REG - Somero Enterprises - Interim Results
Press Announcement
For immediate release
05 September 2018
Somero® Enterprises, Inc.
("Somero" or "the Company" or "the Group")
Interim Results for the six months ended June 30, 2018
Significant momentum continues, underpinning another period of growth
Somero Enterprises, Inc. is pleased to report its interim results for the six months ended June 30, 2018, which are in line with management expectations.
Financial Highlights
· Revenue growth led by robust trading in the US and Europe
· Efficient conversion of revenue growth to profit
· Strong operating cash flow, increased return of cash to shareholders
· US$ 0.055 per share interim dividend declared, 100% increase compared to 2017
H1 2018
US$
H1 2017
US$
% Increase
Revenue
$ 45.0m
$ 42.4m
6%
Adjusted EBITDA(1,2)
$ 14.5m
$ 13.2m
10%
Adjusted EBITDA margin(1,2)
32%
31%
100 bps
Profits before tax
$ 13.6m
$ 12.0m
13%
Adjusted net income(1,3)
$ 10.4m
$ 8.7m
20%
Diluted adjusted net income per share(1,3)
$ 0.18
$ 0.15
20%
Cash flow from operations
$ 12.3m
$ 9.4m
31%
Net cash position (4)
$ 20.7m
$ 18.3m
13%
Interim dividend per share
$ 0.055
$ 0.0275
100%
Business Highlights
· Balanced growth across geographic footprint and product categories:
· Four of six territories grew compared to three in H1 2017 led by strong contribution from Europe and North America, which together represent 83% of total revenues
· Sales in Europe and North America increased 24% and 7%, respectively, vs. H1 2017
· Ride-on screed sales grew 21% vs. H1 2017
· Boomed screed sales grew 13% vs. H1 2017 reflecting the positive impact of the S-22EZ introduced in late 2017
· Investments to support long-term growth:
· Continued progress on developing new products targeting the structural high-rise market segment
· Expanded long-term new product opportunity pipeline driven by focused efforts of product development team
Notes:
1. The Company uses non-US GAAP financial measures in order 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 gain/(loss), other expense, depreciation, amortization, and stock-based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and restricted stock units ("RSU") settlements and other special items.
4. Net cash is defined as cash and cash equivalents less borrowings under bank obligations.
Jack Cooney President and Chief Executive Officer of Somero said:
"Somero delivered a strong performance in H1 2018 with balanced growth across our geographic footprint and product categories. Our business continues to be operationally efficient with 6% sales growth translating into double digit increases in earnings and cash flow. Most importantly, I am pleased with the progress we are making on new product development which is expected to drive the long-term growth of the business. Based on our H1 2018 performance, the momentum of the business carrying over into H2, and healthy market conditions across our footprint, the Board expects Somero to deliver another successful year of growth in line with current market expectations."
For further information, please contact:
Enquiries:
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 (ECM)
Alma PR (Financial PR Advisor) somero@almapr.co.uk
Rebecca Sanders-Hewett +44 (0) 2038 659 667
Susie Hudson
Sam Modlin
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 ("MAR").
Notes to Editors:
Somero Enterprises provides industry-leading concrete-levelling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.
Somero pioneered the Laser Screed market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.
For more information, visit www.somero.com
Chairman's and Chief Executive Officer's Statement
Overview
Somero has delivered another strong set of results in the first half of 2018. Total revenues grew 6% over H1 2017 with four of the Company's six markets reporting increased sales compared to H1 2017. Europe and North America, the Company's two largest markets, led the way with strong sales growth of 24% and 7%, respectively, while the Middle East and our Rest of World territories also provided meaningful contributions to growth in the period. In China, while H1 2018 trading ended slightly down from H1 2017, Somero remains encouraged by the activity level in the market and is pleased to report that the Company has filled its China National Sales Director role, a key addition to the team which should help drive revenue in the region. In addition, as described in the trading update (announced on July 17, 2018), sales were down in H1 2018 in Latin America, compared to H1 2017, due in part to the timing of certain customer projects. The Company expects improvement in H2, as future activity levels are anticipated to be healthy in this territory.
