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RNS
Somero Enterprises Inc.  -  SOM   

Final Results

Released 07:00 15-Mar-2017

RNS Number : 4772Z
Somero Enterprises Inc.
15 March 2017
 

15 March 2017

Somero Enterprises, Inc.

("Somero" or "the Company" or "the Group")

 

Final Results

An exceptional year of profitable growth

 

Somero Enterprises, Inc. ® is pleased to report its annual results for the twelve months ended December 31, 2016.

 

Financial Highlights

 


FY16

FY15

% Increase

Revenue

US$79.4m

US$70.2m

13%

Adjusted EBITDA(1,2)

US$24.6m

US$20.0m

23%

Adjusted EBITDA margin(1,2)

31%

29%


Profits before tax

US$21.3m

US$17.4m

22%

Adjusted net income(1,3)

US$15.6m

US$13.0m

20%

Diluted adjusted net income per share(1,3)

US$0.27

US$0.22

23%

Cash flow from operating activities

US$16.9m

US$14.5m

17%

Net cash(4)

US$20.2m

US$12.6m

60%

Dividend per share

US$0.111

US$0.069

61%

 

·     Annual revenues grew to a record US$ 79.4m, up 13% from 2015, driven by strength in the Company's core geographic markets and strong demand for new products

·     Revenue growth converted efficiently into profit and cash flows:

Adjusted EBITDA increased 23% to a record US$ 24.6m (2015: US$ 20.0m)(1,2)

Adjusted EBITDA margin improved to 31% (2015: 29%) driven by gross margin expansion and operating cost controls

Profits before tax grew 22% to US$ 21.3m (2015: US$ 17.4m)

Cash flow from operating activities increased 17% to US$ 16.9m (2015: US$ 14.5m)

·     Balance sheet continues to strengthen:

Net cash at 31 December 2016 grew to US$ 20.2m, a US$ 7.6m increase over 2015(4)

The Company fully paid off its US$ 1.0m mortgage in January 2017

·     Increased dividend payout ratio to 40% of adjusted earnings for 2016

Final dividend of 8.6 US cents per share declared for a total 2016 dividend of 11.1 US cents per share, a 61% increase over last year

 

Operational Highlights

 

·     Broad geographic growth and solid demand across product line:

6 of 11 geographic markets grew in 2016 led by North America, Europe, Australia and China, which grew US$ 7.4m, US$ 2.3m, US$ 1.3m, US$ 0.3m, respectively compared to 2015

Boomed and Ride-on screed product lines grew US$ 2.2m and US$ 1.9m, respectively compared to 2015

3-D Profiler System® revenues grew US$ 1.7m compared to 2015

Other revenues, driven by sales of parts, accessories and the STS-11M Topping Spreader, grew US$ 3.8m from 2015

·     New product pipeline continues to contribute significantly to growth:

S-940 and S-10A Laser Screed® machine sales combined for US$ 10.6m in 2016 revenue, which represented US$ 4.6m in net growth from 2015

Launched the entry-level S-158 Laser Screed machine in China in Q4 2016

Launched the SP-16 Concrete Hose Line-Pulling and Placing System and next generation 3-D Profiler System at the World of Concrete Trade Show in January 2017

·     Completed construction of 14,000 sq. ft. Global Headquarters and Training facility in Fort Myers, Florida in April 2016

Construction underway of a hands-on training facility on the Fort Myers campus that will be the future home of the Somero Concrete Institute scheduled to open in Q2 2017

 

 

Notes:

1. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. See further information regarding non-GAAP measures below.

2.  Adjusted EBITDA as used herein is a calculation of the Company's net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4.  Net cash is defined as cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.

 

Jack Cooney, CEO of Somero, said:

 

"2016 was an excellent year for Somero.  We achieved record revenues, profits, and cash flow and ended the year with the strongest balance sheet in our history. This was the third year of our five-year plan to become as US$90m revenue business, and I'm delighted to report we are already 75% of the way there with two years to go.  However, what makes me most proud, is that we were able to achieve these results because we never lost sight of our mission to help our customers build successful, profitable businesses.  Our employees have built an exceptional organization that earns the loyalty of our customer base day in and day out.  It is this dedication that fills me with tremendous pride.

 

I am excited at the opportunities that lie ahead for Somero in 2017.  We are financially stronger than ever, have the broadest product portfolio in our history and have made significant investments to increase our global reach.   We believe we are well positioned to capture growth in our core North American, European and Chinese markets, extend our global footprint, and continue to grow revenues from new products. Most importantly, we believe we are well-positioned to continue to deliver strong results and dividends for our shareholders and create shareholder value in the future."

 

 

For further information, please contact:

 

Somero Enterprises, Inc.                                                                              www.somero.com

Jack Cooney, CEO                                                                                            +1 239 210 6500

John Yuncza, CFO

Howard Hohmann, EVP Sales

 

finnCap Ltd (NOMAD and Broker)

Matt Goode (Corporate Finance)                                                              +44 (0)20 7220 0500

Carl Holmes (Corporate Finance)

Tim Redfern (Corporate Broking)

 

Redleaf Communications Ltd (Financial PR Advisor)                      somero@redleafpr.com

Rebecca Sanders-Hewett                                                                             +44 (0)20 7382 4730

David Ison

Susie Hudson

 

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

 

Notes to Editors:

Somero Enterprises provides industry-leading concrete-leveling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.

 

Somero pioneered the Laser Screed market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.

 

For more information, visit www.somero.com

 

Chairman's Statement

 

Performance and Dividend

Somero delivered excellent results in 2016, achieving record revenues of US$ 79.4m, a 13% increase over 2015, and profits before tax of US$ 21.3m, a 22% increase over 2015. In 2016, 6 of our 11 geographic markets grew compared to 2015 led by our core markets of North America, Europe, and China along with a significant contribution from Australia.  On a product basis, we saw broad-based demand in 2016 which led to sales growth in our Boomed and Ride-on screeds and 3-D Profiler System® product categories, as well as growth in Other revenues which was attributable to strong sales of parts, accessories and the STS-11M Topping Spreader. Growth in both the Boomed and Ride-on screed machine categories highlight the wide range of project types, large and small, that drove demand for our equipment in 2016.  Importantly, this growth translated into a record level of profit and free cash flow for the Company, a result of disciplined cost control and working capital management.  While we are pleased to deliver these exceptional results to our shareholders, we are equally pleased that each of our Somero employees understands these results are only possible with an unrelenting commitment to deliver innovative products, solutions and services to our customers.

