Final Results
Somero Enterprises Inc.
16 April 2007
Embargoed for 7.00am, Monday 16 April 2007
THIS ANNOUNCEMENT MAY NOT BE RELEASED, PUBLISHED OR DISTRIBUTED IN OR INTO THE
UNITED STATES, CANADA, JAPAN OR AUSTRALIA OR TO US PERSONS (AS DEFINED IN
REGULATION S UNDER THE US SECURITIES ACT OF 1933, AS AMENDED) OR TO RESIDENTS,
NATIONALS OR CITIZENS OF CANADA, JAPAN OR AUSTRALIA.
Somero Enterprises, Inc. (R)
Full year results for the twelve months to 31 December 2006
Revenues up over 30% and profits up nearly 50%
in maiden results as a listed Company
Somero Enterprises, Inc. (R), ('Somero' or 'the Company'), is pleased to report
is maiden results as a listed company for the year to 31 December 2006 following
its successful listing on AIM in November 2006. Somero is a North American
manufacturer of patented laser guided equipment used for the spreading and
levelling of high volumes of concrete for floors in the construction industry.
Financial Highlights
• Revenue increased 32% at $55.9m (2005: $42.3m*)
• EBITDA1 increased 49.9% to $14.7m (2005: $9.8m*)
• Pre-tax income increased 31% to $8.2m (2005: $6.3m*)
• Net income2 before amortisation increased 38% to $7.8m (2005: $5.6m*)
• Dividend of 0.33 cents per share for the period 1 November 2006 to 31
December 2006
Business Highlights
Strong results across all product lines
• Large line equipment sales (including the SXP Large Laser Screed and
its predecessors) increased 43.4% to $25.4m.
• Small line equipment sales (including the CopperHead and PowerRake)
increased 27.3% to $16.0m
• Other revenues, including sales of spare parts, refurbished machines
and accessories, increased 20.6% to $14.6m
Strong results across all geographic territories
• Units sold into 44 countries outside North America
• First time sales into the Ukraine, UAE and Iceland
• New independent sales representatives in Russia and Eastern Europe
• New distributors appointed in China and India
• Award winning new 'HoseHog' product launched in August 2006
• Plans to develop dedicated Sales Training College in Michigan in 2007
Commenting, Jack Cooney, President and CEO of Somero, said:
'We are delighted to report a very strong first set of results as a listed
company, with a solid performance across all our product lines and geographic
markets. Trading in the first three months of this year has been entirely in
line with management's expectations.
'The outlook for 2007 appears strong in all markets. The non-residential
construction market is expected to continue to be strong throughout this year
and next. Somero is focused on continuing its growth in all areas. We will
look to expand our presence in emerging markets, introduce innovative new
products into new and existing markets, and add small line sales and
demonstration personnel in all regions. The Company's attractive fundamentals,
market position and products, together with an experienced management team,
provide us with a solid platform on which to continue to grow the business both
organically and, where appropriate, through selective acquisitions.'
Stuart Doughty, Non-executive Chairman of Somero, added:
'We look forward with great enthusiasm to what I feel sure will be a very
exciting first full financial year post flotation and will continue to focus on
maximising the benefits of our enhanced capital structure.'
For further information contact:
Financial Dynamics +44 (0)20 7831 3113
Harriet Keen / Matt Dixon
Jefferies +44 (0)207 968 8000
Charles Cameron / Nandan Shinkre
Notes
1 References to EBITDA are to Somero's operating income plus depreciation
expense and amortisation expense of intangibles plus non cash
stock-based compensation expense.
2 References to Net Income before amortisation are to Somero's net
income plus amortisation expense of intangibles.
* The combined figures for the year to 31 December 2005 are unaudited. On 10
August 2005, the Company acquired certain assets and assumed certain
liabilities from its then parent, Dover. The figures shown for the year to
31 December 2005 represent a combination of the audited results for 1
January 2005 to 10 August 2005 for Somero Enterprises Group and the audited
results for 11 August 2005 to 31 December 2005 for Somero Enterprises.
Further detail can be found in the Company's Admission Document prepared
for its listing on AIM in November 2006.
About Somero
Somero(R) designs, manufactures and sells equipment that automates the process
of spreading and leveling large volumes of concrete for flooring and other
horizontal surfaces, such as paved parking lots. Somero's innovative,
proprietary products, including the Large Laser Screed(R), employ laser-guided
technology to achieve a high level of precision.
Its products have been sold primarily to concrete contractors for use in
non-residential construction projects in over 50 countries. Laser screeding
equipment has been specified for use in constructing warehouses, assembly
plants, retail centres and in other commercial construction projects requiring
extremely flat concrete slab floors by a variety of companies, such as Costco,
Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, the
United States Postal Service, and Toys 'R' Us.
Somero's headquarters are located in New Hampshire, USA. It operates a
manufacturing facility in Michigan, USA, and has a sales and service office in
Chesterfield, England. Somero has 124 employees, and markets and sells its
products through a direct sales force, external sales representatives, and
independent dealers in North America, Latin America, Europe, the Middle East,
South Africa, Asia and Australia. Somero is listed on the Alternative Investment
Market of the London Stock Exchange and its trading symbol is SOM.L.
This announcement does not constitute or form part of any offer or invitation to
sell, or any solicitation of any offer to purchase, any securities of Somero
Enterprises, Inc. (the 'Company').
This announcement may not be released, published or distributed in or into the
United States, Canada, Japan or Australia or to US Persons (as defined in
Regulation S under the US Securities Act of 1933, as amended (the 'US Securities
Act')) or to residents, nationals or citizens of Canada, Japan or Australia.
The distribution of this announcement in certain other jurisdictions may also be
restricted by law and persons into whose possession this announcement or any
document or other information referred to herein comes should inform themselves
about and observe any such restriction. Any failure to comply with these
restrictions may constitute a violation of the securities laws of any such
jurisdiction.
No securities of the Company have been registered under the US Securities Act.
No securities of the Company may be offered or sold in the United States or to
US persons (as defined in Regulation S under the US Securities Act) except
pursuant to an effective registration statement under the US Securities Act or
pursuant to an available exemption from the registration requirements under the
US Securities Act.
No securities of the Company have been registered under the applicable
securities laws of Australia, Canada or Japan and may not be offered or sold
within Australia, Canada or Japan or to, or for the account or benefit of
citizens or residents of Australia, Canada or Japan.
ENDS
Somero Enterprises, Inc. (R)
Full year results for the twelve months to 31 December 2006
Chairman's Statement
Overview
Our continued focus on high quality engineering, coupled with a policy of
continuous product development and customer service, has enabled us to deliver a
very successful year with financial results exceeding our expectations.
Somero's products have helped revolutionise the concrete placing industry and
are increasingly recognised by blue chip Logistics and Retail customers as
essential in achieving greater levels of operating efficiency in their own
highly competitive markets.
Our policy of providing spares and service back-up coupled with a comprehensive
training program and making our customers' needs our top priority, is
maintaining our strong market position and clearly differentiates us from the
competition.
Taking advantage of the growth in the emerging economies in the Middle East, Far
East and the former Eastern Block countries, we have employed significantly more
resources in sales and marketing in those territories, helping to drive the
Group's strong revenue growth of over 32% over the prior year.