On a product basis, sales in three of the five product categories increased compared to H1 2017 with sales of Boomed screeds, Ride-on screeds and Other revenues increasing 13%, 21% and 4%, respectively. The top line growth converted efficiently to increased profit through effective cost management and gross margin improvement. Gross margins increased to 57.5% in H1 2018 from 56.8% in H1 2017 while operating expenses decreased by US$ 0.1m due to decreased amortization costs of US$ 0.8m offset by increases in selling, marketing, customer support, engineering and product development costs. Adjusted EBITDA grew to US$ 14.5m, representing a 32% margin, compared to US$ 13.2m in H1 2017, or a 31% margin. The Company's financial position remains very strong, supported by cash flows from operations that increased to US$ 12.3m, 31% growth compared to H1 2017. Net cash increased to US$ 20.7m at June 30, 2018 from US$ 19.0m at December 31, 2017 despite returning US$ 9.2m in cash to shareholders with the dividend paid in April 2018. On top of the strong H1 2018 financial performance, Somero also continued to make good progress with the new product development that is key to driving the long-term growth and value of the business.
Based on the strong performance in H1 2018 and the Board's confidence in the outlook for the business, we are pleased to report that the Board has approved an interim dividend for the six months ended June 30, 2018 of 5.50 US cents per share representing a 100% increase from the H1 2017 interim dividend. The interim dividend will be payable on October 17, 2018 to shareholders on the register at September 28, 2018. Following an internal review, the Board has decided to rebalance its dividend in order that a greater portion of the full year dividend shall be paid as an interim dividend meaning a one-off rebasing of the interim dividend this year.
Market Review
In North America during the first half of 2018, non-residential construction activity remained strong and our customers reported project backlogs that extend well into 2019, underpinning our growth prospects. In H1 2018, the North American market reported sales of US$ 30.5m, a 7% increase over H1 2017 as sales of Boomed screeds, Ride-on screeds and Other revenues all increased compared to the prior year. With robust market conditions and customer confidence in the outlook for non-residential construction in the US, we expect solid H2 2018 trading in this key territory.
Our European market continues to perform well with sales increasing to US$ 6.7m, up 24% from H1 2017. Broadly across the European continent non-residential construction market conditions remained healthy and activity levels high, highlighted by the sale of equipment in fourteen countries across Europe in the half. The United Kingdom, Germany, and France were the most significant contributors to growth in H1 2018.
In China, H1 2018 sales were US$ 2.5m, down from US$ 2.7m in H1 2017. Despite the flat performance, we are encouraged by the positive impact of marketing and demand generation activities we initiated to begin the year. In addition, during the period the Company hired a China National Sales Director based in Shanghai.
The Middle East also contributed to growth in H1 2018 with sales increasing to US$ 1.2m, up from US$ 0.8m in H1 2017, while our Rest of World territories reported sales of US$ 3.6m, an increase from US$ 3.4m in H1 2017. On a country basis, the Middle East reported sales in three countries, the United Arab Emirates, Egypt, and Turkey while in the Rest of World territories performance was led by meaningful contributions from Australia and India. In Latin America, while sales decreased to US$ 0.5m from US$ 1.7m in H1 2017, we look for meaningful improvement in this territory as we have a solid pipeline of opportunities arising from anticipated H2 2018 customer projects and as overall activity in the territory remains healthy.
New Product Development
In H1 2018, Somero's revenue growth was in part driven by the launch of the S-22EZ, introduced in late 2017, that positively impacted our Boomed screed sales which grew by 13%. In addition, sales of the SP-16 Concrete Line Pulling and Placing System, a new product launched in early 2017, continued to grow reaching US$ 0.7m in sales during the first half of the year. We are pleased with the traction from these new products. We are also pleased with the progress that we have made on developing new products including the testing of prototype machines that target the high-rise structural market segment as well as in identifying new product ideas to add to our long-term pipeline. Through our development and prototype testing processes we have deepened our understanding of the high-rise structural market and view this development effort as a key element to support the Company's growth in the coming years.
