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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Somero Enterprise Inc. | LSE:SOM | London | Ordinary Share | COM STK USD0.001 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 335.00 | 330.00 | 340.00 | 335.00 | 332.50 | 335.00 | 62,870 | 08:00:13 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMSOM
RNS Number : 6269H
Somero Enterprises Inc.
14 March 2018
14 March 2018
Somero Enterprises, Inc.
("Somero" or "the Company")
Final Results
Record year of profitable growth, significant increase to dividend payout
Somero Enterprises, Inc. is pleased to report its annual results for the twelve months ended December 31, 2017.
Financial Highlights
Hot Features
Premium
FY17 FY16 % Increase
----------------------------- --------- --------- -----------
Revenue US$85.6m US$79.4m 8%
----------------------------- --------- --------- -----------
Adjusted EBITDA(1,2) US$28.0m US$24.6m 14%
----------------------------- --------- --------- -----------
Adjusted EBITDA margin(1,2) 33% 31% 200 BPS
----------------------------- --------- --------- -----------
Profits before tax US$25.7m US$21.3m 21%
----------------------------- --------- --------- -----------
Adjusted net income(1,3) US$17.5m US$15.6m 12%
----------------------------- --------- --------- -----------
Diluted adjusted net
income per share(1,3) US$0.31 US$0.27 15%
----------------------------- --------- --------- -----------
Cash flow from operating
activities US$19.8m US$17.0m 16%
----------------------------- --------- --------- -----------
Net cash(4) US$19.0m US$20.2m (6%)
----------------------------- --------- --------- -----------
Ordinary dividend per
share US$0.155 US$0.111 40%
----------------------------- --------- --------- -----------
Supplemental dividend US$0.036 - N/A
per share
----------------------------- --------- --------- -----------
-- Annual revenues grew to a record US$ 85.6m, up 8% from 2016
-- Healthy profit conversion and cash flow generation:
-- Adjusted EBITDA increased 14% to a record US$ 28.0m (2016: US$ 24.6m)
-- Adjusted EBITDA margin improved to 33% (2016: 31%)
-- Cash flow from operating activities increased 18% to US$ 19.8m (2016: US$ 17.0m)
-- Strong, secure financial position:
-- Debt-free balance sheet
-- Strong cash flow generation leading to a net cash position at 31 December 2017 of US$ 19.0m despite US$ 13.9m of dividend payments in 2017
-- Increased dividend payout ratio to 50% of adjusted earnings for 2017:
-- Final dividend of 12.75 US cents per share declared for a total 2017 dividend of 15.5 US cents per share, a 40% increase over last year
-- Supplemental dividend of 3.6 US cents per share declared to be paid with final 2017 dividend
Operational Highlights
-- Growing contribution from international markets and healthy demand across entire product line:
-- Four of six regions grew in 2017 led by Europe, North America, Latin America and Rest of World territories
-- Sales of Ride-on screeds grew 29% to US$ 18.6m (2016: US$ 14.4m) -- 3-D Profiler System(R) revenues grew 11% to US$6.8 (2016: US$ 6.1m)
-- Other revenues, driven by sales of parts and accessories grew 12% to US$ 18.7 (2016: US$ 16.7m)
-- New products contributed meaningfully to growth
-- Planned move into a new leased facility in Chesterfield, UK in Q2 2018 to accommodate growth
Notes:
1. The Company uses non-US GAAP financial measures to provide supplemental information regarding the Company's operating performance. See further information regarding non-GAAP measures below.
2. Adjusted EBITDA as used herein is a calculation of the Company's net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.
4. Net cash is defined as cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.
Jack Cooney, CEO of Somero, said:
"2017 was a strong trading year for Somero delivering a financial performance ahead of market expectations. We delivered record revenues, profits and cash flow from operations for our shareholders. We have made significant progress on executing our strategy and now, as we enter the last year of the five-year plan we established back in 2014, we are closing in on achieving our target of US$ 90m revenue in 2018. While we have seen many changes in recent years, the one constant has been our unrelenting commitment to helping our customers build successful, profitable businesses. It is this tremendous effort and passion of our employees who pursue this mission day in and day out that earns the loyalty of our customer base and delivers these exceptional results for our shareholders.
Somero is financially stronger than ever and well positioned to capture growth across our broad global footprint. We have identified a broad range of opportunities in related products and new markets, and our secure financial position will therefore enable us to increase investment to accelerate product development initiatives over the next year. In addition, the Board has adopted a supplementary dividend policy to enable the distribution of any excess capital to shareholders. All the while, as we work to execute our growth strategy, I am confident the Company will deliver strong results and dividends for our shareholders that will continue to create shareholder value."
The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.
For further information, please contact:
Somero Enterprises, Inc. www.somero.com
Jack Cooney, CEO +1 239 210 6500
John Yuncza, CFO
Howard Hohmann, EVP Sales
finnCap Ltd (NOMAD and Broker)
Matt Goode (Corporate Finance) +44 (0)20 7220 0500
Carl Holmes (Corporate Finance)
Tim Redfern (Corporate Broking)
Alma PR (Financial PR Advisor) somero@almapr.co.uk
Rebecca Sanders-Hewett +44(0) 20 3865 9667
Susie Hudson
Sam Modlin
Notes to Editors:
Somero Enterprises provides industry-leading concrete-levelling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.
Somero pioneered the Laser Screed market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.
For more information, visit www.somero.com
Chairman's Statement
Performance and Dividend
I am pleased to report that Somero has delivered another year of outstanding results for our shareholders in 2017. It was a very successful year, with record sales and profits, growing contributions from our international markets, new product launches contributing meaningfully to growth, a significant and meaningful return of cash to shareholders through dividends, and most importantly, continued progress on identifying new product and new market opportunities.
I am also delighted to report that with the Company's impressive 2017 results, healthy financial position, and the Board's confidence in the business outlook, the Board has approved increasing the dividend payout ratio to 50% of 2017 adjusted net income. The increased payout results in a final 2017 dividend of 12.75 US cents per share payable on April 20, 2018 to shareholders on the register at April 3, 2018. Together with the interim dividend paid in October 2017 of 2.75 US cents per share, the 2017 full year regular dividend payment to shareholders is 15.5 US cents per share, a 40% increase from 2016.
