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Somero Enterprises (SOM)

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Wednesday 11 March, 2020

Somero Enterprises

Final Results

RNS Number : 6916F
Somero Enterprises Inc.
11 March 2020
 

11 March 2020

Somero Enterprises, Inc.

("Somero" or "the Company")

 

Final Results

Strong H2 performance, increasing 2020 investment to drive long-term growth

 

Somero Enterprises, Inc. reports its annual results for the twelve months ended 31 December 2019.

 

Financial Highlights

· Robust financial performance for the year made possible by flexible operating cost model

· Adjusted EBITDA margin of 32% (2018: 33%)

· Adjusted net income of US$ 21.1m (2018: US$ 21.4m)

· Strong H2 recovery led by the US as weather conditions improved

· Global H2 2019 sales were US$ 50.3m (H1 2019: US$ 39.0m)

· Healthy operating cash flows of US$ 18.9m in 2019 resulting in US$ 23.8m year-end net cash

· Substantial return of cash to shareholders:

· Paid US$ 17.4m in dividends to shareholders in 2019 (2018: US$ 12.3m)

 

 

FY19

FY18

% Change

 

(US$)

(US$)

 

Revenue

89.3m

94.0m

-5%

Adjusted EBITDA(1,2)

28.7m

30.8m

-7%

Adjusted EBITDA margin(1,2)

32%

33%

 

Profits before tax

27.0m

29.1m

-7%

Adjusted net income(1,3)

21.1m

21.4m

-1%

Diluted adjusted net income per share(1,3)

0.37

0.38

-3%

Cash flow from operating activities

18.9m

23.8m

-21%

Net cash(4)

23.8m

28.2m

-16%

Ordinary dividend per share

0.1875

0.190

-1%

Supplemental dividend per share

0.077

0.117

-34%

 

Operational Highlights

· Demand across markets and product lines remained healthy

· Better than anticipated H2 recovery in the US as weather conditions improved

· Good growth in North America, China, Latin America and India

· New products contributed meaningfully to growth

· Sales of the SkyScreed® (the world's first Laser Screed machine to allow screeding on structural high rise applications) and the Somero Line Dragon® product line (formerly the SP-16 Line Pulling & Placing System) (following its acquisition in January 2019) combined to contribute US$ 2.2m in incremental 2019 sales

· 3-D Profiler System® and Other revenues contributed US$ 0.9m of incremental sales in 2019 compared to 2018

 

Post-Period Highlights

· Share buyback program of an aggregate value of up to US$ 1.0m authorized by the Board in order to offset dilution from on-going equity award programs, to be completed in 2020

 

 

 

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 stock-based compensation and non-cash lease expense.

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, President and CEO of Somero, said:

 

"2019 was a highly profitable year for Somero and I am pleased with the results we have been able to achieve despite the headwinds we have faced. Notwithstanding record levels of rainfall during the first half of 2019 in the US, a US-China tariff dispute and macro-economic uncertainly in Europe, we delivered nearly US$ 29.0m in EBITDA with strong margins and healthy cash flows while also taking a substantial step forward in our product development journey with the launch of our SkyScreed® 25.  The SkyScreed® 25 is the world's first Laser Screed machine to allow screeding on structural high-rise applications. 

 

Our management team moved quickly to tackle each challenge we faced during the year, with the end result being another year of strong profits and a return of over US$ 17.0m in dividends to our shareholders.  Our performance in 2019 is a great illustration of the strength of our management team, the flexibility of our operating model, and our commitment to driving long-term growth. 

 

We enter 2020 in a strong financial position, allowing us to make investments to capture growth in new and existing markets with a growing product offering, with particular increased investment in the SkyScreed to support its future growth.  We are excited by the opportunities that lie ahead, and I am confident in our ability to execute our strategy, delivering strong results and dividends for our shareholders."

 

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

 

 

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)

Kate Bannatyne (Corporate Finance)

Tim Redfern/Richard Chambers (ECMO)

 

Alma PR (Financial PR Advisor)                                                             [email protected]

Rebecca Sanders-Hewett   +44 (0)20 3405 0205

Susie Hudson

Sam Modlin

David Ison

 

 

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

To see a video of Somero's newest product, the SkyScreed® 25 in action, visit https://bit.ly/2IfhlVg

 

 

Chairman's Statement

 

Performance and Dividend

We have delivered another year of strong profits and advanced our new product growth initiatives. Given the challenges faced over the period, particularly in the first half, I am very pleased with the numbers delivered, and the fact that the business recovered to a level higher than the top of our previous expectations demonstrates the underlying strength of our business.

 

Our strong balance sheet provides us with the flexibility to make investments to develop new products, expand our operational capacity, and add resources to sell and support our products and services in new and existing markets.  These investments underpin the long term success of our business, and we are pleased to be in a position to make them while maintaining a disciplined return of cash to shareholders. 

 

In 2019, we paid a record US$ 17.4m in dividends.  I am delighted to report that based on confidence in the business outlook, the Board has approved a final 2019 ordinary dividend of 13.0 US cents per share and a supplemental dividend of 7.7 US cents per share, which on a combined basis represents a US$ 11.7m payment to shareholders.  Both amounts are payable on April 30, 2020 to shareholders of record on April 14, 2020.  Together with the interim dividend paid in October 2019 of 5.75 US cents per share, the 2019 full-year ordinary dividend is 18.75 US cents per share. The supplemental dividend declared is in accordance with the Company's supplementary dividend policy adopted on March 14, 2018 that states the Company intends to distribute 50% of the excess of net cash over the year-end target of US$ 15.0m. 

 

The Board has also approved a US$ 1.0m share buyback program for the purpose of mitigating future dilution resulting from share issuances under the Company's equity award programs.  We expect to complete this program in H1 2020.

 

Strategic Progress

Innovation is at the core of our strategy.  The launch of the SkyScreed® 25 in January 2019 marked a new chapter in Somero's legacy of innovation and opened a new, untapped market segment.  The SkyScreed is a disruptive technology that will dramatically change the way work is done on structural high-rise jobsites.  Not only did we achieve our target of US$ 1.0m in first year SkyScreed sales, we also gained a deep understanding of this new market segment and the jobsite challenges our customers face.  Based on our 2019 success along with the knowledge and experience we gained, we are confident in the meaningful long-term growth opportunity this product and the broader market segment represents.

 

Our presence outside our main US market remains strong and presents significant opportunity for the future.  Revenues outside North America in 2019 represented 27% of total sales in 2019 compared to 31% in 2018 as a result of several specific regional challenges. However, non-residential construction market conditions remain generally positive across the globe, we are seeing meaningful contributions from new products outside the US, and we have a clear strategy in place to deepen our penetration of non-US markets by promoting adoption of wide-placement theory and quality concrete flooring standards. Together, these factors give us confidence that our international markets represent a significant long-term opportunity for Somero.