In November 2006, Somero successfully completed its transition to a public
company listed on AIM. Both the Board and management team welcome our new
shareholders and thank them for the confidence they have placed in us. We look
forward to working with them.
Results
Total revenue for the year to 31 December 2006 was $55.9m, 32.1% above 2005 and
EBITDA was $14.7m, 49.9% above the previous year. The costs of the flotation
were netted against the proceeds and not included in the results.
Corporate Governance and The Board
We have appointed three additional non executive directors to the Board. They
all bring a considerable breadth of experience and knowledge and I believe
produce a very strong, cohesive and complimentary body. As Chairman, I must
compliment both the Executive and Non-Executive Directors for the manner in
which the flotation was accommodated into the business in such a seamless way
and I believe this is testament to the competence and resilience of the
management team.
Tom Anderson is currently the President and Managing Partner of Schwing Bioset,
Inc. and serves as Chairman of our Remuneration committee. Tom recently retired
after 30 years of service as president and chief executive officer of Schwing
America, Inc. a manufacturer of concrete equipment including concrete pumps,
recyclers, truck mixers and accessories, and became the president and managing
partner of Schwing Bioset, Inc. Since 1989, he has served as the president and
managing partner of Concrete Pump Repair. Tom is also a partner in Engineered
Chassis Systems, a speciality truck manufacturer. He spent 22 years on the Board
of the American Concrete Pumping Association and five years as the president of
the Concrete Pump Manufacturers Association.
Ron Maskalunas, who retired from PricewaterhouseCoopers LLP in 2001 after
serving as a Partner for 24 years, serves as Chairman of the Audit Committee.
For the past five years, Ron has been a self-employed corporate consultant,
advising on a range of corporate issues including the implementation of
Sarbanes-Oxley controls and procedures for a company listed on the New York
Stock Exchange. He is a Certified Public Accountant.
Ian Weingarten is currently a managing director of The Gores Group LLC, which is
the investment manager of Gores Capital Partners, L.P. and its affiliated
partnerships. Prior to joining Gores in 2002, Ian was a director at UBS Warburg
and was previously an investment professional at Apollo Management, L.P. as well
as a private investment firm investing capital for two high net worth families.
Ian has previously been a member of the mergers and acquisitions group within
the investment banking division at Goldman Sachs & Co. Ian is also a director of
SER Holdings, Inc., which is the ultimate parent company of SER Solutions, Inc.,
a contact centre management solutions business owned by Gores, and certain of
its subsidiaries.
We have aimed to comply with the combined code and have formally constituted the
Audit, Nominations and Remuneration committees.
People
There is considerable strength and depth in the Company with a high degree of
motivation arising from a very cohesive and motivated team. We would like to
take this opportunity to thank all our employees for their continued hard work
and commitment throughout the last year.
Markets and Prospects
As major retailers and logistics companies expand globally and increasingly
appreciate that a contributing factor to their efficiency is the standard of the
floor surface from which they operate, so we are increasingly enjoying the
benefits of being specified as a nominated equipment provider to enable them to
achieve that objective.
The development of markets in this way and our concentration on the provision of
a high quality service and product adds considerable value to our business and
enables us to gain market penetration at a much greater rate than would
otherwise be the case were we simply to follow the infrastructure market and
contractors alone.
The infrastructure market continues to grow across virtually all economies.
Growth in the commercial and retail construction market appears to continue
relatively unabated. We are not currently involved in the residential housing
market.
Given that our product offering is particularly focused on the industrial and
commercial sector, with margin orientation also mirroring that profile, we are
confident that we are well protected against the vagaries of rapidly changing
factors in local economies.
We look forward with great enthusiasm to what I feel sure will be a very
exciting first full financial year post flotation and will continue to focus on
maximising the benefits of our enhanced capital structure.
Chief Executive's Review
I am pleased to report the results of Somero Enterprises, Inc. for the year
ended 31 December 2006. Revenues were $55.9m, 32.1% above 2005 levels, and the
Company reported EBITDA of $14.7m, an increase of 49.9% on the previous year.
Net Income before amortisation stood at $7.8m, 38% higher than 2005.
In achieving these outstanding results, we focused in 2006 on the main
components of our business strategy, namely to enhance and expand Somero's
product offering, expand our geographic footprint and distribution channels,
maintain our focus on cash flow and cost control.
Results were strong across all product lines and in all geographic territories.
We continue to expand into new geographic markets and to benefit from strong
commercial building trends worldwide. North America saw increased growth driven
by the acceptance of small line equipment, strong non-residential construction
and the large line replacement demand. Internationally, we sold units into a
total of 44 countries outside North America with new sales this year into the
Ukraine, UAE and Iceland.
The addition of small line sales and demonstration personnel and a complete year
of PowerRake sales resulted in small line growth of 28.2% to $11.1m in North
America. Europe also added sales and demonstration personnel along with
independent sales representatives which increased small line sales by 34.8% to
$3.5m. Small line sales in Australia and Asia were flat while in Latin and South
America we hired a sales manager in the third quarter that generated small line
sales of $400K.
Large line sales continued with strong growth in 2006 with sales up 43.4% to
$25.4m. European sales were up 34.8% to $5.4m driven by new independent sales
representatives in Russia and Eastern Europe and the beginning of the
replacement demand in the U.K. where the Company has had a presence for some 20
years.
Large line sales in the U.S. and Canada were also strong with sales increasing
44.5% to $18.8m. This was the result of strong non-residential construction and
the replacement cycle. Large line sales in Australia and Asia continue to grow
with a sales increase of $500K to $1.3m. This included our first SXP Large Laser
Screed sales to China to support the Costco expansion into China.
We reorganised our management team in 2006 to ensure that we have strong
management teams in each of our locations and for new territories where we see
the potential for further expansion. Recruiting qualified sales and support
personnel in North America was a focus in 2006. We have further enhanced our
recruitment and selection process and begun to see the result of these actions
adding considerable strength to our marketing and sales force especially in
those new emerging identified markets. In turn, as the year has progressed, we
have seen this product a positive contribution to our financial results. We
expect to be fully staffed in the field by the end of the first quarter of 2007
across all our key markets and, as we develop our dedicated Sales Training
College in Michigan in 2007, we expect new employees to be highly productive in
a shorter period of time.
Agents and distributors outside of North America are being recruited to expand
our sales and service presence in other markets. We have had early success in
South America and Europe and are optimistic that new distributors in China and
India will be equally successful. Our biggest industry trade show, World of
Concrete, was held in China for the first time in 2006. Our products were well
received and our key distribution partner has committed sales, service and
engineering resources to expand the Chinese market for our products.
Our product development process continues to produce innovative equipment for
the concrete industry. The newest of these, the HoseHog, was introduced in
August. The HoseHog was nominated in the Most Innovative Product contest
sponsored by Concrete Construction & Masonry Products Magazine in connection
with World of Concrete in January 2007 and won the award in the 'Experts'
Choice' category. Previously the CopperHead and the PowerRake have both won
awards in this contest in 2003 and 2006 respectively.
Our goal of maintaining high margins is key to our product development process.
To this end, we continue to assess the value proposition of our products and
carefully control our costs. Manufacturing operations in our Houghton Michigan
facility continued their focus on cost reductions in 2006.
The competitive landscape did not change significantly in 2006. Our field
research and experience show that alternative low-technology or manual methods
of placing and screeding concrete continue to be our main competition. The small
hand-held vibratory screeds, primarily sold by small and mid-sized manufacturers
of tools and equipment, are still being utilized by concrete contractors.
