Interim Results

RNS Number : 0090J

Somero Enterprises Inc.

06 September 2016

 

Press Announcement

For immediate release

September 6, 2016

Somero Enterprises, Inc.®

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

Interim Results for the six months ended June 30, 2016

Somero Enterprises, Inc. is pleased to report its interim results for the six months ended June 30, 2016.

Financial Highlights

	H1 2016	H1 2015	% Increase
Revenue	US$39.7m	US$35.3m	12%
Adjusted EBITDA(1,2)	US$12.1m	US$9.5m	27%
Adjusted EBITDA Margin(1,2)	30%	27%
Operating Income	US$10.3m	US$8.3m	24%
Adjusted Net Income(1,3)	US$7.3m	US$6.0m	22%
Diluted Adjusted Net Income Per Share(1,3,4)	US$0.13	US$0.10	30%

·     Broad-based geographic growth led by core markets and strong demand for new products:

·     Revenue increased 12% to US$ 39.7m (H1 2015: US$ 35.3m)

·     Effective conversion of revenue growth into profit:

·     Adjusted EBITDA increased 27% to US$ 12.1m (H1 2015: US$ 9.5m)^(1,2)

·     Adjusted EBITDA margin grew to 30% (H1 2015: 27%) ^(1,2)

·     Operating income increased 24% to US$ 10.3m (H1 2015: US$ 8.3m)

·     Adjusted net income increased 22% to US$ 7.3m (H1 2015: US$ 6.0m)^(1,3)

·     Diluted adjusted net income per share grew 30% to US$ 0.13 (H1 2015: US$ 0.10) ^(1,3,4)

·     Net cash flow from operations was US$5.8m (H1 2015: US$7.3m) with the change driven primarily by increased working capital investment and timing of income tax payments

·     Balance sheet continues to strengthen and reflect long-term investment:

·     Investment in new Global Headquarters and Training Facility in Fort Myers, Florida completed with US$ 3.3 spend in H1 2016

·     Strong net cash position at June 30, 2016 of US$ 11.1m (December 31, 2015: US$ 12.6m) despite capital expenditures related to construction and US $ 2.8M in dividend payments in H1 2016 ⁽⁴⁾

·     Increased dividend payment to shareholders:

·     2.5 US cents per share declared for payment in H2 2016; a 32% increase over last year

Business Highlights

·     Six of 11 regions delivered sales growth compared to H1 2015, led by core markets:

·     The North American market was very strong, with sales increasing to US$ 29.8m, a 24% increase compared to H1 2015

·     EMEA sales increased 13% compared to H1 2015 led by Europe which grew to US$ 2.6m in H1 2016 (H1 2015: US$ 1.9m)

·     Sales in China increased 15% to US$ 3.8m compared to H1 2015

·     Strong demand for new products - Mid line and Small line machines, 3-D Profiler Systems, and growth in Other revenues were significant contributors to the strong H1 2016 performance:

·     S-10A and S-940 Laser Screed machines contributed combined sales of US$ 5.1m in H1 2016

·     3-D Profiler System sales increased to US$ 3.0m, up 50% from H1 2015

·     Other revenues increased to US$ 8.1m, up 45% from H1 2015, driven by growth in sales of parts and services and the STS-11m Spreader

·     Construction completed on new Global Headquarters and Training Facility in Fort Myers, Florida

·     Building officially opened April 2016 on budget at a total project cost of US $ 4.8m

Notes:

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

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

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

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

Commenting, Jack Cooney, President and Chief Executive Officer of Somero, said:

"Somero Enterprises, Inc. is pleased to announce that the healthy trading momentum referred to in the Company's 12 July 2016 trading update has continued.  Revenue grew 12% and Operating Income by 24% compared to H1 2015 with six of 11 regions reporting increased sales, led by strong performance in the Company's core North American, European and Chinese markets.  On a product basis, the strong H1 2016 performance was driven by robust demand for recently launched new products - Mid line and Small line machines, 3-D Profiler Systems, and growth in Other revenues.  Due to the solid H1 2016 results and continued healthy trading environment, the Board expects another successful year of growth in line with current market expectations."

