Final Results

RNS Number : 5484Q
Somero Enterprises Inc.
01 March 2016
 

1 March 2016

Somero Enterprises, Inc.

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

 

Final Results

An exceptional year of profitable growth

 

Somero Enterprises, Inc. is pleased to report its annual results for the twelve months ended December 31, 2015.

 

Financial Highlights

·     Revenue ahead of market expectations reflecting strong demand across the product portfolio:

·     Total revenue increased by 18% to US$ 70.2m (2014: US$ 59.3m)

·     Efficient conversion of revenue growth into profit:

·     Adjusted EBITDA increased 34% to US$ 20.0m (2014: US$ 15.0m)(1,2)

·     Adjusted EBITDA margin grew to 29% (2014: 25%) driven by gross margin expansion and effective operating cost controls

·     Pre-tax income increased 40% to US$ 17.4m (2014: US$ 12.4m)

·     Adjusted Net Income grew 28% to US$ 13.0m (2014: US$ 10.1m) (3)

·     Basic adjusted net income per share grew 28% to US$ 0.23 (2014: US$ 0.18) (3)

·     Strong growth in operating cashflows:

·     Net cash from operating activities increased by 18% to $14.5m

·     Balance sheet continues to strengthen:

·     Increased net cash at December 31, 2015 of US$ 12.6m (4) a US$ 6.0m increase over 2014

·     Post period close, successfully negotiated a five year extension to secured revolving line of credit

·     Healthy dividend increase:

·     Final dividend of 5.0 US cents per share declared for a total 2015 dividend of 6.9 US cents per share; a 25% increase over last year

 

Business Highlights

·     Internally funded investments to increase business scale:

·     20,000 sq. ft. expansion of Houghton, Michigan Operations and Support facility in 2015

·     Construction underway on a 14,000 sq. ft. new Global Headquarters and Training facilities in Fort Myers, Florida

·     New products continue to be a significant driver of growth:

·     S-485 Laser Screed® machine revenues were US$ 3.9m in 2015

·     New product pipeline continues with introduction of the Somero Floor Levelness System® and S-10A Laser Screed® machine in late 2015, S-940 Laser Screed® machine in early 2016 at the World of Concrete in Las Vegas

·     Balanced product line and geographic growth:

·     Large line, small line and 3D Profiler system revenues grew 26%, 40%, and 19%, respectively

·     Revenue growth led by North America, Europe and the Middle East, which grew a combined US$ 16.0m compared to prior year

·     China remains a key target for future revenue growth

 

Notes:

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

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

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

4.  Net cash is defined as cash and cash equivalents less borrowings under bank obligations.

 

Jack Cooney, CEO of Somero, said:

 

"This was one of the most exciting, challenging and rewarding years I have had the pleasure of experiencing with Somero.  By every measurement, 2015 was a tremendous year.  We grew the business significantly, we expanded our product portfolio with innovative new products, we made progress in developing key new markets, we expanded our operational and training capabilities with investment in new facilities, we delivered remarkable financial performance, and we acquired key new talent for the organization.  While all of these are considerable accomplishments, I'm most pleased with the performance of our Management Team which excelled in managing the rapid growth we experienced while remaining focused on the continued pursuit of improving the products, solutions, and levels of service we offer our customers.  Our employees' passion for our customers' success is the ultimate reason we have been and will continue to be successful.

 

"We see 2016 as an exciting year full of opportunity. We believe we are well positioned to capitalize on expected growth in our core US and other existing markets, extend our global footprint and grow revenues from new products. Most importantly, we look forward to delivering another year of superior results for our shareholders."

 

 

For further information, please contact:

 

Somero Enterprises, Inc.                                                                              www.somero.com

Jack Cooney, CEO                                                                                            +1 239 210 6500

John Yuncza, CFO

Howard Hohmann, EVP Sales

 

Canaccord Genuity Ltd (NOMAD and Joint Broker)

Bruce Garrow                                                                                                    +44 (0)20 7523 8000

Piers Coombs

Mark Whitmore

 

finnCap Ltd (Joint Broker)

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

Carl Holmes (Corporate Finance)

Tim Redfern (Corporate Broking)

 

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

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

David Ison

Susie Hudson

 

Notes to Editors:

 

Our Mission

Somero® designs and assembles laser-guided and technologically innovative machinery used in horizontal concrete placement to advance the productivity, concrete flatness and efficiency of the jobsite. Somero promotes customer training, technical support and continuous innovation for all its products.

 

Our Vision

Somero's vision is for our innovative, cutting edge technology and processes to be in use wherever a ready mix truck is discharging concrete for a horizontal concrete slab. Somero technology and equipment will enable every installation to be completed faster, flatter and with fewer people. We will continually pass on Somero knowledge and expertise to all our global customers.

 

Our Products

Somero's innovative, proprietary products include the large S-22E Laser Screed®, CopperHead®, Mini Screed™ C, S-840 Laser Screed®, S-15R Laser Screed®, STS-11m Spreader, S-485 Laser Screed®, S-940 Laser Screed®, and S-10A Laser Screed® machines as well as the 3-D Profiler System® and Somero Floor Levelness SystemTM.  This equipment employs laser-guided proprietary technology to achieve a high level of precision in concrete surface flatness at a higher rate of efficiency than conventional methods and results in the highest level of flat-floor precision attainable at less cost to the flooring contractor.

 

Our Customers 

Somero's products have been sold to concrete contractors for non-residential construction projects in over 90 countries and across every time zone around the globe. Our target customer is the commercial concrete flooring contractor, of any size, who is ready to move to the next level of profitability with their business.  The keys to our success are the quality of our equipment, the unparalleled level of service, education and training we provide, and the investment we make in relationships with our customers.  Somero equipment and service helps our customers achieve their business and profitability goals, creating the loyalty that retains them as a customer for life.   

 

Our Applications 

Somero Laser Screed® equipment is used to place and screed  the concrete slab in all building types, as well as all floors in multi-story buildings.  Somero equipment has been specified for use in the construction of warehouses, manufacturing assembly plants, exterior paving and parking structures, retail centers, and other commercial construction projects that require 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, Lowe's, Toys 'R' Us, and ProLogis.

 

Our Unique Strengths

Somero operates in global markets with minimal direct competition.  The Company has been highly innovative throughout its history bringing 32 new products to market since pioneering the Laser Screed® machine market in 1986, developing proprietary designs that are protected by a portfolio of 55 patents.  Somero offers our customers a compelling value proposition that includes not only equipment with unsurpassed quality and performance, but also an unparalleled combination of global service, technical support, training and education.

 

Our Locations

Somero's Global Headquarters and Training Facilities are located in Fort Myers, Florida and the Company's Operations and Support Offices are located in Houghton, Michigan. In addition, Somero maintains an established Sales, Service and Training Facility that is home to the Somero Concrete College in Shanghai, China as well as sales and service offices located in Chesterfield, England and New Delhi, India.

