Company has not yet issued its financial statements for the period that includes its annual test date. The Company does not expect adoption of this ASU to have a material impact on the results of operations, financial position or cash flow.
 
 
3.       Stock Options

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 Company’s 2010 Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, unrestricted stock, dividend equivalent rights and cash awards.  All plans are administered by the Compensation Committee of the Board of Directors who select 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.

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.   The Company authorized 60,000 shares under the 1997 Plan, all of which have been granted.  Under the 2002 Stock Option Plan, the Company authorized 650,000 shares, 629,892 of which have been granted.  The 1996, 1997 and 2002 Plans remain in effect until such time as no shares of Stock remain available for issuance under the Plans and the Company and Optionees have no further rights or obligations under the Plans.  Under the 2010 Equity Incentive Plan, the Company authorized 500,000 shares, none of which have been granted.  The ability to make awards under the 2010 Plan will terminate in May 2020.  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.  Cancelled or expired options can be reissued.

 
- 9 -

 
The Company measures and recognizes compensation expense for all stock-based payments at fair value. 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. Stock based compensation expense relating to stock option awards for the nine months ended September 30, 2011 and 2010 was $72,883 and $59,779, respectively. These expenses were included in the selling, general and administrative lines of the Consolidated Statements of Operations. Unamortized stock compensation expense as of September 30, 2011 totaled approximately $95,359 and these costs will be expensed over a weighted average period of 2.4 years. There were 18,559 options granted during the nine months ended September 30, 2011.   The following table summarizes stock option activity under the Stock Option Plans for the nine months ended September 30, 2011

   
Nine Months Ended September 30, 2011
 
   
Number
of Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining Contractual
Term (Years)
   
Aggregate
Intrinsic
Value
 
Outstanding at beginning of period
    634,252     $ 2.37       3.59     $ 2,747,390  
Granted
    18,559       7.12              
Exercised
    98,000       4.45             427,675  
Forfeited or expired
                       
Outstanding at end of period
    554,811     $ 2.79       3.29     $ 1,490,311  
Exercisable at end of period
    500,794     $ 2.37       2.75     $ 1,490,311  
Unvested at end of period
    54,017     $ 6.67       8.36     $  


4.       Earnings Per Share

The following table shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of potential dilutive common stock.

   
Three Months Ended September 30,
 
   
2011
   
2010
 
             
Net income
  $ 541,000     $ 782,295  
Shares used in calculation of income per share:
               
     Basic
    4,628,632       4,575,632  
          Effect of dilutive options
    319,405       417,854  
     Diluted
    4,948,037       4,993,486  
Net income per share:
               
     Basic
  $ 0.12     $ 0.17  
     Diluted
  $ 0.11     $ 0.16  
                 
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
             
Net income
  $ 821,205     $ 1,702,775  
Shares used in calculation of income per share:
               
     Basic
    4,595,196       4,573,196  
          Effect of dilutive options
    319,405       421,574  
     Diluted
    4,914,601       4,994,770  
Net income per share:
               
     Basic
  $ 0.18     $ 0.37  
     Diluted
  $ 0.17     $ 0.34  
 
 
- 10 -

 
5.       Comprehensive Income (Loss)

The following table shows the computation of comprehensive income (loss):
 
   
Three Months Ended September 30,
 
   
2011
   
2010
 
Net income
  $ 541,000     $ 782,295  
Other comprehensive income (loss):
               
Foreign currency translation adjustments
    (941 )     26,190  
Total comprehensive income
  $ 540,059     $ 808,485  
                 
 
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Net income
  $ 821,205     $ 1,702,775  
Other comprehensive income (loss):
               
Foreign currency translation adjustments
    (66,408 )     31,452  
Total comprehensive income
  $ 754,797     $ 1,734,227  


6.       Subsequent Events

Subsequent events have been considered through the date when this Form 10-Q was filed.  Based on the evaluation, the Company did not identify any subsequent events that would have required adjustment to or disclosure in the unaudited consolidated financial statements.
 

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 including those identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  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 Quarterly Report on Form 10-Q to conform these statements to actual results.
 