For further information, please contact:

Enquiries:

Somero Enterprises, Inc.                                                                       www.somero.com Jack Cooney, CEO                                                                                    [phone] John Yuncza, CFO Howard Hohmann, EVP Sales finnCap Ltd (NOMAD and Joint Broker) Matt Goode (Corporate Finance)                                                               [phone] Carl Holmes (Corporate Finance) Tim Redfern (Corporate Broking) Canaccord Genuity Ltd (Joint Broker) Bruce Garrow                                                                                           [phone] Piers Coombs Redleaf Communications Ltd (Financial PR Advisor)                           [e-mail] Rebecca Sanders-Hewett                                                                           [phone] David Ison Susie Hudson

About Somero^®

Somero designs and assembles laser-guided and technologically innovative machinery used in horizontal concrete placement to advance the productivity, concrete flatness and efficiency of the jobsite.

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

Somero has approximately 170 employees, marketing and selling products through a direct sales force, external sales representatives, and independent dealers in the Americas, Europe, Middle East, South Africa, Asia, and Australia.  Somero's Global Headquarters and Training Facility is located in Fort Myers, Florida and the Company's Operations and Support offices are located in Houghton, Michigan.  In addition, Somero maintains a Sales, Service and Training Facility that is home to the Somero Concrete College in Shanghai, China as well as sales and service offices located in Chesterfield, England and New Delhi, India.

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

For more news and information on Somero, please visit http://www.somero.com/.

Chairman's and Chief Executive Officer's Statement

Performance and Dividend

Somero is on track for another year of solid growth in 2016.  H1 2016 revenues were US$ 39.7m, an increase of 12% compared to H1 2015.  Growth came from a variety of geographies with sales in six of our 11 markets increasing compared to H1 2015, highlighted by particularly strong performance in the Company's core markets of North America, Europe and China.  On a product basis, sales of Mid line and Small line machines, 3-D Profiler Systems, and Other revenues grew 143%, 22%, 50%, and 45%, respectively, compared to H1 2015.  Gains across multiple product categories highlight the broad reach of Somero's product offering and ability to capture growth in a variety of market segments.  Continued focus on delivering innovative new products with compelling value propositions was a key driver of growth for Mid line and Small line machine sales. H1 2016 sales of the recently launched Mid line S-10A and Small line S-940 Laser Screed machines totaled US$ 1.8m and US$ 3.3m, respectively. 

The strong top-line performance is only part of the story.  Disciplined management drove efficient translation of revenue growth to profit and operating cash flow, providing the Company with a strengthened balance sheet and the flexibility to make long-term investments such as the newly constructed Global Headquarters and Training Facility. Gross margins in H1 2016 improved to 56.2% from 55.0% in H1 2015 driven by the positive impacts of price increases and productivity gains while Adjusted EBITDA margin improved to a healthy 30% in H1 2016 compared to 27% in H1 2015.^(1,2)

Based on the strong performance in H1 2016 and the Board's confidence in the Company's future, we are pleased to report that the interim dividend for the six months ended June 30, 2016 of 2.5 US cents per share has been approved by the Board and will be payable on October 19, 2016 to shareholders on the register at September 30, 2016. 

People

Somero's success is only made possible by the contribution of each of our 170 employees around the globe.  On behalf of the Board, we would like to thank them for their dedication and hard work. Without our employees' commitment and passion for our customers' success, we could not deliver these extraordinary results for our shareholders.  The Board and management team remain committed to providing our employees the opportunity to fully develop their expertise, broaden their experience and foster innovation by creating an environment that challenges our people, enables them to do their best work, and rewards them for their performance.

Markets

Performance in the North American market remained strong supported by a healthy non-residential construction environment.  North American revenues increased 24% to US$ 29.8m (H1 2015: US$ 24.1m) driven in part by demand for new products. Sales in Europe grew 37% to US$ 2.6m (H1 2015: US$ 1.9m) continuing a solid recovery trend.  Market conditions in China improved in H1 2016 as sales grew to US$ 3.8m, up 15% from H1 2015, which was driven in part by the positive impact of our long-term financing program for customers that requires installation of our machine shut-off payment protection tool.  Our experience with the China long-term financing program has been positive to date and in H1 2016, approximately 35% of our sales in China were financed under this program.  In addition to solid performance in our core markets, sales in Australia increased 38% to US$ 1.1m compared to H1 2015, while India, Scandinavia, and Russia reported H1 2016 sales that were modestly ahead of or on par with H1 2015.  In the Latin America, Southeast Asia, Korea and Middle East territories, while H1 2016 sales were below previous year levels, the Company remains encouraged by solid activity in these markets and expects improvement over the rest of the year.