The initial public offering in November 2006 was successfully completed with
limited disruption to daily operations, as reflected in our very strong results
for the year to 31 December 2006. Employees met the new corporate structure with
enthusiasm and our focus as a Group is firmly on the continued delivery of
shareholder value.
Current Trading
Trading in the first three months of this year has been entirely in line with
management's expectations and the non-residential construction market remains
strong. We were encouraged by the record attendance at the annual industry
trade show in January which often acts as a barometer for our sales outlook for
the year. International attendance was particularly high and we secured a
number of sales leads in new territories. In the first quarter we also
reorganised our US and European sales organisation to place increased emphasis
on developing further sales in China, the Middle East and India.
Outlook
The outlook for 2007 appears strong in all markets. The non-residential
construction market is expected to continue to be strong throughout this year
and next. Somero is focused on continuing its growth in all areas. We will
look to expand our presence in emerging markets, introduce innovative new
products into new and existing markets, and add small line sales and
demonstration personnel in all regions. The Company's attractive fundamentals,
market position and products, together with an experienced management team,
provide us with a solid platform on which to continue to grow the business both
organically and, where appropriate, through selective acquisitions.
Financial Review
SUMMARY OF FINANCIAL RESULTS (1)
SOMERO SOMERO SOMERO
ENTERPRISES ENTERPRISES, ENTERPRISES,
GROUP INC. Combined (2) INC.
January 1, 2005 August 11, 2005 For the Year 12 Months
Through Through Ended Ended
Figures in US$ Thousands August 10, December 31, December 31, December 31,
2005 2005 2005 2006
REVENUE $ 25,769 $ 16,549 $ 42,318 $ 55,894
COST OF SALES 12,661 7,953 20,614 25,708
-
GROSS PROFIT 13,108 8,596 21,704 30,186
OPERATING EXPENSES:
Selling Expense 3,925 2,542 6,467 9,066
Engineering Expense 710 417 1,127 1,202
General & Administrative Expense 3,734 2,637 6,371 8,046
Total Operating Expenses 8,369 5,596 13,965 18,314
OPERATING INCOME 4,739 3,000 7,739 11,872
OTHER INCOME (EXPENSE)
Interest Expense (307) (1,162) (1,469) (3,714)
Interest Income 383 - 383 157
Foreign Exchange Gain (Loss) (90) (40) (130) 247
Other 37 (288) (251) (325)
INCOME BEFORE TAXES 4,762 1,510 6,272 8,237
PROVISION FOR INCOME TAXES 1,681 548 2,229 2,856
NET INCOME $ 3,081 $ 962 $ 4,043 $ 5,381
EPS Diluted $ 0.10 $ 0.03 $ 0.13 $ 0.17
Other Data:
EBITDA (3)(4) 5,598 4,208 9,806 14,696
Net Income Before Amortization 3,662 1,963 5,625 7,764
- - - -
Depreciation Expense 278 207 485 382
Amortization of Intangibles 581 1,001 1,582 2,383
Capital Expenditures 118 79 197 398
Notes:
1. On August 11, 2005, Somero Enterprises Inc., an entity formed by affiliates
of The Gores Group, LLC, acquired certain assets and assumed certain liabilities
from Dover Industries, Inc. For purposes herein and as described in the audited
financial statements, (i) the results for Somero Enterprises Group are
representative of the Somero Business for periods prior to August 11, 2005 and
(ii) the results of Somero Enterprises, Inc. are representative of the Somero
Business for periods as of August 11, 2005 and thereafter.
2. The combined 2005 results represent the summation of (i) the results for
January 1, 2005 through August 10, 2005 for Somero Enterprises Group and (ii)
the results for August 11, 2005 through December 31, 2005 for Somero
Enterprises, Inc. The accounting treatment for both periods is essentially the
same with the exception of amortization of intangibles and immaterial
differences in depreciation expense.
3. EBITDA and Net Income Before Amortization are not measurements of the
Company's financial performance under GAAP and should not be considered as an
alternative to net income, operating income or any other performance measures
derived in accordance with GAAP or as an alternative to GAAP cash flow from
operating activities as a measure of profitability or liquidity. EBITDA and Net
Income Before Amortization are presented herein because management believes they
are useful analytical tools for measuring the profitability and cash generation
of the business. 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 EBITDA is frequently used by securities analysts, lenders and others in
their evaluation of companies, its calculation of EBITDA may not be comparable
to other similarly titled measures reported by other companies.
4. EBITDA as used herein is a calculation of Operating Income plus Deprecation
Expense, Amortization of Intangibles and non-cash stock based compensation.
5. Net Income Before Amortization is a calculation of Net Income plus
Amortization of Intangibles.
Net Income to EBITDA reconciliation and Net income before amortization Reconciliation
SOMERO SOMERO SOMERO
ENTERPRISES ENTERPRISES, ENTERPRISES,
GROUP INC. Combined (2) INC.
January 1, 2005 August 11, 2005 For the Year For the Year
Through Through Ended Ended
Figures in US$ Thousands August 10, December 31, December 31, December 31,
2005 2005 2005 2006
EBITDA Reconciliation
NET INCOME $ 3,081 $ 962 $ 4,043 $ 5,381
Tax Provision 1,681 548 2,229 2,856
Interest Expense 307 1,162 1,469 3,714
Interest income (383) - (383) (157)
Foreign Exchange Gain 90 40 130 (247)
Other Expense (37) 288 251 325
Depreciation 278 207 485 382
Amortization 581 1,001 1,582 2,383
Stock based compensation - - - 59
EBITDA $ 5,598 $ 4,208 $ 9,806 $ 14,696
Net Income before Amortization
Reconciliation
Net Income $ 3,081 $ 962 $ 4,043 $ 5,381
Amortization $ 581 $ 1,001 $ 1,582 $ 2,383
Net Income before Amortization $ 3,662 $ 1,963 $ 5,625 $ 7,764
Revenues
Somero's consolidated revenues for the twelve months ended 31 December 2006 were
$55.9 million, which represented a 32.1% increase from $42.3 million in
consolidated revenues for the Twelve months ended 31 December 2005. Somero's
revenues consist primarily of sales of new large line products (the SXP Large
Laser Screed and its predecessors), sales of new small line products (the
CopperHead and PowerRake) and other revenues, which consist of, among other
things, revenue from sales of spare parts, refurbished machines and accessories.
The overall increase in revenues for the Twelve months ended 31 December 2006 as
compared to the Twelve month period ended 30 June 2005 was driven by growth in
each of Large Line Sales, Small Line Sales and Other Revenues. The table below
shows the breakdown between large line sales, small line sales and other
revenues during the Twelve months ended 31 December 2005 (unaudited) and 2006:
12 Months ended 12 Months ended
31 December 2005 31 December 2006
Percentage Percentage
(in millions) of net sales (in millions) of net sales
Large line Sales $ 17,705 41.8% $ 25,394 45.4%
Small Line Sales $ 12,515 29.6% $ 15,930 28.5%
Other Revenues $ 12,098 28.6% $ 14,570 26.1%
Total $ 42,318 100% $ 55,894 100%
Large line sales increased from $17.7m for the twelve months ended 31 December
2005 to $25.4m for the twelve month period ended 31 December 2006. This increase
in revenue was driven by a 32.3% increase in unit volume (from 71 units to 94
units) and increases in average selling prices. The higher unit volume was
driven primarily by increased replacement demand in the United States and
increased international sales.
