Final Results

RNS Number : 3603J

Somero Enterprises Inc.

07 April 2015

 

Somero Enterprises, Inc.

7 April 2015

Somero Enterprises, Inc.®

Full year results for the twelve months to 31 December 2014

Somero Enterprises, Inc. ®, ("Somero" or the "Company") is pleased to report results for the twelve months to 31 December 2014. Somero is a North American assembly company of patented laser guided equipment used for the spreading and leveling of high volumes of concrete for floors in the construction industry. Somero has operations worldwide and is primarily focused on the non-residential construction industry.

Financial Highlights

·    Revenue increased by 32% to US$ 59.3m (2013: US$ 45.1m)

·    Adjusted EBITDA increased by 67% to US$ 15.0m (2013: US$ 9.0m)^(1,2)

·    Pre-tax income increased by 91% US$ 12.4m (2013: US$ 6.5m)

·    Adjusted net income before amortization increased 118% to US$ 16.1m (2013: US$ 7.4m)⁽³⁾

·    EPS before amortization of US$ 0.29 (2013: US$ 0.13)

·    Basic EPS US$ 0.26 (2013: US$ 0.10)

·    Net cash at December 31, 2014  of US$ 6.6m  (Net cash at December 31, 2013 of US$ 3.4m)⁽⁴⁾

·    Final dividend of 4.0 US cents per share, for a total dividend for the year of 5.5 US cents per share; a 150% increase over last year

Business Highlights

·    Total investment in hiring and training 37 new employees and moving into a new office building totaled US$ 1.4m

·    Sales in North America continued strong with an increase of 46% to US$ 37.2m

·    Sales in Asia had significant growth, namely

o Increased sales and service presence in China resulted in 44% increase to US$ 9.5m

o Increased sales and service presence in Southeast Asia resulted in strong growth from US$ 0.4m in 2013 to US$ 0.7m in 2014

o Increased sales and service presence in India pushed the sales growth cycle to US$ 0.6m over US$ 0.0m in 2013

·    Europe continued its recovery resulting in an increase of 20% to US$ 3.6m compared to US$ 3.0m in 2013

·    7 of the 10 regions experienced growth

·    Our new product, the S-485 Laser Screed® machine introduced in October 2014 had sales of US$ 0.9m

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 on 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, stock based compensation and the write-down of Goodwill, as applicable.

3.  Adjusted net income before amortization is a calculation of net income plus amortization of intangibles.

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

For further information, please contact:

Somero Enterprises, Inc.                                                                    Tel: [phone]

Jack Cooney, CEO

Howard Hohmann, Executive Vice President of Sales

Neil Mathur, CFO

Canaccord Genuity Limited (Nominated Adviser & Broker)        Tel: [phone]

Peter Stewart

Piers Coombs

Chris Robinson

About Somero

Somero designs, assembles, and sells patented, laser-guided equipment that automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces such as paved parking lots. 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, and the new S-485 Laser Screed® machines which employ laser-guided proprietary technology to achieve a high level of precision in concrete surface flatness at a higher rate of efficiency than conventional methods.  This results in the highest level of flat-floor precision attainable at less cost to the flooring contractor.

Somero's products have been sold to concrete contractors for non-residential construction projects in over 92 countries and across every time zone around the globe. Laser Screed® equipment has been specified for use in the construction of warehouses, assembly plants, retail centers, and other commercial construction projects that require extremely flat concrete-slab floors and 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.

Somero Laser Screed® equipment holds a 99% market share in the non-residential, horizontal concrete flooring industry in over 92 countries.  Somero equipment is used to construct the concrete slab in all building types, as well as all floors in multi-story buildings.  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 key to our success is, not only the quality of our equipment and the service that we provide, but the investment we make in the relationship with our customers.  Somero equipment and service helps our customers achieve their business and profitability goals, creating the loyalty that maintains them as a customer for life.   

Somero's assembly operations are located in Michigan, USA with headquarters in Florida, USA. It has sales and service offices in Chesterfield, England; Shanghai, China; and New Delhi, India.

Somero has approximately 165 employees and markets and sells its products through a direct sales force, external sales representatives, and independent dealers in the Americas, Europe, Middle East, South Africa, Asia, and Australia.

Somero is listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) and its trading symbol is SOM.L.

Chairman's Statement

Overview

Somero completed an exceptional year of growth in 2014, ending the period with revenue of US$ 59.3m vs. US$ 45.1m for 2013.  Key to our strong performance has been our continued efforts to seek improvement in our products, processes, services, and people.  Seven of the ten regions in which we operate grew and our performance in North America and China was outstanding.   Our very experienced sales team in North America, the continued strength of China's economy, and our extensive investment in the Asian market contributed to our success. 

People

We significantly invested in our people throughout the organization in 2014, increasing our staffing levels by 29%.  Our existing 165 employees were key drivers of our growth while we added and trained additional staff and made key promotions in line with our expansion.  We expect 2015 will be another exciting year, continuing to offer career entry and advancement opportunities. The Board appreciates all of our employees for their hard work, dedication, and loyalty.

