RNS Number : 7118R
Somero Enterprises Inc.
10 March 2021
March 10, 2021
Somero Enterprises, Inc.
("Somero" or "the Company")
Final Results
Healthy North American market drives strong finish to 2020
Somero Enterprises, Inc. reports its annual results for the twelve months ended 31 December 2020.
Financial Highlights
· Leveraged flexible cost structure when combined with strong H2 trading delivered healthy profits and stable margins
· Global H2 2020 sales were US$ 53.3m (H1 2020: US$ 35.3m), with record US H2 sales
· Adjusted EBITDA margin of 29% (2019: 32%)
· Adjusted net income in the year of US$ 18.9m (2019: US$ 21.1m)
· Operating cash flows grew to US$ 30.6m in 2020 (2019: US$18.9m) driven by effective working capital management
· Reductions to accounts receivable and inventory provided a significant one-time benefit of US$ 6.7m to 2020 operating cash flow
· Year-end cash of US$ 35.4m (2019: US$ 23.8m) reflects the highlest level in Somero's history
· Disciplined return of cash to shareholders
· Paid US$ 13.9m in dividends to shareholders in 2020 (2019: US$ 17.4m)
· Completed US$ 1.0m share buy-back program authorized in August 2020
Diluted adjusted net income per share(1), (3), (4)
0.33
0.37
Other data
Adjusted EBITDA (1), (2), (4)
26,106
28,714
Adjusted net income (1), (3), (4)
18,873
21,126
Depreciation expense
965
977
Amortization of intangibles
153
145
Capital expenditures
3,734
3,015
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 gain(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,
2020
2019
US$ 000
US$ 000
Adjusted EBITDA reconciliation
Net income
18,773
21,111
Tax provision
5,839
5,929
Interest expense
45
42
Interest income
(244)
(241)
Foreign exchange impact
(47)
71
Other
(511)
(310)
Depreciation
965
977
Amortization
153
145
Stock-based compensation
911
760
Non-cash lease expense
222
230
Adjusted EBITDA
26,106
28,714
Adjusted net income
Net income
18,773
21,111
Amortization
153
145
Tax impact of stock option & RSU settlements
(53)
(130)
Adjusted net income
18,873
21,126
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 gain(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 1% to US$ 88.6m (2019: US$ 89.3m). Company revenues consist primarily of sales from Boomed screed products, which include the S-22E, S-22EZ, S-15R, S-10A and SRS-4 Laser Screed machines, sales from Ride-on screed products, which are drive through the concrete machines that include the 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 and Other revenues which consist primarily of revenue from sales of parts and accessories, sales of other equipment, including the Broom + CureTM, service, training and shipping charges.
Boomed screed sales declined to US$ 31.7m (2019: US$ 38.0m) due to a change in the product mix of boom screeds sold, while Ride-on screed and Remanufactured sales increased to US$ 17.6m (2019: US$ 16.9m) and to US$ 5.8m (2019: US$ 4.4m), respectively. Further contributions came from Somero Line Dragon, formerly known as SP-16 Concrete Hose Line-Pulling and Placing Systems, sales US$ 4.7m (2019: US$ 2.8m) and the 3D Profiler System US$ 7.5m (2019: US$ 6.2m) due to higher volume. Sales of the SkyScreed remained consistent contributing US$ 1.0m, and Other revenues increased to US$ 20.3m (2019: US$ 20.0m) primarily due to sales of the Somero Broom + CureTM, partly offset by decreased parts revenue.
Revenue breakdown by geography
North America
EMEA(1)
ROW(2)
Total US$ in millions
US$ in millions
US$ in millions
US$ in millions
2020
2019
2020
2019
2020
2019
2020
2019
Net sales
% of Net sales
Net sales
% of Net sales
Boomed screeds (3)
24.3
27.4
5.2
4.9
2.2
5.7
31.7
35.8%
38.0
42.6%
Ride-on screeds (4)
13.8
12.7
2.0
2.3
1.8
1.9
17.6
19.7%
16.9
18.9%
Remanufactured machines
5.1
3.0
0.2
0.7
0.5
0.7
5.8
6.5%
4.4
4.9%
3-D Profiler System
6.9
5.8
0.1
0.2
0.5
0.2
7.5
8.5%
6.2
6.9%
Somero Line Dragon (5)
4.3
2.2
0.3
0.5
0.1
0.1
4.7
5.3%
2.8
3.2%
SkyScreed
1.0
1.0
-
-
-
-
1.0
1.1%
1.0
1.1%
Other (6)
15.3
13.4
2.1
2.1
2.9
4.5
20.3
23.1%
20.0
22.4%
Total
70.7
65.5
9.9
10.7
8.0
13.1
88.6
100.0%
89.3
100.0%
Notes:
