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Somero Enterprises (SOM)

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Wednesday 14 March, 2018

Somero Enterprises

Final Results

RNS Number : 6269H
Somero Enterprises Inc.
14 March 2018
 

14 March 2018

Somero Enterprises, Inc.

("Somero" or "the Company")

 

Final Results

Record year of profitable growth, significant increase to dividend payout

Somero Enterprises, Inc. is pleased to report its annual results for the twelve months ended December 31, 2017.

 

Financial Highlights

 

 

FY17

FY16

% Increase

Revenue

US$85.6m

US$79.4m

8%

Adjusted EBITDA(1,2)

US$28.0m

US$24.6m

14%

Adjusted EBITDA margin(1,2)

33%

31%

200 BPS

Profits before tax

US$25.7m

US$21.3m

21%

Adjusted net income(1,3)

US$17.5m

US$15.6m

12%

Diluted adjusted net income per share(1,3)

US$0.31

US$0.27

15%

Cash flow from operating activities

US$19.8m

US$17.0m

16%

Net cash(4)

US$19.0m

US$20.2m

(6%)

Ordinary dividend per share

US$0.155

US$0.111

40%

Supplemental dividend per share

US$0.036

-

N/A

 

·     Annual revenues grew to a record US$ 85.6m, up 8% from 2016

·     Healthy profit conversion and cash flow generation:

·     Adjusted EBITDA increased 14% to a record US$ 28.0m (2016: US$ 24.6m)

·     Adjusted EBITDA margin improved to 33% (2016: 31%)

·     Cash flow from operating activities increased 18% to US$ 19.8m (2016: US$ 17.0m)

·     Strong, secure financial position:

·     Debt-free balance sheet

·     Strong cash flow generation leading to a net cash position at 31 December 2017 of US$ 19.0m despite US$ 13.9m of dividend payments in 2017

·     Increased dividend payout ratio to 50% of adjusted earnings for 2017:

·     Final dividend of 12.75 US cents per share declared for a total 2017 dividend of 15.5 US cents per share, a 40% increase over last year

·     Supplemental dividend of 3.6 US cents per share declared to be paid with final 2017 dividend

 

Operational Highlights

 

·     Growing contribution from international markets and healthy demand across entire product line:

·     Four of six regions grew in 2017 led by Europe, North America, Latin America and Rest of World territories

·     Sales of Ride-on screeds grew 29% to US$ 18.6m (2016: US$ 14.4m)

·     3-D Profiler System® revenues grew 11% to US$6.8 (2016: US$ 6.1m)

·     Other revenues, driven by sales of parts and accessories grew 12% to US$ 18.7 (2016: US$ 16.7m)

·     New products contributed meaningfully to growth

·      Planned move into a new leased facility in Chesterfield, UK in Q2 2018 to accommodate growth

 

Notes:

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

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

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

4.  Net cash is defined as cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.

 

Jack Cooney, CEO of Somero, said:

 

"2017 was a strong trading year for Somero delivering a financial performance ahead of market expectations. We delivered record revenues, profits and cash flow from operations for our shareholders.  We have made significant progress on executing our strategy and now, as we enter the last year of the five-year plan we established back in 2014, we are closing in on achieving our target of US$ 90m revenue in 2018.  While we have seen many changes in recent years, the one constant has been our unrelenting commitment to helping our customers build successful, profitable businesses.  It is this tremendous effort and passion of our employees who pursue this mission day in and day out that earns the loyalty of our customer base and delivers these exceptional results for our shareholders. 

 

Somero is financially stronger than ever and well positioned to capture growth across our broad global footprint. We have identified a broad range of opportunities in related products and new markets, and our secure financial position will therefore enable us to increase investment to accelerate product development initiatives over the next year. In addition, the Board has adopted a supplementary dividend policy to enable the distribution of any excess capital to shareholders. All the while, as we work to execute our growth strategy, I am confident the Company will deliver strong results and dividends for our shareholders that will continue to create shareholder value."

 

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

 

For further information, please contact:

 

Somero Enterprises, Inc.                                                                              www.somero.com

Jack Cooney, CEO                                                                                            +1 239 210 6500

John Yuncza, CFO

Howard Hohmann, EVP Sales

 

finnCap Ltd (NOMAD and Broker)

Matt Goode (Corporate Finance)                                                              +44 (0)20 7220 0500

Carl Holmes (Corporate Finance)

Tim Redfern (Corporate Broking)

 

Alma PR (Financial PR Advisor)                                                                  [email protected]

Rebecca Sanders-Hewett                                                                             +44(0) 20 3865 9667

Susie Hudson

Sam Modlin

 

Notes to Editors:

Somero Enterprises provides industry-leading concrete-levelling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.

 

Somero pioneered the Laser Screed market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.

 

For more information, visit www.somero.com

 

 

 

Chairman's Statement

 

Performance and Dividend

I am pleased to report that Somero has delivered another year of outstanding results for our shareholders in 2017.  It was a very successful year, with record sales and profits, growing contributions from our international markets, new product launches contributing meaningfully to growth, a significant and meaningful return of cash to shareholders through dividends, and most importantly, continued progress on identifying new product and new market opportunities.  

 

I am also delighted to report that with the Company's impressive 2017 results, healthy financial position, and the Board's confidence in the business outlook, the Board has approved increasing the dividend payout ratio to 50% of 2017 adjusted net income.  The increased payout results in a final 2017 dividend of 12.75 US cents per share payable on April 20, 2018 to shareholders on the register at April 3, 2018. Together with the interim dividend paid in October 2017 of 2.75 US cents per share, the 2017 full year regular dividend payment to shareholders is 15.5 US cents per share, a 40% increase from 2016.

 

In addition, upon completing the review of the Company's year-end cash position and cash requirements for the coming year, the Board has also decided to adopt a supplementary dividend policy.  Going forward, the Board will look to maintain a target net cash balance of at least US$ 15.0m, measured at each year end and intends to distribute 50% of the excess of net cash over the year-end target in the form of a supplemental dividend. The cash reserve figure has been raised from US$ 10.0m previously considered to be acceptable, reflecting the increased scale of the business and capital requirements for future investment and product development. The Board believes this policy strikes the appropriate balance between maintaining an adequate cash reserve to manage the business and providing a disciplined return of capital to shareholders. This policy will be subject to periodic review.

 

The Board has therefore approved a supplemental dividend of 3.6 US cents per share that will be paid at the same time as the final 2017 dividend.  The combined regular and supplemental dividend to be paid on April 20, 2018 will be 16.35 US cents per share, a significant and meaningful return of cash to our shareholders. 