In addition, upon completing the review of the Company's year-end cash position and cash requirements for the coming year, the Board has also decided to adopt a supplementary dividend policy. Going forward, the Board will look to maintain a target net cash balance of at least US$ 15.0m, measured at each year end and intends to distribute 50% of the excess of net cash over the year-end target in the form of a supplemental dividend. The cash reserve figure has been raised from US$ 10.0m previously considered to be acceptable, reflecting the increased scale of the business and capital requirements for future investment and product development. The Board believes this policy strikes the appropriate balance between maintaining an adequate cash reserve to manage the business and providing a disciplined return of capital to shareholders. This policy will be subject to periodic review.
The Board has therefore approved a supplemental dividend of 3.6 US cents per share that will be paid at the same time as the final 2017 dividend. The combined regular and supplemental dividend to be paid on April 20, 2018 will be 16.35 US cents per share, a significant and meaningful return of cash to our shareholders.
Strategic Progress
2017 was an important year of significant progress. Revenues from our international markets contributed meaningfully to growth during the year representing US$ 5.0 m in net growth for 2017. In 2017, 32% of total revenues came from regions outside of North America combined, up from 29% in 2016. We are focused on driving international growth and further diversifying the Company's geographic revenue base. We will do this by adding additional resources, such as we did in Europe and India in 2017, and by continuing to promote adoption of wide-placement theory and quality concrete flooring standards across the globe.
We have also enhanced our product development process. In 2017, Somero allocated more resources to developing innovative, new solutions for our customers with a focus on identifying new market segments, such as structural high-rise buildings, where the Company can leverage its core technology and expertise. 2017 also represented a full-year of Somero Innovation Council meetings, which are comprised of a broad group of industry experts that provide input on new product concepts. The Somero Innovation Council has been an invaluable resource to understand customer challenges and needs, and ultimately to identify potential innovative solutions. Somero new product development is and always has been a customer led process. We understand customer involvement throughout the development cycle is critical to ensure our ideas turn into tangible products that create meaningful value for our customers.
Lastly, Somero took another step forward in its commitment to training and education in the concrete contractor industry with the launch of the Somero Concrete Institute ("SCI") in 2017. The SCI combines classroom education with hands-on training in the placement and finishing of concrete floors. The SCI is a unique endeavor, and we believe a strategically important one as well, to help address the significant shortage of skilled labor in the concrete contractor industry.
Our People
Somero's 177 employees around the globe are the engine that drives the Company. Somero is a people business built on strong employee and customer relationships. Our passionate and dedicated workforce is the foundation of our success and the Board remains committed to ensuring we create the most productive and rewarding work environment possible for each of our employees.
Current Trading and Outlook
The high level of activity in North America during the latter part of 2017 has continued in 2018. We continue to see strong interest in our equipment and remain encouraged by the positive non-residential construction outlook in the US for 2018. The expected positive impact from US corporate tax reform is an additional factor reinforcing our confidence in North American growth prospects.
In Europe, the strong performance of 2017 is also expected to carry forward into 2018. Similar to conditions we see in the North American market, European interest in our equipment remains strong driven by demand for replacement equipment, technology upgrades, and new products. Our confidence in the growth prospects in Europe is supported by improved economic conditions across the territory.
In China, healthy interest in our products continues and we expect to see further improvement in 2018 driven in part by our marketing and demand generation initiatives that gained traction in H2 2017. Although it has taken longer than expected to gain a significant foothold in this important region, longer-term we see a sizable opportunity in the quality-oriented market segment and plan to continue our market development efforts to promote wide-placement methods and flatness and levelness standards to target this segment. In addition, we will continue to grow our customer base by offering competitive entry-level machines, such as the S-158C, that target the productivity-oriented market and provide future up-sell opportunities.
In Latin America, we expect solid performance from Mexico and growth opportunities from the other countries in the region. In our other regions, including the Middle East and our Rest of World territory, we expect to see significant opportunities in 2018 and beyond and, importantly, are encouraged by the positive economic climate across this broad territory.
The Board believes the Company has many meaningful growth opportunities in 2018 across its broad portfolio of markets and products and is confident that Somero is poised to deliver another year of profitable growth to shareholders in 2018.
Larry Horsch
Non-Executive Chairman
March 14, 2018
President and Chief Executive Officer's Review
Overview
2017 was a truly exceptional year for Somero as we set another record for revenues, profits, cash flow from operations, and returned nearly US$ 14.0m in dividends to our shareholders. A lot of hard work goes into delivering such outstanding results, and I am proud of our employees who once again rose to the challenge.
2017 growth was well-balanced across our global markets with revenues generated from our non-US markets growing to 32% of total revenues in 2017, and four of our six regions increasing compared to 2016 with North America, Europe, Latin America and our Rest of World territories all contributing to growth. On a product basis, our growth was led by our sales of Ride-on screeds, 3-D Profiler Systems, and Other revenues which include sales of parts, accessories and our new SP-16 Concrete Hose Line-Pulling and Placing System. We are pleased with the diversification in revenues across our markets and product range, as the Company has benefitted from an expanded global footprint and from efforts to expand the product range to provide solutions that meet the needs of customers regardless of project type or size.
Finally, having retired all our debt in 2017, we enter 2018 with the strongest balance sheet in our history. This provides flexibility to make strategic investments that support the Company's long-term growth. We will continue to strike an appropriate balance between optimizing profits and returning capital to our shareholders by making meaningful long-term investments to grow the business, such as the construction and launch of the Somero Concrete Institute in 2017. As we continue to explore new product opportunities and work to increase our penetration in our international markets, we believe having this financial flexibility to make well-timed investments will be critical in the coming years.
While 2017 was a remarkable year, we are excited to explore a wide range of significant new opportunities in 2018.
Region Reviews
In 2017, sales in North America grew 2% compared to 2016 to reach US$ 57.8m, with strong H2 trading reflecting the strength in the underlying commercial construction industry and the strong pipeline of projects that remain in front of our US customer base. The market drivers for the North American market continue to be demand for replacement equipment, technology upgrades, fleet additions, and new products such as the SP-16 Concrete Hose Line-Pulling and Placing System. The high volume of commercial construction activity in 2017 combined with a growing shortage of skilled labor added to the demand for Somero equipment and the labor savings our equipment provides.
In Europe, 2017 sales grew 53% compared to 2016 to reach US$ 12.2m with well-balanced demand across the region and particularly strong trading in the UK, Italy, Poland, Spain and the Czech Republic. Importantly, sales across our entire product range were also balanced with notable growth in the Boomed screed and Ride-on screed product lines.
