Interim Results

RNS Number : 0099R

Somero Enterprises Inc.

08 September 2014

 



Somero Enterprises, Inc.

September 8, 2014

Press Announcement

For immediate release

September 8, 2014

Somero Enterprises, Inc.®

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

Interim Results for the six months ended June 30, 2014

Somero Enterprises, Inc.^® is pleased to report its interim results for the six months ended June 30, 2014.

Financial Highlights

·     Group revenue of US$29.5m (H1 2013: US$21.0m)

·     Adjusted Group EBITDA of US$7.4m (H1 2013: US$3.7m)

·     Pre-tax income of US$6.4m (H1 2013: US$1.9m)

·     Net income of US$8.2m (H1 2013: US$1.5m) increased due to a 41% increase in Group Revenue and the release of a non-cash US$4.1m tax valuation allowance

·     Net cash at June 30, 2014 of US$7.4m (Net cash at December 31, 2013 US$3.4m)

·     1.5 US cent per share dividend declared for payment in H2 2014

Business Highlights

·     Group revenue increased by 41% in H1 2014 compared to H1 2013

·     North American sales increased by 55% primarily due to an increase in Large and Mid Line sales

·     Successful introduction of S-15R Laser Screed resulting in total S-15 sales of US$3.4m in H1 2014

·     Sales in rest of world (RoW) increased 35% in H1 2014 compared to H1 2013

·     Significant investment growth in China led to a 63% increase in sales in China

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

"Somero Enterprises, Inc. is pleased to announce that the strong trading referred to in the Company's recent trading updates continued through the end of the first half.  Revenues for H1 2014 were over 41% ahead of those reported in H1 2013. Trading continues to be encouraging, and I am very pleased that the Company can now invest in measures aimed at supporting growth into the medium and longer term, as well as in 2014.  Confidence in global macroeconomic trends continues to improve.  We see opportunity for Somero to progress through the remainder of the year. With August having just delivered another good month's trading, the Board is confident Somero will deliver another strong year of growth ahead of current market expectations."

For further information please contact:

Canaccord Genuity

[phone]

Chris Robinson/Piers Coombs

About Somero®

Somero is a North American manufacturer of patented, laser-guided equipment used to spread and level high volumes of concrete flooring for the commercial construction industry. Expanding into new geographic markets, Somero's innovative, proprietary products help contractors throughout the world achieve the highest level of precision in flat-floor construction, thus reducing construction time and improving cost savings.

Somero's innovative, proprietary products include the large S-22E Laser Screed^®, CopperHead^®, Mini Screed™-C, S-840 Laser Screed^®, S-15M Laser Screed®, and the STS-11M Spreader, which employ laser-guided technology to achieve the highest level of precision.

Somero's products have been sold to concrete contractors for non-residential construction projects in more than 90 countries across every time zone around the globe. Laser Screed® equipment has been specified for use in the construction of warehouses, assembly plants, retail centers, and other commercial construction projects which require extremely flat concrete-slab floors and by a variety of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, the United States Postal Service, Lowe's, Toys 'R' Us and ProLogis.

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

Somero has approximately 155 employees and markets and sells its products through a direct sales force, external sales representatives and independent dealers in North America, Latin America, Europe, the Middle East, South Africa, Asia and Australia.

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

Chairman's and Chief Executive Officer's Statement

Overview

We are pleased to report Group revenues for H1 2014 are up 41% over the comparable period last year at US$29.5m vs. US$21.0m, with gross margins at 55% in H1 2014 vs. 52% in H1 2013 leading to H1 2014 EBITDA of US$7.4m vs. US$3.7m in H1 2013.  In H1, we saw significant growth in the large majority of our regions, and we are very positive about the continued momentum we have entering the second half of the year.

For over 28 years, Somero has delivered sustainable, flat floor placement solutions to meet world needs, with innovative technology that sets us apart as a true leader.  We are growing in areas across the globe that reflect the greatest need for our systems. We continue to meet the ever increasing demands for high quality, flat, concrete floors in non-residential and industrial concrete construction markets.

Our increased revenues and profitability, together with a focus on working capital, resulted in the company increasing its net-cash position by 117% as of June 30, 2014 as compared to December 31, 2013.

