Interim Results

RNS Number : 0454Z

Somero Enterprises Inc.

15 September 2009

 



PRESS ANNOUNCEMENT
15 September 2009
Somero Enterprises, Inc ® ('Somero' or 'the Company' or 'the Group')
Interim Results for the six months ended 30 June 2009

Somero Enterprises, Inc.®, is pleased to report its interim results for the six months to 30 June 2009. Somero is a North American manufacturer of patented laser guided equipment used for the spreading and levelling of high volumes of concrete for floors in the commercial construction industry. Expanding into new geographic markets, Somero's innovative, proprietary products help contractors worldwide achieve a high level of precision in flat floor construction which reduces construction time and improves cost savings. Financial Highlights §         Revenue and operating results in line with management’s expectations following 24 June 2009 trading update and equity placing announcement §         Group revenue of US$13.4m (H1 2008: US$31.0m) §         Pre-tax (loss)/income of US($2.0m) (H1 2008: US$3.1m) §         Successful equity placing has reduced adjusted net debt to US$4.8(4)m (31 December 2008 US$9.7m) Business Highlights §         Increased focus on opportunities for growth in international markets –         Investment in China and the Middle East now producing good interest and response –         Latin and South America continue to produce positive results §         Balance of cost management and investment for growth –         Strategic investment in new products targeted for release in Q4 2009 –         Continued commitment to increasing penetration of the Middle and Far East markets §         Positive actions keep progress on track –         Further cost saving program implemented in June with continued focus on creating additional cost savings across the Group –         Placing has reduced adjusted net debt from US$9.7m at end 2008 to US$4.8(4)m at 30 June 2009 –         Management retention and incentive plan agreed Commenting, Jack Cooney, President and Chief Executive Officer of Somero, said: 'We are pleased to report revenue today that is consistent with our expectations. We believe our markets are at or near their bottom and we are continuing to focus on every sales opportunity, while maintaining tight controls on cost. We are also pursuing the increasing internationalisation of our business and focusing on new product development with new products expected in the second half of 2009.   'The recent placing, raising gross proceeds of US$5.5m, was successfully completed alongside lowered covenant requirements from our lending bank. The placing has strengthened our balance sheet considerably and significantly reduced interest payments and we are well placed as our markets rebuild. This along with our aggressive cost cutting policy provides a stable platform from which to address opportunities as the markets start to improve'.
For further information please contact:
Hawkpoint Partners			[phone]
Christopher Kemball / Chris Robinson
Collins Stewart			[phone]
Piers Coombs
References to adjusted EBITDA are to Somero's net (loss)/income plus interest income, interest expense, taxes, depreciation, amortization, foreign exchange, stock based compensation and other expense. References to adjusted net (loss)/income before amortization are to Somero's net (loss)/income plus amortization expense of intangibles.  Adjusted EBITDA and adjusted net (loss)/income before amortization are not measurements of the Company's financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and adjusted net (loss)/income 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. See reconciliation of adjusted EBITDA and adjusted net (loss)/income before amortization to net (loss)/income. Adjusted net debt consists of actual net debt of $4.5m plus $0.3m in costs associated with the equity raise that were paid subsequent to 30 June 2009.