 

 

Chairman's Statement

 

Performance and Dividend

Somero delivered another exceptional year of profitable growth in 2015.  The Company grew revenues to US$ 70.2m in 2015, an 18% increase over 2014, and profits before tax to US$ 17.4m, a 40% increase over 2014. Our growth in 2015 came from a variety of geographies including North America, Europe, the Middle East, Southeast Asia and Korea and a variety of product lines including large line machines, small line machines and our 3D Profiler systems. This performance highlights the breadth, reach and diversity of our global business. The efficient translation of this growth into strong profits and free-cash flow was made possible by the continued disciplined management of the business. While our 2015 financial performance was remarkable, it is only a by-product of our continued focus on delivering innovative products, solutions and services to our customers.

 

As a consequence of this stellar performance and the Board's confidence in the Company's future, we are pleased to report that the final 2015 dividend of 5.0 US cents per share has been approved and will be payable on April 4, 2016 to shareholders on the register at March 18, 2016.  Together with the interim dividend paid in October 2015 of 1.9 US cents per share, this represents a full year dividend payment to shareholders of 6.9 US cents per share, a 25% increase from 2014. 

 

Strategic Progress

The Company enters 2016 with increased focus and alignment on what makes Somero a truly exceptional business. Somero's unique business model rests on two key competitive advantages; (1) unparalleled industry expertise, service, training and support, and (2) innovative product leadership. As we move forward, our mission remains to prioritize investment in these value drivers on our path to achieving our strategic objective of doubling Company revenue by 2018, compared to 2013.

 

Board of Directors

In October 2015, Ron Maskalunas stepped down from the Company's board of directors and Robert Scheuer was appointed. Throughout his nine-year tenure, Ron served as Chairman of the Audit Committee and played an instrumental role in helping lead and build the Company.  The Board sincerely thanks Ron for his many contributions over the years, and welcomes Robert to the Company.  Robert brings exceptional operational and leadership experience to the Company having previously served in a series of senior executive roles at Dover Corporation (NYSE ticker "DOV"), an $8 billion Fortune 500 corporation, and Kraft Foods, Inc.  There have been no other Board changes during the period.

 

Our People

Somero's success is in the hands of our 165 employees around the globe.  On behalf of the Board, I would like to thank them all for their dedication and hard work during the year. Without our employees' tireless commitment and passion for our customers' success, we would not have delivered these extraordinary results for our shareholders.  As a company, we must continue to create an environment that stretches and challenges our people and enables them to do their best work.  I look forward to working with the Board and the management team to make sure that we do.

 

Management Equity Bonus Program

We are also excited to announce the first year of the new Equity Bonus Program for senior management.  Under this program, eligible senior managers are able to choose to receive a portion of their annual performance bonus in shares of Company stock. We believe that allowing our senior management team to share in the future performance of the Company's share price will further align their interests with those of our shareholders.

 

Current Trading and Outlook

Healthy trading momentum in the US has carried forward into 2016 from the strong finish to 2015.  The momentum is driven by demand for replacement equipment, fleet additions, technology upgrades and new products.  The underlying non-residential construction market fundamentals in the US remain strong, evidenced by lengthy project backlogs for our customers that extend well into 2016.  This gives us confidence in our growth prospects for 2016.

 

In Europe, we are seeing similar carryover of momentum into 2016 which highlights a continued, steady recovery from the recessionary low point in 2010-2011. The momentum drivers in Europe are similar to the US.  In the Middle East, coming off extraordinary growth in 2015, we expect to continue to see significant opportunities in 2016. 

 

In Latin America, we expect stable performance in Mexico and Chile and are optimistic for improvement in the other counties in the region outside of Brazil's economic challenges.

 

The Asian markets remain positioned for improvement and will be primarily driven by increased penetration of our products.  We expect to see greater need and willingness to use our products and services as acceptance of wide-placement and flatness, levelness standards grows.  We will continue to support promotion of the benefits of using wide-placement processes to obtain high quality flat and level floors through our innovative Somero Concrete College initiative in China.  In addition, we believe providing customers with Somero's new direct long-term financing options, which was enabled by development of Somero's proprietary machine shut-off capability, will have a positive impact on sales in the region.

 

The Board believes the Company is well-positioned to capitalize on global market opportunities in the coming year and is confident Somero will deliver another year of solid growth. 

 

 

Larry Horsch

Non-Executive Chairman

March 1, 2016

 

 

 

President and Chief Executive Officer's Review

 

Overview

2015 was a tremendous year of growth with sales increasing 18% to US$ 70.2m.  This robust growth was led by North America where sales grew 32% to US$ 49.2m, Europe where sales grew 58% to US$ 5.7m, and the Middle East where sales grew 238% to US$ 2.7m.  In addition to the strong top-line performance, we were able to improve gross margin to 55.8%, from 54.0% in 2014, through productivity gains, product cost reductions and price increases.  Our gross margin expansion combined with significant leverage in our operating costs drove an EBITDA(1) increase of 34% to US$ 20.0m.  Finally, the strong operating results coupled with disciplined working capital management improved our year-end net cash(2) position to US$ 12.6m, a US$ 6.0m  increase from 2014.  In addition, we completed development of three new innovative products, completed a 20,000 square-foot expansion of operations facilities, and are well-underway to completing construction of our new 14,000 square-foot global headquarters in Florida.  By all measures, 2015 truly was a remarkable year.

 

Region Reviews

In North America, 2015 cement consumption from non-residential building construction grew 14%(3).  The healthy increase in non-residential construction spending spurred customer demand for replacement machines, fleet additions, and technology upgrades.  This combined with new product introductions, price increases and a shortage of skilled labor in the concrete contractor industry all contributed to the 32% annual sales increase in North America. 

 

Europe continued its positive trajectory with a solid year of growth in 2015, with sales increasing 58% from 2014 to US$ 5.7m.  Growth in 2015 was driven by improvements in the UK, Spain, Poland, Italy, and Germany. 

 

Sales in the Middle East grew to US$ 2.7m, well ahead of expectations and driven by increased activity in Dubai, Turkey, and Saudi Arabia.  As expected, sales in Russia remained slow due to its continued unstable geo-political climate.

