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. |
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For immediate release |
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18 May 2010 |
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Somero Enterprises, Inc. ® |
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Full year results for the twelve months to 31 December 2009 |
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Somero Enterprises, Inc. ®, ("Somero" or the "Company") is pleased to report results for the twelve months to 31 December 2009. Somero is a North American manufacturer of patented laser guided equipment used for the spreading and leveling of high volumes of concrete for floors in the construction industry. Somero has operations worldwide and is primarily focused on the non-residential construction industry.
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Financial Highlights |
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• |
Full year revenue and operating results in line with management's expectations following 23 November 2009 trading update |
• |
Revenue decreased by 53% to US$24.2m (2008: US$51.9m) |
• |
Adjusted EBITDA decreased by 87% to US$0.8m (2008: US$6.0m) which includes a US$0.2m restructuring charge (2) (3) |
• |
Pre-tax loss at US$16.6m (2008 Pre-tax income: US$2.2m) |
• |
Adjusted net income/(loss) before amortization decreased to US$(13.1m) (2008: US$4.0m) (2) (4) |
• |
EPS before amortization US($0.29) (Basic EPS: US($0.34)) vs. US$0.12 in 2008 (Basic EPS: US$0.05) |
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Non-cash write down of US$13.5m Goodwill |
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Business Highlights |
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Use of proceeds from June 2009 placing reduced net debt from US$9.7m at the end of 2008 to US$5.9m at 31 December 2009 (1) |
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Successful modification of bank agreements providing added covenant flexibility throughout 2010 |
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Operating costs (excluding depreciation and amortization) in 2010 expected to be around US$8.6m, down from a level of US$23.3m in 2008. Cost reductions included a 10% reduction in employee compensation |
• |
Continued focus on product development with the introduction of the new PowerRake® 3.0 in November 2009, the new Mini Rake and the introduction of 3D Profiler System® capability to our Small line equipment in January 2010 |
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First full year of sales for the Mini Screed™ Commercial accounted for 6.3% of total Company revenues |
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Increased investment in Asia as a result of continued strong interest and results |
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Increased focus on opportunities for growth in international markets supported by the re-launch of our website in over 50 languages |
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Implemented a new share option plan to retain and incentivize management |
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Lawrence Horsch appointed Non-Executive Chairman in October 2009 |
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1 |
Net Debt is defined as total borrowings under bank obligations less cash and cash equivalents. |
2 |
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 on pages 6 and 7. |
3 |
Adjusted EBITDA as used herein is a calculation of its net income/(loss) plus tax provision/(benefit), interest expense, interest income, foreign exchange gain, other expense, depreciation, amortization, stock based compensation and the write-down of Goodwill. |
4 |
Adjusted net income/(loss) before amortization is a calculation of income/(loss) plus Amortization of Intangibles. |
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Enquiries |
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Hawkpoint Partners Limited |
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Chris Robinson |
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Serge Rissi |
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+44 (0)20 7665 4500 |
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Collins Stewart Europe |
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Piers Coombs |
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+44 (0)20 7523 8000 |
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About Somero |
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Somero® designs, manufactures and sells equipment that automates the process of spreading and leveling large volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots. Somero's innovative, proprietary products, including the large SXP®-D, CopperHead®, and new Mini Screed™ C Laser Screed® machines employ laser-guided technology to achieve a high level of precision.
Somero's products have been sold primarily to concrete contractors for use in non-residential construction projects in over 60 countries across every time zone around the globe. Laser Screed equipment has been specified for use in constructing warehouses, assembly plants, retail centers and in other commercial construction projects requiring extremely flat concrete floors by a variety of companies, such as Costco, Home Depot, B&Q, Daimler, various Coca-Cola bottling companies, the United States Postal Service, Lowe's, Toys 'R' Us and ProLogis.
Somero's headquarters and manufacturing operations are located in Michigan, USA with Executive offices in Florida. It has a sales and service office in Chesterfield, England.
Somero has approximately 56 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.
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Somero Enterprises, Inc ® |
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Full year results for the twelve months to 31 December 2009 |
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Chairman's Statement |
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Overview |
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In my short time as Chairman, I have become very familiar with the serious issues facing the Company and have been impressed with the management team's rapid response to these challenges.
The Company is focused on maintaining profitability and its solid relationship with its lending bank. This focus has allowed the Company to continue to implement its strategic plan, successfully introducing new products into the market and maximizing opportunities from investments in emerging markets.
Our lending bank remains supportive and we have re-set a 2009 year-end covenant and quarterly covenants in 2010 so that they are aligned with Somero's 2010 budget. The first quarter of 2010 was within bank covenants.
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Markets |
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Despite the global recession and a 53% reduction in revenues, our emerging market operations performed well in 2009 with international sales accounting for 47% of total Group revenues, down from 50% in 2008. Following this strong result, the Company intends to continue its program of investment in emerging markets in 2010. Mature market revenue declines were driven by lower levels of business for our customers.
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New Product Development |
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Following its introduction in late 2008, the Mini Screed™ Commercial generated 6.3% of total Company revenues in its first full year of sales. In 2009, new product development focused on Small line equipment with the introduction of a more powerful PowerRake®, a lower-cost Mini Rake and the new development of utilizing the 3D Profiler System® on Small line Laser Screed® equipment. We also introduced a new Large line machine, the SXP-D, which quickly gained market recognition due to its new diagnostic capabilities and the Somero Total Care program, an innovative three year total warranty program.
Our refurbished program continued to be successful in 2009 with Small line refurbished equipment sales increasing by 84% over 2008 with more than 62% of sales from North America.
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Board |
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On behalf of the Board, I would like to thank Stuart Doughty, the former non-executive Chairman who stepped down from the Board in the second half of 2009, for his years of service to the Company.