 

Our People

The Board enjoys active engagement with the full management team during the year, witnessing first-hand the commitment and energy of the teams that run the business.  The strength of our people and culture is a key driver of our success and essential in delivering shareholder value.  We are extremely proud to work with such a talented group of employees who work passionately to help our customers achieve their business goals. On behalf of the Board, I would like to thank the management team and all 179 Somero employees located throughout the world for delivering these outstanding 2019 results.

 

Coronavirus

Whilst we have not seen an impact to date on our business, we are closely monitoring the evolving Coronavirus situation.  Our supply chain has been unaffected as we do not source components from China and while we have yet to see delays in projects outside of China, we remain in the early stages of understanding the impact of the virus.  We will provide updates in due course if we anticipate our full-year 2020 results will be impacted.

 

Outlook

The Board is confident in the outlook for 2020 with the solid momentum in the US carrying forward from 2019 supported by the strength of the US customer project backlogs that span well into 2020.  Outside of the US, while market conditions and activity levels remain generally positive, the Board continues to recognize factors impacting each market that slightly temper underlying growth expectations for 2020.

 

The Board is also confident in the significant long-term growth opportunity from new products such as the SkyScreed, and reflective of this confidence, and as announced on 22 January, the Board has made the decision to increase investment in the SkyScreed to support its future growth.  This investment will primarily consist of adding sales and support staff for new products and will drive an increase in operating costs that slightly tempers our overall profitability expectations for 2020.  Thanks to our strong financial position and positive momentum, the business is in a good position to be able to make this investment now, in order to feel the benefit in future years. 

 

With this comprehensive view, the Board expects 2020 will be a profitable year with healthy cash generation.  Revenues are expected to be comparable to 2019 with EBITDA broadly in line with 2019 and in line with current market expectations. 

 

Larry Horsch

Non-Executive Chairman

March 11, 2020

 

 

 

 

 

President and Chief Executive Officer's Review

 

Overview

Following a well-documented challenging start to 2019, strong and profitable trading ahead of the Board's expectations in H2 meant we finished the year strong.  Revenues in H2 2019 were US$ 50.3m, a record level of sales and an increase over the US$ 49.0m reported in H2 2018, as the US fully recovered from historic levels of rainfall during the first half of 2019.  Led by the strength of H2 trading in the US, we reported combined 2019 sales of US$ 89.3m, EBITDA of US$ 28.7m and ended the year with US$ 23.8m in net cash, all of which were ahead of the guidance provided on 11 July 2019.(1) 

 

The strength of the cash generation of the business enabled the Company to pay US$ 17.4m in dividends in 2019, a record for cash returned to shareholders, and still maintain a strong and secure financial position to start 2020.  Most importantly, we took a significant step forward with our new product growth initiatives marked by the successful launch of our SkyScreed® 25. 

 

Region Reviews

Three of our six markets grew in 2019 compared to 2018 led by North America and followed to a lesser extent by Latin America and China. 

 

In North America, as weather conditions began to normalize across broad sections of the US in H2 2019 and previously delayed projects were started, trading activity accelerated.  This improvement ultimately resulted in H2 2019 sales in North America of US$ 38.3m, a 12% increase over H2 2018, and full-year sales of US$ 65.5m, a 1.2% increase compared to 2018.  Overall, this was a significant improvement from H1 2019 when sales were US$ 27.2m, down US$ 3.2m compared to H1 2018.  General market conditions in North America remain favorable as we enter 2020.  With a high-level of non-residential construction activity, a continued shortage of skilled labor and extended customer project backlogs that span well into 2020, partly the result of ongoing recovery from inclement weather during H1 2019, the outlook for our largest market remains optimistic. 

 

In Europe, 2019 sales declined to US$ 10.0m compared to US$ 13.5m in 2018, reflecting the impact of economic uncertainty across the region on customer equipment purchase decisions.  Project activity levels across the region were encouraging as we sold products into eighteen countries there in 2019, with the most significant contributors being the UK, Poland, Hungary, Belgium and France. We see significant opportunities across the region for 2020 with the main drivers of performance being demand for replacement equipment, technology upgrades and new products. 

 

We are also pleased with our 2019 performance in China despite the turmoil from the US-China tariff dispute.  Revenues for this market grew to US$ 5.6m, up from US$ 5.3m in 2018, reflecting a focus on the products favored in the market and effective demand generation and sales execution led by our in-country management.  The longer-term opportunity in China will ultimately be driven by demand for quality concrete floors by building owners and end-users. We will continue to pursue market development efforts to drive this acceptance and demand. 

 

In Latin America, 2019 sales were US$ 2.0m, up US$ 0.3m compared to 2018, as 2019 project activity remained solid.  During the year, the most significant contributions in the region came from Mexico and Chile.  We remain encouraged by the activity seen in this region, particularly in Mexico and Brazil albeit in the early stages and expect to see improvement in 2020. 

 

The Middle East was negatively impacted by economic and geopolitical uncertainty.  2019 sales in the Middle East were US$ 0.7m, a decline of US$ 1.7m compared to 2018.  Although activity levels in the region were generally solid throughout the year, these prospects did not translate into trading as a result of customer cautiousness.  The main contributors to sales during the period in the Middle East were Turkey, the United Arab Emirates and Egypt. 

 

In our Rest of World region, 2019 sales declined US$ 0.9m from 2018.  The two major territories comprising most of this region are Australia and India.  Australia represented much of the decline in 2019 due primarily to a weakened local currency that slowed the pace of trading.  Despite the impact of currency, we continue to see positive non-residential construction activity in this market.  We are also pleased with the traction we continue to gain in India as sales grew to US$ 1.4m in 2019, a 34% increase from 2018, and are encouraged by signs of increasing demand for quality concrete floors in this market. 

 

Cashflow and Balance Sheet

Somero's earnings and the cash flow generated from these profits were strong in 2019.  The Company delivered US$ 18.9m in operating cash flow in 2019, down from US$ 23.8m in 2018 due to the timing of tax payments and the strong finish to 2019 trading that resulted in an increase in trade receivables carrying over into 2020, and ended the year with US$ 23.8m in net cash. 