Small line sales increased from $12.5m for the twelve months period 31 December
2005 to $15.9m for the twelve month period ended 31 December 2006. This increase
was driven largely by the August 2005 introduction of the PowerRake, which
generated $5.3m in revenues in the twelve months ended 31 December 2006 from the
sale of 127 units. Increased sales of CopperHeads also contributed to revenue
growth, with 256 units sold during the twelve months ended 31 December 2006
(generating revenues of $10.7m), compared with 246 units sold during the twelve
months ended 31 December 2005 (generating revenues of $10.1m). These increases
have resulted from changes made in 2005 to the Small line sales team structure
to create specialist Small line demonstration teams, which has led to an
increase in the number of demonstrations performed.
Other revenues, including sales of spare parts, refurbished machines and
accessories, increased from $12.1 million during the twelve months ended 31
December 2005 to $14.6 million during the twelve months ended 31 December 2006.
This revenue growth resulted primarily from the increased installed base of
machines and support kits and accessories available for the CopperHead and
PowerRake products. Included in other sales were the sales of 7 sets of the new
Hose Hog product. The Hose Hog was introduced in August of 2006.
International sales growth has also contributed to increases in sales revenue.
Sales to customers located in North America comprises the majority of Somero's
revenue, constituting 72.1% and 72.3% of total revenue for the twelve months
ended 31 December 2006 and 2005, respectively, while sales to customers in
Europe, South Africa and the Middle East combined contributed 21.8% and 20.7%,
respectively. The remaining sales in these periods were to customers in Asia,
Australia, Central America and South America. The Company has been focused on
expanding international sales, with revenues outside North America increasing to
$15.6m during the twelve months ended 31 December 2006, an increase of 33.3%
over revenues of $11.7 million during the twelve months ended 31 December 2005.
Sales in Europe, South Africa and the Middle East generated $12.2 million during
the twelve months ended 31 December 2006, compared with $8.8 million during the
twelve months ended 31 December 2005. Sales of the Large Laser Screed and the
Small line product in these regions increased by 34.8% and 36.1% respectively
between these two periods. Sales in Asia, Australia and Central and South
America represented $3.4 million during the twelve months ended 31 December
2006, as compared to $3.0 million during the twelve months ended 31 December
2005. This increase was driven by an increase in sales of Large Laser Screed to
five units during the twelve months ended 31 December 2006, compared with three
units during the corresponding period of 2005.
Despite the focus on international expansion, North American (the United States
and Canada) sales experienced the highest total growth of any individual region
during these periods. Sales to customers in North America were $40.3m during the
twelve months ended 31 December 2006, a 31.8% increase over North American sales
of $30.6m during the twelve months ended 31 December 2005.
Gross Profit
Somero's gross profit for the twelve months ended 31 December 2006 was $30.2
million, a 39.1% increase over $21.7 million for the twelve months ended 31
December 2005. As a percentage of revenue, gross profit increased to 54.0% for
the twelve months ended 31 December 2006, from 51.3% for the twelve months ended
31 December 2005. The increase in gross profit as a percentage of revenue has
been due to increased sales volumes, increasing list prices, an improvement in
product mix with an increasing percentage of total revenues derived from sales
of recently-introduced products that have higher margins, such as the
CopperHead, PowerRake, Hose Hog and spare parts, and management's strategy of
implementing manufacturing cost reduction initiatives.
Operating Expenses
Operating expenses were $18.3m for the twelve months ended 31 December 2006, a
31.1% increase over $14.0m for the twelve months ended 31 December 2005. The
increase in operating expenses, which consists of selling, engineering and
general and administrative expenses, resulted primarily from higher amortisation
expenses (an increase of $0.8m), an increase in total sales and the new costs
of being a public company, with operating expenses equalling 32.8% and 33.0% of
revenues for the twelve months ended 31 December 2006 and for the twelve months
ended 31 December 2005, respectively.
Selling expense increased by $2.6m, or 40.2%, to $9.1 m for the twelve months
ended 31 December 2006, as compared with $6.5m for the twelve months ended 31
December 2005. The increase in selling expense was primarily due to increased
sales, which resulted in increased commissions, additional sales support
required for the increased sales of the small line Copperhead and PowerRake
products, both of which require more product demonstration efforts in the sales
process, and increased support and commissions for a higher mix of external
international sales representatives.
Engineering expense increased by $0.1m, or 6.7%, to $1.2m for the twelve months
ended 31 December 2006 from $1.1m for the twelve months ended 31 December 2005.
The main increase was due to the hiring of an additional employee in the second
half 2005 engaged in future product development, including the development of
the HoseHog, which was launched in August 2006.
General and administrative expense increased $1.7m, or 26.3% to $8.0m for the
twelve months ended 31 December 2006 from $6.4m for the twelve months ended 31
December 2005. A substantial amount of the increase in general and
administrative expense resulted from increased amortisation of intangible assets
resulting from the write-up of those intangible assets from historical book
value in connection with the Somero Acquisition in August 2005. Depreciation and
amortisation increased from $2.1m to $2.8m from the twelve months ended 31
December 2005 to the twelve months ended 31 December 2006, resulting primarily
from increased amortisation attributable to the write-up of the book value of
intangible assets following the Somero Acquisition. Further detail can be found
in the Company's Admission Document prepared for its listing on AIM in November
2006.
Other Income (Expense)
Other income (expense) was ($3.6)m for the twelve months ended 31 December 2006,
compared to ($1.5)m for the twelve months ended 31 December 2005. Other income
(expense) consists of interest income and expense, foreign exchange gains and
losses, gains and losses on disposal of assets, and other expenses consisting
primarily of management fees paid to Gores. The increase in other income
(expense) has resulted primarily from increased interest expense.
Interest expense was $3.7m for the twelve months ended 31 December 2006 compared
to $1.5m in the twelve months ended 31 December 2005, resulting primarily from
increased indebtedness following the Somero Acquisition and, to a lesser extent,
rising interest rates during the 2006. Subsequent to the year end on March 16,
Somero has entered into a new financing agreement with Citizens Bank New
Hampshire, a wholly owned subsidiary of The Royal Bank of Scotland Group plc
which reduced the rates to 6.55% (fixed for five years) for $10.0m of the debt,
LIBOR plus 1.40% for a revolving portion, and allows for reductions of loan
principal with excess cash on a revolving basis. The new financing will result
in $1.3m in unamortized loan origination fees being written off in the first
half of 2007.
Foreign exchange gain was $0.2m for the twelve months ended June 30, 2006,
compared with a foreign exchange loss of $0.1m for the twelve months ended 31
December 2005 resulting primarily from sales made to Europe, combined with a
weakening U.S. Dollar compared to the Pound Sterling and the Euro.
Other expense was $0.3m for the twelve months ended 31 December 2006, compared
with $0.3m for the twelve months ended 31 December 2005, primarily resulting
from management fees of $0.3m paid to Gores during that period.
