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RNS
Somero Enterprises Inc.  -  SOM   

Interim Results

Released 07:00 06-Sep-2017

RNS Number : 9098P
Somero Enterprises Inc.
06 September 2017
 

Press Announcement

 

 For immediate release

 

06 September 2017

 

 

 

Somero® Enterprises, Inc.
("Somero" or "the Company" or "the Group")

 

 

 

Interim Results for the six months ended June 30, 2017

 

Somero Enterprises, Inc. is pleased to report its interim results for the six months ended June 30, 2017, which are in line with management expectations.

 

Financial Highlights


H1 2017

US$

H1 2016

US$

% Increase

Revenue

$ 42.4m

$ 39.7m

          7%

Adjusted EBITDA(1,2)

$ 13.2m

$ 12.1m

9%

Adjusted EBITDA margin(1,2)

31%

30%


Profits before tax

$ 12.0m

$ 10.4m

15%

Adjusted net income(1,3)

$ 8.7m

$ 7.3m

19%

Diluted adjusted net income per share(1,3)

$ 0.15

$ 0.13

15%

Interim dividend per share

$ 0.0275

$ 0.025

10%

 

·     Significant growth experienced led by strong trading in Europe and Latin America:

7% revenue increase -to US$ 42.4m (H1 2016: US$ 39.7m)

 

·     Efficient conversion of revenue increase to profits:

Adjusted EBITDA increased by 9% ---to US$ 13.2m (H1 2016: US$ 12.1m) (1,2)

Adjusted EBITDA margin grew to 31% (H1 2016: 30%) (1,2)

15% increase in profits before tax to US$ 12.0m (H1 2016: US$ 10.4m)

Adjusted net income increased by 19% to US$ 8.7m (H1 2016: US$ 7.3m) (1,3)

Diluted adjusted net income per share grew to US$ 0.15 (H1 2016: US$ 0.13) (1,3,4)

 

·     Strong cash generation experienced, strengthening the balance sheet and increasing return to shareholders:

Net cash flow from operations grew by 62% to US$ 9.4m (H1 2016: US$5.8m)

Net cash position at June 30, 2017 was US$ 18.3m (December 31, 2016: US$ 20.2m) even with H1 2017 increases in dividend payments, settlements of options and restricted stock units (RSUs) and debt repayment (4)

10% increase in interim dividend declared compared to the prior year - $0.0275 per share for payment on October 18, 2017

$0.133 per share special dividend, totaling US $7.5m, paid to shareholders August 14, 2017

 

Business Highlights

 

·     Broad-based geographic and product line growth:

Three of six territories grew in H1 2017 led by Europe, Latin America and the Rest of World countries

H1 2017 trading in North America ended with June at the highest levels of the year with market indicators pointing to solid H2 2017 trading

Ride-on Screed sales grew 29% vs. H1 2016

3-D Profiler System® revenues grew 30% vs. H1 2016

Other revenues grew 14% vs. H1 2016 driven by sales of parts and accessories and STS-11M Topping Spreaders

 

·     New products contributed meaningfully to sales growth:

S-158C in China, the SP-16 Concrete Hose Line Pulling and Placing System, and the next generation 3-D Profiler System combined for US$ 1.4m in sales growth vs. H1 2016

 

·     Investments to support strategy and expansion:

Completed construction of Somero Concrete Institute on Fort Myers, Florida campus and held first classes in Q2 2017

Completed designs to expand Fort Myers Headquarters with targeted completion in Q2 2018 at a total cost of US$ 1.3m 

 

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 gain/(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.

 

Jack Cooney President and Chief Executive Officer of Somero said:

"Somero's sales performance during H1 2017 experienced solid momentum, prompting a 10% increase in our interim dividend following the efficient conversion of revenues into profits and cash flow.  We are particularly pleased that our growth in H1 2017 came from a variety of territories and product lines, highlighting Somero's diverse portfolio of markets and products.  We have proven our ability to extend our sales reach through product development and our strengthened financial position will provide funding for strategic investments so that we can build on the recent opportunities created by our talented team. With the solid H1 2017 performance and healthy momentum carrying over into H2, the Board expects Somero to deliver another successful year of growth in line with current market expectations."