 

Based on the stellar 2016 performance, the Company's sound financial position, and the Board's confidence in the Company's future, we are pleased to report that the Board has approved increasing the dividend payout ratio to 40% of adjusted net income for 2016.  The increase results in a final 2016 dividend of 8.6 US cents per share which has been approved by the Board and will be payable on 17 April 2017 to shareholders on the register at 31 March 2017. Together with the interim dividend paid in October 2016 of 2.5 US cents per share, the 2016 full year dividend payment to shareholders is 11.1 US cents per share, a 61% increase from 2015.

 

Strategic Progress

Our entire organization is focused and aligned on what makes Somero a truly exceptional business: (1) our commitment to provide our customers access to unparalleled industry expertise, service, training and support, and (2) our commitment to develop innovative products and solutions that help our customers improve their processes, quality and efficiency. Our objective is to prioritize investment in these value drivers.  In 2016, we completed our new Global Headquarters and Training Facility in Fort Myers to provide a state-of-the-art venue for customer training and product demonstration.  In 2017, we plan to take the next step by constructing a hands-on training facility located on our Fort Myers campus.  This added investment is expected to enable Somero to launch the Somero Concrete Institute in the second quarter of 2017.  We expect the Somero Concrete Institute to provide a comprehensive educational opportunity for students from across the globe to become certified in concrete placing and finishing, reinforcing Somero's commitment to training and education, and helping address the growing shortage of skilled labor in the North American concrete contractor industry.  We also plan to continue to invest in identifying new, innovative products and solutions that help our customers achieve their profitability goals, such as with our SP-16 Concrete Hose Line-Pulling and Placing System which launched in January 2017 at the World of Concrete Trade Show in Las Vegas.

 

Our People

The dedication and hard work of Somero's 178 employees around the globe is fundamental to our success. We could not deliver these record-setting results for our shareholders without our most valuable asset, our employees.  On behalf of the Board, I would like to thank all our employees across the globe for their tireless commitment and passion for our customers' success.  In return, I look forward to working with the Board to ensure we create the most productive and rewarding work environment possible so each of our employees can realize their full potential.

 

Current Trading and Outlook

The solid momentum in North America at the end of 2016 has carried over into 2017 driven by demand for replacement equipment, technology upgrades, and interest in new products.  We remain encouraged by the solid level of non-residential construction activity in the US, a view that is supported by reports from our customers of lengthy project backlogs that extend well into 2017.  Proposals for US corporate tax reform and fiscal policy programs to invest in US infrastructure are additional factors reinforcing our confidence in North American growth prospects.

 

In Europe, the 2016 acceleration of recovery from the recessionary low point in 2011 is expected to carry forward into 2017, driven by demand for replacement equipment, technology upgrades, and interest in new products, much like we see in the US which is encouraging for the future.

 

In China, the interest level in our products remains healthy and we are excited by the growth opportunity in front of us. In particular, we see solid interest in our S-158 entry level product, which opens up the productivity oriented market segment to us that we expect to help us grow our customer base and offer future up-sell opportunities.  We also continue to see traction with our market development efforts to promote wide-placement methods and flatness, levelness standards.   These factors, along with our very low market penetration in China, point to solid growth prospects for 2017 and beyond.

 

In Latin America, we are expecting stable performance from Mexico and Chile, and we have begun to see modestly increased activity in Brazil, and are optimistic for a satisfactory contribution to growth from the other countries in the region.  In our other markets, including the Middle East, Australia, India, Scandinavia, Korea, and Southeast Asia, we expect to see significant opportunities in 2017 and are encouraged by the market climate across this broad territory.

 

The Board believes the Company is well-positioned to capitalize on the many opportunities we see across our portfolio of markets and products and we remain confident Somero is poised to deliver another year of profitable growth to our shareholders in 2017.

 

 

Larry Horsch

Non-Executive Chairman

March 15, 2017

 

 

President and Chief Executive Officer's Review

 

Overview

I am very pleased to report that 2016 was an exceptional year for Somero. Our financial results were outstanding as we ended the year with record revenues, profits, and the strongest balance sheet and net cash(1) position in the Company's history.  We also made meaningful investments in order to execute our growth strategy in the years to come.   We finished construction and moved into our new 14,000 square foot Global Headquarters and Training Facility in Fort Myers, we broke ground on a new hands-on training facility on our Fort Myers campus, we completed development of three new products, and most importantly, we added key talent to the organization to help lead the Company forward.  As good a year as 2016 was, we are even more excited about the opportunities that lie ahead.

 

Region Reviews

The performance in the North American market continues to be strong, reflecting a healthy commercial construction environment supported by the new political establishment.  Market estimates indicate that in 2016 North American cement consumption from non-residential building construction grew an estimated 10.9%(2) compared to 2015 which is consistent with the extensive project backlogs our customers have reported.  Also in 2016, North American sales increased a robust 15% compared to 2015 to reach US$ 56.6m, driven by an abundance of commercial construction activity combined with a growing shortage of skilled labor in the concrete contractor industry that in turn increased demand for Somero equipment.  New products have also been a key contributor to growth in North America as the new S-10A and S-940 Laser Screed machines have gained considerable traction in the market. 

 

Our European market accelerated its recovery in 2016 with sales growing 40% compared to 2015 to reach US$ 8.0m.  Importantly, this growth was well-balanced across our product line and on a geographic basis, with particularly solid trading activity in Italy, Poland, UK, Spain and the Czech Republic. 

 

The China market stabilized in 2016 contributing US$ 6.4m in sales for the year, a 5% increase compared to 2015.  The positive underlying market fundamentals and long-term growth prospects in China remain intact and we have seen continued traction from our training and educational efforts to advance awareness, acceptance and demand for higher quality floors through wide-placement methods.  We took several important steps in 2016 to position ourselves for future growth in China: we recruited an experienced manager based in Shanghai to lead our sales team in China; we successfully brought our training and educational efforts to the job-site by hosting a Mega Product Demonstration on a high-visibility job with one of our largest customers; and, late in 2016, we introduced our newly designed entry-level S-158 Laser Screed machine and the S-940 Laser Screed machine to the China market, two products that we believe will attract new productivity-oriented customers, which is an important, incremental market segment.  Finally, while not new in 2016, our long-term financing program continues to be a success with our equipment shut-off capability proving to be an effective tool to secure timely payments from customers who require a financing option.  All sales under the long-term financing program that began in Q4 2015 are current on scheduled payments, and the Company has earned over US$ 0.2m in interest income in 2016 from financing these sales.  