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People |
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The Board would like to take this opportunity to thank all employees for their performance, commitment and dedication throughout the past year. We commend their sacrifice to the Company by accepting a 10% compensation reduction.
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Non-cash charge |
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The Company's analysis of its Goodwill accounts resulted in a one-time, non-cash write down of US$13.5m.
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Current Trading & Outlook |
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2010 revenues to date are consistent with our previously indicated expectations. We believe our markets are at or near their bottom and we continue to focus on every sales opportunity, while maintaining tight controls on cost.
We have seen some increase in sales activity in selected regions. We are confident that Somero is well positioned to grow as we pursue the increasing internationalization of our business and focus on new product development. Notwithstanding encouraging trends, the Board remains cautious on the outcome for 2010.
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Larry Horsch Non-Executive Chairman |
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President and Chief Executive Officer's Statement |
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Overview |
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The unprecedented depth and length of the worldwide recession required considerable focus on our bank relationship and covenants. The management team reacted promptly making swift and significant reductions to our cost structure. Despite these cost reductions, the Company remained true to its strategic plan which includes focusing on product development and growing the Company's presence in emerging markets. During the restructuring there was minimal reduction in sales personnel recognizing the critical requirement to retain key staff in order to take advantage of opportunities as markets start to grow.
We pursued our product development with a single-minded focus to introduce new products. We introduced the new PowerRake® 3.0 in November 2009, and the new Mini Rake and the 3D Profiler System® capability for our Small line equipment in January 2010. As we came into 2009 we introduced the As Is program, which utilized some of our trade-in machines, the SXP®-D, a new Large line machine, and the Somero Total Care program, an innovative three year total warranty program for the SXP®-D. These new programs have had a significant impact on revenues.
New equipment sales are very dependent on taking trade-ins. Recognizing trade-ins increase our inventory, we introduced a program of selling that equipment in As Is condition. This program has been very effective in minimizing our inventory growth. The As Is program allowed us to continue taking customer trade-ins and, along with the Somero Total Care program, drove new equipment sales that would not have happened without these programs.
The redesign of our website was initiated in late 2009 and launched in January. Enhancements to the technology and design will provide our customers easier access to product information and customer support. By utilizing Google™ translation software on the website, our customers have the ability to roughly translate major portions of the information they need in over 50 languages.
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Product Development |
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The introduction of the new Large line machine, the SXP™-D is a significant success. This new innovation provides full-time electrical system, hydraulic system and engine performance diagnostics alerts to the operator instantly should faults occur during operation. The machine was developed in response to customer feedback and is an excellent example of our close relationship with our customers.
The PowerRake® 3.0 is a new concept for the raking machine that utilizes a two mast system allowing the contractor to place the concrete at more precise levels before screeding. This improves the final floor quality, making the machine an important asset to the contractor.
The new Mini Rake is a complimentary product to the Mini Screed™ Commercial. It is a lower-cost raking machine that levels the concrete in front of the Mini Screed utilizing only one person. It improves the quality of the floor and reduces labor for the contractor.
The introduction of 3D Profiler System® for our Small line equipment gives our customers additional utilization for their equipment. Previously only available on Large line screeds, the 3D system allows the contractor to create parking lots, parking garages, and other three dimensional projects using their small Laser Screed® equipment. The increased utilization of their equipment provides more profit for the contractor.
In our continuing efforts to get customer input, we conducted formal customer surveys during the World of Concrete tradeshow to gather feedback on our products for future product development.
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Emerging Markets/Geographic Growth |
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Emerging markets remain a key growth opportunity for Somero. We will continue to position ourselves to identify and take advantage of opportunities by adding additional investments in these markets.
The implementation of our emerging markets strategy continues on three core aims: |
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• |
To identify international logistics companies, development companies and building operators to ensure Western floor flatness specifications are carried through to new markets; |
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To target local contractors tendering for projects for these major international players and local contractors with a Western joint venture partner; and |
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To develop a package whereby we can provide in-depth floor construction training, beyond the operator training that we currently provide, and selling this training as part of the overall package of equipment and services to install a concrete floor. |
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We continue to pursue these three core aims as we increase our penetration and investment in emerging markets.