Provision for Income Taxes
Provision for income taxes increased by $0.6m, or 28.1%, to $2.9m in the twelve
months ended 31 December 2006, as compared with $2.2m for the twelve months
ended 31 December 2005. Overall, Somero's effective tax rate decreased from
35.5% to 34.7% due to a decrease in state income tax due to apportionment
changes, and total taxes in the UK were higher in 2006 at a lower statutory rate
than the US (32% v. 34%).
Net Income
Net income increased by $1.3m, or 33.1%, to $5.4m in the twelve months ended 31
December 2006 as compared with $4.0m for the twelve months ended 31 December
2005. The primary cause of the increase in net income was increased sales and
gross margin offset by increased operating expenses.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 and 2006 (in thousands, except share amounts)
ASSETS 2005 2006
CURRENT ASSETS:
Cash and cash equivalents $ 2,391 $ 1,895
Accounts receivable-net 2,644 4,101
Inventories-net 4,504 4,912
Prepaid expenses and other assets 577 584
Income tax receivable - 211
Deferred tax asset 47 152
Total current assets $ 10,163 $ 11,855
PROPERTY, PLANT AND EQUIPMENT-net 4,834 4,712
INTANGIBLE ASSETS-net 23,987 21,616
GOODWILL 16,400 16,400
DEFERRED FINANCING COSTS 1,826 1,349
OTHER ASSETS 45 113
TOTAL ASSETS $ 57,255 $ 56,045
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable-current portion $ 1,500 $ 2,400
Accounts payable 2,384 2,842
Accrued expenses 2,373 3,125
Due to related party 710 -
Income taxes payable 374 -
Obligations under capital leases current portion - 657
Total current liabilities 7,341 9,024
Notes payable, net of current portion 30,500 18,600
Obligations under capital leases net of current portion 657 -
Deferred income taxes 15 146
TOTAL LIABILITIES 38,513 27,770
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value, 50 million shares authorized,
no shares issued and outstanding - -
Common stock-Series A, $.001 par value, 1,000 shares
authorized, 1,000 issued and outstanding at
December 31, 2005, cancelled in 2006 - -
Common stock-Series B, $.001 par value, 99,000 shares
authorized, 94,000 issued and outstanding at
December 31, 2005, cancelled in 2006 - -
Common stock, $.001 par value, 80 million shares authorized,
34,281,968 shares issued and outstanding at
December 31, 2006 - 4
Additional paid in capital 17,783 21,926
Retained earnings 962 6,343
Other comprehensive income (loss) (3) 2
Total stockholder's equity 18,742 28,275
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 57,255 $ 56,045
See notes to consolidated financial statements.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005
AND FOR THE YEAR ENDED DECEMBER 31, 2006
(in thousands)
August 11, 2005 Year Ended
Through December 31,
December 31, 2005 2006
REVENUE $ 16,549 $ 55,894
COST OF SALES 7,953 25,708
8,596 30,186
GROSS PROFIT
OPERATING EXPENSES
Selling expenses 2,542 9,066
Engineering expenses 417 1,202
General and administrative expenses 2,637 8,046
Total operating expenses 5,596 18,314
OPERATING INCOME 3,000 11,872
OTHER INCOME (EXPENSE)
Interest expense (1,162) (3,714)
Interest income - 157
Foreign exchange gain (loss) (40) 247
Other (288) (325)
INCOME BEFORE INCOME TAXES 1,510 8,237
PROVISION FOR INCOME TAXES 548 2,856
NET INCOME $ 962 $ 5,381
EARNINGS PER COMMON SHARE
Basic $ 0.03 $ 0.18
Diluted $ 0.03 $ 0.17
See notes to consolidated financial statements
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005 AND
FOR THE YEAR ENDED DECEMBER 31, 2006 (in thousands, except share data)
Common Stock Common Stock
Series A Series B Common Stock
Shares Amount Shares Amount Shares Amount
BALANCE-August 11,
2005 1,000 $ - - $ - -
Issuance of shares - - 94,000 - -
Contributed capital - - - - -
Transfer of loan from
parent to equity - - - - -
Cumulative translation
adjustment - - - - -
Net income - - - - -
BALANCE-December 31,
2005 1,000 - 94,000 - - -
Amended and restated
certificate of
incorporation (10/05/06) (1,000) - (94,000) - 30,000,000 -
Issuance of common stock
(11/01/06)
net of issuance costs 4,281,968 4
Cumulative translation
adjustment - - - - - -
Net Income - - - - - -
Share based compensation
Dividends paid - - - - - -
BALANCE-December 31,
2006 - $ - - $ - 34,281,968 $ 4
See notes to consolidated financial statements.
Additional Other Total
Paid In Retained Comprehensive Stockholder's Comprehensive
Capital Earnings Income (Loss) Equity Income
BALANCE-August 11,
2005 $ - $ - $ - $ - $ -
Issuance of shares - - - - -
Contributed capital 1,100 - - 1,100
Transfer of loan from
parent to equity 16,683 - - 16,683
Cumulative translation
adjustment - - (3) (3) (3)
Net income - 962 - 962 962
BALANCE-December 31,
2005 17,783 962 (3) 18,742 $
959
Amended and restated
certificate of
incorporation (10/05/06) - - - - -
Issuance of common stock
(11/01/06)
net of issuance costs 5,874 - - 5,878 -
Cumulative translation
adjustment - - 5 5 5
Net Income - 5,381 - 5,381 5,381
Share based compensation 59 59
Dividends paid (1,790) - - (1,790) -
BALANCE-December 31,
2006 $ 21,926 $ 6,343 $ 2 $ 28,275 $ 5,386
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005 AND
THE YEAR ENDED DECEMBER 31, 2006
(in thousands)
August 11, 2005 Year
Through Ended
December 31, 2005 December 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 962 $ 5,381
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes (32) 26
Depreciation and amortization 1,208 2,765
Amortization of deferred financing costs - 477
Gain on sale of assets - (15)
Realized gain (loss) on currency exchange 40 -
Share based compensation - 59
Working capital changes:
Accounts receivable (622) (1,457)
Inventories (157) (394)
Prepaid expenses and other assets (291) (7)
Income taxes receivable - (211)
Other assets (45) (68)
Accounts payable and other liabilities 77 1,210
Income taxes payable 375 (374)
Net cash provided by operating activities 1,515 7,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment - 132
(Expenditures)/Reimbursement for loan and acquisition
costs-net (1,826) -
Payment for purchase of business-net of cash (46,735) -
Working capital advance paid to Parent (265) -
Property and equipment purchases (79) (398)
Net cash used in investing activities (48,905) (266)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial debt financing from parent 47,000 -
Borrowings from additional financing 32,000 -
Working capital advance from Parent 41 -
Contributed capital 1,100 -
Payment for financing costs - (5)
Repayment of notes payable - (11,000)
Repayment of working capital advance from parent (30,317) (710)
Payment of dividends - (1,790)
Contribution from parent - 1,700
Proceeds from initial public offering of common stock, net of - 4,178
costs
Net cash provided by (used in) financing activities 49,824 (7,627)
Effect of exchange rates on cash and cash equivalents (43) 5
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,391 (496)
CASH AND CASH EQUIVALENTS:
Beginning of period - 2,391
End of period $ 2,391 $ 1,895
See notes to consolidated financial statements.