 

This robust financial position allowed the Company to comfortably maintain a dividend pay-out ratio of 50% and the Company's supplemental dividend policy.  Under this dividend policy, the Company paid a total of US$ 17.4m in dividends to shareholders in 2019, an record for the Company. I am pleased to report that reflecting the Board's confidence in the business outlook for the Company and in the strength of cash generation from the business, the Board has declared a final 2019 ordinary dividend of 13.0 US cents per share and a supplemental dividend of 7.7 US cents per share, both payable on April 30, 2020 that combined will result in a US$ 11.7m dividend payment to shareholders. 

 

Product Development

New products are a significant growth driver of the business, and in 2019 two new products, the Somero Line Dragon® (the new generation SP-16 Line Pulling & Placing System) and the SkyScreed® 25, combined to contribute US$ 2.0m in incremental sales compared to 2018.  This contribution was meaningful to the 2019 results and the launch of the SkyScreed® 25 was an important milestone for the Company.  Over the last two years, a significant portion of our product development resources have been focused on designing and developing solutions for the high-rise structural market.  The launch of the SkyScreed® 25 was the culmination of this multi-year effort.  We met our first year target of achieving US$ 1.0m in SkyScreed sales, gained a deep understanding of an exciting new market segment, and now enter 2020 with confidence in both our product offering and in the meaningful long-term growth opportunity this product and the broader market segment represents.

 

As such as previously communicated with the market, the Board has made the decision to increase investment in resources targeted at developing, selling and supporting new products, such as the SkyScreed, in 2020 and beyond. We are confident in our ability to deliver on these initiatives alongside continuing to deliver profitable growth for our shareholders.

 

Expansion Update

The Company has made significant progress on the US$ 3.5m expansion to our Houghton, Michigan facility.  The project will add 35,000 square feet to the facility, provide our assembly operations with needed space to accommodate new products, and add needed office space for our customer support and engineering teams.  The project is on track to be completed in Q1 2020 with approximately half of the planned project cost to be expended in 2020.

 

The US$ 0.5m planned expansion to the Global Headquarters and Training Facilities in Fort Myers, Florida has been delayed due to a backlog in the municipality permitting process.  Timing to complete the project is currently being evaluated by management and we will provide an update in due course.

 

Conclusion

2019 was a good year of progress for Somero.  We delivered robust financial results, returned a record level of cash to shareholders and made significant progress on our new product initiatives.  We will look to continue on our journey towards capitalizing on the substantial and wide-ranging opportunities in front of us, and I am confident our management team is up to the task.  We are pleased with the health of the North American market that is supported by customer project backlogs that extend well into 2020, encouraged by opportunities in our international markets, and excited by the long-term opportunity of our new products. 

 

As our performance in 2019 clearly illustrates, our talented and agile management team with  a flexible operating platform can steer us through challenges without losing focus on our growth objectives.  We are extremely well positioned for our next phase of growth and look forward to delivering another year of substantial progress for our shareholders.

 

 

Jack Cooney

President and Chief Executive Officer

March 11, 2020

 

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 December 31,

 

 

2019

2018

 

US$ 000

Except per share

data

US$ 000

Except per share data

 

 

 

Revenue

89,306

94,001

Cost of sales

38,602

40,375

Gross profit

50,704

53,626

 

 

 

Operating expenses

 

 

Selling, marketing and customer support

11,108

11,059

Engineering and product development

1,796

1,357

General and administrative

11,198

12,037

Total operating expenses

24,102

24,453

Operating income

26,602

29,173

Other income (expense)

 

 

Interest expense

(42)

(54)

Interest income

241

188

Foreign exchange impact

(71)

(42)

Other

310

(191)

Income before income taxes

27,040

29,074

 

 

 

Provision for income taxes

5,929

7,531

Net income

21,111

21,543

 

 

 

 

Per Share

Per Share

 

US$

US$

Basic earnings per share

0.37

0.38

Diluted earnings per share

0.37

0.38

Basic adjusted net income per share(1) (2) (4)

0.38

0.38

Diluted adjusted net income per share(1) (2) (4)

0.37

0.38

 

 

 

Other data

 

 

Adjusted EBITDA (1) (2) (4)

28,714

30,837

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

21,126

21,407

Depreciation expense

977

1,175

Amortization of intangibles

145

-

Capital expenditures

3,015

803

 

 

 

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 the Company's net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization stock-based compensation and non-cash lease expense.

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 December 31,

 

2019

2018

 

US$ 000

US$ 000

Adjusted EBITDA reconciliation

 

 

Net income

21,111

21,543

Tax provision

5,929

7,531

Interest expense

42

54

Interest income

(241)

(188)

Foreign exchange impact

71

42

Other

(310)

191

Depreciation

977

1,175

Amortization

145

-

Stock based compensation

760

489

Non-cash lease expense

230

-

Adjusted EBITDA

28,714

30,837

 

 

 

Adjusted net income reconciliation

 

 

Net income

21,111

21,543

Amortization

145

-

Tax impact of stock option & RSU settlements

(130)

(136)

Adjusted net income

21,126

21,407

 

 

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 the Company's net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization stock-based compensation and non-cash lease expense.

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 declined by 5% to US$ 89.3m (2018: US$ 94.0m). 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 machine sales, 3-D Profiler System, Somero Line Dragon (formerly SP-16 Concrete Hose Line-Pulling and Placing Systems), SkyScreed 25 and Other Revenues which consist primarily of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges. 

 

Ride-on screed sales declined to US$ 16.9m (2018: US$ 22.9m) due to lower volume, partially offset by price increases, Boomed screed sales declined to US$ 38.0m (2018: US$ 39.1m) due to lower volume, partially offset by price increases, the Somero Line Dragon, including SP-16 Concrete Hose Line-Pulling and Placing Systems, sales increased to US$ 2.8m (2018: US$ 1.6m) due to higher volume, the SkyScreed 25 contributed US$ 1.0m, and Other revenues increased to US$ 20.0m (2018: US$ 19.2m) primarily due to increased sales of parts and accessories.