We were encouraged by activity at our annual industry tradeshow, the World of Concrete, and indications from attendees were that activity levels are increasing. In 2010 we will look to continuing development of new and innovative products to satisfy our customers' needs and to expand our presence in emerging markets. |
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Jack Cooney President and Chief Executive Officer |
Summary of Financial Results |
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Year ended |
Year ended |
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31 December, |
31 December, |
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2008 |
2009 |
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US$ 000 |
US$ 000 |
Revenue |
51,941 |
24,227 |
Cost of sales |
23,116 |
12,550 |
Gross profit |
28,825 |
11,677 |
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|
|
Operating expenses |
|
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Selling expenses |
11,518 |
5,366 |
Engineering expenses |
1,384 |
673 |
General and administrative expenses |
12,477 |
7,636 |
Restructuring expenses |
582 |
240 |
Goodwill impairment |
0 |
13,522 |
Total operating expenses |
25,961 |
27,437 |
Operating income/(loss) |
2,864 |
(15,760) |
Other income (expense) |
|
|
Interest expense |
(856) |
(949) |
Interest income |
67 |
3 |
Foreign exchange gain |
99 |
100 |
Other |
(12) |
7 |
Income/(loss) before income taxes |
2,162 |
(16,599) |
Provision/(benefit) for income taxes |
(505) |
1,214 |
Net income/(loss) |
1,657 |
(15,385) |
Other data |
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Adjusted EBITDA (1) (2) (4) |
5,984 |
807 |
Adjusted net income/(loss) before amortization (1) (3) (4) |
3,989 |
(13,052) |
Depreciation expense |
373 |
339 |
Amortization of intangibles |
2,332 |
2,333 |
Capital expenditures |
589 |
49 |
Notes: |
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1 |
Adjusted EBITDA and Adjusted income/(loss) Before Amortization are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to income/(loss), operating income/(loss) 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/(loss) Before Amortization 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/(loss) plus tax provision/(benefit), interest expense, interest income, foreign exchange gain, other expense, depreciation, amortization, stock based compensation. |
3 |
Adjusted Net Income/(loss) Before Amortization as used herein is a calculation of Net Income/(loss) plus Amortization of Intangibles. |
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. |
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Net Income/(loss) to Adjusted EBITDA Reconciliation and Adjusted Net Income/(loss) Before Amortization Reconciliation |
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12 months ended |
12 months ended |
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31-Dec-08 |
31-Dec-09 |
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US$ 000 |
US$ 000 |
Adjusted EBITDA reconciliation |
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Net income/(loss) |
1,657 |
(15,385) |
Tax provision/(benefit) |
505 |
(1,214) |
Interest expense |
856 |
949 |
Interest income |
(67) |
(3) |
Foreign exchange gain |
(99) |
(100) |
Other expense |
12 |
(7) |
Depreciation |
373 |
339 |
Amortization |
2,332 |
2,333 |
Stock based compensation |
415 |
373 |
Goodwill impairment |
0 |
13,522 |
Adjusted EBITDA |
5,984 |
807 |
Adjusted net income/(loss) before amortization reconciliation |
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|
Net income/(loss) |
1,657 |
(15,385) |
Amortization |
2,332 |
2,333 |
Adjusted net income/(loss) before amortization reconciliation |
3,989 |
(13,052) |
Notes: References to "Adjusted Net Income/(loss) Before Amortization" in this document are to Somero's net income/(loss) plus amortization of intangibles. Although Adjusted Net Income/(loss) Before Amortization is not a measure of operating income/(loss), operating performance or liquidity under US GAAP, this financial measure is included because management believes it will be useful to investors when comparing Somero's results of operations both before and after the Somero Acquisition, including by eliminating the effects of increases in amortization of intangibles that have occurred as a result of the write-up of these assets in connection with the Somero Acquisition. Adjusted Net Income/(loss) Before Amortization should not, however, be considered in isolation or as a substitute for operating income/(loss) as determined by US GAAP, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with US GAAP. Since Adjusted Net Income/(loss) Before Amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, Adjusted Net Income/(loss) Before Amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net income/(loss) to Adjusted EBITDA and Adjusted Net Income/(loss) Before Amortization is presented above. |
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Revenues |
Somero's consolidated revenues decreased by 53% to US$24.2m (2008: US$51.9m). Somero's revenues consist primarily of sales from new Large line products (the SXP-D Large Laser Screed and its predecessors), sales from new Small line products (the CopperHead and PowerRake) and other revenues, which consist of, among other things, revenue from sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems and accessories. The overall decrease in revenues for the year was driven by reductions in each of Large line sales, Small line sales and other revenues. The following table shows the breakdown between Large line sales, Small line sales and other revenues during the 12 months ended 31 December 2008 and 2009: |
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12 months ended 31 December 2008 |
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12 months ended 31 December 2009 |
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(US$ in millions) |
Percentage of net sales |
(US$ in millions) |
Percentage of net sales |
Large line sales |
21.3 |
41.1% |
9.0 |
37.2% |
Small line sales |
15.4 |
29.6% |
5.6 |
23.1% |
Other revenues |
15.2 |
29.3% |
9.6 |
39.7% |
Total |
51.9 |
100% |
24.2 |
100% |
Large line sales decreased to US$9.0m (2008: US$21.3m) as a result of a 55% decrease in volume to 32 units (2008: 71), Small line sales decreased to US$5.6m (2008: US$15.4m) as volumes decreased to 119 (2008: 320) and other revenues, including sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems and accessories, decreased to US$9.6m (2008: US$15.2m).
Sales to customers located in North America comprise the majority of Somero's revenue, constituting 53% of total revenue (2008: 51%), while sales to customers in Europe, South Africa and the Middle East combined contributed 31% (2008: 40%). The remaining sales in these periods were to customers in Asia, Australia, Central America and South America. Sales in Europe, South Africa and the Middle East generated US$7.6m (2008: US$20.5m) with sales of Large line and Small line products in these regions decreasing by 67% and 72% respectively.