For further information, please contact:

 

 

Enquiries:

 

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

Elisabeth Cowell                                                                                             +44 (0)20 7382 4730

David Ison

 


 

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 ("MAR").

 

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 and Chief Executive Officer's Statement

 

Overview

 

Somero is on track for another year of profitable growth in 2017 after a strong set of results for the first half of the year.  The highlights are a 7% growth in revenues, 9% growth in EBITDA, a US$ 3.6m increase in cash flows from operations, and the declaration on June 5, 2017 of a US$ 0.133 per share special dividend totaling US$ 7.5m that was paid to shareholders on August 14, 2017. We are pleased with this balanced performance and the healthy momentum of the business that has carried over into the second half of the year.

 

During the first half of the year, three of Somero's six markets grew compared to H1 2016 led by strong performance in Europe, Latin America and our Rest of World territories.  On a product basis, three of Somero's six product categories also grew compared to H1 2016 with sales of Ride-on Screeds increasing by a creditable 29%, sales of 3-D Profiler Systems increasing 30%, and Other revenues, which includes sales of parts and accessories increasing 14%.  The top-line growth converted efficiently into increased profit driven by sound cost management and the benefits of price increases and productivity gains.  Gross margins improved to 56.8% compared to 56.2% in H1 2016 while EBITDA margin improved to 31% compared to 30% in H1 2016.  Importantly, profit growth combined with sound working capital management drove the increase in cash flows from operations to US$ 9.4m, up from US$ 5.8m in H1 2016, an increase of 62%.  The strong cash flows resulted in a healthy net cash position of US$ 18.3m as of June 30, 2017 that adequately supports the US$ 0.133 per share special dividend totaling US$ 7.5m that was paid on August 14, 2017.(1)

 

Based on the strong performance in H1 2017 and the Board's confidence in the Company's future, we are pleased to report that the interim dividend for the six months ended June 30, 2017 was increased to 2.75 US cents per share by the Board and will be payable on October 18, 2017 to shareholders on the register at September 29, 2017. 

 

Market Review

 

The North American market remains healthy and our customers continue to report extended project backlogs that span well into 2018.  H1 2017 trading in North America ended with June at the highest levels of the year as weather conditions across the country improved and the heavy rains seen throughout H1 2017 began to subside.  While H1 2017 sales in North America were $ 28.4m, marginally down from the US$ 29.8m in H1 2016, we are encouraged by the high level of activity in the market that has carried forward which supports our expectation for solid H2 2017 trading in the US. 

 

Our European market reported particularly strong performance in H1 2017 with sales increasing to US$ 5.4m, up 108% from the US$ 2.6m in H1 2016 as the recovery throughout Europe accelerated and economic conditions have improved.  European sales came from a broad range of countries in H1 2017, with the most significant contributions from the United Kingdom, Germany, and the Czech Republic. 

 

In China, the slow start to the year led to H1 2017 sales of US$ 2.7m, down from US$ 3.8m in H1 2016.  However, sales in China also ended the first half on a positive note with June trading at the highest level of the year.  We expect to build on this momentum and see improvement in H2 2017 driven by marketing, sales execution and lead generation activities focused on both our existing and new entry level products.  In addition, experience with our China long-term financing program remains positive and in line with our previous reporting. 