New product development

Our product development effort is a customer-driven process focused on customer needs and value requirements.  We are continually looking for new and innovative ideas to introduce to the industry and to each market we serve.

In H2 2016, we will launch the S-158C, an entry level Small line machine designed exclusively for the China and India markets primarily focused on the productivity improvement value proposition.  This machine is designed to benefit contractors with smaller sized slab projects and targets customers who are not ready to move to a higher level Small line or boom-out Laser Screed machine.  The S-158C will have a small footprint, will be affordable, easy to use, highly productive, and importantly will expand the number of customers utilizing Somero branded equipment.

Cash flow and Balance Sheet

The Company generated US$ 5.8m in operating cash flow in H1 2016, down 21% from H1 2015 due primarily to increased working capital investment and timing of federal and state tax payments in H1 2016.  Tax payments in H1 2016 totaled US$ 4.7m and included final payment of amounts due for the tax year 2015 as well as an increased level of estimated tax payments for 2016.  The net increase in working capital in H1 2016 of US$ 1.6m was driven by an increase in accounts receivable of US$ 2.9m, primarily related to the high volume of North American sales occurring late in June 2016, an increase in inventory of US$ 0.6m, offset partly by an increase in accrued expenses and accounts payable of US$ 1.9m.  We ended June 30, 2016 with net cash of US$ 11.1m⁽¹⁾, a US$ 1.6m decrease from year-end 2015, due primarily to H1 2016 cash payments for federal and state tax payments, US$ 2.8m in shareholder dividends, and US$ 3.8m in capital expenditures primarily related to the Global Headquarters construction project. 

Expansion progress

In April 2016, we completed construction and officially opened the new 14,000 square-foot Global Headquarters and Training Facility in Fort Myers, Florida.  The final project cost was US$ 4.8m, of which US$ 3.3m was included in H1 2016 capital expenditures.  Due to increased demand for training and education on concrete floor wide-placement and finishing best practices, we are accelerating plans to design and construct a hands-on training environment to be located at our Fort Myers facility.  This investment supports one of our key competitive advantages which is the industry expertise, training and education we uniquely provide to our customers.  We expect the project will be completed in Q1 2017 at a total project cost of US $ 0.7m.

Current trading and outlook

Positive trading momentum in North America has continued into H2 2016 reflecting a healthy non-residential construction market in the United States driven by demand for new products, replacement equipment, fleet additions, and technology upgrades.  The ongoing construction growth and project backlogs our customers are experiencing point to continued solid performance in the North American market for the remainder of 2016. 

Overall activity levels in EMEA were positive in H1 2016, with Europe particularly active continuing a positive recovery trend.  In the Middle East, while H1 2016 revenues of US$ 1.4m were down compared to H1 2015, we continue to be encouraged by activity levels across numerous countries that comprise this territory. 

The China market improved in H1 2016 due to positive market conditions, traction with our market development activities, and the positive impact of the long-term financing program. In H1 2016, approximately 35% of our sales in China were financed under the long-term financing program.  Our low penetration rate combined with greater acceptance of wide-placement theory and flatness standards and customer willingness to use our products and services provides Somero ample opportunity for growth going forward in this market.

We are also seeing positive activity levels in Latin America and expect meaningful improvement in H2 2016. In Southeast Asia and Korea, while H1 2016 sales were below previous year levels, we remain encouraged by solid opportunities in each of these markets.

After significantly strong trading in June to finish H1 2016, the solid activity levels from H1 2016 have carried over to July and August as we continue to see significant opportunities across our broad portfolio of markets. 

We are very pleased with our performance in the first half of 2016 and remain confident in delivering another year of solid, profitable growth for our shareholders in line with current market expectations.