 

Strategic Progress

2017 was an important year of significant progress.  Revenues from our international markets contributed meaningfully to growth during the year representing US$ 5.0 m in net growth for 2017.  In 2017, 32% of total revenues came from regions outside of North America combined, up from 29% in 2016.  We are focused on driving international growth and further diversifying the Company's geographic revenue base. We will do this by adding additional resources, such as we did in Europe and India in 2017, and by continuing to promote adoption of wide-placement theory and quality concrete flooring standards across the globe.

 

We have also enhanced our product development process.  In 2017, Somero allocated more resources to developing innovative, new solutions for our customers with a focus on identifying new market segments, such as structural high-rise buildings, where the Company can leverage its core technology and expertise.  2017 also represented a full-year of Somero Innovation Council meetings, which are comprised of a broad group of industry experts that provide input on new product concepts.  The Somero Innovation Council has been an invaluable resource to understand customer challenges and needs, and ultimately to identify potential innovative solutions.  Somero new product development is and always has been a customer led process.  We understand customer involvement throughout the development cycle is critical to ensure our ideas turn into tangible products that create meaningful value for our customers.   

 

Lastly, Somero took another step forward in its commitment to training and education in the concrete contractor industry with the launch of the Somero Concrete Institute ("SCI") in 2017.  The SCI combines classroom education with hands-on training in the placement and finishing of concrete floors.  The SCI is a unique endeavor, and we believe a strategically important one as well, to help address the significant shortage of skilled labor in the concrete contractor industry.

 

Our People

Somero's 177 employees around the globe are the engine that drives the Company.  Somero is a people business built on strong employee and customer relationships.  Our passionate and dedicated workforce is the foundation of our success and the Board remains committed to ensuring we create the most productive and rewarding work environment possible for each of our employees.

 

Current Trading and Outlook

The high level of activity in North America during the latter part of 2017 has continued in 2018.  We continue to see strong interest in our equipment and remain encouraged by the positive non-residential construction outlook in the US for 2018.  The expected positive impact from US corporate tax reform is an additional factor reinforcing our confidence in North American growth prospects.

 

In Europe, the strong performance of 2017 is also expected to carry forward into 2018.  Similar to conditions we see in the North American market, European interest in our equipment remains strong driven by demand for replacement equipment, technology upgrades, and new products.  Our confidence in the growth prospects in Europe is supported by improved economic conditions across the territory. 

 

In China, healthy interest in our products continues and we expect to see further improvement in 2018 driven in part by our marketing and demand generation initiatives that gained traction in H2 2017.  Although it has taken longer than expected to gain a significant foothold in this important region, longer-term we see a sizable opportunity in the quality-oriented market segment and plan to continue our market development efforts to promote wide-placement methods and flatness and levelness standards to target this segment.  In addition, we will continue to grow our customer base by offering competitive entry-level machines, such as the S-158C, that target the productivity-oriented market and provide future up-sell opportunities. 

 

In Latin America, we expect solid performance from Mexico and growth opportunities from the other countries in the region.  In our other regions, including the Middle East and our Rest of World territory, we expect to see significant opportunities in 2018 and beyond and, importantly, are encouraged by the positive economic climate across this broad territory.

 

The Board believes the Company has many meaningful growth opportunities in 2018 across its broad portfolio of markets and products and is confident that Somero is poised to deliver another year of profitable growth to shareholders in 2018.

 

 

Larry Horsch

Non-Executive Chairman

March 14, 2018

 

 

 

 

President and Chief Executive Officer's Review

 

Overview

2017 was a truly exceptional year for Somero as we set another record for revenues, profits, cash flow from operations, and returned nearly US$ 14.0m in dividends to our shareholders.  A lot of hard work goes into delivering such outstanding results, and I am proud of our employees who once again rose to the challenge. 

 

2017 growth was well-balanced across our global markets with revenues generated from our non-US markets growing to 32% of total revenues in 2017, and four of our six regions increasing compared to 2016 with North America, Europe, Latin America and our Rest of World territories all contributing to growth.  On a product basis, our growth was led by our sales of Ride-on screeds, 3-D Profiler Systems, and Other revenues which include sales of parts, accessories and our new SP-16 Concrete Hose Line-Pulling and Placing System.  We are pleased with the diversification in revenues across our markets and product range, as the Company has benefitted from an expanded global footprint and from efforts to expand the product range to provide solutions that meet the needs of customers regardless of project type or size. 

 

Finally, having retired all our debt in 2017, we enter 2018 with the strongest balance sheet in our history.  This provides flexibility to make strategic investments that support the Company's long-term growth.  We will continue to strike an appropriate balance between optimizing profits and returning capital to our shareholders by making meaningful long-term investments to grow the business, such as the construction and launch of the Somero Concrete Institute in 2017.  As we continue to explore new product opportunities and work to increase our penetration in our international markets, we believe having this financial flexibility to make well-timed investments will be critical in the coming years. 

 

While 2017 was a remarkable year, we are excited to explore a wide range of significant new opportunities in 2018.

 

Region Reviews

In 2017, sales in North America grew 2% compared to 2016 to reach US$ 57.8m, with strong H2 trading reflecting the strength in the underlying commercial construction industry and the strong pipeline of projects that remain in front of our US customer base.  The market drivers for the North American market continue to be demand for replacement equipment, technology upgrades, fleet additions, and new products such as the SP-16 Concrete Hose Line-Pulling and Placing System. The high volume of commercial construction activity in 2017 combined with a growing shortage of skilled labor added to the demand for Somero equipment and the labor savings our equipment provides. 

 

In Europe, 2017 sales grew 53% compared to 2016 to reach US$ 12.2m with well-balanced demand across the region and particularly strong trading in the UK, Italy, Poland, Spain and the Czech Republic.  Importantly, sales across our entire product range were also balanced with notable growth in the Boomed screed and Ride-on screed product lines. 

 

In China, while 2017 sales declined 14% compared to 2016 to US$ 5.5m, H2 2017 trading improved year-over-year due to the positive impact from marketing and demand generation initiatives.  In our view, China remains a significant opportunity of which Somero currently has very small market penetration.  The market fundamentals and long-term growth prospects in the commercial construction industry in China remain positive and Somero intends to continue its training and educational efforts to advance acceptance and demand for higher quality floors through wide-placement methods.  This quality segment of the China market will be Somero's area of focus in 2018.  In addition, we will continue to grow our customer base by offering competitive entry-level machines, such as the S-158C, that target the productivity-oriented market and provide future up-sell opportunities. Also, our staff in China will be moving in H2 2018 to a site of similar size and location to our current headquarters in the region. This is due to a change in our lease agreement, and we do not expect the move to result in any disruption or significant cost.  Finally, our long-term financing program in China supported by our equipment shut-off capability remains a positive and effective program.    