Expansion Update
We are continuing to evaluate plans for expanding our Fort Myers and Houghton facilities to accommodate future growth. Previously we reported that we expected the project cost associated with expanding our Fort Myers headquarters would amount to US$ 1.3m and this continues to be our expectation for the Fort Myers project which has yet to commence. In addition, with our core business growth and the introduction of new products in the coming years, we anticipate the need to expand our Houghton facility. However, before committing capital expenditures to expand either our Fort Myers or Houghton facilities, we will complete a full assessment of the impact of planned growth from our core business and new products for 2019 and beyond. We expect to complete this assessment by the end of H1 2019 and will update shareholders further thereafter.
People
On behalf of the Board, we would like to thank all our global employees for their continued dedication and passion for our customers' success. Our employees have risen to meet all the challenges associated with a growing business and have once again delivered strong results and returns for our shareholders. The Board and management team remain focused on providing our employees opportunities to grow with the Company by maintaining a rewarding and challenging working environment that is full of opportunity.
Current Trading and Outlook
The positive trading momentum experienced in North America has carried over into H2 2018 reflecting robust non-residential construction markets and a high-level of confidence by our customer base. We are pleased with these strong market conditions as well as in the broad customer interest across our product lines highlighting a wide-range of project activity in the market. Positive market conditions and healthy customer project backlogs give us confidence in delivering a solid performance in North America for the remainder of 2018.
The momentum of trading activity in Europe is expected to carry over in H2 2018 and we expect sales in the territory will be broad-based, with a variety of countries contributing meaningfully to sales. We expect the market will continue to be driven by demand for replacement equipment and technology upgrades, as well as interest in new products.
In China, we are aiming to gain increased traction in H2 2018 with the sales and marketing initiatives launched at the beginning of the year starting to deliver returns, in addition to positive contributions to market performance over the medium-term from the recently added local leadership. We continue to view China as a significant long-term opportunity for the business and one which we are committed to pursuing.
In the Middle East, we expect to see a continuation of the H1 2018 performance for the rest of the year while in Latin America, we anticipate H2 2018 will improve due to the meaningful opportunities and solid level of activity across a variety of countries in this territory. In our Rest of World territories, we also anticipate that the solid H1 2018 performance will continue through the remainder of the year and are particularly pleased with the traction we are gaining in the India market.
Overall, we see strong activity across our entire geographic footprint and strong interest across our product categories in H2 2018. With the broad-based opportunity for growth and the performance of the Company in the first half of 2018, the Board remains confident in delivering another year of profitable growth for our shareholders in line with current market expectations.
Larry Horsch
Non-Executive Chairman
Jack Cooney
President and Chief Executive Officer
September 5, 2018
Somero Enterprises Inc.
Business and Financial Review
Summary of financial results
For the six months ended June 30
* unaudited
2018
2017
US$ 000's
US$ 000's
Except per share data
Except per share data
Revenue
44,974
42,436
Cost of sales
19,114
18,323
Gross profit
25,860
24,113
Operating expenses
Selling, marketing and customer support
5,770
5,354
Engineering and product development
928
749
General and administrative
5,714
6,400
Total operating expenses
12,412
12,503
Operating income
13,448
11,610
Other income (expense)
Interest expense
(18)
(55)
Interest income
76
128
Foreign exchange gain (loss)
(7)
295
Other
127
26
Income before income taxes
13,626
12,004
Provision for income taxes
3,048
2,426
Net income
10,578
9,578
Per Share
Per Share
US$
US$
Basic earnings per share
0.19
0.17
Diluted earnings per share
0.19
0.17
Basic adjusted net income per share (1,3,4)
0.19
0.16
Diluted adjusted net income per share (1,3,4)
0.18
0.15
Other data
Adjusted EBITDA (1,2,4)
14,512
13,212
Adjusted net income (1,3,4)
10,447
8,745
Depreciation expense
566
579
Amortization of intangibles
-
772
Capital expenditures
568
1,721
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 its net income excluding tax provision, interest expense, interest income, foreign exchange gain (loss), other expense, depreciation, amortization, and stock-based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.
4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.
Somero Enterprises, Inc.
