Interim Results
Somero Enterprises Inc.
06 September 2007
Embargoed for 7.00am, 6 September 2007
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)
Interim results for the six months to 30 June 2007
Strong growth from international expansion strategy
Somero Enterprises, Inc. (R), ('Somero' or 'the Company'), is pleased to report
its interim results for the six months to 30 June 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 commercial
construction industry. Expanding into new geographic markets, Somero's
innovative, proprietary products help contractors worldwide achieve a high level
of precision in flat floor construction which reduces construction time and
improves cost savings.
Financial Highlights
• Revenue increased 18% at $34.4m (2006: $29.1m)
• Improved balance between US and international sales, with
international now accounting for 40.8% of Company revenues, up from 25.1
in the prior period
• EBITDA1 increased 17% to $9.3m (2006: $7.9m)
• Pre-tax income increased 15% to $5.4m (2006: $4.6m)
• Net income before Amortisation2 and the early repayment of debt increased
47% to $6.0m (2006: $4.1m)
• Refinancing of debt at a significantly lower interest rate (LIBOR + 1.4%
compared to the former rate of LIBOR + 3.5%), plus repayment of $5.2m of
bank debt, reducing debt to $15.8m at 30 June 2007
• Proposed interim dividend of $0.03 per share
Business highlights
• Operating in strong markets
• Non residential construction industry remains strong
• US and European replacement market remains strong
• Investigation of suitability of new markets in China and the Middle
East appear encouraging with expansion strategy now in place
• International expansion supported by investment in sales resource and
training
• Significant investment in additional sales personnel, office openings
and marketing in the US, Europe and emerging markets
• Dedicated sales manager in place in UAE and search underway for sales
manager in China
• Somero Sales College continues to evolve with classes planned for
Europe in the second half
• Growth in all product revenue lines
• 60 large line units sold (1H06: 51 units) and 214 small line units
sold (1H06: 210)
• New products launch 1 September 2007 - improved PowerRake and
CopperHead
• Additional new products in prototyping
• Positive outlook
• Trading remains in line with expectations
• Non-residential construction worldwide continues strong
• Europe and Rest of World sales will continue to exceed prior year
sales
Commenting, Jack Cooney, President and CEO of Somero, said:
'It is pleasing to report that demand in the non-residential construction market
in which we operate has remained strong, both in the US and internationally.
Our international expansion strategy has helped to provide us with new
opportunities for growth and our investigation of wholly new geographic markets
for us - such as the Middle East and China - have also produced positive
results. As we invest in sales and training to support the expansion of our
business, we remain committed to continuing to enhance and expand Somero's
product offering and to maintaining our focus on cash flow and cost control.
'We view the outlook for the remainder of the year positively. Trading remains
in line with expectations and we are confident that sales for the current
financial year will continue to exceed prior year levels.'
Financial Dynamics +44 (0)20 7831 3113
Harriet Keen / Matt Dixon
Jefferies +44 (0)207 968 8000
Charles Cameron / Nandan Shinkre
Notes
1 References to EBITDA are to Somero's operating income plus
depreciation expense and amortisation expense of intangibles plus non cash
stock-based compensation expense.
2 References to Net Income before Amortisation defined as Net Income
plus Amortisation of Intangibles plus Early Extinguishment of Debt (see note
under net income reconciliation to EBITDA for a discussion of the non-GAAP
measures used).
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 Laser Screed(R), employ laser-guided
technology to achieve a high level of precision.
Its products have been sold primarily to concrete contractors for use in
non-residential construction projects in over 50 countries. Laser screeding
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, and Toys 'R' Us.
Somero's headquarters are located in New Hampshire, USA. It operates a
manufacturing facility in Michigan, USA, and has a sales and service office in
Chesterfield, England. Somero has 146 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.
ENDS
CEO/Chairman Statement
The first half of 2007 was very good with strong growth in the European and Rest
of World markets. Sales agents and a maturing organization drove a 103% revenue
increase in European countries over the comparative period. Overall, both large
line and small line equipment sales were strong as the acceptance of their value
proposition increases.