About Somero 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 Laser Screed®, CopperHead® and new Mini Screed™, 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 slab floors by a variety of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, Westinghouse, the United States Postal Service, Lowe's and Toys 'R' Us. Somero's executive offices and training facility are located in Florida, USA. Its main operations, including manufacturing, are in Michigan, USA. There is also a sales and service office in Chesterfield, England. Somero has 73 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.  Chairman's and Chief Executive Officer's Statement While revenues in 1H 2009 were lower than the same period last year, we are pleased to confirm that they are in line with our expectations.  Operational Performance As expected, revenues declined in all our end markets but we have responded by dramatically reducing our cost base and by renegotiating our bank covenants to remain compliant through a period of turbulence. We have experienced extensive customer interest in our new Somero As-Is Program offering of used Large Line machines and Small Line machines that opens a new market niche for sales of refurbished inventory. We have also continued product development and expect to introduce new products in the second half of 2009. The new Mini-Screed Commercial has been a highlight, contributing over 6% of year to date revenue. The new SXP-D along with our Somero Total Care warranty program (introduced Q4 2008) has been well received and we expect it to improve significantly the replacement demand for Large Line as concrete contractors regain the confidence to invest in their businesses.   Emerging Markets Emerging markets such as Latin and South America, China and the Middle East remain a key area of focus for Somero. We are pleased by the relative strength of Latin and South America, and continue to see increased interest in China and the Middle East.  A central component of our business strategy continues to be our entry into emerging international markets where construction demand is expected to recover quickly and demand for ever higher building quality standards continues to rise. We will continue to position ourselves to take advantage of these trends by adding additional resources in these markets.  The rollout of our emerging markets' strategy is centered on three core aims: to identify international blue chip logistics companies, development companies and building owners with a view to ensuring Western floor flatness specifications are carried through to their new markets to target joint venture relationships with major western contractors and local contractors who are tendering for projects for these major international players to enhance our current training program to provide a more comprehensive service offering to contractors for the complete floor/slab construction Product Development As well as focusing on emerging market opportunities, we remain committed to developing innovative, state-of-the-art, proprietary, high-margin products that meet the ever changing needs of our customers. Despite overall cost reductions, we have continued to invest 3% of sales in product development and expect to launch new products in Q4 2009. We remain confident that the launch of these products will continue to provide growth opportunities for Somero over the medium and longer term. Interim Dividend While no dividends were declared in the first half of 2009, the Board has reconfirmed its intention to consider using a portion of future surplus free cash generated by the Company to return capital to shareholders, either through dividend payments or a share buy-back program. Stock Appreciation Rights Plan  Following our trading update and equity placing in June, Somero's Remuneration Committee has reviewed the alternatives for ensuring that management are appropriately incentivized to rebuild shareholder value and to be retained within the Group. Following a thorough review of a number of schemes, the Remuneration Committee has developed a Stock Appreciation Rights Plan. This plan will provide a retention program for key managers and fully align their efforts with our shareholders' interests. Whilst based on appreciation in equity value, this will be a cash program with no new equity issued and therefore there will be no dilution