Net income to adjusted EBITDA reconciliation and Adjusted net income reconciliation
* unaudited
Six months ended June 30
2018
US$ 000's
2017
US$ 000's
Adjusted EBITDA reconciliation
Net income
10,578
9,578
Tax provision
3,048
2,426
Interest expense
18
55
Interest income
(76)
(128)
Foreign exchange (gain) loss
7
(295)
Other Expense
(127)
(26)
Depreciation
566
579
Amortization
-
772
Stock based compensation
498
251
Adjusted EBITDA(1,2,4)
14,512
13,212
Adjusted net income reconciliation
Net income
10,578
9,578
Amortization
-
772
Tax impact of stock option & RSU settlements
(131)
(1,605)
Adjusted net income reconciliation (1,3,4)
10,447
8,745
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 its net income plus tax provision, interest expense, interest income, foreign exchange gain (loss), other expense, depreciation, amortization, and stock-based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.
4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.
Revenues
The Company's consolidated revenues increased by 6% to US$ 45.0--m (H1 2017: US$ 42.4m). The Company's revenues consist primarily of sales from Boomed Screed products, which include the S22-EZ, S-15R and S-10A Laser Screed machines, sales from Ride-on Screed products, which are drive through the concrete machines that include the S-840, S-485, S-940 and S-158C Laser Screed machines, remanufactured machines sales, 3-D Profiler Systems, and Other revenues which consist of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges. The overall increase for the period was driven by sales of Boomed screeds, Ride-on screeds and Other revenues.
Boomed Screed sales increased to US$ 18.5--m (H1 2017: US$ 16.4m) as unit volume increased to 60 units (H1 2017: 55 units), Ride-on screed sales increased to US$ 11.4m (H1 2017: US$ 9.4m) primarily due to an increase in volume to 118 units (H1 2017: 97), remanufactured machine sales decreased to US$ 2.1m (H1 2017: US$ 3.0m) as unit volume decreased to 13 units (H1 2017: 21), 3-D Profiler System sales decreased to US$ 2.9m (H1 2017: US$ 3.9m) as unit volume decreased to 29 units (H1 2017: 38), and Other revenues increased to US$ 10.1m (H1 2017: US$ 9.7m) primarily due to increased sales of parts and accessories as well as to increased sales of other equipment including the SP-16 Concrete Line Pulling and Placing System. The following table shows the breakdown during the six months ended June 30, 2018 and 2017:
North America US$
EMEA⁽¹⁾ US$
ROW ⁽²⁾ US$
Revenue breakdown by geography
in millions
in millions
in millions
Total US$ in millions
2018
2017
2018
2017
2018
2017
2018
2017
Net sales
% of Net sales
Net sales
% of Net sales
Boomed Screeds ⁽³⁾
12.2
10.9
4.9
4.0
1.4
1.5
18.5
41.1%
16.4
38.7%
Ride-on Screeds ⁽⁴⁾
8.0
5.9
2.7
2.1
0.7
1.4
11.4
25.3%
9.4
22.2%
Remanufactured machines
1.1
1.8
-
-
1.0
1.2
2.1
4.7%
3.0
7.0%
3-D Profiler Systems
2.6
3.7
-
-
0.3
0.2
2.9
6.4%
3.9
9.2%
Other⁽⁵⁾
6.6
6.1
1.6
1.2
1.9
2.4
10.1
22.5%
9.7
22.9%
Total
30.5
28.4
9.2
7.3
5.3
6.7
45.0
100.0%
42.4
100.0%
Notes:
1. EMEA includes the Europe, India, Middle East, Scandinavia and Russia markets.
2. ROW includes the China, Australia, Latin America, Korea, and Southeast Asia markets.
3. Boomed Screeds include the S-22EZ, S-15R, and S-10A.4. Ride-On Screeds include the S-840, S-940, S-485, and S-158C.
5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M Topping Spreader, Copperhead, Mini Screed C and SP-16 Concrete Line Pulling and Placing System.
Units by product line
H1 2018
H1 2017
Boomed Screeds
60
55
Ride-on Screeds
118
97
Remanufactured machines
13
21
3-D Profiler Systems
29
38
Total
220
211
Sales to customers located in North America contributed 68% of total revenue (H1 2017: 67%), sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed 20% (H1 2017: 17%) and sales to customers in ROW (China, Southeast Asia, Australia, Korea and Latin America) contributed 12% (H1 2017: 16%).