The sales and support infrastructure in Europe has been strengthened with
additional agents in Belgium, Holland, the Baltics and Sweden. Our new full-time
sub agent, with responsibilities in Greece, Turkey, Albania and South Africa
began on 1 May 2007.
The flatting of sales in the US was due to two principal factors, both of which
were Company specific, rather than market related in the first half. The first
of these was a strong comparative period, where sales for the year to 31
December 2006 were up 45% on the prior year. A more steady rate of growth such
as that seen in the first half of the current financial year is much more in
line with our expectations for our US business. The second factor related to
the retention and recruitment of sales people, with small line sales growth
slowed by employee departures and the longer than expected recruitment and
training time for qualified sales and field demonstration personnel. The third
factor was the deliberate managing down of our dealer network in favour of a
predominantly direct sales model which, in general, has proved to be
considerably more effective in sales generation.
Prompt action was taken to address this and we have committed additional
resources toward the development of the Somero Sales College to shorten the
training cycle and get high level personnel performing out in the field more
quickly. We are confident that our Sales College is the most effective means of
improving retention rates going forward, supported by our ongoing recruitment
initiatives, principally because of the unique nature of the product and
services we sell where comprehensive training of new sales people is required.
This view is consistent with our decision to gradually dismantle our dealer
network in the US (which accounts for a small minority of sales) as we continue
to build up our direct sales force over time.
Rest of World sales growth of 66% was driven by strong growth in Australia, and
the establishment of distributor channels in South America and South Africa.
Emerging Markets
A central component of our business strategy has been our entry into and growth
within emerging and international markets. Two senior managers were assigned to
hire or reallocate sales personnel, open offices and hire agents in a number of
new territories.
Our own investigation of new geographic markets concluded that there was a
shortage of concrete flooring specialists. A three-pronged strategy is underway
for China and the Middle East.
• Identify international logistics companies, development companies and
building operators to target with a view to ensuring Western specifications
are carried through to new markets.
• Target local contractors who are tendering for projects for these major
international players and local contractors with a Western joint venture
partner; and
• Develop a package whereby we can provide in-depth floor construction
training, beyond the operator training that we currently provide. This may
be developed in-house or via strategic alliance with partners.
Interim Dividend
The Board proposes to pay an interim dividend of $0.03 per share, payable on 8
October 2007 to shareholders on the register as at 21 September 2007.
Current trading and outlook
It is pleasing to report that demand in the non-residential construction market
in which we operate has remained strong both in the US and internationally. Our
international expansion strategy has helped to provide us with new opportunities
for growth and our investigation of wholly new geographic markets for us - such
as the Middle East and China - have also produced positive results. As we
invest in sales and training to support the expansion of our business, we remain
committed to continuing to enhance and expand Somero's product offering and to
maintaining our focus on cash flow and cost control.
We expect a gradual improvement in small line sales in the US following the
actions we have taken in relation to recruitment, training and retention of
staff and will continue to invest in sales, marketing and new office openings in
emerging markets as the year progresses.
We view the outlook for the remainder of the year positively. Trading remains
in line with expectations and we are confident that sales for the current
financial year will continue to exceed prior year levels.
Jack Cooney
Chief Executive Officer
Stuart Doughty
Chairman
Business and Financial Review
SUMMARY OF FINANCIAL RESULTS
SOMERO ENTERPRISES, INC.