 

The China market was challenging in 2015, but market conditions stabilized in the second half of the year and we remain encouraged by the underlying market fundamentals and long-term growth prospects in the region. We ended the year with US$ 6.1m in sales, a decrease of US$ 3.4m from 2014.  A significant factor adversely impacting the market was a slowdown in money flow throughout the construction industry.  To address this factor, in the fourth quarter 2015, Somero began offering long-term financing to customers that requires the installation of our machine shut-off payment protection tool.  While our experience with this program has been very positive to date, we will continue to develop alternative third-party financing options for customers.  In the meantime, we expect the Somero long-term financing program will have a positive impact on sales.  There is a growing awareness in the market of US floor flatness and levelness standards as supported by the China Flooring Association.  The training and educational efforts we are promoting through the Somero Concrete College in China and the efforts of our sales engineers are increasing awareness, acceptance and demand for higher quality floors through wide-placement methods.  Higher wage rates in China are leading to demand for greater automation which increases the value of Somero equipment.  We expect the Chinese economy will continue to evolve towards more logistics, big box retailing, and e-commerce which increase owners' demands for the productivity and flatness provided by Somero equipment.    

 

In Southeast Asia, sales increased to US$ 1.3m in 2015 from US$ 0.7m in 2014.   We view Southeast Asia as a significant growth opportunity for us in the coming years given our very low current market penetration and the growing demand for higher quality floors in the region.

 

In Australia, sales decreased to US$ 1.0m in 2015 from US$ 2.4m in 2014.   The primary factor pressuring sales volume in 2015 was the devaluation of the Australian dollar which led to our equipment becoming more expensive for local Australian customers.  If this continues, it will inhibit the growth opportunity in this territory in 2016.

 

Our results in India in 2015 were flat with 2014 as we ended the year with US$ 0.6m in revenues for the territory.  We are still in the initial phase of penetration of this significant market.  We will continue to focus our efforts to promote the benefits of higher quality floors, increase our marketing activities, and hold educational seminars for engineers and architects to drive broader acceptance of wide-placement methods and flatness, levelness standards. 

 

People

Our staffing level of 165 employees at the end of 2015 was unchanged from year-end 2014.  We were able to support the Company's growth in 2015 leveraging the investments we made in 2014 to increase our staff.  Going forward, we will continue to selectively invest in new positions to support our 2018 strategic objective.  However, more importantly than the number of staff we employ is the quality and fit of the individuals we hire.  We devote a large part of the hiring process to determine if a candidate fits the Somero culture, embraces our core values, and will be a significant, productive contributor.   

 

Product Development

On an annual basis, Somero invests approximately 2% of sales on product development, and our goal is to introduce at least one new product every year.  Our product development effort is a customer-driven process that relies on customer focus groups, surveys, and feedback from our sales and technical support staff.  Structuring development this way allows us to remain focused on customer needs and value requirements.  2015 was a highly productive year for our engineering team.  During the year, we completed development of three new products: our new S-940 Laser Screed® and S-10A Laser Screed® machines as well as our Somero Floor Levelness SystemTM.   The S-10A Laser Screed® machine and the Somero Floor Levelness SystemTM were officially released in the fourth quarter of 2015, while the S-940 Laser Screed® machine was released in the first quarter of 2016.  Even though these products were only available for a small portion of the year, they contributed US$ 0.4m in 2015 sales on a combined basis. Similarly, sales of the S-485 Laser Screed® machine introduced in the fourth quarter 2014 grew considerably to US$ 3.9m in 2015, up from US$ 0.9m in 2014. 

 

Progress Towards our 2018 Strategic Objective

2015 was the second year of our five-year plan to double our 2013 revenues by 2018, and we've made tremendous progress towards this target.  We ended 2015 with US $70.2m in revenues putting us more than half-way towards the goal after only two years of the plan.  With solid fundamentals in the US and European markets and significant additional growth opportunities across our broad portfolio of products and geographic markets, we remain confident in our ability to achieve our strategic target in 2018.  

 

Expansion Update

In 2014, the Board and management concluded that the anticipated growth of the business over the medium term required an expanded facilities footprint.  Consequently, we decided to expand our Houghton, Michigan, facility and planned construction of a new global headquarters and training facility in Fort Myers, Florida.  In 2015, we made significant progress on these projects. 

 

In October 2015, we completed our 20,000 square-foot expansion of our Operations and Support Offices in Houghton, Michigan, for a total project cost of US$ 1.3m.  The expansion provides us with a facility that is able to support growth up to and exceeding our 2018 strategic objective. 

 

Also, in 2015 we purchased land, designed and began construction on a new 14,000 square-foot Global Headquarters and Training Facility in Fort Myers, Florida for a total expected cost of US$ 4.8m.  Ground breaking on construction occurred in October 2015.  The project remains on on-budget and we expect to complete construction and move into our new facility in the second quarter 2016. 

 

Cashflow and Balance Sheet

Our disciplined management of operating costs ensured we were able to efficiently translate our growth into profits.  2015 profits before tax increased 40% to US$ 17.4m while EBITDA(1,2) increased 34% to US$ 20.0m.  In addition, strong operating cash flows and effective working capital management drove considerable strengthening of our net cash(2) position at year end. We ended 2015 with net cash of US$ 12.6m, a US$ 6.0m increase over 2014, even after paying US$ 3.3m in dividends to shareholders and investing US$ 4.2m in capital expenditures primarily related to our construction projects.  We are entering 2016 with the strongest balance sheet in our 30-year history. 

 

Conclusion

This was one of the most exciting, challenging and rewarding years I have had the pleasure of experiencing with Somero.  By every measurement, 2015 was a tremendous year.  We grew the business significantly, we expanded our product portfolio with innovative new products, we made progress in developing key new markets, we expanded our operational and training capabilities with investment in new facilities, we delivered remarkable financial performance, and we acquired key new talent for the organization.  While all of these are considerable accomplishments, I'm most pleased with the performance of our Management Team which excelled in managing the rapid growth we experienced while remaining focused on the continued pursuit of improving the products, solutions, and levels of service we offer our customers.  Our employees' passion for our customers' success is the ultimate reason we have been and will continue to be successful.

 

We see 2016 as an exciting year, full of opportunity. We believe we are well positioned to capitalize on expected growth in our core US and other existing markets, extend our global footprint and grow revenues from new products. Most importantly, we look forward to delivering another year of superior results for our shareholders.

 

 

Jack Cooney

President and Chief Executive Officer

March 1, 2016

 

Notes:

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

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

3. Percentage derived from Portland Cement Association Market Intelligence Fall Cement Outlook report dated November 2015.

 

 

 

Market Overview

 

Global Market Opportunity

Demand for Somero's equipment is underpinned by consistent drivers that apply across all the regions we serve, the need for high quality floors and a shortage of skilled workers boosting the need for more automated equipment, which will continue to advance market penetration.

                                                                                                                                                         

Market Dynamics

North America has shown strong recovery in equipment pricing and sales since the recessionary low-point in 2010-2011.  Non-residential construction industry fundamentals remain sound in the US, with cement consumption from non-residential building construction increasing a robust 14% in 2015.(1)  

 

Europe, the territory with our second largest installed base of equipment, has shown continued steady improvement from the recessionary low-point in 2010-11, however the region would appear to be at an earlier stage of recovery than North America. 