 

In Latin America, sales increased 35% from 2016 to US$ 2.3m for the year driven by strong project activity in Mexico in H1 2017, along with good contributions from Chile and Panama throughout the year. 

 

While sales in the Middle East were down 28% compared to 2016 to US$ 2.1m, the activity level in the region was strong throughout the year despite several opportunities slipping into 2018.  The Middle Eastern countries with meaningful contributions to 2017 sales were Turkey, the United Arab Emirates, and Saudi Arabia. 

 

In our Rest of World region, 2017 sales were particularly strong with a 50% increase from 2016 to US$ 5.7m.  While the region covers a wide range of territories, the most significant contributors to growth were India, Scandinavia and Korea.  For India, a meaningful future market opportunity for Somero, the positive results were driven by the addition of in-country sales leadership in 2017.

 

Cashflow and Balance Sheet

Somero's cash generation remains healthy, and 2017 was a year of record operating cash flows.  The Company managed working capital effectively throughout the year, and even with the year-end increase to accounts receivable driven by particularly strong sales in December 2017, the overall increase in net working capital investment was in line with the growth in sales.  For the year, operating cash flows grew to US$ 19.8m, up from US$ 17.0m in 2016.  This cash flow allowed the Company to fully retire its debt in early 2017, to raise the dividend pay-out ratio on the final 2016 dividend paid in April 2017 and to pay a US$ 7.5m special dividend in August 2017.  In total, Somero paid US$ 13.9m in dividends to shareholders for the year.  In addition to the increased dividends, in 2017 Somero funded US$ 0.8m construction of the Somero Concrete Institute and settled US$ 5.3m in stock options and restricted stock units for cash. Following these outflows, the Company ended the year with a US$ 19.0m net cash(1) balance.  Reflecting the Board's confidence in the continued growth prospects of the Company, the Board has resolved to further raise the dividend payout ratio to 50% of adjusted net income to return even more profits to shareholders beginning with the 2017 final dividend to be paid in April 2018  Furthermore, as detailed above, the Board has adopted a supplementary dividend policy and has declared a supplemental dividend of US$ 2.0m or 3.6 US cents per share to be paid alongside the 2017 final dividend. 

 

People

During the year we successfully drove greater efficiencies throughout our operations and support functions, while delivering a period of record results. These efficiency gains have offset the investments to bring new talent into the organization, with this rebalancing providing the right support for our continued growth. As a result, our employee count decreased by 1 compared to year-end 2016 with 177 employees at year end. In 2018 we will continue to add resources to the organization, particularly in the sales, customer support and product development areas, while also working to increase our operational efficiency and scale.  We remain highly selective in the quality and fit of the individuals we hire and devote a large part of the hiring process to identifying individuals who embrace the Somero culture and core values.   

 

Product Development

Somero's goal is to introduce at least one new product every year, and in 2017 we met this goal with the introduction of the S-22EZ at the end of 2017 that was formally introduced to the market at the January 2018 World of Concrete Trade Show in Las Vegas, USA.  The S-22EZ adds improvements to the legacy S-22E Boomed screed centered on increasing the weight and balance of the machine and improving its ease of use and ease of maintenance.   As with all of our product improvements, the changes to the S-22E were the result of ideas on ways to deliver even better products and solutions that came directly from our strong customer relationships.  Additionally in 2017, products that were developed the previous year, the S-158C and SP-16 Concrete Hose Line-Pulling and Placing System machine, contributed meaningfully to growth with a combined US$ 1.1m contribution to 2017 sales.

 

With a secure financial position and a broad range of opportunities available that Somero is well-placed to capitalize on, the Board has made the decision to moderately increase investment to enable us to accelerate product development initiatives over the next year. Somero's technical expertise, resources, scale and close customer relationships provide us with a unique opportunity to enter into related market segments. We are confident in our ability to accelerate product development along with continuing to deliver profitable growth for our shareholders and look forward to updating the market in due course.

 

Progress Towards our 2018 Strategic Objective

We have completed the fourth year of our five-year plan which targets reaching revenue of US$ 90m in 2018.  With one year remaining on the plan, and based on solid fundamentals in the US, Europe and meaningful growth opportunities across our remaining international markets, we remain confident in our ability to meet our strategic target in 2018.    

 

Expansion Update

In September 2017, the Company announced that the Board had approved plans to build a US $1.3m expansion to the Company's Fort Myers headquarters with a target to complete in H1 2018 to accommodate planned future growth of the business.  Following the high level of activity and potential site development requirements, the Company is reviewing the plans to ensure that this expansion covers all of the anticipated business needs.

 

Also, with the significant growth we have experienced in our European region, the Company is moving into a larger, leased facility in Chesterfield, UK near our current leased site.  The Company expects the move will be completed by early Q2 2018, and the larger facility will better accommodate the added personnel and increased sales volume in our UK and larger European region.  The Company does not expect to incur material capital expenditure from the move, nor incur meaningful increased operating costs from the new facility.

 

Conclusion

2017 was an outstanding year for Somero.  The Company delivered a strong financial performance which provided a significant return of cash to shareholders through dividends and further strengthened the Company's financial position. Most importantly, we took real strides to advance our long-term strategy of growing the business globally and through innovative, new products. Our talented management team led the way and met the challenge of managing business growth while keeping focused on improving the products, solutions, and services we offer our customers.  I am proud of our team's performance this year and understand the significant effort from each team member to deliver these outstanding results. 

 

While 2017 was a great year for the Company, we see many opportunities ahead as we work to develop new products and market segments and to increase penetration in our international markets.  This will bring new challenges for the Company, but I believe that the execution of our strategy has positioned us well to capitalize on these opportunities and I am certain our management team is up to the task.  All the while, as we work to grow the business, I look forward to delivering another year of progress for our shareholders.

 

 

Jack Cooney

President and Chief Executive Officer

March 14, 2018

 

 

 

Notes:

(1)   Net Cash is defined as total cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.