 

Sales in Australia improved substantially in 2016, growing 130% from 2015 to reach US$ 2.3m.  The considerable improvement in Australia was driven in part by improved economic conditions combined with the strengthening of the Australian dollar in 2016.

 

Sales in the Middle East grew 7% from 2015 to reach US$ 2.9m for the year, another healthy year for the region.  Driving the performance in 2016 were strong contributions from Turkey, the United Arab Emirates, and Saudi Arabia. 

 

In Latin America, while sales declined 15% from 2015 to US$ 1.7m for the year, the second half of 2016 was considerably improved from the start of the year reflecting noticeably improved activity levels across the region, including modest improvement in Brazil.

 

In Southeast Asia, sales declined to US$ 0.4m in 2016 from US$ 1.3m in 2015.   However, despite the sluggish performance in 2016, we continue to view Southeast Asia as a significant future growth opportunity given our very low current market penetration and the growing demand for higher quality floors in the region.

 

While sales in India in 2016 declined to US$ 0.1m from US$ 0.6m in 2015, we exited the year with a solid pipeline of opportunities, some of which were delayed as a result of the Indian banking system reforms that slowed bank financing approvals.  We also view India as a significant future growth opportunity for Somero and will continue to develop the market through marketing activities and by hosting educational seminars for potential customers, engineers, architects, and building owners that promote the benefits of higher quality concrete floors. 

 

As expected, sales in Russia improved only modestly to US$ 0.2m in 2016 given the continued unstable economic and geo-political climate in the country.

 

Cashflow and Balance Sheet

Driven by record revenues and profits combined with effective working capital management, 2016 was also a year of record operating cash flows for Somero.  Operating cash flows grew to US$ 16.9m, up from US$ 14.5m in 2015, and year-end 2016 net cash balances increased to US$ 20.2m from US$ 12.6m a year ago(1).  The growth in net cash is remarkable considering in 2016 we also paid US$ 4.2m in dividends to shareholders and invested US$ 4.4m in capital expenditures related largely to our expansion projects.  On top of this, I am particularly pleased that we have also increased our dividend payout ratio to 40% of adjusted net income to return even more of our profits to shareholders beginning with the dividend to be paid in April 2017.  The Board plans to review the Company's cash position alongside cash requirements for current business needs and future investment during the first half of 2017. The Board will then assess the level of excess cash that may be subject to distribution back to shareholders through a special dividend later in 2017.

 

People

During 2016, we increased our staffing by 13 to reach 178 employees at the end of the year as we made key investments to bring new talent into the organization to drive and support our growth.  We will continue to work on striking the right balance between investing in new talent and leveraging our operational scale.  We are highly selective in the quality and fit of the individuals we hire and devote a large part of the hiring process to determine if a candidate fits the Somero culture, embraces our core values, and will be a significant, productive contributor.   

 

Product Development

Each year, Somero invests approximately 2% of sales on product development with a goal of introducing at least one new product every year.  The efficiency of our product development effort is due to our customer-focused approach that relies on a high level of customer engagement through focus groups, surveys, and feedback we routinely gather through interactions with our direct sales and support staff.  2016 was another efficient year as our Engineering team completed development of three new products: our entry-level S-158 Laser Screed machine targeted for the Chinese market, our new SP-16 Concrete Hose Line-Pulling and Placing System and our next generation 3-D Profiler System.  All three new products have been well-received by the market, with the S-158 launching at the end of 2016 in China, and the SP-16 and next generation 3-D Profiler System launching in January 2017 at the World of Concrete Trade Show in Las Vegas, Nevada.  Additionally, in 2016 we gained significant sales traction with products that were developed in the previous year, the S-10A and the S-940 Laser Screed machines.  These two products contributed, on a combined basis, US$ 10.6m in sales in 2016, which represented US$ 4.6m in net growth from 2015.

 

Progress Towards our 2018 Strategic Objective

This was the third year of our five-year plan that targets reaching revenues of US$ 90m in 2018.  We have now roughly met 75% of the target by reaching just over US$ 79m in revenues in 2016 with two years of the plan remaining.  Given solid fundamentals in the US and European markets, strong growth prospects in China, and meaningful additional growth opportunities across our portfolio of products and geographic markets, we remain confident in our ability to meet our strategic target in 2018.  

 

Expansion Update

In April 2016, we completed construction and moved into our new 14,000 square-foot Global Headquarters and Training Facility in Fort Myers, Florida.  The new Training Facility provides us with a state of the art classroom environment that we have already used to train and educate nearly 150 customer operators since we first opened the new facility.  In addition, due to increasing industry demand for enhanced training and education, we have accelerated plans to construct a hands-on training environment on our Fort Myers campus.  This will become part of the Somero Concrete Institute which is planned to launch in Q2 2017.  This investment highlights Somero's continued commitment to the industry, and further distinguishes Somero as an industry leader in training and education.  We expect to complete the project by the end of Q1 2017 for a total building cost of US$ 0.7m. 

 

Conclusion

This was a record setting year for Somero in terms of our financial performance, but that is only part of the story.  We have also made real strides in executing our strategy to grow the business globally through innovative new products, expanding our operational and training capabilities to meet the future needs of our customers, and adding critical new talent to the organization.  We have done this while also delivering remarkable financial results, strengthening our balance sheet and increasing our dividend to return more cash to our shareholders. 

 

These achievements would not be possible without our talented management team leading the effort. I want to personally highlight the tremendous performance of our Managers in 2016 who each excelled at managing another year of rapid growth while keeping focus on improving the products, solutions, and levels of service we offer our customers.  Somero's success begins with our employees' passion and dedication to ensuring our customers achieve their business and profitability goals.  I am most proud that we have not lost sight of that.

 

We anticipate another exciting year ahead for Somero, and are looking forward to capitalizing on the significant opportunities ahead.   Through the investments we have made in 2016 and plan to make in 2017, we believe we are well-positioned to capitalize on expected growth in our core markets of the US, Europe and China, capture revenues from new products and new markets, and continue to extend and deepen our global footprint. Most importantly, we look forward to delivering another year of remarkable results for our shareholders.

