TIDMSOM

RNS Number : 3974Y

Somero Enterprises Inc.

09 September 2020

 
Press Announcement 
For immediate release 
09 September 2020 
 

Somero(R) Enterprises, Inc.

("Somero" or "the Company" or "the Group")

Interim Results for the six months ended June 30, 2020

Secure financial position, healthy H1 2020 profits and cash flow, investments for future growth

Financial Highlights

-- Generated US$ 35.3m in H1 2020 revenues (H1 2019: US$ 39.0m) despite disruption from COVID-19 pandemic

-- Cost reductions and cash management drove healthy profits and a strong financial position to end H1

o US$ 8.7m in H1 2020 adjusted EBITDA (H1 2019: US$ 11.2m)

o June 30, 2020 net cash of US$ 28.9m (June 30, 2019: US$ 15.1m)

-- Investments for long-term growth continue to be made possible by healthy cash flow and a strong balance sheet

o US$ 3.5m 35,000 square foot expansion of Houghton, MI facility expected to be completed in early Q3

o US$ 0.5m Fort Myers, FL training facility expansion with expected completion in Q3

-- Resumption of dividend payments, reflecting the strong financial position and the Board's confidence in the business

o Payment of the deferred FY 2019 dividend of US$ 0.207 per share

o Interim dividend of US$ 0.040 per share

   o         Combined dividend total of US$ 14.0m 
   --       Recommencement of the US$ 1.0m share buyback program 

-- Reinstatement of financial guidance for the full year with revenue expected to be approximately US$ 75.0m, adjusted EBITDA approximately US$ 19.0m, and ending net cash approximately US$ 20.0m

 
                                 H1 2020    H1 2019   % Change 
                                     US$        US$ 
 Revenue                         $ 35.3m    $ 39.0m        -9% 
 Adjusted EBITDA(1,2)             $ 8.7m    $ 11.2m       -22% 
 Adjusted EBITDA margin(1,2)         25%        29%    -400bps 
 Profits before tax               $ 7.5m    $ 10.5m       -29% 
 Adjusted net income(1,3)         $ 5.8m     $ 8.0m       -29% 
 Diluted adjusted net income 
  per share(1,3)                  $ 0.10     $ 0.14       -29% 
 Cash flow from operations        $ 7.0m     $ 4.4m        59% 
 Net cash(4)                     $ 28.9m    $ 15.1m        91% 
 Interim dividend per share     $ 0.0400   $ 0.0575       -30% 
 

Operational Highlights

-- Continued strong focus on strategic investments to position the business for sustained long-term growth

-- Three new products released in H1 2020 contributed a combined US$ 1.6m in revenue during the period:

o SkyScreed(R) 36, offering extended reach on high-rise structural applications

o Somero(R) SRS-4, a lightweight, easily transported compact boomed screed

o Somero(R) Broom + Cure(TM) machine that efficiently applies curing agents and texture to exterior concrete slabs

-- SkyScreed demos paused throughout H1 2020 due to COVID-19 restrictions but began to resume in June resulting in the first sale of the SkyScreed(R) 36

-- Somero Line Dragon(R), launched in H2 2019, gained traction and contributed US$ 1.7m in H1 2020 revenues (H1 2019: US$ 1.1m)

Notes:

1. The Company uses non-US GAAP financial measures to provide supplemental information regarding the Company's operating performance. See further information regarding non-GAAP measures below.

2. Adjusted EBITDA as used herein is a calculation of the Company's net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization stock-based compensation and non-cash lease expense.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4. Net cash is defined as cash and cash equivalents less borrowings under bank obligations exclusive of deferred financing costs.

Jack Cooney, CEO of Somero, said:

"Our teams have risen to the challenges of the past few months brilliantly. We adjusted rapidly to changing market conditions, and the talent, flexibility and resilience we have in the business has never been more evident. In response to the crisis, our team developed a plan with four main objectives; to protect the health of our employees, to preserve cash, to protect profits, and to uphold our commitment to product development. Following this half, I am pleased to report we met all four objectives while delivering a solid sales performance.

The pandemic has served as an excellent stress test for the business, and while difficult decisions have been made along the way, I am confident we will emerge a better business. I want to thank all our employees globally for working tirelessly to serve our customers during an unprecedented period.