- 11 -

 
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, meteorological and oceanic monitoring.  We design, manufacture and market these products and services to a diversified customer base consisting of federal, state, local and foreign governments, engineering companies, universities and hydropower companies.  Our products and services enable these entities to monitor and collect hydrological, meteorological and oceanic data for the management of critical water resources, for early warning of potentially disastrous floods, storms or tsunamis, for the optimization of hydropower plants and for providing real-time weather conditions at airports.
 
Our key products are the SatLink2 Transmitter/Logger, the Xpert/XLite dataloggers, the Accububble Self-Contained Bubbler, the Accubar Pressure Sensor, and Tempest 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.  The Xpert and XLite are more powerful dataloggers that have significantly more logging capability and communications options than the SatLink2.  Our Tempest and XConnect systems software allow us to provide turn-key systems solutions to our customers.

We began fiscal year 2011 with a backlog of approximately $11,748,000 as compared to beginning fiscal year 2010 with a backlog of approximately $11,908,000.  The backlog of customer orders at September 30, 2011 was approximately $10,482,000 as compared to a backlog of approximately $14,509,000 at September 30, 2010. We anticipate that we will continue to experience quarterly fluctuations in our sales and revenues in 2011.  Operating results will depend upon the product mix and upon the timing of project awards and funding.

International sales, which totaled 39% of revenues for 2010, are a significant portion of our revenues.  We believe that international revenues will grow as a percentage of our total business as we plan to develop stronger international partnerships and expand our international sales opportunities. International sales are however difficult to forecast because they are frequently delayed due to the different governmental procurement and approval processes. Our domestic business is highly dependent upon government business.  Contracts and purchase orders with Federal, state and local government agencies represented approximately 39% of our 2010 revenues.

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 2011 as compared to 2010 due to planned spending on sales and marketing activities and on the development of new products and applications.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of financial condition and results of operations are based upon the 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 2 to our financial statements included in the Company's Form 10-K for the year ended December 31, 2010. There were no significant changes in critical accounting estimates in the third quarter of 2011.

 
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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 September 30,
 
   
2011
   
2010
 
             
Net sales and revenues
    100.0 %     100.0 %
Cost of sales and revenues
    57.2       56.0  
Gross profit
    42.8       44.0  
                 
Selling, general and administrative expenses
    18.1       15.6  
Research and Development expenses
    9.4       8.5  
Operating income
    15.3       19.9  
Interest and other income
    0.4       0.3  
Income before  income taxes
    15.7       20.2  
Income taxes (benefit)
    5.7       6.8  
Net income
    10.0 %     13.4 %

 
Three months ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Net Sales and Revenues
 
Revenues for the third quarter ended September 30, 2011 decreased 7% to $5,415,230 from $5,833,904 in 2010.  Net sales and revenues are broken down between sales of standard products and sales of systems and services.  Standard products had a net sales and revenue decrease of 43% to $1,907,764 from $3,351,321 in 2010 due primarily to decreased shipments of standard products to federal agencies.  The decrease is due to the accelerated purchases of equipment as a result of stimulus funding, totaling approximately $5,200,000, received in fiscal year 2009.   The equipment purchases were shipped in 2009 and 2010.  The equipment purchases would otherwise have been spread out over future years.   Net sales and revenues for systems and services, however, increased 41% to $3,507,466 in the third quarter of 2011 from $2,482,584 in 2010 due to increased sales of systems and projects.
 
Overall domestic revenues decreased 35% to $2,669,381 in the third quarter of 2011 versus $4,104,959 in 2010 while international revenues increased 59% to $2,745,849 in the third quarter of 2011 versus $1,728,945 in the same period in 2010.  The decrease in domestic revenues was primarily due to reduced purchases by federal agencies.  The increase in international revenues was primarily due to increased sales of systems and projects.

Bookings in the third quarter of 2011 increased 19% to approximately $6,500,000 as compared to approximately $5,445,000 in the third quarter of 2010.