 

 

FINANCIAL REVIEW

 

 

 

 

 

Summary of Financial Results

 

 

 

 

 

 

 

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2017

2016

 

US$ 000

US$ 000

 

 

 

Revenue

85,634

79,353

Cost of sales

36,870

34,270

Gross profit

48,764

45,083

 

 

 

Operating expenses

 

 

Sales, marketing and customer support

10,426

10,056

Engineering and product development

1,222

1,071

General and administrative

11,683

12,768

Total operating expenses

23,331

23,895

Operating income

25,433

21,188

Other income (expense)

 

 

Interest expense

(80)

(95)

Interest income

262

267

Foreign exchange impact

477

(117)

Other

(354)

34

Income before income taxes

25,738

21,277

Provision for income taxes

7,322

7,019

Net income

18,416

14,258

Other data

 

 

Adjusted EBITDA (1) (2) (4)

28,000

24,579

Adjusted net income (1) (3) (4)

17,504

15,637

Depreciation expense

1,199

1,121

Amortization of intangibles

901

1,545

Capital expenditures

1,959

4,435

 

 

Notes:

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

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

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

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

 

 

Net income to adjusted EBITDA reconciliation and

 

 

Adjusted net income reconciliation

 

 

 

 

 

 

Year ended

Year ended

 

December 31, 2017

December 31,

2016

 

US$ 000

US$ 000

Adjusted EBITDA reconciliation

 

 

Net income

18,416

14,258

Tax provision

7,322

7,019

Interest expense

80

95

Interest income

(262)

(267)

Foreign exchange impact

(477)

117

Other

354

(34)

Depreciation

1,199

1,121

Amortization

901

1,545

Stock based compensation

467

725

Adjusted EBITDA

28,000

24,579

 

 

 

Adjusted net income reconciliation

 

 

Net income

18,416

14,258

Amortization

901

1,545

Tax impact of stock option & RSU settlements

(1,813)

(166)

Adjusted net income

17,504

15,637

 

 

Notes:

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

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

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

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

 

Revenues

The Company's consolidated revenues increased by 8% to US$ 85.6m (2016: US$ 79.4m). Company revenues consist primarily of sales from Boomed screed products, which include the S-22E, S-22EZ, S-15R and S-10A Laser Screed machines, sales from Ride-on screed products, which are drive through the concrete machines that include the S-840, S-485, S-940 and S-158C Laser Screed machines, Remanufactured machines sales, 3-D Profiler System, and Other Revenues which consist primarily of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges.  The overall increase for the year was due to Ride-on screeds, 3-D Profiler Systems, along with an increase in Other revenues.

 

Ride-on screed sales increased to US$ 18.6m (2016: US$ 14.4m) due to higher volume and price increases, 3-D Profiler System sales increased to US$ 6.8m (2016: US$ 6.1m) due to increased unit sales and Other revenues increased to US$ 18.7m (2016: US$ 16.7m) primarily due to increased sales of parts and accessories and increased sales of other equipment including the Mini C and SP-16.

 

 

Revenue breakdown by geography

 

 

 

 

 

 

 

 

 

 

 

North America

EMEA(1)

ROW(2)

Total

 

US$ in millions

US$ in millions

US$ in millions

US$ in millions

 

 

 

 

 

 

 

2017

2016

 

2017

2016

2017

2016

2017

2016

Net sales

% of Net sales

Net sales

% of Net sales

 

 

 

 

 

 

 

 

 

 

 

Boomed screeds (3)

24.0

27.0

9.1

6.0

2.8

3.3

35.9

41.9%

36.3

45.7%

Ride-on screeds (4)

11.6

10.4

4.4

2.3

2.6

1.7

18.6

21.7%

14.4

18.1%

Remanufactured machines

3.5

3.7

0.0

0.4

2.1

1.8

5.6

6.6%

5.9

7.5%

3D Profiler System

6.5

5.4

0.0

0.2

0.3

0.5

6.8

7.9%

6.1

7.7%

Other (5)

12.2

10.1

2.5

2.8

4.0

3.8

18.7

21.9%

16.7

21.0%

Total

57.8

56.6

16.0

11.7

11.8

11.1

85.6

100.0%

79.4

100.0%

 

Notes:

1. EMEA includes the Europe, India, Middle East, Scandinavia and Russia markets.

2. ROW includes the China, Australia, Latin America, Korea, and Southeast Asia markets.

3. Boomed Screeds include the S-22E, S-22EZ, S-15R, and S-10A.

4. Ride-On Screeds include the S-840, S-940, S-485, and S-158C.

5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M, Copperhead, and Mini Screed C.

 

Units by product line

 

 

 

2017

2016

 

 

 

Boomed screeds

120

130

Ride-on screeds

189

159

Remanufactured machines

39

42

3D Profiler System

66

61

Total

414

392

 

Sales to customers located in North America contributed 68% of total revenue (2016: 71%), sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed 19% (2016: 15%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, and China) contributed 13% (2016: 14%).

 

Sales in North America were US$ 57.8m (2016: US$ 56.6m) up 2% driven by higher sales of Ride-on screeds, 3D Profiler Systems, and an increase in Other revenues. Sales in EMEA were US$ 16m (2016: US$ 11.7m) which is up 37% primarily due to an increase in Boomed screed and Ride-on screed sales. Sales in ROW were US$ 11.8m (2016: US$ 11.1m) which is up 6% driven by an increase in sales of Ride-on screeds and other revenues.

 

Regional sales

US$ in millions

 

2017

2016

North America

57.8

56.6

Europe

12.2

8.0

China

5.5

6.4

Middle East

2.1

2.9

Latin America

2.3

1.7

Rest of World

5.7

3.8

Total

85.6

79.4

 

Gross profit

Gross profit increased to US$ 48.8m (2016: US$ 45.1m), with gross margins improving to 56.9% (2016:  56.8%) due to price increases, product cost reductions and productivity gains.

 

Operating expenses

Operating expenses decreased by US$ 0.6m to US$ 23.3m (2016: US$ 23.9m). This decrease is due to lower amortization expense in the current year as the intangible asset being amortized became fully amortized during the year. 

 

Other income (expense)

Other income increased to US$ 0.3m, compared to other income of US$ 0.1m in 2016, due to an increase in foreign exchange gains offset partly by loss on disposal of fixed assets which comprises the majority of Other expense in 2017.

 

Provision for income taxes

The provision for income taxes was US$ 7.3m in 2017 compared to US$ 7.0m in 2016. Overall, Somero's effective tax rate changed from 33.0% in 2016 to 28.4% in 2017.  