Strong market acceptance of new products such as the S-22E led to a 67% increase in Large Line sales in H1 2014 over H1 2013. The new S-15R led to a 128% increase in S-15 sales in H1 2014 over H1 2013.  Specialized product sales which include our 3-D Profiler System®, increased over 62% in H1 2014 vs. H1 2013.  Refurbished machine sales increased 83% in H1 2014 over H1 2013. H1 parts revenues were up 32% in H1 2014 vs. H1 2013.

This sustainable growth and continued recovery in the majority of our markets, has allowed us to accelerate our planned investments in China and India.

We are focused on providing our customers with sales and service, but more importantly, providing them with the knowledge and understanding of how to install the highest quality floor demanded by their customers.  By providing a complete program of sales, service and education, we have succeeded in greatly increasing our customer loyalty and have strengthened the Somero brand. 

Operational Performance

North America

The US and Canada experienced stronger than expected growth for H1 2014, compared to H1 2013 last year, reaching a 55% increase. The majority of sales came from the central US during this period, partly due to extreme weather conditions on the East Coast negatively impacting sales. We anticipate sales on the East Coast to be strong in the second half of the year with a continued increase in momentum for sales within the central US.    Specialty products, such as the 3-D Profiler System® have had positive growth with H1 2014 51% higher than H1 2013. The demand for refurbished equipment, both Small and Large Line, drove sales positively in H1 2014 with an increase of 101% over H1 2013. Parts sales increased 28% in H1 2014 over H1 2013.  Customer Support calls reached an all-time record in H1 2014, up 44% over H1 2013. This is a true indication that our customers are not only using their equipment on a routine basis but that the demand in their usage is on the rise.

To meet the globally increasing demand for refurbished equipment, we have added another crane and production line in the factory, solely for refurbishing existing products. This will allow us to build new and refurbished products simultaneously to keep up with the demand in our markets.

China

China performed ahead of anticipated growth in H1 2014, ending up almost 63% compared to H1 2013. Sales, customer service, and our support teams continue to provide our customers with the proper training required to install a high quality concrete floor. This has increased customer loyalty, driving repeat business. The focus of our Sales Engineers to drive floor specifications has been a key component of our sales process, supporting our growth in H1 2014 and directing the market in our favor. This will provide us with a stable platform on which to continue to grow sales revenues.  

The Chinese market has been a big outlet for our refurbished equipment, driving sales in H1 2014 165% higher than sales in H1 2013, and improving part sales 61% in H1 2014 over H1 2013. 

The Board of Directors had the opportunity to travel to China in H1 2014 to meet with the Sales, Marketing, and Support Teams. The trip provided them with a better understanding of the market and our customers, as well as providing an opportunity to get to know our China employees firsthand.  We were all impressed with the talent and focus of each employee and are now even more encouraged on the opportunity ahead for this young group of people.  We continue to invest in hiring additional employees to add to this solid foundation of dedicated individuals of whom we are extremely proud.

With a deep understanding of our customers and the needs of the market, we have implemented the Somero Concrete College which is a training program for new and potential customers. This program not only benefits our customers, but adds to our solid foundation of customer loyalty. Along with our products, education and customer training, this unique program will make it very difficult for competitors to penetrate our market. 

India

One of our key drivers to success, and the foundation we establish when entering new markets, is to have in-country sales, service, and support in place. Our strategy in India has been to mirror what we have learned and implemented in China. We are pleased to report that the team's H1 2014 sales were surprisingly strong for a startup. Today, we have two sales people and one customer support person in-country who are fully operational to support our current customer base. As the demand grows for additional staffing, we are prepared to increase support in all areas.  We already see strong interest in one of our new products, the S-15R. This product was launched in late 2013 and has become the machine of choice in India among customers who are looking for a small-boomed machine. 

Europe

We have begun to see a gradual upturn in sales and parts interest in Europe during the first half of the year, including countries that have been dormant for a long period of time. Sales in H1 2014 were up 17% over H1 2013 led by S-15R sales and a 97% increase in parts sales in H1 2014 over H1 2013.  We anticipate continued momentum going into the second half of the year as economic indicators show some improvement.  The majority of our S-840 sales have been to customers who own walk-behind models but need to improve floor quality. This progression is typical once customers get larger, more complicated projects that require larger, more productive machines. 