Markets

North America has held strong, leading group revenues of US$ 37.2m (2013: US$ 25.5m). China's revenues increased 44% over 2013 ending at US$ 9.5m (2013: US$ 6.6m).  Our European market saw a 20% increase in revenues with US$ 3.6m (2013: US$ 3.0m).  Australia and Southeast Asia also experienced strong growth in 2014 while Russia and the Middle East experienced sales decline particularly due to political factors in those regions.

New product development

In 2014, Somero introduced the S-485 Laser Screed®. Designed for easier set-up and operation, Simplicity Defined is the motto for this new Laser Screed®.  It requires one less person to operate and only one person is needed to establish grade or fine tune the programmable height receivers. We have had an outstanding response to this new machine as it was just introduced in October and contributed US$ 0.9m to our 2014 sales.

Product development continues to be a focus of our plans for 2015 as we are always working towards new and innovative ideas to introduce to the industry.

Current trading and outlook

Strong US sales momentum has carried forward into 2015 as a result of our new product introductions, replacement demands on outdated technology, and the ongoing construction growth that our customers are experiencing. This is another positive indicator of our customers demand to keep up with the fast growing economy. This growth trajectory is expected to result in strong sales for 2015. 

The Asian markets remain positioned for continued growth this year. Continued penetration of our products and brand awareness signifies a greater need, and willingness to use our products and services. Rising penetration rate in China, which is currently estimated at 1%, will provide us ample opportunity to increase growth going forward. We are also pleased to announce that our customers in China now have access to financing options made available specifically for Somero® equipment, which is expected to have a positive impact on sales in the region. With the addition of the new facility, Concrete College and the financing option all play a key role into our 5-year strategic plan for the region.

Growth is also anticipated in Latin America outside of Brazil's economic slowdown. This was driven by strong fourth quarter sales in Mexico, attributed to the manufacturing sector, and is continuing into 2015. We are also seeing positive signs of improvement in other countries in this region and we are optimistic about what is ahead. 

Due to the anticipated growth of the business in the medium term, the Board has concluded that the current Global Headquarters in Fort Myers will not be large enough to accommodate future growth.  As a result, the Company has entered into an agreement to purchase land to build a new Global Headquarters at an expected cost of up to US$ 4.0m spread over 2015 and 2016.

We are very encouraged by the sound start to 2015 and are confident that this will be another year of solid growth for the company.

Larry Horsch

Non-Executive Chairman

President and Chief Executive Officer's Statement

Overview

This was the first year of our strategy to double our 2013 revenue of US$ 45.1m by 2018.  It was a remarkable year with sales increasing 32% to US$ 59.3m.  This was driven by strong growth in 7 of our 10 regions, led by North America's increase in sales of 46% to US$ 37.2m and China with a sales increase of 44% to US$ 9.5m.  Our committed focus on improving gross margin through cost and discounting reductions and pricing power resulted in gross margin increasing to 54.0% from 52.2%.  Due to our strong operating leverage, our EBITDA^(1,2) increased 67% to US$ 15.0m resulting in a 94% increase in net cash to US$ 6.6m.

Geographical growth

In North America, actual non-residential cement consumption exceeded the industry's original forecast of 22% growth in 2014 to end up at 30%⁽³⁾.  This construction growth, our new product introduction, pricing power, and the shortage of skilled labor by our customers all contributed to the 46% increase in North America sales.  In 2015, we plan to expand our Michigan facility to accommodate our growth at an approximate cost of US$ 1.0m.

All three of our Asian markets grew substantially this year.  In China, we increased sales by 44% to US$ 9.5m.  This structural growth is driven by increasing our penetration rate in all regions of China and the broader awareness of US floor flatness standards now issued by the China Flooring Association.  The higher wage rates in China are leading to greater automation which increases the value of Somero equipment.  The Chinese economy is evolving towards more logistics, big box retailing, and e-commerce which increase owners' demands for the speed and flatness provided by Somero equipment.  We invested an additional US$ 0.8m in 2014 to expand our team by 5 people to 19 employees.  Our new office is 150% larger than our headquarters in Florida and will include the Somero Concrete College and warehousing for over US$ 1.0m in spare parts and equipment inventory to service China.

In Southeast Asia, sales increased from US$ 0.4m in 2013 to US$ 0.7m in 2014 representing sales in all the major countries.  We expect to see strong sustained growth from this region as we increase our market awareness and penetration as evidenced by the sale of two Large line screeds and two 3-D Profilers for the startup of a multi-year project in Jakarta, Indonesia which will create a dedicated bus line with concrete pavement in early 2015.

Our sales in India were very good for the initial phases of penetration into this significant market.  To increase awareness within the industry, we have stepped up our marketing efforts as well as attended trade shows and conducted seminars for engineers and architects.  Cement consumption is three times that in the US, and we continue to invest in sales and develop revenue opportunities within the market.

Europe continues its road to recovery and demonstrates growth year over year.  Latin America remained flat due to the Brazilian economy and currency.  As expected, sales in Russia and the Middle East were slow due to the geo-political changes that occurred in 2014.