In China, while 2017 sales declined 14% compared to 2016 to US$ 5.5m, H2 2017 trading improved year-over-year due to the positive impact from marketing and demand generation initiatives. In our view, China remains a significant opportunity of which Somero currently has very small market penetration. The market fundamentals and long-term growth prospects in the commercial construction industry in China remain positive and Somero intends to continue its training and educational efforts to advance acceptance and demand for higher quality floors through wide-placement methods. This quality segment of the China market will be Somero's area of focus in 2018. In addition, we will continue to grow our customer base by offering competitive entry-level machines, such as the S-158C, that target the productivity-oriented market and provide future up-sell opportunities. Also, our staff in China will be moving in H2 2018 to a site of similar size and location to our current headquarters in the region. This is due to a change in our lease agreement, and we do not expect the move to result in any disruption or significant cost. Finally, our long-term financing program in China supported by our equipment shut-off capability remains a positive and effective program.
In Latin America, sales increased 35% from 2016 to US$ 2.3m for the year driven by strong project activity in Mexico in H1 2017, along with good contributions from Chile and Panama throughout the year.
While sales in the Middle East were down 28% compared to 2016 to US$ 2.1m, the activity level in the region was strong throughout the year despite several opportunities slipping into 2018. The Middle Eastern countries with meaningful contributions to 2017 sales were Turkey, the United Arab Emirates, and Saudi Arabia.
In our Rest of World region, 2017 sales were particularly strong with a 50% increase from 2016 to US$ 5.7m. While the region covers a wide range of territories, the most significant contributors to growth were India, Scandinavia and Korea. For India, a meaningful future market opportunity for Somero, the positive results were driven by the addition of in-country sales leadership in 2017.
Cashflow and Balance Sheet
Somero's cash generation remains healthy, and 2017 was a year of record operating cash flows. The Company managed working capital effectively throughout the year, and even with the year-end increase to accounts receivable driven by particularly strong sales in December 2017, the overall increase in net working capital investment was in line with the growth in sales. For the year, operating cash flows grew to US$ 19.8m, up from US$ 17.0m in 2016. This cash flow allowed the Company to fully retire its debt in early 2017, to raise the dividend pay-out ratio on the final 2016 dividend paid in April 2017 and to pay a US$ 7.5m special dividend in August 2017. In total, Somero paid US$ 13.9m in dividends to shareholders for the year. In addition to the increased dividends, in 2017 Somero funded US$ 0.8m construction of the Somero Concrete Institute and settled US$ 5.3m in stock options and restricted stock units for cash. Following these outflows, the Company ended the year with a US$ 19.0m net cash(1) balance. Reflecting the Board's confidence in the continued growth prospects of the Company, the Board has resolved to further raise the dividend payout ratio to 50% of adjusted net income to return even more profits to shareholders beginning with the 2017 final dividend to be paid in April 2018 Furthermore, as detailed above, the Board has adopted a supplementary dividend policy and has declared a supplemental dividend of US$ 2.0m or 3.6 US cents per share to be paid alongside the 2017 final dividend.
People
During the year we successfully drove greater efficiencies throughout our operations and support functions, while delivering a period of record results. These efficiency gains have offset the investments to bring new talent into the organization, with this rebalancing providing the right support for our continued growth. As a result, our employee count decreased by 1 compared to year-end 2016 with 177 employees at year end. In 2018 we will continue to add resources to the organization, particularly in the sales, customer support and product development areas, while also working to increase our operational efficiency and scale. We remain highly selective in the quality and fit of the individuals we hire and devote a large part of the hiring process to identifying individuals who embrace the Somero culture and core values.
Product Development
Somero's goal is to introduce at least one new product every year, and in 2017 we met this goal with the introduction of the S-22EZ at the end of 2017 that was formally introduced to the market at the January 2018 World of Concrete Trade Show in Las Vegas, USA. The S-22EZ adds improvements to the legacy S-22E Boomed screed centered on increasing the weight and balance of the machine and improving its ease of use and ease of maintenance. As with all of our product improvements, the changes to the S-22E were the result of ideas on ways to deliver even better products and solutions that came directly from our strong customer relationships. Additionally in 2017, products that were developed the previous year, the S-158C and SP-16 Concrete Hose Line-Pulling and Placing System machine, contributed meaningfully to growth with a combined US$ 1.1m contribution to 2017 sales.
With a secure financial position and a broad range of opportunities available that Somero is well-placed to capitalize on, the Board has made the decision to moderately increase investment to enable us to accelerate product development initiatives over the next year. Somero's technical expertise, resources, scale and close customer relationships provide us with a unique opportunity to enter into related market segments. We are confident in our ability to accelerate product development along with continuing to deliver profitable growth for our shareholders and look forward to updating the market in due course.
Progress Towards our 2018 Strategic Objective
We have completed the fourth year of our five-year plan which targets reaching revenue of US$ 90m in 2018. With one year remaining on the plan, and based on solid fundamentals in the US, Europe and meaningful growth opportunities across our remaining international markets, we remain confident in our ability to meet our strategic target in 2018.
Expansion Update
In September 2017, the Company announced that the Board had approved plans to build a US $1.3m expansion to the Company's Fort Myers headquarters with a target to complete in H1 2018 to accommodate planned future growth of the business. Following the high level of activity and potential site development requirements, the Company is reviewing the plans to ensure that this expansion covers all of the anticipated business needs.
Also, with the significant growth we have experienced in our European region, the Company is moving into a larger, leased facility in Chesterfield, UK near our current leased site. The Company expects the move will be completed by early Q2 2018, and the larger facility will better accommodate the added personnel and increased sales volume in our UK and larger European region. The Company does not expect to incur material capital expenditure from the move, nor incur meaningful increased operating costs from the new facility.
Conclusion
2017 was an outstanding year for Somero. The Company delivered a strong financial performance which provided a significant return of cash to shareholders through dividends and further strengthened the Company's financial position. Most importantly, we took real strides to advance our long-term strategy of growing the business globally and through innovative, new products. Our talented management team led the way and met the challenge of managing business growth while keeping focused on improving the products, solutions, and services we offer our customers. I am proud of our team's performance this year and understand the significant effort from each team member to deliver these outstanding results.
While 2017 was a great year for the Company, we see many opportunities ahead as we work to develop new products and market segments and to increase penetration in our international markets. This will bring new challenges for the Company, but I believe that the execution of our strategy has positioned us well to capitalize on these opportunities and I am certain our management team is up to the task. All the while, as we work to grow the business, I look forward to delivering another year of progress for our shareholders.
Jack Cooney
President and Chief Executive Officer
March 14, 2018
Notes:
(1) Net Cash is defined as total cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.
