Final Results
Somero Enterprises Inc.
01 April 2008
Tuesday, 1 April 2008
THIS ANNOUNCEMENT MAY NOT BE RELEASED, PUBLISHED OR DISTRIBUTED IN OR INTO THE
UNITED STATES, CANADA, JAPAN OR AUSTRALIA OR TO US PERSONS (AS DEFINED IN
REGULATION S UNDER THE US SECURITIES ACT OF 1933, AS AMENDED) OR TO RESIDENTS,
NATIONALS OR CITIZENS OF CANADA, JAPAN OR AUSTRALIA.
Somero Enterprises, Inc. (R)
Full year results for the twelve months to 31 December 2007
Revenues up over 18% and pre-tax profits up by 30%
Strong performance across all product lines
Somero Enterprises, Inc. (R), ('Somero' or 'the Company') is pleased to report
results for the twelve months to 31 December 2007. Somero is a North American
manufacturer of patented laser guided equipment used for the spreading and
levelling of high volumes of concrete for floors in the construction industry.
Somero has operations worldwide and is primarily focused on the non-residential
construction industry.
Financial Highlights
• Revenue increased 18.8% to US$66.4m (2006: US$55.9m)
• EBITDA increased 12.2% to US$16.5m (2006: US$14.7m)
• Pre-tax income increased 30.5% to US$10.7m (2006: US$8.2m)
• Net income before amortisation increased 38.5% to US$10.8m (2006: US$7.8m)
• EPS before amortisation of US$0.31 (basic EPS: US$0.20)
• Dividend of 3.0c per share declared for the period 1 July 2007 to 31
December 2007, resulting in a full year dividend of 6.0c per share (2006:
0.33c)
Business Highlights
Another strong performance across all product lines:
• Large line equipment sales increased 20.1% to US$30.5m (2006: US$25.4m)
• Small line equipment sales increased 13.8% to US$18.1m (2006: US$15.9m)
• Other revenues, including the sale of spare parts, refurbished machines
and accessories increased 21.9% to US$17.8m (2006: US$14.6m)
Strategic growth and expansion plans continue apace:
• Revenue balance improved, with international sales accounting for 40.2% of
Group revenue (2006: 27.4%)
• Units sold into 47 countries outside of North America
• Sales into diverse new markets: Aruba, Chile, India, Trinidad & Tobago and
Tunisia
• New offices opened in key markets of Dubai, China, Germany and Spain
• Sales College and senior management relocation within the US to enhance
sales efficiency
Continued focus on product enhancement:
• New Mini-Screed product launched to tap into opportunities in residential
market
• Enhanced Copperhead and PowerRake models launched
Commenting on the results Stuart Doughty, Non-Executive Chairman of Somero said:
'I am delighted with the progress we have made in 2007, both in growing our
lines of business and in extending our global reach. International sales now
represent over 40% of Group revenues, and we expect to increase this further in
the year ahead.
'Whilst we are seeing some signs of slowing equipment purchases in the US, the
non-residential construction market itself in the US remains strong and sales in
the Rest of the World continue to grow in line with our expectations. We remain
committed to investing in the development of important new markets, whilst being
mindful of the need to regularly review our cost base against prevailing market
conditions. We continue to focus on maximising our cash generation, maintaining
high levels of customer support and developing new products to keep Somero at
the forefront of this industry.'
Jack Cooney, President and Chief Executive Officer commented:
'In 2008 we will look to expand our presence in emerging markets with new
products and new sales personnel. Our Group's attractive fundamentals including
strong cash flow, market position and products, together with an experienced
management team, provide us with a solid platform on which to continue to grow
organically and, where appropriate, through selective acquisitions. We look
forward to delivering further on our strategic goals in the year ahead.'
For further information contact:
Financial Dynamics +44 (0)20 7831 3113
Harriet Keen / Matt Dixon / Erwan Gouraud
Hawkpoint Partners Limited +44 (0)20 7665 4500
Christopher Kemball
Collins Stewart +44 (0)20 7523 8000
Nick Ellis
About Somero:
Somero(R) designs, manufactures and sells equipment that automates the process
of spreading and leveling large volumes of concrete for commercial flooring and
other horizontal surfaces, such as paved parking lots. Somero's innovative,
proprietary products, including the large SXP(R) Laser Screed(R), CopperHead(R)
and new Mini ScreedTM employ laser-guided technology to achieve a high level of
precision.
Somero's products have been sold primarily to concrete contractors for use in
non-residential construction projects in over 50 countries across every time
zone around the globe. Laser Screed equipment has been specified for use in
constructing warehouses, assembly plants, retail centres and in other commercial
construction projects requiring extremely flat concrete slab floors by a variety
of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various
Coca-Cola bottling companies, the United States Postal Service, Lowe's and Toys
'R' Us.
Somero's headquarters are located in New Hampshire, USA, and are due to relocate
to Florida in July 2008. It operates a manufacturing facility in Michigan, USA,
and has a sales and service office in Chesterfield, England. Somero has over 150
employees and markets and sells its products through a direct sales force,
external sales representatives and independent dealers in North America, Latin
America, Europe, the Middle East, South Africa, Asia and Australia. Somero is
listed on the Alternative Investment Market of the London Stock Exchange and its
trading symbol is SOM.L.
This announcement does not constitute or form part of any offer or invitation to
sell, or any solicitation of any offer to purchase, any securities of Somero
Enterprises, Inc. (the 'Company').
This announcement may not be released, published or distributed in or into the
United States, Canada, Japan or Australia or to US Persons (as defined in
Regulation S under the US Securities Act of 1933, as amended (the 'US Securities
Act')) or to residents, nationals or citizens of Canada, Japan or Australia. The
distribution of this announcement in certain other jurisdictions may also be
restricted by law and persons into whose possession this announcement or any
document or other information referred to herein comes should inform themselves
about and observe any such restriction. Any failure to comply with these
restrictions may constitute a violation of the securities laws of any such
jurisdiction.
No securities of the Company have been registered under the US Securities Act.
No securities of the Company may be offered or sold in the United States or to
US persons (as defined in Regulation S under the US Securities Act) except
pursuant to an effective registration statement under the US Securities Act or
pursuant to an available exemption from the registration requirements under the
US Securities Act.
No securities of the Company have been registered under the applicable
securities laws of Australia, Canada or Japan and may not be offered or sold
within Australia, Canada or Japan or to, or for the account or benefit of
citizens or residents of Australia, Canada or Japan.
Somero Enterprises, Inc. (R)
Full year results for the twelve months to 31 December 2007
Chairman's Statement
2007 was an excellent year for Somero, with growth across all product lines and
particularly strong growth in Europe and emerging markets. During the period we
significantly reduced our debt and have started to realise the benefits of our
investment in resources in those areas of the world where we have identified
considerable, long-term growth potential for our business.