For the Six Months Ended
June 30,
Figures in US$ Thousands 2007 2006
REVENUE $ 34,374 $ 29,076
COST OF SALES 14,604 13,268
GROSS PROFIT 19,770 15,808
OPERATING EXPENSES
Selling Expenses 5,619 4,484
Engineering Expenses 847 598
General and Administrative Expenses 5,612 4,151
Total Operating Expenses 12,078 9,233
OPERATING INCOME 7,692 6,575
OTHER INCOME (EXPENSE)
Interest Expense (2,425) (1,934)
Interest Income 36 35
Foreign Exchange Gain 50 167
Other - (196)
INCOME BEFORE INCOME TAXES 5,353 4,647
PROVISION FOR INCOME TAXES 2,042 1,758
NET INCOME
$ 3,311 $ 2,889
EPS Diluted (3)
$ 0.10 $ 0.10
EPS Diluted - Net Income Before Amortisation and Extinguishment (3)
$ 0.17 $ 0.14
Other Data:
EBITDA (1)(2) 9,284 7,934
Net Income Before Amortization and Cost of Early
Extinguishment of Debt 5,984 4,073
Depreciation Expense 191 175
Amortization of Intangibles 1,192 1,184
Loss on Early Extinguishment of Debt 1,481 -
Capital Expenditures 216 263
Notes:
1). 'EBITDA' and 'Net Income Before Amortisation and Cost of Early
Extinguishment of Debt' 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
and Early Extinguishment of Debt 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) Diluted earnings per share represents income available to shareholders
divided by the weighted average shares outstanding plus additional common shares
that would have been outstanding if dilutive potential common shares had been
issued. Dilutive common shares outstanding at June 30, 2007 were approximately
34,450,000. The Company had 95,000 shares outstanding at June 30, 2006 and
issued a stock split of 315.79:1 in November 2006. There were no dilutive
shares at June 30, 2006 and the adjusted shares for the stock split would have
been approximately 30,000,000. Diluted Earnings per share on 'Net Income Before
Amortisation and Cost of Early Extinguishment of Debt' is not a GAAP measurement
and has been presented because Management believes it is a useful analytical
tool.
Net Income to EBITDA reconciliation and Net income before amortisation Reconciliation
SOMERO ENTERPRISES INC.
For the six months
Ended
June 30,
Figures in US$ Thousands 2007 2006
EBITDA Reconciliation
NET INCOME $ 3,311 $ 2,889
Tax Provision 2,042 1,758
Interest Expense 2,425 1,934
Interest Income (36) (35)
Foreign Exchange Gain (50) (167)
Other Expense - 196
Depreciation 191 175
Amortisation 1,192 1,184
Stock Based Compensation 209 -
EBITDA $ 9,284 $ 7,934
Net Income before Amortization Reconciliation
Net Income $ 3,311 $ 2,889
Amortization $ 1,192 $ 1,184
Cost of early extinguishment of debt $ 1,481
Net Income before Amortization and loss on
early extinguishment of debt $ 5,984 $ 4,073
Notes:
References to 'Net Income Before Amortisation and Early Extinguishment of Debt'
in this document are to Somero's net income plus amortization of intangibles
plus costs associated with early extinguishment of debt. Although net income
before amortisation and early extinguishment of debt 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 amortisation of intangibles that have occurred as a result of the
write-up of assets in connection with the Somero Acquisition. Net income before
amortisation and early extinguishment of debt 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 and early extinguishment of debt is not a measure determined in
accordance with US GAAP and is thus susceptible to varying calculations, net
income before amortisation and early extinguishment of debt, 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 and
Early Extinguishment of Debt' is presented above.
Revenues
Somero's consolidated revenues for the six months ended 30 June 2007 were
US$34.4m, which represented an 18.2% increase from US$29.1m in consolidated
revenues for the six months ended 30 June 2006. Somero's revenues consist
primarily of sales of new large line products (the SXP Large Laser Screed),
sales of new small line products (the CopperHead and PowerRake) and other
revenues, which consist of, among other things, revenue from sales of spare
parts, refurbished machines, topping spreaders and accessories. The overall
increase in revenues for the six months ended 30 June 2007 as compared to the
six months ended 30 June 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 six months
ended 30 June 2007 and the six months ended 30 June 2006.
6 Months Ended 6 Months Ended
June 30, 2007 (unaudited) June 30, 2006 (unaudited)
(in Percentage (in Percentage
thousands) of net sales thousands) of net sales
Large line Sales $ 17,109 49.8% $ 13,525 46.5%
Small Line Sales $ 9,532 27.7% $ 8,633 29.7%
Other Revenues $ 7,733 22.5% $ 6,918 23.8%
Total $ 34,374 100% $ 29,076 100%
Large line sales increased from US$13.5 for the 6 months ended 30 June 2006 to
US$17.1m for the 6 months ended 30 June 2007. This increase in revenue was
driven by a 17.6% increase in unit volume (from 51 units to 60 units) and
increases in average selling prices. The higher unit volume was driven entirely
by increased international sales.