Larry Horsch

Non-Executive Chairman

Jack Cooney

President and Chief Executive Officer

September 6, 2016

Notes:

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

Somero Enterprises Inc. Business and Financial Review
Summary of financial results			For the six months ended June 30
*  unaudited			2016	2015
			US$ 000's	US$ 000's
			Except per share data	Except per share data
Revenue			39,711	35,333
Cost of sales			17,385	15,895
Gross profit			22,326	19,438
Operating expenses
Selling expenses			3,972	3,616
Engineering expenses			538	540
General and administrative expenses			7,470	6,987
Total operating expenses			11,980	11,143
Operating income			10,346	8,295
Other income (expense)
Interest expense			(43)	(48)
Interest income			125	4
Foreign exchange loss			(63)	(29)
Income before income taxes			10,365	8,222
Provision for income taxes			3,658	2,849
Net income			6,707	5,373
			Per Share	Per Share
			US$	US$
Basic earnings per share			0.12	0.10
Diluted earnings per share			0.12	0.09
Basic adjusted net income per share (1,3,4)			0.13	0.11
Diluted adjusted net income per share(1,3,4)			0.13	0.10
Other data
Adjusted EBITDA(1,2,4)			12,052	9,512
Adjusted net income(1,3,4)			7,313	6,036
Depreciation expense			482	347
Amortization of intangibles			772	772
Capital expenditures			3,806	2,178

Notes:

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

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

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

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

Somero Enterprises, Inc. Net income to adjusted EBITDA reconciliation and Adjusted net income reconciliation
*  unaudited	Six months ended June 30
	2016 US$ 000's	2015 US$ 000's
Adjusted EBITDA reconciliation
Net income	6,707	5,373
Tax provision	3,658	2,849
Interest expense	43	48
Interest income	(125)	(4)
Foreign exchange loss	63	29
Depreciation	482	347
Amortization	772	772
Stock based compensation	452	98
Adjusted EBITDA(1,2,4)	12,052	9,512
Adjusted net income reconciliation
Net income	6,707	5,373
Amortization	772	772
Tax impact of stock option & RSU settlements	(166)	(109)
Adjusted net income reconciliation(1,3,4)	7,313	6,036

Notes:

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

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

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

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

Revenues

The Company's consolidated revenues increased by 12% to US$ 39.7m (H1 2015: US$ 35.3m). Company revenues consist primarily of sales from Large line products (the S22-E Laser Screed machine), sales from Mid line products (the S-15R and S-10A), sales from Small line products (the S-840, S-940, S-485 and CopperHead), Remanufactured machine sales, 3-D Profiler Systems, and Other revenues, which consist of, among other things, revenue from sales of spare parts and accessories, Topping Spreaders, Mini Screeds, service revenues and freight charges. The overall increase for the period was driven by sales of Mid line and Small line machines, 3-D Profiler Systems, and Other revenues. The following table shows the breakdown during the six months ended June 30, 2016 and 2015:

	Six months ended:
	June 30, 2016		June 30, 2015
	US$ 000's	Percentage of Net sales	US$ 000's	Percentage of Net sales
Large line sales	12.4	31.2%	15.4	43.6%
Mid line sales	5.6	14.1%	2.3	6.5%
Small line sales	7.7	19.4%	6.3	17.8%
Remanufactured sales	2.9	7.3%	3.7	10.5%
3-D Profiler sales	3.0	7.6%	2.0	5.7%
Other	8.1	20.4%	5.6	15.9%
Total	39.7	100.0%	35.3	100.0%

Large line sales decreased to US$ 12.4m (H1 2015: US$ 15.4m) primarily as a result of a decrease in volume to 34 units (H1 2015:  44 units),  Mid line sales increased to US$ 5.6m (H1 2015:  US$ 2.3m) primarily due to an increase in volume to 30 units (H1 2015: 12), Small line sales increased to US$ 7.7m (H1 2015: US$ 6.3m)  primarily due to an increase in volume to 89 units (H1 2015: 76), Remanufactured sales decreased to US$ 2.9m (H1 2015:  US$ 3.7m) despite unit volume remaining flat at 23 units (H1 2015: 23) due primarily to a change in mix, and 3-D Profiler System sales increased to US$ 3.0m (H1 2015:  US$ 2.0m) primarily due to an increase in units sold to 30 (H1 2015: 21).