 

The Board believes that China represents the greatest market opportunity for growth outside North America, given its massive quantity of cement consumption.  China is estimated to represent nearly 57.5% of total world cement consumption in 2015 compared to 3.5% for North America. (2)  The growth opportunity in this territory is significant given our current very low current penetration of this market and the Board does not believe that the near-term opportunity is materially affected by a slowdown in growth in the region. 

 

For territories across the Rest of the World, Somero also has very low market penetration.  The most significant growth opportunity in this region is India, with its cement consumption second only to China and forecast to represent 7.4% of world cement consumption in 2015, more than double North American consumption. (2) 

 

Drivers of Growth

Key drivers of growth in North America will be growth in US non-residential construction spend which is forecast to grow each year by 5%-7% through 2019.(3)  Other growth drivers are technology upgrades to an aging fleet of installed Somero equipment, fleet additions, new product introductions, and a shortage of skilled labor in the concrete construction industry. 

 

In Europe, growth will be driven by continued recovery of the non-residential construction market across mainland Europe, in addition to technology upgrades to an aging fleet of installed Somero equipment, fleet additions, new product introductions, and a shortage of skilled labor in the concrete construction industry.

 

In China, we expect growth will be driven by large multinational corporation projects that require high-quality floors that adhere to western flatness and levelness standards, broader domestic acceptance of wide-placement and US flatness, levelness floor specifications as supported by the China Flooring Association, an increase in the availability of long-term financing options offered to our customers by Somero, and an increasing shortage of skilled labor. 

 

For territories in the Rest of the World, the primary drivers of growth will be increased demand for higher quality concrete floors, broader domestic acceptance of wide-placement and US flatness, levelness floor specifications, and shortages of skilled labor.

 

Notes:

1. Percentage derived from Portland Cement Association Market Intelligence Fall Cement Outlook report dated November 2015.

2. Percentage derived from Portland Cement Association Market Intelligence World Cement Consumption report dated August 2013.

3. Estimates obtained from FMI Research Services Group 3Q 2015 Construction Outlook Report.

 

 

Business Model

 

A Clear Strategic Objective

In 2014, the Company outlined our strategic objective to double 2013 revenue of US$ 45.1m by 2018.  In 2015, the Company made significant progress towards this goal, growing revenues by US$ 10.9m, or 18% from the prior year to reach US$ 70.2m.  Our strategic objective remains in view as we continue to execute plans to grow the business through geographical expansion and product innovation.

 

Geographic Expansion

Somero is a truly global business, supplying over 90 countries with our unique products and services.  Replicating the success of our business in the North American market in other territories across the globe is a key element of our strategy.  Supporting this commitment to grow the business globally is our investment in our international employees.  Since 2007, virtually all our staffing increases have been employees based outside of North America.  We will continue to make selective investments to expand our global sales and support coverage as we pursue this strategy. 

 

Product Innovation

2015 was a highly productive year for our Engineering team as we completed development on three new products, our new S-940 Laser Screed® and S-10A Laser Screed® machines as well as our Somero Floor Levelness SystemTM.  The S-10A Laser Screed® machines and the Somero Floor Levelness SystemTM were released in fourth quarter 2015, while the S-940 Laser Screed® machine was officially released in first quarter 2016 at the World of Concrete in Las Vegas.  Somero will continually search for new opportunities to leverage our core technology and design capabilities to introduce innovative new products to the industry.

 

Key Differentiators

While Somero sells equipment to our concrete contractor customer base, the Company is much more than simply a seller of equipment.  Somero is committed to making our customers successful in their businesses.  We are able to deliver on this promise through two competitive advantages that differentiate us in the market, (1) unparalleled industry expertise, service, training and support, and (2) innovative product leadership. Our deep and comprehensive industry expertise means we truly understand our customer's business.  As a result, we are able to provide our customers with valuable insight and guidance regarding their projects, well beyond the use of our equipment on the job-site.  In addition, because we work so closely with our customers, we are able to develop new and innovative products that address our customer's needs so they can produce higher quality floors, reduce manpower, increase their productivity, and ultimately become more successful in their business. 

 

A Multi-Faceted Value Proposition

Somero's unique value proposition provides benefits to both our customer and the building owner.  For the customer, the use of Somero equipment increases the quality of the concrete floor and improves the customer's job site productivity which in turn increases the profit the customer earns from the project.  For the building owner, using Somero equipment to produce a high quality flat and level floor will improve the appearance of the building, improve the operational efficiency of the building's operations, reduce the maintenance cost of the building, and reduce the maintenance cost of operational equipment including forklifts.

 

 

FINANCIAL REVIEW

 

 

 

 

 

Summary of Financial Results

 

 

 

 

 

 

 

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000

US$ 000

 

 

 

Revenue

70,222

59,277

Cost of sales

31,059

27,290

Gross profit

39,163

31,987

 

 

 

Operating expenses

 

 

Selling expenses

7,491

7,150

Engineering expenses

1,031

1,166

General and administrative expenses

13,068

11,079

Total operating expenses

21,590

19,395

Operating income

17,573

12,592

Other income (expense)

 

 

Interest expense

(191)

(107)

Interest income

20

39

Foreign exchange loss

(43)

(122)

Other

-

(3)

Income before income taxes

17,359

12,399

Provision/(benefit) for income taxes

5,809

(2,142)

Net income

11,550

14,541

Other data

 

 

Adjusted EBITDA

20,034

14,951

Adjusted net income

12,966

10,133

Depreciation expense

719

553

Amortization of intangibles

1,545

1,545

Capital expenditures

4,162

1,221

 

 

 

Notes:

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

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

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

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

 

 

Net income to adjusted EBITDA reconciliation and

 

 

Adjusted net income reconciliation

 

 

 

 

 

 

Year ended

Year ended

 

December 31, 2015

December 31, 2014

 

US$ 000

US$ 000

Adjusted EBITDA reconciliation

 

 

Net income

11,550

14,541

Tax provision/(benefit)

5,809

(2,142)

Interest expense

191

107

Interest income

(20)

(39)

Foreign exchange loss

43

122

Other expense

-

3

Depreciation

719

553

Amortization

1,545

1,545

Stock based compensation

197

262

Adjusted EBITDA

20,034

14,952

 

 

 

Adjusted net income reconciliation

 

 

Net income

11,550

14,541

Amortization

1,545

1,545

Reversal of valuation allowance for deferred tax assets

-

(4,056)

Tax impact of stock option & RSU settlements

(129)

(1,897)

Adjusted net income

12,966

10,133

 

 

Notes:

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

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

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

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

 

Revenues

The Company's consolidated revenues increased by 18% to US$ 70.2m (2014: US$ 59.3m). Company revenues consist primarily of sales from new Large line products (the S22-E Large Laser Screed® and its predecessors), sales from Mid line products (the S-15R and the new S10A), sales from Small line products (the S-840, CopperHead, and the S-485), Remanufactured machines sales, 3-D Profiler System sales, and Other Revenues, which consist of, among other things, revenue from sales of spare parts, Topping Spreaders, Mini Screeds, and accessories. The overall increase for the year was driven by Large line sales, Small line sales, 3D Profiler System sales, and Other sales.