Small line sales increased from US$8.6m for the six months ended 30 June 2006 to
US$9.5m for the six months ended 30 June 2007. Sales of CopperHeads and
PowerRakes unit sales increased from 210 units sold during the six months ended
30 June 2006 compared with 214 units sold during the six months ended 30 June
2007. These increases in unit volume were entirely from international sales.
Other revenues, including sales of spare parts, refurbished machines, topping
spreaders and accessories, increased from US$6.9m during the 6 months ended 30
June 2006 to US$7.7m during the 6 months ended 30 June 2007. This revenue growth
resulted primarily from the increased sales of topping spreaders.
Growth outside North America has been responsible for the increases in sales
revenue. Sales to customers located in North America comprise the majority of
Somero's revenue, constituting 59.2% and 74.9% of total revenue for the six
months ended 30 June 2007and 2006 respectively, while sales to customers in
Europe, South Africa and the Middle East combined contributed 30.1% and 17.5%,
respectively. North American (the United States and Canada) sales experienced a
slight slowdown from US$21.8m during the six months ended 30 June 2006 to
US$20.4m in 2007, principally due to issues related to the retention and
recruitment of sales people in the US. The remaining sales in these periods were
to customers in Asia, Australia, Central America and South America.
The Company has been focused on expanding sales outside North America, with
revenues increasing to US$14.0 during the six months ended 30 June 2007, an
increase of 92.0% over revenues of US$7.3m during the during the six months
ended 30 June 2006. Sales in Europe, South Africa and the Middle East generated
US$10.3m during the six months ended 30 June 2007, compared with US$5.1m during
the during the six months ended 30 June 2006. Sales of the Large Laser Screed
and the small line product outside North America increased by 117.4% and 73.6%
respectively between these two periods. Sales in Asia, Australia and Central
and South America represented US$3.7m during the six months ended 30 June 2007,
as compared to US$2.2m during the six months ended 30 June 2006. This increase
was driven by an increase in sales of Large line to 8 units and small line to 28
units during the six months ended 30 June 2007, compared with units Large line
of 5 and Small line of 11 of during the corresponding period of 2006.
Gross Profit
Somero's gross profit for the six months ended 30 June 2007 was US$19.8m, a
25.1% increase over US$15.8m for the six months ended 30 June 2006. As a
percentage of revenue, gross profit increased to 57.5% for the six months ended
30 June 2007, from 54.4% for the six months ended 30 June 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 management's strategy of implementing manufacturing cost reduction
initiatives.
Operating Expenses
Operating expenses were US$12.1m for the six months ended 30 June 2007, a 30.8%
increase over US$9.2m for the six months ended 30 June 2006. The increase in
operating expenses, which consists of selling, engineering and general and
administrative expenses, resulted primarily from an increase in total selling
expenses due to increased headcount of 12, an increase in product development
costs and the new costs of being a public company which was US$.9m for the six
months ended 30 June 2007. Operating expenses were 35.1% and 31.8% of revenues
for the 6 months ended 30 June 2007 and for the six months ended 30 June 2006,
respectively.
Debt Restructuring
The Company entered into new financing with Citizens Bank New Hampshire, a
wholly owned subsidiary of Royal Bank of Scotland at a lower Libor rate than
prior financing. The RBS financing consisted of a US$10m term loan and a US$14m
available revolver line. At June 2007 the Company bank debt was US$15.8m,
reduced by US$5.2 from a debt of US$21m as at 31 December 2006 (see footnote 5
to the financial statements).
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:
June 30,
2007 2006
Income available to shareholders 3,311 2,889
Basic weighted average shares outstanding 34,282 30,000
Net dilutive effect of stock options 168 -
Diluted weighted average shares outstanding 34,450 30,000
The Company had 95,000 shares outstanding at 30 June 2006 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 30 June 2007 and 2006
Earnings per Share
Earnings per share at 30 June 2007 and 30 June 2006 and is as follows:
June 30,
2007 2006
Basic earnings per share $ 0.10 $ 0.10
Diluted earnings per share $ 0.10 $ 0.10
Before amortization of intangibles
and Cost of extinguishment of debt $ 0.17 $ 0.14
(See note attached to the 'Net Income to EBITDA Reconciliation and Net Income
before Amortisation Reconciliation' table for discussion of the non-GAAP
measures used).
