SOMERO ENTERPRISES, INC. 
By ?
Press Announcement |
For immediate release |
September 3, 2013 |
Somero Enterprises, Inc.® |
("Somero" or "the Company" or "the Group") |
Interim Results for the six months ended June 30, 2013
Somero Enterprises, Inc.® is pleased to report its interim results for the six months ended June 30, 2013.
Financial Highlights
· Group revenue of US$21.0m (H1 2012: US$16.1m)
· Adjusted Group EBITDA of US$3.7m (H1 2012: US$2.5m)
· Pre-tax income of US$1.9m (H1 2012: US$0.9m)
· Net cash at June 30, 2013 of US$1.3m (Net debt at December 31, 2012 US$1.9m)
· 0.9 US cent per share dividend declared for payment in H2 2013
Business Highlights
· Group revenue increased by 30% in H1 2013 compared to H1 2012
· North American sales increased by 28% primarily due to an increase in Small line sales
· Successful introduction of S-15M Laser Screed resulting in US$1.5m in H1 2013 sales
· Successful introduction of STS-11m resulting in US$0.8m in H1 2013 sales
· Sales in ROW increased 61% in H1 2013 compared to H1 2012
· Significant investment growth in China led to a 71% increase in sales to China
Commenting, Jack Cooney, President and Chief Executive Officer of Somero, said:
"Somero Enterprises, Inc. is pleased to announce that the strong trading referred to in the Company's recent trading updates continued through the end of the first half. Revenues for H1 2013 were over 30% ahead of those reported in H1 2012. Trading continues to be encouraging, and I am very pleased that the Company can now invest in measures aimed at supporting growth into the medium and longer term, as well as in 2013. Confidence in global macroeconomic trends continue to improve and we see opportunity for Somero to progress through the remainder of the year. With August having just delivered another good month's trading, the Board now expects EBITDA for the full year to be around 15% ahead of previous expectations."
For further information please contact:
Canaccord Genuity
+44 (0)20 7665 4500
Chris Robinson/Piers Coombs
About Somero®
Somero is a North American manufacturer of patented laser guided equipment used for the spreading and leveling of high volumes of concrete for floors in the commercial construction industry. Expanding into new geographic markets, Somero's innovative, proprietary products help contractors worldwide achieve a high level of precision in flat floor construction which reduces construction time and improves cost savings.
Somero's innovative, proprietary products, including the large SXP®-D, CopperHead® and Mini Screed? C, S-840 Laser Screed®, the new S-15M Laser Screed® and the new STS-11m Spreader models employ laser-guided technology to achieve a high level of precision.
Somero's products have been sold primarily to concrete contractors for use in non-residential construction projects in over 79 countries across every time zone around the globe. Laser Screed equipment has been specified for use in constructing warehouses, assembly plants, retail centers and in other commercial construction projects requiring extremely flat concrete slab floors by a variety of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, the United States Postal Service, Lowe's and Toys 'R' Us and ProLogis.
Somero's headquarters and manufacturing operations are located in Michigan, USA with executive offices in Florida, USA. It has sales and service operations in Chesterfield, England and Shanghai, China.
Somero has approximately 119 employees and markets and sells its products through a direct sales force, external sales representatives and independent dealers in North America, Latin America, Europe, the Middle East, South Africa, Asia and Australia.
Somero is listed on the Alternative Investment Market of the London Stock Exchange and its trading symbol is SOM.L.
Chairman's and Chief Executive Officer's Statement
Overview
We are pleased to report Group revenues for H1 2013 have continued their recent positive momentum and are 30% ahead of the comparable period last year at US$21.0m vs. US$16.1m, with gross margins of just under 52% in H1 2013 vs 49% in H1 2012 leading to H1 2013 EBITDA of US$3.7m vs. US$2.5m in H1 2012. Our increased revenues and profitability, together with a focus on working capital, resulted in the company moving into a net cash positive position as of June 30, 2013.
The steady recovery in our markets and Somero's improved performance has allowed us to invest in new hires in both sales and service. The Company has continued its investment in China and India in H1 to position itself to serve customers early in their industry experience and bring them products, information and education to establish a relationship that will add value to their businesses for the long term.
With our customer-focused sales, engineering and service teams, we are dedicated to being available to our customers 24 hours per day, 365 days per year. Training and spare parts support have been a focus of our Customer Support group and this focus has resulted in an overall increase in parts revenue of 5% and training revenue increase of 46% over the same period last year.
Operational Performance
US
H1 2013 sales were up 28% over the same period last year (US$12.2mil vs. US$9.5mil). Small line revenue was significantly higher in H1 2013 compared to H1 2012 due to higher unit volumes (46 units in H1 2013 compared to 36 units in H1 2012) and higher selling prices. Large line revenue also increased significantly in H1 2013 compared to H1 2012 due to higher unit volumes (11 units in H1 2013 compared to 10 units in H1 2012) and higher selling prices.