Revenue by product line and geography
	North America		EMEA		RoW		Total
	2016	2015	2016	2015	2016	2015	2016	2015
US$ millions
Large line	11.1	13.7	0.4	0.4	0.9	1.3	12.4	15.4
Mid line	2.8	0.6	2.2	0.8	0.6	0.9	5.6	2.3
Small line	5.8	3.8	0.9	1.5	1.0	1.0	7.7	6.3
Remanufactured	2.0	1.3	-	0.2	0.9	2.2	2.9	3.7
3-D Profiler Systems	2.9	1.6	-	0.2	0.1	0.2	3.0	2.0
Other	5.2	3.1	1.0	0.9	1.9	1.6	8.1	5.6
Total	29.8	24.1	4.5	4.0	5.4	7.2	39.7	35.3

Units by product line	Total
	2016	2015
Large line	34	44
Mid line	30	12
Small line	89	76
Remanufactured	23	23
3-D Profiler Systems	30	21
Total	206	176

Sales in North America totaled US$ 29.8m (H1 2015: US$ 24.1m) and represented 75% of total revenues (H1 2015: 68%), sales to customers in EMEA (Russia, Middle East, Europe, Scandinavia and India) contributed US$ 4.5m (H1 2015: US$ 4.0m) and sales to customers in ROW (China, Southeast Asia, Australia, Korea and Latin America) contributed US$ 5.4m (H1 2015: 7.2m).

Regional sales breakdown	H1 2016	H1 2015
North America	29.8	24.1
ROW (China)	3.8	3.3
EMEA (Middle East)	1.4	1.9
EMEA (Europe)	2.6	1.9
ROW (Latin America)	0.2	1.4
ROW (Southeast Asia)	0.2	1.0
ROW (Australia)	1.1	0.8
ROW (Korea)	0.1	0.7
EMEA (Scandinavia)	0.3	0.1
EMEA (India)	0.1	0.1
EMEA (Russia)	0.1	-
Total	39.7	35.3

Gross profit

Gross profit percentage improved to 56.2% compared to 55.0% in H1 2015 due to the positive impacts of price increases, productivity gains, and product mix.

Operating expenses

Operating expenses excluding depreciation, amortization and stock based compensation for H1 2016 were US$ 10.6m (H1 2015: US$ 10.2m). The increase has been driven primarily by increased personnel costs, sales commissions, marketing costs, professional fees and insurance expenses.  Total employment increased to 170 as compared to 165 at the end of 2015.

Debt

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

Provision for income taxes

The provision for income taxes increased to US$ 3.7m, at an effective tax rate of 35%, compared to a provision of US$ 2.8m in H1 2015, at an effective tax rate of 35%, due primarily to a higher reported income during the period.

Earnings per share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. 

Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units.  Earnings per common share has been computed based on the following:

									Six months ended June 30
									2016 US$ 000's					2015 US$ 000's
Income available to stockholders									6,707					5,373
Basic weighted shares outstanding									56,153,294					56,185,038
Net dilutive effect of stock options and restricted stock units									1,652,276					1,851,381
Diluted weighted average shares outstanding									57,805,570					58,036,419
									Per Share					Per Share
									US$					US$
Basic earnings per share									0.12					0.10
Diluted earnings per share									0.12					0.09
Basic adjusted net income per share									0.13					0.11
Diluted adjusted net income per share									0.13					0.10
Somero Enterprises, Inc. Condensed Consolidated Balance Sheets As of June 30, 2016 and December 31, 2015
*  unaudited									As of June 30, 2016 US$ 000's					As of December 31, 2015 US$ 000's
Assets
Current assets:
Cash and cash equivalents									12,104					13,709
Accounts receivable - net									10,160					7,242
Inventories									9,035					8,479
Prepaid expenses and other assets									1,085					862
Deferred tax asset									327					410
Total current assets									32,711					30,702
Accounts receivable, non-current - net									901					885
Property, plant, and equipment - net									11,590					8,266
Intangible assets - net									1,723					2,495
Goodwill									2,878					2,878
Deferred tax asset									3,090					3,119
Other assets									18					26
Total assets									52,911					48,371
Liabilities and stockholders' equity
Current liabilities:
Notes payable - current portion									48					48
Accounts payable									4,660					3,705
Accrued expenses									5,264					4,330
Income tax payable									46					1,044
Total current liabilities									10,018					9,127
Notes payable, net of current portion (less deferred financing costs of $54 as of June 30, 2016 and $70 as of December 31, 2015)									946					954
Other liabilities									113					84
Total liabilities									11,077					10,165
Stockholders' equity
Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding									-					-
Common stock, US$.001 par value, 80,000,000 shares authorized, 56,425,598 shares issued at June 30, 2016 and December 31, 2015:									26					26
Less: treasury stock, 221,996 shares as of June 30, 2016 and 318,866 shares as of December 31, 2015, at cost									(483)					(614)
Additional paid in capital									21,839					22,008
Retained earnings									22,334					18,432
Other comprehensive loss									(1,882)					(1,646)
Total stockholders' equity									41,834					38,206
Total liabilities and stockholders' equity									52,911					48,371
See notes to unaudited consolidated financial statements.
Somero Enterprises, Inc. Consolidated Statements of Comprehensive Income * For the six months ended June 30, 2016 and 2015
*  unaudited											Six months ended June 30
											2016 US$ 000's Except per share data			2015 US$ 000's Except per share data
Revenue											39,711			35,333
Cost of sales											17,385			15,895
Gross profit											22,326			19,438
Operating expenses
Selling expenses											3,972			3,616
Engineering expenses											538			540
General and administrative expenses											7,470			6,987
Total operating expenses											11,980			11,143
Operating income											10,346			8,295
Other income (expense)
Interest expense											(43)			(48)
Interest income											125			4
Foreign exchange (loss)											(63)			(29)
Income before income taxes											10,365			8,222
Provision for income taxes											3,658			2,849
Net income											6,707			5,373
Other comprehensive income
Cumulative translation adjustment											(227)			(20)
Change in fair value of derivative instruments - net of income taxes											(9)			(10)
Comprehensive income											6,471			5,343
Earnings per common share
Earnings per share - basic											0.12			0.10
Earnings per share - diluted											0.12			0.09
Weighted average number of common shares outstanding
Basic											56,153,294			56,185,038
Diluted											57,805,570			58,036,419
See notes to unaudited consolidated financial statements.
*  US GAAP requires the previous Consolidated Statements of Operations to now be called Statements of Comprehensive Income
Somero Enterprises, Inc. Consolidated Statements of Changes in Stockholders' Equity For the six months ended June 30, 2016
* unaudited
			Common stock				Treasury stock					Retained earnings/ (accumulated deficit) US$ 000's		Other Compre- hensive income (loss) US$ 000's
						Additional paid-in capital US$ 000's										Total stockholder's equity US$ 000's
			Shares		Amount US$ 000's		Shares			Amount US$ 000's
Balance - December 31, 2015			56,425,598		26	22,008	318,866			(614)		18,432		(1,646)		38,206
Cumulative translation adjustment			-		-	-	-			-		-		(227)		(227)
Change in fair value of derivative instruments			-		-	-	-			-		-		(9)		(9)
Net income			-		-	-	-			-		6,707		-		6,707
Stock based compensation			-		-	452	-			-		-		-		452
Dividend			-		-	-	-			-		(2,805)		-		(2,805)
Treasury stock			-		-	(131)	(96,870)			131		-		-		-
RSUs settled for cash			-		-	(345)	-			-		-		-		(345)
Stock options settled for cash			-		-	(145)	-			-		-		-		(145)
Balance - June 30, 2016			56,425,598		26	21,839	221,996			(483)		22,334		(1,882)		41,834
See notes to unaudited consolidated financial statements.

Somero Enterprises, Inc. Consolidated Statements of Cash Flows For the six months ended June 30, 2016 and 2015
*unaudited		Six months ended June 30
		2016 US$ 000's	2015 US$ 000's
Cash flows from operating activities:
Net income		6,707	5,373
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes		112	(152)
Depreciation and amortization		1,254	1,119
Amortization of deferred financing costs		16	16
Stock based compensation		452	98
Working capital changes:
Accounts receivable		(2,934)	(1,231)
Inventories		(556)	(306)
Prepaid expenses and other assets		(223)	-
Other assets		9	6
Accounts payable, accrued expenses and other liabilities		1,918	767
Income taxes payable		(998)	1,649
Net cash provided by operating activities		5,757	7,339
Cash flows from investing activities:
Property and equipment purchases		(3,807)	(2,178)
Net cash used in investing activities		(3,807)	(2,178)
Cash flows from financing activities:
Payment of dividend		(2,805)	(2,246)
Payment of RSUs		(345)	(210)
Purchase of treasury stock		-	(197)
Stock options settled for cash		(145)	(110)
Repayment of notes payable		(24)	(242)
Net cash used in financing activities		(3,319)	(3,005)
Effect of exchange rates on cash and cash equivalents		(236)	(30)
Net (decrease) increase in cash and cash equivalents		(1,605)	2,126
Cash and cash equivalents:
Beginning of period		13,709	7,950
End of period		12,104	10,076
See notes to unaudited consolidated financial statements.