 

Large line sales increased to US$ 28.3 m (2014: US$ 22.4m) as a result of increased volume and price increases,  Small line sales increased to US$ 13.6 m (2014: US$ 9.7m) also due to higher volume and price increases, 3D Profiler System sales increased to US$ 4.4m (2014: US$ 3.7) and Other revenues, including sales of spare parts, Topping Spreaders, Mini Screeds, and accessories, increased modestly to US$ 11.9 m (2014: US$ 11.1m).

 

 

Revenue breakdown by geography

 

 

 

 

 

 

 

 

 

 

 

North America

EMEA

ROW

Total

 

US$  in millions

US$ in millions

US$ in millions

US$ in millions

 

 

 

 

 

 

 

2015

2014

 

2015

2014

2015

2014

2015

2014

Net sales

% of Net sales

Net sales

% of Net sales

 

 

 

 

 

 

 

 

 

 

 

Large line

24.5

17.0

1.9

1.5

1.9

3.9

28.3

40.3%

22.4

37.8%

Mid line

2.8

2.2

1.6

1.2

1.3

2.5

5.7

8.1%

5.9

9.9%

Small line

8.5

6.2

3.4

1.3

1.7

2.2

13.6

19.4%

9.7

16.4%

Remanufactured machines

2.6

2.4

0.6

0.2

3.1

3.9

6.3

9.0%

6.5

11.0%

3D Profiler System

3.8

3.3

0.3

0.2

0.3

0.2

4.4

6.3%

3.7

6.2%

Other

7.0

6.1

1.8

1.9

3.1

3.1

11.9

16.9%

11.1

18.7%

Total

49.2

37.2

9.6

6.3

11.4

15.8

70.2

100.0%

59.3

100.0%
                                 

 

 

Units by product line

 

 

 

Total

 

2015

2014

 

 

 

Large line

80

64

Mid line

29

31

Small line

165

126

Remanufactured machines

43

49

3D Profiler System

47

40

Total

364

310

 

Sales to customers located in North America contributed 70% of total revenue (2014: 63%), sales to customers in EMEA (Europe, India, Middle East, and South Africa) contributed 14% (2014: 11%) and sales to customers in RoW (Southeast Asia, Australia, Latin America, and China) contributed 16% (2014: 27%).

Sales in North America were US$ 49.2m (2014: US$ 37.2m) which is up 32% driven by higher Large line and Small line sales. Sales in EMEA were US$ 9.6m (2014: US$ 6.3m) which is up 52% primarily due to an increase in Small line sales. Sales in RoW were US$ 11.4m (2014: US$ 15.8m) which are down 28% primarily due to declines in Large line, Mid line, and remanufactured sales.

 

Regional sales

2015

2014

North America

     49.2

    37.2

EMEA (Europe)

       5.7

      3.6

ROW (Korea)

       1.0

      0.6

ROW (Latin America)

       2.0

      2.6

EMEA (India)

       0.6

      0.6

ROW (Australia)

       1.0

      2.4

ROW (Southeast Asia)

       1.3

      0.7

ROW (China)

       6.1

      9.5

EMEA (Middle East)

       2.7

      0.8

EMEA (Scandinavia)

       0.5

      0.6

EMEA (Russia)

       0.1

      0.7

Total

     70.2

    59.3

 

Gross profit

Gross profit increased to US$ 39.2m (2014: US$ 32.0m), with gross margins increasing to 55.8% (2014:  54.0%) due to price increases, product cost reductions, and factory efficiency.

 

Operating expenses

Operating expenses increased by 11% to US$ 21.6m (2014: US$ 19.4m). This increase was driven primarily by increased commissions and insurance associated with higher sales volume,  and higher personnel costs due in part to increased average headcount in 2015 vs. 2014.

 

Other income (expense)

Other expenses remained flat at US$ (0.2m) consisting of interest expense, interest income, and foreign exchange gains and losses.

 

Provision/(benefit) for income taxes

The provision for income taxes was US$ 5.8m in 2015 as compared to a benefit of US$ 2.1m in 2014. Overall, Somero's effective tax rate changed from (17.3%) in 2014 to 33.5% in 2015 due to a one-time reversal of a deferred tax valuation allowance of US$ 4.1m in 2014, and US$ 5.9m in settlements of Restricted Stock Units and Stock Options which were deductible for tax purposes in 2014. 

 

Net income

Net income decreased to US$ 11.6m from US$ 14.5m in 2014 due primarily to significant, non-recurring tax benefits in 2014.  On an adjusted basis, excluding amortization and tax benefits associated with reversal of the deferred tax asset valuation allowance and settlements of RSUs and stock options, adjusted net income increased to US$ 13.0m from US$ 10.1m in 2014 driven by higher sales volume, gross margin expansion and operating cost controls.  Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000's

US$ 000's

 

 

 

Income available to stockholders

11,550

14,541

 

 

 

Basic weighted shares outstanding

56,145,563

56,274,097

Net dilutive effect of stock options and restricted stock units

1,545,716

1,641,129

Diluted weighted average shares outstanding

57,691,279

57,915,226

 

The Company had 56,106,732 shares outstanding at December 31, 2015.  Earnings per share at December 31, 2015 are as follows:

 

 

Year Ended

December 31,

2015

Per Share

Year Ended

December 31,

2014

Per Share

 

US$

US$

Basic earnings per share

0.21

0.26

Diluted earnings per share

0.20

0.25

Basic adjusted net income per share

0.23

0.18

Diluted adjusted net income per share

0.22

0.17

 

 

Consolidated Balance Sheets

 

 

As of December 31, 2015 and 2014

 

 

 

 

As of

December 31,

2015

As of

December 31, 2014

 

 

US$ 000

US$ 000

Assets

 

 

Current Assets:

 

 

 

Cash and cash equivalents

13,709

7,950

 

Accounts receivable - net

8,127

6,599

 

Inventories

8,479

8,390

 

Prepaid expenses and other assets

862

734

 

Deferred tax asset

410

174

 

Total current assets

31,587

23,847

Property, plant and equipment - net

8,266

4,823

Intangible assets - net

2,495

4,040

Goodwill

2,878

2,878

Deferred financing costs

70

103

Deferred tax asset

3,119

3,505

Other assets

26

32

Total assets

48,441

39,228

 

 

 

 

Liabilities and stockholders' equity

 

 

Current liabilities:

 

 

 

Notes payable - current portion

48

266

 

Accounts payable

3,705

4,096

 