 

The Tax Cuts and Jobs Act (TCJA) passed on December 22, 2017 lowered the US corporate tax rate to 21% from 35% effective January 1, 2018.  As a result of this change in law, the Company expects its future after-tax earnings will be positively impacted and its go-forward effective tax rate will approximate 21%.  The lowering of the US corporate income tax rate to 21% requires revaluation of the Company's net deferred tax asset as of December 31, 2017 that resulted in a one-time non-cash tax charge of US $0.6m included in the Company's 2017 results.  In addition, the TCJA includes a provision that will result in a one-time deemed repatriation tax on the Company's cumulative unrepatriated foreign profits primarily relating to historical profits earned by the Company's UK entity.  The Company will have the option to pay the deemed repatriation tax over an eight-year period.  The Company is still assessing the final amount of the tax, but it is expected to not exceed US $0.8m, will be one-time in nature, and will be more than offset by tax savings from the lowered US tax rate.

 

Net income

Net income increased to US$ 18.4m from US$ 14.3m in 2016 due primarily to increased sales volume, gross margin improvement and operating cost controls.  On an adjusted basis, excluding amortization and tax benefits associated with settlements of RSUs and stock options, adjusted net income increased to US$ 17.5m from US$ 15.6m in 2016.  Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2017

2016

 

US$ 000's

US$ 000's

 

 

 

Income available to stockholders

18,416

14,258

 

 

 

Basic weighted shares outstanding

56,233,912

56,178,723

Net dilutive effect of stock options and restricted stock units

401,697

1,708,228

Diluted weighted average shares outstanding

56,635,609

57,886,951

 

The Company had 56,242,121 shares outstanding at December 31, 2017.  Earnings per share at December 31, 2017 and 2016 are as follows:

 

 

Year ended

December 31,

2017

Per Share

Year ended

December 31,

2016

Per Share

 

US$

US$

Basic earnings per share

0.33

0.25

Diluted earnings per share

0.33

0.25

Basic adjusted net income per share

0.31

0.28

Diluted adjusted net income per share

0.31

0.27

 

Consolidated Balance Sheets

 

 

As of December 31, 2017 and 2016

 

 

 

 

As of

December 31,

2017

As of

December 31, 2016

 

 

US$ 000

US$ 000

Assets

 

 

Current assets:

 

 

 

Cash and cash equivalents

19,038

21,216

 

Accounts receivable - net

11,026

6,310

 

Inventories

8,697

8,760

 

Prepaid expenses and other assets

2,540

2,428

 

Total current assets

41,301

38,714

Accounts receivable, non-current - net

54

254

Property, plant and equipment - net

12,306

11,558

Intangible assets - net

-

901

Goodwill

2,878

2,878

Deferred tax asset

1,596

3,351

Other assets

268

29

Total assets

58,403

57,685

 

 

 

 

Liabilities and stockholders' equity

 

 

Current liabilities:

 

 

 

Notes payable - current portion

-

16

 

Accounts payable

3,181

2,831

 

Accrued expenses

6,103

5,329

 

Income tax payable

713

147

 

Total current liabilities

9,997

8,323

Notes payable, net of current portion

-

970

Other liabilities

513

223

Total liabilities

10,510

9,516

 

 

 

 

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 and 56,425,598 shares issued and 56,242,121 and 56,203,602 shares outstanding at December 31, 2017 and 2016, respectively

26

26

 

Less: treasury stock, 183,477 shares as of December 31, 2017 and 221,996 shares as of December 31, 2016 at cost

(407)

(483)

 

Additional paid in capital

17,169

22,112

 

Retained earnings

33,034

28,480

 

Other comprehensive loss

(1,929)

(1,966)

 

Total stockholders' equity

47,893

48,169

Total liabilities and stockholders' equity

58,403

57,685

 

 

 

 

See notes to consolidated financial statements.

 

 

 

Consolidated Statements of Comprehensive Income

 

 

For the years ended December 31, 2017 and 2016

 

 

 

 

 

 

 

 

Year ended

Year ended

 

 

December 31

December 31

 

 

2017

2016

 

 

US$ 000

US$ 000

 

 

except per share data

except per share data

 

 

 

 

Revenue

85,634

79,353

Cost of sales

36,870

34,270

Gross profit

48,764

45,083

 

 

 

 

Operating expenses

 

 

 

Sales, marketing and customer support

10,426

10,056

 

Engineering and product development

1,222

1,071

 

General and administrative

11,683

12,768

 

Total operating expenses

23,331

23,895

 

 

 

 

Operating income

25,433

21,188

Other income (expense)

 

 

 

Interest expense

(80)

(95)

 

Interest income

262

267

 

Foreign exchange impact

477

(117)

 

Other

(354)

34

 

 

 

 

Income before income taxes

25,738

21,277

Provision for income taxes

7,322

7,019

Net income

18,416

14,258

Other comprehensive income (loss)

 

 

 

Cumulative translation adjustment

37

(322)

 

Change in fair value of derivative instruments - net of income tax

-

2

Total comprehensive income

18,453 

13,938

 

 

 

 

Earnings per common share

 

 

Earnings per share basic                                                                                  

0.33

0.25

Earnings per share diluted                                                                                

0.33

0.25

 

 

 

 

Weighted average number of common shares outstanding                           

 

 

Basic

56,233,912

56,178,723

 

Diluted

56,635,609

57,886,951

 

 

 

 

See notes to consolidated financial statements.

 

 

 

Consolidated Statements of Changes in Stockholders' Equity

 

 

For the years ended December 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

Amount

Additional Paid-In Capital

Shares

Amount

Retained earnings

Other Compre-hensive

Loss

Total Stockholders' Equity

 

 

 

US$ 000

US$ 000

 

US$ 000

US$ 000

US$ 000

US$ 000

 

Balance - January 1, 2016

56,425,598

26

22,008

318,866

(614)

18,432

(1,646)

38,206

 

Cumulative translation adjustment

-

-

-

-

-

-

(322)

(322)

 

Change in fair value of derivative instruments

-

-

-

-

-

-

2

2

 

Net income

-

-

-

-

-

14,258

-

14,258

 

Stock based compensation

-

-

725

-

-

-

-

725

 

Dividend

-

-

-

-

-

(4,210)

-

(4,210)

 

Treasury stock

-

-

(131)

(96,870)

131

-

-

-

 

RSUs settled for cash

-

-

(345)

-

-

-

-

(345)

 

Stock options settled for cash

-

-

(145)

-

-

-

-

(145)

 

Balance - December 31, 2016

56,425,598

26

22,112

221,996

(483)

28,480

(1,966)

48,169

 

Cumulative translation adjustment

-

-

-

-

-

-

37

37

 

Change in fair value of derivative instruments

-

-

-

-

-

-

-

-

 

Net income

-

-

-

-

-

18,416

-

18,416

 

Stock based compensation

-

-

467

-

-

-

467

 