 

Latin American sales were also particularly strong during the period, increasing to US$ 1.7m, up from US$ 0.2m in H1 2016 driven by meaningful contributions from Mexico and Peru.  In the Middle East, while H1 2017 sales were US$ 0.8m, down from US$ 1.4m in H1 2016, we continue to see a high level of interest in our equipment and have carried a solid pipeline of opportunities over into H2 2017.  For our Rest of World territories, which include Australia, Southeast Asia, Korea, India, Scandinavia and Russia, sales grew 79% to US$ 3.4m compared to US$ 1.9m in H1 2016, with Korea and Scandinavia the most significant contributors to growth and with Australia and India also reporting sales increases compared to the previous year. 

 

New product development

 

In H1 2017, Somero's revenue growth was in part driven by new products introduced in late 2016 and early 2017, specifically the S-158C in China, the SP-16 Concrete Line Pulling and Placing System, and the next generation 3-D Profiler System.  On a combined basis, these products contributed US $1.4m in growth during H1 2017.  Given the success associated with in-house innovation, Somero continues to invest in its customer-driven product development effort.  Our hiring of a Global Business Development Manager in late 2016 has provided even more focus on identifying new market opportunities and new market segments for our engineering team to explore which will drive our product pipeline for years to come. 

 

Expansion Update

 

In April 2017, we completed construction of the hands-on training facility located on the Fort Myers, Florida campus and launched the Somero Concrete Institute by holding the first training class through which American Concrete Institute (ACI) certification was offered to attendees.  The Somero Concrete Institute is an important strategic investment that provides a comprehensive educational opportunity for students from across the globe to become certified in concrete placing and finishing.  This initiative is a testament to Somero's commitment to training and education and will help address the growing shortage of skilled labour in the North American concrete contractor industry. 

 

Also, in June 2017, the Board approved plans to build a US $1.3m expansion to the Company's Fort Myers headquarters to accommodate planned future growth.  The building project is on track to be completed in H1 2018, with the majority of the spend to occur in Q1 2018.  This investment is needed to support the future growth of the business and the planned hiring of additional sales, customer support, and product development personnel in 2017. 

 

People

 

On behalf of the Board, we would like to thank all our global employees for their continued dedication and passion for our customers' success.  Our employees are central to Somero's success and to delivering these strong results for our shareholders.  The Board and management team remain committed to providing our employees a rewarding and challenging working environment, full of opportunity, so that each employee can realize their full potential. 

 

Current trading and outlook

 

The positive trading momentum experienced at the end of the first half in North America has carried over into H2 2017, reflecting the healthy state of the non-residential construction market in the United States.  We are pleased with the broad interest ongoing across all our product lines, including our new products, as well as in our customers' confidence in their project backlogs. Together, these factors provide us with confidence in our expectations for a solid performance in North America for the remainder of 2017. 

The trading activity in Europe accelerated in H1 2017 and we anticipate this momentum will continue through the year with a variety of countries contributing meaningfully to sales and with demand being driven by replacement equipment, technology upgrades, and interest in new products.

In China, we are encouraged by the improved trading in June and expect to build off this platform through focused marketing, sales execution and lead generation activities, and by gaining traction with our entry level products, all of which we expect will result in H2 2017 improvement. 

In Latin America, we anticipate that H2 2017 will see a continuation in the significant opportunities available to us, while in the Middle East, where a number of opportunities carried over into H2 2017, we also expect solid H2 2017 performance. 

In our Rest of World territories, also building off the strong performance in H1 2017, we expect to capitalize on a wide range of opportunities across our broad portfolio of markets in H2 2017. 

Overall, the Board is pleased with the performance of the Company in the first half of 2017 and remains confident in delivering another year of profitable growth for our shareholders in line with current market expectations.

 

Larry Horsch

Non-Executive Chairman

 

 

Jack Cooney

President and Chief Executive Officer

September 6, 2017

 

Notes:

1. Net Cash is defined as cash and cash equivalents less total borrowings under bank obligations.



 

Somero Enterprises Inc.