1. EMEA includes the Europe, Middle East, Scandinavia and Russia.
2. ROW includes the China, Australia, Latin America, Korea, India and Southeast Asia
3. Boomed Screeds include the S-22E, S-22EZ, S-15R, S-10A and SRS-4.
4. Ride-on Screeds include the 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 Somero Broom + CureTM, STS-11M Topping Spreader, Copperhead, and Mini Screed C.
Units by product line
2020
2019
Boomed screeds
125
128
Ride-on screeds
157
159
Remanufactured machines
37
27
3D Profiler System
67
56
Somero Line Dragon®(1)
132
87
SkyScreed®
3
4
Other (2)
46
34
Total
567
495
Notes:
1. Includes sales of the Somero Line Dragon and its predecessor the SP-16 Concrete Hose Line-Pulling and Placing Systems.
2. Other includes equipment such as the Somero Broom + CureTM, STS-11M Topping Spreader, Copperhead, and Mini Screed C.
Sales to customers located in North America contributed 80% of total revenue (2019: 73%), sales to customers in EMEA (Europe, Middle East, Scandinavia, and Russia) contributed 11% (2019: 12%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, India and China) contributed 9% (2019: 15%).
Sales in North America were US$ 70.7m (2019: US$ 65.5m) up 8% driven mostly by sales from new products, including the SRS-4 and Somero Broom+ Cure, coupled with volume growth of Remanufactured machines and price increases across most of the product lines, partly offset by a decrease in volume of legacy Boomed screeds. Sales in EMEA were US$ 9.9m (2019: US$ 10.7m), which is a decrease of 7% primarily due to a decrease in legacy Boom screeds, partly offset by incremental sales of the SRS-4. Sales in ROW were US$ 8.0m (2019: US$ 13.1m), representing a 39% decline driven primarily by lower sales across most of the product lines.
US$ in millions
Regional sales
2020
2019
North America
70.7
65.5
Europe
8.6
10.0
China
3.9
5.6
Middle East
0.4
0.7
Latin America
1.1
2.0
Rest of World (1)
3.9
5.5
Total
88.6
89.3
Notes:
1. Includes Australia, India, Southeast Asia, Korea and Russia.
Gross profit
Gross profit declined to US$ 48.8m (2019: US$ 50.7m), with gross margins declining to 55% (2019: US$ 57%) primarily due to unfavorable product mix mostly driven by the decrease in sales of Boomed screeds, offset by an increase in sales of Remanufactured machines, which generate lower gross margin.
Operating expenses
Operating expenses increased by US$ 0.9m to US$ 25.0m (2019: US$ 24.1m). This increase is due to higher general and administrative costs, offset by lower selling, marketing and customer support expense.
Debt
As of December 31, 2020, the Company had no outstanding debt. The Company renewed its US$ 10.0m secured revolving line of credit extending the term to mature in September 2024 and no other material changes.
Other income (expense)
Other income (expense) was US$ 0.8m of other income, compared to US$ 0.4m in 2019, primarily due to a higher unrealized foreign currency exchange gains.
Provision for income taxes
The provision for income taxes was US$ 5.8m in 2020 compared to US$ 5.9m in 2019. Overall, Somero's effective tax rate changed to 23.7% in 2020 from 21.9% in 2019.
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 restricted stock units.