Overview
Our continued focus on high-quality engineering, coupled with a commitment to
continuous product development and high levels of customer service, has enabled
us to deliver a very successful year with financial results at the high end of
the market's expectations. Somero's products have helped to revolutionise the
concrete placing industry, so much so that they are increasingly recognised by
blue chip logistics and retail customers as essential to achieving greater
levels of operating efficiency in their own highly competitive markets.
Our policy of providing spares and service back-up, coupled with a comprehensive
training programme, and making customers' needs our top priority is helping us
maintain our strong market position and clearly differentiates us from any
competition.
In line with our strategic ambitions for our business, we began to take real
advantage in 2007 of growth in the economies of the Middle East, Far East and
the former Eastern Bloc. We employed significantly more resources in sales and
marketing in those territories, helping to drive Group revenue which increased
18.8% on the prior year.
Markets
As major retailers and logistics companies refurbish their existing assets and
expand globally, they are increasingly recognising that a significant
contributing factor to the efficiency of their operations is the standard of the
floor surface from which they work. As a result we are enjoying the benefits of
being specified by these companies as a 'supplier of choice'.
The development of markets in this way, and our concentration on the provision
of a high-quality service, means that we are very well positioned to gain market
penetration at a much greater rate in the years ahead than if we were simply to
follow the infrastructure market and contractors alone.
The infrastructure market continues to grow across virtually all economies,
including the US. Growth in the commercial and retail construction market also
continues. Whilst our core market focus has been and remains the
non-residential construction market, we remain of the view that opportunities do
exist for us to successfully expand our product offering into the residential
arena, despite concerns over the current economic climate. As a consequence, in
December 2007 we introduced a new product, the Mini Screed, which addresses this
otherwise untapped market.
The Board
On behalf of the Board, I would like to pay particular thanks to Ian Weingarten,
the independent, Non-Executive Director representing the Company's previous
owner who stepped down from the Board in the second half of 2007.
Nominated Advisor
Hawkpoint Partners will become the Company's NOMAD with effect from 1 April 2008
and Collins Stewart will continue as the Company's sole broker.
People
I continue to be impressed by the considerable strength and depth of the Somero
team at all levels of the business. On behalf of the Board I would like to
take this opportunity to thank all our employees for their continued hard work,
commitment and motivation throughout the past year.
Current Trading and Outlook
Whilst we are seeing some signs of slowing in equipment purchases in the US, the
non-residential construction market itself in the US remains strong and sales in
the Rest of the World continue to grow in line with our expectations. We remain
committed to investing in the development of important new markets, whilst being
mindful of the need to regularly review our cost base against prevailing market
conditions.
We continue to focus on maximising our cash generation, maintaining high levels
of customer support and developing new products to keep Somero at the forefront
of this industry.
Stuart Doughty
Non-Executive Chairman
President and Chief Executive Officer's Review
I am very pleased to report today full year results for the twelve months to 31
December 2007. Revenues were US$66.4m, 18.8% above 2006 levels (2006: US$55.9m)
and the Company reported EBITDA for the period of US$16.5m, an increase of 12.2%
on the previous year (2006: US$14.7m). Net Income before amortisation stood at
US$10.8m, 38.5% higher than 2006. EPS on a Net Income before amortisation basis
were 24.0% higher than 2006.
These are outstanding results of which we are very proud. To achieve them, we
focused during the year on the three main tenets of our business strategy,
namely to expand our geographic footprint into new and emerging markets; to
enhance and expand our product offering; and to maintain our keen focus on cash
generation and cost control.
Performance
Results during the period were strong across all product lines and saw growth in
almost all of the geographies in which we operate.
By product line, small line equipment sales stood at US$18.1m for the year, an
increase of 13.8% over 2006 (2006: US$15.9m). North America saw a small decline
in small line sales to US$10.6m, although the second half recorded an
improvement, as expected, over the second half of 2006. Our efforts to add
sales and demonstration personnel in Europe along with independent sales
representatives helped to deliver a significant increase in European small line
sales, up 54.3% to US$5.4m (2006: US$3.5m). Small line sales in the rest of the
world showed equally impressive growth, up by 61.5% to US$2.1m (2006: US$1.3m).
Total large line sales continued to demonstrate strong growth in 2007 with sales
up 20.1% to US$30.5m (2006: US$25.4m). European sales were up 87.0% to US$10.1m
(2006: US$5.4m), driven by new independent sales representatives in Russia and
Eastern Europe and the continuing replacement demand in the UK where the Company
has had a presence for some 20 years.
Large line sales in the US and Canada declined slightly with sales of US$17.5m
in 2007 compared to US$18.8m in 2006, itself a 44.5% increase on the previous
year. This performance was achieved against significant growth a year earlier
as a result of continued strong non-residential construction and the replacement
cycle. Large line sales in the Rest of the World continued to grow with a sales
increase of US$1.6m to US$2.9m.
North America saw stable business during the year as large line sales continued
to be driven by replacement demand and small line sales improved in the second
half, as planned, as a result of new hires in our small line sales team.
Strategic Expansion
We continued to expand during the year into new geographic markets and to
benefit from strong commercial building trends worldwide. In 2007 we added
sales representation in Dubai, Germany and Spain. Internationally, during the
year we sold units into 47 countries outside North America, with new sales this
year into markets as diverse as Aruba, Chile, India, Trinidad & Tobago and
Tunisia.
During the first half of the year, as reported, we experienced a number of
changes in our sales force. As a result, and to improve our sales recruitment
and training programme more generally, we established the Somero Sales College
in the second half of the year. This Sales College will enhance our
capabilities as we continue to focus on future growth. To further increase the
effectiveness of the Sales College, and to embed it more deeply into the
organisational and cultural structure of the Somero business, both the College
and Senior Management Group will move in July 2008 to Fort Myers, Florida. This
will allow us to conduct outdoor training on a year-round basis. The Group will
lease back until September 2008 its current Corporate Headquarters facility in
New Hampshire which was sold in January 2008.
We have retained our focus on building capacity for future expansion into the
current financial year. Since the year end, we have reorganised our sales
management team and hired a sales manager in China to capitalise on emerging
market opportunities and the growing importance of China as a logistics hub.
Agents and distributors outside of North America are also being recruited to
expand our sales and service presence in other markets. We have had early
success in South America and Europe and are optimistic that our new distributors
in China and India will be equally successful.
Product Development
Our product development process continues to produce innovative equipment for
the concrete industry. The newest of these products, the Mini ScreedTM, was
introduced in December 2007. The Mini Screed is the Company's first product
offering directed toward the US residential screeding market which, we believe,
is a significant market opportunity for Somero.
Additionally, during the period we continued to focus on our commitment to
product enhancement by introducing new, improved versions of our popular
Copperhead and PowerRake products.
Competition and Market Drivers
The competitive landscape did not change significantly in 2007. Our field
research and experience show that alternative low-technology or manual methods
of placing and screeding concrete continue to be our main competition.