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
AS OF 30 JUNE 2007 AND 31 DECEMBER 2006 (in thousands, except share amounts)
30 June 31 December
ASSETS 2007 2006
CURRENT ASSETS:
Cash and cash equivalents $ 1,776 $ 1,895
Accounts receivable-net 4,838 4,101
Inventories-net 6,525 4,912
Prepaid expenses and other assets 353 584
Income tax receivable - 211
Deferred tax asset 116 152
Total current assets 13,608 11,855
PROPERTY, PLANT AND EQUIPMENT-net 4,736 4,712
INTANGIBLE ASSETS-net 20,425 21,616
GOODWILL 16,400 16,400
DEFERRED FINANCING COSTS 115 1,349
OTHER ASSETS 176 113
TOTAL ASSETS $ 55,460 $ 56,045
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable-current portion $ 1,429 $ 2,400
Accounts payable 4,640 2,842
Accrued expenses 2,154 3,125
Income taxes payable 909 -
Obligations under capital lease - 657
Total current liabilities 9,132 9,024
Notes payable, net of current portion 14,416 18,600
Deferred income taxes 172 146
TOTAL LIABILITIES 23,720 27,770
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value, 50 million shares authorized, - -
no shares issued and outstanding
Common stock, $.001 par value, 80 million shares authorized,
34,281,968 shares issued and outstanding at 31 December 2006
and 30 June 2007 4 4
Additional paid in capital 22,135 21,926
Retained earnings 9,541 6,343
Other comprehensive income 60 2
Total stockholder's equity 31,740 28,275
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 55,460 $ 56,045
See notes to condensed consolidated financial statements.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE SIX MONTHS ENDED 30 JUNE 2007 AND 30 JUNE 2006 (in thousands)
Six Months Six Months
Ended Ended
30 June 2007 30 June 2006
(unaudited) (unaudited)
REVENUE $ 34,374 $ 29,076
COST OF SALES 14,604 13,268
19,770 15,808
GROSS PROFIT
OPERATING EXPENSES
Selling expenses 5,619 4,484
Engineering expenses 847 598
General and administrative expenses 5,612 4,151
Total operating expenses 12,078 9,233
OPERATING INCOME 7,692 6,575
OTHER INCOME (EXPENSE)
Interest expense (2,425) (1,934)
Interest income 36 35
Foreign exchange gain 50 167
Other - (196)
INCOME BEFORE INCOME TAXES 5,353 4,647
PROVISION FOR INCOME TAXES 2,042 1,758
NET INCOME $ 3,311 $ 2,889
EARNINGS PER COMMON SHARE
Basic $ 0.10 $ 0.10
Diluted $ 0.10 $ 0.10
See notes to condensed consolidated financial statements
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (unaudited)
FOR THE SIX MONTHS ENDED 30 JUNE 2007 (in thousands, except share data)
dditional Other Total
Common Stock Paid In Retained Comprehensive Stockholder's Comprehensive
Shares Amount Capital Earnings Income Equity Income
BALANCE-31 December 2006 34,281,968 $ 4 $ 21,926 $ 6,343 $ 2 $ 28,275 $ 5,386
Cumulative translation $ 23 $ 23 $ 23
adjustment
Change in fair value of
derivative instruments $ 35 $ 35 $ 35
Net Income $ 3,311 $ 3,311 $ 3,311
Share based compensation $ 209 $ 209
Dividend $ (113) $ (113) $ -
BALANCE-30 June 2007 34,281,968 4 22,135 9,541 60 31,740 3,369
See notes to condensed consolidated financial statements.