Sales in North America totaled US$ 30.5m (H1 2017: US$ 28.4m) up 7%, driven by increased sales of Boomed screeds, Ride-on screeds and Other revenues. Sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed US$ 9.2m (H1 2017: US$ 7.3m) which grew 26% driven by growth in sales of Boomed screeds, Ride-on screeds and Other revenues. Sales to customers in ROW (China, Southeast Asia, Australia, Korea and Latin America) contributed US$ 5.3m (H1 2017: US$ 6.7m) decreasing by 21% primarily due to decreases across the range of product categories.
US$ in millions
Regional sales
H1 2018
H1 2017
North America
30.5
28.4
Europe
6.7
5.4
China
2.5
2.7
Middle East
1.2
0.8
Latin America
0.5
1.7
Rest of World
3.6
3.4
Total
45.0
42.4
Gross profit
Gross profit percentage improved to 57.5% compared to 56.8% in H1 2017 due to the positive impacts of price increases and productivity gains.
Operating expenses
Operating expenses excluding depreciation, amortization and stock-based compensation for H1 2018 were US$ 11.7m (H1 2017: US$ 11.3m). The increase is primarily due to increased personnel costs, sales commissions, marketing costs, and professional fees. Total employment increased to 182 as compared to 177 at the end of 2017.
Debt
On January 31, 2017, the Company paid off the remaining outstanding principal totaling US$ 1.0m on its commercial real estate mortgage along with accrued interest using cash on hand. There was no prepayment penalty. There were also no changes to the Company's US$ 10.0m secured revolving line of credit which will mature in February 2021.
Provision for income taxes
The provision for income taxes increased to US$ 3.0m, at an effective tax rate of 22%, compared to a provision of US$ 2.4m in H1 2017, at an effective tax rate of 20%. The increase in the effective tax rate is due primarily to the favorable tax impact of RSU and stock option settlements in H1 2017 offset partly by the lower US statutory tax rate in effect for 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:
Six months ended June 30
2018
US$ 000's
2017
US$ 000's
Income available to stockholders
10,578
9,578
Basic weighted shares outstanding
56,263,757
56,225,522
Net dilutive effect of stock options and restricted stock units
448,690
551,002
Diluted weighted average shares outstanding
56,712,447
56,776,524
Per Share
Per Share
US$
US$
Basic earnings per share
0.19
0.17
Diluted earnings per share
0.19
0.17
Basic adjusted net income per share
0.19
0.16
Diluted adjusted net income per share
0.18
0.15
Somero Enterprises, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2018 and December 31, 2017
* unaudited
As of
June 30,
2018
US$ 000's
As of
December 31,
2017
US$ 000's
Assets
Current assets:
Cash and cash equivalents
20,650
19,038
Accounts receivable - net
8,718
11,026
Inventories
10,288
8,697
Prepaid expenses and other assets
1,356
1,780
Total current assets
41,012
40,541
Accounts receivable, non-current - net
193
54
Property, plant, and equipment - net
12,292
12,306
Goodwill
2,878
2,878
Deferred tax asset
1,455
1,596
Other assets
253
268
Total assets
58,083
57,643
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
2,229
3,181
Accrued expenses
5,571
5,343
Income tax payable
996
713
Total current liabilities
8,796
9,237
Other liabilities
467
513
Total liabilities
9,263
9,750
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 at June 30, 2018 and December 31, 2017 and 56,288,329 and 56,242,121 outstanding at June 30, 2018 and December 31, 2017
26
26
Less: treasury stock, 137,269 shares as of June 30, 2018 and 183,477 shares as of December 31, 2017 at cost
(325)
(407)
Additional paid in capital
16,939
17,169
Retained earnings
34,412
33,034
Other comprehensive loss
(2,232)
(1,929)
Total stockholders' equity
48,820
47,893
Total liabilities and stockholders' equity
58,083
57,643
See notes to unaudited consolidated financial statements.
Somero Enterprises, Inc.