Accrued expenses

4,330

2,896

 

Income tax payable

1,044

25

 

Total current liabilities

9,127

7,283

Notes payable, net of current portion

1,024

1,072

Other liabilities

84

91

Total liabilities

10,235

8,446

 

 

 

 

Stockholders' equity

 

 

 

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

-

-

 

Common stock, US$.001 par value, 80,000,000 shares authorized, 56,425,598 shares issued at December 31, 2015 and 2014

26

26

 

Less: treasury stock, 318,866 shares as of December 31, 2015 and 232,700 shares as of December 31, 2014 at cost

(614)

(416)

 

Additional paid in capital

22,008

22,336

 

Retained earnings

18,432

10,194

 

Other comprehensive loss

(1,646)

(1,358)

 

Total stockholders' equity

38,206

30,782

Total liabilities and stockholders' equity

48,441

39,228

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

Consolidated Statements of Comprehensive Income*

 

 

For the years ended December 31, 2015 and 2014

 

 

 

 

 

 

 

 

Year ended

Year ended

 

 

December 31

December 31

 

 

2015

2014

 

 

US$ 000

US$ 000

 

 

except per share data

except per share data

 

 

 

 

Revenue

70,222

59,277

Cost of sales

31,059

27,290

Gross profit

39,163

31,987

 

 

 

 

Operating expenses

 

 

 

Selling expenses

7,491

7,150

 

Engineering expenses

1,031

1,166

 

General and administrative expenses

13,068

11,079

 

Total operating expenses

21,590

19,395

 

 

 

 

Operating income

17,573

12,592

Other income (expense)

 

 

 

Interest expense

(191)

(107)

 

Interest income

20

39

 

Foreign exchange (loss)/gain

(43)

(122)

 

Other

-

(3)

 

 

 

 

Income before income taxes

17,359

12,399

Provision/(benefit) for income taxes

5,809

(2,142)

Net income

11,550

14,541

Other comprehensive income/(loss)

 

 

 

Cumulative translation adjustment

(280)

(79)

 

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

(8)

-

Other comprehensive income/(loss)

11,262

14,462

 

 

 

 

Earnings per common share

 

 

Earnings per share basic                                                                                  

0.21

0.26

Earnings per share diluted                                                                                

0.20

0.25

 

 

 

 

Weighted average number of common shares outstanding                           

 

 

Basic

56,145,563

56,274,097

 

Diluted

57,691,279

57,915,226

 

 

 

 

See notes to consolidated financial statements.

 

 

* US GAAP requires the previous Consolidated Statements of Operations now be called Statements of Comprehensive Income.

 

 

Consolidated  Statements of Changes in Stockholders' Equity

 

 

For the years ended December 31, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

Additional Paid-In Capital

Shares

Amount

Retained earnings/ (Accumulated deficit)

Compre-hensive income/

(loss)

Total Stockholders' Equity

 

 

US$ 000

US$ 000

 

US$ 000

US$ 000

US$ 000

US$ 000

 

Balance - January 1, 2014

56,425,598

26

27,984

60,827

(61)

(2,774)

(1,279)

23,896

 

Cumulative translation adjustment

-

-

-

-

-

(79)

(79)

 

Net income

-

-

-

-

14,541

-

14,541

 

Stock based compensation

-

262

-

-

-

-

262

 

Dividend

-

-

-

-

(1,573)

-

(1,573)

 

Treasury stock

-

-

171,873

(355)

-

-

(355)

 

RSUs settled for cash

-

(4,874)

-

-

-

-

(4,874)

 

Stock options settled for cash

-

(1,036)

-

-

-

-

(1,036)

 

Balance - December 31, 2014

56,425,598

26

22,336

232,700

(416)

10,194

(1,358)

30,782

 

Cumulative translation adjustment

-

-

-

-

-

(280)

(280)

 

Change in fair value of derivative instruments

-

-

-

-

-

(8)

(8)

 

Net income

-

-

-

-

11,550

-

11,550

 

Stock based compensation

-

-

197

-

-

-

-

197

 

Dividend

-

-

-

-

(3,312)

-

(3,312)

 

Treasury stock

-

-

-

86,166

(198)

-

-

(198)

 

RSUs settled for cash

-

-

(275)

-

-

-

-

(275)

 

Stock options settled for cash

-

-

(250)

-

-

-

-

(250)

 

Balance - December 31, 2015

56,425,598

26

22,008

318,866

(614)

18,432

(1,646)

38,206

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 
                         

 

 

Consolidated Statements of Cash Flows

 

 

For the years ended December 31, 2015 and 2014

 

 

 

 

 

 

Year ended

Year ended

 

December 31

December 31

 

2015

2014

 

US$ 000

US$ 000

Cash flows from operating activities:

 

 

  Net income

11,550

14,541

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

 

 

    Deferred taxes

150

(3,251)

    Depreciation and amortization

2,264

2,098

    Amortization of deferred financing costs

33

32

    Stock based compensation

197

262

  Working capital changes:

 

 

    Accounts receivable

(1,528)

(1,192)

    Inventories

(89)

(1,609)

    Prepaid expenses and other assets

(128)

(98)

    Other assets

6

11

    Accounts payable, accrued expenses and other liabilities

1,036

2,051

    Income taxes payable

1,019

(500)

    Net cash provided by operating activities

14,510

12,345

 

 

 

Cash flows from investing activities:

 

 

  Proceeds from sale of property and equipment

-

25

  Property and equipment purchases

(4,162)

(1,221)

  Net cash used in investing activities

(4,162)

(1,196)

 

 

 

Cash flows from financing activities:

 

 

  Payment of dividend

(3,312)

(1,573)

  Payment of RSU's

(275)

(4,874)

  Purchase of treasury stock

(198)

(355)

  Stock options settled for cash

(250)

(1,036)

  Repayment of notes payable

(266)

(1,265)

   Net cash used in financing activities

(4,301)

(9,103)

 

 

 

Effect of exchange rates on cash and cash equivalents

(288)

(79)

 

 

 

Net increase in cash and cash equivalents

5,759

1,967

 

 

 

Cash and cash equivalents:

 

 

Beginning of year

7,950

5,983

End of year

13,709

7,950

 

 

 

See notes to consolidated financial statements.

 

 

 

 

Notes to the Consolidated Financial Statements

As of December 31, 2015 and 2014

 

1.   Organization and description of business

Nature of business

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

 

2.   Summary of significant accounting policies

Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. 

 

Principles of consolidation

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

 

Cash and cash equivalents 

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

 

Accounts receivable and allowances for doubtful accounts 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable.  Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience.  As of December 31, 2015 and 2014, the allowance for doubtful accounts was approximately US$ 698,000 and US$ 324,000, respectively. Bad debts expense was US$ 381,000 and US$ 49,000 in 2015 and 2014, respectively.