SOMERO ENTERPRISES, INC. AND SUBSIDIARIES (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2007 AND THE SIX MONTHS ENDED 30 JUNE 2006 (in
thousands)
Six Months Six Months
Ended Ended
30 June 2007 30 June 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,311 $ 2,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes 61 93
Depreciation and amortization 2,629 1,359
Amortization of deferred financing costs 114 238
Gain on sale of assets - (3)
Realized gain (loss) on currency exchange 50 (167)
Share based compensation 209 -
Working capital changes:
Accounts receivable (737) (1,228)
Inventories (1,613) (237)
Prepaid expenses and other assets 231 260
Income taxes receivable 212 -
Other assets (29) (62)
Accounts payable and other liabilities 828 1,293
Income taxes payable 909 (119)
Net cash provided by operating activities 6,175 4,316
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment - 22
Payment for financing costs (125) -
Property and equipment purchases (216) (263)
Net cash used in investing activities (341) (241)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from additional financing 22,254 -
Repayment of notes payable (27,409) (500)
Payment of capital lease (658) (1)
Payment of dividends (113) -
Payment of deferred offering costs - (326)
Net cash provided by (used in) financing activities (5,926) (827)
Effect of exchange rates on cash and cash equivalents (27) 146
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (119) 3,394
CASH AND CASH EQUIVALENTS:
Beginning of period 1,895 2,391
End of period $ $
1,776 5,931
See notes to condensed consolidated financial statements.
Somero ENTERPRISES, INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) FOR THE SIX
MONTHS ENDED 30 JUNE 2007 AND 30 JUNE 2006
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization-On 10 August 2005, Somero Enterprises, Inc. acquired certain assets
and assumed certain liabilities from various affiliates of Dover Industries,
Inc. (collectively, the 'Somero Business'). Somero Enterprises Inc. and its
subsidiaries are herein referred to as the 'Company' or 'Somero.'
Nature of Business- The Company designs, manufactures, refurbishes, sells and
distributes concrete leveling, contouring and placing equipment, related parts
and accessories, and training services worldwide. The operations are conducted
from a corporate office in Jaffrey, New Hampshire, a single assembly facility
located in Houghton, Michigan, and a European distribution office in the United
Kingdom.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The interim financial data as of 30 June 2007 and 31
December 2006 and the six months ended June 30, 2007 and June 30, 2006 is
unaudited. The condensed consolidated financial statements, in the opinion of
Somero management, includes all normal recurring adjustments necessary for a
fair presentation of the statement of results for the interim periods. The
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ('US GAAP') but do not include all of
the information and note disclosures required by US GAAP. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in Somero's Annual
Report and filing with the AIM exchange for the year ended 31 December 2006.
The results for the six month period ended 30 June 2007 are not necessarily
indicative of the results to be expected for the year ending 31 December 2007 or
for any other interim period.
Principles of Consolidation-The consolidated financial statements include the
accounts of Somero Enterprises, Inc. and its subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Cash and Cash Equivalents-Cash includes cash on hand, cash in banks, and
temporary investments with a maturity of three months or less when purchased.
Accounts Receivable and Allowances for Doubtful Accounts-Financial instruments
which potentially subject the Company to concentrations of credit risk consist
primarily of accounts receivable. The Company's accounts receivable are derived
from revenue earned from a diverse group of customers primarily located in the
United States. The Company performs credit evaluations of its commercial
customers and maintains an allowance for doubtful accounts receivable based upon
the expected ability to collect accounts receivable. Reserves, if necessary,
are established for amounts determined to be uncollectible based on specific
identification and historical experience. As of 30 June 2007 and 31 December
2006, the allowance for doubtful accounts was approximately $175,000 and
$97,000, 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. In March, 2007 the
Company refinanced its debt obligations and expensed approximately $1,245,000 of
deferred financing costs and incurred approximately $125,000 of new deferred
financing costs.
Intangible Assets and Goodwill- Long-Lived Assets, Including Goodwill and Other
Acquired 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. Goodwill is
not amortized 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, at least annually for impairment or when events and circumstances
indicate the carrying amount of an asset may not be recoverable. For the periods
ended 30 June 2007 and 31 December 2006, 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.
Revenue Recognition - products-The Somero Business 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 collectibility is reasonably assured. For product sales
where shipping terms are F.O.B. shipping point, revenue is recognized upon
shipment. For arrangements which include F.O.B. destination shipping terms,
revenue is recognized upon delivery to the customer. Standard products do not
have customer acceptance criteria. Revenues for training are deferred until the
training is completed unless the training is deemed inconsequential or
perfunctory.