In H1 2013, spare parts sales were up 17% and calls to the US Customer Support group were up significantly indicating that customers are using our equipment more frequently. This is also consistent with verbal customer feedback that their business has increased.
EMEA
H1 2013 sales were up 4% over the same period last year (US$3.3mil vs. US$3.2mil). Large line revenue was slightly lower in H1 2013 compared to H1 2012 due to lower unit volumes (1 unit vs. 2 units) and Small line revenue was also slightly lower in H1 2013 compared to H1 2012 due to lower unit volumes (15 units vs. 20 units). Other revenues were significantly higher in H1 2013 compared to H1 2012 due to interest in the S-15M and refurbished equipment. Russia led EMEA sales with a 142% increase over last year (US$1.1mil vs. US$0.5mil).
Although spare parts sales were down 29% in H1, calls to the UK Customer Support group were up significantly, an indication customers are using our equipment more frequently.
Emerging Markets
H1 2013 sales were up 59% over the same period last year (US$5.4mil vs. US$3.4mil). Sales in China were up 71%, Latin America up 35%, Australia up 154% and Korea was down 11% in H1 2013 compared to H1 2012.
H1 2013 revenue growth in China was a result of a strong team of sales people in place, higher than expected Large line unit sales and increased sales of our Service Plan which is now in full execution mode.
We have identified education and training on flat floor construction as the key to long term sales growth in emerging markets. As such, we have continued to cultivate our relationships with World Tech Floors, the Concrete Floors Asia Association, and the China Flooring Association, (now known as the Flooring Branch of the China Building and Materials Federation).
With the expansion of quality flooring construction practices in China, the establishment of concrete flooring construction standards has become the basis for the stable development of the industry as well as the expansion and growth of the contractors involved in the industry.
At the invitation of Somero, a delegation of 12 people from the China Flooring Association and some of its members, visited the United States for a Concrete Flooring Summit in June. The focus of the visit was to understand the overall construction concept of the flooring industry in the United States, conduct technical exchanges with representatives from the American Concrete Institute ("ACI") and the American Society of Concrete Contractors ("ASCC") and visit jobsites. The Chinese delegation felt they could apply what they had learned during the summit and as a follow up have invited the ASCC and ACI representatives to China for their Annual Meeting in December. They have also asked Somero to sponsor a major flooring construction award at their meeting.
We continue to develop the market in India which is in the early stages of development, by adding sales people and building Customer Support capability.
Product Development
The new S-15m Large line product and the STS-11m Topping Spreader were significant contributors to the Group's results. Designed for emerging markets, seven of the nine S-15m units sold in H1 2013 were sold outside of North America and all of the seven STS-11m units sold in H1 2013 were sold outside of North America.
As well as focusing on emerging market opportunities, we remain committed to developing innovative, state-of-the-art, proprietary, high-margin products that meet the ever changing needs of our customers. We anticipate the announcement of new products in Q4 2013 and remain confident that the launch of these products will continue to provide growth opportunities for Somero.
Liquidity
There was a net cash inflow of US$2.9m during H1 2013 which includes a US$3.2m reduction in Group net debt from December 2012. The driver for decreased debt is a 30% increase in revenues and improved working capital.
Dividend
We were pleased that we were in a position to return to the dividend list with a 0.8 US cent per share dividend declared in February 2013 alongside our results for the year to December 2012. In reflection of Somero's continued progress and growth and the Director's confidence in the Company's outlook, the Board is pleased to declare an interim dividend for the six months ended June 30 2013 of 0.9 US cent per share, slightly above the dividend we paid for the whole of last year. This dividend will be payable on October 21, 2013 to shareholders on the register at October 4, 2013.
Current Trading and Outlook
With the benefit of the steady recovery the Company is experiencing, the Group is in a good position to invest in certain incremental sales and personnel costs to help drive growth in the medium and longer term. This is expected to have some impact on our reported net operating margin in H2 2013, but with August having just delivered another good month's trading, the Board now expects EBITDA for the full year to be around 15% ahead of previous expectations and we believe we can look forward to the future with increasing confidence, based on the higher levels of activity in our markets and our strengthened financial position.