We begin the second half of the year with confidence in the strength of our financial position, in the flexibility of our operating model, and in the demand seen for our recently launched products. At the same time, we remain cautious with the full understanding the uncertainty associated with the global pandemic will likely remain in place through the remainder of the year. Moving forwards, our focus is sharp and our management team is committed to continuing to deliver healthy profits and cash flows to our shareholders while continuing to make sound strategic investments for long-term growth."

For further information, please contact:

 
 
  Enquiries: 
Somero Enterprises, Inc. www.somero.com 
 Jack Cooney, CEO +1 239 210 6500 
 John Yuncza, CFO 
 Howard Hohmann, EVP Sales 
 
 finnCap Ltd (NOMAD and Broker) 
 Matt Goode (Corporate Finance) +44 (0)20 7220 0500 
 Carl Holmes (Corporate Finance) 
 Kate Bannatyne (Corporate Finance) 
 Tim Redfern / Richard Chambers ( ECM ) 
 
 Alma PR (Financial PR Advisor) somero@almapr.co.uk 
 Rebecca Sanders-Hewett +44 (0)20 3405 0205 
 Susie Hudson 
 David Ison 
 Sam Modlin 
 
 

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

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(R) market in 1986 and has maintained its market-leading position by continuing to focus on bringing new products to market and developing patent-protected proprietary designs. In addition to its products, Somero offers customers unparalleled global service, technical support, training and education, reflecting the Company's emphasis on helping its customers achieve their business and profitability goals, a key differentiator to its peers.

For more information, visit www.somero.com

Chairman's and Chief Executive Officer's Statement

Overview

Revenue for the first six months of 2020 totaled US$ 35.3m, a 9% decline compared to trading in H1 2019. While H1 2019 was adversely impacted by historic levels of rainfall, the main impact on trading performance in H1 2020 was the global COVID-19 pandemic. It created significant uncertainty and led to shelter-in-place restrictions, slowing the pace of construction projects and in turn slowing the pace of our trading. Despite the pandemic, we have not seen a fundamental long-term change in our markets and are in fact encouraged by the health of the underlying US non-residential construction market, a view supported by the extended project backlogs our customers report albeit alongside reported delays on their projects. In our second largest market, Europe, we continue to see positive underlying non-residential construction market conditions and have seen encouraging signs of improved activity reflected by modest improvement in trading to end H1 2020. The remaining international regions continue to reflect a greater degree of uncertainty with market activity correlated to control over COVID-19 infection rates.

On a longer-term basis, COVID-19 restrictions have significantly accelerated a shift toward e-commerce and online fulfillment that we anticipate will drive demand in the coming years for new warehousing and benefit our core laser screed machine product categories. While estimates of demand for new warehousing vary, it is a positive factor in our longer-term outlook.

Despite the challenges associated with COVID-19 we were still able to make good traction with our new products. Combined sales of the three new products we launched in H1 2020, the SkyScreed(R) 36, the Somero(R) SRS-4, and the Somero(R) Broom + Cure(TM) machine, were US$ 1.6m. In addition, the Somero Line Dragon(R), the next generation SP-16 Line Pulling and Placing System launched in H2 2019, gained traction and contributed US$ 1.7m in H1 2020 revenues (H1 2019: US$ 1.1m).

Immediately following the outbreak of COVID-19, the Company made quick adjustments to staffing levels and enacted cost cutting measures to partially offset operational inefficiencies from reduced volume. The result of these actions was a stable, though modestly decreased, gross margin of 54.7% in H1 2020 compared to 56.0% in H1 2019. Further actions were also taken to reduce operating expenses. These measures included cancellation of 2020 profit sharing and bonuses, resulting in operating costs remaining essentially flat with the prior year period, reflecting an increase of less than US$ 0.1m. These measures translated to H1 2020 adjusted EBITDA of US$ 8.7m, a healthy 25% margin, compared to US$ 11.2m, a 29% margin, in H1 2019.