Consolidated Statements of Comprehensive Income
For the six months ended June 30, 2018 and 2017
* unaudited
Six months ended June 30
2018
US$ 000's
Except per share data
2017
US$ 000's
Except per share data
Revenue
44,974
42,436
Cost of sales
19,114
18,323
Gross profit
25,860
24,113
Operating expenses
Selling, marketing and customer support
5,770
5,354
Engineering and product development
928
749
General and administrative
5,714
6,400
Total operating expenses
12,412
12,503
Operating income
13,448
11,610
Other income (expense)
Interest expense
(18)
(55)
Interest income
76
128
Foreign exchange gain (loss)
(7)
295
Other
127
26
Income before income taxes
13,626
12,004
Provision for income taxes
3,048
2,426
Net income
10,578
9,578
Other comprehensive income
Cumulative translation adjustment
(303)
(70)
Change in fair value of derivative instruments - net of income taxes
1
-
Comprehensive income
10,276
9,508
Earnings per common share
Earnings per share - basic
0.19
0.17
Earnings per share - diluted
0.19
0.17
Weighted average number of common shares outstanding
Basic
56,263,757
56,225,522
Diluted
56,712,447
56,776,524
See notes to unaudited consolidated financial statements.
Somero Enterprises, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 2018
* unaudited
Common stock
Treasury stock
Retained earnings/
US$ 000's
Other
Comprehensive
income (loss)
US$ 000's
Additional
paid-in
capital
US$ 000's
Total
Stockholders'
equity
US$ 000's
Shares
Amount
US$ 000's
Shares
Amount
US$ 000's
Balance - December 31, 2017
56,425,598
26
17,169
183,477
(407)
33,034
(1,929)
47,893
Cumulative translation adjustment
-
-
-
-
-
-
(303)
(303)
Net income
-
-
-
-
-
10,578
-
10,578
Stock based compensation
-
-
498
-
-
-
-
498
Dividend
-
-
-
-
-
(9,200)
-
(9,200)
Treasury stock
-
-
(104)
(46,208)
82
-
-
(22)
RSUs settled for cash
-
-
(541)
-
-
-
-
(541)
Stock options settled for cash
-
-
(83)
-
-
-
-
(83)
Balance - June 30, 2018
56,425,598
26
16,939
137,269
(325)
34,412
(2,232)
48,820
See notes to unaudited consolidated financial statements.
Somero Enterprises, Inc.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2018 and 2017
*unaudited
Six months ended June 30
2018
US$ 000's
2017
US$ 000's
Cash flows from operating activities:
Net income
10,578
9,578
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes
141
186
Depreciation and amortization
566
1,351
Bad debt
88
125
Amortization of deferred financing costs
-
38
Stock based compensation
498
251
Working capital changes:
Accounts receivable
2,082
(3,025)
Inventories
(1,591)
(270)
Prepaid expenses and other assets
424
432
Other assets
2
1
Accounts payable, accrued expenses and other liabilities
(757)
1,585
Income taxes payable (receivable)
283
(855)
Net cash provided by operating activities
12,314
9,397
Cash flows from investing activities:
Proceeds from sale of property and equipment
15
16
Property and equipment purchases
(568)
(1,721)
Net cash used in investing activities
(553)
(1,705)
Cash flows from financing activities:
Payment of dividend
(9,200)
(4,836)
Payment of RSUs
(541)
(432)
Purchase of treasury stock
(22)
-
Stock options settled for cash
(83)
(4,288)
Repayment of notes payable
-
(1,024)
Net cash used in financing activities
(9,846)
(10,580)
Effect of exchange rates on cash and cash equivalents
(303)
(70)
Net increase (decrease) in cash and cash equivalents
1,612
(2,958)
Cash and cash equivalents:
Beginning of period
19,038
21,216
End of period
20,650
18,258
See notes to unaudited consolidated financial statements.
Notes to the Consolidated Financial Statements
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. We have reclassified certain prior year amounts 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 US 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 June 30, 2018 and December 31, 2017, the allowance for doubtful accounts was approximately US$ 860,000 and US$ 859,000, respectively.
Inventories
Inventories are stated at the lower of cost, using the first in, first out ("FIFO") method, 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 June 30, 2018 and December 31, 2017, the provision for obsolete and slow moving inventory was US$ 134,000 and US$ 110,000, respectively.
Deferred financing costs
Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument. These financing costs are being amortized using the effective interest method.
Intangible assets and goodwill
Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Intangible assets were fully amortized during the six months ended June 30, 2017.