Larry Horsch
Chairman
Jack Cooney
President and Chief Executive Officer
Business and Financial Review
Summary of Financial Results (1)(2)(3)(4)
For the six months ended June 30
2013 2012
US$ 000 US$ 000
except per share data except per share data
Revenue 20,989 16,103
Cost of sales 10,145 8,186
Gross profit 10,844 7,917
Operating expenses
Selling expenses 3,224 2,536
Engineering expenses 377 260
General and administrative expenses 5,036 3,992
Total operating expenses 8,637 6,788
Operating income 2,207 1,129
Other income (expense)
Interest expense (151) (192)
Interest income 9 1
Foreign exchange loss (213) (47)
Other - 15
Income before income taxes 1,852 906
Provision for income taxes 361 59
Net income 1,491 847
Earnings per share basic $0.03 $0.01
Earnings per share diluted $0.03 $0.01
Earnings per share basic - adjusted net income before amortization $0.05 $0.04
Earnings per share diluted - adjusted net income before amortization $0.05 $0.03
Other data
Adjusted EBITDA 3,650 2,515
Adjusted net income before amortization 2,657 2,013
Depreciation expense 189 137
Amortization of intangibles 1,166 1,166
Capital expenditures 130 175
See notes to unaudited condensed consolidated financial statements.
1. References to adjusted EBITDA are to Somero's net income plus interest income, interest expense, taxes, depreciation, amortization, foreign exchange, stock based compensation expense and other expense.
2. References to adjusted net income before amortization are to Somero's net income plus amortization expense of intangibles.
3. Adjusted EBITDA and adjusted net income before amortization are not measurements of the Company's financial performance under United States Generally Accepted Accounting Principles ("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 before amortization 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. See net income to EBITDA reconciliation andnet income before amortization reconciliation.
4. Earnings per share diluted adjusted net income before amortization represents income available to stockholders divided by the weighted average shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. Earnings per share diluted net income before amortization are not US GAAP measurements and have been presented because management believes they are useful analytical tools.
Net income to EBITDA reconciliation and
net income before amortization reconciliation (Unaudited)
For the six months ended June 30
2013 2012
US$ 000 US$ 000
Adjusted EBITDA reconciliation
Net income 1,491 847
Tax provision 361 59
Interest expense 151 192
Interest income (9)-
Foreign exchange loss 213 47
Other - (15)
Depreciation 189 137
Amortization 1,166 1,166
Stock based compensation 88 82
Adjusted EBITDA 3,650 2,515
Adjusted net income before amortization reconciliation
Net income 1,491 847
Amortization 1,166 1,166
Adjusted net income before amortization reconciliation 2,657 2,013
See notes to unaudited condensed consolidated financial statements.
Notes
References to adjusted net income before amortization in this document are to Somero's net income plus amortization of intangibles. Although adjusted net income before amortization is not a measure of operating income, operating performance or liquidity under US GAAP, this financial measure is included because management believes it will be useful to investors when comparing Somero's results of operations by eliminating the effects of amortization of intangibles that have occurred as a result of the write-up of assets in connection with the Somero Acquisition. Adjusted net income before amortization should not, however, be considered in isolation or as a substitute for operating income as determined by US GAAP, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with US GAAP. Since adjusted net income before amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, adjusted net income before amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net income to EBITDA reconciliation andnet income before amortization reconciliation is presented above.
Revenues
Somero's consolidated revenues for the six months ended June 30, 2013 were US$21.0m, which represented a 30% increase from US$16.1m for the six months ended June 30, 2012. Somero's revenues consist primarily of sales of new Large line products (the SXP®-D Large Laser Screed), sales of new Small line products (the CopperHead®, PowerRake® and S-840) and other revenues, which consist of, among other things, revenue from sales of services, spare parts, refurbished machines, topping spreaders, accessories, Mini Screed? Commercial and the S-15m. The overall increase in revenues for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was driven by increased Large line sales, increased Small line sales and Other revenues. The table below shows the breakdown between Large line sales, Small line sales and Other revenues during the six months ended June 30, 2013 and 2012.
Six months ended Six months ended
June 30, 2013 (unaudited) June 30, 2012 (unaudited)
In US$ 000 | Percentage of net sales | In US$ 000 | Percentage of net sales | |
Large line sales | 6,285 | 29.9% | 4,538 | 28.2% |
Small line sales | 5,377 | 25.6% | 5,184 | 32.2% |
Other revenues | 9,327 | 44.5% | 6,381 | 39.6% |
Total | 20,989 | 100% | 16,103 | 100% |
Revenue by Product Line
Large line unit sales were 19 units for H1 2013 (compared to sales of 14 units in H1 2012). North America sales were higher with 11 units in H1 2013 compared to 10 units in H1 2012. EMEA sales were lower with 1 unit in H1 2013 compared to 2 units in H1 2012. ROW was higher with 7 units in H1 2013 compared to 2 units in H1 2012.
Small line unit sales were 67 in H1 2013 compared to 70 in H1 2012. North America units were 46 and 36 for H1 2013 and H1 2012, respectively, while EMEA contributed 15 and 20 units for H1 2013 and H1 2012, respectively.