FINANCIAL REVIEW
Summary of Financial Results
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000 US$ 000
Revenue 85,634 79,353
Cost of sales 36,870 34,270
----------- -----------
Gross profit 48,764 45,083
Operating expenses
Sales, marketing and customer
support 10,426 10,056
Engineering and product development 1,222 1,071
General and administrative 11,683 12,768
Total operating expenses 23,331 23,895
----------- -----------
Operating income 25,433 21,188
Other income (expense)
Interest expense (80) (95)
Interest income 262 267
Foreign exchange impact 477 (117)
Other (354) 34
----------- -----------
Income before income taxes 25,738 21,277
Provision for income taxes 7,322 7,019
Net income 18,416 14,258
----------- -----------
Other data
Adjusted EBITDA (1) (2) (4) 28,000 24,579
Adjusted net income (1) (3)
(4) 17,504 15,637
Depreciation expense 1,199 1,121
Amortization of intangibles 901 1,545
Capital expenditures 1,959 4,435
Notes:
1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
2. Adjusted EBITDA as used herein is a calculation of net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.
4. The Company uses non-US GAAP financial measures to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.
Net income to adjusted EBITDA
reconciliation and
Adjusted net income reconciliation
Year ended Year ended
December
31,
December
31, 2017 2016
US$ 000 US$ 000
Adjusted EBITDA reconciliation
Net income 18,416 14,258
Tax provision 7,322 7,019
Interest expense 80 95
Interest income (262) (267)
Foreign exchange impact (477) 117
Other 354 (34)
Depreciation 1,199 1,121
Amortization 901 1,545
Stock based compensation 467 725
Adjusted EBITDA 28,000 24,579
----------- -----------
Adjusted net income reconciliation
Net income 18,416 14,258
Amortization 901 1,545
Tax impact of stock option &
RSU settlements (1,813) (166)
Adjusted net income 17,504 15,637
----------- -----------
Notes:
1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
2. Adjusted EBITDA as used herein is a calculation of net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization, and stock based compensation.
3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.
4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.
Revenues
The Company's consolidated revenues increased by 8% to US$ 85.6m (2016: US$ 79.4m). Company revenues consist primarily of sales from Boomed screed products, which include the S-22E, S-22EZ, S-15R and S-10A Laser Screed machines, sales from Ride-on screed products, which are drive through the concrete machines that include the S-840, S-485, S-940 and S-158C Laser Screed machines, Remanufactured machines sales, 3-D Profiler System, and Other Revenues which consist primarily of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges. The overall increase for the year was due to Ride-on screeds, 3-D Profiler Systems, along with an increase in Other revenues.
Ride-on screed sales increased to US$ 18.6m (2016: US$ 14.4m) due to higher volume and price increases, 3-D Profiler System sales increased to US$ 6.8m (2016: US$ 6.1m) due to increased unit sales and Other revenues increased to US$ 18.7m (2016: US$ 16.7m) primarily due to increased sales of parts and accessories and increased sales of other equipment including the Mini C and SP-16.
Revenue breakdown
by geography
North America EMEA(1) ROW(2) Total
US$ in US$ in US$ in US$ in millions
millions millions millions
2017 2016
2017 2016 2017 2016 2017 2016 Net % of Net % of
sales Net sales Net
sales sales
Boomed
screeds
(3) 24.0 27.0 9.1 6.0 2.8 3.3 35.9 41.9% 36.3 45.7%
Ride-on
screeds
(4) 11.6 10.4 4.4 2.3 2.6 1.7 18.6 21.7% 14.4 18.1%
Remanufactured
machines 3.5 3.7 0.0 0.4 2.1 1.8 5.6 6.6% 5.9 7.5%
3D Profiler
System 6.5 5.4 0.0 0.2 0.3 0.5 6.8 7.9% 6.1 7.7%
Other (5) 12.2 10.1 2.5 2.8 4.0 3.8 18.7 21.9% 16.7 21.0%
Total 57.8 56.6 16.0 11.7 11.8 11.1 85.6 100.0% 79.4 100.0%
---------------- ------- ------- ----- ----- ----- ----- ------- ------- ------- -------
Notes:
1. EMEA includes the Europe, India, Middle East, Scandinavia and Russia markets.
2. ROW includes the China, Australia, Latin America, Korea, and Southeast Asia markets.
3. Boomed Screeds include the S-22E, S-22EZ, S-15R, and S-10A.
4. Ride-On Screeds include the S-840, S-940, S-485, and S-158C.
5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M, Copperhead, and Mini Screed C.
Units by product
line
2017 2016
-------------------- ----- -----
Boomed screeds 120 130
Ride-on screeds 189 159
Remanufactured
machines 39 42
3D Profiler System 66 61
Total 414 392
-------------------- ----- -----
Sales to customers located in North America contributed 68% of total revenue (2016: 71%), sales to customers in EMEA (Europe, India, Middle East, Scandinavia, and Russia) contributed 19% (2016: 15%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, and China) contributed 13% (2016: 14%).
Sales in North America were US$ 57.8m (2016: US$ 56.6m) up 2% driven by higher sales of Ride-on screeds, 3D Profiler Systems, and an increase in Other revenues. Sales in EMEA were US$ 16m (2016: US$ 11.7m) which is up 37% primarily due to an increase in Boomed screed and Ride-on screed sales. Sales in ROW were US$ 11.8m (2016: US$ 11.1m) which is up 6% driven by an increase in sales of Ride-on screeds and other revenues.
Regional sales US$ in millions
2017 2016
---------------- -------- --------
North America 57.8 56.6
Europe 12.2 8.0
China 5.5 6.4
Middle East 2.1 2.9
Latin America 2.3 1.7
Rest of World 5.7 3.8
---------------- -------- --------
Total 85.6 79.4
---------------- -------- --------
Gross profit
Gross profit increased to US$ 48.8m (2016: US$ 45.1m), with gross margins improving to 56.9% (2016: 56.8%) due to price increases, product cost reductions and productivity gains.
Operating expenses
Operating expenses decreased by US$ 0.6m to US$ 23.3m (2016: US$ 23.9m). This decrease is due to lower amortization expense in the current year as the intangible asset being amortized became fully amortized during the year.
Other income (expense)
Other income increased to US$ 0.3m, compared to other income of US$ 0.1m in 2016, due to an increase in foreign exchange gains offset partly by loss on disposal of fixed assets which comprises the majority of Other expense in 2017.
Provision for income taxes
The provision for income taxes was US$ 7.3m in 2017 compared to US$ 7.0m in 2016. Overall, Somero's effective tax rate changed from 33.0% in 2016 to 28.4% in 2017.