for shareholders. The program will issue phantom shares in each year of a fixed three year period starting in the future at the discretion of the Board with the number of shares issued based on a percentage of the manager's salary and Somero's share price at time of issue. The cash pay out under the Plan will fall due on the third anniversary of each tranche of the issue provided the manager has met the terms of the Plan, including remaining an employee of the Group. To illustrate the impact of the Stock Appreciation Rights Plan, it is anticipated that, when the first tranche of phantom shares are issued, the aggregate of each manager's salary multiplied by the allocated percentage will be US$1.0m.  This is the base from which any stock price appreciation, and therefore cash payments under the Stock Appreciation Rights Plan, will be calculated.  Somero's current stock option program for management, under which 2,825,315 options were issued with a strike price of 90p or greater, and 602,885 issued at a strike price of 16.5p, will remain in place. The Stock Appreciation Rights Plan will be capped at 90p per ordinary Somero share, the price at which the majority of the options under the existing incentive scheme would begin to return value. There are currently 56,425,598 ordinary Somero shares in issue. Current Trading and Outlook We are pleased with the performance delivered during the first half considering the unprecedented commercial environment we have experienced.  As we enter the second half of the year, trading is continuing in line with management's expectations following the 24 June 2009 trading update. We see our markets in all geographies slowly starting to rebuild and anticipate increasing momentum as we move into next year. We remain committed to maintaining tight cost control with a policy of progressive international expansion. Despite continuing our policy of net debt reduction, we remain committed to continued investment in new product development, and believe we are well placed as our markets rebuild. Stuart Doughty Chairman Jack Cooney President and Chief Executive Officer Business and Financial Review Summary of Financial Results (1) (2) (3) (4)
									For the six months ended 30 June
									2009 US$  000	2008 US$  000
Revenue									13,429	31,016
Cost of sales									7,285	13,460
Gross profit									6,144	17,556
Operating expenses
Selling expenses									3,055	6,760
Engineering expenses									382	981
General and administrative expenses									4,174	6,459
Total operating expenses									7,611	14,200
Operating (loss)/income									(1,467)	3,356
Other income (expense)
Interest expense									(734)	(457)
Interest income									2	22
Foreign exchange gain									150	225
Other									4	(22)
(Loss)/income before income taxes									(2,045)	3,124
Provision for income taxes									766	(1,164)
Net (loss)/income									(1,279)	1,960
(Loss)/earnings per share diluted									US ($0.04)	US  $0.06
(Loss)/earnings per share diluted - adjusted net (loss)/income before amortisation									US  $0.00	US  $0.09
Other data
Adjusted EBITDA									101	4,918
Adjusted net (loss)/income before amortisation									(112)	3,126
Depreciation expense									184	184
Amortisation of intangibles									1,167	1,166
Capital expenditures									7	347
References to adjusted EBITDA are to Somero's net (loss)/income plus interest income, interest expense, taxes, depreciation, amortization, foreign exchange and other expense. References to adjusted net (loss)/income before amortization are to Somero's net (loss)/income plus amortization expense of intangibles. Adjusted EBITDA and adjusted net (loss)/income before amortization are not measurements of the Company's financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and adjusted net (loss)/income 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. See reconciliation of adjusted EBITDA and adjusted net (loss)/income before amortization to net income. Diluted (loss)/earnings per share represents (loss)/income available to shareholders divided by the weighted average shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. All common stock equivalents were anti-dilutive at 30 June 2009. Diluted earnings per share on net (loss)/income before amortization is not a GAAP measurement and has been presented because management believes it is a useful analytical tool.