Other revenues, including sales of spare parts, refurbished machines, topping spreaders and accessories, increased from US$6.4m during the six months ended June 30, 2012 to US$9.3m during the six months ended June 30, 2013.
Units by Geography North America EMEA ROW Total |
2013 2012 2013 2012 2013 2012 2013 2012 |
Large Screed 11 10 1 2 7 2 19 14 |
Small Screed 46 36 15 20 6 14 67 70 |
Revenue by Geography
Sales in North America totaled US$12.2m for H1 2013 as compared with US$9.5m in H1 2012 and represented 58% of total revenues (prior period was 59% of total). Sales in EMEA increased to US$3.3m in H1 2013 compared to US$3.2m in H1 2012.
North America | $12.2 | $9.5 |
EMEA (Europe) | $1.2 | $1.8 |
EMEA (India) | $0.0 | $0.2 |
EMEA (Middle East) | $0.7 | $0.6 |
EMEA (Scandinavia) | $0.3 | $0.1 |
EMEA (Russia) | $1.1 | $0.5 |
ROW (Korea) | $0.2 | $0.2 |
ROW (South America) | $1.6 | $1.2 |
ROW (Australia) | $0.8 | $0.3 |
ROW (China) | $2.9 | $1.7 |
Total | $21.0 | $16.1 |
Gross Profit
Somero's gross profit percentage for H1 2013 was 51.7 % as compared to 49.2% in H1 2012. The increase in gross profit percentage is primarily attributable to the price increase implemented in early 2013 and an improved sales mix geared towards higher margin new machines.
Operating Expenses
Operating expenses excluding depreciation, amortization and stock based compensation for H1 2013 were US$7.3m (US$5.5m in H1 2012). The increase has been driven by the investments in emerging markets and additional hires.
Debt Restructuring
As discussed in Note 5, the Company entered into a new credit facility in March 2013. The new agreement will mature between March 2016 and March 2018.
· US$5,000,000 March 2016 secured revolving line of credit
· US$6,085,000 March 2018 delayed draw term loan
· US$1,200,000 March 2018 Commercial Real Estate Mortgage
The Company entered into a new credit facility up to a maximum of US$12,285,000. The interest rates on each of the loans will be Libor plus a percentage based upon a covenant schedule up to a maximum of Libor plus 3.5%. The Company's new loan facility is secured by substantially all of its business assets. The fees that will be paid to the bank are US$30,000 and are included in deferred financing costs. The amendment, along with simplified covenants, allows management to focus on implementation of its strategic plan, successfully introduce new products into the market and maximize opportunities from investments in emerging markets.
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:
For the six months ended June 30 | |||
2013 | 2012 | ||
000's | 000's | ||
Income available to stockholders | $1,491 | $ 847 | |
Basic weighted average shares outstanding | 56,365 | 56,426 | |
Diluted weighted average shares outstanding | 60,496 | 59,204 | |
Basic earnings per share | $0.03 | $0.01 | |
Diluted earnings per share | $0.03 | $0.01 | |
Net income before amortization of intangibles | |||
basic earnings per share | $0.05 | $0.04 | |
Net income before amortization of intangibles | |||
diluted earnings per share | $0.05 | $0.03 | |
(See note attached to the net income to EBITDA reconciliation and adjusted net income before amortization table for discussion of the non-US GAAP measures used.)