 

Inventories 

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

 

Deferred financing costs

Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument.  These financing costs are being amortized using the effective interest method.

 

Intangible assets and goodwill

Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date.  Goodwill represents the excess cost of the business combination over the Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.  The Company did not incur a goodwill impairment loss for the year ended December 31, 2015 or 2014. (See Note 4 for more information.)

 

The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended December 31, 2015, the Company tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.) 

 

Revenue recognition 

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

 

Warranty liability 

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

 

 

2015

2014

 

US$ 000

US$ 000

 

 

 

Balance, January 1

(193)

(179)

Warranty charges

409

397

Accruals

(523)

(411)

Balance, December 31

(307)

(193)

               

Property, plant, and equipment

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

 

Income taxes

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

 

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

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision/ (benefit) for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2015 and 2014. The Company is subject to a three year statute of limitations by major tax jurisdictions, and currently 2012 through 2014 remain open to investigation.

 

Use of estimates

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

 

Stock based compensation

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

 

Transactions in and translation of foreign currency

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

 

Comprehensive income

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

 

Earnings per share

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

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000's

US$ 000's

 

 

 

Income available to stockholders

11,550

14,541

 

 

 

Basic weighted shares outstanding

56,145,563

56,274,097

Net dilutive effect of stock options and restricted stock units

1,545,716

1,641,129

Diluted weighted average shares outstanding

57,691,279

57,915,226

 

Fair value

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

 

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

 

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

 

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

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

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

 

 

 

Quoted prices

 

 

 

 

 

in active markets

Significant other

Significant other

 

 

 

Identical Assets

observable inputs

unobservable inputs

 

 

 

Level 1

Level 2

Level 3

 

 

US$ 000

US$ 000

US$ 000

US$ 000

Year ended December 31, 2014

 

 

 

Asset:

 

 

 

 

 

Goodwill

2,878

 

 

2,878

 

Interest rate swap

-

 

 

-

 

 

 

 

 

 

Year ended December 31, 2015

 

 

 

Asset:

 

 

 

 

 

Goodwill

2,878

 

 

2,878

 

Interest rate swap

(4)

 

 

(4)

 

New accounting pronouncements

In August 2015, the FASB deferred the effective dates by 1 year for Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The new effective date for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

 

In July 2015, THE FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. The amendment applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company plans to adopt this standard with the interim period beginning January 1, 2016 and expects no material adjustments as a result of the adoption of this standard.

 

In November 2015, THE FASB issued Accounting Standards Update No. 2015-17 Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in the Update are effective for financial statements issued for annual periods beginning after December 15, 2017.   The Company plans to adopt this standard with the fiscal period beginning January 1, 2018 and expects no material adjustments as a result of the adoption of this standard.

 

3.  Inventories

Inventories consisted of the following at December 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

Year ended

 

 

 

 

December 31,

 

December 31,

 

 

 

 

2015

 

2014

 

 

 

 

US $ 000

 

US $ 000

 

 

 

 

 

 

 

Raw Material

 

 

        2,576

 

     2,312

Finished goods and work in process

        2,259

 

     2,970

Remanufactured

 

 

        3,644

 

     3,108

Total

 

 

 

        8,479

 

     8,390

 

4.  Goodwill and intangible assets

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

 

The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2015 and 2014, and that the value of patents was not impaired as of December 31, 2015 and 2014.

The following table reflects other intangible assets:

 

 

Year ended

Year ended

 

Weighted average

December 31,

December 31,

 

amortization

2015

2014

 

period

US$ 000's

US$ 000's

Capitalized cost

 

 

 

Patents

12 years

18,538

18,538

Intangible assets not subject to amortization

-

49

49

 

 

18,587

18,587

Accumulated amortization

 

 

 

Patents

12 years

16,092

14,547

Intangible assets not subject to amortization

-

-

-

 

 

16,092

14,547

Net carrying costs

 

 

 

Patents

12 years

2,446

3,991

Intangible assets not subject to amortization

-

49

49

 

 

2,495

4,040

 

Amortization expense associated with the intangible assets in each of the years ended December 31, 2015 and 2014 was approximately US$ 1,545,000. Future amortization of intangible assets is expected to be as follows for the years ended:

 

 

December 31

 

US$ 000

2016

1,545

2017

901

Thereafter

-

 

2,446

 

5.  Property, plant, and equipment

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

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000

US$ 000

 

 

 

Land

864

207

Building and improvements

6,325

3,686

Machinery and equipment

4,599

3,760

 

11,788

7,653

Less:  accumulated depreciation and amortization

(3,522)

(2,830)

 

8,266

4,823

 

Depreciation expense for the years ended December 31, 2015 and 2014 was approximately US$ 719,000 and US$ 553,000, respectively.

 

6.  Notes payable

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

 

 

 

 

 

 

 

 

2015

2014

 

US$ 000's

US$ 000's

March 2016 secured revolving line of credit

-

-

April 2018 delayed draw term loan

-

218

April 2018 commercial real estate mortgage

1,072

1,120

Total bank debt

1,072

1,338

 

 

 

Less debt due within one year

(48)

(266)

 

 

 

Obligations due after one year

1,024

1,072

 

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

The future payments by year under the Company's amended loan are as follows:

 

 

US$ 000's

2016

48

2017

48

2018

976

Thereafter

-

Total

1,072 

 

The Company entered into an amended credit facility in March 2013. The new agreement will mature between March 2016 and March 2018.

·     US$ 5,000,000 March 2016 secured revolving line of credit

·     US$ 6,000,000 April 2018 delayed draw term loan

·     US$ 1,447,000 April 2018 Commercial Real Estate Mortgage

The interest rate on the revolving line of credit is based on the 1-month LIBOR rate plus 2.75%.  The interest rate on the delayed draw term loan was 3.17% as of December 31, 2015 and was based on the 3-month LIBOR rate plus 2.75%.  The interest rate on the commercial real estate mortgage was 2.99% as of December 31, 2015 and was based on the 1-month LIBOR rate plus 2.75%. The Company's loan facility is secured by substantially all of its business assets. 

 

7.  Retirement program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company matches vests immediately.  The Company contributed approximately US$397,000 to the savings and retirement plan during 2015 and contributed US$ 259,000 during 2014.

 

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 represent the full 12 months of each successive period as follows:

 

 

 

 

US$ 000

2016

565

2017

382

2018

260

2019

144

Thereafter

-

 

1,351

 

9.  Capital leases

Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2015.  Future minimum payments by year represent the full 12 months of each successive period as follows:

 

 

 

 

US$ 000

2016

16

2017

15

2018

3

Thereafter

-

 

34

 

 

 

 

10.  Supplemental cash flow and non-cash financing disclosures

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000

US$ 000

Cash paid for interest

83

71

Cash paid for taxes

4,700

1,697

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

(4)

-

 

11.  Business and credit concentration

The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance.  At December 31, 2015 and 2014, the Company had two customers which represented 11% and 10% of total accounts receivable, respectively.