Earnings per common share has been computed based on the following:
Year ended December 31,
2020 US$ 000
2019 US$ 000
Income available to stockholders
18,773
21,111
Basic weighted shares outstanding
56,336,687
56,330,400
Net dilutive effect of stock options and restricted stock units
636,909
489,218
Diluted weighted average shares outstanding
56,973,596
56,819,618
Per Share
Per Share
US$
US$
Basic earnings per share
0.33
0. 37
Diluted earnings per share
0.33
0. 37
Basic adjusted net income per share
0.34
0. 38
Diluted adjusted net income per share
0.33
0. 37
Consolidated Balance Sheets
As of December 31, 2020 and 2019
As of December 31,
2020
2019
US$ 000
US$ 000
Assets
Current assets:
Cash and cash equivalents
35,388
23,757
Accounts receivable - net
6,411
11,979
Inventories- net
11,127
12,289
Prepaid expenses and other assets
1,676
1,291
Total current assets
54,602
49,316
Accounts receivable, non-current - net
736
904
Property, plant, and equipment - net
16,509
13,714
Financing lease right-of-use assets-net
485
557
Operating lease right-of-use assets-net
1,295
1,213
Intangible assets - net
1,545
1,698
Goodwill
3,294
3,303
Deferred tax asset
80
564
Other assets
303
261
Total assets
78,849
71,530
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
4,380
2,227
Accrued expenses
6,702
5,960
Financing lease liability - current
162
148
Operating lease liability - current
204
247
Income tax payable
888
1,078
Total current liabilities
12,336
9,660
Financing lease liability - long-term
228
262
Operating lease liability - long-term
1,133
982
Other liabilities
1,622
1,587
Total liabilities
15,319
12,491
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 56,124,409 and 56,348,068 shares outstanding at December 31, 2020 and 2019, respectively
26
26
Less: treasury stock, 301,189 shares as of December 31, 2020 and 77,530 shares as of December 31, 2019 at cost
(1,040)
(191)
Additional paid in capital
17,598
17,001
Retained earnings
49,771
44,923
Other comprehensive loss
(2,825)
(2,720)
Total stockholders' equity
63,530
59,039
Total liabilities and stockholders' equity
78,849
71,530
See Notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2020 and 2019
Year ended December 31,
2020
2019
US$ 000
US$ 000
except per share data
except per share data
Revenue
88,572
89,306
Cost of sales
39,758
38,602
Gross profit
48,814
50,704
Operating expenses
Sales, marketing and customer support
10,312
11,108
Engineering and product development
1,826
1,796
General and administrative
12,821
11,198
Total operating expenses
24,959
24,102
Operating income
23,855
26,602
Other income (expense)
Interest expense
(45)
(42)
Interest income
244
241
Foreign exchange impact
47
(71)
Other
511
310
Income before income taxes
24,612
27,040
Provision for income taxes
5,839
5,929
Net income
18,773
21,111
Other comprehensive income
Cumulative translation adjustment
(105)
104
Comprehensive income
18,668
21,215
Earnings per common share
Earnings per share - basic
0.33
0.37
Earnings per share - diluted
0.33
0.37
Weighted average number of common shares outstanding
Basic
56,336,687
56,330,400
Diluted
56,973,596
56,819,618
See Notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2020 and 2019
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, 2019
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
Cumulative translation adjustment
-
-
-
-
-
-
(105)
(105)
Net income
-
-
-
-
-
18,773
-
18,773
Stock-based compensation
-
-
911
-
-
-
-
911
Dividend
-
-
-
-
-
(13,925)
-
(13,925)
Treasury stock
-
-
849
(44,354)
(849)
-
-
0
RSUs settled for cash
-
-
(223)
-
-
-
-
(223)
Share buy-back
-
-
(951)
268,013
-
-
-
(951)
Investment in Subsidiary
-
-
11
-
-
-
-
11
Balance - December 31, 2020
56,425,598
26
17,598
301,189
(1,040)
49,771
(2,825)
63,530
See Notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2020 and 2019
Year ended December 31,
2020 US$ 000
2019 US$ 000
Cash flows from operating activities:
Net income
18,773
21,111
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes
484
286
Depreciation and amortization
1,118
1,122
Non-cash lease expense
222
230
Bad debt
215
188
Stock-based compensation
911
760
Gain on non-cash payment for intangible asset
-
(171)
Gain/Loss on disposal of property and equipment
(98)
16
Working capital changes:
Accounts receivable
5,521
(2,494)
Inventories
1,162
(1,374)
Prepaid expenses and other assets
(385)
210
Other assets
(42)
(35)
Accounts payable, accrued expenses and other liabilities
2,945
936
Income taxes payable
(190)
(1,934)
Net cash provided by operating activities
30,636
18,851
Cash flows from investing activities:
Proceeds from sale of property and equipment
80
-
Property and equipment purchases
(3,734)
(3,015)
Payments for intangible assets
-
(138)
Business acquisition, net of cash acquired
-
(2,073)
Net cash used in investing activities
(3,654)
(5,226)
Cash flows from financing activities:
Payment of dividend
(13,925)
(17,443)
RSUs settled for cash
(223)
(593)
Stock buy-back
(951)
-
Investment in subsidiary
11
-
Payments under financing leases
(158)
(169)
Net cash used in financing activities
(15,246)
(18,205)
Effect of exchange rates on cash and cash equivalents
(105)
104
Net increase (decrease) in cash and cash equivalents
11,631
(4,476)
Cash and cash equivalents:
Beginning of year
23,757
28,233
End of year
35,388
23,757
See Notes to consolidated financial statements.