Sales in Asia, Australia and Latin and South America decreased to US$3.7m (2008: US$5.2m) driven by a decrease in Large line volumes to 7 units (2008: 9 units) and in Small line units to 19 (2008: 28 units). |
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Gross Profit |
Gross profit decreased to US$11.7m (2008: US$28.8m), with gross margins declining to 48% (2008: 55%). The decrease in gross margins was a result of several factors including a change in sales mix from higher margin Large line and Small line to lower margin Other and lower production volumes leading to less cost absorption. Increased discounting, particularly on Large line, was also a factor. |
|
Operating Expenses |
Operating expenses excluding goodwill impairment decreased by 46% to US$13.9m (2008: US$26.0m). This decrease was driven by the restructurings at the end of 2008 and in 2009, lower sales which resulted in decreased sales commissions, the elimination of some engineering and administrative personnel and fewer projects being worked on in 2009 as compared to 2008. Restructuring expenses amounted to US$0.2m as the Company continued to streamline its operations during the global recession. Total employment is down from approximately 90 to 56 people for the period. The company recorded a US$13.5 non-cash goodwill impairment charge. |
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Other Income (Expense) |
Other expenses were US$0.8m (2008: US$0.7m). Other expenses consisted of interest income, interest expense, foreign exchange gains and losses and gains and losses on the disposal of assets. |
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Provision/(benefit) for Income Taxes |
The provision/(benefit) for income taxes was US($1.2m) in 2009 as compared to US$0.5m in 2008 due to a net loss. Overall, Somero's effective tax rate changed from 23.4% to 7.3% due to a net loss and a valuation allowance. The Company has filed its 2009 US Federal Tax Return and expects a refund of US$1,041,000 due to the ability to carry the 2009 loss back to previous tax years. |
|
Net Income/(loss) |
Net income/(loss) decreased to US$(15.4m) from US$1.7m in 2008. The primary cause of the decrease in net income/(loss) was a non-cash goodwill impairment charge and decreased sales. Basic Earnings/(loss) Per Share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings/(loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings/(loss) per common share have been computed based on the following: |
|
2008 US$ 000 |
2009 US$ 000 |
Net income/(loss) |
1,657 |
(15,385) |
Basic weighted shares outstanding |
34,281,968 |
45,748,122 |
Net dilutive effect of stock options |
- |
- |
Diluted weighted average shares outstanding |
34,281,968 |
45,748,122 |
The Company had 56,425,598 shares outstanding at 31 December 2009. |
Earnings/(loss) Per Share |
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Earnings/(loss) per share at 31 December 2009 is as follows: |
|
|
|
|
US$ |
Basic earnings/(loss) per share |
|
(0.34) |
Diluted earnings/(loss) per share |
|
(0.34) |
Diluted earnings/(loss) per share |
|
(0.29) |
Consolidated Balance Sheets |
|
|
|
|
|
As of 31 December 2008 and 2009 |
|
|
|
|
2008 US$ 000 |
2009 US$ 000 |
Assets |
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
789 |
34 |
|
Accounts receivable - net |
2,434 |
2,152 |
|
Inventories - net |
5,819 |
6,177 |
|
Prepaid expenses and other assets |
800 |
720 |
|
Income tax receivable |
137 |
1,228 |
|
Deferred tax asset |
466 |
0 |
|
Total current assets |
10,445 |
10,311 |
Property, plant and equipment - net |
4,260 |
3,954 |
|
Intangible assets - net |
16,872 |
14,538 |
|
Goodwill |
16,400 |
2,878 |
|
Deferred financing costs |
52 |
10 |
|
Deferred tax asset |
0 |
4 |
|
Other assets |
75 |
35 |
|
Total assets |
48,104 |
31,730 |
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
Current liabilities: |
|
|
|
|
Notes payable - current portion |
1,429 |
460 |
|
Accounts payable |
1,960 |
1,911 |
|
Accrued expenses |
1,279 |
414 |
|
Other liabilities |
360 |
0 |
|
Total current liabilities |
5,028 |
2,785 |
Notes payable, net of current portion |
9,026 |
5,493 |
|
Deferred income taxes |
239 |
0 |
|
Other liabilities, net of current portion |
422 |
107 |
|
Total liabilities |
14,715 |
8,385 |
|
|
|
|
|
Stockholders' equity |
|
|
|
|
Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding |
0 |
0 |
|
Common stock, US$.001 par value, 80,000,000 shares authorized, 34,281,968 and 56,425,598 shares issued and outstanding at December 31, 2008 and December 31, 2009, respectively |
4 |
26 |
|
Additional paid in capital |
22,759 |
28,025 |
|
Retained earnings |
11,728 |
(3,657) |
|
Other comprehensive loss |
(1,102) |
(1,049) |
|
Total stockholders' equity |
33,389 |
23,345 |
Total liabilities and stockholders' equity |
48,104 |
31,730 |
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
|
|
|
|
Consolidated Statements of Operations |
|
|
For the years ended 31 December 2008 and 2009 |
|
|
|
|
Year ended 31 December |
Year ended 31 December |
|
|
2008 US$ 000 |
2009 US$ 000 |
|
|
except per share data |
except per share data |
|
|
|
|
|
Revenue |
51,941 |
24,227 |
|
Cost of sales |
23,116 |
12,550 |
|
|
|
|
|
Gross profit |
28,825 |
11,677 |
|
|
|
|
|
Operating expenses |
|
|
|
|
Selling expenses |
11,518 |
5,366 |
|
Engineering expenses |
1,384 |
673 |
|
General and administrative expenses |
12,477 |
7,636 |
|
Restructuring expenses |
582 |
240 |
|
Goodwill impairment |
0 |
13,522 |
|
Total operating expenses |
25,961 |
27,437 |
|
|
|
|
Operating income/(loss) |
2,864 |
(15,760) |
|
Other income (expense) |
|
|
|
|
Interest expense |
(856) |
(949) |
|
Interest income |
67 |
3 |
|
Foreign exchange gain |
99 |
100 |
|
Other |
(12) |
7 |
|
|
|
|
Income/(loss) before income taxes |
2,162 |
(16,599) |
|
Provision/(benefit) for income taxes |
505 |
(1,214) |
|
Net income/(loss) |
1,657 |
(15,385) |
|
|
|
|
|
|
|
|
|
Earnings/(loss) per common share |
|
|
|
|
Basic |
0.05 |
(0.34) |
|
Diluted |
0.05 |
(0.34) |
Weighted average number of common shares outstanding |
|||
|
Basic |
34,281,968 |
45,748,122 |
|
Diluted |
34,281,968 |
45,748,122 |
|
|
|
|
See notes to consolidated financial statements. |
|
|
Consolidated Statements of Changes in Stockholders' Equity |
For the years ended 31 December 2008 and 2009 |
||||||
|
|
|
|
|
Other |
|
|
Common Stock |
Additional |
|
Comprehen- |
Total |
|
|
|
|
paid In |
Retained |
sive |
stockholders' |
|
Shares |
Amount |
capital |
earnings |
income (loss) |
equity |
|
|
US$ 000 |
US$ 000 |
US$ 000 |
US$ 000 |
US$ 000 |
Balance - 1 January 2008 |
34,218,968 |
4 |
22,344 |
12,128 |
(248) |
34,228 |
Cumulative translation adjustment |
- |
- |
- |
- |
(625) |
(625) |
Change in fair value of derivative instruments |
- |
- |
- |
- |
(229) |
(229) |
Net income/(loss) |
- |
- |
- |
1,657 |
- |
1,657 |
Share based compensation |
- |
- |
415 |
- |
- |
415 |
Dividend |
- |
- |
- |
(2,057) |
- |
(2,057) |
Balance - 31 December 2008 |
34,281,968 |
4 |
22,759 |
11,728 |
(1,102) |
33,389 |
Cumulative translation adjustment |
- |
- |
- |
- |
(185) |
(185) |
Change in fair value of derivative instruments |
- |
- |
- |
- |
238 |
238 |
Net income/(loss) |
- |
- |
- |
(15,385) |