Somero Enterprises, Inc. and Subsidiaries | |||
Condensed Consolidated Balance Sheets (unaudited) | |||
As of June 30, 2013 and December 31, 2012 | |||
(in thousands, except per share amounts) | 2013 | 2012 | |
US$ 000 | US$ 000 | ||
Assets | |||
Current Assets: | |||
Cash and cash equivalents | 4,024 | 1,167 | |
Accounts receivable - net | 4,996 | 4,396 | |
Inventories | 7,136 | 6,390 | |
Prepaid expenses and other assets | 604 | 656 | |
Total current assets | 16,760 | 12,609 | |
Property and equipment - net | 3,694 | 3,765 | |
Intangible assets - net | 6,424 | 7,579 | |
Goodwill | 2,878 | 2,878 | |
Deferred financing costs | 151 | 75 | |
Deferred tax asset | 458 | - | |
Other assets | 44 | 34 | |
Total assets | 30,409 | 26,940 | |
Liabilities and stockholders' equity | |||
Current liabilities: | |||
Notes payable - current portion | 1,265 | 511 | |
Accounts payable | 3,654 | 2,648 | |
Accrued expenses | 1,760 | 915 | |
Income tax payable | 871 | 170 | |
Total current liabilities | 7,550 | 4,244 | |
Notes payable, net of current portion | 1,463 | 2,568 | |
Other liabilities | 36 | 19 | |
Total liabilities | 9,049 | 6,831 | |
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 shares issued and 56,364,771 shares outstanding at June 30, 2013; 56,425,598 shares issued and outstanding at December 31, 2012 | 26 | 26 | |
Additional paid-in capital | 28,419 | 28,331 | |
Less: Treasury stock, 60,827 shares as of June 30, 2013 and 0 shares as of December 31, 2012, at cost | (60) | - | |
Accumulated deficit | (6,155) | (7,195) | |
Other comprehensive loss | (870) | (1,053) | |
Total stockholders' equity | 21,360 | 20,109 | |
Total liabilities and stockholders' equity | 30,409 | 26,940 | |
See notes to unaudited condensed consolidated financial statements. | |||
Somero Enterprises, Inc. and Subsidiaries | |||||
Condensed Consolidated Statements of Operations (unaudited) | |||||
For the six months ended June 30, 2013 and 2012 | |||||
For the six months ended June 30 | |||||
2013 | 2012 | ||||
US$ 000 | US$ 000 | ||||
except per share data | except per share data | ||||
Revenue | 20,989 | 16,103 | |||
Cost of sales | 10,145 | 8,186 | |||
Gross profit | 10,844 | 7,917 | |||
Operating expenses | |||||
Selling expenses | 3,224 | 2,536 | |||
Engineering expenses | 377 | 260 | |||
General and administrative expenses | 5,036 | 3,992 | |||
Total operating expenses | 8,637 | 6,788 | |||
Operating income | 2,207 | 1,129 | |||
Other income (expense) | |||||
Interest expense | (151) | (192) | |||
Interest income | 9 | - | |||
Foreign exchange loss | (213) | (47) | |||
Other | - | 15 | |||
Income before income taxes | 1,852 | 906 | |||
Provision for income taxes | 361 | 59 | |||
Net income | 1,491 | 847 | |||
Earnings per common share | |||||
Basic | $0.03 | $0.01 | |||
Diluted | $0.03 | $0.01 | |||
See notes to unaudited condensed consolidated financial statements. | |||||
Somero Enterprises, Inc. and Subsidiaries | |||||||||
Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) | |||||||||
For the six months ended June 30, 2013 | |||||||||
Common StockTreasury StockOther
Compre-
Additional hensive Total
paid-in Accumulated Income stockholders'
Shares Amount capital Shares Amount Deficit (loss) equity
US$000 US$000 US$000 US$000 US$000 US$000
Balance - December 31, 2012 | 56,425,598 | 26 | 28,331 | - | - | (7,195) | (1,053) | 20,109 | ||||
Cumulative translation adjustment | - | - | - | - | - | - | 178 | 178 | ||||
Change in fair value of derivative instruments | - | - | - | - | - | - | 5 | 5 | ||||
Net income | - | - | - | - | - | 1,491 | - | 1,491 | ||||
Stock based compensation | - | - | 88 | - | - | - | - | 88 | ||||
Dividend | - | - | - | - | - | (451) | - | (451) | ||||
Purchase of Treasury stock | - | - | - | 60,827 | (60) | - | (60) | |||||
Balance - June 30, 2013 | 56,425,598 | 26 | 28,419 | 60,827 | (60) | (6,155) | (870) | 21,360 | ||||
See notes to unaudited condensed consolidated financial statements. | ||||||||||||
Somero Enterprises, Inc. and Subsidiaries | |||||
Condensed Consolidated Statements of Cash Flows (unaudited) | |||||
For the six months ended June 30, 2013 and 2012 | |||||
Six months ended | Six months ended | ||||
June 30 2013 | June 30 2012 | ||||
(unaudited) | (unaudited) | ||||
US$ 000 | US$ 000 | ||||
Cash flows from operating activities: | |||||
Net income | 1,491 | 847 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||
Deferred taxes | (458) | - | |||
Depreciation and amortization | 1,356 | 1,303 | |||
Amortization of deferred financing costs | 83 | 59 | |||
Gain on sale of assets | - | (15) | |||
Share based compensation | 88 | 82 | |||
Working capital changes: | |||||
Accounts receivable | (600) | (3) | |||
Inventories | (746) | (216) | |||
Prepaid expenses and other assets | 52 | 50 | |||
Other assets | (10) | - | |||
Accounts payable, accrued expenses and other liabilities | 1,868 | (210) | |||
Income tax receivable/payable | 701 | (9) | |||
Net cash provided by operating activities | 3,825 | 1,888 | |||
Cash flows from investing activities: | |||||
Proceeds from sale of property and equipment | - | 16 | |||
Property and equipment purchases | (130) | (175) | |||
Net cash used in investing activities | (130) | (159) | |||
Cash flows from financing activities: | |||||
Borrowings from additional financing | 10,758 | 8,242 | |||
Repayment of notes payable | (11,109) | (9,526) | |||
Payment of dividend | (451) | - | |||
Purchase of treasury stock | (60) | - | |||
Loan origination fees | (159) | (47) | |||
Net cash used in financing activities | (1,021) | (1,331) | |||
Effect of exchange rates on cash and cash equivalents | 183 | 46 | |||
Net increase in cash and cash equivalents | 2,857 | 444 | |||
Cash and cash equivalents: | |||||
Beginning of period | 1,167 | 89 | |||
End of period | 4,024 | 533 | |||
See notes to unaudited condensed consolidated financial statements. | |||||
1. Organization and Description of Business
Nature of BusinessSomero Enterprises, Inc. (the "Company" or "Somero") designs, manufactures, refurbishes, sells and distributes concrete levelling, contouring and placing equipment, related parts and accessories, and training services worldwide. Somero's headquarters and manufacturing operations are located in Michigan, USA with executive offices in Florida, USA. It has sales and service operations in Chesterfield, England and Shanghai, China.