Region Reviews

North American sales increased to US$ 27.8m, a 2% increase from H1 2019. Growth from the prior year period was due in part to historic levels of rainfall in H1 2019 that had a significant, adverse impact on trading in that period. In North America, project delays and slowdowns were seen in H1 2020, along with heightened uncertainty by our customers, due to the broad impact of the pandemic. We were encouraged to see signs of improvement to end H1 2020 as activity picked up with the easing of restrictions, a trend that appears to be carrying over into the second half of the year. Our confidence in the health of the underlying non-residential construction market remains intact and we anticipate some longer-term benefit from new warehousing demand associated with an accelerated shift to e-commence and online fulfilment.

Europe reported sales of US$ 4.1m in H1 2020, a US$ 1.4m decline from H1 2019, after experiencing COVID-19 impacts similar to North America. We have not observed a fundamental change in the underlying non-residential construction market in Europe and are encouraged by early, although modest, signs of improvement in trading activity to end H1 2020. We anticipate future benefit from recently launched new products, as well as from longer-term anticipated demand for new warehousing.

The impact of the pandemic was seen earlier and more acutely in China, with multiple highly populated regions subject to severe restrictions as the government took dramatic steps to contain the virus spread. China revenues in H1 2020 were US$ 1.8m, down from US$ 2.5m in H1 2019, reflecting this disruption. On a positive note, as we progressed to the end of H1 2020, the government eased restrictions and activity began to normalize at a faster pace than seen in North America and Europe.

All our other regions also faced challenges from the pandemic during the first half of the year, and in some cases the impact was more severe than that experienced in the US and Europe. For example, severe shelter-in place restrictions in Australia during H1 2020 had a clear negative impact on trading during the period. Revenues from Australia, included in our Rest of World classification, were US$ 0.9m in H1 2020 compared to US$ 1.9m in H1 2019. Similar pressures on trading associated with the pandemic were seen in India, Latin America and the Middle East, markets that contributed sales of US$ 0.3m, US$ 0.2m, and US$ 0.2m, respectively, all equal to or down from the prior year period. As with all our non-core markets, the level of non-residential construction activity is subject to a certain amount of volatility which, coupled with having relatively small revenue bases, makes for challenging year-on-year comparisons, particularly during such a volatile period. We anticipate activity in each of these markets in H2 2020 but understand it will be dependent on control over COVID-19 infection rates in each respective territory. In the meantime, we remain poised to capture opportunities in these markets when activity begins to normalize and uncertainty diminishes.

Strategic Progress

A key pillar of our growth strategy is innovation and our innovation process begins with our customers. Through extensive customer interactions, at times in the formal setting of customer innovation councils, Somero identifies solutions to challenges that will enable our customers to complete their projects faster, more efficiently, and with improved quality and safety. These solutions ultimately help our customers build successful, profitable businesses.

H1 2020 was an intense period of product development, and despite disruption from the pandemic, we did not lessen these efforts. We launched three new products and added to our pipeline of future product ideas. These new products made an immediate contribution to our H1 2020 performance, combining for US$ 1.6m in sales in the period. Most importantly, our product development efforts continue to open new markets segments for Somero, such as with the SkyScreed and the targeted structural high-rise segment. Our pipeline of new product ideas continues to target new, untapped market segments, in addition to the structural high-rise market, that expand the global opportunity for Somero and provide significant runway for future growth.

Of the recent new products, the biggest impact came from the Somero(R) SRS-4 that contributed US$1.1m in H1 2020 revenues during only four months of commercial availability. The Somero(R) SRS-4 is a lightweight, high-performance, remote controlled boomed screed that is easily transported and can access applications not particularly well-suited to our larger equipment. We expect the SRS-4 contribution to revenue in H2 2020 will increase.

We also introduced the SkyScreed(R) 36 to expand our product offering targeting the structural high-rise market segment. The SkyScreed(R) 36 provides extended reach to efficiently place large concrete slabs on high-rise structural jobs. Sales opportunities for SkyScreed products were limited in H1 2020 due to shelter-in-place restrictions and associated project delays that reduced opportunities for jobsite product demonstrations, a key element to the selling process. As restrictions began to ease, we successfully completed the sale of the first SkyScreed(R) 36 resulting in a US$ 0.3m contribution to revenue in H1 2020.