An additional driver for the sale of our products is the poor quality of
concrete in some of the emerging markets where we are starting to operate. In
these markets customers need to use topping hardeners to obtain an acceptable
finish and are purchasing Somero Topping Spreaders in partnership with their
Laser Screed(R). In addition, high oil prices have made the use of concrete
more competitive, particularly on parking lots, which has driven increased sales
of our 3D systems which allow for the screeding of contoured surfaces. At the
same time, there is a significant push on the part of US ready mix suppliers for
the use of pervious concrete which is an emerging trend that will increase the
sales of large line Laser Screeds. Against this supportive backdrop, continuing
replacement demand has allowed the Company to take additional machines on trade
as the market for refurbished machines increased substantially in 2007.
Whilst we are aware of current economic reports, the global non-residential
construction market is expected to continue to be robust throughout this year
and the next. One key driver is the rebuilding and upgrading of logistics space
in the global supply chain. The emergence of China as a major supplier of
components has caused global supply chain logistics space to be relocated,
enlarged and enhanced. We are playing a part in this evolution.
We were encouraged by the strong attendance at the annual industry trade show in
January which often acts as a barometer for our sales outlook for the year.
International attendance was particularly high and we secured a number of sales
leads in new territories. In the first quarter, we also reorganised our US and
European sales organisations to develop further sales in China, the Middle East
and other emerging markets.
In 2008 we will look to expand our presence in emerging markets with new
products and new sales personnel. The Company's attractive fundamentals
including strong cash flow, market position and products, together with an
experienced management team, provide us with a solid platform on which to
continue to grow the business both organically and, where appropriate, through
selective acquisitions.
We look forward to delivering further on our strategic goals in the year ahead.
Jack Cooney
President and Chief Executive Officer
Financial Review
Summary of Financial Results (1) (2) (3) (4)
Somero Enterprises Inc.
12 months 12 months
ended ended
31-Dec-06 31-Dec-07
US$ 000 US$ 000
Revenue 55,894 66,436
Cost of sales 25,708 28,828
Gross profit 30,186 37,608
Operating expenses:
Selling expense 9,066 11,949
Engineering expense 1,202 1,831
General and administrative expense 8,046 10,514
Total operating expenses 18,314 24,294
Operating income 11,872 13,314
Other income (expense)
Interest expense (3,714) (1,472)
Interest income 157 74
Foreign exchange gain/(loss) 247 279
Other (325) (1,479)
Income before taxes 8,237 10,716
Provision for income taxes 2,856 3,789
Net income 5,381 6,927
Other data:
EBITDA(1) (2) (4) 14,696 16,494
Net income before
amortisation (1) (3) (4) 7,764 10,792
Depreciation expense 382 378
Amortisation of intangibles 2,383 2,384
Capital expenditures 398 491
Notes:
1. EBITDA and Net Income Before Amortisation are not measurements of the
Company's financial performance under GAAP and should not be considered as an
alternative to net income, operating income or any other performance measures
derived in accordance with GAAP or as an alternative to GAAP cash flow from
operating activities as a measure of profitability or liquidity. EBITDA and Net
Income Before Amortisation are presented herein because management believes they
are useful analytical tools for measuring the profitability and cash generation
of the business. 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 EBITDA is frequently used by securities analysts, lenders and others in
their evaluation of companies, its calculation of EBITDA may not be comparable
to other similarly titled measures reported by other companies.
2. EBITDA as used herein is a calculation of Operating Income plus Deprecation
Expense, Amortisation of Intangibles and non-cash stock based compensation.
3. Net income before amortization as used herein is a calculation of Net Income
plus Amortisation of Intangibles plus Loss on extinguishment of debt.
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 EBITDA reconciliation and net income before amortisation
reconciliation
Somero Enterprises, Inc.
12 months 12 months
ended ended
31-Dec-06 31-Dec-07
US$ 000 US$ 000
EBITDA reconciliation
Net income 5,381 6,927
Tax provision 2,856 3,789
Interest expense 3,714 1,472
Interest income (157) (74)
Foreign exchange gain (247) (279)
Other expense 325 1,479
Depreciation 382 378
Amortisation 2,383 2,384
Stock based compensation 59 418
EBITDA 14,696 16,494
Net income before amortisation reconciliation
Net income 5,381 6,927
Amortisation 2,383 2,384
Loss on extinguishment of debt - 1,481
Net income before amortisation 7,764 10,792
Notes:
References to 'Net Income Before Amortisation' in this document are to Somero's
net income plus amortisation of intangibles plus loss on extinguishment of debt.
Although net income before amortisation is not a measure of operating income,
operating performance or liquidity under US GAAP, this financial measure is
included because management believes it will be useful to investors when
comparing Somero's results of operations both before and after the Somero
Acquisition, including by eliminating the effects of increases in amortisation
of intangibles that have occurred as a result of the write-up of these assets in
connection with the Somero Acquisition. Net income before amortisation should
not, however, be considered in isolation or as a substitute for operating income
as determined by US GAAP, or as an indicator of operating performance, or of
cash flows from operating activities as determined in accordance with US GAAP.
Since net income before amortisation is not a measure determined in accordance
with US GAAP and is thus susceptible to varying calculations, net income before
amortisation, as presented, may not be comparable to other similarly titled
measures of other companies. A reconciliation of net income to EBITDA and Net
Income Before Amortisation is presented above.
Revenues
Somero's consolidated revenues for the 12 months ended 31 December 2007were
US$66.4m, which represented an 18.8% increase from US$55.9m in revenues for the
12 months ended 31 December 2006. Somero's revenues consist primarily of sales
of new large line products (the SXP Large Laser Screed and its predecessors),
sales of new small line products (the CopperHead and PowerRake) and other
revenues, which consist of, among other things, revenue from sales of spare
parts, refurbished machines, Topping Spreaders, 3D systems and accessories. The
overall increase in revenues for the 12 months ended 31 December 2007 as
compared to the 12 month period ended 31 December 2006 was driven by growth in
each of large line sales, small line sales and other revenues.
The table below shows the breakdown between large line sales, small line sales
and other revenues during the 12 months ended 31 December 2006 and 2007:
12 months ended 12 months ended
31 December 2006 31 December 2007
Percentage of Percentage of
(US$ in millions) net sales (US$ in millions) net sales
Large line sales 25.4 45.4% 30.5 45.9%
Small line sales 15.9 28.5% 18.1 27.3%
Other revenues 14.6 26.1% 17.8 26.8%
Total 55.9 100% 66.4 100%
Large line sales increased from US$25.4m for the 12 months ended 31 December
2006 to US$30.5m for the 12 month period ended 31 December 2007. This increase
in revenue was caused by a 13.8% increase in unit volume (from 94 units to 107
units) and increases in average selling prices. The higher unit volume was
driven by a 96.4% increase in international sales.
Small line sales increased from US$15.9m for the 12 months period 31 December
2006 to US$18.1m for the 12 month period ended 31 December 2007. This increase
was driven entirely by increases in non-US sales. Total Small Line units
increased from 383 in 2006 to 394 in 2007 as the average selling prices also
rose US small line sales declined 4.2% in 2007 as substantial turnover in the
sales group required a significant training period for new personnel; however,
Small line sales in the second half of 2007 exceeded the second half of 2006.