- |
(15,385) |
Share based compensation |
- |
- |
373 |
- |
- |
373 |
Equity issue |
22,143,630 |
22 |
4,893 |
- |
- |
4,915 |
Balance - 31 December 2009 |
56,425,598 |
26 |
28,025 |
(3,657) |
(1,049) |
23,345 |
|
|
|
|
|
|
|
See notes to consolidated financial statements. |
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
|
For the years ended 31 December 2008 and 2009 |
|
|
|
|
Year ended |
Year ended |
|
|
31 December |
31 December |
|
|
2008 |
2009 |
|
|
US$ 000 |
US$ 000 |
|
Cash flows from operating activities: |
|
|
|
Net income/(loss) |
1,657 |
(15,385) |
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
|||
Deferred taxes |
(100) |
223 |
|
Depreciation and amortization |
2,705 |
2,672 |
|
Amortization of deferred financing costs |
42 |
42 |
|
Loss/(gain) on sale of assets |
10 |
(8) |
|
Share based compensation |
415 |
373 |
|
Goodwill impairment |
0 |
13,522 |
|
Working capital changes: |
|
|
|
Accounts receivable |
1,439 |
86 |
|
Inventories |
222 |
(161) |
|
Prepaid expenses and other assets |
1 |
80 |
|
Other assets |
60 |
41 |
|
Accounts payable and other liabilities |
(2,416) |
(1,660) |
|
Income taxes payable |
(511) |
(1,020) |
|
Net cash provided by/(used in) operating activities |
3,524 |
(1,195) |
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
Proceeds from sale of property and equipment |
680 |
23 |
|
Property and equipment purchases |
(575) |
(49) |
|
Net cash provided by/(used in) investing activities |
105 |
(26) |
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
Borrowings from additional financing |
5,837 |
37,593 |
|
Repayment of notes payable |
(10,311) |
(42,095) |
|
Payment of dividends |
(2,057) |
0 |
|
Proceeds from equity issue, net of costs |
0 |
4,915 |
|
Net cash provided by/(used in) financing activities |
(6,531) |
413 |
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
(151) |
53 |
|
|
|
|
|
Net (decrease) in cash and cash equivalents |
(3,053) |
(755) |
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
Beginning of year |
3,842 |
789 |
|
End of year |
789 |
34 |
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
Notes to the Consolidated Financial Statements As of 31 December 2008 and 2009 |
|
1. |
Organization and Description of Business |
|
Nature of Business Somero Enterprises, Inc. (the "Company" or "Somero") 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 Houghton, Michigan, executive offices in Fort Myers, Florida, a European distribution office in the United Kingdom, and sales offices in Canada, Germany, Dubai and China |
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.
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. Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience. As of 31 December 2008 and 2009, the allowance for doubtful accounts was approximately US$650,000 and US$232,000, respectively. Bad debts expense/(income) was US$313,000 and US$(51,000) in 2008 and 2009, 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. These financing costs are being amortized using the effective interest method.
Intangible Assets and Goodwill 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 31 December 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 incurred a goodwill impairment loss for the year ended 31 December 2009 (see Note 4 for more information.)
The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended 31 December 2009, the Company incurred a goodwill impairment loss and tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.)
Revenue Recognition The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment. For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer. Standard products do not have customer acceptance criteria. Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.
Warranty Liability The Company provides warranties on all equipment sales ranging from 60 days to three years, depending on the product. Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.
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 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.
In June 2006, the Financial Accounting Standards Board (FASB) issued accounting guidance to create a single model to address accounting uncertainty in tax positions. This guidance clarifies that a tax position must be more likely than not of being sustained before being recognized in financial statements. 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 the accompanying consolidated financial statements.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Stock Based Compensation The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.
Transactions in and Translation of Foreign Currency The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. Balance sheet amounts are translated at 31 December 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/(loss). 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 operations.
Comprehensive Income/(loss) Comprehensive income/(loss), is the combination of reported net income/(loss) and other comprehensive income/(loss) ("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/(loss). OCI was composed of the following for the years ended 31 December 2008 and 2009. Total comprehensive income/(loss) for the years was approximately US$803,000 and US$(15,332,000), respectively. |
|
2008 |
2009 |
|
US$000 |
US$000 |
Net Income/(loss) |
$1,657 |
$(15,385) |
Cumulative Translation Adjustment |
(625) |
(185) |
Change in fair value of derivative instruments - net of income taxes |
(229) |
238 |
Total Comprehensive Income/(loss) |
$803 |
$(15,332) |
|
Earnings/(loss) Per Share Basic earnings/(loss) per share represents income/(loss) available to common stockholders divided by the weighted average number of shares outstanding during the year. Diluted earnings/(loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. All common stock equivalents were anti-dilutive at 31 December 2009. Earnings/(loss) per common share have been computed based on the following: |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Net income/(loss) |
1,657 |
(15,385) |
Basic weighted average shares outstanding Net dilutive effect of stock options |
34,281,968 - |
45,748,122 - |
Diluted weighted average shares outstanding |
34,281,968 |
45,748,122 |
|
Fair Value Measurements The Company uses fair value measurements in areas that include, but are not limited to: impairment testing of goodwill and long-lived asset and share-based compensation arrangements. 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. |
|
|
|
Fair Value Measurements at Reporting Date |
Assets: |
31 December 2009 US$000 |
Quoted Prices In Active Markets for Identical Assets (Level 1) US$000 |
Significant Other Observable Inputs
(Level 2) US$000 |
Significant Unobservable Inputs (Level 3) US$000 |
Goodwill |
2,878 |
|
|
2,878 |
Refer to Footnote 4 for the goodwill impairment impact upon earnings. |
|
|
|
|
New Accounting Pronouncements |
|
In March 2008, the FASB issued accounting guidance on disclosures about derivative instruments and hedging activities. The standards require companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. The Company adopted the new disclosure requirements in the period beginning 1 January 2009.