At the end of H1 2020, we introduced the Somero(R) Broom + Cure(TM) machine. The Somero(R) Broom + Cure(TM) machine provides an efficient mechanical process to apply curing agents and texture to exterior concrete slabs in accordance with American Concrete Institute standards. Despite launching at the end of H1 2020, we sold our first Broom + Cure(TM) machine in the period, contributing US$ 0.2m in H1 2020 revenue, and are encouraged by early interest in this unique product.

The integration of Line Dragon(R) has been fully completed. The launch of the Somero Line Dragon(R) in H2 2019, a next generation product combining the best features of the Somero SP-16 and the legacy Line Dragon(R) design, gained traction in H1 2020. Sales of this product contributed US$ 1.7m in revenues during H1 2020, up US$ 0.6m compared to H1 2019. We are pleased with the long-term growth opportunity we see for this product.

Expansion Update

The expansion of the Houghton, Michigan Operations and Support Offices is strategically important to support our longer-term plans, and we are nearing completion of this project. The 35,000 square feet we are adding to the facility provides the space needed for more efficient operations and the capacity needed to accommodate new products and increased volume up to an estimated US$ 125m in annual revenues. The project is expected to be completed in Q3 2020 with a final project cost of approximately US$ 3.5m, the vast majority of which has been expended as of June 30, 2020.

The US$ 0.5m expansion to the Global Headquarters and Training Facilities in Fort Myers, Florida is also anticipated to be completed in Q3 2020. This project increases classroom capacity to accommodate broader attendance at training and product demonstration events. We believe this is an important strategic investment that distinguishes Somero as leading the industry through training and education.

Our People

On behalf of the Board, we would like to thank all our global employees for their continued dedication and passion for our customers' success during these testing times. Our employees worked tirelessly to ensure great outcomes for our customers and, in turn, delivered positive results and returns to our shareholders. The Board and management team remain as committed as ever to providing our employees with a rewarding and challenging working environment that is full of opportunity.

Dividend and share buyback program

With the positive H1 2020 result and based on our strong financial position and confidence in the business, we are pleased to report that the Board has decided to accelerate payment of the deferred 2019 dividends, totaling $0.207 per share, and to declare an interim 2020 dividend of $0.040 per share. The Board determined that the current level of excess cash, in large part attributable to the deferral of the 2019 dividend payments, is no longer required and therefore the Company can resume dividend payments and distribute this cash to shareholders. The combined dividend of $0.247 per share, representing a total payment of US$ 14.0m, will be payable on October 15, 2020 to shareholders on the register as of September 25, 2020.

In addition, the Board has re-approved the US$ 1.0m share buyback program expected to be completed by the end of 2020. The buyback program was initially intended to be completed in H1 2020 but cancelled alongside the decision on March 30, 2020 to defer payment of the 2019 dividends. The purpose of the share buyback is to mitigate dilution from future share issuances under the Company's equity award programs. It is intended that any shares repurchased will be immediately cancelled. The maximum price paid per Ordinary Share is to be no more than the higher of 105 per cent. of the average middle market closing price of an Ordinary Share for the five business days preceding the date of any share buyback, the price of the last independent trade and the highest current independent purchase bid.

During the course of the buyback program, the Company will make further announcements to the market as and when share purchases are made.

Current Trading and Outlook

H1 2020 was challenging on many levels, but we met these challenges head-on and enter H2 2020 with confidence in the health and performance of the business and in the security afforded by our strong financial position. This confidence is exemplified by the Board's decision to pay the 2019 dividends as well as an interim 2020 dividend totaling, and to re-authorize the US$ 1.0m share buyback program.

While our outlook for the remainder of 2020 remains cloudy due to the continued uncertainty caused by the pandemic, we do see encouraging signs in our two largest markets, the US and Europe, that provides a degree of confidence. Accordingly, our expectation is for H2 2020 trading volumes to improve compared to H1 2020. As such, the outlook for the full year 2020 includes expectations for revenues of approximately US$ 75.0m, adjusted EBITDA of approximately US$ 19.0m, and ending net cash of approximately US$ 20.0m. This confidence is based on a healthy US non-residential construction market, supported by extended project backlogs reported by our customers, and based on the expectation for no meaningful increase to COVID-19 shelter-in-place restrictions in the US or Europe. The outlook also incorporates encouraging market demand seen for our new products, which we anticipate will be a positive contributor to H2 2020 trading.