Other revenues, including sales of spare parts, refurbished machines, Topping
spreaders, 3Dsystems and accessories, increased from US$14.6m during the 12
months ended 31 December 2006 to US$17.8m during the 12 months ended 31 December
2007 This revenue growth resulted primarily from the sales of Topping Spreaders
used in emerging markets to compensate for poor quality concrete, and increased
sales of 3D used for increasingly popular concrete parking lots.
International sales growth has driven the increases in sales revenue. Sales to
customers located in North America comprises the majority of Somero's revenue,
constituting 59.9% and 72.6% of total revenue for the 12 months ended 31
December 2007 and 2006, respectively, while sales to customers in Europe, South
Africa and the Middle East combined contributed 31.2% and 21.8%, respectively.
The remaining sales in these periods were to customers in Asia, Australia,
Central America and South America. The Company has been focused on expanding
international sales, with revenues outside North America increasing to US$26.6m
during the 12 months ended 31 December 2007, an increase of 70.5% over revenues
of US$15.6m during the 12 months ended 31 December 2006. Sales in Europe, South
Africa and the Middle East generated US$20.7m during the 12 months ended 31
December 2007, compared with US$12.2m during the 12 months ended 31 December
2006. Sales of the Large Laser Screed and the small line product in these
regions increased by 87.0% and 54.3% respectively between these two periods.
Sales in Asia, Australia and Central and South America represented US$5.9m
during the 12 months ended 31 December 2007, as compared to US$3.4m during the
12 months ended 31 December 2006. This increase was driven by an increase in
sales of Large Laser Screed to 12 units during the 12 months ended 31 December
2007, compared with five units during the corresponding period of 2006 and by an
increase in Small line units to 52 from 34 over the comparable periods.
Despite the sizable improvements internationally, North America (the United
States and Canada) experienced nearly flat revenues. Sales to customers in North
America were US$39.8m during the 12 months ended 31 December 2007, a 1.5%
decrease over North American sales of US$40.3m during the 12 months ended 31
December 2006. The non-residential construction environment has continued strong
and is forecast to remain stable over the next two years.
Gross Profit
Somero's gross profit for the 12 months ended 31 December 2007 was US$37.6m, a
24.5% increase over US$30.2m for the 12 months ended 31 December 2006. As a
percentage of revenue, gross profit increased to 56.6% for the 12 months ended
31 December 2007, from 54.0% for the 12 months ended 31 December 2006. The
increase in gross profit as a percentage of revenue has been due to increased
sales volumes, increasing list prices, an improvement in product mix, and the
benefit from higher realised prices that came from exchange rate changes, (see
operating expenses for discussion of offsetting increases in cost due to
exchange rates) and management's strategy of implementing manufacturing cost
reduction initiatives.
Operating Expenses
Operating expenses were US$24.3m for the 12 months ended 31 December 2007, a
32.8% increase over US$18.3m for the 12 months ended 31 December 2007. This
increase included $0.6m in expenses related to opening offices in Dubai, China,
Germany and Spain. Additionally, the increase in operating expenses (which
consist of selling, engineering and general and administrative expenses)
resulted primarily from higher selling expenses as the Company aggressively
added to it sales and demonstration group to increase the capacity for
demonstrating small line products, and an increase in costs as a result of
being a public company, with operating expenses equaling 36.6% and 32.8% of
revenues for the 12 months ended 31 December 2007 and for the 12 months ended 31
December 2006, respectively.
Selling expense increased by US$2.8m, or 30.8%, to US$11.9m for the 12 months
ended 31 December 2007, as compared with US$9.1m for the 12 months ended 31
December 2006. The increase in selling expense was primarily due to increased
international sales, which resulted in increased commissions, and the effect of
exchange rates as the Company has a significant sale and service presence in the
UK and Europe.
Engineering expense increased by US$0.6m, or 50.0%, to US$1.8m for the 12 months
ended 31 December 2007 from US$1.2m for the 12 months ended 31 December 2006.
The main increase was due to greater focus on identifying opportunities and
building prototype products which included the Mini Screed introduced in
December 2007.
General and administrative expense increased US$2.5m, or 31.3% to US$10.5m for
the 12 months ended 31 December 2007 from US$8.0m for the 12 months ended 31
December 2006. A substantial amount of the increase in general and
administrative expense resulted from increased costs from a full year of being a
public company which were US$1.0m for the year ended 31 December 2007.
Additionally, US$0.6m was spent to open additional sales offices in Dubai,
China, Germany, and Spain.
Other Income (Expense)
Other expenses included US$2.6m for the 12 months ended 31 December 2007,
compared to expenses of US$3.6m for the 12 months ended 31 December 2006. Other
expenses consisted of interest income and expenses, foreign exchange gains and
losses, gains and losses on disposal of assets, and other expenses consisting
primarily of management fees paid to Gores. The decrease in other expenses has
resulted primarily from reduced interest expense.
Interest expense was US$1.5m for the 12 months ended 31 December 2007 compared
to US$3.7m in the 12 months ended 31 December 2006, resulting primarily from
decreased indebtedness following the IPO in November 2006 the continued
reductions in debt as excess cash has been used to pay down additional debt, and
the companies refinance of debt which reduced the interest rate paid from LIBOR
plus 3.0 to LIBOR plus 0.9. The new financing resulted in a one time charge of
US$1.5m in un-amortised loan origination fees being written off in the first
half of 2007.
Foreign exchange gain was US$0.3m for the 12 months ended 31 December 2007,
compared with a foreign exchange gain of US$0.2m for the 12 months ended 31
December 2006 resulting primarily from sales made to Europe, combined with a
weakening US Dollar compared to the Pound Sterling and the Euro.
Other expenses included US$1.5m for the 12 months ended 31 December 2007,
compared with US$0.3m for the 12 months ended 31 December 2006, primarily
resulting from the write off of unamortised loan origination fees when the
Company refinanced in March 2007, and the elimination of US$0.3m in management
fees that had been paid to the former owner of Somero before the November 2006
IPO.
Provision for Income Taxes
The provision for income taxes increased by US$0.9m, or 31.0%, to US$3.8m in the
12 months ended 31 December 2007, as compared with US$2.9m for the 12 months
ended 31 December 2006. Overall, Somero's effective tax rate increased from
34.7% to 35.4% due to an increase in federal income tax due to an increase in
subpart F income and a decrease in credits and deductions.
Net Income
Net income increased by US$1.5m, or 27.8%, to US$6.9m in the 12 months ended 31
December 2007 as compared with US$5.4m for the 12 months ended 31 December 2006.
The primary cause of the increase in net income was increased sales and gross
margin offset by increased operating expenses.
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted average number of shares outstanding during the period.