The Tax Cuts and Jobs Act (TCJA) passed on December 22, 2017 lowered the US corporate tax rate to 21% from 35% effective January 1, 2018. As a result of this change in law, the Company expects its future after-tax earnings will be positively impacted and its go-forward effective tax rate will approximate 21%. The lowering of the US corporate income tax rate to 21% requires revaluation of the Company's net deferred tax asset as of December 31, 2017 that resulted in a one-time non-cash tax charge of US $0.6m included in the Company's 2017 results. In addition, the TCJA includes a provision that will result in a one-time deemed repatriation tax on the Company's cumulative unrepatriated foreign profits primarily relating to historical profits earned by the Company's UK entity. The Company will have the option to pay the deemed repatriation tax over an eight-year period. The Company is still assessing the final amount of the tax, but it is expected to not exceed US $0.8m, will be one-time in nature, and will be more than offset by tax savings from the lowered US tax rate.
Net income
Net income increased to US$ 18.4m from US$ 14.3m in 2016 due primarily to increased sales volume, gross margin improvement and operating cost controls. On an adjusted basis, excluding amortization and tax benefits associated with settlements of RSUs and stock options, adjusted net income increased to US$ 17.5m from US$ 15.6m in 2016. Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000's US$ 000's
----------- -----------
Income available to stockholders 18,416 14,258
Basic weighted shares outstanding 56,233,912 56,178,723
Net dilutive effect of stock
options and restricted stock
units 401,697 1,708,228
Diluted weighted average shares
outstanding 56,635,609 57,886,951
----------------------------------- ----------- -----------
The Company had 56,242,121 shares outstanding at December 31, 2017. Earnings per share at December 31, 2017 and 2016 are as follows:
Year ended Year ended
December December
31, 31,
2017 2016
Per Share Per Share
US$ US$
Basic earnings per share 0.33 0.25
Diluted earnings per share 0.33 0.25
Basic adjusted net income per
share 0.31 0.28
Diluted adjusted net income
per share 0.31 0.27
------------------------------- ----------- -----------
Consolidated Balance Sheets
As of December 31, 2017 and
2016
As of As of
December December
31, 31, 2016
2017
US$ 000 US$ 000
Assets
Current assets:
Cash and cash equivalents 19,038 21,216
Accounts receivable - net 11,026 6,310
Inventories 8,697 8,760
Prepaid expenses and other
assets 2,540 2,428
Total current assets 41,301 38,714
Accounts receivable, non-current
- net 54 254
Property, plant and equipment
- net 12,306 11,558
Intangible assets - net - 901
Goodwill 2,878 2,878
Deferred tax asset 1,596 3,351
Other assets 268 29
Total assets 58,403 57,685
--------------------------------------------- ---------- -----------
Liabilities and stockholders'
equity
Current liabilities:
Notes payable - current portion - 16
Accounts payable 3,181 2,831
Accrued expenses 6,103 5,329
Income tax payable 713 147
Total current liabilities 9,997 8,323
Notes payable, net of current
portion - 970
Other liabilities 513 223
Total liabilities 10,510 9,516
--------------------------------------------- ---------- -----------
Stockholders' equity
Preferred stock, US$.001 par - -
value, 50,000,000 shares authorized,
no shares issued and outstanding
Common stock, US$.001 par value,
80,000,000 shares authorized,
56,425,598 and 56,425,598 shares
issued and 56,242,121 and 56,203,602
shares outstanding at December
31, 2017 and 2016, respectively 26 26
Less: treasury stock, 183,477
shares as of December 31, 2017
and 221,996 shares as of December
31, 2016 at cost (407) (483)
Additional paid in capital 17,169 22,112
Retained earnings 33,034 28,480
Other comprehensive loss (1,929) (1,966)
Total stockholders' equity 47,893 48,169
-------------------------------------------- ---------- -----------
Total liabilities and stockholders'
equity 58,403 57,685
--------------------------------------------- ---------- -----------
See notes to consolidated financial
statements.
Consolidated Statements of Comprehensive
Income
For the years ended December
31, 2017 and 2016
Year ended Year ended
December December
31 31
2017 2016
US$ 000 US$ 000
except except
per share per share
data data
Revenue 85,634 79,353
Cost of sales 36,870 34,270
------------------------------------------- ----------- -----------
Gross profit 48,764 45,083
------------------------------------------- ----------- -----------
Operating expenses
Sales, marketing and customer
support 10,426 10,056
Engineering and product development 1,222 1,071
General and administrative 11,683 12,768
----------- -----------
Total operating expenses 23,331 23,895
------------------------------------------ ----------- -----------
Operating income 25,433 21,188
Other income (expense)
Interest expense (80) (95)
Interest income 262 267
Foreign exchange impact 477 (117)
Other (354) 34
------------------------------------------ ----------- -----------
Income before income taxes 25,738 21,277
Provision for income taxes 7,322 7,019
Net income 18,416 14,258
------------------------------------------- ----------- -----------
Other comprehensive income (loss)
Cumulative translation adjustment 37 (322)
Change in fair value of derivative
instruments - net of income
tax - 2
Total comprehensive income 18,453 13,938
Earnings per common share
Earnings per share basic 0.33 0.25
Earnings per share diluted 0.33 0.25
Weighted average number of common shares
outstanding
Basic 56,233,912 56,178,723
Diluted 56,635,609 57,886,951
See notes to consolidated financial
statements.