Notes to the Consolidated Financial Statements
As of December 31, 2020 and 2019
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; New Delhi, India; and Melbourne, Australia.
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 using the accrual basis of accounting.
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, 2020 and 2019, the allowance for doubtful accounts was approximately US$ 1,187,000 and US$ 961,000, respectively. Bad debt expense was US$ 215,000 and US$ 188,000 in 2020 and 2019, 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, 2020 and 2019, the provision for obsolete and slow-moving inventory was US$ 361,000 and US$ 346,000, 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, 2020 nor December 31, 2019.
Revenue recognition
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.
During the year ended December 31, 2020 and 2019, there was US$ 633,000 and US$ 652,000, respectively, of revenue recognized during the period from liabilities related to extended service agreements (deferred contract revenue).
As of December 31, 2020 and 2019, there are US$ 3,009,000 and US$ 596,000, respectively, in customer deposit liabilities for advance payments received during the period for contracts expected the following period. As of the year ended December 31, 2020 and 2019, 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, 2019
(613)
Warranty charges
416
Accruals
(734)
Balance, December 31, 2019
(931)
Balance, January 1, 2020
(931)
Warranty charges
248
Accruals
(491)
Balance, December 31, 2020
(1,174)
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$ 911,000 and US$ 760,000 for the years ended December 31, 2020 and 2019, respectively. In addition, the Company settled US$ 223,000 and US$ 593,000 in restricted stock units for cash during the years ended December 31, 2020 and 2019, 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,
2020 US$ 000
2019 US$ 000
Income available to stockholders
18,773
21,111
Basic weighted shares outstanding
56,336,687
56,330,400
Net dilutive effect of stock options and restricted stock units
636,909
489,218
Diluted weighted average shares outstanding
56,973,596
56,819,618
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, 2019
Asset: Goodwill
3,303
3,303
Year ended December 31, 2020
Asset: Goodwill
3,294
3,294
3. Inventories
Inventories consisted of the following:
Year ended December 31,
2020
2019
US $ 000
US $ 000
Raw material
5,543
4,267
Finished goods and work in process
2,933
3,154
Remanufactured
2,651
4,868
Total
11,127
12,289
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, 2020, 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, 2020 and 2019, and that the value of patents was not impaired as of December 31, 2020. The following table reflects other intangible assets:
Weighted average
Year ended December 31,
Amortization
2020
2019
Period
US$ 000
US$ 000
Capitalized cost
Patents
12 years
19,247
19,247
Intangible Assets
7,434
7,434
26,681
26,681
Accumulated amortization
Patents
12 years
18,626
18,578
Intangible Assets
6,510
6,405
25,136
24,983
Net carrying costs
Patents
12 years
621
669
Intangible Assets
924
1,029
1,545
1,698
Amortization expense associated with the intangible assets in each of the years ended December 31, 2020 and 2019 was approximately US$ 153,000 and US$ 145,000, respectively.