Diluted earnings per share reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any
adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate to outstanding stock
options. Earnings per common share have been computed based on the following:
2006 2007
US$ 000 US$ 000
Net income 5,381 6,927
Basic weighted average
shares outstanding 30,714 34,282
Net dilutive effect of
stock options 47 -
Diluted weighted average
shares outstanding 30,761 34,282
The Company had 34,281,968 shares outstanding at 31 December 2007.
Earnings Per Share and Dividend
Earnings per share at 31 December 2007 is as follows:
US$
Basic earnings per share 0.20
Diluted earnings per share 0.20
Net Income before amortisation earnings per share 0.31
The Company's Board of Directors resolved to declare a dividend of 3.0c per
share of common stock payable to shareholders on the register as of 25 April
2008 and payable on 12 May 2008. This dividend relates to the period from 1
July 2007 to the fiscal year end at 31 December 2007.
Consolidated Balance Sheets
As of 31 December 2006 and 2007
2006 2007
US$ 000 US$ 000
Assets
Current assets:
Cash and cash equivalents 1,895 3,842
Accounts receivable - net 4,101 4,279
Inventories - net 4,912 6,948
Prepaid expenses and other assets 584 860
Income tax receivable 211 -
Deferred tax asset 152 594
Assets held for sale - 618
Total current assets 11,855 17,141
Property, plant and equipment - net 4,712 4,103
Intangible assets - net 21,616 19,236
Goodwill 16,400 16,400
Deferred financing costs 1,349 94
Other assets 113 135
Total assets 56,045 57,109
Liabilities and stockholders' equity
Current liabilities:
Notes Payable - current portion 2,400 1,429
Accounts payable 2,842 4,051
Accrued expenses 3,125 2,453
Income taxes payable - 374
Obligations under capital leases - current portion 657 -
Other liabilities 0 152
Total current liabilities 9,024 8,459
Notes payable, net of current portion 18,600 13,500
Deferred income taxes 146 467
Other liabilities, net of current portion - 455
Total liabilities 27,770 22,881
Commitments and contingencies - -
Stockholders' equity
Preferred stock, US$.001 par value, 50,000,000
shares authorised, no shares issued and
outstanding - -
Common stock, US$.001 par value, 80,000,000
shares authorised, 34,281,968 shares issued
and outstanding at 31 December 2007 4 4
Additional paid in capital 21,926 22,344
Retained earnings 6,343 12,128
Other comprehensive income (loss) 2 (248)
Total stockholders' equity 28,275 34,228
Total liabilities and stockholders' equity 56,045 57,109
See notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended 31 December 2006 and 2007
Year ended Year ended
31 December 31 December
2006 2007
US$ 000 US$ 000
Revenue 55,894 66,436
Cost of sales 25,708 28,828
Gross profit 30,186 37,608
Operating expenses
Selling expenses 9,066 11,949
Engineering expenses 1,202 1,831
General and administrative expenses 8,046 10,514
Total operating expenses 18,314 24,294
Operating income 11,872 13,314
Other income (expense)
Interest expense (3,714) (1,472)
Interest income 157 74
Foreign exchange gain 247 279
Other (325) (1,479)
Income before income taxes 8,237 10,716
Provision for income taxes 2,856 3,789
Net income 5,381 6,927
Earnings per common share
Basic 0.18 0.20
Diluted 0.17 0.20
Weighted average number of common shares outstanding
Basic 30,714 34,282
Diluted 30,761 34,282
See notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended 31 December 2006 and 2007
Common Stock - Common Stock -
Series A Series B Common Stock
Shares Amount Shares Amount Shares Amount
US$ 000 US$ 000 US$ 000
Balance - 31 December
2005 1,000 - 94,000 - - -
Amended and
restated certificate
of incorporation
(10/05/06) (1,000) - (94,000) - 30,000,000 -
Issuance of common
stock (11/01/06) net
of issuance costs 4,281,968 4
Cumulative translation
adjustment - - - - - -
Net income - - - - - -
Share based
compensation
Dividends paid - - - - - -
Balance - 31 December
2006 - - - - 34,281,968 4
Cumulative translation
adjustment
Change in fair value
of derivative
instruments
Net income
Share based
compensation
Dividends paid
Balance - 31 December
2007 - - - - 34,281,968 4
Other
compre-
Additional hensive Total Compre-
paid In Retained Income stockholders' hensive
capital earnings (loss) equity income
US$ 000 US$ 000 US$ 000 US$ 000 US$ 000
Balance - 31 December
2005 17,783 962 (3) 18,742 959
Amended and
restated certificate
of incorporation
(10/05/06) - - - - -
Issuance of common
stock (11/01/06) net
of issuance costs 5,874 - - 5,878 -
Cumulative translation
adjustment - - 5 5 5
Net income - 5,381 - 5,381 5,381
Share based
compensation 59 59
Dividends paid (1,790) - - (1,790) -
Balance - 31 December
2006 21,926 6,343 2 28,275 5,386
Cumulative translation
adjustment (5) (5) (5)
Change in fair value
of derivative
instruments (245) (245) (245)
Net income 6,927 6,927 6,927
Share based
compensation 418 418
Dividends paid (1,142) (1,142)
Balance - 31 December
2007 22,344 12,128 (248) 34,228 6,677
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended 31 December 2006 and 2007
Year ended Year ended
31 December 31 December
2006 2007
US$ 000 US$ 000
Cash flows from operating activities:
Net income 5,381 6,927
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred taxes 26 91
Depreciation and amortisation 2,765 2,762
Amortisation of deferred financing costs 477 1,380
Gain on sale of assets (15) (5)
Share based compensation 59 418
Working capital changes:
Accounts receivable (1,457) (178)
Inventories (394) (2,036)
Prepaid expenses and other assets (7) (276)
Income taxes receivable (211) -
Other assets (68) (22)
Accounts payable and other liabilities 1,210 686
Income taxes payable (374) 587
Net cash provided by operating activities 7,392 10,334
Cash flows from investing activities:
Proceeds from sale of property and equipment 132 25
Property and equipment disposals - 78
Property and equipment purchases (398) (491)
Net cash used in investing activities (266) (388)
Cash flows from financing activities:
Borrowings from additional financing - 22,254
Payment for financing costs (5) (125)
Repayment of notes payable (11,000) (28,325)
Payment of capital lease - (657)
Repayment of working capital advance from parent (710) -
Payment of dividends (1,790) (1,142)
Contribution from parent 1,700 -
Proceeds from initial public offering of common stock,
net of costs 4,178 -
Net cash used in financing activities (7,627) (7,995)
Effect of exchange rates on cash and cash equivalents 5 (4)
Net increase (decrease) in cash and cash equivalents (496) 1,947
Cash and cash equivalents:
Beginning of period 2,391 1,895
End of period 1,895 3,842
See notes to consolidated financial statements.