Consolidated Statements of Changes in Stockholders'
Equity
For the years ended December 31, 2017
and 2016
Common Stock Treasury
Stock
Shares Amount Additional Shares Amount Retained Other Total
Paid-In earnings Compre-hensive Stockholders'
Capital Loss Equity
US$ US$ US$ US$ US$ US$
000 000 000 000 000 000
Balance -
January 1,
2016 56,425,598 26 22,008 318,866 (614) 18,432 (1,646) 38,206
-------------- ----------- ------- ----------- --------- ------- --------- --------------- --------------
Cumulative
translation
adjustment - - - - - - (322) (322)
Change in
fair value
of
derivative
instruments - - - - - - 2 2
Net income - - - - - 14,258 - 14,258
Stock based
compensation - - 725 - - - - 725
Dividend - - - - - (4,210) - (4,210)
Treasury
stock - - (131) (96,870) 131 - - -
RSUs settled
for cash - - (345) - - - - (345)
Stock options
settled for
cash - - (145) - - - - (145)
Balance -
December 31,
2016 56,425,598 26 22,112 221,996 (483) 28,480 (1,966) 48,169
-------------- ----------- ------- ----------- --------- ------- --------- --------------- --------------
Cumulative
translation
adjustment - - - - - - 37 37
Change in - - - - - - - -
fair value
of derivative
instruments
Net income - - - - - 18,416 - 18,416
Stock based
compensation - - 467 - - - - 467
Dividend - - - - - (13,862) - (13,862)
Treasury
stock - - (76) (38,519) 76 - - -
RSUs settled
for cash - - (464) - - - - (464)
Stock options
settled for
cash - - (4,870) - - - - (4,870)
Balance -
December 31,
2017 56,425,598 26 17,169 183,477 (407) 33,034 (1,929) 47,893
-------------- ----------- ------- ----------- --------- ------- --------- --------------- --------------
See notes to consolidated
financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2017
and 2016
Year Year
ended ended
December December
31 31
2017 2016
US$ 000 US$
000
Cash flows from operating activities:
Net income 18,416 14,258
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred taxes 1,755 178
Depreciation and amortization 2,100 2,666
Bad debt 141 400
Amortization of deferred financing
costs 38 32
Stock based compensation 467 725
Working capital changes:
Accounts receivable (4,657) (110)
Inventories 63 (281)
Prepaid expenses and other assets (112) (293)
Other assets (239) (3)
Accounts payable, accrued expenses
and other liabilities 1,282 278
Income taxes payable 566 (897)
Net cash provided by operating activities 19,820 16,953
------------------------------------------------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 202 71
Property and equipment purchases (1,959) (4,435)
Net cash used in investing activities (1,757) (4,364)
------------------------------------------------- --------- ---------
Cash flows from financing activities:
Payment of dividend (13,862) (4,210)
RSUs settled for cash (464) (345)
Stock options settled for cash (4,870) (145)
Payments under capital leases (58) (14)
Repayment of notes payable (1,024) (48)
Net cash used in financing activities (20,278) (4,762)
------------------------------------------------- --------- ---------
Effect of exchange rates on cash and
cash equivalents 37 (320)
------------------------------------------------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (2,178) 7,507
Cash and cash equivalents:
Beginning of year 21,216 13,709
--------- ---------
End of year 19,038 21,216
------------------------------------------------- --------- ---------
See notes to consolidated financial
statements.
Notes to the Consolidated Financial Statements
As of December 31, 2017 and 2016
1. Organization and description of business
Nature of business
Somero Enterprises, Inc. (the "Company" or "Somero") designs, assembles, remanufactures, sells and distributes concrete leveling, contouring and placing equipment, related parts and accessories, and training services worldwide. Somero's Operations and Support Offices are in Michigan, USA with Global Headquarters and Training Facilities in Florida, USA. Sales and service offices are located in Chesterfield, England; Shanghai, China; and New Delhi, India.
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.
Principles of consolidation
The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Cash and cash equivalents
Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased. The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation ("FDIC"). The Company has not experienced any losses related to amounts in excess of FDIC limits.
Accounts receivable and allowances for doubtful accounts
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable. Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience. As of December 31, 2017 and 2016, the allowance for doubtful accounts was approximately US$ 859,000 and US$ 743,000, respectively. Bad debt expense was US$ 141,000 and US$ 400,000 in 2017 and 2016, respectively.
Inventories
Inventories are stated using the first in, first out ("FIFO") method at the lower of cost or net realizable value. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts.
Deferred financing costs
Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the expected remaining term of the debt instrument. These financing costs are being amortized using the effective interest method. Deferred financing costs, consisting of loan origination fees, are reflected as an offset to notes payable on the accompanying balance sheets.
Intangible assets and goodwill
Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date. Goodwill represents the excess cost of the business combination over the Company's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005. The Company did not incur a goodwill impairment loss for the year ended December 31, 2017 or 2016. (See Note 4 for more information.)
The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the year ended December 31, 2017, the Company tested its other intangible assets including customer relationships and technology for impairment and found no impairment. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable and less than the asset's (or asset group's) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Note 4 for more information.)
Revenue recognition
The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred, or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment. For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer. Standard products do not have customer acceptance criteria. Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory.
Warranty liability
The Company provides warranties on all equipment sales ranging from 60 days to three years, depending on the product. Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.
2017 2016
US$ 000 US$ 000
-------- --------
Balance, January
1 (547) (307)
Warranty charges 447 478
Accruals (451) (718)
Balance, December
31 (551) (547)
------------------- -------- --------
Property, plant, and equipment
Property, plant and equipment is stated at cost net of accumulated depreciation and amortization. Land is not depreciated. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 2 to 10 years for machinery and equipment.
Income taxes
The Company determines income taxes using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items reflected in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable.
The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions. This involves a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements. The Company is subject to a three-year statute of limitations by major tax jurisdictions.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated financial statements, which there were none in 2017 and 2016.
The Tax Cuts and Jobs Act (the "Act") was enacted in December 2017. The Act changes existing United States tax law and includes numerous provisions that will affect businesses. The Act, for instance, introduces changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act will also have international tax consequences for companies that operate internationally. Although the Act generally applies to tax years beginning January 1, 2018, certain provisions of the Act apply to tax years ending December 31, 2017.
Prior to this reporting period, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption of the repatriation of foreign earnings. Upon enactment, the Act imposes a tax on certain historical foreign earnings and profits at various tax rates. The Company was not able to determine a reasonable estimate of the tax liability for this item for the 2017 reporting period by the time it issued its 2017 financial statements. The Company did not have the necessary information available, prepared, or analyzed to develop a reasonable estimate of the tax liability for this item (or evaluate how the Act will impact the Company's existing accounting position to indefinitely reinvest unremitted foreign earnings). As a result, the Company did not include an estimate for this item in its 2017 financial statements but will do so in its financial statements for the first reporting period in which the Company is able to obtain, prepare, and analyze the necessary information to complete the accounting under ASC Topic 740.
The Act also reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded decreases related to deferred tax assets of US$ 1,093,000 and to deferred tax liabilities of US$ 448,000, with a corresponding adjustment to deferred income tax expense of US$ 645,000.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Stock based compensation
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.
Transactions in and translation of foreign currency
The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. Balance sheet amounts are translated at December 31 exchange rates and statement of operations accounts are translated at average rates. The resulting gains or losses are charged directly to accumulated other comprehensive income. The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency. Gains and losses from transactions are included as foreign exchange loss in the accompanying consolidated statements of comprehensive income.
Comprehensive income
Comprehensive income is the combination of reported net income and other comprehensive income ("OCI"). OCI is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income.