2. Summary of Significant Accounting Policies
Basis of PresentationThe interim financial data as of June 30, 2013 and the six month periods ended June 30, 2013 and 2012 is unaudited. The condensed consolidated financial statements, in the opinion of Somero management, includes all normal recurring adjustments necessary for a fair presentation of the statement of results for the interim periods. The statements have been prepared in accordance with US GAAP but do not include all of the information and note disclosures required by US GAAP. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Somero's Annual Report and filing with the AIM exchange for the year ended December 31, 2012. The results for the six month period ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other interim period.
Principles of ConsolidationThe consolidated financial statements include the accounts of Somero Enterprises, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Cash and Cash EquivalentsCash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased.
Accounts Receivable and Allowances for Doubtful AccountsFinancial 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, 2013 and December 31, 2012, the allowance for doubtful accounts was approximately US$300,000 and US$304,000, respectively.
InventoriesInventories are stated at the lower of cost, using the first in, first out ("FIFO") method, or market. 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 repayment term of the debt instrument, which was four years from the debt inception date. These financing costs are being amortized using the effective interest method.
Intangible AssetsIntangible assets consist principally of customer relationships and patents, and are carried at their fair value, 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. The Company evaluates the carrying value of long-lived assets, including goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the periods ended June 30, 2013 and December 31, 2012, no such events or circumstances were identified. 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.
GoodwillGoodwill is not amortized but is subject to impairment tests on an annual basis or more frequently if events and circumstances indicate that the value of goodwill may not be recoverable. The Company has chosen December 31 as its periodic assessment date. The Company considers factors including continued economic developments and the overall macro-economic environment and determined that a triggering event did not occur at June 30, 2013. 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.
Revenue RecognitionThe 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. For arrangements which include ex works, revenue is recognized when goods are made available to the seller. 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 LiabilityThe Company provides warranties on all equipment sales ranging from six months 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 and Equipment Property 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 on buildings 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 TaxesDeferred 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. The Company uses a two-step approach to recognize and measure 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, tax positions are measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. Interest expense and penalties related to unrecognized tax benefits are recorded as interest expense and penalties, respectively.
Use of EstimatesThe preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Stock Based CompensationThe Company accounts for its stock option issuance in accordance with guidance set out by the Financial Accounting Standards Board ("FASB".) This guidance requires recognition of 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 guidance also requires measurement of 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$88,000 and US$82,000 for the six month periods ended June 30, 2013 and 2012, respectively.
Transactions in and Translation of Foreign Currency
The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. The preparation of the consolidated financial statements requires the translation of these financial statements to USD. The assets and liabilities of these subsidiaries are translated at period end exchange rates and the statement of operations accounts are translated at average rates for the period. The resulting gains or losses are recorded directly to accumulated other comprehensive income.
The Company is also exposed to market risks related to fluctuations in foreign exchange rates because it has some sales transactions, and some monetary assets and liabilities of its foreign subsidiaries that are denominated in foreign currencies other than the designated functional currency. Gains and losses from such transactions are included as foreign exchange loss in the accompanying consolidated statements of operations.
Comprehensive income/(loss)Comprehensive income/(loss) is the combination of reported net income and other comprehensive income/(loss) ("OCI"). OCI consists of changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income. OCI was composed of the following for the six months ended June 30, 2013 and 2012.