Notes to the Consolidated Financial Statements
As of 31 December 2006 and 2007
1. Organisation and Description of Business
Nature of Business Somero Enterprises, Inc. (the 'Company' or 'Somero') designs,
manufactures, refurbishes, sells and distributes concrete levelling, contouring
and placing equipment, related parts and accessories, and training services
worldwide. The operations are conducted from a corporate office in Jaffrey, New
Hampshire, a single assembly facility located in Houghton, Michigan, a European
distribution office in the United Kingdom, and sales offices in Canada and
Germany.
2. Summary of Significant Accounting Policies
Basis of Presentation The consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America.
Principles of Consolidation The consolidated financial statements include the
accounts of Somero Enterprises, Inc. and its subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Cash and Cash Equivalents Cash includes cash on hand, cash in banks, and
temporary investments with a maturity of three months or less when purchased.
Accounts Receivable and Allowances for Doubtful Accounts Financial instruments
which potentially subject the Company to concentrations of credit risk consist
primarily of accounts receivable. The Company's accounts receivable are derived
from revenue earned from a diverse group of customers primarily located in the
United States. The Company performs credit evaluations of its commercial
customers and maintains an allowance for doubtful accounts receivable based upon
the expected ability to collect accounts receivable. Reserves, if necessary,
are established for amounts determined to be uncollectible based on specific
identification and historical experience. As of 31 December 2006 and 2007, the
allowance for doubtful accounts was approximately US$97,000 and US$191,000,
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 amortisation and are amortised
over the expected repayment term of the debt instrument, which is four years
from the debt inception date. These financing costs are being amortised using
the effective interest method.
Intangible Assets and Goodwill Intangible assets consist principally of customer
relationships and patents, and are carried at their fair value, less accumulated
amortisation. Intangible assets are amortised using the straight-line method
over a period of three to twelve years, which is their estimated period of
economic benefit. Goodwill is not amortised but is subject to impairment tests
on an annual basis, and the Company has chosen 31 December as its periodic
assessment date.
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 years ended 31 December 2006 and 2007, no
such events or circumstances were identified. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from
such asset (or asset group) are separately identifiable and less than the
asset's (or asset group's) carrying value. In that event, a loss is recognised
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 recognises 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
collectibility is reasonably assured. For product sales where shipping terms
are F.O.B. shipping point, revenue is recognised upon shipment. For
arrangements which include F.O.B. destination shipping terms, revenue is
recognised 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 Reserve The Company provides warranties on all equipment sales ranging
from three months to one year, depending on the product. Warranty reserves 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
amortisation. Land is not depreciated. Depreciation is computed on buildings
using the straight-line method over the estimated useful lives of the assets,
which is 31.5 to 40 years for buildings (depending on the nature of the
building), 15 years for improvements, and 2 to 5 years for machinery and
equipment.
Assets Held For Sale Assets held for sale are recorded at the lower of their
book value or net realisable value. Depreciation is not recorded on these
assets once they are classified as held for sale. In November 2007, the Company
received an offer for the sale of its Corporate Office in Jaffrey, New Hampshire
which it eventually accepted. The sale was completed in January 2008 and a gain
of US$5,000 was recorded.
Income Taxes The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ('SFAS') No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognised in income in the period that
includes the enactment date. Deferred tax assets are reduced by a valuation
allowance, if necessary, to the extent that it appears more likely than not,
that such assets will be unrecoverable.
In June 2006, the Financial Accounting Standards Board ('FASB') issued FIN 48,
Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109, Accounting for Income Taxes ('FIN 48'), effective for fiscal years
beginning after 15 December 2006. This interpretation clarifies the accounting
for uncertainty in income taxes recognised in financial statement in accordance
with SFAS No. 109, Accounting for Income Taxes. Under FIN 48, the Company may
recognise the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognised in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realised upon ultimate settlement. FIN 48 also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, and accounting for income
taxes in interim periods, and requires increased disclosures. FIN 48, as
amended, had a US$170,000 impact in the year ended 31 December 2007.
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.
Accounting Pronouncements to be Adopted
In September 2006, the FASB issued Statement of Financial Accounting Standard ('
SFAS') No. 157, Fair Value Measurements ('SFAS 157'). SFAS 157 clarifies the
principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value
hierarchy that prioritises the information used to develop those assumptions.
Under the standard, fair value measurements would be separately disclosed by
level within the fair value hierarchy. SFAS 157 is effective for fiscal years
beginning after November 2007, with early adoption permitted. Somero is
currently in the process of evaluating any potential impact of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159), which provides companies
with an option to report selected financial assets and liabilities at fair
value. The objective of SFAS 159 is to reduce both the complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS 159 is effective fiscal years beginning after 15
November 2007. Somero did not make a fair value election for any financial asset
or liability as of 1 January 2008.
Stock Based Compensation The Company accounts for its stock option issuance
under SFAS No. 123R, Share Based Payment ('SFAS 123R'). SFAS 123R required
recognition of the cost of employee services received in exchange for an award
of equity instruments in the financial statements over the period the employee
is required to perform the services in exchange for the award (presumptively the
vesting period). SFAS 123R also requires measurement of the cost of employee
services in exchange for an award based on the grant-date fair value of the
award.
Transactions in and Translation of Foreign Currency The functional currency for
the Company's subsidiaries outside the United States is the applicable local
currency. Balance sheet amounts are translated at 31 December exchange rates
and statement of operations accounts are translated at average rates. The
resulting gains or losses are charged directly to accumulated other
comprehensive income. 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 in the Company's net income as foreign exchange gain
(loss) in the accompanying consolidated statements of income.
Comprehensive Income Comprehensive income, which is the combination of reported
net income and other comprehensive income, was composed only of the Company's
net income and foreign exchange gains (losses) for the years ending 31 December
2006 and 2007. Total comprehensive income for the years was approximately
US$5,386,000 and US$6,677,000, respectively.
Earnings Per Share Basic earnings per share represents income available to
common stockholders divided by the weighted average number of shares outstanding
during the year. Diluted earnings per share reflect additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate to
outstanding stock options. 84,210 shares have been excluded from the
calculation because they are anti-dilutive. Earnings per common share have been
computed based on the following:
2006 2007
US$ 000 US$ 000
Net income 5,381 6,927
Basic weighted average shares outstanding 30,714 34,282
Net dilutive effect of stock options 47 -
Diluted weighted average shares outstanding 30,761 34,282
The Company had 95,000 shares outstanding at 31 December 2005 and issued a stock
split of 315.79:1 in 2006, prior to its initial public offering. Share and per
share amounts have been adjusted to reflect the stock split for the periods
ended 31 December 2006 and 2007.