Business and Financial Review



Summary of financial results

For the six months ended June 30

*  unaudited


2017

2016



US$ 000's

US$ 000's



Except per share data

Except per share data





Revenue


42,436

39,711

Cost of sales

18,323

17,385

Gross profit


24,113

22,326





Operating expenses



Selling, marketing and customer support

5,354

5,167

Engineering and product development

749

538

General and administrative

6,400

6,275

Total operating expenses

12,503

11,980




Operating income

11,610

10,346

Other income (expense)



Interest expense

(55)

(43)

Interest income

128

125

Foreign exchange gain (loss)

295

(63)

Other

26

-

Income before income taxes

12,004

10,365




Provision for income taxes

2,426

3,658

Net income


9,578

6,707



Per Share

Per Share



US$

US$

Basic earnings per share

0.17

0.12

Diluted earnings per share

0.17

0.12

Basic adjusted net income per share (1,3,4)

0.16

0.13

Diluted adjusted net income per share (1,3,4)

0.15

0.13

Other data

 

 



Adjusted EBITDA (1,2,4)

13,212

12,052

Adjusted net income (1,3,4)

8,745

7,313

Depreciation expense

579

482

Amortization of intangibles

772

772

Capital expenditures

1,720

3,806

 

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 excluding tax provision, interest expense, interest income, foreign exchange gain (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.

 

Somero Enterprises, Inc.

Net income to adjusted EBITDA reconciliation and Adjusted net income reconciliation

*  unaudited

Six months ended June 30


2017

US$ 000's

2016

US$ 000's


Adjusted EBITDA reconciliation



Net income

9,578

6,707

Tax provision

2,426

3,658

Interest expense

55

43

Interest income

(128)

(125)

Foreign exchange (gain) loss

(295)

63

Other Expense

(26)

-

Depreciation

579

482

Amortization

772

772

Stock based compensation

251

452

Adjusted EBITDA(1,2,4)

13,212

12,052




Adjusted net income reconciliation



Net income

9,578

6,707

Amortization

772

772

Tax impact of stock option & RSU settlements

(1,605)

(166)

Adjusted net income reconciliation (1,3,4)

8,745

7,313

 

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 gain (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 7% to US$ --42.4m (H1 2016: US$ 39.7m). Company revenues consist primarily of sales from Boomed Screed products, which include the S22-E, 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-158C Laser Screed machines, remanufactured machines sales, 3-D Profiler Systems, 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 period was driven by sales of Ride-on Screed products, 3-D Profiler Systems, and Other revenues.

 

Boomed Screed sales decreased to US$ --16.4m (H1 2016: US$ 17.9m) primarily as a result of a decrease in volume to 55 units (H1 2016:  64 units),  Ride-on Screed sales increased to US$ 9.4m (H1 2016:  US$ 7.3m) primarily due to an increase in volume to 97 units (H1 2016: 81), remanufactured machine sales remained flat at US$ 3.0m (H1 2016:  US$ 3.0m) despite a unit volume decrease to 21 units (H1 2016: 23) due primarily to a shift in mix toward higher priced equipment, 3-D Profiler System sales increased to US$ 3.9m (H1 2016:  US$ 3.0m) primarily due to an increase in units sold to 38 (H1 2016: 30), and Other revenues increased to US$ 9.7m (H1 2016: US$ 8.5m) primarily due to increased sales of parts and accessories and increased sales of other equipment including the STS-11M Topping Spreader. The following table shows the breakdown during the six months ended June 30, 2017 and 2016:

 




North America US$

EMEA¹ US$

ROW ² US$






Revenue breakdown by geography

in millions

in millions

in millions


Total US$ in million











2017

2016




2017

2016

2017

2016

2017

2016


Net sales

% of Net sales

Net sales

% of Net sales

Boomed Screeds ³


10.9

13.8

4.0

2.6

1.5

1.5


16.4

38.7%

17.9

45.1%

Ride-on Screeds ⁽⁴⁾


5.9

5.7

2.1

0.9

1.4

0.7


9.4

22.2%

7.3

18.4%

Remanufactured machines

1.8

2.0

-

-

1.2

1.0


3.0

7.0%

3.0

7.5%

3-D Profiler Systems


3.7

2.9

-

-

0.2

0.1


3.9

9.2%

3.0

7.5%

Other⁽⁵⁾



6.1

5.4

1.2

0.9

2.4

2.2


9.7

22.9%

8.5

21.5%

Total



28.4

29.8

7.3

4.4

6.7

5.5


42.4

100.0%

39.7

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-158C.         
 