In 2014, we increased our staff by 37 people to 165 people representing a 29% increase.  This consistently represents one of our largest investments each year, with employees located in multiple countries, including China, India, United States, United Kingdom, and Europe.  Given our hugely dominant share of the laser screed market, it is difficult to find prospective employees with the full scope of sales or support experience we seek and the hiring and training process of our employees is consequently a major investment both in time and financial resources.  A large part of the hiring process is devoted to determining if a person fits the Somero culture, embraces our core values, and will be a significant contributor.   

Product development

Somero invests 2% of sales on product development and introduces new products every year.  It is a customer driven process whereby we utilize customer focus groups, customer surveys, and feedback from our sales and technical support staff.  This process keeps us focused on the customer needs and value requirements.  In 2014, we introduced the S-485 which is a ride-on Small line Laser Screed® with new simplistic operational capabilities, speed, and labor savings.  Introduced in the 4th Quarter, it generated US$ 0.9m of revenue. 

China Somero concrete college

In growing any emerging market, there needs to be an increasing demand for the product and a venue in which to teach customers the fundamentals of success. Learning how to operate our equipment is the easy part of this process because we have simplified it through our Product Development Team. In contrast, understanding how to place a high-quality concrete slab is more difficult as it is more than just placing the concrete and allowing it to harden.  Until now, trial and error has been the only way for our customers to learn successful placing of a concrete floor. If the Concrete Contractor doesn't get it right the first time, their second chance could cost them hundreds of thousands of dollars as well as the opportunity to ever work with that owner or client again.

We have therefore devised the very first education and training program of its kind, specifically for the Chinese market.  We call this program the Somero Concrete College.  This 5-day, hands-on program will educate and train our customers to become industry leaders in placing a concrete floor successfully and with the utmost confidence.  Our customers and their crews are taught step-by-step, utilizing our very talented team of professionals who are considered the best in industry.  Our ultimate goal is to make the customer successful and drive industry expectations to higher levels which promotes demand for our equipment.

The biggest part of this endeavor was to secure a suitable location in which to provide indoor training, thus keeping our customers comfortable in any type of weather condition.  Our 4,000 square-meter facility (office/warehouse) will be utilized for the training grounds, regional sales office, customer service call center, and parts warehousing.  This one-of-a-kind program is specific to the Chinese market and the training will encompass:

·    Using our equipment

·    Proper screeding techniques

·    Concrete placement techniques

·    Finishing techniques

·    Understanding concrete mix designs and performance

·    Saw cut and sealing of the concrete floor

·    Measuring quality floor standards properly

In addition to the Somero Concrete College, we are pleased to announce that we are also launching our Screed Training program at the facility.  This program is specifically designed for new customers and will educate them in proper operation and maintenance of a newly purchased Somero Laser Screed®.  This training program will be similar to our training program currently provided in the US and is designed to provide our customers a stress-free and enjoyable learning environment.  The completion of the Somero Concrete College will occur in the fourth quarter of 2015.

By providing these programs, we are able to prove to our customers, and ultimately their customers, that we are all together in this rapidly growing market.

Management targeting a doubling of group revenue by 2018

In my statement last year, I introduced our five year growth plan to double our year 2013 revenue by year 2018.  Our 2014 revenue of US$ 59.3m exceeded our expectations, with 7 of 10 regions increasing year over year.  Latin America was flat and Russia and the Middle East decreased, both due to political unrest.  Actual non-residential cement consumption exceeded the industry's original forecast of 131%⁽³⁾.  This growth is occurring throughout the US; therefore, we expanded our sales force by two people to a total of seven.  The substantial increase in revenue was driven by two new products: the S-15R; the S-485, with our new proprietary operating system; our two new sales people; and the increased construction activity.

The Asian market is driven by China, as their total concrete consumption was 30 times the US in 2014.  North American sales were US$ 37.2m which could make the China sales potential hundreds of millions of US dollars.  This year, China sales increased 44% to US$ 9.5m.  Our low penetration rate provides Somero with a large, sustainable opportunity.  However, we continue to increase our market awareness, supported by our 44% increase in sales.  Our specifications engineers are continuously engaged in educating the market through seminars to the China Flooring Association, the China Logistics Association, as well as large building owners and developers in order to increase the awareness of the quality, speed, and value of Somero Laser Screed® equipment. 

We continue to make significant investments in China through hiring and training employees, securing our new office, developing the concrete college, and aggressive marketing efforts.  Ensuring we expand the penetration rate and product awareness is a critical part of exceeding our strategic plan to triple revenue by 2018.

The India market has also experienced growth. With two salespeople and a support technician, sales increased from US$ 0.0m to US$ 0.6m.  We continue to expand our importing capabilities to enlarge our inventory of machines and spare parts in order to support our expansion in the market.

Revenue in Southeast Asia increased from US$ 0.4m in 2013 to US$ 0.7m in 2014.  Our market awareness has been significantly increased as evidenced by our work on the concrete bus lane project in Jakarta, Indonesia. 