 

 

Jack Cooney

President and Chief Executive Officer

March 15, 2017

 

 

Notes:

(1)   Net Cash is defined as total cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.

(2)   Percentage derived from Portland Cement Association Market Intelligence Fall Cement Outlook report dated November 2016.

 

 

 

FINANCIAL REVIEW






Summary of Financial Results










Year ended

Year ended


December 31,

December 31,


2016

2015


US$ 000

US$ 000




Revenue

79,353

70,222

Cost of sales

34,270

31,059

Gross profit

45,083

39,163




Operating expenses



Sales, marketing and customer support

10,056

9,438

Engineering

1,071

1,031

General and administrative

12,768

11,121

Total operating expenses

23,895

21,590

Operating income

21,188

17,573

Other income (expense)



Interest expense

(95)

(191)

Interest income

267

20

Foreign exchange loss

(117)

(43)

Other

34

-

Income before income taxes

21,277

17,359

Provision for income taxes

7,019

5,809

Net income

14,258

11,550

Other data



Adjusted EBITDA (1) (2) (4)

24,579

20,034

Adjusted net income (1) (3) (4)

15,637

12,966

Depreciation expense

1,121

719

Amortization of intangibles

1,545

1,545

Capital expenditures

4,435

4,162

 

 

 

Notes:

1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

2. Adjusted EBITDA as used herein is a calculation of its net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.

3.  Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.

 

 

Net income to adjusted EBITDA reconciliation and



Adjusted net income reconciliation







Year ended

Year ended


December 31, 2016

December 31, 2015


US$ 000

US$ 000

Adjusted EBITDA reconciliation



Net income

14,258

11,550

Tax provision

7,019

5,809

Interest expense

95

191

Interest income

(267)

(20)

Foreign exchange loss

117

43

Other

(34)

-

Depreciation

1,121

719

Amortization

1,545

1,545

Stock based compensation

725

197

Adjusted EBITDA

24,579

20,034




Adjusted net income reconciliation



Net income

14,258

11,550

Amortization

1,545

1,545

Tax impact of stock option & RSU settlements

(166)

(129)

Adjusted net income

15,637

12,966

 

 

Notes:

1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

2. Adjusted EBITDA as used herein is a calculation of its net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.

 

Revenues

The Company's consolidated revenues increased by 13% to US$ 79.4m (2015: US$ 70.2m). Company revenues consist primarily of sales from Boomed screed products, which include the S-22E, S-15R and S-10A Laser Screed machines, sales from Ride-on screed products, which are drive through the concrete machines that include the S-840, S-485, S-940 and S-158 Laser Screed machines, Remanufactured machines sales, 3-D Profiler System, and Other Revenues which consist primarily of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges.  The overall increase for the year was driven by sales of Boomed screeds, Ride-on screeds, 3-D Profiler Systems, along with an increase in Other revenues.

 

Boomed screed sales increased to US$ 36.3 m (2015: US$ 34.1m) as a result of increased volume and price increases, Ride-on screed sales increased to US$ 14.4 m (2015: US$ 12.5m) also due to higher volume and price increases, 3-D Profiler System sales increased to US$ 6.1m (2015: US$ 4.4) due to increased unit sales and Other revenues increased to US$ 16.7 m (2015: US$ 12.9m) primarily due to increased sales of parts and accessories and increased sales of other equipment including the STS-11M Topping Spreader.

 

 

Revenue breakdown by geography












North America

EMEA(1)

ROW(2)

Total


US$  in millions

US$ in millions

US$ in millions

US$ in millions








2016

2015


2016

2015

2016

2015

2016

2015

Net sales

% of Net sales

Net sales

% of Net sales












Boomed screeds (3)

27.0

27.3

6.0

3.5

3.3

3.3

36.3

45.7%

34.1

48.6%

Ride-on screeds (4)

10.4

8.3

2.3

3.0

1.7

1.2

14.4

18.1%

12.5

17.8%

Remanufactured machines

3.7

2.6

0.4

0.6

1.8

3.1

5.9

7.5%

6.3

9.0%

3D Profiler System

5.4

3.8

0.2

0.3

0.5

0.3

6.1

7.7%

4.4

6.2%

Other (5)

10.1

7.2

2.8

2.2

3.8

3.5

16.7

21.0%

12.9

18.4%

Total

56.6

49.2

11.7

9.6

11.1

11.4

79.4

100.0%

70.2

100.0%

 

Notes:

1. EMEA includes the Europe, India, Middle East, Scandinavia and Russia markets.

2. ROW includes the China, Australia, Latin America, Korea, and Southeast Asia markets.

3. Boomed Screeds include the S-22E, S-15R, and S-10A.

4. Ride-On Screeds include the S-840, S-940, S-485, and S-158.

5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M, Copperhead, and Mini Screed C.

 

Units by product line




2016

2015




Boomed screeds

130

109

Ride-on screeds

159

146

Remanufactured machines

42

43

3D Profiler System

61

47

Total

392

345

 

Sales to customers located in North America contributed 71% of total revenue (2015: 70%), sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed 15% (2015: 14%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, and China) contributed 14% (2015: 16%).

 

Sales in North America were US$ 56.6m (2015: US$ 49.2m) up 15% driven by higher sales of Ride-on screeds, Remanufactured machines, and an increase in Other revenues. Sales in EMEA were US$ 11.7m (2015: US$ 9.6m) which is up 22% primarily due to an increase in Boom screed sales. Sales in ROW were US$ 11.1m (2015: US$ 11.4m) down modestly due to a decline in Remanufactured sales offset partly by an increase in sales of Ride-on screeds.

 

Regional sales

US$ in millions


2016

2015

North America

56.6

49.2

Europe

8.0

5.7

China

6.4

6.1

Middle East

2.9

2.7

Australia

2.3

1.0

Latin America

1.7

2.0

Scandinavia

0.5

0.5

Southeast Asia

0.4

1.3

Korea

0.3

1.0

Russia

0.2

0.1

India

0.1

0.6

Total

79.4

70.2

 

Gross profit

Gross profit increased to US$ 45.1m (2015: US$ 39.2m), with gross margins improving to 56.8% (2015:  55.8%) due to price increases, product cost reductions and productivity gains.