Net (loss)/income to EBITDA reconciliation and net (loss)/income before amortization
							For the six months ended 30 June
							2009 US$ 000			2008 US$ 000
Adjusted EBITDA reconciliation
Net (loss)/income							(1,279)			1,960
Tax provision							(766)			1,164
Interest expense							734			457
Interest income							(2)			(22)
Foreign exchange gain							(150)			(225)
Other							(4)			22
Depreciation							184			184
Amortisation							1,167			1,166
Stock-based compensation							217			212
Adjusted EBITDA							101			4,918
Net (loss)/income before amortisation reconciliation
Net (loss)/income							(1,279)			1,960
Amortisation							1,167			1,166
Net (loss)/income before amortisation							(112)			3,126
Notes References to adjusted net (loss)/income before amortization in this document are to Somero's net (loss)/income plus amortization of intangibles. Although adjusted net (loss)/income before amortization is not a measure of operating income, 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 by eliminating the effects of amortization of intangibles that have occurred as a result of the write-up of assets in connection with the Somero Acquisition. Adjusted net (loss)/income before amortization should not, however, be considered in isolation or as a substitute for operating income 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 (loss)/income before amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, adjusted net (loss)/income before amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net (loss)/income to EBITDA and adjusted net (loss)/income before amortization is presented above.
Revenues Somero's consolidated revenues for the six months ended 30 June 2009 were US$13.4m, which represented a 56.8% decrease from US$31.0m in consolidated revenues for the six months ended 30 June 2008. Somero's revenues consist primarily of sales of new Large Line products (the SXP-D Large Laser Screed), sales of new Small Line products (the CopperHead and PowerRake) and other revenues, which consist of, among other things, revenue from sales of spare parts, refurbished machines, topping spreaders, accessories, and the new Mini-Screed Commercial. The overall decrease in revenues for the six months ended 30 June 2009 as compared to the six months ended 30 June 2008 was driven, as expected, by reduced Large Line sales. The table below shows the breakdown between Large Line sales, Small Line sales and other revenues during the six months ended 30 June 2009 and the six months ended 30 June 2008
	six months ended 30 June 2009 (unaudited)				six months ended 30 June 2008 (unaudited)
	In US$ 000	Percentage of net sales			In US$ 000			Percentage of net sales
Large Line sales	4,106	30.6%			13,197			42.5%
Small Line sales	3,467	25.8%			9,542			30.8%
Other revenues	5,856	43.6%			8,277			26.7%
Total	13,429	100%			31,016			100%
Revenue by Product Line Large Line unit sales were 15 units for the period (43 units comparable period last year).  Both North America and EMEA were lower with six units sold each (18 units and 20 units respectively for the comparable period). In addition to lower unit volumes average selling prices were lower due to larger discounts. Small Line unit sales were 76 for the period down from 198 for the comparable period last year. North America units were 41 and 124 for the respective periods, while EMEA contributed 22 and 56 units respectively. Other revenues, including sales of spare parts, refurbished machines, topping spreaders and accessories, decreased from US$8.3m during the six months ended 30 June 2008 to US$5.9m during the six months ended 30 June 2009. Our 3-D product remained strong and the new Mini-Screed contributed $0.9m (38 Units) of new revenue compared to none in the comparable period.  Revenue by Geography Sales made in North America totaled $6.9m for the period as compared with $15.0m last year and represented 51.7% of total revenues (prior period was 48.1% of total). Sales in EMEA were $4.5m in H1 2009 compared to $13.1m in H1 2008. Gross Profit Somero's gross profit percentage for H1 2009 was 45.8% as compared to 56.6% in H1 2008. The lower margins were due to larger discounts, a larger mix of lower margin other products, and lower absorption of manufacturing overhead.  Operating Expenses Operating expenses excluding depreciation, amortization and stock based compensation for H1 2009 were $6.2m ($12.8m in H1 2008). The reduction has been driven by aggressive cost cutting including the elimination of approximately 100 jobs, and by salary, bonus, benefit and commission reductions. Additionally, the management team was required to reduce costs in all other categories of expense.  