In 2014, the European construction market entered a new phase of growth and this year felt like the market had reached a phase of recovery.  Positive growth is being seen in pockets all across Europe, and we expect to see continued growth in many more regions.  The introduction of new products in 2014 presented us with opportunities for a new customer base and this will have positive impact, alongside our core products. 

Cashflow and balance sheet

Our SG&A expense control system ensured that we maximized EBITDA⁽¹⁾. We generated US$ 6.6m in net cash⁽²⁾ after paying US$ 1.6m in dividends, US$ 1.7m in taxes, US$ 6.3m in equity instruments, and reducing debt by US$ 1.3m. 

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 that we will increase the dividend payout ratio to 30%.  Therefore, a final 2014 dividend of 4.0 US cents per share has been announced on April 7, 2015 that will be payable on May 11, 2015 to shareholders on the register at April 24, 2015 and together with the interim dividend paid in October 2014 of 1.5 US cents per share, represents a full year dividend to shareholders of 5.5 US cents per share; a 150% increase on the previous year.  The final 2014 dividend of 4.0 US cents per share represents a 208% increase over the final 2013 dividend.

Conclusion

When we closed the books on 2014, we met or exceeded much of our expectations throughout the year. I was delighted in the performance of the Management Team and the focus maintained by their respective departments amidst the pace of growth we experienced. This was one of the most exciting years I have had the pleasure of experiencing with Somero.

As we endeavor to improve our culture, mission, and vision, we are confident that the strategic direction we have chosen is sound and our excitement only grows as we plan to bring new products and services to the market in the coming years. We will continue to accelerate and become ever more competitive, thus ensuring Somero' s continued success and ability to attain a global leadership position. We are confident in our platform and our ability to drive the execution of our plans, guaranteeing our investments in innovation, people, systems and markets, deliver profitable growth, and improve return on invested capital.

With the US in its recovery mode, our penetration in emerging markets, and the positive upswing of momentum in Europe, we are already ahead of our five year growth plan projections.

We are all very excited about the opportunities going into 2015.

Jack Cooney

President and Chief Executive Officer

April 7, 2015

Financial Review
Summary of financial results		Year ended	Year ended
		December 31,	December 31,
		2014	2013
		US$ 000	US$ 000
Revenue		59,277	45,078
Cost of sales		27,290	21,536
Gross profit		31,987	23,542
Operating expenses
Selling expenses		7,150	6,524
Engineering expenses		1,166	881
General and administrative expenses		11,079	9,734
Total operating expenses		19,395	17,139
Operating income		12,592	6,403
Other income (expense)
Interest expense		(107)	(216)
Interest income		39	13
Foreign exchange (loss)/gain		(122)	249
Other		(3)	2
Income before income taxes		12,399	6,451
(Benefit)/provision for income taxes		(2,142)	1,071
Net income		14,541	5,380
Other data
Adjusted EBITDA		14,951	8,953
Adjusted net income before amortization		16,086	7,384
Depreciation expense		553	369
Amortization of intangibles		1,545	2,004
Capital expenditures		1,221	795

Notes:

1. Adjusted EBITDA and Adjusted net income before amortization 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 before amortization are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

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

3. Adjusted net income before amortization as used herein is a calculation of net income plus amortization of intangibles.

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

Net income to adjusted EBITDA reconciliation and
Adjusted net income before amortization reconciliation
	Year ended	Year ended
	December 31,	December 31,
	2014	2013
	US$ 000	US$ 000
Adjusted EBITDA reconciliation
Net income	14,541	5,380
Tax (benefit)/provision	(2,142)	1,071
Interest expense	107	216
Interest income	(39)	(13)
Foreign exchange loss/(gain)	122	(249)
Other expense	3	(2)
Depreciation	553	369
Amortization	1,545	2,004
Stock based compensation	262	177
Adjusted EBITDA	14,952	8,953
Adjusted net income before amortization reconciliation
Net income	14,541	5,380
Amortization	1,545	2,004
Adjusted net income before amortization reconciliation	16,086	7,384

Notes:

1. Adjusted EBITDA and Adjusted net income before amortization 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 before amortization are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

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

3. Adjusted net income before amortization as used herein is a calculation of net income plus amortization of intangibles.

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

Revenues

The Company's consolidated revenues increased by 32% to US$ 59.3m (2013: US$ 45.1m). Company revenues consist primarily of sales from new Large line products (the S22-E Large Laser Screed® and its predecessors), sales from new Small line products (the S-840, CopperHead, and the new S-485), and other revenues, which consist of, among other things, revenue from sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3-D Profilers, S-15R, and accessories. The overall increase for the year was driven by all categories - Large line sales, Small line sales, and Other revenues. The following table shows the breakdown between Large line sales, Small line sales, and Other revenues during the 12 months ended December 31, 2014 and 2013:

	12 months ended 31 December 2014		12 months ended 31 December 2013
	(US$ in millions)	Percentage of net sales	(US$ in millions)	Percentage of net sales
Large line sales	22.4	37.8%	14.2	31.5%
Small line sales	9.7	16.4%	10.8	24.0%
Other revenues	27.2	45.8%	20.1	44.5%
Total	59.3	100.0%	45.1	100.0%

Large line sales increased to US$ 22.4 m (2013: US$ 14.2m) as a result of a  52% increase in volume to 64 units (2013:  42 units),  Small line sales decreased to US$ 9.7 m (2013: US$ 10.8m)  due to a slight decrease in units 126 (2013: 132), and Other revenues, including sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3-D Profilers, S-15R and accessories, increased to US$ 27.2 m (2013: US$ 20.1m).