In Europe, as noted, we are encouraged by early signs of improvement and remain hopeful market activity continues to normalize as the COVID-19 virus is contained. COVID-19 considerations aside, the drivers for performance in Europe will include demand for new products, replacement equipment and technology upgrades.

In China, we are pleased market activity has begun to normalize from virus impacts at a faster pace than in the US and Europe and are also pleased with the stabilizing impact of local leadership in the China business. Our view that the long-term opportunity in China hinges on the acceptance of and demand for quality by the market remains unchanged.

In the Middle East, Latin America, India and Australia, while we anticipate H2 2020 activity in each of these markets, we understand the level of activity will be dependent on control over COVID-19 infection rates in each respective territory. Our focus in H2 2020 is to capture opportunities in these markets when activity begins to normalize and uncertainty diminishes.

We look forward to the period ahead and to the positive impact on our business from all the new products we have been bringing to market. Never before has Somero experienced so much activity in product development efforts that are laying the foundation for long-term growth. We are encouraged by the early signs of improvement observed to end H1 2020 in our two largest markets, and we enter H2 2020 with confidence in the strength and performance of our business and our ability to execute and deliver healthy profits and cash flows to our shareholders.

Larry Horsch

Non-Executive Chairman

Jack Cooney

President and Chief Executive Officer

September 9, 2020

 
 FINANCIAL REVIEW 
                                                     For the six months ended 
 Summary of financial results                                         June 30 
 * unaudited                                               2020          2019 
                                                        US$ 000       US$ 000 
                                                     Except per    Except per 
                                                     share data    share data 
                                                  -------------  ------------ 
 
 Revenue                                                 35,266        39,012 
 Cost of sales                                           15,961        17,160 
                                                  -------------  ------------ 
 Gross profit                                            19,305        21,852 
 
 Operating expenses 
 Selling, marketing and customer support                  5,175         5,533 
 Engineering and product development                        963         1,046 
 General and administrative                               5,649         5,126 
 Total operating expenses                                11,787        11,705 
------------------------------------------------  -------------  ------------ 
 
 Operating income                                         7,518        10,147 
 Other income (expense) 
 Interest expense                                          (22)          (21) 
 Interest income                                            109           116 
 Foreign exchange impact                                   (80)          (54) 
 Other                                                     (60)           266 
 Income before income taxes                               7,465        10,454 
------------------------------------------------  -------------  ------------ 
 
 Provision for income taxes                               1,712         2,401 
 Net income                                               5,753         8,053 
===========================================  ===  =============  ============ 
 
                                                      Per Share     Per Share 
                                                            US$           US$ 
 Basic earnings per share                                  0.10          0.14 
 Diluted earnings per share                                0.10          0.14 
 Basic adjusted net income per share (1), 
  (2), (4)                                                 0.10          0.14 
 Diluted adjusted net income per share 
  (1), (2), (4)                                            0.10          0.14 
------------------------------------------------  -------------  ------------ 
 Other data 
 Adjusted EBITDA (1), (2), (4)                            8,651        11,180 
 Adjusted net income (1), (3), (4)                        5,779         7,986 
 Depreciation expense                                       486           480 
 Amortization of intangibles                                 77            69 
 Capital expenditures                                     1,463           587 
 
 

Notes:

1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

2. Adjusted EBITDA as used herein is a calculation of net income plus tax provision, interest expense, interest income, foreign exchange gain (loss), other expense, depreciation, amortization, stock-based compensation and non-cash lease expense.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4. The Company uses non-US GAAP financial measures to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.

 
 Net income to adjusted EBITDA reconciliation and 
  Adjusted net income reconciliation 
 * unaudited                                       Six months ended June 30 
 
                                                         2020          2019 
                                                      US$ 000       US$ 000 
                                                -------------  ------------ 
 Adjusted EBITDA reconciliation 
 Net income                                             5,753         8,053 
 Tax provision                                          1,712         2,401 
 Interest expense                                          22            21 
 Interest income                                        (109)         (116) 
 Foreign exchange impact                                   80            54 
 Other                                                     60         (266) 
 Depreciation                                             486           480 
 Amortization                                              77            69 
 Non-cash lease expense                                   105           123 
 Stock-based compensation                                 465           361 
----------------------------------------------  -------------  ------------ 
 Adjusted EBITDA                                        8,651        11,180 
----------------------------------------------  -------------  ------------ 
 
 Adjusted net income reconciliation 
 Net income                                             5,753         8,053 
 Amortization                                              77            69 
 Tax impact of stock option & RSU settlements            (51)         (136) 
----------------------------------------------  -------------  ------------ 
 Adjusted net income reconciliation                     5,779         7,986 
----------------------------------------------  -------------  ------------ 
 

Notes:

1. Adjusted EBITDA and Adjusted net income are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts, lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.