Earnings per share
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued using the treasury stock method. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000's US$ 000's
----------- -----------
Income available to stockholders 18,416 14,258
Basic weighted shares outstanding 56,233,912 56,178,723
Net dilutive effect of stock
options and restricted stock
units 401,697 1,708,228
Diluted weighted average
shares outstanding 56,635,609 57,886,951
----------------------------------- ----------- -----------
Fair value
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because of the short-term nature of these instruments. The carrying value of our long-term debt approximates fair value due to the variable nature of the interest rates under our Credit Facility.
The FASB has issued accounting guidance on fair value measurements. This guidance provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it.
This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy.
-- Level 1 - Quoted prices for identical instruments in active markets.
-- Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
-- Level 3 - Unobservable inputs for the asset or liability which are supported by little or no market activity and reflect the Company's assumptions that a market participant would use in pricing the asset or liability.
Quoted
prices
in active Significant Significant
markets other other
identical observable unobservable
assets inputs inputs
Level Level Level
1 2 3
US$ 000 US$ 000 US$ 000 US$ 000
--------------- -------- ----------- ------------ --------------
Year ended December
31, 2016
Asset:
Non-recurring
Goodwill 2,878 2,878
Recurring
Interest
rate swap (2) (2)
Year ended December
31, 2017
Asset:
Non-recurring
Goodwill 2,878 2,878
Recurring
Interest
rate swap - -
--------------- -------- ----------- ------------ --------------
New accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The company plans to adopt the new standard using the full retrospective approach.
In February 2016, the FASB released Accounting Standard Update 2016-02, Leases. The new guidance requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. Lessees are required to recognize a single lease cost, amortized on a straight-line basis over the lease term for operating leases. All cash payments are to be classified as operating activities on the cash flow statement. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Lessees are required to measure leases under the new guidance at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating adoption of the guidance.
3. Inventories
Inventories consisted of the following
at December 31, 2017 and 2016:
Year ended Year ended
December December
31, 31,
2017 2016
US $ 000 US $ 000
----------- -----------
Raw material 3,159 2,574
Finished goods and
work in process 4,007 3,583
Remanufactured 1,531 2,603
Total 8,697 8,760
----------------------- ----------- -----------
4. Goodwill and intangible assets
Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value.
The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2017 and 2016, and that the value of patents was not impaired as of December 31, 2016.
The following table reflects other intangible assets:
Year ended Year ended
Weighted December December
average 31, 31,
Amortization 2017 2016
Period US$ 000's US$ 000's
-------------- ----------- -----------
Capitalized cost
Patents 12 years 18,538 18,538
Accumulated amortization
Patents 12 years 18,538 17,637
Net carrying costs
Patents 12 years 0 901
Amortization expense associated with the intangible assets in each of the years ended December 31, 2017 and 2016 was approximately US$ 901,000 and US$ 1,545,000, respectively. Net intangible assets were fully amortized in 2017.
5. Property, plant, and equipment
Property, plant, and equipment consist of the following at December 31:
2017 2016
US$ 000 US$ 000
-------- --------
Land 864 864
Building and improvements 10,545 9,483
Machinery and equipment 5,098 5,769
-------------------------------- -------- --------
16,507 16,116
Less: accumulated depreciation
and amortization (4,201) (4,558)
12,306 11,558
-------------------------------- -------- --------
Depreciation expense for the years ended December 31, 2017 and 2016 was approximately US$ 1,199,000 and US$ 1,121,000, respectively.
6. Notes payable
The Company's debt obligations consisted of the following at December 31:
2017 2016
US$ 000's US$ 000's
April 2018 commercial real
estate mortgage - 1,024
February 2021 secured revolving - -
line of credit
--------------------------------- ----------- ----------
Total bank debt - 1,024
--------------------------------- ----------- ----------
Less debt due within one
year - (48)
Obligations due after one
year - 976
--------------------------------- ----------- ----------
The Company's revolving line of credit of US$ 10,000,000 is collateralized by all inventories and accounts receivable.
The Company entered into an amended credit facility in February 2016. The new agreement matures February 2021 for the secured revolving line of credit.
The interest rate on the revolving line of credit is based on the 1-month LIBOR rate plus 1.25%. No amounts were drawn under the secured revolving line of credit in 2017 or 2016. The Company's credit facility is secured by substantially all its business assets.
The company fully paid off its commercial real estate mortgage in January 2017.
7. Retirement program
The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company's matching contributions vest immediately. The Company contributed approximately US$ 462,000 to the savings and retirement plan during 2017 and contributed US$ 350,000 during 2016.
8. Operating leases
The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments are as follows for the years ended:
December
31
US$ 000
---------
2018 384
2019 243
2020 107
2021 105
2022 105
Thereafter 1,046
1,990
------------ ---------
9. Capital leases
Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2017. This is included in accrued expenses on the accompanying balance sheets. Future minimum payments are as follows for the years ended:
December
31
US$ 000
---------
2018 83
2019 55
2020 17
2021 2
Thereafter -
157
------------ ---------
10. Supplemental cash flow and non-cash financing disclosures
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000 US$ 000
----------- -----------
Cash paid for interest 42 58
Cash paid for taxes 4,944 7,747
Non-cash financing activities
- change in fair value
of derivative instruments - 2
Capital lease liabilities 190 -
assumed
------------------------------- ----------- -----------
11. Business and credit concentration
The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance. At December 31, 2017 and 2016, the Company had two customers which represented 15% and 20% of total accounts receivable, respectively.
12. Commitments and contingencies
The Company has entered into employment agreements with certain members of senior management. The terms of these are for renewable one-year periods and include non-compete and non-disclosure provisions as well as provide for defined severance payments in the event of termination or change in control.
The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.