Revenue breakdown by geography
	North America		EMEA		RoW		Total
US$ millions	2014	2013	2014	2013	2014	2013	2014	2013
Large screed	17.0	8.2	1.5	2.2	3.9	3.8	22.4	14.2
Small screed	6.2	7.6	1.3	2.3	2.2	0.9	9.7	10.8
Other	14.0	9.7	3.5	3.3	9.7	7.1	27.2	20.1
Total	37.2	25.5	6.3	7.8	15.8	11.8	59.3	45.1

Units breakdown by geography
	North America		EMEA		RoW		Total
	2014	2013	2014	2013	2014	2013	2014	2013
Large screed	48	24	4	6	12	12	64	42
Small screed	73	90	15	27	38	15	126	132

Sales to customers located in North America contributed 63% of total revenue (2013: 57%), sales to customers in EMEA (Europe, India, Middle East, and South Africa) contributed 11% (2013: 17%) and sales to customers in RoW (Asia, Australia, Latin America, and Pacific) contributed 26% (2013: 26%).

Sales in North America generated US$ 37.2m (2013: US$ 25.5m) which is up 46% primarily due to higher Large line sales (48 Large line units in 2014 vs. 24 in 2013) but partially offset by lower Small line sales (73 Small line units in 2014 vs. 90 in 2013). Sales in EMEA generated US$ 6.3m (2013: US$ 7.8m) which is down 19% primarily due to lower Large line sales (4 Large line units in 2014 vs. 6 in 2013) and lower Small lines sales (15 Small line units in 2014 vs. 27 in 2013). Sales in RoW generated US$ 15.8m (2013: US$ 11.8m) which are up 34% primarily due to higher Small line sales (38 Small line units in 2014 vs.15 in 2013).

Regional sales breakdown	2014	2013
North America	37.2	25.5
ROW (China)	9.5	6.6
EMEA (Russia)	0.7	2.3
EMEA (Middle East)	0.8	2.1
ROW (Australia)	3.1	2.3
EMEA (Europe)	3.6	3.0
EMEA (Scandinavia)	0.6	0.4
ROW (Korea)	0.6	0.2
EMEA (India)	0.6	0.0
ROW (Latin America)	2.6	2.7
Total	59.3	45.1

Gross profit

Gross profit increased to US$ 32.0m (2013: US$ 23.5m), with gross margins increasing to 54% (2013:  52%) due to price increase, cost reductions, and factory efficiency.

Operating expenses

Operating expenses increased by 14% to US$ 19.4m (2013: US$ 17.1m). This increase was driven primarily by continuing to invest in Asia, sales commissions, insurance expenses, additional hires, and management and employee profit sharing.  Total employment increased to 165 from 128 in 2014.

Other income (expense)

Other expenses were (US$0.2m) (2013: US$ 0.0m) consisting of interest expense, interest income, foreign exchange gains and losses and gains and losses on the disposal of assets.

(Benefit)/provision for income taxes

The benefit for income taxes was (US$ 2.1m) in 2014 as compared to a provision of US$ 1.1m in 2013. Overall, Somero' s effective tax rate changed from 16.6% in 2013 to (17.3%) in 2014 due to a non-cash valuation allowance of US$ 4.1m, and US$ 5.9m settlement of Restricted Stock Units and settlement of Stock Options which are deductible for tax purposes.

Net income

Net income increased to US$ 14.5m from US$ 5.4m in 2013. The primary cause of the increase in net income was a 32% increase in revenues, US$ 4.1m non-cash valuation allowance, and higher gross margins.  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,
	2014	2013
	US$ 000	US$ 000
Net income	14,541	5,380
Basic weighted shares outstanding	56,274,097	56,425,598
Net dilutive effect of stock options and restricted stock units	1,641,129	4,302,189
Diluted weighted average shares outstanding	57,915,226	60,727,787

The company had 56,274,097 shares outstanding at December 31, 2014.  Earnings per share at December 31, 2014 are as follows:

	US$
Basic earnings per share	0.26
Diluted earnings per share	0.25
Basic adjusted net income before amortization	0.29
Diluted adjusted net income before amortization	0.28