Placing of new shares The Company placed new shares in a private placement announced 24 June 2009. The effect was to raise approximately $5.5 million before expenses ('the Placing'). A total of 20,606,730 shares of common stock of $0.001 par value each ('New Shares') were placed with institutional investors at a price of 15 pence per New Share, representing a discount of approximately 14.3% to the closing middle market price (derived from the Daily Official List) on 23 June 2009. The senior management team of Somero subscribed for 1,536,900 New Shares at a price of 15 pence per New Share, representing an investment of approximately $0.4 million. The net proceeds available to the Company were approximately $5 million.  Debt Restructuring In conjunction with the placing of new shares the Company was able to renegotiate its debt agreement with Citizens Bank New Hampshire, a wholly owned subsidiary of Royal Bank of Scotland, to allow for greater flexibility on the debt service covenant as well as the funded debt to EBITDA covenant. Additionally, the Company used $0.6m of the placing proceeds to break interest rate hedges at approximately 5.15% and 5.20% to allow for reduced interest rates going forward. At 30 June 2009, bank debt was $4.6m as compared with $10.5m at 31 December 2008. (See note 5 to the financial statements). Earnings per Share Basic (loss)/earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted (loss)/earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to (loss)/income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. (Loss)/earnings per common share have been computed based on the following:
				30June 2009 US$ 000		30 June 2008 US$ 000
(Loss)/income available to shareholders				(1,279)		1,960
Basic and diluted weighted average shares outstanding				34,894		34,282

	30 June  2009			30 June  2008
Basic and diluted (loss)/earnings per share	($0.04)			$ 0.06
Net (loss)/income before amortization of intangibles earnings per share	$0.00			$0.09
(See note attached to the net (loss)/income to EBITDA reconciliation and adjusted net (loss)/income before amortization table for discussion of the non-GAAP measures used).
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) AS OF 30 JUNE 2009 AND 31 DECEMBER 2008 (in thousands, except share amounts)
			30 June 2009 US$ 000			31December 2008 US$ 000
Assets
Current assets:
Cash and cash equivalents			158			789
Accounts receivable - net			2,005			2,434
Inventories - net			5,536			5,819
Prepaid expenses and other assets			287			800
Income tax receivable			945			137
Deferred tax asset			413			466
Total current assets			9,344			10,445
Property, plant and equipment - net			4,073			4,260
Intangible assets - net			15,705			16,872
Goodwill			16,400			16,400
Deferred financing costs			31			52
Other assets			81			75
Total assets			45,634			48,104
Liabilities and stockholder's equity
Current liabilities
Accounts payable			1,871			1,960
Accrued expenses			1,329			1,279
Notes payable - current portion			460			1,429
Other liabilities			11			360
Total current liabilities			3,671			5,028
Notes payable, net of current portion			4,177			9,026
Deferred income taxes			335			239
Other liabilities, net of current portion			30			422
Total liabilities			8,213			14,715
Commitments and contingencies			-			-
Stockholder's equity
Preferred stock, US$0.001 par value, 50m shares authorised, no shares issued and outstanding			-			-
Common stock, US$0.001 par value, 80m shares authorised, 56,425,598 and 34,281,968 shares issued and outstanding at 30 June 2009 and 31 December 2008, respectively.			26			4
Additional paid in capital			27,916			22,759
Retained earnings			10,449			11,728
Other comprehensive loss			(970)			(1,102)
Total stockholder's equity			37,421			33,389
Total liabilities and stockholder's equity			45,634			48,104
See notes to condensed consolidated financial statements.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2009 AND 30 JUNE 2008
		For the six months ended 30 June			For the six months ended 30 June
		2009			2008
		US$ 000			US$ 000
Revenue		13,429			31,016
Cost of sales		7,285			13,460
Gross profit		6,144			17,556
Operating expenses
Selling expenses		3,055			6,760
Engineering expenses		382			981
General and administrative expenses		4,174			6,459
Total operating expenses		7,611			14,200
Operating (loss)/income		(1,467)			3,356
Other income (expense)
Interest expense		(734)			(457)
Interest income		2			22
Foreign exchange gain		150			225
Other		4			(22)
(Loss)/income before income taxes		(2,045)			3,124
Provision for income taxes		766			(1,164)
Net (loss)/income		(1,279)			1,960
(Loss)/earnings per common share
Basic and diluted		US($0.04)			US$0.06
See notes to consolidated financial statements.

SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2009
Consolidated Statements of Changes in Stockholders' Equity For the six months ended 30 June 2009
																		Other
		Common Stock - Series A			Common Stock - Series B			Common Stock					Additional paid in capital	Retained earnings			Comprehensive income (loss)		Total stockholders equity			Comprehensive income
		Shares	Amount		Shares		Amount	Shares		Amount
			US$ 000				US$ 000			US$ 000			US$ 000	US$ 000			US$ 000		US$ 000			US$ 000
Balance - 31 December 2008		-	-		-		-	34,281,968		4			22,759	11,728			(1,102)		33,389			803
Cumulative translation adjustment																	(156)		(156)			(156)
Change in fair value of derivative instruments																	289		289			289
Net loss														(1,279)					(1,279)			(1,279)
Stock based compensation													217						217
Common stock issuance								22,143,630		22			4,940						4,962
Balance - 30 June 2009		-	-		-		-	56,425,598		26			27,916	10,449			(969)		37,422			(1,146)

SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 6 MONTHS ENDED 30 JUNE 2009 AND THE 6 MONTHS ENDED 30 JUNE 2008
Consolidated Statements of Cash Flows
For the six months ended 30 June 2009 and the six months ended 30 June 2008
											Six months ended 30 June 2009 (unaudited) US$ 000					Six months ended 30 June 2008 (unaudited) US$ 000
Cash flows from operating activities:
Net (loss)/income											(1,279)					1,960
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Deferred taxes											149					(19)
Depreciation and amortization											1,178					1,350
Amortisation of deferred financing costs											21					21
Loss on sale of assets											(4)					22
Realised gain (loss) on currency exchange											0					0
Share based compensation											217					212
Working capital changes:
Accounts receivable											561					(221)
Inventories											283					94
Prepaid expenses and other assets											775					145
Income taxes receivable											0					0
Other assets											(6)					(148)
Accounts payable and other liabilities											(917)					(338)
Income taxes payable											(737)					(229)
Net cash provided by operating activities											241					2,849
Cash flows from investing activities:
Proceeds from sale of property and equipment											11					637
Property and equipment purchases											(7)					(347)
Net cash used in investing activities											4					290
Cash flows from financing activities:
Repayment of notes payable											(5,818)					(3,714)
Payment of dividends											0					(1,029)
Proceeds from offering of common stock, net of costs											5,233					0
Net cash used in financing activities											(585)					(4,743)
Effect of exchange rates on cash and cash equivalents											(291)					(1)
Net decrease in cash and cash equivalents											(631)					(1,605)
Cash and cash equivalents:
Beginning of period											789					3,842
End of period											158					2,237
See notes to consolidated financial statements.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)  FOR THE 6 MONTHS ENDED 30 JUNE 2009 AND 30 JUNE 2008
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, Italy, Spain, Dubai and China. 2.    Summary of Significant Accounting Policies Basis of Presentation The interim financial data as of 30 June 2009 and the six months ended 30 June 2009 and 30 June 2008 is unaudited. The condensed consolidated financial statements, in the opinion of Somero management, includes all normal recurring adjustments necessary for a fair presentation of the statement of results for the interim periods. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP') but do not include all of the information and note disclosures required by US GAAP. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Somero's Annual Report and filing with the AIM exchange for the year ended 31 December 2008. The results for the six month period ended 30 June 2009 are not necessarily indicative of the results to be expected for the year ending 31 December 2009 or for any other interim period. 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 30 June 2009 and 31 December 2008, the allowance for doubtful accounts was approximately US$514,000 and US$650,000, respectively.  Inventories Inventories are stated at the lower of cost, using the first in, first out ('FIFO') method, or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts.   Deferred Financing Costs Deferred financing costs incurred in relation to long-term debt, are reflected net of accumulated amortization and are amortized over the expected repayment term of the debt instrument, which was four years from the debt inception date. These financing costs are being amortized using the effective interest method.  Intangible Assets Intangible assets consist principally of customer relationships and patents, and are carried at their fair value, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the periods ended 30 June 2009 and 31 December 2008, no such events or circumstances were identified. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.  Goodwill Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if events and circumstances indicate that the value of goodwill may not be recoverable. The Company has chosen 31 December as its periodic assessment date. The Company considers factors including continued economic developments and the overall macro-economic environment and determined that a triggering event occurred at 30 June 2009. During the six months ended 30 June 2009, based on a combination of factors including the current economic environment, the operating results of the Company's business, and the Company's market capitalization, the Company concluded that there were sufficient indicators to require the Company to perform an interim goodwill impairment analysis. Accordingly, in the six months ended 30 June 2009, the Company compared the fair value of the reporting unit with its carrying value and determined that the estimated fair value exceeded the carrying value. As part of the analysis, the Company computed fair value by preparing a discounted cash flow analysis, a comparison of its market capitalization to that of other comparable companies and a weighted average fair value. Under each method, the analysis resulted in the fair value of the Company exceeding the carrying value of the Company. 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.  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 three months 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 accounts for income taxes in accordance with Statement of Financial Accounting Standards ('SFAS') No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable. The Company accounts for uncertainty in income taxes in accordance with FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes ('FIN 48').  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 accounts for its stock option issuance under SFAS No. 123R, Share Based Payment ('SFAS 123R'). SFAS 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS 123R also requires measurement of the cost of employee services in exchange for an award based on the grant-date fair value of the award. Compensation expense related to share based payments was US$ 217,000 and US$ 212,000 for the six month periods ended 30 June 2009 and 30 June 2008, respectively.  Transactions in and Translation of Foreign Currency The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. Balance sheet amounts are translated at 30 June exchange rates and historical exchange rates for capital assets. 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 income. Comprehensive (loss)/income Comprehensive (loss)/income is the combination of reported net (loss)/income and other comprehensive income ('OCI'). OCI consists of 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. OCI was composed of the following for the six months ended 30 June 2009 and 30 June 2008. Total comprehensive (loss)/income for the periods was approximately US$(1,146,000) and US$1,965,000, respectively.