5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M Topping Spreader, Copperhead, and Mini Screed C.
 

Units by product line






H1 2017

H1 2016

Boomed Screeds






55

64

Ride-on Screeds






97

81

Remanufactured machines





21

23

3-D Profiler Systems






38

30

Total







211

198

 

 

Sales to customers located in North America contributed 67% of total revenue (H1 2016: 75%), sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed 17% (H1 2016: 11%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, and China) contributed 16% (H1 2016: 14%).

 

Sales in North America totaled US$ 28.4m (H1 2016: US$ 29.8m) down 5%, driven by lower sales of Boomed Screeds. Sales to customers in EMEA (Russia, Middle East, Europe, Scandinavia and India) contributed US$ 7.3m (H1 2016: US$ 4.4m) which grew 66% primarily due to an increase in Boomed Screed and Ride-on Screed sales. Sales to customers in ROW (China, Southeast Asia, Australia, Korea and Latin America) contributed US$ 6.7m (H1 2016: 5.5m) which grew 22% primarily due to an increase in Ride-on Screeds, remanufactured machines, 3-D Profiler System, and Other sales.

 








US$ in millions

Regional sales






H1 2017

H1 2016

North America






28.4

29.8

Europe







5.4

2.6

China







2.7

3.8

Middle East






0.8

1.4

Latin America






1.7

0.2

Rest of World






3.4

1.9

Total







42.4

39.7

 

Gross profit

 

Gross profit percentage improved to 56.8% compared to 56.2% in H1 2016 due to the positive impacts of price increases, productivity gains, and product mix.

 

Operating expenses

 

Operating expenses excluding depreciation, amortization and stock based compensation for H1 2017 were US$ 11.3m (H1 2016: US$ 10.6m). The increase has been driven primarily by increased personnel costs, sales commissions, marketing costs, professional fees and insurance expenses.  Total employment increased to 179 as compared to 170 at the end of 2016.

 

Debt

 

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. 

 

Provision for income taxes

 

The provision for income taxes decreased to US$ 2.4m, at an effective tax rate of 20%, compared to a provision of US$ 3.7m in H1 2016, at an effective tax rate of 35%, due primarily to the favorable tax impact of RSU and stock option settlements.

 

Earnings per share

 

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, as well as any adjustments to income that would result from the assumed issuance. 

Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units.  Earnings per common share has been computed based on the following:


Six months ended June 30

 


2017

US$ 000's

2016

US$ 000's

 

Income available to stockholders

9,578

6,707

 




 

Basic weighted shares outstanding

56,225,522

56,153,294

 

Net dilutive effect of stock options and restricted stock units

551,002

1,652,276

 

Diluted weighted average shares outstanding

56,776,524

57,805,570

 




 


Per Share

Per Share

 


US$

US$

 

Basic earnings per share

0.17

0.12

 

Diluted earnings per share

0.17

0.12

 

Basic adjusted net income per share

0.16

0.13

 

Diluted adjusted net income per share

0.15

0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Somero Enterprises, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2017 and December 31, 2016

 

*  unaudited

As of

June 30,

2017

US$ 000's

As of

December 31,

2016

US$ 000's

 

Assets




 

Current assets:



 

Cash and cash equivalents

18,258

21,216

 

Accounts receivable - net

9,363

6,310

 

Inventories

9,030

8,760

 

Prepaid expenses and other assets

1,996

2,428

 