 

Operating expenses

Operating expenses increased by 11% to US$ 23.9m (2015: US$ 21.6m). This increase was driven by increased commissions and insurance associated with higher sales volume, higher personnel costs due to wage inflation and increased average headcount, increased benefits costs, and increased bonuses in 2016.

 

Other income (expense)

Other income increased to US$ 0.1m, compared to other expense of US$ 0.2m in 2015, due to a decrease in interest expense and an increase in interest income offset partly by an increase in foreign exchange loss.

 

Provision for income taxes

The provision for income taxes was US$ 7.0m in 2016 as compared to US$ 5.8m in 2015. Overall, Somero's effective tax rate changed from 33.5% in 2015 to 33.0% in 2016.  

 

Net income

Net income increased to US$ 14.3m from US$ 11.6m in 2015 due primarily to increased sales volume, gross margin improvement and operating cost controls.  On an adjusted basis, excluding amortization and tax benefits associated settlements of RSUs and stock options, adjusted net income increased to US$ 15.6m from US$ 13.0m in 2015.  Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:

 


Year ended

Year ended


December 31,

December 31,


2016

2015


US$ 000's

US$ 000's




Income available to stockholders

14,258

11,550




Basic weighted shares outstanding

56,178,723

56,145,563

Net dilutive effect of stock options and restricted stock units

1,708,228

1,545,716

Diluted weighted average shares outstanding

57,886,951

57,691,279

 

The Company had 56,203,602 shares outstanding at December 31, 2016.  Earnings per share at December 31, 2016 and 2015 are as follows:

 


Year Ended

December 31,

2016

Per Share

Year Ended

December 31,

2015

Per Share


US$

US$

Basic earnings per share

0.25

0.21

Diluted earnings per share

0.25

0.20

Basic adjusted earnings per share

0.28

0.23

Diluted adjusted earnings per share

0.27

0.22

 

Consolidated Balance Sheets



As of December 31, 2016 and 2015





As of

December 31,

2016

As of

December 31, 2015



US$ 000

US$ 000

Assets



Current assets:




Cash and cash equivalents

21,216

13,709


Accounts receivable - net

6,310

5,969


Inventories

8,760

8,479


Prepaid expenses and other assets

2,428

2,135


Total current assets

38,714

30,292

Accounts receivable, non-current - net

254

885

Property, plant and equipment - net

11,558

8,266

Intangible assets - net

901

2,446

Goodwill

2,878

2,878

Deferred tax asset

3,351

3,529

Other assets

29

75

Total assets

57,685

48,371





Liabilities and stockholders' equity



Current liabilities:




Notes payable - current portion

16

16


Accounts payable

2,831

3,705


Accrued expenses

5,329

4,330


Income tax payable

147

1,044


Total current liabilities

8,323

9,095

Notes payable, net of current portion

970

986

Other liabilities

223

84

Total liabilities

9,516

10,165





Stockholders' equity




Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding

-

-


Common stock, US$.001 par value, 80,000,000 shares authorized, 56,425,598 and 56,425,598 shares issued and 56,203,602 and 56,106,732 shares outstanding at December 31, 2016 and 2015, respectively

26

26


Less: treasury stock, 221,996 shares as of December 31, 2016 and 318,866 shares as of December 31, 2015 at cost

(483)

(614)


Additional paid in capital

22,112

22,008


Retained earnings

28,480

18,432


Other comprehensive loss

(1,966)

(1,646)


Total stockholders' equity

48,169

38,206

Total liabilities and stockholders' equity

57,685

48,371





See notes to consolidated financial statements.



 

Consolidated Statements of Comprehensive Income



For the years ended December 31, 2016 and 2015









Year ended

Year ended



December 31

December 31



2016

2015



US$ 000

US$ 000



except per share data

except per share data





Revenue

79,353

70,222

Cost of sales

34,270

31,059

Gross profit

45,083

39,163





Operating expenses




Sales, marketing and customer support

10,056

9,438


Engineering

1,071

1,031


General and administrative

12,768

11,121


Total operating expenses

23,895

21,590





Operating income

21,188

17,573

Other income (expense)




Interest expense

(95)

(191)


Interest income

267

20


Foreign exchange loss

(117)

(43)


Other

34

-





Income before income taxes

21,277

17,359

Provision for income taxes

7,019

5,809

Net income

14,258

11,550

Other comprehensive income (loss)




Cumulative translation adjustment

(322)

(280)


Change in fair value of derivative instruments - net of income tax

2

(8)

Total comprehensive income

13,938

11,262





Earnings per common share



Earnings per share basic                                                                                  

0.25

0.21

Earnings per share diluted                                                                                

0.25

0.20





Weighted average number of common shares outstanding                           



Basic

56,178,723

56,145,563


Diluted

57,886,951

57,691,279





See notes to consolidated financial statements.



 

Consolidated Statements of Changes in Stockholders' Equity



For the years ended December 31, 2016 and 2015














Common Stock


Treasury Stock



 









 


Shares

Amount

Additional Paid-In Capital

Shares

Amount

Retained earnings

Other Compre-hensive

Loss

Total Stockholders' Equity

 



US$ 000

US$ 000


US$ 000

US$ 000

US$ 000

US$ 000

 

Balance - January 1, 2015

56,425,598

26

22,336

232,700

(416)

10,194

(1,358)

30,782

 

Cumulative translation adjustment

-

-

-

-

-

-

(280)

(280)

 

Change in fair value of derivative instruments

-

-

-

-

-

-

(8)

(8)

 

Net income

-

-

-

-

-

11,550

-

11,550

 

Stock based compensation

-

-

197

-

-

-

-

197

 

Dividend

-

-

-

-

-

(3,312)

-

(3,312)

 

Treasury stock

-

-

-

86,166

(198)

-

-

(198)

 

RSUs settled for cash

-

-

(275)

-

-

-

-

(275)

 

Stock options settled for cash

-

-

(250)

-

-

-

-

(250)

 

Balance - December 31, 2015

56,425,598

26

22,008

318,866

(614)

18,432

(1,646)

38,206

 

Cumulative translation adjustment

-

-

-

-

-

-

(322)

(322)

 

Change in fair value of derivative instruments

-

-

-

-

-

-

2

2

 

Net income

-

-

-

-

-

14,258

-

14,258

 

Stock based compensation

-

-

725

-

-

-

-

725

 

Dividend

-

-

-

-

-

(4,210)

-

(4,210)

 

Treasury stock

-

-

(131)

(96,870)

131

-

-

-

 

RSUs settled for cash

-

-

(345)

-

-

-

-

(345)

 

Stock options settled for cash

-

-

(145)

-

-

-

-

(145)

 

Balance - December 31, 2016

56,425,598

26

22,112

221,996

(483)

28,480

(1,966)

48,169

 









See notes to consolidated financial statements.