Consolidated Balance Sheets
For the Years Ended December 31, 2014 and 2013
		Year ended	Year ended
		December 31,	December 31,
		2014	2013
		US$ 000	US$ 000
Assets
Current assets:
	Cash and cash equivalents	7,950	5,983
	Accounts receivable - net	6,599	5,407
	Inventories	8,390	6,781
	Prepaid expenses and other assets	734	636
	Deferred tax asset	174	-
	Total current assets	23,847	18,807
Property, plant, and equipment - net		4,823	4,181
Intangible assets - net		4,040	5,585
Goodwill		2,878	2,878
Deferred financing costs		103	135
Deferred tax asset		3,505	428
Other assets		32	43
Total assets		39,228	32,057
Liabilities and stockholders' equity
Current liabilities:
	Notes payable - current portion	266	1,265
	Accounts payable	4,096	3,239
	Accrued expenses	2,896	1,756
	Income tax payable	25	525
	Total current liabilities	7,283	6,785
Notes payable, net of current portion		1,072	1,338
Other liabilities		91	38
	Total liabilities	8,446	8,161
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, 2014 and 2013	26	26
	Less: treasury stock, 232,700 shares as of December 31, 2014 and 60,827 shares as of December 31, 2013, at cost	(416)	(61)
	Additional paid in capital	22,336	27,984
	Retained earnings/(accumulated deficit)	10,194	(2,774)
	Other comprehensive loss	(1,358)	(1,279)
	Total stockholders' equity	30,782	23,896
Total liabilities and stockholders' equity		39,228	32,057
See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income *
For the Years Ended December 31, 2014 and 2013
		Year ended	Year ended
		December 31,	December 31,
		2014	2013
		US$ 000	US$ 000
		except per share data	except per share data
Revenue		59,277	45,078
Cost of sales		27,290	21,536
Gross profit		31,987	23,542
Operating expenses
	Selling expenses	7,150	6,524
	Engineering expenses	1,166	881
	General and administrative expenses	11,079	9,734
	Total operating expenses	19,395	17,139
Operating income		12,592	6,403
Other income (expense)
	Interest expense	(107)	(216)
	Interest income	39	13
	Foreign exchange (loss)/gain	(122)	249
	Other	(3)	2
Income before income taxes		12,399	6,451
(Benefit)/provision for income taxes		(2,142)	1,071
Net income		14,541	5,380
Other comprehensive income
	Cumulative translation adjustment	(79)	(230)
	Change in fair value of derivative instruments - net of income taxes	-	4
Comprehensive income		14,462	5,154
Earnings per common share
Earnings per share basic		0.26	0.10
Earnings per share diluted		0.25	0.09
Weighted average number of common shares outstanding
	Basic	56,274,097	56,425,598
	Diluted	57,915,226	60,727,787
See notes to consolidated financial statements.
*  US GAAP requires the previous Consolidated Statements of Operations to now be called Statements of Comprehensive Income

Consolidated  Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2014 and 2013
	Common stock			Treasury stock			Other
			Additional			Retained earnings/	Compre-	Total
			paid-in			(accumulated	hensive	stockholder's
		Amount	capital		Amount	deficit)	income (loss)	equity
	Shares	US$ 000	US$ 000	Shares	US$ 000	US$ 000	US$ 000	US$ 000
Balance - January 1, 2013	56,425,598	26	28,331	-	-	(7,195)	(1,053)	20,109
Cumulative translation adjustment	-	-	-	-	-	-	(230)	(230)
Change in fair value of derivative instruments	-	-	-	-	-	-	4	4
Net income	-	-	-	-	-	5,380	-	5,380
Stock based compensation	-	-	177	-	-	-	-	177
Dividend	-	-	-	-	-	(959)	-	(959)
Treasury stock	-	-	-	60,827	(61)	-	-	(61)
Stock options settled for cash	-	-	(524)	-	-	-	-	(524)
Balance - December 31, 2013	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
See notes to consolidated financial statements.

Consolidated Statements of Cash Flows
For the Years Ended December 31, 2014 and 2013
		Year ended	Year ended
		December 31,	December 31,
		2014	2013
		US$ 000	US$ 000
Cash flows from operating activities:
Net income		14,541	5,380
Adjustments to reconcile net income to net cash provided by operating activities:
	Deferred taxes	(3,251)	(428)
	Depreciation and amortization	2,098	2,373
	Amortization of deferred financing costs	32	100
	Stock based compensation	262	177
Working capital changes:
	Accounts receivable	(1,192)	(1,011)
	Inventories	(1,609)	(391)
	Prepaid expenses and other assets	(98)	20
	Other assets	11	(9)
	Accounts payable, accrued expenses and other liabilities	2,051	1,451
	Income taxes payable	(500)	355
	Net cash provided by operating activities	12,345	8,017
Cash flows from investing activities:
	Proceeds from sale of property and equipment	25	-
	Property and equipment purchases	(1,221)	(795)
	Net cash used in investing activities	(1,196)	(795)
Cash flows from financing activities:
	Borrowings from additional financing	-	11,269
	Payment of dividend	(1,573)	(959)
	Payment of RSUs	(4,874)	-
	Purchase of treasury stock	(355)	(61)
	Stock options settled for cash	(1,036)	(524)
	Loan origination fees	-	(160)
	Repayment of notes payable	(1,265)	(11,745)
	Net cash used in financing activities	(9,103)	(2,180)
Effect of exchange rates on cash and cash equivalents		(79)	(226)
Net increase in cash and cash equivalents		1,967	4,816
Cash and cash equivalents:
Beginning of year		5,983	1,167
End of year		7,950	5,983
See notes to consolidated financial statements.