 

Revenue breakdown by geography

 

 

 

 

 

 

 

 

 

 

 

North America

EMEA(1)

ROW(2)

Total

 

US$ in millions

US$ in millions

US$ in millions

US$ in millions

 

 

 

 

 

 

 

2019

2018

 

2019

2018

2019

2018

2019

2018

Net sales

% of Net sales

Net sales

% of Net sales

 

 

 

 

 

 

 

 

 

 

 

Boomed screeds (3)

27.4

27.0

4.9

8.7

5.7

3.4

38.0

42.6%

39.1

41.7%

Ride-on screeds (4)

12.7

16.6

2.3

4.0

1.9

  2.3

16.9

18.9%

22.9

24.4%

Remanufactured machines

3.0

2.3

0.7

0.4

0.7

2.4

4.4

4.9%

5.1

5.4%

3D Profiler System

5.8

5.3

0.2

0.2

0.2

0.6

6.2

6.9%

6.1

6.5%

Somero Line Dragon (5)

2.2

1.5

0.5

0.1

0.1

-

2.8

3.2%

1.6

1.7%

SkyScreed 25

1.0

-

-

-

-

-

1.0

1.1%

-

-

Other (6)

13.4

12.0

2.1

2.5

4.5

4.7

20.0

22.4%

19.2

20.3%

Total

65.5

64.7

10.7

15.9

13.1

13.4

89.3

100.0%

94.0

100.0%

Notes:

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

2. ROW includes the China, Australia, Latin America, Korea, India and Southeast Asia markets. In the 2018 Annual Report, India was included in EMEA. India has been reclassified in the above table and is included in ROW for the years presented.

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.  Includes sales of the Somero Line Dragon and its predecessor the SP-16 Concrete Hose Line-Pulling and Placing Systems.

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

 

Units by product line

 

 

 

2019

2018

Boomed screeds

128

132

Ride-on screeds

159

234

Remanufactured machines

27

35

3D Profiler System

56

59

Total

370

460

 

Sales to customers located in North America contributed 73% of total revenue (2018: 69%), sales to customers in EMEA (Europe, Middle East, Scandinavia, and Russia) contributed 12% (2018: 17%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, India and China) contributed 15% (2018: 14%).

 

Sales in North America were US$ 65.5m (2018: US$ 64.7m) up 1.2% driven by higher volume and price increases across most of the product lines, coupled with incremental sales from new products including the Somero Line Dragon, the SkyScreed 25 and an increase in Other revenues. Sales in EMEA were US$ 10.7m (2018: US$ 15.9m) which is down 33% primarily due to an decline in Boomed screed, Ride-on screed sales, and Other revenues, offset by an increase in sale of Somero Line Dragon (formerly SP-16 Concrete Hose Line-Pulling and Placing Systems).  Sales in ROW were US$ 13.1m (2018: US$ 13.4m), representing a 2.0% decline driven by lower sales of Ride-on screeds, Remanufactured machines, 3D Profiler Systems and Other revenues, offset by an increase in Boomed screed sales.

 

 

US$ in millions

Regional sales

2019

2018

North America

65.5

64.7

Europe

10.0

13.5

China

5.6

5.3

Middle East

0.7

2.4

Latin America

2.0

1.7

Rest of World (1)

5.5

6.4

Total

89.3

94.0

Notes:

1. ROW includes Australia, India, Southeast Asia, Korea and Russia. 

 

Gross profit

Gross profit declined to US$ 50.7m (2018: US$ 53.6m), with gross margins remaining steady at 57.0% with  modest selling price increases, favorable product and geographical mix, and productivity gains, offsetting normal inflationary cost increases.

 

Operating expenses

Operating expenses declined by US$ 0.4m to US$ 24.1m (2018: US$ 24.5m). This decrease is due to lower administrative costs, offset by higher engineering and product development expenses.

 

Debt

As of December 31, 2019, the Company had no outstanding debt and there were no changes to the Company's US$ 10.0m secured revolving line of credit which will mature in February 2021.

 

Other income (expense)

Other income (expense) was US$ 0.4m of other income, compared to other expense of US$ 0.1m in 2018, primarily due to a gain on a non cash payment for intangible assets.

 

Provision for income taxes

The provision for income taxes was US$ 5.9m in 2019 compared to US$ 7.5m in 2018. Overall, Somero's effective tax rate changed to 21.9% in 2019 from 25.9% in 2018. 

 

Earnings per share

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

 

 

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

 

 

  Year ended December 31,

 

 

2019

US$ 000's

2018

US$ 000's

 

 

 

 

Income available to stockholders

21,111

21,543

 

 

 

Basic weighted shares outstanding

56,330,400

56,276,778

Net dilutive effect of stock options and restricted stock units

489,218

451,573

56,819,618

56,728,351

 

 

Per Share

Per Share

 

US$

US$

Basic earnings per share

0. 37

0. 38

Diluted earnings per share

0. 37

0. 38

Basic adjusted net income per share

0. 38

0. 38

Diluted adjusted net income per share

0. 37

0. 38

 

 

 

Consolidated Balance Sheets

 

 

As of December 31, 2019 and 2018

 

 

 

 

  As of December 31,

 

 

2019

2018

 

 

US$ 000

US$ 000

Assets

 

 

Current assets:

 

 

 

Cash and cash equivalents

23,757

28,233

 

Accounts receivable - net

11,979

10,231

 

Inventories- net

12,289

10,813

 

Prepaid expenses and other assets

1,291

1,501

Total current assets

49,316

50,778

Accounts receivable, non-current - net

904

346

Property, plant and equipment - net

13,714

12,001

Financing lease right-of-use assets-net

557

-

Operating lease right-of-use assets-net

1,213

-

Intangible assets - net

1,698

-

Goodwill

3,303

2,878

Deferred tax asset

564

850

Other assets

261

226

Total assets

71,530

67,079

 

 

 

 

Liabilities and stockholders' equity

 

 

Current liabilities:

 

 

 

Accounts payable

2,227

2,146

 

Accrued expenses

5,960

6,391

 

Financing lease liability - current

148

-

 

Operating lease liability - current

247

-

 

Income tax payable

1,078

3,012

 

Total current liabilities

9,660

11,549

Financing lease liability - long-term

262

-

Operating lease liability - long-term

982

-

Other liabilities

1,587

430

Total liabilities

12,491

11,979

 

 

 

 

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 56,348,068 and 56,288,329 shares outstanding at December 31, 2019 and 2018, respectively

26

26

 

Less: treasury stock, 77,530 shares as of December 31, 2019 and 137,269 shares as of December 31, 2018 at cost

(191)

(326)

 

Additional paid in capital

17,001

16,969

 

Retained earnings

44,923

41,255

 

Other comprehensive loss

(2,720)

(2,824)

 

Total stockholders' equity

59,039

55,100

Total liabilities and stockholders' equity

71,530

67,079

 

 

 

 

See notes to consolidated financial statements.