Other Markets

Sales in Korea were 87% higher in H1 2014 over H1 2013 primarily due to refurbished Large Line sales. Australia and S.E. Asia ended H1 2014 75% ahead of H1 2013 primarily due to higher Small Line sales and S-15R sales. Sales in Scandinavia increased in H1 2014 by 78% over H1 2013, led by the S-22E and 3-D Profiler System® making their way into the market. The 3-D Profiler System® will give us additional sales opportunities in the new market segment of concrete parking lots.  The 3-D Profiler System® sold in Scandinavia is only the fourth 3-D System in Europe. Latin America had a slow start to the year, being heavily impacted by Brazil's economic conditions. Sales were down 40% in H1 2014 compared to H1 2013 but part sales were up 17% over the same period. This indicates work is being done, but financing for equipment purchases are on hold until the economy gets back on track.  The Middle East was down by 66% in H1 2014 compared to H1 2013.  Russia was impacted by political and economic conditions that resulted in H1 2014 being 51% lower than H1 2013.

Product Development

Along with our continued focus on emerging markets and new products, we are also dedicated to a Simplicity program for the broad range of our product lines. This new program's focus is designed to aid the customer in operational training and maintenance. Product development efforts will focus on new technology and methods aimed at reducing the amount of time and skill that is required to operate our equipment. The Simplicity program will be one of our main goals when developing new products in the future. This program is a true benefit to the customer and will solidify another competitive advantage which will be hard to duplicate.

The new S-22E and the S-15R boomed models were the most significant contributors to the Group's overall results.  The new S-15R drove S-15 sales to 18 units in H1 2014 as compared to 9 units in H1 2013. The S-22E's performance and technology drove Large Line unit sales to 30 units in H1 2014 as compared to 19 units in H1 2013.  Large Line revenues were US$10.5m in H1 2014 vs. US$6.3m in H1 2013.

Liquidity

There was a net cash increase of US$4.0m during H1 2014 which includes a US$0.6m reduction in Group debt from December 2013. The driver for the net cash increase was a 41% increase in revenues and improved working capital utilization.  The Group therefore had net cash of US$7.4m as at June 30, 2014.

Dividend

 The Board is pleased to declare an interim dividend for the six months ended June 30, 2014 of 1.5 US cent per share.  This dividend will be payable on October 20, 2014 to shareholders on the register at October 3, 2014.

Current Trading and Outlook

With the benefit of the steady recovery that the Company is experiencing, the Group is in a good position to invest in certain incremental sales and personnel costs to help drive growth in the medium and long term.   This is expected to have some impact on our reported net operating margin in H2 2014, but with August having just delivered another good month's trading, the Board is confident Somero will deliver another strong year of growth ahead of current market expectations.  We believe we can look to the longer term future for Somero with increasing confidence, based on the higher levels of activity in our markets and our strengthened financial position.

Larry Horsch

Chairman

Jack Cooney

President and Chief Executive Officer

Somero Enterprises, Inc. Business and Financial Review
Summary of Financial Results (1)(2)(3)(4)
	For the six months ended June 30
	2014	2013
	US$ 000's Except per share data	US$ 000's Except per share data
Revenue	29,492	20,989
Cost of sales	13,318	10,145
Gross profit	16,174	10,844
Operating expenses
Selling expenses	3,684	3,224
Engineering expenses	567	377
General and administrative expenses	5,724	5,036
Total operating expenses	9,975	8,637
Operating income	6,199	2,207
Other income (expense)
Interest expense	(56)	(151)
Interest income	11	9
Foreign exchange gain/(loss)	196	(213)
Other	10	-
Income before income taxes	6,360	1,852
Provision for income taxes	(1,834)	361
Net income	8,194	1,491
Earnings per share basic	$0.15	$0.03
Earnings per share diluted	$0.13	$0.03
Earnings per share basic - adjusted net income before amortization	$0.16	$0.05
Earnings per share diluted - adjusted net income before amortization	$0.15	$0.05
Other data (unaudited)
Adjusted EBITDA	7,379	3,650
Adjusted net income before amortization	8,966	2,657
Depreciation expense	266	189
Amortization of intangibles	772	1,166
Capital expenditures	609	130
See notes to unaudited condensed consolidated financial statements.