 

Consolidated Statements of Cash Flows



For the years ended December 31, 2016 and 2015







Year ended

Year ended


December 31

December 31


2016

2015


US$ 000

US$ 000

Cash flows from operating activities:



  Net income

14,258

11,550

  Adjustments to reconcile net income to net cash provided by operating activities:



    Deferred taxes

178

150

    Depreciation and amortization

2,666

2,264

    Bad debt

400

381

    Amortization of deferred financing costs

32

33

    Stock based compensation

725

197

  Working capital changes:



    Accounts receivable

(110)

(1,909)

    Inventories

(281)

(89)

    Prepaid expenses and other assets

(293)

(128)

    Other assets

(3)

6

    Accounts payable, accrued expenses and other liabilities

264

1,036

    Income taxes payable

(897)

1,019

    Net cash provided by operating activities

16,939

14,510




Cash flows from investing activities:



  Proceeds from sale of property and equipment

71

-

  Property and equipment purchases

(4,435)

(4,162)

  Net cash used in investing activities

(4,364)

(4,162)




Cash flows from financing activities:



  Payment of dividend

(4,210)

(3,312)

  RSUs settled for cash

(345)

(275)

  Purchase of treasury stock

-

(198)

  Stock options settled for cash

(145)

(250)

  Repayment of notes payable

(48)

(266)

   Net cash used in financing activities

(4,748)

(4,301)




Effect of exchange rates on cash and cash equivalents

(320)

(288)




Net increase in cash and cash equivalents

7,507

5,759




Cash and cash equivalents:



Beginning of year

13,709

7,950

End of year

21,216

13,709




See notes to consolidated financial statements.



 

Notes to the Consolidated Financial Statements

As of December 31, 2016 and 2015

 

1.   Organization and description of business

Nature of business

Somero Enterprises, Inc. (the "Company" or "Somero") designs, assembles, remaunfactures, sells and distributes concrete leveling, contouring and placing equipment, related parts and accessories, and training services worldwide. Somero's Operations and Support Offices are located in Michigan, USA with Global Headquarters and Training Facilities in Florida, USA.  Sales and service offices are located in Chesterfield, England; Shanghai, China; and New Delhi, India.

 

2.   Summary of significant accounting policies

Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.  Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Principles of consolidation

The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Cash and cash equivalents 

Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased.  The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation ("FDIC").  The Company has not experienced any losses related to amounts in excess of FDIC limits.

 

Accounts receivable and allowances for doubtful accounts 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable.  Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience.  As of December 31, 2016 and 2015, the allowance for doubtful accounts was approximately US$ 743,000 and US$ 698,000, respectively. Bad debt expense was US$ 400,000 and US$ 381,000 in 2016 and 2015, respectively.

 

Inventories 

Inventories are stated using the first in, first out ("FIFO") method at the lower of cost or net realizable value. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. 

 

Deferred financing costs

Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument.  These financing costs are being amortized using the effective interest method.  Deferred financing costs, consisting of loan origination fees, are reflected as an offset to notes payable on the accompanying balance sheets.

 

Intangible assets and goodwill

Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date.  Goodwill represents the excess cost of the business combination over the Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.  The Company did not incur a goodwill impairment loss for the year ended December 31, 2016 or 2015. (See Note 4 for more information.)

 

The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended December 31, 2016, the Company tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.) 

 

Revenue recognition 

The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.  For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment.  For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer.  Standard products do not have customer acceptance criteria.  Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.

 

Warranty liability

The Company provides warranties on all equipment sales ranging from 60 days to three years, depending on the product.  Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.

 


2016

2015


US$ 000

US$ 000




Balance, January 1

(307)

(193)

Warranty charges

478

409

Accruals

(718)

(523)

Balance, December 31

(547)

(307)

               

Property, plant, and equipment

Property, plant and equipment is stated at cost net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 2 to 10 years for machinery and equipment.

 

Income taxes

The Company determines income taxes using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items reflected in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable.

 

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions.  This involves a two-step approach to recognizing and measuring uncertain tax positions.  First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements.  The Company is subject to a three-year statute of limitations by major tax jurisdictions.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2016 and 2015.

 

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Stock based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.   

 

Transactions in and translation of foreign currency

The functional currency for the Company's subsidiaries outside the United States is the applicable local currency.  Balance sheet amounts are translated at December 31 exchange rates and statement of operations accounts are translated at average rates.  The resulting gains or losses are charged directly to accumulated other comprehensive income.  The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency.  Gains and losses from transactions are included as foreign exchange loss in the accompanying consolidated statements of comprehensive income.

 

Comprehensive income

Comprehensive income is the combination of reported net income and other comprehensive income ("OCI"). OCI is changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income. 

 

Earnings per share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued using the treasury stock method.  Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:             

 


Year ended

Year ended


December 31,

December 31,


2016

2015


US$ 000's

US$ 000's




Income available to stockholders

14,258

11,550




Basic weighted shares outstanding

56,178,723

56,145,563

Net dilutive effect of stock options and restricted stock units

1,708,228

1,545,716

Diluted weighted average shares outstanding

57,886,951

57,691,279

 

Fair value

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because of the short-term nature of these instruments. The carrying value of our long-term debt approximates fair value due to the variable nature of the interest rates under our Credit Facility.

 

The FASB has issued accounting guidance on fair value measurements. This guidance provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. 

 

This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. These valuation techniques may be based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions.  These two types of inputs create the following fair value hierarchy.

 

·     Level 1 - Quoted prices for identical instruments in active markets.

·     Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

·     Level 3 -Unobservable inputs for the asset or liability which are supported by little or no market activity and reflect the Company's assumptions that a market participant would use in pricing the asset or liability.