6. Property, plant, and equipment
Property, plant, and equipment consist of the following:
Year ended December 31,
2020
2019
US$ 000
US$ 000
Land
864
864
Building and improvements
15,278
13,149
Machinery and equipment
6,906
5,414
23,048
19,427
Less: accumulated depreciation and amortization
(6,539)
(5,713)
16,509
13,714
Depreciation expense for the years ended December 31, 2020 and 2019 was approximately US$ 965,000 and US$ 977,000, respectively.
7. Line of credit and note payable
In November 2020, the Company renewed its amended credit facility, which consists of a US$ 10.0m secured revolving line of credit, extending the maturity to September 2024. The interest rate on the revolving line of credit 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 line of credit in the years ended December 31, 2020 or in 2019.
Interest expense for the years ended December 31, 2020 and 2019 was approximately US$ 45,000 and US$ 42,000, 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$ 767,000 to the savings and retirement plan during 2020 and contributed US$ 690,000 during 2019.
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 12 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, 2020:
Operating lease cost
US$ 000 307
Finance lease cost:
Amortization of right-of-use assets
222
Interest on lease liabilities
19
Total finance lease cost
241
As of December 31, 2020, the weighted average discount rate for finance and operating leases was 4.7% and 3.9%, respectively, and the weighted average remaining lease term for finance and operating leases was 3.0 years and 10.0 years, respectively. Maturities of lease liabilities are as follows for the years ended:
Operating Leases
Finance Leases
US$ 000
US$ 000
2021
252
177
2022
199
133
2023
194
84
2024
163
21
2025
102
-
Thereafter
717
-
Total
1,627
415
Less imputed interest
(290)
(25)
Total 1,337 390
10. Supplemental cash flow and non-cash financing disclosures
Year ended December 31,
2020
2019
US$ 000
US$ 000
Cash paid for interest
45
41
Cash paid for taxes
5,491
6,315
Finance lease liabilities arising from obtaining right-of-use assets
(20)
245
Operating lease liabilities arising from obtaining right-of-use assets
108
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, 2020 and 2019, the Company had five customers which represented 32% and three customers which represented 22% of total accounts receivable, respectively.
12. Commitments and contingencies
The Company has entered into employment agreements with certain members of senior management. The terms of these 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,
2020 US$ 000
2019 US$ 000
Current Income Tax
Federal
4,320
4,431
State
824
823
Foreign
216
389
Total current income tax expense
5,360
5,643
Deferred tax expense
Federal
407
256
State
72
30
Foreign
-
-
Total deferred tax expense
479
286
Total tax provision
5,839
5,929
As of December 31, 2020 and 2019, the effects of temporary differences that give rise to the deferred tax assets are as follows:
Year ended December 31,
2020 US$ 000
2019 US$ 000
Deferred tax assets
Bad debt allowance
277
220
Inventory
128
288
Accrued expenses
303
378
UK intangibles
105
105
Stock compensation
382
279
Italy - NOL
196
189
Australia- NOL
36
Lease liability
41
-
Other
182
202
Total deferred tax assets
1,650
1,661
Deferred tax liabilities
Prepaid insurance
(130)
(109)
Fixed assets
(571)
(607)
Intangible assets
(590)
(191)
Right of use asset
(47)
-
Total deferred tax liabilities
(1,338)
(907)
Valuation allowance
(232)
(190)
Total net deferred tax asset
80
564
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,
2020 US$ 000
2019 US$ 000
Consolidated income before tax
24,612
27,040
Statutory rate
21%
21%
Statutory tax expense
5,169
5,678
State taxes
723
681
Foreign taxes
(33)
(48)
Permanent differences due to stock options and RSUs
34
(70)
Permanent differences due to other items
25
(11)
Foreign derived intangible income
(323)
(458)
Change in valuation allowance
42
60
Change in reserve
76
108
Other
126
(11)
Tax expense
5,839
5,929
As of December 31, 2020, the Company has US$ 936,000 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 is 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, 2020, 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, 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
Unrecognized tax benefits - January 1, 2020
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, 2020
958
The amount of unrecognized tax benefits as of December 31, 2020, 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 are US$ 76,000 and US$ 108,000 as of December 31, 2020 and 2019, respectively. Interest and penalties related to unrecognized tax benefits are included in the 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:
2020
2019
US$ 000
US$ 000
United States and U.S. possessions
70,683
65,534
Rest of World
17,889
23,772
Total
88,572
89,306
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$ 911,000 and US$ 760,000 for the years ended December 31, 2020 and 2019, respectively. The income tax effect recognized for stock-based compensation was US$ 0.05m and US$ 0.1m, respectively, for the years ended December 31, 2020 and 2019.