Dividend

-

-

-

-

-

(13,862)

-

(13,862)

 

Treasury stock

-

-

(76)

76

-

-

-

 

RSUs settled for cash

-

-

(464)

-

-

-

(464)

 

Stock options settled for cash

-

-

(4,870)

-

-

-

(4,870)

 

Balance - December 31, 2017

56,425,598

26

17,169

183,477

(407)

33,034

(1,929)

47,893

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

                           

 

Consolidated Statements of Cash Flows

 

 

For the years ended December 31, 2017 and 2016

 

 

 

 

 

 

Year ended

Year ended

 

December 31

December 31

 

2017

2016

 

US$ 000

US$ 000

Cash flows from operating activities:

 

 

  Net income

18,416

14,258

  Adjustments to reconcile net income to net cash provided by operating activities:

 

 

    Deferred taxes

1,755

178

    Depreciation and amortization

2,100

2,666

    Bad debt

141

400

    Amortization of deferred financing costs

38

32

    Stock based compensation

467

725

  Working capital changes:

 

 

    Accounts receivable

(4,657)

(110)

    Inventories

63

(281)

    Prepaid expenses and other assets

(112)

(293)

    Other assets

(239)

(3)

    Accounts payable, accrued expenses and other liabilities

1,282

278

    Income taxes payable

566

(897)

    Net cash provided by operating activities

19,820

16,953

 

 

 

Cash flows from investing activities:

 

 

  Proceeds from sale of property and equipment

202

71

  Property and equipment purchases

(1,959)

(4,435)

  Net cash used in investing activities

(1,757)

(4,364)

 

 

 

Cash flows from financing activities:

 

 

  Payment of dividend

(13,862)

(4,210)

  RSUs settled for cash

(464)

(345)

  Stock options settled for cash

(4,870)

(145)

  Payments under capital leases

(58)

(14)

  Repayment of notes payable

(1,024)

(48)

   Net cash used in financing activities

(20,278)

(4,762)

 

 

 

Effect of exchange rates on cash and cash equivalents

37

(320)

 

 

 

Net increase (decrease) in cash and cash equivalents

(2,178)

7,507

 

 

 

Cash and cash equivalents:

 

 

Beginning of year

21,216

13,709

End of year

19,038

21,216

 

 

 

See notes to consolidated financial statements.

 

 

 

Notes to the Consolidated Financial Statements

As of December 31, 2017 and 2016

 

1.   Organization and description of business

Nature of business

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

 

2.   Summary of significant accounting policies

Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.  Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Principles of consolidation

The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Cash and cash equivalents 

Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased.  The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation ("FDIC").  The Company has not experienced any losses related to amounts in excess of FDIC limits.

 

Accounts receivable and allowances for doubtful accounts 

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable.  Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience.  As of December 31, 2017 and 2016, the allowance for doubtful accounts was approximately US$ 859,000 and US$ 743,000, respectively. Bad debt expense was US$ 141,000 and US$ 400,000 in 2017 and 2016, respectively.

 

Inventories 

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

 

Deferred financing costs

Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument.  These financing costs are being amortized using the effective interest method.  Deferred financing costs, consisting of loan origination fees, are reflected as an offset to notes payable on the accompanying balance sheets.

 

Intangible assets and goodwill

Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date.  Goodwill represents the excess cost of the business combination over the Company's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.  The Company did not incur a goodwill impairment loss for the year ended December 31, 2017 or 2016. (See Note 4 for more information.)

 

The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended December 31, 2017, the Company tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.) 

 

Revenue recognition 

The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred, or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.  For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment.  For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer.  Standard products do not have customer acceptance criteria.  Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.

 

Warranty liability

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

 

 

2017

2016

 

US$ 000

US$ 000

 

 

 

Balance, January 1

(547)

(307)

Warranty charges

447

478

Accruals

(451)

(718)

Balance, December 31

(551)

(547)

               

Property, plant, and equipment

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

 

Income taxes

The Company determines income taxes using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items reflected in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable.

 

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions.  This involves a two-step approach to recognizing and measuring uncertain tax positions.  First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements.  The Company is subject to a three-year statute of limitations by major tax jurisdictions.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2017 and 2016.

 

The Tax Cuts and Jobs Act (the "Act") was enacted in December 2017. The Act changes existing United States tax law and includes numerous provisions that will affect businesses. The Act, for instance, introduces changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act will also have international tax consequences for companies that operate internationally. Although the Act generally applies to tax years beginning January 1, 2018, certain provisions of the Act apply to tax years ending December 31, 2017.

 

Prior to this reporting period, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption of the repatriation of foreign earnings. Upon enactment, the Act imposes a tax on certain historical foreign earnings and profits at various tax rates. The Company was not able to determine a reasonable estimate of the tax liability for this item for the 2017 reporting period by the time it issued its 2017 financial statements. The Company did not have the necessary information available, prepared, or analyzed to develop a reasonable estimate of the tax liability for this item (or evaluate how the Act will impact the Company's existing accounting position to indefinitely reinvest unremitted foreign earnings). As a result, the Company did not include an estimate for this item in its 2017 financial statements but will do so in its financial statements for the first reporting period in which the Company is able to obtain, prepare, and analyze the necessary information to complete the accounting under ASC Topic 740.

 

The Act also reduces the corporate tax rate to 21 percent, effective January 1, 2018.  Consequently, we have recorded decreases related to deferred tax assets of US$ 1,093,000 and to deferred tax liabilities of US$ 448,000, with a corresponding adjustment to deferred income tax expense of US$ 645,000.

 

Use of estimates

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

 

Stock based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.   

 

Transactions in and translation of foreign currency

The functional currency for the Company's subsidiaries outside the United States is the applicable local currency.  Balance sheet amounts are translated at December 31 exchange rates and statement of operations accounts are translated at average rates.  The resulting gains or losses are charged directly to accumulated other comprehensive income.  The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency.  Gains and losses from transactions are included as foreign exchange loss in the accompanying consolidated statements of comprehensive income.

 

Comprehensive income

Comprehensive income is the combination of reported net income and other comprehensive income ("OCI"). OCI is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income. 

 

Earnings per share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the year.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued using the treasury stock method.  Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:             

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2017

2016

 

US$ 000's

US$ 000's

 

 

 

Income available to stockholders

18,416

14,258

 

 

 

Basic weighted shares outstanding

56,233,912

56,178,723

Net dilutive effect of stock options and restricted stock units

401,697

1,708,228

Diluted weighted average shares outstanding

56,635,609

57,886,951

 

Fair value

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because of the short-term nature of these instruments. The carrying value of our long-term debt approximates fair value due to the variable nature of the interest rates under our Credit Facility.