Quoted prices

in active markets

identical assets

Level 1

Significant other

observable inputs

Level 2

Significant other

unobservable inputs

Level 3









US$ 000

US$ 000

US$ 000

US$ 000

Year ended December 31, 2015




Asset:






Non-recurring






Goodwill

2,878



2,878


Recurring






Interest rate swap

(4)



(4)

Year ended December 31, 2016




Asset:






Non-recurring






Goodwill

2,878



2,878


Recurring






Interest rate swap

(2)



(2)

 

New accounting pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual periods beginning after December 15, 2018, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2019.

 

In April 2015, the FASB released Accounting Standards Update No. 2015-03 - Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  To simplify the presentation of debt issuance costs, the update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The update is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016.  The Company has applied the new guidance for the current period and prior periods reflected on the balance sheet.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. The amendment applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.   The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company has chosen early adoption.  The balance sheet reflects the new guidance for all periods.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update.  The amendments in the Update are effective for financial statements issued for annual periods beginning after December 15, 2017.   The Company has chosen early adoption.  The balance sheet reflects the new guidance for all periods.

 

In February 2016, the FASB released Accounting Standard Update 2016-02, Leases.  The new guidance requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP.  Lessees are required to recognize a single lease cost, amortized on a straight-line basis over the lease term for operating leases.  All cash payments are to be classified as operating activities on the cash flow statement.  The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.  Lessees are required to measure leases under the new guidance at the beginning of the earliest period presented using a modified retrospective approach.  We are currently evaluating adoption of the guidance.

 

In March 2016, the FASB released Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation.  Under the new guidance, because there will no longer be any excess tax benefits from the exercise of stock options recognized in APIC, when applying the treasury stock method for computing diluted EPS, the assumed proceeds will not include such windfall tax benefits.

The update is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company has chosen early adoption.  The diluted EPS information for the years ended December 31, 2016 and 2015 reflect the adoption of this guidance.

 

3.  Inventories

Inventories consisted of the following at December 31, 2016 and 2015:












Year ended


Year ended





December 31,


December 31,





2016


2015





US $ 000


US $ 000








Raw material



        2,574


     2,576

Finished goods and work in process

        3,583


     2,259

Remanufactured



        2,603


     3,644

Total




        8,760


     8,479

 

4.  Goodwill and intangible assets

Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value.

 

The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2016 and 2015, and that the value of patents was not impaired as of December 31, 2016 and 2015.   

 

The following table reflects other intangible assets:



Year ended

Year ended


Weighted average

December 31,

December 31,


Amortization

2016

2015


Period

US$ 000's

US$ 000's

Capitalized cost




Patents

12 years

18,538

18,538





Accumulated amortization




Patents

12 years

17,637

16,092





Net carrying costs




Patents

12 years

901

2,446

 

Amortization expense associated with the intangible assets in each of the years ended December 31, 2016 and 2015 was approximately US$ 1,545,000. Remaining net intangible assets totaling approximately US$ 901,000 will be fully amortized in 2017.

 

5.  Property, plant, and equipment

Property, plant, and equipment consist of the following at December 31:

 


2016

2015


US$ 000

US$ 000




Land

864

864

Building and improvements

9,483

6,325

Machinery and equipment

5,769

4,599


16,116

11,788

Less:  accumulated depreciation and amortization

(4,558)

(3,522)


11,558

8,266

 

Depreciation expense for the years ended December 31, 2016 and 2015 was approximately US$ 1,121,000 and US$ 719,000, respectively.

 

6.  Notes payable

The Company's debt obligations consisted of the following at December 31:

 








2016

2015


US$ 000's

US$ 000's

April 2018 commercial real estate mortgage

1,024

1,072

February 2021 secured revolving line of credit

-

-

Total bank debt

1,024

1,072




Less debt due within one year

(48)

(48)




Obligations due after one year

976

1,024

 

The Company's revolving line of credit is collateralized by all inventories and accounts receivable.

The future payments under the Company's amended loan and scheduled related loan amortization fees are as follows for the years ended:

 


2016

 US$ 000's

Term loan principal

 

 

Loan origination fees

 

 

Net long term debt

 2017

48

32

16

2018

976

6

970

Thereafter

-

-

-

Total

1,024

38

986

 

The Company entered into an amended credit facility in February 2016. The new agreement matures between April 2018 and February 2021.

·     US$ 1,447,000 April 2018 commercial real estate mortgage

·     US$ 10,000,000 February 2021 secured revolving line of credit

The interest rate on the commercial real estate mortgage was an effective 1.87% as of December 31, 2016 and was based on the swap rate of 1.19% plus the Applicable LIBOR margin of 1.25%. The interest rate on the revolving line of credit is based on the 1-month LIBOR rate plus 1.25%.  No amounts were drawn under the secured revolving line of credit in 2016 or 2015.  The Company's credit facility is secured by substantially all of its business assets. 

 

7.  Retirement program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company's matching contributions vest immediately.  The Company contributed approximately US$ 350,000 to the savings and retirement plan during 2016 and contributed US$ 397,000 during 2015.

 

8.  Operating leases

The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments are as follows for the years ended:

 


December 31


US$ 000

2017

293

2018

255

2019

138

2020

-

Thereafter

-


686

 

9.  Capital leases

Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2016. This is included in accrued expenses on the accompanying balance sheets.  Future minimum payments are as follows for the years ended:

 


December 31


US$ 000

2017

58

2018

49

2019

32

2020

21

Thereafter

-


160

 

 

 

 

10.  Supplemental cash flow and non-cash financing disclosures


Year ended

Year ended


December 31,

December 31,


2016

2015


US$ 000

US$ 000

Cash paid for interest

58

83

Cash paid for taxes

7,747

4,700

Non-cash financing activities - change in fair value of derivative instruments

2

(4)

 

11.  Business and credit concentration

The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance.  At December 31, 2016 and 2015, the Company had two customers which represented 20% and 11% of total accounts receivable, respectively.

 

12.  Commitments and contingencies

The Company has entered into employment agreements with certain members of senior management.  The terms of these are for renewable one year periods and include non-compete and non-disclosure provisions as well as provide for defined severance payments in the event of termination or change in control.

 

The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.