Notes to the Consolidated Financial Statements

As of December 31, 2014 and 2013

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. The operations are conducted from a corporate office in Houghton, Michigan, executive offices in Fort Myers, Florida, and sales and distribution offices in the United Kingdom, China, and 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, 2014 and 2013, the allowance for doubtful accounts was approximately US$ 324,000 and US$ 324,000, respectively. Bad debts expense was US$ 49,000 and US$ 31,000 in 2014 and 2013, 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, 2014 or 2013. (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, 2014, 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.

	2014	2013
	US$ 000	US$ 000
Balance, January 1	(179)	(101)
Warranty charges	397	268
Accruals	(411)	(346)
Balance, December 31	(193)	(179)

Property, plant, and equipment

Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 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 2014 and 2013. The Company is subject to a three year statute of limitations by major tax jurisdictions, and currently 2011 through 2013 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,
	2014	2013
	US$ 000	US$ 000
Net income	14,541	5,380
Basic weighted shares outstanding	56,274,097	56,425,598
Net dilutive effect of stock options and restricted stock units	1,641,129	4,302,189
Diluted weighted average shares outstanding	57,915,226	60,727,787

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, 2013
Asset:
	Goodwill	2,878			2,878
	Interest rate swap	5			5
Year ended December 31, 2014
Asset:
	Goodwill	2,878			2,878
	Interest rate swap	-			-

New accounting pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.

The standard is effective for annual periods beginning after December 15, 2016, 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.

3.  Inventories

Inventories consisted of the following at December 31, 2014 and 2013:

	Year ended	Year ended
	December 31,	December 31,
	2014	2013
	US$ 000	US$ 000
Raw material	2,312	1,794
Finished goods and work in process	2,970	1,900
Refurbished	3,108	3,087
Total	8,390	6,781

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, 2014 and 2013, and that the value of patents was not impaired as of December 31, 2014 and 2013.

The following table reflects Other intangible assets:

		Year ended	Year ended
	Weighted average	December 31,	December 31,
	amortization	2014	2013
	period	US$ 000	US$ 000
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	14,547	13,002
Intangible assets not subject to amortization	-	-	-
		14,547	13,002
Net carrying costs
Patents	12 years	3,991	5,536
Intangible assets not subject to amortization	-	49	49
		4,040	5,585

Amortization expense associated with the intangible assets in each of the years ended December 31, 2014 and 2013 was approximately US$ 1,545,000 and US$ 2,004,000, respectively. Future amortization of intangible assets is expected to be as follows for the years ended:

	December 31
	US$ 000
2015	1,545
2016	1,545
2017	901
Thereafter	-
	3,991

5.  Property, plant, and equipment

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

	Year ended	Year ended
	December 31,	December 31,
	2014	2013
	US$ 000	US$ 000
Land	207	207
Building and improvements	3,686	3,686
Machinery and equipment	3,760	2,680
	7,653	6,573
Less:  accumulated depreciation and amortization	(2,830)	(2,392)
	4,823	4,181

Depreciation expense for the years ended December 31, 2014 and 2013 was approximately US$ 553,000 and US$ 369,000 respectively.

6.  Notes payable

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

	Year ended	Year ended
	December 31,	December 31,
	2014	2013
	US$ 000	US$ 000
March 2016 secured revolving line of credit	-	-
March 2018 delayed draw term loan	218	1,435
March 2018 commercial real estate mortgage	1,120	1,168
Total bank debt	1,338	2,603
Less debt due within one year	(266)	(1,265)
Obligations due after one year	1,072	1,338

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:

	December 31
	US$ 000
2015	266
2016	48
2017	48
2018	976
Thereafter	-
	1,338

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 March 2018 delayed draw term loan

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

The interest rate on the delayed draw loan was 2.99% as of December 31, 2014. The interest rate on the commercial real estate loan was 2.91% as of December 31, 2014. The Company's new loan facility is secured by substantially all of its business assets.  Fees paid to the bank were US$ 30,000.

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$259,000 to the savings and retirement plan during the year ended December 31, 2014 and contributed US$ 201,000 for the year of 2013.

8.  Operating leases

The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non-cancellable operating leases with initial terms in excess of one year were as follows:

	December 31
	US$ 000
2015	533
2016	459
2017	302
2018	265
Thereafter	148
	1,707

9.  Supplemental cash flow and non-cash financing disclosures

	Year ended	Year ended
	December 31,	December 31,
	2014	2013
	US$ 000	US$ 000
Cash paid for interest	71	122
Cash paid for taxes	1,697	968
Non-cash financing activities - change in fair value of derivative instruments	-	(4)

10.  Business and credit concentration

The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance.  At December 31, 2014 and 2013, the Company had two customers which represented 10% and 36% of total accounts receivables, respectively.

11.  Commitments and contingencies

The Company has entered into employment agreements with certain members of senior management.  The terms of these are for renewable one year periods and include non-compete and nondisclosure provisions as well as 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.