													2009 US$ 000			2008 US$ 000
Net (loss)/Income													(1,279)			1,960
Cumulative Translation Adjustment													(156)			(1)
Change in fair value of derivative instruments - net of income taxes													289			6
Total Comprehensive (loss)/Income													(1,146)			1,965
(Loss)/earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted average number of 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. Potential common shares that may be issued by the Company relate to outstanding stock options. All common stock equivalents were anti-dilutive at 30 June 2009. Earnings per common share have been computed based on the following:
									2009						2008
Net (loss)/income									US$ 000 (1,279)						US$ 000 1,960
Basic and diluted weighted average shares outstanding									34,893,670						34,281,968
Fair Value Measurements Effective 1 January 2008, the Company adopted SFAS No. 157. This standard establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements of financial assets and financial liabilities. The Company recorded no change to 1 January 2008 retained earnings as a result of adopting SFAS No. 157. 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 of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The amounts reported in the accompanying consolidated balance sheets approximate fair value due to the nature and short-term maturities of such assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities.  New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ('FASB') issued Financial Accounting Standard No. 157, Fair Value Measurements ('SFAS 157'). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial assets and liabilities for fiscal years beginning after 15 November 2007. In February 2008, the FASB also issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 to fiscal years beginning after 15 November 2008, for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Certain aspects of SFAS 157 were effective as of 1 January 2008 and affected certain note disclosures.  In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This statement requires 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 under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. SFAS No.161 is effective for financial statements for fiscal years and interim periods beginning after 15 November 2008. The Company adopted the new disclosure requirements in the period beginning 1 January 2009 and the adoption had no impact on the Company's financial position, results of operations and cash flows. In June 2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after 15 December 2008. The Company adopted the new standard in the period beginning 1 January 2009 and there was no impact upon its financial statements.   In December 2007, the FASB issued SFAS No. 141R, Business Combinations ('SFAS 141R'), which replaces SFAS No. 141. This statement retains the acquisition method of accounting for acquisitions but establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any non-controlling interests in the acquired entity. This statement also changes the recognition of assets acquired and liabilities assumed arising from contingencies and requires the expensing of acquisition-related costs as incurred. We adopted SFAS 141R on 1 January 2009, which did not have any impact on our consolidated financial statements upon adoption. However, we expect that SFAS 141R will have an impact on our future consolidated financial statements, but the nature and magnitude of the specific effects will depend upon the nature of any future transactions. In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets ('FSP 142-3'). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets, and requires enhanced disclosures relating to: (a) the entity's accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset; (b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class; and (c) for an entity that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for which a statement of financial position is presented, by major intangible asset class. FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after 15 December 2008, and interim periods within those fiscal years. In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP.  In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of SFAS No. 162 ('the Codification'). For financial statements issued for periods ending after 15 September 2009, the Codification will become the single source of all authoritative GAAP recognized by the FASB. The Codification does not change GAAP and will not have an effect on our financial position, results of operations or liquidity. The Codification will change references to GAAP sections in future filings.  On 30 June 2009, we adopted the provisions of SFAS No. 165, Subsequent Events ('SFAS 165'). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for using that date. The adoption of SFAS 165 did not have a significant impact on the accompanying unaudited condensed consolidated financial statements. We evaluated all events or transactions that occurred subsequent to 30 June 2009 and through the time of filing this report and on 15 September 2009. On 30 June 2009, we adopted the provisions of FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ('FSP FAS 107-1 and APB 28-1'). FSP FAS 107-1 and APB 28-1 requires disclosure about fair value of financial instruments for interim and annual reporting periods of publicly traded companies. The adoption did not have a material impact on the consolidated financial statements. 3.  Inventories Inventories consisted of the following at 30 June 2009 and 31 December 2008:
									2009 US$ 000					2008 US$ 000
Raw materials									2,075					2,078
Finished goods and work in process									2,281					3,231
Refurbished									1,180					510
Total									5,536					5,819
4.  Property, Plant and Equipment Property, plant and equipment consist of the following at 30 June 2009 and 31 December 2008:
									2009 US$ 000					2008 US$ 000
Land									207					207
Buildings and improvements									3,637					3,572
Machinery and equipment									1,324					1,410
Sub-total									5,168					5,189
Less: accumulated depreciation and amortization									(1,095)					(929)
									4,073					4,260
Depreciation expense for the six months ended 30 June 2009 and 30 June 2008 was approximately US$184,000 and US$184,000, respectively.