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 Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005. The Company did not incur a goodwill impairment loss for the periods ended June 30, 2018 nor December 31, 2017.
Revenue recognition
The Company adopted ASC 606 "Revenue from contracts with customers" on January 1, 2018. 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.
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 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.
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.
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. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision/(benefit) for income taxes in general and administrative expenses in the accompanying consolidated financial statements.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2018 and 2017. The Company is subject to a three-year statute of limitations by major tax jurisdictions, and currently 2014 through 2016 remain open to investigation.
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$ 498,000 and US$ 251,000 for the six-month periods ended June 30, 2018 and 2017, respectively. The Company settled US$ 83,000 and US$ 4,287,000 in stock options for cash during the six-month periods ended June 30, 2018 and 2017, respectively. In addition, the Company settled US$ 541,000 and US$ 432,000 in restricted stock units for cash and conversion to common shares during the six-month periods ended June 30, 2018 and 2017, 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:
Six months ended June 30
2018
US$ 000's
2017
US$ 000's
Net income
10,578
9,578
Basic weighted shares outstanding
56,263,757
56,225,522
Net dilutive effect of stock options and restricted stock units
448,690
551,002
Diluted weighted average shares outstanding
56,712,447
56,776,524
Fair value measurement
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.
New accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The company 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 within fiscal years beginning after December 15, 2019. Lessees are required to measure leases under the new guidance at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating adoption of the guidance.
3. Inventories
Inventories consisted of the following:
June 30,
2018
US$ 000's
December 31,
2017
US$ 000's
Raw material
1,970
3,159
Finished goods and work in process
5,917
4,007
Remanufactured
2,401
1,531
Total
10,288
8,697
4. Property, plant, and equipment
Property, plant, and equipment consisted of the following:
June 30,
2018
US$ 000's
December 31,
2017
US$ 000's
Land
864
864
Building and improvements
10,596
10,545
Machinery and equipment
5,527
5,098
Sub-total
16,987
16,507
Less: accumulated depreciation and amortization
(4,695)
(4,201)
Total
12,292
12,306
5. 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%. No amounts were drawn under the secured revolving credit line in the six months ended June 30, 2018 or in 2017. The Company's credit facility is secured by substantially all its business assets.
On January 31, 2017, the Company paid off the remaining outstanding principal totaling US$ 1.0m on its commercial real estate mortgage along with accrued interest using cash on hand.
Interest
Interest expense for the six months ended June 30, 2018 and 2017 was approximately US$ 13,000 and US$ 55,000, respectively, and relates primarily to interest costs on leased vehicles.
6. Operating leases
The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year represent the remaining six months for 2018 and the full 12 months of each successive period as follows:
US$ 000's
2018
300
2019
485
2020
337
2021
465
Thereafter
1,139
Total
2,726
Capital leases
Interest rates on capital leases are variable and range from 4.5% to 7.3% at June 30, 2018. Future minimum payments by year represent the remaining six months for 2018 and the full 12 months of each successive period as follows:
US$ 000's
2018
52
2019
75
2020
38
2021
22
Thereafter
10
Total
197
8. 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 nondisclosure provisions as well as provide for defined severance payments in the event of termination or change in control.
The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.
9. Income taxes
The Company's effective tax rate for the six months ended June 30, 2018 was 22% compared to the federal statutory rate of 21%.
The Company is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company was formed in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2014 forward is still open. The Company has no federal, foreign or state income tax returns currently under examination.
At June 30, 2018, the Company had US$ 1.5m in non-current net deferred tax assets recorded on its balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
10. Supplemental cash flow and non-cash financing disclosures
Six months ended June 30
2018
US$ 000's
2017
US$ 000's
Cash paid for interest
17
25
Cash paid for taxes
2,857
3,028
Non-cash financing activities - change in fair value of derivative instruments
1
-
11. Goodwill
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 June 30, 2018 and December 31, 2017.
12. Subsequent events
Dividend
The Board declared an interim dividend for the six months ended June 30, 2018 of 5.5 US cents per share. This dividend will be payable on October 17, 2018 to shareholders on the register at September 28, 2018.
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.ENDIR SSAFMLFASELU
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