 

 

      

 

 

 

Consolidated Statements of Comprehensive Income

 

 

For the years ended December 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  Year ended December 31,

 

 

2019

2018

 

 

US$ 000

US$ 000

 

 

except per share data

except per share data

 

 

 

 

Revenue

89,306

94,001

Cost of sales

38,602

40,375

Gross profit

50,704

53,626

 

 

 

 

Operating expenses

 

 

 

Sales, marketing and customer support

11,108

11,059

 

Engineering and product development

1,796

1,357

 

General and administrative

11,198

12,037

 

Total operating expenses

24,102

24,453

 

 

 

 

Operating income

26,602

29,173

Other income (expense)

 

 

 

Interest expense

(42)

(54)

 

Interest income

241

188

 

Foreign exchange impact

(71)

(42)

 

Other

310

(191)

Income before income taxes

27,040

29,074

 

 

 

Provision for income taxes

5,929

7,531

 

 

 

Net income

21,111

21,543

 

 

 

Other comprehensive income

 

 

 

Cumulative translation adjustment

104

(895)

Comprehensive income

21,215

20,648

 

 

 

 

Earnings per common share

 

 

Earnings per share - basic

0.37

0.38

Earnings per share - diluted

0.37

0.38

 

 

 

 

Weighted average number of common shares outstanding       

 

 

Basic

56,330,400

56,276,778

 

Diluted

56,819,618

56,728,351

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity

 

 

For the years ended December 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

Additional Paid-In Capital

 

 

 

Amount

 

Retained earnings

Other Comprehensive

income (loss)

Total Stockholders' Equity

 

 

Shares

US$ 000

US$ 000

Shares

US$ 000

US$ 000

US$ 000

US$ 000

 

Balance - January 1, 2018

56,425,598

26

17,169

183,477

(407)

32,007

(1,929)

46,866

 

Cumulative translation adjustment

-

-

-

-

-

-

(895)

(895)

 

Net income

-

-

-

-

-

21,543

-

21,543

 

Stock based compensation

-

-

489

-

-

-

-

489

 

Dividend

-

-

-

-

-

(12,295)

-

(12,295)

 

Treasury stock

-

-

(81)

(46,208)

81

-

-

-

 

RSUs settled for cash

-

-

(525)

-

-

-

-

(525)

 

Stock options settled for cash

-

-

(83)

-

-

-

-

(83)

 

Balance - December 31, 2018

56,425,598

26

16,969

137,269

(326)

41,255

(2,824)

55,100

 

Cumulative translation adjustment

-

-

-

-

-

-

104

104

 

Net income

-

-

-

-

-

21,111

-

21,111

 

Stock based compensation

-

-

760

-

-

-

-

760

 

Dividend

-

-

-

-

-

(17,443)

-

(17,443)

 

Treasury stock

-

-

(135)

(59,739)

135

-

-

-

 

RSUs settled for cash

-

-

(593)

-

-

-

-

(593)

 

Balance - December 31, 2019

56,425,598

26

17,001

77,530

(191)

44,923

(2,720)

59,039

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

                

 

 

 

Consolidated Statements of Cash Flows

 

 

For the years ended December 31, 2019 and 2018

 

 

 

 

 

 

 

 Year ended December 31,

 

2019

US$ 000

2018

US$ 000

 

Cash flows from operating activities:

 

 

  Net income

21,111

21,543

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

 

 

  Deferred taxes

286

748

  Depreciation and amortization

1,122

1,175

Non cash lease expense

230

-

  Bad debt

188

150

  Stock based compensation

760

489

Gain on non cash payment for intangible asset

(171)

-

  Loss on disposal of property and equipment

16

114

  Working capital changes:

 

 

  Accounts receivable

(2,494)

353

  Inventories

(1,374)

(2,116)

  Prepaid expenses and other assets

210

1,039

  Other assets

(35)

41

  Accounts payable, accrued expenses and other liabilities

936

(963)

  Income taxes payable

(1,934)

1,271

  Net cash provided by operating activities

18,851

23,844

 

 

 

Cash flows from investing activities:

 

 

  Proceeds from sale of property and equipment

-

47

  Property and equipment purchases

(3,015)

(803)

Payments for intangible assets

(138)

-

Business acquisition, net of cash acquired

(2,073)

-

  Net cash used in investing activities

(5,226)

(756)

 

 

 

Cash flows from financing activities:

 

 

  Payment of dividend

(17,443)

(12,295)

  RSUs settled for cash

(593)

(525)

  Stock options settled for cash

-

(83)

  Payments under capital leases

(169)

(95)

  Net cash used in financing activities

(18,205)

(12,998)

 

 

 

Effect of exchange rates on cash and cash equivalents

104

(895)

 

 

 

Net increase (decrease) in cash and cash equivalents

(4,476)

9,195

 

 

 

Cash and cash equivalents:

 

 

Beginning of year

28,233

19,038

End of year

23,757

28,233

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

Notes to the Consolidated Financial Statements

As of December 31, 2019 and 2018

 

1.  Organization and description of business

 

Nature of business

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

 

2.  Summary of significant accounting policies

 

Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.  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, 2019 and 2018, the allowance for doubtful accounts was approximately US$ 961,000 and US$ 785,000, respectively. Bad debt expense was US$ 188,000 and US$ 150,000 in 2019 and 2018, respectively.

 

Inventories 

Inventories are stated using the first in, first out ("FIFO") method at the lower of cost or net realizable value ("NRV"). Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts.  As of December 31, 2019 and 2018, the provision for obsolete and slow moving inventory was US$ 346,000 and US$ 343,000, respectively. 

 

Business combinations and purchase accounting

The Company includes the results of operations of the businesses that it acquires as of the applicable acquisition date. The purchase price of the acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

 

Intangible assets and goodwill

Intangible assets consist primarily of customer relationships, trademarks 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 seventeen 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 and the purchase of the Line Dragon, LLC business assets in January 2019.  The Company did not incur a goodwill impairment loss for the periods ended December 31, 2019 nor December 31, 2018.

 

Revenue recognition 

The Company adopted ASC 606 "Revenue from contracts with customers" on January 1, 2018.  The new revenue recognition standard requires revenue recognition based on a five-step model that includes: identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the transfer of promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer for such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services transfer to the customer. The Company's contracts and customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

 

The Company generates revenue by selling equipment, parts, accessories, service agreements and training. The Company recognizes revenue for equipment, parts and accessories when it satisfies the performance obligation of transferring the control to the customer. For product sales where shipping terms are FOB shipping point, revenue is recognized upon shipment.  For arrangements which include FOB destination shipping terms, revenue is recognized upon delivery to the customer. The Company recognizes the revenue for service agreements and training once the service or training has occurred.

 

The change in accounting principle from ASC 605 to ASC 606 did not materially impact the amount of revenue recognized in the Company's financial statements.

 

Prior to the adoption of this standard the Company recognized revenue in accordance with ASC 605-10, "Revenue Recognition in Financial Statements". Revenue was recognized when persuasive evidence of an arrangement existed, delivery or service had occurred, the sale price was fixed or determinable and receipt of payment was probable.