1. References to adjusted EBITDA are to Somero's net income plus interest income, interest expense, taxes, depreciation, amortization, foreign exchange, stock based compensation expense and other expense.

2. References to adjusted net income before amortization are to Somero's net income plus amortization expense of intangibles.

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

4. Earnings per share diluted adjusted net income before amortization represents income available to stockholders divided by the weighted average shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. Earnings per share diluted net income before amortization are not US GAAP measurements and have been presented because management believes they are useful analytical tools.

Somero Enterprises, Inc. Net income to EBITDA reconciliation and
Net income before amortization reconciliation (Unaudited)
	For the six months ended June 30
	2014	2013
	US$ 000's	US$ 000's
Adjusted EBITDA reconciliation
Net income	8,194	1,491
Tax provision	(1,834)	361
Interest expense	56	151
Interest income	(11)	(9)
Foreign exchange (gain)/loss	(196)	213
Other	(10)	-
Depreciation	266	189
Amortization	772	1,166
Stock based compensation	142	88
Adjusted EBITDA	7,379	3,650
Adjusted net income before amortization reconciliation
Net income	8,194	1,491
Amortization	772	1,166
Adjusted net income before amortization reconciliation	8,966	2,657
See notes to unaudited condensed consolidated financial statements.

Notes

References to adjusted net income before amortization in this document are to Somero's net income plus amortization of intangibles. Although adjusted net income before amortization is not a measure of operating income, operating performance or liquidity under US GAAP, this financial measure is included because management believes it will be useful to investors when comparing Somero's results of operations by eliminating the effects of amortization of intangibles that have occurred as a result of the write-up of assets in connection with the Somero Acquisition. Adjusted net income before amortization should not, however, be considered in isolation or as a substitute for operating income as determined by US GAAP, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with US GAAP. Since adjusted net income before amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, adjusted net income before amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net income to EBITDA reconciliation andnet income before amortization reconciliation is presented above. 

Revenues

Somero's consolidated revenues for the six months ended June 30, 2014 were US$29.5m, which represented a 41% increase from US$21.0m for the six months ended June 30, 2013. Somero's revenues consist primarily of sales of new Large Line products (the S-22E^® Large Laser Screed®), sales of new Small Line products (the CopperHead®, PowerRake® and S-840) and other revenues, which consist of, among other things, revenue from sales of services, spare parts, refurbished machines, accessories, Mini Screed™ Commercial, STS-11M Spreader, and the S-15R. The overall increase in revenues for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was driven by increased Large Line sales, increased Small Line sales and Other revenues. The table below shows the breakdown between Large Line sales, Small Line sales and Other revenues during the six months ended June 30, 2014 and 2013.

Revenue by Product Line

	Six months ended		Six months ended
	June 30, 2014		June 30, 2013
		Percentage of Net sales		Percentage of Net sales
	US$ 000's		US$ 000's
Large Line Sales	10,508	35.6%	6,285	29.9%
Small Line Sales	5,677	19.2%	5,377	25.6%
Other:
Mid Line Sales	3,396	11.5%	1,491	7.1%
3-D Sales	1,590	5.4%	985	4.7%
Refurb Sales	3,071	10.4%	1,679	8.0%
Parts Sales	3,401	11.6%	2,579	12.3%
Other/Training/Shipping	1,849	6.3%	2,593	12.4%
	29,492	100.0%	20,989	100.0%

Large Line unit sales were 30 units for H1 2014 (compared to sales of 19 units in H1 2013).  North America sales were higher with 21 units in H1 2014 compared to 11 units in H1 2013. Europe, Middle East and Africa (EMEA) sales were higher with 2 units in H1 2014 compared to 1 unit in H1 2013. RoW was flat with 7 units in H1 2014 compared to 7 units in H1 2013.

Small Line unit sales were 70 in H1 2014 compared to 67 in H1 2013. North America units were 42 and 46 for H1 2014 and H1 2013, respectively.  EMEA contributed 9 and 15 units for H1 2014 and H1 2013, respectively.  RoW was 19 and 6 units for H1 2014 and H1 2013, respectively.

Other revenues, including sales of spare parts, refurbished machines, topping spreaders and accessories, increased from US$9.3m during the six months ended June 30, 2013 to US$13.3m during the six months ended June 30, 2014.   