 

The FASB has issued accounting guidance on fair value measurements. This guidance provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. 

 

This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. These valuation techniques may be based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions.  These two types of inputs create the following fair value hierarchy.

 

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

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

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

 

 

 

 

Quoted prices

in active markets

identical assets

Level 1

Significant other

observable inputs

Level 2

Significant other

unobservable inputs

Level 3

 

 

 

 

 

 

 

 

US$ 000

US$ 000

US$ 000

US$ 000

Year ended December 31, 2016

 

 

 

Asset:

 

 

 

 

 

Non-recurring

 

 

 

 

 

Goodwill

2,878

 

 

2,878

 

Recurring

 

 

 

 

 

Interest rate swap

(2)

 

 

(2)

Year ended December 31, 2017

 

 

 

Asset:

 

 

 

 

 

Non-recurring

 

 

 

 

 

Goodwill

2,878

 

 

2,878

 

Recurring

 

 

 

 

 

Interest rate swap

-

 

 

-

 

New accounting pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.  The standard is effective for annual periods beginning after December 15, 2017, 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). The company plans to adopt the new standard using the full retrospective approach.

 

In February 2016, the FASB released Accounting Standard Update 2016-02, Leases.  The new guidance requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP.  Lessees are required to recognize a single lease cost, amortized on a straight-line basis over the lease term for operating leases.  All cash payments are to be classified as operating activities on the cash flow statement.  The update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.  Lessees are required to measure leases under the new guidance at the beginning of the earliest period presented using a modified retrospective approach.  We are currently evaluating adoption of the guidance.

 

3.  Inventories

Inventories consisted of the following at December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

Year ended

 

 

 

 

December 31,

 

December 31,

 

 

 

 

2017

 

2016

 

 

 

 

US $ 000

 

US $ 000

 

 

 

 

 

 

 

Raw material

 

 

3,159

 

     2,574

Finished goods and work in process

4,007

 

     3,583

Remanufactured

 

 

1,531

 

     2,603

Total

 

 

 

8,697

 

     8,760

 

4.  Goodwill and intangible assets

Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value.

 

The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2017 and 2016, and that the value of patents was not impaired as of December 31, 2016.  

 

The following table reflects other intangible assets:

 

 

Year ended

Year ended

 

Weighted average

December 31,

December 31,

 

Amortization

2017

2016

 

Period

US$ 000's

US$ 000's

Capitalized cost

 

 

 

Patents

12 years

18,538

18,538

 

 

 

 

Accumulated amortization

 

 

 

Patents

12 years

18,538

17,637

 

 

 

 

Net carrying costs

 

 

 

Patents

12 years

0

901

 

Amortization expense associated with the intangible assets in each of the years ended December 31, 2017 and 2016 was approximately US$ 901,000 and US$ 1,545,000, respectively.  Net intangible assets were fully amortized in 2017.

 

5.  Property, plant, and equipment

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

 

 

2017

2016

 

US$ 000

US$ 000

 

 

 

Land

864

864

Building and improvements

10,545

9,483

Machinery and equipment

5,098

5,769

 

16,507

16,116

Less:  accumulated depreciation and amortization

(4,201)

(4,558)

 

12,306

11,558

 

Depreciation expense for the years ended December 31, 2017 and 2016 was approximately US$ 1,199,000 and US$ 1,121,000, respectively.

 

6.  Notes payable

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

 

 

 

 

 

 

 

 

2017

2016

 

US$ 000's

US$ 000's

April 2018 commercial real estate mortgage

-

1,024

February 2021 secured revolving line of credit

-

-

Total bank debt

-

1,024

 

 

 

Less debt due within one year

-

(48)

 

 

 

Obligations due after one year

-

976

 

The Company's revolving line of credit of US$ 10,000,000 is collateralized by all inventories and accounts receivable.

 

The Company entered into an amended credit facility in February 2016. The new agreement matures February 2021 for the secured revolving line of credit.

 

The interest rate on the revolving line of credit is based on the 1-month LIBOR rate plus 1.25%.  No amounts were drawn under the secured revolving line of credit in 2017 or 2016.  The Company's credit facility is secured by substantially all its business assets. 

 

The company fully paid off its commercial real estate mortgage in January 2017.

 

7.  Retirement program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company's matching contributions vest immediately.  The Company contributed approximately US$ 462,000 to the savings and retirement plan during 2017 and contributed US$ 350,000 during 2016.

 

8.  Operating leases

The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments are as follows for the years ended:

 

 

December 31

 

US$ 000

2018

384

2019

243

2020

107

2021

105

2022

105

Thereafter

1,046

 

1,990

 

9.  Capital leases

Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2017. This is included in accrued expenses on the accompanying balance sheets.  Future minimum payments are as follows for the years ended:

 

 

December 31

 

US$ 000

2018

83

2019

55

2020

17

2021

2

Thereafter

-

 

157

 

10.  Supplemental cash flow and non-cash financing disclosures

 

Year ended

Year ended

 

December 31,

December 31,

 

2017

2016

 

US$ 000

US$ 000

Cash paid for interest

42

58

Cash paid for taxes

4,944

7,747

Non-cash financing activities - change in fair value of derivative instruments

-

2

Capital lease liabilities assumed

190

-

 

11.  Business and credit concentration

The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance.  At December 31, 2017 and 2016, the Company had two customers which represented 15% and 20% of total accounts receivable, respectively.

 

12.  Commitments and contingencies

The Company has entered into employment agreements with certain members of senior management.  The terms of these are for renewable one-year periods and include non-compete and non-disclosure provisions as well as provide for defined severance payments in the event of termination or change in control.

 

The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.