 

12.  Commitments and contingencies

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

 

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

 

13.  Income taxes

Income Tax Provision

 

 

 

 

 

 

 

 

 

 

Year ended

Year ended

 

 

 

December 31,

December 31,

 

 

 

2015

2014

 

 

 

US$ 000

US$ 000

 

 

 

 

 

Current income tax

 

 

 

Federal

 

4,876

954

 

State

 

468

123

 

Foreign

 

315

32

Total current income tax expense

5,659

1,109

 

 

 

 

 

Deferred tax (benefit)/expense

 

 

 

Federal

 

141

(3,083)

 

State

 

9

43

 

Foreign

 

-

(211)

Total deferred tax (benefit)/expense

150

(3,251)

 

 

 

 

 

Total (benefit)/provision

5,809

(2,142)

 

The components of the net deferred income tax asset at December 31, 2015 and 2014 were as follows:

 

 

 

Year ended

Year ended

 

 

December 31,

December 31,

 

 

2015

2014

 

 

US$ 000

US$ 000

 

 

 

 

Bad debt allowance

248

115

Inventory reserve

147

39

Accrued expenses

-

5

UNICAP - Sec 263A

157

124

 

Current deferred tax asset

552

283

 

 

 

 

Prepaid insurance

(48)

(53)

Prepaid other

(94)

(56)

 

Current deferred tax liabilities

(142)

(109)

 

 

 

 

Accrued warranty

134

97

Stock comp expense (options & RSUs)

261

243

Intangible assets

2,766

3,181

UK intangibles

134

134

Italy - NOL

76

76

Foreign tax credit

237

237

 

Noncurrent deferred tax assets

3,608

3,968

 

 

 

 

Fixed assets

(489)

(463)

 

Noncurrent deferred tax liabilities

(489)

(463)

 

 

 

 

 

 

 

 

Total net deferred tax assets

3,529

3,679

 

 

 

 

 

 

 

 

Rate reconciliation

 

 

Consolidated income before tax

17,359

12,399

Statutory rate

34%

34%

 

Statutory tax expense

5,902

4,216

 

 

 

 

State taxes

315

110

Foreign taxes

(107)

(179)

Meals and entertainment

53

50

Permanent differences due to stock options & RSUs

(129)

(1,897)

Permanent differences due to other items

(402)

10

Valuation allowance

-

(4,056)

Other

177

(396)

 

Tax (benefit)/expense

5,809

(2,142)

 

 

 

 

 

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

 

14.  Revenues by geographic region

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

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2015

2014

 

US$ 000

US$ 000

United States and U.S. possessions

47,621

36,314

Canada

1,547

841

Rest of World

21,054

22,122

Total

70,222

59,277

 

15.  Stock based compensation

The Company has one stock-based compensation plan, which is described below. The compensation cost that has been charged against income for the plan was approximately US$ 197,000 and US$ 262,000 for the years ended December 31, 2015 and 2014, respectively.  The income tax effect recognized for stock based compensation was US$ 0.1m and US$ 1.9m, respectively, for the years ended December 31, 2015 and 2014.  During 2013, the Company recorded a partial valuation allowance against its deferred tax assets related to stock compensation that was reversed during 2014.

 

Stock options

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

 

Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years.  No new options were granted in 2015 and 2014.

A summary of options activity is presented below:

 

Options

Stock options

Weighted-average exercise price

Weighted average remaining contractual term (years)

Aggregate intrinsic value

Outstanding at January 1, 2014

2,402,088

0.44

5.99

-

Granted

                   -

             -

                         -

-

Exercised

(561,461)

0.42

                         -

-

Forfeited

                   -

             -

                         -

-

Outstanding at December 31, 2014

1,840,627

0.44

5.02

-

Exercisable at December 31, 2014

1,840,627

0.44

5.02

-

Outstanding at January 1, 2015

1,840,627

0.44

5.02

-

Granted

-

-

-

-

Exercised

(154,266)

0.47

4.13

-

Forfeited

-

-

-

-

Outstanding at December 31, 2015

1,686,361

0.44

4.01

-

Exercisable at December 31, 2015

1,686,361

0.44

4.01

-

 

Options exercised in 2015 and 2014 were settled for cash of US$ 0.3m and US$ 1.0m, respectively.

As of December 31, 2015, the Company's stock options have all been vested with no unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plan. The fair value of options vested in 2015 and 2014 was US$ 0 and US$ 0 respectively.

 

A summary of restricted stock units activity is presented below:

 

 

Shares

Grant date fair market value US$

Outstanding at January 1, 2014

2,540,899

550,151

Granted

188,800

364,002

Vested or settled for cash

(2,279,349)

(360,154)

Forfeited

 -

-

Outstanding at December 31, 2014

450,350

553,999

Outstanding at January 1, 2015

450,350

553,999

Granted

119,522

232,673

Vested or settled for cash

(140,788)

(145,165)

Forfeited

(5,183)

(10,000)

Outstanding at December 31, 2015

423,901

631,507

 

RSUs settled for cash were US$ 0.3m in 2015 and US$ 4.9m in 2014.

 

As of December 31, 2015, there was US$ 275,000 total unrecognized compensation cost related to non-vested restricted stock units.  Restricted stock unit expense is being recognized over the three year vesting period.  The weighted average remaining vesting period is 1.03 years.           

         

16.  Employee compensation

The Board approved management bonuses and profit sharing dollars totaling US$ 1.2m to be paid in December 2015 and early 2016 based upon the Company meeting certain profitability targets. 

 

17.  Subsequent events

Dividend

In recognition of Somero's strong performance and the Board of Directors' confidence in the continued growth of the Company, the Board is pleased to announce a final 2015 dividend of 5.0 US cents per share that will be payable on April 4, 2016 to shareholders on the register at March 18, 2016.  Together with the interim dividend paid in October 2015 of 1.9 US cents per share, this represents a full year dividend to shareholders of 6.9 US cents per share.  Both the full year dividend and the final dividend represent a 25% increase over the previous year.

 

Change in credit facility

In February 2016 the Company amended the US$ 5,000,000 secured revolving line of credit that was set to expire March 2016.  Under the amended terms, the line of credit was increased to US$ 10,000,000 and is now set to expire in February 2021.  There were no changes to the assets pledged as collateral under the Credit Facility or to the terms of the US$ 1,447,000 Commercial Real Estate Mortgage due in April 2018. 

 

Annual General Meeting

Notice is given that the Annual General Meeting of Stockholders (the "AGM") of the Company will be held at the offices of Canaccord Genuity Limited, 88 Wood Street, London EC2V 7QR on June 7, 2016 at 11:00 am local time

 


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