SOMERO ENTERPRISES, INC. and SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2006 AND FOR THE PERIOD FROM AUGUST 11, 2005 THROUGH
DECEMBER 31, 2005 AND THE YEAR ENDED DECEMBER 31, 2006
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization-Somero Enterprises, Inc. (formerly GTG Portfolio Holdings Inc. and
together with its subsidiaries, the 'Company'), was incorporated on November 12,
2002 and held no assets and conducted no business operations until August 10,
2005. On August 10, 2005, Somero Enterprises, Inc. acquired certain assets and
assumed certain liabilities from various affiliates of Dover Industries, Inc.
(collectively, the 'Somero Business').
Nature of Business- The Company designs, manufactures, refurbishes, sells and
distributes concrete leveling, contouring and placing equipment, related parts
and accessories, and training services worldwide. The operations are conducted
from a corporate office in Jaffrey, New Hampshire, a single assembly facility
located in Houghton, Michigan, and a European distribution office in the United
Kingdom.
Common Stock - The Company had 95,000 shares of Series A and Series B common
stock issued and outstanding at December 31, 2005. On October 5, 2006, the
Company amended and restated its certificate of incorporation to allow for
80,000,000 authorized shares of common stock. The Board of Directors voted on a
stock split of 315.79:1 prior to its initial public offering, converting the
previously issued 95,000 shares of common stock into 30,000,000 shares of issued
and outstanding common stock. Series A and Series B shares were cancelled as
part of the amendment to the certificate of incorporation.
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. These financial statements have been presented to
reflect the operations of Somero Enterprises, Inc. since the Dover Industries
transaction noted above.
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.
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 primarily located in the
United States. 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. Reserves, if necessary,
are established for amounts determined to be uncollectible based on specific
identification and historical experience. As of December 31, 2005 and December
31, 2006, the allowance for doubtful accounts was approximately $110,000 and
$97,000, 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 repayment term of the debt instrument, which is four years
from the debt inception date.
Intangible Assets and Goodwill- Long-Lived Assets, Including Goodwill and Other
Acquired Intangible Assets
Intangible assets consist principally of customer relationships and patents, and
are carried at their fair value, 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.
The Company evaluates the carrying value of long-lived assets, excluding
goodwill, at least annually for impairment or when events and circumstances
indicate the carrying amount of an asset may not be recoverable. For the periods
ended December 31, 2005 and December 31, 2006, no such events or circumstances
were identified. 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 - products-The Somero Business 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 collectibility 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.
Revenue Recognition - sale of equipment under recourse financing-The Company
initially defers recognition of revenue associated with equipment sold under
recourse financing contracts. Revenue is recognized over the life of the
contractual obligation, as is more fully described in note 6.
Warranty Reserve-The Company provides warranties on all equipment sales ranging
from three months to one year, depending on the product. Warranty reserves are
estimated net of the warranty passed through to the Company from vendors,
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 on buildings
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 5 years for machinery and
equipment.
Income Taxes-The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income
Taxes'. 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 carryforwards. 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.
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.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, 'The Fair Value Option for
Financial Assets and Financial Liabilities', which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both the complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective fiscal years beginning after November 15,
2007. We have not completed our evaluation of SFAS No. 159, but we do not expect
the adoption of SFAS No. 159 to have a material effect on our operating results
or financial position.
In June 2006, the FASB issued Interpretation No. 48, 'Accounting for Uncertainty
in Income Taxes' an interpretation of FASB Statement No. 109, which is effective
for fiscal years beginning after December 15, 2006. The interpretation provides
that a tax position is recognized if the enterprise determines that it is more
likely than not that a tax position will be sustained based on the technical
merits of the position, on the presumption that the position will be examined by
the appropriate taxing authority that would have full knowledge of all relevant
information. The tax position is measured at the largest amount of benefit that
is greater than 50% likely of being realized upon ultimate settlement. The
interpretation also provides guidance on removal from recognition,
classification, interest and penalties, accounting for interim periods and
transition. The Company is in the process of evaluating the impact that adoption
of the interpretation will have on its financial statements.
Translation of Foreign Currencies - The functional currency for the Company's
foreign subsidiary is the UK Pound Sterling. 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 exposed to
market risks related to fluctuations in foreign exchange rates because some
sales transactions, and the assets and liabilities of its foreign subsidiaries,
are denominated in foreign currencies. The Company had no outstanding forward
exchange contracts as of December 31, 2005 and December 31, 2006. Gains and
losses from transactions denominated in foreign currencies and forward exchange
contracts are included in the Company's net income as foreign exchange gain
(loss) in the accompanying consolidated statements of operations.
Comprehensive Income - Comprehensive income, which is the combination of
reported net income and other comprehensive income, was composed only of the
Company's net income and foreign exchange gains (losses) for the period from
August 11, 2005 through December 31, 2005, and the year ended December 31, 2006.
Total comprehensive income for the periods was approximately $959,000 and
$5,386,000, respectively.
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 adjustment to income that would result from the assumed
issuance. 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 (in thousands):
2005 2006
Net Income $ 962 $ 5,381
Basic Weighted Average Shares Outstanding 30,000 30,714
Net Dilutive Effect of Stock Options -0- 47
Diluted Weighted Average Shares Outstanding
30,000 30,761
The Company had 95,000 shares outstanding at December 31, 2005 and issued a
stock split of 315.79:1 in 2006, prior to its initial public offering. Share
and per share amounts have been adjusted to reflect the stock split for the
periods ended December 31, 2005 and 2006.
3. BUSINESS COMBINATION
On August 10, 2005, the Company acquired certain assets and assumed certain
liabilities of the Somero Business from Dover whose results of operations are
included in the consolidated results of operations presented herein for the
period from August 11, 2005 to December 31, 2005. The Somero Business was
formerly a division of Dover Industries, Inc. The aggregate purchase price was
$46,735,000, and the Company incurred $1,500,000 of transaction costs.
The Company accounted for the acquisition using the purchase method of
accounting in accordance with SFAS No. 141, 'Business Combinations'. The Company
engaged a third-party valuation specialist to assist in the appraisal of
intangible assets and real and personal property acquired. The total purchase
price has been allocated based upon the fair value of the assets acquired and
liabilities assumed. The excess purchase price above the fair value of the
assets acquired and liabilities assumed has been recorded as goodwill.
Identifiable intangible assets acquired were valued using assumed cash flow
estimates, and applicable discount rates. The Company identified intangible
assets consisting of customer relationships and patents, which will be amortized
over a period of 8 to 12 years, as is more fully described in note 5. The
allocation of the purchase price consideration is as follows (in thousands):
Accounts receivable - net $ 2,033
Inventory - net 4,517
Prepaid expenses 286
Property and equipment 4,305
Intangible assets 41,388
Total assets acquired 52,529
Total liabilities assumed (5,794)
Purchase price $ 46,735
4. INVENTORIES
Inventories consisted of the following at December 31, 2005 and December 31,
2006 (in thousands):
2005 2006
Raw materials $ 2,266 $ 2,422
Finished goods and work in process 2,931 2,679
5,197 5,101
Less: reserve for excess and obsolete inventory (693) (189)
Total $ 4,504 $ 4,912
5. GOODWILL AND INTANGIBLE ASSETS
In 2005 and 2006, the Company performed its annual SFAS No. 142 impairment test
and determined that no impairment loss should be recognized. Goodwill in the
amount of $16,400,000 was recorded in the acquisition of the Somero Business and
the majority is deductible for tax purposes.