Units by Geography	North America		EMEA		RoW		Total
	2014	2013	2014	2013	2014	2013	2014	2013
Large Screed	21	11	2	1	7	7	30	19
Small Screed	42	46	9	15	19	6	70	67

Revenue by Geography

Sales in North America totaled US$19.0m for H1 2014 as compared with US$12.2m in H1 2013 and represented 64% of total revenues (prior period was 58% of total).  Sales in EMEA decreased slightly to US$3.2m in H1 2014 from US$3.3m in H1 2013.  Sales in RoW increased to US$7.3m in H1 2014 compared to US$5.5m in H1 2013.

	2014	2013
	US$ 000's	US$ 000's
North America	$19.0	$12.2
EMEA (Europe)	$1.4	$1.2
EMEA (India)	$0.5	$0.0
EMEA (Middle East)	$0.2	$0.7
EMEA (Scandinavia)	$0.5	$0.3
EMEA (Russia)	$0.6	$1.1
RoW (Korea)	$0.3	$0.2
RoW (Latin America)	$1.0	$1.6
RoW (Australia & Southeast Asia)	$1.3	$0.8
RoW (China)	$4.7	$2.9
Total	$29.5	$21.0

Gross Profit

Somero's gross profit percentage for H1 2014 was 55% as compared to 52% in H1 2013. The increase in gross profit percentage is primarily attributable to the price increase implemented in early 2014.

Operating Expenses

Operating expenses excluding depreciation, amortization and stock based compensation for H1 2014 were US$9.0m (US$7.3m in H1 2013). The increase has been driven by the investments in emerging markets and additional hires.

Debt

There were no material changes to the Company's credit facilities in H1 2014. 

Provision for Income Taxes

The provision for income taxes resulted in a benefit of US$1.8m compared to a provision of US$0.4m in H1 2013 primarily due to the release of the US$4.1m valuation allowance.

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:

	For the six months ended June 30
	2014	2013
	US$ 000's	US$ 000's
Income available to stockholders	$8,194	$1,491
Basic weighted average shares outstanding	56,354	56,365
Diluted weighted average shares outstanding	60,920	60,496
	Per Share	Per Share
Basic earnings per share	$0.15	$0.03
Diluted earnings per share	$0.13	$0.03
Net income before amortization of intangibles basic earnings per share	$0.16	$0.05
Net income before amortization of intangibles diluted earnings per share	$0.15	$0.05

(See notes attached to the net income to EBITDA reconciliation and adjusted net income before amortization table for discussion of the non-US GAAP measures used.)

Somero Enterprises, Inc.
Condensed Consolidated Balance Sheets (unaudited)
As of  June 30, 2014 and December 31, 2013
(in thousands, except per share amounts)			2014	2013
			US$ 000's	US$ 000's
Assets
Current Assets:
Cash and cash equivalents			9,321	5,983
Accounts receivable - net			6,799	5,407
Inventories			8,610	6,781
Prepaid expenses and other assets			645	636
Deferred tax asset			210	-
Total current assets			25,585	18,807
Property and equipment - net			4,524	4,181
Intangible assets - net			4,813	5,585
Goodwill			2,878	2,878
Deferred financing costs			119	135
Deferred tax asset			3,943	428
Other assets			28	43
Total assets			41,890	32,057
Liabilities and stockholders' equity
Current liabilities:
Notes payable - current portion			874	1,265
Accounts payable			4,865	3,239
Accrued expenses			2,292	1,756
Income tax payable			1,711	525
Total current liabilities			9,742	6,785
Notes payable, net of current portion			1,096	1,338
Other liabilities			76	38
Total liabilities			10,914	8,161
Commitments and contingencies
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, 2014 and December 31, 2013;			26	26
Less: Treasury stock, 171,219 shares as of June 30, 2014, and 60,827 shares as of December 31, 2013, at cost			(277)	(61)
Additional paid-in capital			28,023	27,984
Retained earnings/(Accumulated deficit)			4,690	(2,774)
Other comprehensive loss			(1,486)	(1,279)
Total stockholders' equity			30,976	23,896
Total liabilities and stockholders' equity			41,890	32,057
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc.
Condensed Statements of Comprehensive Income*(unaudited)
For the six months ended June 30, 2014 and 2013
		For the six months ended June 30
		2014	2013
		US$ 000's	US$ 000's
		except per  share data	except per share data
Revenue		29,492	20,989
Cost of sales		13,318	10,145
Gross profit		16,174	10,844
Operating expenses
Selling expenses		3,684	3,224
Engineering expenses		567	377
General and administrative expenses		5,724	5,036
Total operating expenses		9,975	8,637
Operating income		6,199	2,207
Other income (expense)
Interest expense		(56)	(151)
Interest income		11	9
Foreign exchange gain/(loss)		196	(213)
Other		10	-
Income before income taxes		6,360	1,852
Provision for income taxes		(1,834)	361
Net Income		8,194	1,491
Comprehensive income
Cumulative translation adjustment		(203)	178
Change in fair value of derivative instruments - net of income taxes		(4)	5
Comprehensive income		7,986	1,674
Earnings per common share
Basic		$0.15	$0.03
Diluted		$0.13	$0.03
See notes to unaudited condensed consolidated financial statements.