 

The Company believes it's previous recognition policy as related to the sale of equipment and training are consistent with the new revenue recognition standard defined within FASB ASC 606 which requires unique performance obligations be recognized upon satisfaction of the performance obligation at the point in time when the control of goods is transferred  to the customer (sale of equipment) or services are performed (training). 

 

During the year ended December 31, 2019 there was US$ 652,000 of revenue recognized during the period from customer deposit liabilities (deferred contract revenue).

As of December 31, 2019 there are US$ 596,000 in customer deposit liabilities for advance payments received during the period for contracts expected to ship in 2020. As of the year ended December 31, 2019 and 2018, there are no significant contract costs such as sales commissions or costs deferred.  Interest income on financing arrangements is recognized as interest accrues, using the effective interest method.

Leases

The Company adopted ASU 2016-02-Leases (Topic 842), as of January 1, 2019 and elected to use ASU 2018-11-Leases (Topic 842), Targeted Improvements, issued by the FASB in July 2018. ASU 2018-11 provides that adopters may take a prospective approach when transitioning to ASU 2016-02. Effectively, an entity would be permitted to change its date of initial application to the beginning of the period of adoption. As such, an entity is not required to adjust comparative period financial information or disclosures for the impacts of ASC 842. ASC 840 presentation and disclosures would be carried forward for comparative periods presented in which ASC 840 was utilized. Additionally, the entity would recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date. Applying ASU 2018-11, the Company elected to present results for the period beginning January 1, 2019 using ASC 842 and comparative periods presented will use presentation and disclosures in accordance with ASC 840.

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.

 

US$ 000

Balance, January 1, 2018

(551)

Warranty charges

475

Accruals

(537)

Balance, December 31, 2018

(613)

 

 

Balance, January 1, 2019

(613)

Warranty charges

416

Accruals

(734)

Balance, December 31, 2019

(931)

 

Property, plant, and equipment

Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 3 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. 

 

Use of estimates

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

 

Stock based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award. Compensation expense related to stock-based payments was US$ 760,000 and US$ 489,000 for the years ended December 31, 2019 and 2018, respectively.  The Company settled US$ 0 and US$ 83,000 in stock options for cash during the years ended December 31, 2019 and 2018, respectively. In addition, the Company settled US$ 593,000 and US$ 525,000 in restricted stock units for cash and conversion to common shares during the years ended December 31, 2019 and 2018, respectively. 

 

Transactions in and translation of foreign currency

The functional currency for the Company's subsidiaries outside the United States is the applicable local currency.  The preparation of the consolidated financial statements requires the translation of these financial statements to USD.  Balance sheet amounts are translated at period-end exchange rates and the statement of comprehensive income accounts are translated at average rates.  The resulting gains or losses are charged directly to accumulated other comprehensive income.  The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency.  Gains and losses from transactions are included as foreign exchange gain (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 changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income. 

 

Earnings per share

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

 

 

 

Earnings per common share have been computed based on the following:

 

  Year ended December 31,

 

2019

 US$ 000's

2018

US$ 000's

Income available to stockholders

21,111

21,543

Basic weighted shares outstanding

56,330,400

56,276,778

Net dilutive effect of stock options and restricted stock units

489,218

451,573

Diluted weighted average shares outstanding

56,819,618

56,728,351

 

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, 2018

 

 

 

Asset:

 

 

 

 

 

Non-recurring

 

 

 

 

 

Goodwill

2,878

 

 

2,878

Year ended December 31, 2019

 

 

 

Asset:

 

 

 

 

 

Non-recurring

 

 

 

 

 

Goodwill

3,303

 

 

3,303

 

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 were required under previous 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 adopted 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 therein.  The Company has implemented the new guidance under ASC 842, using the Targeted Improvements, ASU 2018-11, as of January 1, 2019.

 

3.  Inventories

Inventories consisted of the following at December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

  Year ended December 31,

 

 

 

 

2019

 

2018

 

 

 

 

US $ 000

 

US $ 000

Raw material

4,267

 

 3,634

Finished goods and work in process

3,154

 

 3,617

Remanufactured

 

 

 4,868

 

3,562

Total

 

 

 

12,289

 

10,813

 

4. Acquisition

On January 15, 2019, the Company concurrently executed a settlement agreement and mutual release with Daniel R. Stoltzfus and Line Dragon, LLC (collectively "Line Dragon"), including an asset purchase agreement whereby the Company acquired substantially all of the business assets of Line Dragon (collectively the "Agreements").  The purchase price consists of US$ 2,000,000 in cash and additional consideration (the "Performance Payments") during the period beginning on the day immediately following the close date and ending on May 29, 2031 (the "Performance Period"). The Performance Payments are calculated as 3% of gross revenues from the sale of SP-16 or Line Dragon concrete puller or placer equipment.  The Performance Payments for any full calendar year during the Performance Period shall not be less than US$ 30,000 and the Purchase Price, including the Performance Payments, is subject to a cap. 

 

The purchase was treated as a business combination as it met certain criteria stipulated in ASC 805 - Business Combinations. The Company expects the acquisition of the Line Dragon assets will complement its SP-16 Line Pulling & Placing System product offering. The acquisition of Line Dragon is strategically significant in revenue for the Company, however at the time of the acquisition and at December 31, 2019, the Company concluded that historical results of the acquisition were not material to the Company's consolidated financial results and therefore additional pro-forma disclosures are not presented.

 

The Company completed the Line Dragon purchase price allocation. At close, of the total purchase price, approximately US$ 187,000 was attributed to inventory, US$ 25,000 was attributed to property and equipment, US$ 1,048,000 was attributed to specifically identified intangible assets, including patents, trademarks and customer relations, US$ 400,000 in other intangible assets and US$ 351,000 was attributed to goodwill.  The Company also assumed US$ 11,000 of warranty liability.  Subsequently, pursuant to the terms of the Agreement, the Company exchanged two sets of pulling and placing systems retained by Line Dragon with new models that the Company introduced commercially.  As a result of this exchange, an additional US$ 77,000 was attributed to goodwill.

 

5.  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, 2019 and 2018, and that the value of patents was not impaired as of December 31, 2019. 