Notes to the Consolidated Financial Statements

1.   Organization and description of business

Nature of business

Somero Enterprises, Inc. (the "Company" or "Somero") designs, assembles, remanufactures, sells and distributes concrete leveling, contouring and placing equipment, related parts and accessories, and training services worldwide. Somero's Operations and Support Offices are located in Michigan, USA with Global Headquarters and Training Facilities in Florida, USA. Sales and service offices are located in Chesterfield, England; Shanghai, China; and New Delhi, 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.  We have reclassified certain prior year amounts to conform to the current year presentation. 

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 US 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 June 30, 2016 and December 31, 2015, the allowance for doubtful accounts was approximately US$ 621,000 and US$ 698,000, 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 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 periods ended June 30, 2016 nor December 31, 2015.

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 June 30, 2016 and December 31, 2015, the Company tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

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 FOB shipping point, revenue is recognized upon shipment.  For arrangements which include FOB destination shipping terms, revenue is recognized upon delivery to the customer.  Standard products do not have customer acceptance criteria.  Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.

Warranty liability 

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

Property, plant, and equipment

Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed 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 for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2016 and 2015. The Company is subject to a three-year statute of limitations by major tax jurisdictions, and currently 2012 through 2014 remain open to investigation.

Use of estimates

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

Stock based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.  Compensation expense related to stock based payments was US$ 452,000 and US$ 98,000 for the six month periods ended June 30, 2016 and 2015, respectively.  The Company settled US$ 145,000 and US$ 110,000 in stock options for cash during the six month periods ended June 30, 2016 and 2015, respectively. In addition, the Company settled US$ 345,000 and US$ 210,000 in restricted stock units for cash during the six month periods ended June 30, 2016 and 2015, 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.  The preparation of the consolidated financial statements requires the translation of these financial statements to USD.  Balance sheet amounts are translated at period-end exchange rates and the statement of comprehensive income 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 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 and restricted stock units. Earnings per common share have been computed based on the following:  

	Six months ended June 30
	2016 US$ 000's	2015 US$ 000's
Net income	6,707	5,373
Basic weighted shares outstanding	56,153,294	56,185,038
Net dilutive effect of stock options and restricted stock units	1,652,276	1,851,381
Diluted weighted average shares outstanding	57,805,570	58,036,419

Fair value measurement

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.

		US$ 000's	Quoted prices in active markets Identical Assets Level 1 US$ 000's	Significant other observable inputs Level 2 US$ 000's	Significant other unobservable inputs Level 3 US$ 000's
Year ended December 31, 2015
Asset:
Goodwill		2,878			2,878
Interest rate swap		(4)			(4)
Six months ended June 30, 2016
Asset:
Goodwill		2,878			2,878
Interest rate swap		(13)			(13)

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, 2018, 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 2019.

In April 2015 the FASB released Accounting Standards Update No. 2015-03 - Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  To simplify the presentation of debt issuance costs, the update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. 

The update is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016.  The Company has applied the new guidance for the current period and prior periods reflected on the balance sheet.

In March 2016 the FASB released Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation.  Under the new guidance, because there will no longer be any excess tax benefits from the exercise of stock options recognized in APIC, when applying the treasury stock method for computing diluted EPS, the assumed proceeds will not include such windfall tax benefits.

The update is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company has chosen early adoption.  The diluted EPS information for the six months ended June 30, 2016 and 2015 reflect the adoption of this guidance.