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

Somero Enterprises, Inc.
Condensed Consolidated  Statements of Changes in Stockholders' Equity (unaudited)
For the six months ended June 30, 2014
	Common Stock			Treasury Stock
			Additional Paid-in Capital US$ 000's			Retained Earnings/ (Accumulated Deficit) US$ 000's	Other Comprehensive Income (Loss) US$ 000's	Total Stockholders Equity US$ 000's
	Shares	Amount US$ 000's		Shares	Amount US$ 000's
Balance - December 31, 2013	56,425,598	26	27,984	60,827	(61)	(2,774)	(1,279)	23,896
Cumulative translation adjustment	-	-	-	-	-	-	(203)	(203)
Change in fair value of derivative instruments	-	-	-	-	-	-	(4)	(4)
Net income	-	-	-	-	-	8,194	-	8,194
Stock based compensation	-	-	142	-	-	-	-	142
Dividend	-	-	-	-	-	(730)	-	(730)
Treasury stock	-	-	-	110,392	(216)	-	-	(216)
Stock options settled for cash	-	-	(103)	-	-	-	-	(103)
Balance - June 30, 2014	56,425,598	26	28,023	171,219	(277)	4,690	(1,486)	30,976
See notes to unaudited condensed consolidated financial statements.

Somero Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 2014 and 2013
	Six months ended	Six months ended
	June 30 2014	June 30 2013
	(unaudited)	(unaudited)
	US$ 000's	US$ 000's
Cash flows from operating activities:
Net income	8,194	1,491
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	(3,725)	(458)
Depreciation and amortization	1,038	1,356
Amortization of deferred financing costs	16	83
Share based compensation	142	88
Working capital changes:
Accounts receivable	(1,392)	(600)
Inventories	(1,829)	(746)
Prepaid expenses and other assets	(9)	52
Other assets	15	(10)
Accounts payable, accrued expenses and other liabilities	2,200	1,868
Income tax payable	1,186	701
Net cash provided by operating activities	5,836	3,825
Cash flows from investing activities:
Property and equipment purchases	(609)	(130)
Net cash used in investing activities	(609)	(130)
Cash flows from financing activities:
Borrowings from additional financing	-	10,758
Repayment of notes payable	(633)	(11,109)
Payment of dividend	(730)	(451)
Purchase of treasury stock	(216)	(60)
Stock options settled for cash	(103)	-
Loan origination fees	-	(159)
Net cash used in financing activities	(1,682)	(1,021)
Effect of exchange rates on cash and cash equivalents	(207)	183
Net increase in cash and cash equivalents	3,338	2,857
Cash and cash equivalents:
Beginning of period	5,983	1,167
End of period	9,321	4,024
See notes to unaudited condensed consolidated financial statements.

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

2.  Summary of Significant Accounting Policies

Basis of Presentation 

The interim financial data as of June 30, 2014 and the six month periods ended June 30, 2014 and 2013 is unaudited. The condensed consolidated financial statements, in the opinion of Somero management, includes all normal recurring adjustments necessary for a fair presentation of the statement of results for the interim periods. The statements have been prepared in accordance with US GAAP but do not include all of the information and note disclosures required by US GAAP. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Somero's Annual Report and filing with the AIM exchange for the year ended December 31, 2013. The results for the six month period ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period.