The following table reflects intangible assets that are subject to amortization
under the provisions of SFAS No. 142 (in thousands):
Weighted average
Amortization
Period 2005 2006
Capitalized Cost
Customer Relationships 8 years 6,300 6,300
Patents 12 years 18,538 18,538
Other Intangibles 3 years 150 155
$ 24,988 $ 24,993
Accumulated Amortization
Customer Relationships 8 years 328 1,116
Patents 12 years 644 2,189
Other Intangibles 3 years 29 72
$ 1,001 $ 3,377
Net Carrying Costs
Customer Relationships 8 years 5,972 5,184
Patents 12 years 17,894 16,349
Other Intangibles 3 years 121 83
$ 23,987 $ 21,616
Amortization expense associated with the intangible assets for the period from
August 11, 2005 through December 31, 2005 and the year ended December 31, 2006
was approximately $1,001,000 and $2,376,000, respectively. Future amortization
on intangible assets is as follows (in thousands) at:
December 31,
2007 $ 2,382
2008 2,362
2009 2,332
2010 2,332
Thereafter 12,208
$ 21,616
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31, 2005
and December 31, 2006 (in thousands):
2005 2006
Land $ 207 $ 207
Buildings and improvements 3,398 3,432
Machinery and equipment 600 732
Property and Equipment held under capital leases 658 657
(See Note 8)
Equipment sold under recourse contracts 178 178
5,041 5,206
Less: accumulated depreciation and amortization (207) (494)
$ 4,834 $ 4,712
Depreciation expense for the period August 11, 2005 through December 31, 2005
and the year ended December 31, 2006, was approximately $207,000 and $382,000,
respectively.
The Company previously offered a facility to customers whereby the Company
guaranteed the financing on the sale of equipment. Equipment previously sold
under recourse contracts continues to be included in Property, Plant and
Equipment at a net book value at December 31, 2005 and December 31, 2006 of
approximately $147,000 and $78,000, respectively. Revenue under these
arrangements has been deferred and recognized over the life of the financing
arrangement, approximately 5 years. Deferred revenue of approximately $234,000
and $84,000 related to these transactions was included in accrued expenses at
December 31, 2005 and 2006, respectively. The Company has made no further sales
under recourse arrangements in 2005 or 2006.
7. DEBT OBLIGATIONS
Summary-The Company's debt obligations consisted of the following at December
31, 2005 and December 31, 2006 (in thousands):
2005 2006
Bank debt:
Term loans $ 32,000 $ 21,000
Less debt obligations due within one year 1,500 2,400
Obligations due after one year $ 30,500 $ 18,600
Credit Facility-The Company has a credit facility with a financial institution,
dated November 22, 2005 and amended October 4, 2006, that is composed of the
following at December 31, 2006:
• $3,000,000 revolving working capital line of credit under which
amounts borrowed are due on demand
• $21,500,000 term loan
The working capital line of credit loan bears interest at the Prime Rate (as
defined in the financing agreement) plus 0.75% per annum (8.0% at December 31,
2005 and 9.0% at December 31, 2006). The term loan under the credit facility
bears interest at the Prime Rate plus 2.25% per annum (9.5% at December 31, 2005
and 10.5% at December 31, 2006). All borrowings are secured by substantially all
of the assets of the Company and contain a number of restrictive covenants that,
among other things, limit the ability of the Company to make distributions to
shareholders, make capital expenditures, and incur indebtedness. In addition,
the Company is required to comply with quarterly debt service coverage ratios
and minimum trailing twelve month EBITDA requirements. The credit facility
expires on November 22, 2010.
The amendment to the term loan required the Company to prepay the loan in an
aggregate principal amount equal to $9,500,000 no later than three business days
following the receipt of the proceeds from the initial public offering (see Note
16). Payment was made on November 7, 2006. See Note 20 for further discussion
of debt obligations.
Future Payments-The future payments by year under the Company's debt obligations
are as follows (in thousands) at:
December 31,
2007 $ 2,400
2008 2,400
2009 2,400
2010 13,800
Total payments $ 21,000
Interest-Interest expense on the credit facility during the period August 11,
2005 through December 31, 2005, and the year ended December 31, 2006, was
approximately $457,000 and $3,618,000, respectively, related to the debt
obligation. Interest expense paid by the Company's U.K. subsidiary was
approximately $0 and $13,000 for the period August 11, 2005 through December 31,
2005, and the year ended December 31, 2006, respectively.
8. CAPITAL LEASE OBLIGATIONS
Summary-The Company leases a building in Jaffrey, New Hampshire, which is owned
by a former co-owner of the Somero Business. The lease has a condition in which
the owner of the building can require the Company to purchase the building at
fair value at the end of the lease. Accordingly, the lease requires treatment
as a capital lease.
At December 31, 2006, the gross amount of property and related accumulated
amortization recorded under the capital lease were as follows (in thousands):
2006
Building $ 657
Less: Accumulated Depreciation (23)
$ 634
Future Payments-The future payments under the Company's capital lease obligation
are as follows at December 31, 2006 (in thousands):
2007 $ 657
2008 -
2009 -
2010 -
Thereafter -
Net minimum lease payments 657
Interest-Interest paid during the period August 11, 2005 through December 31,
2005, and the year ended December 31, 2006, was approximately $40,000 and
$83,000, respectively, related to the capital lease obligation.
On January 10, 2007, the Company acquired the building for approximately
$657,000.
9. 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 matches 50% of the employee's contribution, up to the first 4% of the
employee's salary, for the period from August 11, 2005 through December 31, 2005
and matches 75% of the employee's contribution, up to the first 4% for the year
ended December 31, 2006. The Company match vests after one year of service with
the Company. The Company contributed approximately $21,000 and $133,000 to the
savings and retirement plan during the period from August 11, 2005 through
December 31, 2005 and the year ended December 31, 2006, respectively.
10. OPERATING LEASES
The Company leases property, vehicles and office equipment under leases
accounted for as operating leases. Future minimum payments by year under non
cancelable operating leases with initial terms in excess of one year were as
follows (in thousands):
December 31,
2006
2007 $ 183
2008 146
2009 96
2010 15
After 2010 -
Total $ 440
Total rent expense under operating leases was approximately $50,000 and $172,000
during the period August 11, 2005 through December 31, 2005, and the year ended
December 31, 2006, respectively.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company had the following cash and noncash transactions for the years ended
December 31,
2005 2006
Cash paid for interest $ 1,162 $ 3,710
Cash paid for taxes $ 206 $ 3,573
Noncash transactions
Transfer of stockholder loan to equity $ 16,683 $ -
12. TRANSACTIONS WITH RELATED PARTIES
During the period from August 11, 2005 through December 31, 2005, the Company
received a $47,000,000 loan from its sole shareholder, Somero Holdings, LLC of
which $30,317,000 was repaid via the credit facility discussed in Note 7. The
remaining balance of $16,683,000 was contributed to equity as additional paid in
capital in 2005. At December 31, 2005 and December 31, 2006, the Company had
payables due to Somero Holdings, LLC, its majority shareholder, on the
accompanying consolidated balance sheets of approximately $710,000 and $0,
respectively. These advances relate to interest on the original acquisition
financing and working capital advances not repaid by December 31, 2005. During
the period from August 11, 2005 through December 31, 2005, and the year ended
December 31, 2006, the Company incurred interest in the amount of approximately
$706,000 and $2,000 relating to this payable, respectively. This payable was
repaid in November 2006.