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 2020 and 2019 is presented below:
Shares
Grant date fair market value US$
Outstanding at January 1, 2019
440,476
1,665,386
Granted
197,135
994,392
Vested or settled for cash
(148,581)
(332,194)
Forfeited
(2,940)
(15,000)
Outstanding at December 31, 2019
486,090
2,312,584
Outstanding at January 1, 2020
486,090
2,312,584
Granted
326,960
924,737
Vested and settled for cash
(115,759)
(411,661)
Forfeited
(31,221)
(138,633)
Outstanding at December 31, 2020
666,070
2,687,027
RSUs settled for cash were US$ 0.2m in 2020 and US$ 0.6m in 2019.
As of December 31, 2020, there was US$ 1,111,000 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 1.5 years.
16. Employee compensation
The Board approved management bonuses and profit-sharing payments totaling US$ 1.6m, partly paid in December 2020 and the remainder to be paid in early 2021, based upon the Company meeting certain financial 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 2020, the Company issued 35,247 shares of common stock, valued at US$ 100,000 at the time of grant. In March 2019, the Company issued 39,373 shares of common stock, valued at US$ 201,000 at the time of grant.
17. Share buyback
In August 2020, the Board authorized a on market share buyback program for such number of its listed shares of common stock as are equal to US$ 1,000,000. The maximum price paid per Ordinary Share was no more than the higher of 105 percent of the average middle market closing price of an Ordinary Share for the five business days preceding the date of the share buyback, the price of the last independent trade and the highest current independent purchase bid. As of December 31, 2020, the Company purchased 268,013 shares of common stock for an aggregate value of $950,330. The Company estimates the program will be completed by the end of H1 2021.
18. Subsequent events
Dividend
In recognition of Somero's strong performance and the Board of Directors' confidence in the continued growth of the Company, the Board approved a dividend payout ratio of 50% of adjusted net income and is pleased to announce a final 2021 dividend of 12.81 US cents per share that will be payable on April 30, 2021 to shareholders on the register at April 9, 2021. Together with the interim dividend paid in October 2020 of 4.00 US cents per share, this represents a full year regular dividend to shareholders of 16.81 US cents per share. In addition, due to the strength of the Company's cash position at the end of 2020, and upon the review of anticipated future cash requirements for the business, the Board of Directors' has approved a supplemental dividend of 18.10 US cents per share that will be paid together with the final 2020 dividend on April 30, 2021 to shareholders on the register at April 9, 2021. The combined dividend payment on April 30, 2021 will total 30.91 US cents per share, representing a total dividend payment of US$ 17.3m.
Distribution amount:
$0.3091 cents per share
Ex-dividend date:
8 April 2021
Dividend record date:
9 April 2021
Final day for currency election:
23 April 2021
Payment date:
30 April 2021
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.
All dividends, including both ordinary and supplemental, have the option of being paid in either GBP or USD. Payments in USD can be paid by Check or through Crest. Payments in GBP can be paid via Check, Crest and BACS. The default option if no election is made will be for a USD payment via check. Should shareholders wish to change their current currency or payment methods, forms are available through Computhershare Investor Services PLC at https://www-uk.computershare.com/investor/formscatalogue.asp. If shares are held as Depositary Interests through a broker or nominee, the holding company must be contacted and advised of the payment preferences. Such requests are subject to the terms and conditions of the broker or nominee.
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 webcorres@computershare.co.uk.
Equity bonus plan
In January 2021, the Board approved the 2020 Equity Bonus Plan, under which eligible senior managers can elect to receive up to 100% of their 2020 annual performance bonus in shares of common stock. The Company expects to issue shares for awards under the 2020 Equity Bonus Plan in 2021.
Share buyback
In February 2021, 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 2021.
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 15, 2021 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 19, 2021 will be entitled to receive notice of, and vote at, the AGM.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.
END
FR UKRKRAUUORAR