Principles of Consolidation

The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its wholly owned 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. 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, 2014 and December 31, 2013, the allowance for doubtful accounts was approximately US$348,000 and US$324,000, respectively.

Inventories 

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

Deferred Financing Costs

Deferred financing costs incurred in relation to long-term debt, are reflected net of accumulated amortization and are amortized over the expected repayment term of the debt instrument, which was four years from the debt inception date. These financing costs are being amortized using the effective interest method.

Intangible Assets 

Intangible assets consist principally of customer relationships and patents, and are carried at their fair value, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. The Company evaluates the carrying value of long-lived assets, including goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the periods ended June 30, 2014 and December 31, 2013, no such events or circumstances were identified. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Goodwill 

Goodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if events and circumstances indicate that the value of goodwill may not be recoverable. The Company has chosen December 31 as its periodic assessment date. The Company considers factors including continued economic developments and the overall macro-economic environment and determined that a triggering event did not occur at June 30, 2014. Goodwill represents the excess cost of the business combination over the Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.

Revenue Recognition 

The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment. For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer. For arrangements which include ex works, revenue is recognized when goods are made available for sale. 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 six months to three years, depending on the product. Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.

Property and Equipment

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

Income Taxes 

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. The Company uses a two-step approach to recognize and measure 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, tax positions are measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. Interest expense and penalties related to unrecognized tax benefits are recorded as interest expense and penalties, respectively.

 Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Stock Based Compensation

The Company accounts for its stock option issuance in accordance with guidance set out by the Financial Accounting Standards Board ("FASB"). This guidance requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The guidance also requires measurement of the cost of employee services in exchange for an award based on the grant-date fair value of the award. Compensation expense related to stock based payments was US$142,000 and US$88,000 for the six month periods ended June 30, 2014 and 2013, respectively.  The company settled US$103,000 and US$0 in stock options for cash during the six month periods ended June 30, 2014 and 2013, 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. The assets and liabilities of these subsidiaries are translated at period-end exchange rates and the statement of operations accounts are translated at average rates for the period. The resulting gains or losses are recorded directly to accumulated other comprehensive income.

The Company is also exposed to market risks related to fluctuations in foreign exchange rates because it has some sales transactions, and some monetary assets and liabilities of its foreign subsidiaries that are denominated in foreign currencies other than the designated functional currency. Gains and losses from such transactions are included as foreign exchange loss in the accompanying consolidated statements of operations.  

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 reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units.  Earnings per common share has been computed based on the following:                     

                                                                                             For the six months ended June 30                                                    

	2014	2013
	US$ 000's	US$ 000's
	Except share amounts	Except share amounts
Net income	8,194	1,491
Basic weighted average shares outstanding	56,353,793	56,364,771
Diluted weighted average shares outstanding	60,920,139	60,496,157

Fair Value Measurements 

The Company has certain assets and liabilities that may be recorded at fair value at the reporting date.  The fair values may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy.

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

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

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

Fair Value Measurements at Reporting Date

		Quoted Prices In Active Markets for		Significant Other			Significant Unobservable
		Identical Assets		observable Inputs			Inputs
	June 30, 2014	(Level 1)		(Level 2)			(Level 3)
Assets:	US$ 000's	US$ 000's		US$ 000's			US$ 000's
Goodwill (non-recurring)	2,878						2,878
Interest rate swap (recurring)	(2)					(2)

Qualitative Information About Level 3 Fair Value Measurements (US$ in millions) Fair value at Valuation technique Unobservable input Range (weighted average) 6/30/2014 Goodwill Market capitalization Discount rate 100% Interest rate swaps Current interest rates Future interest rates 100%

New Accounting Pronouncements

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

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

3.  Inventories

Inventories consisted of the following at June 30, 2014 and December 31, 2013:

	2014 US$ 000's	2013  US$ 000's
Raw materials	2,223	1,794
Finished goods and work in process	3,374	1,900
Refurbished	3,013	3,087
Total	8,610	6,781

4.  Property and Equipment                                         

Property and equipment consist of the following at June 30, 2014 and December 31, 2013:            

	2014 US$ 000's	2013 US$ 000's
Land	207	207
Buildings and improvements	3,686	3,686
Machinery and equipment	3,277	2,680
Sub-total	7,170	6,573
Less: accumulated depreciation and amortization	(2,646)	(2,392)
Total	4,524	4,181

Depreciation expense for the six months ended June 30, 2014 and 2013 was approximately US$266,000 and US$189,000 respectively.