In June 2008, the FASB issued guidance on accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. The standard is effective for fiscal years beginning after 15 December 2008. The Company adopted the new disclosure requirements in the period beginning 1 January 2009 and there was little impact upon the Company's consolidated financial statements.
The FASB issued guidance on measuring the fair value of certain alternative investments that are effective for periods beginning after 15 December 2009. Its intent is to offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on accounting for distributions to shareholders with components of stock and cash that are effective for periods beginning after 15 December 2009. It clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected to the EPS prospectively and is not a stock dividend. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on accounting and reporting for decreases in ownership of a subsidiary that are effective for periods ending after 15 December 2009. This guidance had no impact upon 2009 financial position and operations and is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on Own-Share Lending Arrangements that are effective for periods beginning after 15 December 2009. The guidance requires an entity that enters into a share-lending arrangement on its own shares (that are classified in equity pursuant to other authoritative accounting guidance) in contemplation of a convertible debt issuance (or other financing) to initially measure the share-lending arrangement at fair value and treat it as an issuance cost and to exclude the shares borrowed under the share-lending arrangement from basic and diluted EPS. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on accounting for transfers of financial assets that are effective for periods beginning after 15 November 2009. The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on consolidations with variable interest entities that are effective for periods beginning after 15 November 2009. The objective of this statement is to improve the financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on improving disclosures about fair value measurements that are effective for periods beginning after 15 December 2009. It adds new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This guidance is not expected to have any impact upon 2010 financial position and operations.
The FASB issued guidance on amendments to certain recognition and disclosure requirements that are effective for periods beginning after 15 November 2009. It addresses certain implementation issues related to an entity's requirement to perform and disclose subsequent-events procedures and is effective immediately. This guidance is not expected to have any impact upon 2010 financial position and operations.
Subsequent events have been evaluated through the date the consolidated financial statements were issued on 17 May 2010. No material subsequent events have occurred since 31 December 2009 that required recognition or disclosure in our consolidated financial statements other than as discussed below in Note 15. |
|
|
3. |
Inventories |
|
Inventories consisted of the following at 31 December: |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Raw materials |
2,078 |
1,547 |
Finished goods and work in process Refurbished |
3,231 510 |
2,486 2,144 |
Total |
5,819 |
6,177 |
4. |
Goodwill and Intangible Assets |
|
Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value. |
|
As required, the Company performed its annual goodwill impairment analysis by comparing the fair value of the reporting unit with its carrying amount. The Company has one reporting unit which is defined as the consolidated reporting entity. As part of the test under Step 1, the Company computed fair value by preparing a discounted cash flow analysis, a market capitalization analysis and a comparison of its market capitalization to that of other comparable companies.
Under the discounted cash flow analysis, the cash flows were determined based on assumptions for revenue, expenses, working capital requirements, capital expenditures and were discounted at a weighted average cost of capital. These estimates were based on historical results and the available information as of 31 December 2009.
The Company calculated fair value by obtaining market data of comparable companies with similar assets and liabilities. The companies selected for comparison included comparable companies with proprietary technology and similar gross margins to that of the Company.
The results of Step 1 indicated that Goodwill was impaired. The Company then performed Step 2 where it determined the fair value of all of its assets and liabilities. This step resulted in allocating a portion of the impairment from Step 1 to any assets that were below book value. The result of this analysis indicated that Goodwill was impaired by approximately US$13.5m at 31 December 2009 and that the value of its intangible assets including customer relationships and technology was not impaired. Prior to 31 December 2009, there were no accumulated impairment losses.