Warranty 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,
specific identification of issues and historical experience.
Property, Plant and Equipment-Property, plant and equipment is stated at
estimated market value based on an independent appraisal at the acquisition date
or at cost for subsequent acquisitions, net of accumulated depreciation and
amortization. Land is not depreciated. Depreciation is computed on buildings
using the straight-line method over the estimated useful lives of the assets,
which is 31.5 to 40 years for buildings (depending on the nature of the
building), 15 years for improvements, and two to five years for machinery and
equipment.
Income Taxes-The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes
'. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit 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.
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 financial statements and accompanying notes. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (the 'FASB') issued
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 prioritizes 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', which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 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 No. 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 No. 159 is effective fiscal years beginning after November 15,
2007. Somero is currently in the process of evaluating any potential impact of
SFAS 159.
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes
- an Interpretation of FASB Statement No. 109, effective for fiscal years
beginning after December 15, 2006. This interpretation clarifies the accounting
for uncertainty in income taxes recognized in financial statements in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. The adoption of FIN 48, as amended, had no impact on the Company
financial condition, results of operations, and cash flows
Stock Based Compensation - The Company accounts for its stock option issuances
under Statement of Financial Accounting Standard No 123R 'Share Based Payment'
(SFAS 123R) which was issued by the FASB in December 2004. SFAS No. 123R
required recognition of the cost of employee serviced 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 no. 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. Somero adopted SFAS No. 123R in January 2006 when
stock options were awarded certain employees when the Company first listed on
the AIM exchange. The impact of adopting SFAS NO. 123R was an expense of
$209,000 for the six months ended June 30, 2007.
Translation of Foreign Currencies - The functional currency for the Company's
foreign subsidiary is the UK Pound Sterling. Balance sheet amounts are
translated at 30 June 2007 exchange rate on the date of the balance sheet and
statement of operations accounts are translated at average rates. The resulting
gains or losses are charged directly to accumulate other comprehensive income.
The Company is exposed to market risks related to fluctuations in UK Pound
Sterling and European Union Euros exchange rates because some sales
transactions, and the assets and liabilities of its foreign subsidiaries, are
denominated in either Pounds or Euros. Gains and losses from transactions
denominated in Pounds or Euros currencies and forward exchange contracts are
included in the Company's net income as foreign exchange gain (loss) in the
accompanying consolidated statements of operations.
Comprehensive Income - Comprehensive income, which is the combination of
reported net income and other comprehensive income, was composed of the
Company's net income, fair value of interest rate swap, and foreign exchange
gains (losses) for the six months ended 30 June 2007 and 30 June 2006. Total
comprehensive income for the periods was approximately $3,369,000 and
$2,868,000, 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 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 (in thousands):
2007 2006
Net Income available to shareholders $ 3,311 $ 2,889
Basic Weighted Average Shares Outstanding 34,282 30,000
Net Dilutive Effect of Stock Options 168 -0-
Diluted Weighted Average Shares Outstanding 34,450 30,000
The Company had 95,000 shares outstanding at 30 June 2006 and issued a stock
split of 315.79:1 in November of 2006, prior to its initial public offering.
Share and per share amounts have been adjusted to reflect the stock split for
the six months ended 30 June 2006.
3. INVENTORIES
Inventories consisted of the following at 30 June 2007 and 31 December 2006 (in
thousands):
2007 2006
Raw materials $ 2,960 $ 2,422
Finished goods and work in process 3,725 2,679
6,685 5,101
Less: reserve for excess and obsolete inventory (160) (189)
Total $ 6,525 $ 4,912
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following at 30 June 2007 and 31
December 2006 (in thousands):
2007 2006
Land $ $ 207
207
Buildings and improvements 4,229 3,432
Machinery and equipment 808 732
Property and Equipment held under capital leases 0 657
Equipment sold under recourse contracts 179 178
5,423 5,206
Less: accumulated depreciation and amortization (687) (494)
$ 4,736 $ 4,712
Depreciation expense for the six months ended 30 June 2007 and the 30 June 2006,
was approximately $193,000 and $175,000, respectively.