13. Income taxes
Income Tax Provision
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000 US$ 000
----------- -----------
Current income tax
Federal 4,336 5,764
State 326 774
Foreign 906 303
Total current income
tax expense 5,568 6,841
------------------------------ ----------- -----------
Deferred tax expense
Federal 1,688 167
State 66 11
Foreign - -
Total deferred tax expense 1,754 178
------------------------------ ----------- -----------
Total tax provision 7,322 7,019
------------------------------ ----------- -----------
The components of the net deferred income tax asset at December 31, 2017 and 2016 were as follows:
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000 US$ 000
----------- -----------
Bad debt allowance 195 263
Inventory reserve 25 109
Accrued Bonus 73 -
UNICAP - Sec 263A 108 179
Prepaid insurance (32) (65)
Prepaid other (106) (104)
Fixed assets (660) (517)
Intangible assets 1,086 2,343
UK intangibles 134 134
Accrued warranty 134 223
Stock based compensation expense
(options & RSUs) 326 473
Italy - NOL 76 76
Foreign tax credit 237 237
Total net deferred tax assets 1,596 3,351
-------------------------------------- ----------- -----------
Rate reconciliation
Consolidated income before tax 25,738 21,277
Statutory rate 34% 34%
Statutory tax expense 8,751 7,234
------------------------------------- ----------- -----------
State taxes 259 518
Foreign taxes (171) (221)
Meals and entertainment 61 44
Permanent differences due to stock
options & RSUs (1,630) (125)
Permanent differences due to other
items (456) (409)
Permanent due to US tax rate change 645 -
Other (137) (22)
Tax expense 7,322 7,019
------------------------------------- ----------- -----------
The Company has US$ 246,185 in foreign loss carry forwards with indefinite expiration dates.
14. Revenues by geographic region
The Company sells its product to customers throughout the world. The breakdown by location is as follows:
Year ended Year ended
December December
31, 31,
2017 2016
US$ 000 US$ 000
----------- -----------
United States and
U.S. possessions 55,504 55,805
Canada 2,365 791
Rest of World 27,765 22,757
-----------
Total 85,634 79,353
------------------- ----------- -----------
15. Stock based compensation
The Company has stock based compensation plans which are described below. The compensation cost that has been charged against income for the plans was approximately US$ 467,000 and US$ 725,000 for the years ended December 31, 2017 and 2016, respectively. The income tax effect recognized for stock based compensation was US$ 1.8m and US$ 0.2m, respectively, for the years ended December 31, 2017 and 2016.
Stock options
An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan, which was cancelled when the old plan was abandoned. The grants have a three-year vesting and a strike price of 30p, a 100% premium over the market price on the date of grant. The remaining stock options will only be issued for new key employees and superior performance.
Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years. No new options were granted in 2017 and 2016.
A summary of options activity is presented below:
Options Stock Weighted-average Weighted Aggregate
options exercise average intrinsic
price remaining value
contractual
term
(years)
Outstanding at January
1, 2016 1,686,361 0.44 4.01 3,895,369
Granted - - - -
Exercised (100,000) 0.47 3.13 (144,945)
Forfeited - - - -
------------------------- ------------ ----------------- ------------- ------------
Outstanding at December
31, 2016 1,586,361 0.44 3.00
Exercisable at December
31, 2016 1,586,361 0.44 3.00
------------------------- ------------ ----------------- ------------- ------------
Outstanding at January
1, 2017 1,586,361 0.44 3.00 3,667,918
Granted - - - -
Exercised (1,569,221) 0.44 2.10 (4,870,392)
Forfeited - - - -
------------------------- ------------ ----------------- ------------- ------------
Outstanding at December
31, 2017 17,140 0.47 2.13 61,195
Exercisable at December
31, 2017 17,140 0.47 2.13 61,195
------------------------- ------------ ----------------- ------------- ------------
Options exercised in 2017 and 2016 were settled for cash of US$ 4.9m and US$ 0.1m, respectively. As of December 31, 2017 and 2016, the Company's stock options have all been vested with no unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plan.
Restricted Stock Units
The Company also regularly issues restricted stock units to employees and non-executive Directors, subject to Board approval. A summary of restricted stock unit activity in 2016 and 2017 is presented below:
Shares Grant date
fair market
value US$
Outstanding at January
1, 2016 428,345 641,507
Granted 148,593 313,894
Vested or settled for
cash (159,585) (119,130)
Forfeited - -
Outstanding at December
31, 2016 417,353 836,271
------------------------- ---------- -------------
Outstanding at January
1, 2017 417,353 836,271
Granted 121,063 419,241
Vested and settled
for cash (151,444) (292,007)
Forfeited - -
Outstanding at December
31, 2017 386,972 963,505
------------------------- ---------- -------------
RSUs settled for cash were US$ 0.5m in 2017 and US$ 0.3m in 2016.
As of December 31, 2017, there was US$ 453,000 total unrecognized compensation cost related to non-vested restricted stock units. Restricted stock unit expense is being recognized over the three-year vesting period. The weighted average remaining vesting period is 1.25 years.
Equity Bonus Plan
The Company has an Equity Bonus Plan, under which eligible senior managers may choose to receive 25% of their annual performance bonus in shares of common stock. In March 2016, the Company issued 96,870 shares of common stock, valued at US$ 204,000 at the time of grant, for awards under the 2015 Equity Bonus Plan. In March 2017, the Company issued 38,519 shares of common stock, valued at US$ 133,000 at the time of grant, for awards under the 2016 Equity Bonus Plan.
16. Employee compensation
The Board approved management bonuses and profit sharing payments totaling US$ 1.5m to be paid in December 2016 and early 2017 based upon the Company meeting certain profitability targets.
17. Subsequent events
Dividend
In recognition of Somero's strong performance and the Board of Directors' confidence in the continued growth of the Company, the Board approved an increase to the dividend payout ratio to 50% of adjusted net income and is pleased to announce a final 2017 dividend of 12.75 US cents per share that will be payable on April 20, 2018 to shareholders on the register at April 3, 2018. Together with the interim dividend paid in October 2017 of 2.75 US cents per share, this represents a full year regular dividend to shareholders of 15.5 US cents per share, a 40% increase over the previous year. In addition, due to the strength of the Company's cash position at the end of 2017, and upon the review of anticipated future cash requirements for the business, the Board of Directors' has adopted a new supplementary dividend policy and approved a supplemental dividend of 3.6 US cents per share that will be paid together with the final 2017 dividend on April 20, 2018 to shareholders on the register at April 3, 2018. The combined dividend payment on April 20, 2018 will total 16.35 US cents per share, representing a total dividend payment of US$ 9.2m.
Equity Bonus Plan
In February 2018, the Board approved the 2017 Equity Bonus Plan, under which eligible senior managers can elect to receive up to 50% of their 2017 annual performance bonus in shares of common stock. The Company expects to issue shares for awards under the 2017 Equity Bonus Plan in 2018.
Annual General Meeting
Notice is given that the Annual General Meeting of Stockholders (the "AGM") of the Company will be held at the Company's headquarters at 14530 Global Parkway, Fort Myers, Florida 33913 on June 12, 2018 at 9:00 am local time.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UORKRWWAOAAR
(END) Dow Jones Newswires
March 14, 2018 03:00 ET (07:00 GMT)
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