Total current assets

38,647

38,714

 

Accounts receivable, non-current - net

101

254

 

Property, plant, and equipment - net

12,684

11,558

 

Intangible assets - net

129

901

 

Goodwill

2,878

2,878

 

Deferred tax asset

3,165

3,351

 

Income tax receivable

708

-

 

Other assets

28

29

 

Total assets

58,340

57,685

 





 

Liabilities and stockholders' equity



 

Current liabilities:



 

Notes payable - current portion

-

16

 

Accounts payable

3,973

2,831

 

Accrued expenses

13,273

5,329

 

Income tax payable

-

147

 

Total current liabilities

17,246

8,323

 

Notes payable, net of current portion

-

970

 

Other liabilities

222

223

 

Total liabilities

17,468

9,516

 





 

Stockholders' equity



 

Additional paid in capital

17,568

22,112

 

Retained earnings

25,722

28,480

 

Other comprehensive loss

(2,036)

(1,966)

 

 Total stockholders' equity

40,872

48,169

 

Total liabilities and stockholders' equity

58,340

57,685

 

See notes to unaudited consolidated financial statements.



 

For the six months ended June 30, 2017 and 2016

 

*  unaudited

Six months ended June 30

 

2017

US$ 000's

Except per share data

2016

US$ 000's

Except per share data

 

42,436

39,711

 

18,323

17,385

 

24,113

22,326

 




 



 

Selling, marketing and customer support

5,354

5,167

 

Engineering and product development

749

538

 

General and administrative

6,400

6,275

 

Total operating expenses

12,503

11,980

 



 

11,610

10,346

 



 

Interest expense

(55)

(43)

 

Interest income

128

125

 

Foreign exchange gain (loss)

295

(63)

 

Other

26

-

 

12,004

10,365

 



 

2,426

3,658

 



 

9,578

6,707

 



 



 

Cumulative translation adjustment

(70)

(227)

 

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

-

(9)

 

9,508

6,471

 





 



 

Earnings per share - basic

0.17

0.12

 

Earnings per share - diluted

0.17

0.12

 





 


 

Basic

56,225,522

56,153,294

 

Diluted

56,776,524

57,805,570

 

See notes to unaudited consolidated financial statements.

 


 

Somero Enterprises, Inc.

Consolidated Statements of Changes in Stockholders' Equity

For the six months ended June 30, 2017

 

* unaudited








 









 


Common stock

 

 

 


Treasury stock

 

 

 

 

Retained earnings/

US$ 000's

Other

Comprehensive

income (loss)

US$ 000's


 


Additional

paid-in

capital

US$ 000's

Total

Stockholders'

equity

US$ 000's

 


 


Shares

Amount

US$ 000's

 

Shares

Amount

US$ 000's

 


 

Balance - December 31, 2016

56,425,598

26

22,112

221,996

(483)

28,480

(1,966)

48,169

 

Cumulative translation adjustment

-

-

-

-

-

-

(70)

(70)

 

Change in fair value of derivative instruments

-

-

-

-

-

-

-

-

 

Net income

-

-

-

-

-

9,578

-

9,578

 

Stock based compensation

-

-

251

-

-

-

-

251

 

Dividend

-

-

-

-

-

(12,336)

-

(12,336)

 

Treasury stock

-

-

(75)

(38,519)

75

-

-

-

 

RSUs settled for cash

-

-

(432)

-

-

-

-

(432)

 

Stock options settled for cash

-

-

(4,288)

-

-

-

-

(4,288)

 

Balance - June 30, 2017

56,425,598

26

17,568

183,477

(408)

25,722

(2,036)

40,872

 










See notes to unaudited consolidated financial statements.

 



 

Somero Enterprises, Inc.