3. Inventories
Inventories consisted of the following at 31 December:
2006 2007
US$ 000 US$ 000
Raw materials 2,422 3,358
Finished goods and work in process 2,679 3,725
5,101 7,083
Less: reserve for excess and obsolete inventory (189) (135)
Total 4,912 6,948
4. Goodwill and Intangible Assets
The following table reflects intangible assets that are subject to amortisation
under the provisions of SFAS No. 142:
Weighted average
amortisation
period 2006 2007
US$ 000 US$ 000
Capitalised cost
Customer relationships 8 years 6,300 6,300
Patents 12 years 18,538 18,538
Other intangibles 3 years 155 159
24,993 24,997
Accumulated amortisation
Customer relationships 8 years 1,116 1,903
Patents 12 years 2,189 3,735
Other intangibles 3 years 72 123
3,377 5,761
Net carrying costs
Customer relationships 8 years 5,184 4,397
Patents 12 years 16,349 14,803
Other intangibles 3 years 83 36
21,616 19,236
Amortisation expense associated with the intangible assets for the years ended
31 December 2006 and 2007 was approximately US$2,376,000 and US$2,384,000,
respectively. Future amortisation on intangible assets is as follows at:
31 December
US$ 000
2008 2,362
2009 2,332
2010 2,332
2011 2,332
Thereafter 9,878
19,236
5. Property, Plant and Equipment
Property, plant and equipment consists of the following at 31 December:
2006 2007
US$ 000 US$ 000
Land 207 207
Buildings and improvements 3,432 3,574
Machinery and equipment 732 975
Property and equipment held under capital leases 657 -
(see Note 7)
Equipment sold under recourse contracts 178 178
5,206 4,934
Less: accumulated depreciation and amortisation (494) (831)
4,712 4,103
Depreciation expense for the years ended 31 December 2006 and 2007, was
approximately US$382,000 and US$378,000, respectively.
The Company previously offered a facility to customers whereby the Company
guaranteed the financing on the sale of equipment. Equipment previously sold
under recourse contracts continues to be included in Property, Plant and
Equipment at a net book value at 31 December 2006 and 2007 of approximately
US$78,000 and US$21,000, respectively. Revenue under these arrangements has
been deferred and recognised over the life of the financing arrangement,
approximately 5 years. Deferred revenue of approximately US$84,000 and
US$20,000 related to these transactions was included in accrued expenses at 31
December 2006 and 2007, respectively. The Company has made no further sales
under recourse arrangements since.
6. Debt Obligations
Summary The Company executed a credit facility with a financial institution in
March 2007 (see section entitled 'Credit Facility' below). The proceeds of the
new term loan and the revolving line of credit were used to pay off in full
existing debt balances. The Company incurred a loss in the early extinguishment
of debt of approximately US$1,481,000 which included deferred financing cost of
approximately US$1,245,000. The Company's debt obligations consisted of the
following at 31 December:
2006 2007
US$ 000 US$ 000
Bank debt:
Term loans 21,000
Five year secured term loan 8,929
Five year secured reducing revolving line of
credit 6,000
Less debt obligations due within one year (2,400) (1,429)
Obligations due after one year 18,600 13,500
Credit Facility The Company has a credit facility with a financial institution
dated 16 March 2007 composed of the following at 31 December 2007:
• US$14,000,000 five year secured reducing revolving line of credit
• US$10,000,000 five year secured reducing term loan
The Company has fixed the interest rate for the term loan and the revolving
facility through a series of interest rate swaps. These swaps have been
desegregated as cash flow hedges. The revolver loan's interest rate swaps
initial notional amount is US$6,000,000, pays a fixed 5.20%, and had a 31
December 2007 fair market value of approximately (US$96,000) which will amortise
down by approximately US$53,000 in the next 12 months. The term loan's interest
rate swap's initial notional amount is US$10,000,000, pays a fixed 5.15%, and
had a 31 December 2007 fair market value of approximately (US$286,000) which
will amortise down by approximately US$88,000 in the next 12 months. The
interest rate swaps are designated as cash flow hedges. The revolver and term
loan interest rates are Libor (fixed by the interest rate swaps) plus an amount
determined by the ratio of 'funded debt/last 12 months EBITDA,' as defined in
the loan agreement. The effective interest rate at 31 December 2007 for the
revolving line of credit was 6.05% and for the term loan 6.10%. The credit
facilities are secured by substantially all of the Company's assets and contain
a number of restrictive covenants that among other things limit the ability of
the Company to incur debt, issue capital stock, change ownership and dispose of
certain assets. The revolving line of credit available reduces over the five
year term and as of 31 December 2007 the borrowed balance is below the credit
line available.
Future Payments The future payments by year under the Company's debt obligations
are as follows:
31 December
US$ 000
2008 1,429
2009 1,429
2010 1,429
2011 1,429
Thereafter 9,213
Total payments 14,929
Interest Interest expense on the credit facility for the years ended 31 December
2006 and 2007, was approximately US$3,618,000 and US$1,392,000, respectively,
related to the debt obligation. Interest expense paid by the Company's U.K.
subsidiary was approximately US$13,000 and US$73,000 for the years ending 31
December 2006 and 2007, respectively.
7. Capital Lease Obligations
Summary The Company previously leased a building in Jaffrey, New Hampshire which
was owned by a former co-owner of the Somero Business and accounted for as a
capital lease. During 2007, the Company purchased the building. At 31 December
2006 and 2007, the gross amount of property and related accumulated depreciation
recorded under the capital lease were as follows:
2006 2007
US$ 000 US$ 000
Building 657 -
Less: accumulated depreciation (23)
634 -
Interest Interest paid during the year 31 December 2006 was approximately
US$83,000 related to the capital lease obligation.
8. Retirement Programme
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 75% of the employee's contribution, up to the first 4% of the
employee's salary, for the year ended 31 December 2006 and matches 75% of the
employee's contribution, up to the first 6% for the year ended 31 December 2007.
The Company match vests after one year of service with the Company. The Company
contributed approximately US$133,000 and US$178,000 to the savings and
retirement plan during the years ended 31 December 2006 and 2007, respectively.
9. Operating Leases
The Company leases property, vehicles and office equipment under leases
accounted for as operating leases. Future minimum payments by year under non
cancellable operating leases with initial terms in excess of one year were as
follows:
31 December
US$ 000
2008 292
2009 162
2010 62
2011 -
After 2011 -
Total 516
Total rent expense under operating leases was approximately US$172,000 and
US$238,000 for the years ended 31 December 2006 and 2007, respectively.
10. Supplemental Cash Flow Disclosures
2006 2007
US$ 000 US$ 000
Cash paid for interest 3,710 1,294
Cash paid for taxes 3,573 3,061
11. Business and Credit Concentration
The Company's line of business could be significantly impacted by, among other
things, the state of the general economy, the Company's ability to continue to
protect its intellectual property rights, and the potential future growth of
foreign competitors. Any of the foregoing may significantly affect management's
estimates and the Company's performance. At 31 December 2006 and 2007, the
Company had receivables from two customers which represented approximately 16%
and 22% of total accounts receivable, respectively.
12. Commitments and Contingencies
The Company has entered into employment agreements with certain members of
senior management. The terms of these agreements range from six months to one
year and include non-compete and nondisclosure provisions as well as providing
for defined severance payments in the event of termination or change in control.