Cost of Sales and Revenues
 
Cost of sales as a percentage of revenues was 57% and 56%, respectively, for the third quarter of 2011 and 2010.   Standard product cost of sales was approximately 55% in the third quarter of 2011 as compared to 46% in 2010.  The increase in cost of sales is attributed to decreased sales volume that resulted in lower absorption of fixed manufacturing costs and changes in the mix of products sold.  Cost of sales for systems and services was 59% in the third quarter of 2011 as compared to 69% in the third quarter of 2010.  The decrease was primarily due to higher margin systems and projects sold in 2010.
 
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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $982,893 for the third quarter of 2011 from $912,216 for the same period in 2010, an increase of $70,677 or 8%.   The increase in selling, general and administrative expenses was primarily due to increased selling and marketing costs in 2011 as compared to 2010.

Research and Development Expenses

Research and development expenses increased to $506,618 for the third quarter of 2011 from $495,784 for the same period in 2010.  The increase was due to increased engineering efforts on new product development.  Engineering time and resources are focused on the development of several new products that will be introduced in 2012.  We also continue making enhancements to SutronWIN that is a web service for the hosting of customer data as well as making enhancements to other existing products.

Interest and Other Income, Net

Due to our cash position, we did not use our line of credit during the third quarter of 2011.  We had interest and other income for the quarter ended September 30, 2011 of $21,270 as compared to interest and other income of $19,426 for the quarter ended September 30, 2010.

Income Taxes

Income tax expense for the quarter ended September 30, 2011 was $307,000 as compared to an income tax expense of $395,000 for the quarter ended September 30, 2010.  The provisions for income taxes represent an effective income tax rate of 36% in 2011 and an effective income tax rate of 34% in 2010.

Nine months ended September 30, 2011 Compared to Nine Months Ended September 30, 2011

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,
 
   
2011
   
2010
 
             
Net sales and revenues
    100.0 %     100.0 %
Cost of sales and revenues
    60.8       57.9  
Gross profit
    39.2       42.1  
                 
Selling, general and administrative expenses
    20.0       17.5  
Research and Development expenses
    10.7       8.7  
Operating income
    8.5       15.9  
Interest and other income
    0.5       0.3  
Income before  income taxes
    9.0       16.2  
Income taxes (benefit)
    3.2       5.7  
Net income
    5.8 %     10.5 %

Net Sales and Revenues
 
Revenues for the nine months ended September 30, 2011 decreased 13% to $14,144,357 from $16,206,680 in 2010.  Net sales and revenues are broken down between sales of standard products and sales of systems and services.  Standard products had a net sales and revenue decrease in 2011 of 38% to $5,995,092 from $9,676,501 in 2010, primarily due to decreased sales to federal agencies.  The decrease is due to the accelerated purchases of equipment as a result of stimulus funding, totaling approximately $5,200,000, received in fiscal year 2009.   The equipment purchases were shipped in 2009 and 2010.  The equipment purchases would otherwise have been spread out over future years.   Net sales and revenues for systems and services, however, increased 25% to $8,149,265 from $6,530,179 in 2010 primarily due to increased systems and project shipments.
 
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Overall domestic revenues decreased 34% to $6,704,002 for the nine months ended September 30, 2011 versus $10,181,682 in 2010 due to decreased shipments to federal agencies.  International revenues increased 24% to $7,440,356 for the nine months ended September 30, 2011 versus $6,024,998 in 2010 due to increased systems and project shipments.
 
Bookings for the nine months ended September 30, 2011 were approximately $12,879,000 as compared to approximately $20,504,000 in 2010, a decrease of 37%.  Several large project awards were received in the nine months ended September 30, 2010 while no similarly sized awards were received in the nine months ended September 30, 2011.  However, customer bookings in the third quarter of 2011 exceeded the aggregate bookings for the first two quarters of the year.

Cost of Sales and Revenues
 
Cost of sales as a percentage of revenues was 61% and 58%, respectively, for the nine months ended September 30, 2011 and 2010.  Standard product cost of sales as a percentage of standard product revenues was approximately 55% and 50%, respectively, for the nine months ended September 30, 2011 and 2010 due to decreased sales volume that resulted in lower absorption of fixed manufacturing costs and changes in the mix of products sold.  Cost of sales for systems and services as a percentage of systems and services revenues was 65% for the nine months ended September 30, 2011 as compared to 70% for the nine months ended September 30, 2010.  The decrease was primarily due to higher margin systems and projects sold in 2010.
 
Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,831,590 in 2011 as compared to $2,835,950 in 2010.  Selling, general and administrative expenses as a percentage of revenues increased to 20% for the nine months ended September 30, 2011 from 17% in 2010.  The increase in expenses is primarily attributed to higher sales and marketing expenses.

Research and Development Expenses

Research and development expenses increased to $1,505,394 for the nine months ended September 30, 2011 from $1,414,536 in 2010, an increase of $90,858 or 6%.  The increase was due to increased engineering efforts on new product development.  Engineering time and resources are focused on the development of several new products that will be introduced in 2012.  We also continue making enhancements to SutronWIN that is a web service for the hosting of customer data as well as making enhancements to other existing products.

Interest and Other Income, Net

Due to the Company's cash position, the Company did not use its line of credit during the nine months ended September 30, 2011.  The Company had net interest and other income in 2011 of $64,237 as compared to net interest and other income of $47,101 in 2010.

Income Taxes

Income taxes decreased 51% in 2011 to $451,000 from $915,000 in 2010.  The provisions for income taxes represent an effective income tax rate of 36% in 2011 and 35% in 2010.
 
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Liquidity and Capital Resources

Cash and cash equivalents were $9,211,321 at September 30, 2011 compared to $9,627,961 at December 31, 2010.  Working capital increased to $18,238,551 at September 30, 2011 compared with $17,086,621 at December 31, 2010.

Net cash used by operating activities was $517,584 for the nine months ended September 30, 2011 as compared to net cash provided by operating activities of $4,697,847 for the nine months ended September 30, 2010. The decrease was due to reductions in collections of accounts receivable and net income.
 
Net cash used by investing activities was $79,208 for the nine months ended September 30, 2011 as compared to net cash provided by investing activities of $67,693 for the nine months ended September 30, 2010.  The decrease is primarily due to an increase in restricted cash.  Restricted cash reflects bid and performance bonds that are secured by the Company’s cash.

Net cash provided by financing activities was $246,560 for the nine months ended September 30, 2011 as compared to net cash provided by financing activities of $15,400 for the nine months ended September 30, 2010.  The increase in cash provided in 2011 was primarily due to proceeds and tax benefits from the exercises of stock options.

We have a new revolving credit facility of $3,000,000 with BB&T that expires on September 5, 2013.  We are permitted to borrow based on accounts receivable and inventory according to pre-established criteria. The credit facility is secured by substantially all the assets of the Company.  Borrowings bear interest at the bank’s prime rate.  During the first nine months of 2011, there were no borrowings on the lines of credit supplied by BB&T.

We frequently bid on and enter into international contracts that require bid and performance bonds.  At September 30, 2011 and December 31, 2010, a commercial bank had issued standby letters of credit in the amount of $1,004,013 and $1,583,000 that served as either a bid or performance bond.  The amount available to borrow under the line of credit was reduced by this amount.
 
Management believes that its existing cash resources and cash flow from operations will provide adequate resources for supporting operations during fiscal 2011.
 
 
Item 3.         Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The Company’s exposure to market risk has not changed materially since December 31, 2010.
 
 
Item 4T.      Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2011, 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 controls over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
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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.

 
Item 6.         Exhibits

10.24
Loan Modification Agreement dated September 16, 2011 between Sutron Corporation and Branch Banking and Trust Company of Virginia, a North Carolina Banking Corporation.

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.
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
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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)
 
       
November 11, 2011
Date
By:
/s/  Raul S. McQuivey  
    Raul S. McQuivey  
   
President and Chief Executive Officer
(Principal Executive Officer)
 
       
 
     
       
November 11, 2011
Date
By:
/s/ Sidney C. Hooper  
    Sidney C. Hooper  
    Chief Financial Officer and Treasurer
(Principal Accounting Officer)
 
       
 
 
 
 
 
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