Consolidated Statements of Cash Flows

For the six months ended June 30, 2017 and 2016

*unaudited

Six months ended June 30


2017

US$ 000's

2016

US$ 000's

Cash flows from operating activities:



  Net income

9,578

6,707

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



    Deferred taxes

186

112

    Depreciation and amortization

1,351

1,254

    Bad debt

125


    Amortization of deferred financing costs

38

16

    Stock based compensation

251

452

  Working capital changes:



    Accounts receivable

(3,025)

(2,934)

    Inventories

(270)

(556)

    Prepaid expenses and other assets

432

(223)

    Other assets

1

9

    Accounts payable, accrued expenses and other liabilities

1,585

1,918

    Income taxes payable (receivable)

(855)

(998)

    Net cash provided by operating activities

9,397

5,757





Cash flows from investing activities:



Proceeds from sale of property and equipment

 

16

                     -

Property and equipment purchases

(1,721)

(3,807)

Net cash used in investing activities

(1,705)

(3,807)





Cash flows from financing activities:



Payment of dividend

(4,836)

(2,805)

Payment of RSUs

(432)

(345)

Stock options settled for cash

(4,288)

(145)

Repayment of notes payable

(1,024)

(24)

Net cash used in financing activities

(10,580)

(3,319)





Effect of exchange rates on cash and cash equivalents

(70)

(236)





Net decrease in cash and cash equivalents

(2,958)

(1,605)





Cash and cash equivalents:



Beginning of period

21,216

13,709

End of period

18,258

12,104





See notes to unaudited consolidated financial statements.



Notes to the Consolidated Financial Statements

 

1.   Organization and description of business

Nature of business

Somero Enterprises, Inc. (the "Company" or "Somero") designs, assembles, remanufactures, 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.  We have reclassified certain prior year amounts 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 US 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 June 30, 2017 and December 31, 2016, the allowance for doubtful accounts was approximately US$ 845,000 and US$ 743,000, respectively.

 

Inventories 

Inventories are stated at the lower of cost, using the first in, first out ("FIFO") method, or market. 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.

 

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 periods ended June 30, 2017 nor December 31, 2016.

 

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 periods ended June 30, 2017 and 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.

 

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 FOB shipping point, revenue is recognized upon shipment.  For arrangements which include FOB 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.

           

Property, plant, and equipment

Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, 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 3 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/ (benefit) 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 2017 and 2016. The Company is subject to a three-year statute of limitations by major tax jurisdictions, and currently 2013 through 2015 remain open to investigation.

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.  Compensation expense related to stock based payments was US$ 251,000 and US$ 452,000 for the six-month periods ended June 30, 2017 and 2016, respectively.  The Company settled US$ 4,287,000 and US$ 145,000 in stock options for cash during the six-month periods ended June 30, 2017 and 2016, respectively. In addition, the Company settled US$ 432,000 and US$ 345,000 in restricted stock units for cash during the six-month periods ended June 30, 2017 and 2016, respectively.

 

Transactions in and translation of foreign currency

The functional currency for the Company's subsidiaries outside the United States is the applicable local currency.  The preparation of the consolidated financial statements requires the translation of these financial statements to USD.  Balance sheet amounts are translated at period-end exchange rates and the statement of comprehensive income 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 gain (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 and restricted stock units. Earnings per common share have been computed based on the following:  

 


Six months ended June 30


2017

US$ 000's

2016

US$ 000's


Net income

9,578

6,707




Basic weighted shares outstanding

56,225,522

56,153,294

Net dilutive effect of stock options and restricted stock units

551,002

1,652,276

Diluted weighted average shares outstanding

56,776,524

57,805,570

 

Fair value measurement

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.

 

 

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, 2017, 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 2018.

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 interim and reporting periods beginning after December 15, 2018.  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.