 

13.  Income taxes

Income Tax Provision

 

 

 

 

 

 

 

 

 

 

Year ended

Year ended

 

 

 

December 31,

December 31,

 

 

 

2017

2016

 

 

 

US$ 000

US$ 000

Current income tax

 

 

 

Federal

 

4,336

5,764

 

State

 

326

774

 

Foreign

 

906

303

Total current income tax expense

5,568

6,841

 

 

 

 

 

Deferred tax expense

 

 

 

Federal

 

1,688

167

 

State

 

66

11

 

Foreign

 

-

-

Total deferred tax expense

1,754

178

 

 

 

 

 

Total tax provision

7,322

7,019

 

The components of the net deferred income tax asset at December 31, 2017 and 2016 were as follows:

 

 

 

Year ended

Year ended

 

 

December 31,

December 31,

 

 

2017

2016

 

 

US$ 000

US$ 000

 

 

 

 

Bad debt allowance

195

263

Inventory reserve

25

109

Accrued Bonus

73

-

UNICAP - Sec 263A

108

179

Prepaid insurance

(32)

(65)

Prepaid other

(106)

(104)

Fixed assets

(660)

(517)

Intangible assets

1,086

2,343

UK intangibles

134

134

Accrued warranty

134

223

Stock based compensation expense (options & RSUs)

326

473

Italy - NOL

76

76

Foreign tax credit

237

237

Total net deferred tax assets

1,596

3,351

 

 

 

 

Rate reconciliation

 

 

Consolidated income before tax

25,738

21,277

Statutory rate

34%

34%

 

Statutory tax expense

8,751

7,234

 

 

 

 

State taxes

259

518

Foreign taxes

(171)

(221)

Meals and entertainment

61

44

Permanent differences due to stock options & RSUs

(1,630)

(125)

Permanent differences due to other items

(456)

(409)

Permanent due to US tax rate change

645

-

Other

(137)

(22)

 

Tax expense

7,322

7,019

 

 

 

 

 

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

 

14.  Revenues by geographic region

The Company sells its product to customers throughout the world.  The breakdown by location is as follows:

 

 

Year ended

Year ended

 

December 31,

December 31,

 

2017

2016

 

US$ 000

US$ 000

United States and U.S. possessions

55,504

55,805

Canada

2,365

791

Rest of World

27,765

22,757

Total

85,634

79,353

 

15.  Stock based compensation

The Company has stock based compensation plans which are described below. The compensation cost that has been charged against income for the plans was approximately US$ 467,000 and US$ 725,000 for the years ended December 31, 2017 and 2016, respectively.  The income tax effect recognized for stock based compensation was US$ 1.8m and US$ 0.2m, respectively, for the years ended December 31, 2017 and 2016. 

 

Stock options

An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan, which was cancelled when the old plan was abandoned. The grants have a three-year vesting and a strike price of 30p, a 100% premium over the market price on the date of grant. The remaining stock options will only be issued for new key employees and superior performance.

 

Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years.  No new options were granted in 2017 and 2016.

 

A summary of options activity is presented below:

 

Options

Stock options

Weighted-average exercise price

Weighted average remaining contractual term (years)

Aggregate intrinsic value

Outstanding at January 1, 2016

1,686,361

0.44

4.01

3,895,369

Granted

-

-

-

-

Exercised

(100,000)

0.47

3.13

(144,945)

Forfeited

-

-

-

-

Outstanding at December 31, 2016

1,586,361

0.44

3.00

 

Exercisable at December 31, 2016

1,586,361

0.44

3.00

 

Outstanding at January 1, 2017

1,586,361

0.44

3.00

3,667,918

Granted

-

-

-

-

Exercised

(1,569,221)

0.44

2.10

(4,870,392)

Forfeited

-

-

-

-

Outstanding at December 31, 2017

17,140

0.47

2.13

61,195

Exercisable at December 31, 2017

17,140

0.47

2.13

61,195

 

 

Options exercised in 2017 and 2016 were settled for cash of US$ 4.9m and US$ 0.1m, respectively.  As of December 31, 2017 and 2016, the Company's stock options have all been vested with no unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plan.

 

Restricted Stock Units

The Company also regularly issues restricted stock units to employees and non-executive Directors, subject to Board approval.  A summary of restricted stock unit activity in 2016 and 2017 is presented below:

 

 

Shares

Grant date fair market value US$

Outstanding at January 1, 2016

428,345

641,507

Granted

148,593

313,894

Vested or settled for cash

(159,585)

(119,130)

Forfeited

-

-

Outstanding at December 31, 2016

417,353

836,271

Outstanding at January 1, 2017

417,353

836,271

Granted

121,063

419,241

Vested and settled for cash

(151,444)

(292,007)

Forfeited

-

-

Outstanding at December 31, 2017

386,972

963,505

 

RSUs settled for cash were US$ 0.5m in 2017 and US$ 0.3m in 2016.

 

As of December 31, 2017, there was US$ 453,000 total unrecognized compensation cost related to non-vested restricted stock units.  Restricted stock unit expense is being recognized over the three-year vesting period.  The weighted average remaining vesting period is 1.25 years.       

 

Equity Bonus Plan

The Company has an Equity Bonus Plan, under which eligible senior managers may choose to receive 25% of their annual performance bonus in shares of common stock.  In March 2016, the Company issued 96,870 shares of common stock, valued at US$ 204,000 at the time of grant, for awards under the 2015 Equity Bonus Plan.   In March 2017, the Company issued 38,519 shares of common stock, valued at US$ 133,000 at the time of grant, for awards under the 2016 Equity Bonus Plan.

 

         

16.  Employee compensation

The Board approved management bonuses and profit sharing payments totaling US$ 1.5m to be paid in December 2016 and early 2017 based upon the Company meeting certain profitability targets. 

 

 

17.  Subsequent events

Dividend

In recognition of Somero's strong performance and the Board of Directors' confidence in the continued growth of the Company, the Board approved an increase to the dividend payout ratio to 50% of adjusted net income and is pleased to announce a final 2017 dividend of 12.75 US cents per share that will be payable on April 20, 2018 to shareholders on the register at April 3, 2018.  Together with the interim dividend paid in October 2017 of 2.75 US cents per share, this represents a full year regular dividend to shareholders of 15.5 US cents per share, a 40% increase over the previous year.  In addition, due to the strength of the Company's cash position at the end of 2017, and upon the review of anticipated future cash requirements for the business, the Board of Directors' has adopted a new supplementary dividend policy and approved a supplemental dividend of 3.6 US cents per share that will be paid together with the final 2017 dividend on April 20, 2018 to shareholders on the register at April 3, 2018.  The combined dividend payment on April 20, 2018 will total 16.35 US cents per share, representing a total dividend payment of US$ 9.2m.

 

Equity Bonus Plan

In February 2018, the Board approved the 2017 Equity Bonus Plan, under which eligible senior managers can elect to receive up to 50% of their 2017 annual performance bonus in shares of common stock.  The Company expects to issue shares for awards under the 2017 Equity Bonus Plan in 2018.

 

Annual General Meeting

Notice is given that the Annual General Meeting of Stockholders (the "AGM") of the Company will be held at the Company's headquarters at 14530 Global Parkway, Fort Myers, Florida 33913 on June 12, 2018 at 9:00 am local time.

 

 


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