5.  Notes Payable Summary The Company renegotiated bank covenants associated with its credit facility in June 2009. Company's debt obligations consisted of the following at 30 June 2009 and 31 December 2008:
									2009					2008
									US$ 000					US$ 000
Bank debt:
Five year secured reducing revolving line of credit									2,337					2,954
Five year secured term loan									2,300					7,501
Less debt obligations due within one year									(460)					(1,429)
Obligations due after one year									4,177					9,026
Credit Facility The Company has a credit facility with a bank dated 16 March 2007 that was amended in June 2009 and composed of the following at 30 June 2009: US$8,000,000 five year secured reducing revolving line of credit US$2,300,000 five year secured reducing term loan In January 2009 the Company renegotiated its loan agreements with the bank to obtain concessions on its debt service covenant and its funded debt to EBITDA covenant. In return, the Company agreed to an immediate increase of 1.6% in its interest rate with a changed pricing grid that allowed for a further maximum increase of 1.75%. The Company's maximum revolving line of credit was set at US$8,000,000.  In June 2009, in conjunction with a private placement of $5,463,000 of new equity, the Company again renegotiated its loan agreements with the bank to obtain concessions on its debt service covenant and its funded debt to EBITDA covenant and paid off the remaining liability on its interest rate swaps at a cost of $615,000. As a result of the renegotiation and pay down of debt, $328,000 of loss on cash flow hedges was recognized in the statement of operations as interest expense and removed from other comprehensive income. The remaining $287,000 in other comprehensive income will be amortized over the term of the amounts outstanding under the credit facility. The interest rates on the revolver and term loan are Libor 1-month and Libor 3-month, respectively, plus an amount determined by the ratio of 'funded debt/last 12 months EBITDA,' as defined in the loan agreement. The interest rates were 4.57% and 4.87% on the revolver and term loan at 30 June 2009. The interest rates were 6.05% and 6.10% on the revolver and term loan at December 31, 2008. 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. The revolving line of credit available reduces over the five year term and as of 30 June 2009 the borrowed balance is below the credit line available. At 30 June 30 2009, the Company had $5,663,000 additional funds available on its revolver Future Payments The future payments by year under the Company's debt obligations are as follows:
				30 June US$ 000
2009				230
2010				460
2011				460
2012				3,487
Total payments				4,637
Interest Interest expense on the credit facility for the six months ended 30 June 2009 and 30 June 2008 was approximately US$406,000 and US$454,000, respectively, related to the debt obligation. Additionally, there was $328,000 charged to interest expense as a result of the modification to the term loan.
6.  Equity raise The Company successfully raised $5.5m through a private placement in June 2009. The Company incurred approximately $517,000 in costs for the equity raise which were netted against the gross proceeds.
7.  Operating Leases The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non cancellable operating leases with initial terms in excess of one year were as follows:
		30 June US$ 000
2009		172
2010		296
2011		196
2012		162
2013		82
Total		908
Total rent expense under operating leases for the periods ended 30 June 2009 and 30 June 2008 was approximately US$184,000 and US$318,000.
8.  Commitments and Contingencies The Company has entered into employment agreements with certain members of senior management. The terms of these agreements range from six months to one year and include 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 as of 31 December 2007. There is a related contingent liability of US$38,000 to cancel the contract as of 30 June 2009 which declines over 5 years on a pro-rated basis. 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.
9.  Income Taxes Somero adopted FIN 48 on 1 January 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 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. The Company's effective tax rate for the six months ended 30 June 2009 was 37.5% compared to the federal statutory rate of 34.0%. The effective tax rate is greater than the statutory rate mainly due to the effect of state and foreign taxes. As of 30 June 2009, the Company had a gross unrecognized tax benefit (including interest and penalties) of $4,000. Accrued interest and penalties related to unrecognized tax benefits are not included in tax expense. Somero is subject to US federal income tax as well as income tax of multiple state jurisdictions. The Company began business in 2005 and therefore the statute of limitations for all federal, foreign and state income tax matters for tax years from 2005 forward is still open. Somero has no federal, foreign or state income tax returns currently under examination.
10.  Supplemental Cash Flow and Non-Cash Financing Disclosures
							2009 US$ 000			2008 US$ 000
Cash paid for interest							734			457
Cash paid for taxes							(86)			1,568
Non-cash financing activities - Change in fair value of derivative instruments							289			6
Accrued stock issuance costs							271			0
11.  Intangible Assets
The following table reflects intangible assets that are subject to amortization under  the provisions of SFAS No. 142, Goodwill and Other Intangible Assets:
		Weighted average amortization period					30 June 2009 US$ 000				31 December 2008 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					3,084				2,691
Patents		12 years					6,051				5,278
Other intangibles		3 years					2				1
							9,137				7,970
Net carrying costs
Customer relationships		8 years					3,216				3,609
Patents		12 years					12,487				13,260
Other intangibles		3 years					2				3
							15,705				16,872
Amortization expense for the six months ended 30 June 2009 and 30 June 2008 was US$1,167,000 and US$1,166,000, respectively.
Estimated amortization expense on intangibles for the remainder of 2009 is US$1,165,000 and US$2,332,000 for each of the years ending 2010, 2011, 2012 and 2013.
12.  Intangible Assets As of 15 September 2009, Somero's Remuneration Committee has reviewed the alternatives for ensuring that management are appropriately incentivized to rebuild shareholder value and to be retained within the Group. The Remuneration Committee has agreed to the terms of a Stock Appreciation Rights Plan and no awards have been granted as of 15 September 2009.

 

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