 

3.  Inventories

Inventories consisted of the following:


June 30,

2017

US$ 000's

December 31,

2016

US$ 000's



Raw material

2,797

2,574

Finished goods and work in process

4,208

3,583

Remanufactured

2,025

2,603

Total

9,030

8,760

 

4.  Property, plant, and equipment

Property, plant, and equipment consisted of the following:


June 30,

2017

US$ 000's

December 31,

2016

US$ 000's



Land

864

864

Building and improvements

10,546

9,483

Machinery and equipment

6,304

5,769

Sub-total

17,714

16,116




Less:  accumulated depreciation and amortization

(5,030)

(4,558)




 Total

12,684

11,558

 

5.  Notes payable

The Company's debt obligations consisted of the following:


June 30,

2017

US$ 000's

December 31,

2016

US$ 000's



February 2021 secured revolving line of credit

-

-

April 2018 commercial real estate mortgage

-

 

1,024

Deferred financing costs


-

Total bank debt

-

1,024




Less debt due within one year

-

(48)




Obligations due after one year

-

976

 

The company has implemented Accounting Standards Update No. 2015-03-Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs for the periods ended June 30, 2016 and 2017. This update requires that debt issuance costs related to debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability. The implementation of Subtopic 835-30 has moved deferred financing costs from an asset to a direct reduction in liability, as shown above.

 

As of December 31, 2016 the current portion of term loan principal due of US $48,000 was offset by US$ 32,000 of loan origination fees, while the non-current portion of term loan principal due of US$ 976,000 was offset by US $6,000 of loan origination fees.

 

The Company entered into an amended credit facility in February 2016. The agreement will mature between March 2018 and February 2021.

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

 

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.

 

Interest

Interest expense on the credit facility for the six months ended June 30, 2017 and 2016 was approximately US$ 55,000 and USD$ 43,000, respectively, and includes amortized swap interest fees and amortized loan origination fees.

6.  Operating leases

The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year represent the remaining six months for 2017 and the full 12 months of each successive period as follows:


US$ 000's

2017

155

2018

280

2019

148

2020

2

Thereafter

-

Total 

585

 

Capital leases

Interest rates on capital leases are variable and range from 4.5% to 7.3% at June 30, 2017.  Future minimum payments by year represent the remaining six months for 2017 and the full 12 months of each successive period as follows:


US$ 000's

2017

46

2018

85

2019

56

2020

28

Thereafter

2

Total

217

 

8.  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 nondisclosure 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.

9.  Income taxes

The Company's effective tax rate for the six months ended June 30, 2017 was 20% compared to the federal statutory rate of 34%. The effective tax rate is lower than the federal statutory rate primarily due to the favorable tax impact of RSU and stock option settlements.

The Company is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company was formed in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2013 forward is still open. The Company has no federal, foreign or state income tax returns currently under examination.

At June 30, 2017, the Company had US$ 3,165,000 in non-current net deferred tax assets recorded on its balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

10.  Supplemental cash flow and non-cash financing disclosures


Six months ended June 30


2017

US$ 000's

2016

US$ 000's


Cash paid for interest

25

29

Cash paid for taxes

3,028

4,679

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

2

(9)

 

11.  Goodwill and intangible assets

The following table reflects intangible assets:


Weighted average

amortization

period

June 30,

2017

US$ 000's

December 31,

2016

US$ 000's



Capitalized cost




Patents

12 years

18,538

18,538

Intangible assets not subject to amortization

-


-



18,538

18,538

Accumulated amortization




Patents

12 years

18,409

17,637

Intangible assets not subject to amortization

-


-



18,409

17,637

Net carrying costs




Patents

12 years

129

901

Intangible assets not subject to amortization

-


-



129

901

 

Future amortization of intangible assets is expected by year represent the remaining six months for 2017 and the full 12 months of each successive period as follows:


US$ 000's

2017

129

2018

-

Thereafter

-

Total

129

 

12.  Subsequent events

Dividend

The Board declared an interim dividend for the six months ended June 30, 2017 of 2.75 US cents per share.   This dividend will be payable on October 18, 2017 to shareholders on the register at September 29, 2017.

 

 

 

 

 


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