 

The following table reflects other intangible assets:

 

 

Weighted average

  Year ended December 31,

 

 

Amortization

2019

2018

 

 

 

Period

US$ 000's

US$ 000's

 

Capitalized cost

Patents

12 years

  18,538

 

 

Intangible Assets

 

  7,434

  6,300

 

 

 

 

  26,681

24,838

 

Accumulated amortization

Patents

12 years

 

 

Intangible Assets

 

6,405

6,300

 

 

 

 

24,983

24,838

 

Net carrying costs

Patents

12 years

669

-

 

 

Intangible Assets

 

1,029

-

 

 

 

 

1,698

-

 

          

 

Amortization expense associated with the intangible assets in each of the years ended December 31, 2019 and 2018 was approximately US$ 145,000 and US$ 0, respectively.  Net intangible assets were fully amortized in 2018.

 

6.  Property, plant, and equipment

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

 

  Year ended December 31,

 

 

2019

2018

 

 

US$ 000

US$ 000

 

 

 

 

 

Land

 864

 864

 

Building and improvements

 13,149

 11,128

 

Machinery and equipment

5,414

 5,022

 

 

19,427

17,014

 

Less:  accumulated depreciation and amortization

(5,713)

(5,013)

 

 

13,714

12,001

 

     

 

Depreciation expense for the years ended December 31, 2019 and 2018 was approximately US$ 977,000 and US$ 1,175,000, respectively.

 

7.  Line of credit and note payable 

In February 2016, the Company entered into an amended credit facility which consists of a US$ 10.0m secured revolving line of credit that will mature in February 2021.  The interest rate on the revolving credit line is based on the one-month LIBOR rate plus 1.25%.  The Company's credit facility is secured by substantially all its business assets.  No amounts were drawn under the secured revolving credit line in the years ended December 31, 2019 or in 2018. 

 

Interest expense for the years ended December 31, 2019 and 2018 was approximately US$ 42,000 and US$ 54,000, respectively, and relates primarily to interest costs on leased vehicles.

 

8.  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$ 690,000 to the savings and retirement plan during 2019 and contributed US$ 591,000 during 2018.

 

9.  Leases

The Company leases property, vehicles, and equipment under leases accounted for as operating and finance leases. The leases have remaining lease terms of less than 1 year to 13 years, some of which include options for renewal. The exercise of these renewal options is at the sole discretion of the Company. The right-of-use assets and related liabilities presented on the Consolidated Balance Sheet, reflect management's current expectations regarding the exercise of renewal options.  The components for lease expense were as follows as of December 31, 2019:

Operating lease cost

 

301

Finance lease cost:

  Amortization of right-of-use assets

230

  Interest on lease liabilities

15

Total finance lease cost

245

 

As of December 31, 2019, the weighted average discount rate was 4.7% and 4.4%, respectively, and the weighted average remaining lease term for finance and operating leases was 3.0 years and 10.5 years, respectively.  Maturities of lease liabilities are as follows for the years ended:

 

 

Operating Leases

Finance Leases

 

US$ 000's

US$ 000's

2020

303

166

2021

157

142

2022

105

90

2023

100

40

2024

100

  -

Thereafter

801

  -

  Total 

 1,566

438

Less imputed interest

(337)

(28)

  Total     1,229     410 

 

10.  Supplemental cash flow and non-cash financing disclosures

 

 

 

 

 Year ended December 31,

 

 

2019

2018

 

US$ 000

US$ 000

Cash paid for interest

41

34

Cash paid for taxes

6,315

6,013

Finance lease liabilities arising from obtaining right-of-use assets

245

22

Operating lease liabilities arising from obtaining right-of-use assets

1,229

-

Non-cash payment for intangible assets

257

-

 

 

 

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, 2019 and 2018, the Company had three customers which represented 22% and two customers which represented 23% 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 also 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

 

  Year ended December 31,

 

2019

US$ 000

2018

US$ 000

Current Income Tax

 

 

Federal

 4,431

 5,194

State

 823

 844

Foreign

 389

 745

Total current income tax expense

5,643

6,783

Deferred tax expense

 

 

Federal

 256

 632

State

 30

 11

Foreign

 -

 105

Total deferred tax expense

286

748

Total tax provision

5,929

7,531

 

 

 

As of December 31, 2019 and 2018, the effects of temporary differences that give rise to the deferred tax assets are as follows:

 

 Year ended December 31,

 

2019

US$ 000

2018

US$ 000

Deferred tax assets

 

 

Bad Debt Allowance

 220

 185

Inventory

 288

 251

Accrued Expenses

 378

 242

Intangible Assets

 485

UK Intangibles

 105

 105

Stock Compensation

 279

 178

Italy - NOL

 189

 129

Other

202

 147

Total deferred tax assets

1,661

1,722

Deferred tax liabilities

 

 

Prepaid Insurance

 (109)

 (124)

Fixed Assets

 (607)

 (619)

Intangible Assets

(191)

-

Total deferred tax liabilities

 (907)

 (743)

Valuation Allowance

(190)

(129)

Total net deferred tax asset

564

850

 

A reconciliation of the income tax provision with the amount of tax computed by applying the federal statutory rate to pretax income follows:

    Year ended December 31,

 

2019

US$ 000

2018

US$ 000

Consolidated Income Before Tax

 27,040

 29,074

Statutory Rate

21%

21%

Statutory tax expense

5,678

 6,105

 

 

 

State Taxes

681

 677

Foreign Taxes

 (48)

 (115)

Permanent differences due to share based compensation

 (70)

 (87)

Permanent differences due to other items

 (11)

 112

Foreign Derived Intangible Income

 (458)

 (471)

Tax Credits

-

(19)

Change in Valuation Allowance

60

 129

Change in Reserve

108

193

Out of Period Adjustment

-

860

Other

(11)

 147

Tax expense

 5,929

 7,531

 

 

 

 

As of December 31, 2019, the Company has US$ 786,000 of foreign loss carryforwards with an indefinite carryforward life.  Management assesses the recoverability of our deferred tax assets as of the end of each quarter, weighing all positive and negative evidence, and are required to establish and maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.  As of December 31, 2019, management has determined that a valuation allowance is currently needed against the Company's net operating loss carryforward deferred tax assets.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  The Company has open years for the tax year 2013 and forward.  The Company has open years related to United Kingdom filings for the tax year 2018, and open years related to Italian filings for tax years 2014 forward. 

 

The Company adopted the accounting standard for uncertain tax positions, ASC 740-10, and as required by the standard, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.  For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management's belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.