The Company has entered into a 5 year or minimum purchase obligation of
US$625,000 with a supplier as of 31 December 2007. There is a related
contingent liability of US$55,000 to cancel the contract as of 31 December 2007
which declines over 5 years on a pro-rated basis.
The Company is subject to various unresolved legal actions which arise in the
normal course of its business. Although it is not possible to predict with
certainty the outcome of these unresolved legal actions or the range of possible
losses, the Company believes these unresolved legal actions will not have a
material effect on its financial statements.
13. Income Taxes
The FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, which the Company adopted as of
January 1, 2007. The Interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under FIN 48, the Company may recognise the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognised in
the financial statements should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realised upon ultimate
settlement. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. The impact of the Company's reassessment of its
tax positions in accordance with the requirements of FIN 48 has resulted in a
charge of US$170,000. In assessing the ability to realise net deferred tax
assets, management considers whether it is more likely than not that some
portion of the deferred tax assets will be realised. The ultimate realisation
of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning strategies
in making this assessment, but must give greater weight to recent historical
operating losses. Based on those considerations, management believes it is more
likely than not that the Company will realise the benefits of the deferred tax
asset at 31 December 2007, and has not recognised a valuation allowance against
the total net deferred tax asset.
At the end of the year, the Company had a gross unrecognised tax benefit
(including interest and penalties) of US$128,000. Of this total, US$76,000
represents the amount of unrecognised tax benefits (net of the federal benefit
on state issues) that, if recognised, would favorably affect the effective
income tax rate in a future period.
As part of its continuing practice, the Company has accrued interest related to
unrecognised tax benefits in interest expense. Total accrued interest for
unrecognised tax benefits at the end of the year was US$6,000.
The Company elected to include accrued penalties related to unrecognised tax
benefits in other expense. Total accrued penalties related to unrecognised tax
benefits at the end of the year were US$35,000.
The Company is subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. The Company began business in 2005 and therefore
all federal, foreign and state income tax returns for tax years from 2005
forward are still open. The Company has no Federal, foreign or state income tax
returns currently under examination.
A reconciliation of the beginning and ending amounts of the Company's gross
unrecognised tax benefits is as follows:
Balance at 1 January 2007 US$ -
Additions related to tax positions of prior years US$ 81,000
Additions related to tax positions of the current year US$ 47,000
Adjustments due to settlements US$ -
Reductions due to lapse of statute of limitations US$ -
Balance at 31 December 2007 US$ 128,000
Included in the balance at 31 December 2007 are US$125,211 of tax positions
which will decrease within the next 12 months. The Company will be filing
amended returns for the years ended 31 December 2005 and 2006 to eliminate the
tax exposure related to these items.
The provision for income taxes at 31 December 2006 and 2007 includes the
following:
2006 2007
US$ 000 US$ 000
Current income tax
Federal 2,314 3,021
State 193 315
Foreign 323 362
Total current income tax expense 2,830 3,698
Deferred tax expense
Federal 23 88
State 3 3
Foreign - -
Total deferred tax expense 26 91
Total tax expense 2,856 3,789
The components of the net deferred income tax asset at 31 December were as
follows:
2006 2007
US$ 000 US$ 000
Deferred tax asset (liability)
Depreciation 28 (24)
Intangibles (195) (345)
Share based compensation 21 173
Interest rate swap - 159
Other 152 164
Net deferred tax asset 6 127
Current 152 164
Non-current (146) (37)
6 127
The statutory federal income tax rate was 34% for the years ended 31 December
2006 and 2007. Differences between the income tax expense reported in the
statement of operations and the amount computed by applying the statutory
federal income tax rate to earnings before tax are due to the following items:
2006 2007
US$ 000 US$ 000
Consolidated income before tax 8,237 10,716
Statutory rate 34% 34%
Statutory tax expense 2,801 3,644
State taxes 164 210
IRC Section 199 deduction (74) (197)
Meals and entertainment 53 60
Other (88) 72
Actual tax expense 2,856 3,789
The Company expenses research and development costs as incurred. Total research
and development expense for the research and development tax credit was
approximately US$752,000 and US$866,000 for the years ended 31 December 2006 and
2007, respectively.
14. Sales by Geographic Region
The Company sells its product to customers throughout the world. The breakdown
by location is as follows:
2006 2007
US$ 000 US$ 000
United States and US possessions 38,354 38,395
Canada 2,262 1,449
Rest of world 15,278 26,592
Total 55,894 66,436
15. Stock Based Compensation
The Company has one share-based compensation plan, which is described below. The
compensation cost that has been charged against income for the plan was
approximately US$59,000 and US$418,000 for the years ended 31 December 2006 and
2007, respectively. The income tax benefit recognised for share-based
compensation arrangements was approximately US$21,000 and US$152,000 for the
years ended 31 December 2006 and 2007, respectively.
In October 2006, the Company implemented the 2006 Stock Incentive Plan (the
'Plan'). The Plan authorises the Board of Directors to grant incentive and
nonqualified stock options to employees, officers, service providers and
directors of the Company for up to 3,400,000 shares of its common stock. Options
granted under the Plan have a term of up to ten years and generally vest over a
three-year period beginning on the date of the grant. Options under the Plan
must be granted at a price not less than the fair market value at the date of
grant.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option pricing model. The risk-free interest rate is based
on the U.S. Treasury rate for the expected life at the time of grant, volatility
is based on the average long-term implied volatilities of peer companies as our
Company has limited trading history and the expected life is based on the
average of the life of the options of 10 years and an average vesting period of
3 years. The following table illustrates the assumptions for the Black-Scholes
model used in determining the fair value of options granted to employees for the
years ended 31 December 2006 and 2007.
2006 2007
Dividend yield 2.96% 4.37%
Risk-free interest rate 4.52% 2.93%
Volatility 25.10% 25.00%
Expected life (in years) 4.4 3.0
A summary of option activity under the stock option plans as of 31 December
2007, and changes during the year then ended is presented below:
Weighted -
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term (yrs) Value
Outstanding at
1 January 2007 2,656,832 2.34 - -
Granted 101,484 1.97
Exercised - -
Forfeited (92,270) 2.39
Outstanding at
31 December 2007 2,666,046 2.32 8.87 4,898,904
Exercisable at
31 December 2007 862,757 2.34 8.84 1,585,330
The weighted-average grant-date fair value of options granted was US$.48 and
US$.24 for the years ended December 31, 2006 and 2007, respectively.
A summary of the status of the Company's non-vested shares as of 31 December
2007, and changes during the year then ended is presented below:
Weighted Average
Shares Grant-Date Fair Value
Non-vested shares as of 31 December 2006 2,656,832 1,284,000
Granted 101,484 24,356
Vested (862,757) (414,123)
Forfeited (92,270) (44,290)
Non-vested shares as of 31 December 2007 1,803,289 849,943
As of 31 December 2007, there was US$789,000 of total unrecognised compensation
cost related to non-vested share-based compensation arrangements granted under
the Company's stock option plan. That cost is expected to be recognised over a
period of 3 years.
This information is provided by RNS
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