3.  Inventories

Inventories consisted of the following:

	June 30, 2016 US$ 000's	December 31, 2015 US$ 000's
Raw material	2,406	2,576
Finished goods and work in process	3,675	2,259
Remanufactured	2,954	3,644
Total	9,035	8,479

4.  Property, plant, and equipment

Property, plant, and equipment consisted of the following:

	June 30, 2016 US$ 000's	December 31, 2015 US$ 000's
Land	864	864
Building and improvements	9,462	6,325
Machinery and equipment	5,268	4,599
Sub-total	15,594	11,788
Less:  accumulated depreciation and amortization	(4,004)	(3,522)
Total	11,590	8,266

5.  Notes payable

The Company's debt obligations consisted of the following:

	June 30, 2016 US$ 000's	December 31, 2015 US$ 000's
February 2021 secured revolving line of credit	-	-
April 2018 commercial real estate mortgage	1,048	1,072
Deferred financing costs	(54)	(70)
Total bank debt	994	1,002
Less debt due within one year	(48)	(48)
Obligations due after one year	946	954

The company has implemented Accounting Standards Update No. 2015-03-Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs for the periods ended June 30, 2015 and 2016. This update requires that debt issuance costs related to debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability. The implementation of Subtopic 835-30 has moved deferred financing costs from an asset to a direct reduction in liability, as shown above.

The Company entered into an amended credit facility in February 2016. The agreement will mature between April 2018 and February 2021.

·     US$ 10,000,000 February 2021 secured revolving line of credit

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

The interest rate on the commercial real estate loan was 1.71% as of June 30, 2016. The Company's loan facility is secured by substantially all of its business assets. 

Future Payments

The future payments by year represent the remaining six months for 2016 and the full 12 months of each successive period for the Company's loan facility:

	US$ 000's
2016	24
2017	48
2018	976
Thereafter	-
Total	1,048

Interest

Interest expense on the credit facility for the six months ended June 30, 2016 and 2015 was approximately US$ 41,000 and USD$ 46,000, respectively, and includes amortized swap interest fees and amortized loan origination fees.

6.  Operating leases

The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year represent the remaining six months for 2016 and the full 12 months of each successive period as follows:

	US$ 000's
2016	189
2017	320
2018	275
2019	129
Thereafter	-
Total	913

7.  Capital leases

Interest rates on capital leases are variable and range from 4.5% to 7.3% at June 30, 2016.  Future minimum payments by year represent the remaining six months for 2016 and the full 12 months of each successive period as follows:

	US$ 000's
2016	12
2017	23
2018	15
2019	15
Thereafter	4
Total	69

8.  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.

9.  Income taxes

The Company's effective tax rate for the six months ended June 30, 2016 was 35% compared to the federal statutory rate of 34%. The effective tax rate is higher than the federal statutory rate primarily due to the effect of state and foreign income taxes.

The Company is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company was formed in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2012 forward is still open. The Company has no federal, foreign or state income tax returns currently under examination.

At June 30, 2016, the Company had US$ 327,000 in current net deferred tax assets and US$ 3,090,000 in non-current net deferred tax assets recorded on its balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

10.  Supplemental cash flow and non-cash financing disclosures

	Six months ended June 30
	2016 US$ 000's	2015 US$ 000's
Cash paid for interest	29	37
Cash paid for taxes	4,679	1,373
Non-cash financing activities - change in fair value of derivative instruments	(9)	10

11.  Goodwill and intangible assets

The following table reflects intangible assets:

	Weighted average amortization period	June 30, 2016 US$ 000's	December 31, 2015 US$ 000's
Capitalized cost
Patents	12 years	18,538	18,538
Intangible assets not subject to amortization	-	49	49
		18,587	18,587
Accumulated amortization
Patents	12 years	16,864	16,092
Intangible assets not subject to amortization	-	-	-
		16,864	16,092
Net carrying costs
Patents	12 years	1,674	2,446
Intangible assets not subject to amortization	-	49	49
		1,723	2,495

Future amortization of intangible assets is expected by year represent the remaining six months for 2016 and the full 12 months of each successive period as follows:

	US$ 000's
2016	773
2017	901
Thereafter	-
Total	1,674

12.  Subsequent events

Dividend

The Board declared an interim dividend for the six months ended June 30, 2016 of 2.5 US cents per share.   This dividend will be payable on October 19, 2016 to shareholders on the register at September 30, 2016.

 

END

 

 

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