For the six months ended June 30
2013 | 2012 | |
US$ 000 | US$ 000 | |
Net income | 1,491 | 847 |
Cumulative translation adjustment | 178 | 20 |
Change in fair value of derivative instruments - net of income taxes | 5 | 26 |
Total comprehensive income | 1,674 | 893 |
Earnings Per ShareBasic 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 reflects 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 and restricted stock units. Earnings per common share has been computed based on the following:
For the six months ended June 30
2013 | 2012 | |
US$ 000 Except share amounts | US$000 Except share amounts | |
Net income | 1,491 | 847 |
Basic weighted average shares outstanding | 56,364,771 | 56,425,598 |
Diluted weighted average shares outstanding | 60,496,157 | 59,204,457 |
Fair Value MeasurementsThe Company has certain assets and liabilities that may be recorded at fair value at the reporting date. The fair values 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.
Fair Value Measurements at Reporting Date
Quoted Prices In Active Markets for | Significant Other | Significant Unobservable | |||||||||||||||||||||||||||||||||||||||
June 30, 2013 | Identical Assets | observable Inputs | Inputs | ||||||||||||||||||||||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||||||||||||||||||
Assets: | US$000 | US$000 | US$000 | US$000 | |||||||||||||||||||||||||||||||||||||
Goodwill | 2,878 | 2,878 | |||||||||||||||||||||||||||||||||||||||
Interest rate swap | 5 | 5 | |||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||
Quoted prices in Active Markets for | Significant Other | Significant Unobservable | |||||||||||||||||||||||||||||||||||||||
Identical Assets | observable Inputs | Inputs | |||||||||||||||||||||||||||||||||||||||
December 31, 2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||||||||||||
Assets: | US$000 | US$000 | US$000 | US$000 | |||||||||||||||||||||||||||||||||||||
Goodwill | 2,878 | 2,878 | |||||||||||||||||||||||||||||||||||||||
New Accounting Pronouncements
Disclosures about offsetting assets and liabilities -In December 2011, the FASB issued accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires entities to disclose both gross and net information about instruments and transactions that are offset in the statement of financial position, as well as instruments and transactions that are subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB issued guidance clarifying the scope of the disclosures to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements and securities lending and securities borrowing transactions. This guidance was effective January 1, 2013, with retrospective application required. The guidance did not have a material impact on our consolidated financial statements. See Note 5 for additional information.
Reporting of amounts reclassified out of accumulated other comprehensive income -In February 2013, the FASB issued accounting guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income in its entirety in the same reporting period. For other amounts not required to be reclassified in their entirety to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. This guidance will be effective for reporting periods beginning after December 15, 2013 and is not expected to have a material impact on our consolidated financial statements.
Joint and several liability arrangements -In February 2013, the FASB issued accounting guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is also required to disclose the nature and amount of the obligation as well as any other information about those obligations. This guidance is effective January 1, 2014, with retrospective application required. We do not expect the adoption to have a material impact on our consolidated financial statements.
Parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity -In March 2013, the FASB issued accounting guidance on the parent's accounting for the cumulative translation adjustment "CTA" upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new standard clarifies existing guidance regarding when the CTA should be released into earnings upon various deconsolidation and consolidation transactions. This guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our consolidated financial statements.
Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists -In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the financial statements if available under the applicable tax jurisdiction. The guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our consolidated financial statements.
3. Inventories
Inventories consisted of the following at June 30, 2013 and December 31, 2012:
2013 | 2012 | |
US$ 000 | US$ 000 | |
Raw materials | 2,059 | 2,311 |
Finished goods and work in process | 3,045 | 2,365 |
Refurbished | 2,032 | 1,714 |
Total | 7,136 | 6,390 |
4. Property and Equipment
Property and equipment consist of the following at June 30, 2013 and December 31, 2012:
2013 | 2012 | ||||
US$ 000 | US$ 000 | ||||
Land | 207 | 207 | |||
Buildings and improvements | 3,602 | 3,602 | |||
Machinery and equipment | 2,098 | 1,979 | |||
Sub-total | 5,907 | 5,788 | |||
Less: accumulated depreciation and amortization | (2,213) | (2,023) | |||
Total | 3,694 | 3,765 | |||
Depreciation expense for the six months ended June 30, 2013 and 2012 was approximately US$189,000 and US$137,000, respectively.
5. Notes Payable
The Company's debt consisted of the following at June 30, 2013 and December 31, 2012:
2013 | 2012 | |
US$ 000 | US$ 000 | |
30 month secured reducing revolving line of credit | - | 666 |
30 month secured reducing term loan | - | 2,414 |
March 2016 secured revolving line of credit | - | |
March 2018 delayed draw term loan | 1,536 | |
March 2018 Commercial Real Estate Mortgage | 1,192 | |
Total bank debt | 2,728 | 3,080 |
Less debt due within one year | (1,265) | (511) |
Obligations due after one year | 1,463 | 2,568 |
The Company entered into a new credit facility in March 2013. The new agreement will mature between March 2016 and March 2018.