 

13.  Income taxes

Income Tax Provision











Year ended

Year ended




December 31,

December 31,




2016

2015




US$ 000

US$ 000

Current income tax




Federal


5,764

4,876


State


774

468


Foreign


303

315

Total current income tax expense

6,841

5,659






Deferred tax expense




Federal


167

141


State


11

9


Foreign


-

-

Total deferred tax expense

178

150






Total tax provision

7,019

5,809

 

The components of the net deferred income tax asset at December 31, 2016 and 2015 were as follows:

 



Year ended

Year ended



December 31,

December 31,



2016

2015



US$ 000

US$ 000





Bad debt allowance

263

248

Inventory reserve

109

147

UNICAP - Sec 263A

179

157

Prepaid insurance

(65)

(48)

Prepaid other

(104)

(94)

Fixed assets

(517)

(489)

Intangible assets

2,343

2,766

UK intangibles

134

134

Accrued warranty

223

134

Stock based compensation expense (options & RSUs)

473

261

Italy - NOL

76

76

Foreign tax credit

237

237

Total net deferred tax assets

3,351

3,529





Rate reconciliation



Consolidated income before tax

21,277

17,359

Statutory rate

34%

34%


Statutory tax expense

7,234

5,902





State taxes

518

315

Foreign taxes

(221)

(107)

Meals and entertainment

44

53

Permanent differences due to stock options & RSUs

(125)

(129)

Permanent differences due to other items

(409)

(402)

Other

(22)

177


Tax expense

7,019

5,809





 

The Company has US$ 246,185 in foreign loss carry forwards with indefinite expiration dates.

 

14.  Revenues by geographic region

The Company sells its product to customers throughout the world.  The breakdown by location is as follows:

 


Year ended

Year ended


December 31,

December 31,


2016

2015


US$ 000

US$ 000

United States and U.S. possessions

55,805

47,621

Canada

791

1,547

Rest of World

22,757

21,054

Total

79,353

70,222

 

15.  Stock based compensation

The Company has stock based compensation plans which are described below. The compensation cost that has been charged against income for the plans was approximately US$ 725,000 and US$ 197,000 for the years ended December 31, 2016 and 2015, respectively.  The income tax effect recognized for stock based compensation was US$ 0.2m and US$ 0.1m, respectively, for the years ended December 31, 2016 and 2015. 

 

Stock options

An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan, which was cancelled when the old plan was abandoned. The grants have a three-year vesting and a strike price of 30p, a 100% premium over the market price on the date of grant. The remaining stock options will only be issued for new key employees and superior performance.

 

Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years.  No new options were granted in 2016 and 2015.

A summary of options activity is presented below:

 

Options

Stock options

Weighted-average exercise price

Weighted average remaining contractual term (years)

Aggregate intrinsic value

Outstanding at January 1, 2015

1,840,627

0.44

5.02

4,246,248

Granted

-

-

-

-

Exercised

(154,266)

0.47

4.13

(350,879)

Forfeited

-

-

-

-

Outstanding at December 31, 2015

1,686,361

0.44

4.01

3,895,369

Exercisable at December 31, 2015

1,686,361

0.44

4.01

3,895,369

Outstanding at January 1, 2016

1,686,361

0.44

4.01

3,895,369

Granted

-

-

-

-

Exercised

(100,000)

0.47

3.13

(227,451)

Forfeited

-

-

-

-

Outstanding at December 31, 2016

1,586,361

0.44

3.00

3,667,918

Exercisable at December 31, 2016

1,586,361

0.44

3.00

3,667,918

 

Options exercised in 2016 and 2015 were settled for cash of US$ 0.1m and US$ 0.3m, respectively.

As of December 31, 2016 and 2015, the Company's stock options have all been vested with no unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plan.

 

Restricted Stock Units

The Company also regularly issues restricted stock units to employees and non-executive Directors, subject to Board approval.  A summary of restricted stock unit activity in 2015 and 2016 is presented below:

 


Shares

Grant date fair market value US$

Outstanding at January 1, 2015

450,350

553,999

Granted

123,966

242,673

Vested or settled for cash

(140,788)

(145,165)

Forfeited

(5,183)

(10,000)

Outstanding at December 31, 2015

428,345

641,507

Outstanding at January 1, 2016

428,345

641,507

Granted

148,593

313,894

Vested and settled for cash

(159,585)

(119,130)

Forfeited

-

-

Outstanding at December 31, 2016

417,353

836,271

 

RSUs settled for cash were US$ 0.3m in 2016 and US$ 0.3m in 2015.

 

As of December 31, 2016, there was US$ 334,000 total unrecognized compensation cost related to non-vested restricted stock units.  Restricted stock unit expense is being recognized over the three year vesting period.  The weighted average remaining vesting period is 1.17 years.       

 

Equity Bonus Plan

In 2015, the Company established the 2015 Equity Bonus Plan, under which eligible senior managers were able to choose to receive 25% of their 2015 annual performance bonus in shares of common stock.  In March 2016, the Company issued 96,870 shares of common stock, valued at $204,000 at the time of grant, for awards under the 2015 Equity Bonus Plan.   In November 2016, the Board approved the 2016 Equity Bonus Plan under which eligible senior managers can elect to receive up to 25% of their 2016 annual performance bonus in shares of common stock.  The Company expects to issue shares for awards under the 2016 Equity Bonus Plan in 2017.

         

16.  Employee compensation

The Board approved management bonuses and profit sharing dollars totaling US$ 1.5m to be paid in December 2016 and early 2017 based upon the Company meeting certain profitability targets. 

 

17.  Subsequent events

Dividend

In recognition of Somero's strong performance and the Board of Directors' confidence in the continued growth of the Company, the Board approved an increase to the dividend payout ratio to 40% of adjusted net income and is pleased to announce a final 2016 dividend of 8.6 US cents per share that will be payable on April 17, 2017 to shareholders on the register at March 31, 2017.  Together with the interim dividend paid in October 2016 of 2.5 US cents per share, this represents a full year dividend to shareholders of 11.1 US cents per share, a 61% increase over the previous year.

 

Payoff of Mortgage

On January 31, 2017, the Company paid off the remaining outstanding principal totaling US$ 1.0m on its commercial real estate mortgage along with accrued interest using cash on hand.  There was no prepayment penalty.  There were also no changes to the Company's US$ 10.0m secured revolving line of credit which will expire in February 2021. 

 

Annual General Meeting

Notice is given that the Annual General Meeting of Stockholders (the "AGM") of the Company will be held at the offices of finnCap, 60 New Broad Street, London EC2M 1JJ on June 6, 2017 at 11:00 am local time.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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