5. DEBT OBLIGATIONS
Summary-The Company executed a credit facility with a financial institution on
16 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
the 31 December 2006 balances. The Company incurred a loss on the early
extinguishment of debt of approximately $1,481,000 which included deferred
financing cost of approximately $1,245,000.
Company's debt obligation consisted of the following at 30 June 2007 and 31
December 2006 (in thousands)
2007 2006
Bank debt
Term loans $ 21,000
Five year secured term loan 9,643 -
Five year secured reducing revolving line of credit 6,202 -
Less debt obligations due within one year 1,429 2,400
Obligations due after one year $ 14,416 $ 18,600
Credit Facility-The Company has a credit facility with a financial institution,
dated March 16, 2007 was composed of the following:
• $14,000,000 five-year secured reducing revolving line of credit
• $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. The revolver loan's interest
rate swap's initial notional amount is $6,000,000, pays a fixed 5.20%, and had a
30 June 2007 fair market value of approximately $6,000 which will amortise down
by approximately $3,000 in the next twelve months. The term loan's interest
rate swap's initial notional amount is $10,000,000, pays a fixed 5.15%, and had
a 30 June 2007 fair market value of approximately $50,000 which will amortise
down by approximately $7,000 in the next twelve months. The interest rate swaps
are designated as cash flow hedges. The revolver and the term loan interest
rates are Libor (fixed by the interest rate swaps) plus an amount determined by
the ratio of 'funded debt / last twelve months EBITDA,' as defined in the loan
agreement. The effective interest rate at 30 June 2007 for the revolving line
of credit was 6.6% and for the term loan 6.55%. The new credit facilities are
secured by substantially all of the Company's assets and contain a number of
restrictive covenants that among other things limit the ability of the Company
to incur debt, issue capital stock, change ownership and dispose of certain
assets. The revolving line of credit available reduces over the five year term
and as of 30 June 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 (in thousands) as of 30 June 2007:
2007 $ 714
2008 1,429
2009 1,429
2010 2,531
Thereafter 9,742
Total payments $ 15,845
Interest- Interest expense on the credit facilities for the six months ended 30
June 2007 and the six months ended 30 June 2006, was approximately $902,000 and
$1,879,000, respectively, related to the debt obligation. Interest expense
recorded by the Company's U.K. subsidiary was approximately $70,000 and $13,000
for the period 30 June 2007, and the six months ended 30 June 2006 respectively.
6. OPERATING LEASES
The Company leases property, vehicles and office equipment under leases
accounted for as operating leases. Future minimum payments by year under
noncancelable operating leases with initial terms in excess of one year were as
follows (in thousands):
30 June
2007
2007 $ 101
2008 165
2009 115
2010 24
After 2010 -
Total $ 405
Total rent expense under operating leases for the period ending 30 June 2007 and
30 June 2006 was approximately $123,000 and $70,000.
7. 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 noncompete and nondisclosure provisions as well as providing
for defined severance payments in the event of termination or change in control.
8. INCOME TAXES
FASB issued Interpretation No. 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 recognize 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 recognized in
the financial statements should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, 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 been determined
to be immaterial.
The Company's effective tax rate for the six months ended 30 June 2007 was 38.1%
compared to the federal statutory tax rate of 34.0%. The effective tax rate is
more than the statutory tax rate due to the effect of state taxes.
The Company adopted the provisions of FIN 48, on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized no increase or decrease in
the liability for unrecognized tax benefits which would affect earnings if
recognized. While the Company believes the Company has adequately provided for
all tax positions, amounts asserted by taxing authorities could be greater than
the Company's accrued position. Accordingly, additional provisions on federal
and state tax-related matters could be recorded in the future as revised
estimates are made or the underlying matters are settled or otherwise resolved.
The Company recognizes interest accrued related to unrecognized tax benefits in
interest expense. Penalties, if incurred, would be recognized as a component of
other expense. The Company does not believe it is reasonably possible the
recorded uncertain tax positions will increase or decrease within the next
twelve months.
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