The following table reflects Other intangible assets: |
|
Weighted average |
|
|
|
amortization period |
2008 US$000 |
2009 US$000 |
Capitalized cost |
|
|
|
Customer relationships |
8 years |
6,300 |
6,300 |
Patents |
12 years |
18,538 |
18,538 |
Other intangibles |
3 years |
4 |
4 |
|
|
24,842 |
24,842 |
Accumulated amortization |
|
|
|
Customer relationships |
8 years |
2,691 |
3,479 |
Patents |
12 years |
5,278 |
6,823 |
Other intangibles |
3 years |
1 |
2 |
|
|
7,970 |
10,304 |
Net carrying costs |
|
|
|
Customer relationships |
8 years |
3,609 |
2,821 |
Patents |
12 years |
13,260 |
11,715 |
Other intangibles |
3 years |
3 |
2 |
|
|
16,872 |
14,538 |
|
Amortization expense associated with the intangible assets for the years ended 31 December 2008 and 2009 was approximately US$2,332,000 and US$2,333,000, respectively. Future amortization on intangible assets is expected to be as follows at: |
|
31 December US$ 000 |
2010 |
2,333 |
2011 |
2,331 |
2012 |
2,331 |
2013 |
2,004 |
2014 |
1,545 |
|
10,544 |
Thereafter |
3,994 |
|
14,538 |
5. |
Property, Plant and Equipment |
|
Property, plant and equipment consist of the following at 31 December: |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Land |
207 |
207 |
Buildings and improvements |
3,572 |
3,572 |
Machinery and equipment |
1,410 |
1,423 |
|
5,189 |
5,202 |
Less: accumulated depreciation and amortization |
(929) |
(1,248) |
|
4,260 |
3,954 |
|
Depreciation expense for the years ended 31 December 2008 and 2009, was approximately US$373,000 and US$339,000, respectively. |
|
|
6. |
Notes Payable |
|
The Company's debt obligations consisted of the following at 31 December: |
|
|
|
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Bank debt: |
|
|
Five year secured reducing revolving line of credit |
2,954 |
3,883 |
Five year secured term loan |
7,501 |
2,070 |
Less debt obligations due within one year |
(1,429) |
(460) |
Obligations due after one year |
9,026 |
5,493 |
|
Credit Facility The Company has a credit facility with a bank dated 16 March 2007 that has been amended multiple times and composed of the following at 31 December 2009: |
|
|
• |
US$7,000,000 five year secured reducing revolving line of credit |
• |
US$2,070,000 five year secured reducing term loan |
|
|
|
The interest rates on the revolver and term loan are Libor 1-month and Libor 3-month, respectively, plus 4.75% per the agreed pricing grid subsequent to 31 December 2009. The interest rates were 4.48% and 4.50% on the revolver and term loan at 31 December 2009. The 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.
In January 2010, the Company again renegotiated its loan covenants. In return for a change in covenants, the Company agreed to a reduction in its line of credit to US$5,750,000. The change in 2009 covenants allowed it to avoid missing its year end 2009 requirements. The new agreement temporarily suspends the funded debt ratio until December 31, 2010, replaces it with a quarterly EBITDA minimum target, and the change fee was US$30,000.
Future Payments The future payments by year under the Company's debt obligations are as follows:
|
|
31 December US$ 000 |
|
|
2010 |
460 |
2011 |
460 |
2012 |
5,033 |
2013 |
- |
2014 |
- |
Total payments |
5,953 |
|
Interest Interest expense on the credit facility for the years ended 31 December 2008 and 2009, was approximately US$861,000 and US$949,000, respectively, related to the debt obligation. The 2009 expense includes US$380,000 of loss on cash flow hedges as a result of paying off interest rate swaps that were recognized in the statement of operations as interest expense and removed from other comprehensive income/(loss).
|
|
|
7. |
Retirement Program |
|
The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company match vests after one year of service with the Company. The Company matched 100% of the employee's contribution up to the first 6% of the employee's compensation for the year ended 31 December 2008 and matched 100% of the employee's contribution, up to the first 6% of the employee's compensation through 30 June 2009. At mid-year, the Company suspended the match. The Board of Directors at their discretion and within plan limitations may make a discretionary match at a future date to supplement the changes incurred. The Company contributed approximately US$284,000 and US$113,000 to the savings and retirement plan during the years ended 31 December 2008 and 2009, respectively. |
|
|
8. |
Operating Leases |
|
The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non-cancellable operating leases with initial terms in excess of one year were as follows: |
|
31 December |
|
US$ 000 |
2010 |
331 |
2011 |
230 |
2012 |
174 |
2013 |
82 |
2014 |
0 |
Total |
817 |
9. |
Supplemental Cash Flow and Non-Cash Financing Disclosures |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Cash paid for interest |
856 |
543 |
|
|
|
Cash paid for taxes |
1,242 |
(206) |
Non-cash financing activities - Change in fair value of derivative instruments Inventory received in lieu of payment |
229 0 |
(238) 196 |
10. |
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 31 December 2008 the Company had two customers which represented 16% of total accounts receivables and at 31 December 2009, the Company had two customers which represented approximately 30% of total accounts receivable. |
|
|
11. |
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 providing for defined severance payments in the event of termination or change in control. The Company entered into a 5 year or minimum purchase obligation of US$625,000 with a supplier in 2007 which it successfully negotiated away so that there is no related contingent liability as of 31 December 2009. 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 financial statements. |
|
|
12. |
Income Taxes |
|
Somero adopted guidance from the FASB in 2007 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The guidance also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
At 31 December 2009, the Company had a gross unrecognized tax benefit (including interest and penalties) of US$4,000.
Somero is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company began business in 2005 and therefore the statute of limitations for all federal, foreign and state income tax matters for tax years from 2005 forward are still open. Somero has no federal, foreign or state income tax returns currently under examination. |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Current Income Tax |
|
|
Federal |
(33) |
(951) |
State |
69 |
23 |
Foreign |
513 |
(247) |
Total current income tax (provision/benefit) |
549 |
(1,175) |
|
|
|
Deferred tax expense |
|
|
Federal |
62 |
(119) |
State |
10 |
(20) |
Foreign |
(116) |
100 |
Total deferred tax (provision/benefit) |
(44) |
(39) |
|
|
|
Total provision/benefit |
505 |
(1,214) |
The components of the net deferred income tax asset at 31 December 2008 and 2009 were as follows: |
||
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
Deferred Tax Asset |
|
|
Intangibles |
833 |
1,101 |
Intangibles - Foreign |
- |
102 |
Goodwill |
- |
3,188 |
Share-based compensation |
318 |
435 |
Net Operating Loss - State |
- |
71 |
Net Operating Loss - Foreign |
- |
89 |
Interest Rate Swap |
262 |
- |
Other |
640 |
276 |
Gross deferred tax asset |
2,053 |
5,263 |
|
|
|
Valuation Allowance |
- |
(4,823) |
Deferred tax asset |
2,053 |
440 |
|
|
|
Deferred Tax Liability |
|
|
Depreciation |
(347) |
279) |
Prepaids |
(174) |
(157) |
Goodwill |
(1,305) |
- |
Deferred tax liability |
(1,826) |
(436) |
|
|
|
Net deferred tax asset |
227 |
4 |
|
|
|
Current |
466 |
- |
Non-current |
(239) |
4 |
Net deferred tax asset |
227 |
4 |
|
|
|
Rate Reconciliation |
|
|
Consolidated income/(loss) before tax |
2,162 |
(16,599) |
Statutory rate |
34% |
34% |
Statutory tax expense |
735 |
(5,643) |
|
|
|
State taxes |
52 |
(8) |
IRC Section 199 Deduction |
(35) |
- |
Meals and Entertainment |
57 |
28 |
Foreign Tax Items |
(356) |
19 |
Valuation Allowance |
- |
4,387 |
Other |
52 |
3 |
Tax provision/benefit |
505 |
(1,214) |
|
At 31 December 2009, the Company had a net deferred tax asset. 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. Since realization of any future tax benefit at 31 December 2009 was not sufficiently assured, a valuation allowance for the amount of the 2009 net deferred tax asset was provided. At 31 December 2008, no valuation allowance was necessary; thus the valuation allowance increased approximately US$4,800,000 for the year ended 31 December 2009.