· US$5,000,000 March 2016 secured revolving line of credit
· US$6,085,000 March 2018 delayed draw term loan
· US$1,200,000 March 2018 Commercial Real Estate Mortgage
The Company entered into a new credit facility up to a maximum of US$12,285,000. The interest rates on each of the loans are Libor plus a percentage based upon a covenant schedule up to a maximum of Libor plus 3.5%. The Company's new loan facility is secured by substantially all of its business assets. The fees paid to the bank were US$30,000.
Future PaymentsThe future payments by year represent the remaining six months for 2013 and the full 12 months of each successive period for the Company's amended loan facility:
June 30
US$ 000
2013 633
2014 976
2015 48
2016 48
2017 48
Thereafter 975
Total payments 2,728
InterestInterest expense on the credit facility for the six months ended June 30, 2013 and 2012, was approximately US$150,000 (includes US$92,000 of amortized swap interest fees and amortized loan origination fees) and US$192,000 (includes $81,000 of amortized swap interest fees and amortized loan origination fees), respectively, related to the debt obligation. Interest expense includes US$0 and US$26,000 in 2013 and 2012, respectively, related to the loss on cash flow hedges as a result of paying off interest rate swaps that were recognized in the statement of operations as interest expense and removed from other comprehensive income/(loss).
6. Operating Leases
The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non-cancellable operating leases with initial terms in excess of one year represent the remaining six months for 2013 and the full 12 months of each successive period:
June 30
US$ 000
2013 154
2014 271
2015 252
2016 147
2017 1
Total 825
7. Commitments and Contingencies
The Company has entered into employment agreements with certain members of senior management. The terms of these agreements range from six months to one year and include non-compete and non-disclosure provisions as well as providing 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.
8. Income Taxes
The Company's effective tax rate for the six months ended June 30, 2013 was 19.5% compared to the federal statutory rate of 34.0%. The effective tax rate is based on the estimated annual effective tax rate as required by US GAAP for interim periods. The effective tax rate is lower than the statutory rate mainly due to the effect of removing the valuation allowance associated with a portion of our goodwill and share-based compensation deferred tax assets. The Company has provided a valuation allowance of approximately US$4,606,000 and US$5,073,000 at June 30, 2013 and December 31, 2012 respectively, related to our deferred tax assets.
Somero is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company began business in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2010 forward is still open. Somero has no federal, foreign or state income tax returns currently under examination.
At June 30, 2013, the Company had US$458,000 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.
The Company has US$2,774,120 in state loss carry forwards with varying expiration dates and US$3,790,012 in foreign loss carry forwards with indefinite expiration dates.
.
9. Supplemental Cash Flow Disclosures
For the six months ended 30 June
2013 | 2012 | |
US$ 000 | US$ 000 | |
Cash paid for interest | 60 | 113 |
Cash paid for taxes | 12 | 8 |
10. Intangible Assets
The following table reflects intangible assets that are subject to amortization.
Weighted average | |||||||
amortization | June 30 | December 31 | |||||
period | US$ 000 | US$ 000 | |||||
Capitalized cost | |||||||
Customer relationships | 8 years | 6,300 | 6,300 | ||||
Patents | 12 years | 18,538 | 18,538 | ||||
Other intangibles | 3 years | 4 | 4 | ||||
Intangible assets not subject to amortization | - | 50 | 39 | ||||
24,892 | 24,881 | ||||||
Accumulated amortization | |||||||
Customer relationships | 8 years | 6,234 | 5,841 | ||||
Patents | 12 years | 12,230 | 11,457 | ||||
Other intangibles | 3 years | 4 | 4 | ||||
Intangible assets not subject to amortization | - | - | - | ||||
18,468 | 17,302 | ||||||
Net carrying costs | |||||||
Customer relationships | 8 years | 66 | 459 | ||||
Patents | 12 years | 6,308 | 7,081 | ||||
Other intangibles | 3 years | - | - | ||||
Intangible assets not subject to amortization | - | 50 | 39 | ||||
6,424 | 7,579 | ||||||
Amortization expense for each of the six month periods ended June 30, 2013 and 2012 was approximately US$1,166,000.
Estimated amortization expense on intangibles for the remainder of 2013 is US$838,000. Future amortization of intangible assets is expected to be as follows at:
June 30 | |
US$ 000 | |
2013 | 838 |
2014 | 1,545 |
2015 | 1,545 |
2016 | 1,545 |
2017 | 901 |
6,374 |
11. Subsequent Events
In preparing the consolidated financial statements, the Company has evaluated all subsequent events and transactions for potential recognition or disclosure through September 3, 2013, the date the consolidated financial statements were available for issuance.
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