Unrecognized tax benefits - January 1, 2018

  958

Increases from positions taken during prior periods

  - 

Increases from positions taken during current period

  - 

Settled positions

  - 

Lapse of statute of limitations

  - 

Unrecognized tax benefits - December 31, 2018

  958

 

 

 

Unrecognized tax benefits - January 1, 2019

958

Increases from positions taken during prior periods

  - 

Increases from positions taken during current period

  - 

Settled positions

  - 

Lapse of statute of limitations

  -   

Unrecognized tax benefits - December 31, 2019

  958

 

The amount of unrecognized tax benefits as of December 31, 2019, if recognized, would favorably affect the Company's effective tax rate.  These unrecognized tax benefits are classified as "Other Long-Term Liabilities" in the Company's Consolidated Balance Sheet as the Company does not intend to make significant payments in the next twelve months.  The interest and penalties related to the unrecognized tax benefits is US$ 108,000 and US$ 263,000 as of December 31, 2019 and 2018, respectively.  Interest and penalties related to unrecognized tax benefits are included in provision for income tax expense.

 

14.  Revenues by geographic region

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

 

2019

2018

 

US$ 000

US$ 000

United States and U.S. possessions

65,534

64,661

Rest of World

23,772

29,340

Total

89,306

94,001

 

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$ 760,000 and US$ 489,000 for the years ended December 31, 2019 and 2018, respectively.  The income tax effect recognized for stock based compensation was US$ 0.1m and US$ 0.1m, respectively, for the years ended December 31, 2019 and 2018. 

 

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 2019 and 2018.  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, 2018

17,140

2.13

61,195

Granted

-

-

-

-

Exercised

 (17,140)

 1.13

 (61,195)

Forfeited

-

-

-

-

Outstanding at December 31, 2018

-

-

-

Exercisable at December 31, 2018

-

-

-

-

 

 

Options

 

Stock options

Weighted-average exercise price

Weighted average remaining contractual term (years)

Aggregate intrinsic value

Outstanding at January 1, 2019

-

-

-

-

Granted

-

-

-

-

Exercised

-

-

-

-

Forfeited

-

-

-

-

Outstanding at December 31, 2019

-

-

-

-

Exercisable at December 31, 2019

-

-

-

-

 

No options were exercised in 2019, and options exercised in 2018 were settled for cash of US$ 0.1m.  As of December 31, 2019 and 2018, 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 2019 and 2018 is presented below:

 

 

Shares

Grant date fair market value US$

Outstanding at January 1, 2018

 386,972

 963,505

Granted

 200,971

 1,062,130

Vested or settled for cash

 (117,316)

 (230,371)

Forfeited

 (30,151)

 (129,878)

Outstanding at December 31, 2018

 440,476

 1,665,386

Outstanding at January 1, 2019

 440,476

 1,665,386

Granted

197,135

 994,392

Vested and settled for cash

 (148,581)

 (332,194)

Forfeited

 (2,940)

 (15,000)

Outstanding at December 31, 2019

486,090

2,312,584

 

RSUs settled for cash were US$ 0.6m in 2019 and US$ 0.5m in 2018.

 

As of December 31, 2019, there was US$ 1,130,000 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 1.41 years. 

 

16.  Employee compensation

The Board approved management bonuses and profit-sharing payments totaling US$ 0.8m to be paid in December 2019 and early 2020 based upon the Company meeting certain profitability targets. 

 

Equity Bonus Plan

The Company has an Equity Bonus Plan, under which eligible senior managers may choose to receive a percentage of their annual performance bonus in shares of common stock.  In March 2019, the Company issued 39,373 shares of common stock, valued at US$ 201,000 at the time of grant. In March 2018, the Company issued 34,157 shares of common stock, valued at US$ 180,000 at the time of grant.

 

 

 

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 2019 dividend of 13.0 US cents per share that will be payable on April 30, 2020 to shareholders on the register at April 14, 2020.  Together with the interim dividend paid in October 2019 of 5.75 US cents per share, this represents a full year regular dividend to shareholders of 18.75 US cents per share.  In addition, due to the strength of the Company's cash position at the end of 2019, 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 7.7 US cents per share that will be paid together with the final 2019 dividend on April 30, 2020 to shareholders on the register at April 14, 2020.  The combined dividend payment on April 30, 2020 will total 20.7 US cents per share, representing a total dividend payment of US$ 11.7m.

 

All future dividends, including both ordinary and supplemental, now have the option of being paid in two currencies, GBP and USD.  In addition, there is also the option of being paid by Check or through Crest for either currency and additionally via BACS for GBP payments.  If no election is made, dividends will be paid in USD and via Check. If shareholders wish to change their current currency or payment methods, forms are available through Computershare Investor Services PLC at https://www-uk.computershare.com/investor/formscatalogue.asp 

 

Distribution Amount:

$0.207 cents per Share

Ex-dividend Date:

09 April 2020

Dividend Record Date:

14 April 2020

Final day for Currency Election:

15 April 2020

Payment Date:

30 April 2020

 

Further, any participant holding the Security on behalf of beneficial owners resident in a treaty country with the United States of America can facilitate claims for tax relief at source for its underlying beneficial owners.  In order to ensure that the appropriate rate of US Withholding Tax is applied correctly, completed documentation must be provided to the Depositary, Computershare Investor Services PLC.

 

Additional information on currency election and tax withholding can be found at: https://investors.somero.com/aim-rule-26.  Shareholders can also contact Computershare Investor Services PLC by telephone at +44 (0370) 702 0000 or email via [email protected].

 

Equity Bonus Plan

In February 2020, the Board approved the 2019 Equity Bonus Plan, under which eligible senior managers can elect to receive up to 50% of their 2019 annual performance bonus in shares of common stock.  The Company expects to issue shares for awards under the 2019 Equity Bonus Plan in 2020.

 

Share Buyback

In February 2020, the Board approved a share buyback program, pursuant to which, the Board intends to carry out an on market buyback of such number of its listed shares of common stock as are equal to US$ 1,000,000.  The purpose of the program is to mitigate future dilution resulting from share issuances under the Company's equity award programs.  The Company estimates that the program will be fulfilled by the end of 2020. 

 

Adoption of QCA

The Board has approved the adoption of the Quoted Companies Alliance Corporate Governance Code (the "QCA Code") in substitution for the UK Corporate Governance Code 2018.  The Board intends that the adoption of the QCA Code shall be effective from 15 April 2020, in conjunction with the release of its annual report. The Board considers the adoption of the QCA Code appropriate for companies of similar sizes to Somero and for companies who are listed on AIM and believes that its adoption is for the benefit of the Company and its shareholders.

 

Annual General Meeting

The Annual General Meeting of Stockholders (the "AGM") of the Company will be held at 14530 Global Parkway, Fort Myers, FL 33913 USA on June 9, 2020 at 9:00 am local time.  The notice of the AGM shall be released with the annual report and shall include instructions for remote participation.  Stockholders of record at the close of business on April 13, 2020 will be entitled to receive notice of, and vote at, the AGM.

 

 


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