The Company has filed its US Federal Tax Return for the year ended 31 December 2009, which reflected the carry back of the 2009 loss to prior years. Included in Income tax receivable on the consolidated balance sheet is US$1,041,000 reflecting the amount of the tax refund intended to be filed by the Company.
The Company has US$2,200,000 in state loss carry forwards with varying expiration dates and US$300,000 in foreign loss carry forwards with indefinite expiration dates.
The Company expenses research and development costs as incurred. Total research and development expense for the research and development tax credit was approximately US$683,000 and US$0 for the years ended 31 December 2008 and 2009, respectively. |
|
|
13. |
Revenues by Geographic Region |
|
The Company sells its product to customers throughout the world. The breakdown by location is as follows: |
|
2008 |
2009 |
|
US$ 000 |
US$ 000 |
United States and U.S. possessions |
24,656 |
12,368 |
Canada |
1,455 |
579 |
Rest of world |
25,830 |
11,280 |
Total |
51,941 |
24,227 |
|
A significant portion of the Company's long-lived assets are located in the United States. |
|
|
14. |
Stock Based Compensation |
|
The Company has one share-based compensation plan, which is described below. The compensation cost that has been charged against income/(loss) for the plan was approximately US$415,000 and US$373,000 for the years ended 31 December 2008 and 2009, respectively. The income tax effect recognized for share based compensation was approximately a benefit of US$148,000 and an expense of US$148,000 for the years ended December 31, 2008 and 2009, respectively. 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 3,428,197 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 term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the years ended 31 December 2008 and 2009. |
|
2008 |
2009 |
Dividend yield |
1.64% |
0.00% |
Risk-free interest rate |
2.90% |
1.40% |
Volatility |
25.50% |
47.3% |
Expected term |
4.6 |
4.6 |
|
A summary of option activity under the stock option plan as of 31 December 2009, and changes during the year then ended is presented below: |
Options |
Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (yrs) |
Aggregate Intrinsic Value |
|
|
|
|
|
Outstanding at 1 January 2009 |
2,828,895 |
2.24 |
- |
- |
Granted |
602,885 |
0.24 |
|
|
Exercised |
- |
- |
|
|
Forfeited |
(81,542) |
2.04 |
|
|
Outstanding at 31 December 2009 |
3,350,238 |
1.88 |
7.44 |
-- |
Exercisable at 31 December 2009 |
2,412,439 |
2.24 |
5.64 |
-- |
|
The weighted-average grant-date fair value of options granted was US$.33 and US$.09 for the years ended 31 December 2008 and 2009, respectively.
A summary of the status of the Company's non-vested shares as of 31 December 2009, and changes during the year then ended is presented below: |
|
|
Weighted Average |
|
Shares |
Grant-Date Fair Value |
Non-vested shares as of 31 December 2008 |
1,182,838 |
.41 |
Granted |
602,885 |
.09 |
Vested |
(766,382) |
.45 |
Forfeited |
(81,542) |
.39 |
Non-vested shares as of 31 December 2009 |
937,799 |
.10 |
|
As of 31 December 2009, there was US$103,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plan. That cost is expected to be recognized over the vesting period. The fair value of options vested in 2008 and 2009 was US$375,000 and US$345,000, respectively. |
|
|
15. |
Subsequent Events |
|
The board felt it was critical to have a meaningful retention/incentive program for key employees while being fair to the shareholders. The Remuneration Committee has developed a substitute Stock Option plan for management retention and incentivizing. This is not expected to have a material impact upon the company's financial position or operations. The plan was authorized by the Board of Directors on 20 January 2010 and implemented 17 February 2010.
There are 5.6 million shares available to be granted under the new plan which is 10% of the 56 million shares that are authorized. The initial grant was for 2.3 million shares as replacements for grants under the old option plan which were cancelled and the old plan was abandoned. The grants have a 3 year vesting and a strike price of 30P, a 100% premium over the market price on the date of grant. The remaining shares will only be issued for new key employees and superior performance.
As discussed in Note 12, the Company has filed its 2009 US Federal Tax Returnand expects a refund of US$1,041,000 due to the ability to carry the 2009 loss back to previous tax years which is included in income tax receivables on the consolidated balance sheet.
As discussed in Note 6, in January 2010, the Company renegotiated its loan covenants. In return for a change in covenants, the Company agreed to a reduction in its line of credit to US$5,750,000. The change in 2009 covenants allowed it to avoid missing its year end 2009 requirements. The agreement temporarily suspends the funded debt ratio until December 31, 2010, replaces it with a quarterly EBITDA minimum target, and the change fee was US$30,000. |