12.  Income taxes

Income Tax Provision
			Year ended	Year ended
			December 31,	December 31,
			2014	2013
			US$ 000	US$ 000
Current income tax
	Federal		954	1,331
	State		123	41
	Foreign		32	127
Total current income tax expense			1,109	1,499
Deferred tax (benefit)/expense
	Federal		(3,083)	(402)
	State		43	(26)
	Foreign		(211)	-
Total deferred tax (benefit)/expense			(3,251)	(428)
Total (benefit)/provision			(2,142)	1,071

The components of the net deferred income tax asset at December 31, 2014 and 2013 were as follows:

		Year ended	Year ended
		December 31,	December 31,
		2014	2013
		US$ 000	US$ 000
Bad debt allowance		115	115
Inventory reserve		39	64
Accrued expenses		5	63
UNICAP - Sec 263A		124	60
	Current deferred tax asset	283	302
Prepaid insurance		(53)	(43)
Prepaid other		(56)	(85)
	Current deferred tax liabilities	(109)	(128)
Accrued warranty		97	64
Stock comp expense (options & RSUs)		243	164
Charitable contributions		-	1
Intangible assets		3,181	3,489
State NOL		-	14
UK NOL		-	417
UK intangibles		134	134
Italy - NOL		76	76
Foreign tax credit		237	237
	Noncurrent deferred tax assets	3,968	4,596
Fixed assets		(463)	(286)
	Noncurrent deferred tax liabilities	(463)	(286)
Total deferred tax assets		3,679	4,484
Valuation allowance for deferred tax assets		-	(4,056)
Deferred tax assets, net of valuation allowance		3,679	428
Total net deferred tax asset		3,679	428
Rate reconciliation
Consolidated income before tax		12,399	6,451
Statutory rate		34%	34%
	Statutory tax expense	4,216	2,193
State taxes		110	15
Foreign taxes		(179)	(27)
Revaluation of deferred tax assets		-	116
Meals and entertainment		50	43
Permanent differences due to stock options & RSUs		(1,897)	-
Permanent differences due to other items		10	-
Valuation allowance		(4,056)	(1,017)
Other		(396)	(252)
	Tax (benefit)/expense	(2,142)	1,071

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

13.  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,
		2014	2013
		US$ 000	US$ 000
United States and US possessions		36,314	24,226
Canada		841	1,248
Rest of World		22,122	19,604
Total		59,277	45,078

14.  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$ 262,000 and US$ 177,000 for the years ended December 31, 2014 and 2013, respectively.  The income tax effect recognized for stock based compensation was $1.9m and zero, respectively, for the years ended December 31, 2014 and 2013.  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 2014 and 2013.

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, 2013	3,067,345	0.56	6.76	-
Granted	-	-	-	-
Exercised	(459,566)	0.41	-	-
Forfeited	(205,691)	2.34	-	-
Outstanding at December 31, 2013	2,402,088	0.44	5.99	-
Exercisable at December 31, 2013	2,401,402	0.44	5.99	-
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	-

Options exercised in 2014 and 2013 were settled for cash of US$ 1.0m and US$ 0.5m, respectively.

A summary of the status of the Company's non-vested stock options as of December 31, 2014, and changes during the year then ended is presented below:

	Stock options	Weighted grant-date fair value
Non-vested stock options as of December 31, 2013	686	0.05
Granted	-	-
Vested	(686)	0.05
Forfeited	-	-
Non-vested stock options as of December 31, 2014	-	-

As of December 31, 2014, there was US$ 0 of total 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 2014 and 2013 was US$ 0 and US$ 51,000 respectively.

A summary of restricted stock units activity is presented below:

	Shares	Grant date fair market value US$
Outstanding at January 1, 2013	2,300,446	370,654
Granted	240,453	179,497
Vested	-	-
Forfeited	-	-
Outstanding at December 31, 2013	2,540,899	550,151
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

RSUs vested in 2014 were settled for cash US$ 4.9m.

As of December 31, 2014, there was US$ 329,000 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 1.58 years.                     

15.  Employee compensation

The Board approved management bonuses and profit sharing dollars totaling US$ 1.3m to be paid in December 2014 and early 2015 based upon the Company meeting certain profitability targets. 

16.  Reclassed items

US$524,000 and 459,566 shares were reclassed from Treasury stock to Additional paid-in capital and stock options settled for cash at December 31, 2013.

17.  Subsequent events

Dividend

A final 2014 dividend of 4.0 US cents per share has been announced on April 7, 2015 and will be payable on May 11, 2015 to shareholders on the register as of April 24, 2015 and together with the interim dividend paid in October 2014 of 1.5 US cents per share, represents a full year dividend to shareholders of 5.5 US cents per share; a 150% increase on the previous year.  The final 2014 dividend of 4.0 US cents per share represents a 208% increase over the final 2013 dividend.

Capital Expenditure

Due to the anticipated growth of the business in the medium term, the Board has concluded that the current Global Headquarters in Fort Myers will not be large enough to accommodate future growth.  As a result, the Company has entered into an agreement to purchase land to build a new Global Headquarters at an expected cost of up to US$ 4.0m spread over 2015 and 2016.

 

END

 

 

FR UUSORVSASRAR