The Company has a management fee agreement and a 401(k) retirement plan through
the investment manager of Somero Holdings, LLC. Fees paid under the management
fee agreement were approximately $167,000 and $336,000 for the period from
August 11, 2005 through December 31, 2005, and the year ended December 31, 2006,
respectively. The Company took over management of its 401k plan in November
2006 and the management fee ended.
13. 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
foreign competitors. Any of the foregoing may significantly affect management's
estimates and the Company's performance. At December 31, 2005, and December
31, 2006, the Company had receivables from two customers which represented
approximately 25% and 16% of total accounts receivable, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
senior management. The terms of these agreements range from six months to one
year and include noncompete and nondisclosure provisions as well as providing
for defined severance payments in the event of termination.
15. INCOME TAXES
The Company calculates current and deferred income tax expense and deferred
income tax assets and liabilities in accordance with SFAS No. 109.
The provision for income taxes at December 31, 2005 and December 31, 2006
includes the following (in thousands):
2005 2006
Current income tax
Federal $507 $2,314
State 84 193
Foreign (11) 323
Total current income tax expense $580 $2,830
Deferred tax expense
Federal ($28) $23
State (4) 3
Foreign - -
Total deferred tax (benefit) expense ($32) $26
Total tax expense $548 $2,856
The components of the net deferred income tax asset at December 31 were as
follows (in thousands):
2005 2006
Deferred tax asset (liability)
Depreciation $38 $28
Intangibles (53) (195)
Share-based compensation - 21
Other 47 152
Net deferred tax asset (Liability) $32 $6
Current $47 $152
NonCurrent (15) (146)
$32 $6
The statutory federal income tax rate was 34% for the period from August 11,
2005 through December 31, 2005, and the year ended December 31, 2006.
Differences between the income tax expense reported in the statement of
operations and the amount computed by applying the statutory federal income tax
rate to earnings before tax are due to the following items (in thousands):
2005 2006
Consolidated Income before tax $1,510 $8,237
Statutory rate 34% 34%
Statutory tax expense $513 $2,801
State taxes 53 164
IRC Section 199 Deduction (17) (74)
Meals and Entertainment 13 53
Other (14) (88)
Actual tax expense $548 $2,856
In assessing the ability to realize net deferred tax assets, management
considers whether it is more likely than not that some portion of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment, but must give greater weight to recent historical operating losses.
Based on those considerations, management believes it is more likely than not
that the Company will realize the benefits of the deferred tax asset at December
31, 2006, and has not recognized a valuation allowance against the total net
deferred tax asset.
The Company intends to reinvest the undistributed earnings of its foreign
subsidiary and accordingly has not provided for taxes on this undistributed
amount.
16. INITIAL PUBLIC OFFERING
On November 1, 2006, the Company offered 4,281,968 shares of common stock at
$2.34 per share in its initial public offering. All shares were purchased and
the Company received $5,878,000 net of fees. Total fees for the transaction
were $5,570,000.
Prior to the initial public offering, the Board declared a dividend of
$1,790,000, which was paid concurrent with the initial public offering to
shareholders of record as of October 5, 2006. Immediately after the offering
and upon receipt of the dividend, Somero Holdings LLC reimbursed the Company
$1,700,000 for costs related to the transaction. The dividend and subsequent
reimbursement have been recorded as components of paid in capital.
17. RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as incurred. Total research
and development expense for the research and development tax credit was
approximately $214,000 and $752,000 for the period August 11, 2005 through
December 31, 2005, and the year ended December 31, 2006, respectively.
18. SALES BY GEOGRAPHIC LOCATION
The Somero Business sells its product to customers throughout the world. The
breakdown by location is as follows (in thousands):
2005 2006
United States and U.S. Possessions $ 11,503 $ 38,354
Canada 569 2,262
Rest of World 4,477 15,278
Total $ 16,549 $ 55,894
19. STOCK BASED COMPENSATION
The Company accounts for its stock option issuances under Statement of Financial
Accounting Standard No. 123 (revised 2004), 'Share-Based Payment,' ('SFAS No.
123R') which was issued by the FASB in December 2004. SFAS No. 123R requires
recognition of 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). SFAS No. 123R also requires measurement of the cost of employee
services received in exchange for an award based on the grant-date fair value of
the award.
The Company has one share-based compensation plan, which is described below. The
compensation cost that has been charged against income for the plan was
approximately $59,000 for the year ended December 31, 2006. The income tax
benefit recognized for share-based compensation arrangements was approximately
$21,000 for the year ended December 31, 2006.
In October 2006, the Company implemented the 2006 Stock Incentive Plan (the
'Plan'). The Plan authorizes the Board of Directors to grant incentive and
nonqualified stock options to employees, officers, service providers and
directors of the Company for up to 3,400,000 shares of its common stock. Options
granted under the Plan have a term of up to ten 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 life 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 a average vesting period of 3
years. The following table illustrates the assumptions for the Black-Scholes
model used in determining the fair value of options granted to employees for the
year ended December 31, 2006.
Year Ended
December 31, 2006
Dividend yield 2.96%
Risk-free interest rate 4.52%
Volatility 25.10%
Expected life ( in years) 4.4
A summary of option activity under the stock option plans as of December 31,
2006, and changes during the year then ended is presented below:
Weighted -
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term (yrs) Value
Outstanding at
January 1, 2006 - $ - $ - $ -
Granted 2,656,832 2.34 9.84 745,166
Exercised - - - -
Forfeited or
expired - - - -
Outstanding at
December 31,
2006 2,656,832 $ 2.34 $ 9.84 $ 745,166
Exercisable at
December 31,
2006 - - - -
The weighted-average grant-date fair value of options granted during the year
ended December 31, 2006 was $.48.
A summary of the status of the Company's non-vested shares as of December 31,
2006, and changes during the year then ended is presented below:
Weighted Average
Shares Grant-Date Fair Value
Non-vested shares as of December 31, 2005
Granted 2,656,832 $1,284,000
Vested - -
Forfeited - -
Non-vested shares as of December 31, 2006 2,656,832 $1,284,000
As of December 31, 2006, there was $1,225,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Company's stock option plans. That cost is expected to be recognized over a
period of 3 years.
20. SUBSEQUENT EVENTS
The Company executed a credit facility with a financial institution on March 16,
2007 that is composed of the following:
• $14,000,000 Five year Secured Reducing Revolving Line of Credit
• $10,000,000 Five year Secured Term Loan
The Company has fixed the notes for the term loan and the revolving facility
through a series of swaps. The new credit facilities are secured by
substantially all of the Company's assets and contain a number of restrictive
covenants that among other things limit the ability of the company to incur
debt, issue capital stock, change ownership and dispose of certain assets.
The new term loan and a portion of the new revolving loan were used to pay off
in full the December 31, 2006 term debt which will result in a one time,
non-cash write off the unamortized loan origination fee of approximately
$1,300,000 and a prepayment penalty of $235,000.
Future Payments- The future payments by year under the Company's Revolving Line
of Credit and the Term Loan are as follows (in thousands).
December 31,
2007 1,071
2008 3,000
2009 3,000
2010 3,000
Thereafter 9,743
Total Payments 19,814
This information is provided by RNS
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