5.  Notes Payable

The Company's debt consisted of the following at June 30, 2014 and December 31, 2013:             

	2014 US$ 000's	2013 US$ 000's
March 2018 delayed draw term loan	826	1,435
March 2018 Commercial Real Estate Mortgage	1,144	1,168
Total bank debt	1,970	2,603
Less debt due within one year	(874)	(1,265)
Obligations due after one year	1,096	1,338

The Company entered into a credit facility in March 2013 that will mature between March 2016 and March 2018.

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

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

·  US$1,477,000 March 2018 Commercial Real Estate Mortgage

The interest rates on each of the loans are Libor plus a percentage based upon a covenant schedule up to a maximum of Libor plus 3.5%.   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 2014 and the full 12 months of each successive period for the Company's amended loan facility:

	US$ 000's
2014	632
2015	266
2016	48
2017	48
2018	976
Total	1,970

Interest 

Interest expense on the credit facility for the six months ended June 30, 2014 and 2013, was approximately US$55,000 (includes US$13,000 of amortized swap interest fees and amortized loan origination fees) and US$150,000 (includes $92,000 of amortized swap interest fees and amortized loan origination fees), respectively, related to the debt obligation.

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 under non-cancellable operating leases with initial terms in excess of one year represent the remaining six months for 2014 and the full 12 months of each successive period:      

	US$ 000's
2014	162
2015	309
2016	192
2017	42
2018	30
Thereafter	19
Total	754

7. Capital Leases

The Company leases property, vehicles and office equipment under leases accounted for as capital leases. Future minimum payments by year represent the remaining six months for 2014 and the full 12 months of each successive period:

	US$ 000's
2014	9
2015	18
2016	18
2017	17
2018	3
Thereafter	-
Total	65

8. Commitments and Contingencies

The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are one year and include non-compete and non-disclosure provisions as well as providing 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, 2014 was (28.8)% compared to the federal statutory rate of 34.0%. The effective tax rate is lower than the statutory rate primarily due to the effect of removing the Company's previously recorded valuation allowance associated with the Company's deferred tax assets. The Company has provided a valuation allowance of approximately US$0 and US$4,056,000 at June 30, 2014 and December 31, 2013, respectively, related to the Company's deferred tax assets.

The Company is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company began business in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2010 forward is still open. The Company has no federal, foreign or state income tax returns currently under examination.

At June 30, 2014, the Company had US$4,153,000 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 Disclosures

	For the six months ended June 30
	2014 US$ 000's	2013 US$ 000's
Cash paid for interest	34	60
Cash paid for taxes	702	12

11. Intangible Assets

The following table reflects intangible assets that are subject to amortization.

	Weighted average
	amortization	June 30		December 31
	period	US$ 000's		US$ 000's
Capitalized cost
Customer relationships	8 years	6,300		6,300
Patents	12 years	18,538		18,538
Other intangibles	3 years	4		4
Intangible assets not subject to amortization	-	49		49
		24,891		24,891
Accumulated amortization
Customer relationships	8 years	6,300		6,300
Patents	12 years	13,774		13,002
Other intangibles	3 years	4		4
Intangible assets not subject to amortization	-	-		-
		20,078		19,306
Net carrying costs
Customer relationships	8 years	-	-
Patents	12 years	4,764	5,536
Other intangibles	3 years	-	-
Intangible assets not subject to amortization	-	49	49
		4,813	5,585

Amortization expense for each of the six month periods ended June 30, 2014 and 2013 was approximately US$772,000 and $1,166,000, respectively.                       

Future amortization of intangible assets is expected to be as follows at:

	US$ 000's
2014	772
2015	1,545
2016	1,545
2017	902
Total	4,764

12.  Reclassed Items

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

13. Subsequent Events

In preparing the consolidated financial statements, the Company has evaluated all subsequent events and transactions for potential recognition or disclosure through September 8, 2014, the date the consolidated financial statements were available for issuance.

 

END

 

 

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