2. Adjusted EBITDA as used herein is a calculation of the Company's net income plus tax provision, interest expense, interest income, foreign exchange gain (loss), other expense, depreciation, amortization, stock-based compensation and non-cash lease expense.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and excluding the tax impact of stock option and RSU settlements and other special items.

4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.

Revenues

The Company's consolidated revenues decreased by 9% to US$ 35.3--m (H1 2019: US$ 39.0m). The Company's revenues consist primarily of sales from Boomed Screed products, which include the S22-EZ, S-15R, S-10A and SRS-4 Laser Screed machines, sales from Ride-on Screed products, which are drive through the concrete machines that include the S-485, S-940 and S-158C Laser Screed machines, remanufactured machines sales, 3-D Profiler Systems, Somero Line Dragon, formerly SP-16 Concrete Line Pulling and Placing System, SkyScreed, Broom + Cure(TM) and Other revenues which consist of revenue from sales of parts and accessories, sales of other equipment, service, training and shipping charges. The overall decrease for the period was driven by sales of Boomed screeds, Ride-on screeds and Other revenues.

Boomed Screed sales decreased to US$ 11.6--m (H1 2019: US$ 16.2m) as unit volume decreased to 43 units (H1 2019: 56 units), Ride-on screed sales decreased to US$ 6.7m (H1 2019: US$ 7.8m) primarily due to an decrease in volume to 63 units (H1 2019: 75), remanufactured machine sales increased to US$ 2.7m (H1 2019: US$ 1.9m) as unit volume increased to 20 units (H1 2019: 12), 3-D Profiler System sales increased to US$ 3.5m (H1 2019: US$ 2.4m) as unit volume increased to 32 units (H1 2019: 22), Somero Line Dragon(R), formerly SP-16 Concrete Line Pulling and Placing System, sales increased to US$ 1.7m (H1 2019: US$ 1.1m) as unit volume increased to 48 units (H1 2019: 36), SkyScreed(R) sales remained consistent with H1 2019, and Other revenues decreased to US$ 8.8m (H1 2019: US$ 9.4m). The following table shows the breakdown during the six months ended June 30, 2020 and 2019:

 
 Revenue breakdown by 
  geography 
 
                     North America           EMEA (1)             ROW (2)                        Total 
                     US$ in millions      US$ in millions      US$ in millions               US$ in millions 
                                                                                        2020               2019 
                       2020      2019       2020      2019       2020      2019    Net      % of      Net       % of 
                                                                                   sales     Net      sales     Net 
                                                                                            sales              sales 
 
 Boomed screeds 
  (3)                   8.2      11.0        2.7       2.8        0.7       2.4     11.6     32.9%     16.2      41.5% 
 Ride-on screeds 
  (4)                   5.4       5.8        0.9       1.5        0.4       0.5      6.7     19.0%      7.8      20.0% 
 Remanufactured 
  machines              2.4       1.1          -       0.6        0.3       0.2      2.7      7.6%      1.9       4.9% 
 3D Profiler 
  System                3.2       2.1          -       0.2        0.3       0.1      3.5     10.0%      2.4       6.2% 
 Somero Line 
  Dragon (R) 
  (5)                   1.7       0.9          -       0.1          -       0.1      1.7      4.8%      1.1       2.8% 
 SkyScreed 
  (R)                   0.3       0.2          -         -          -         -      0.3      0.8%      0.2       0.5% 
 Other (6)              6.6       6.1        0.9       1.5        1.3       1.8      8.8     24.9%      9.4      24.1% 
 Total                 27.8      27.2        4.5       6.7        3.0       5.1     35.3    100.0%     39.0     100.0% 
                  ---------  --------                       ---------  --------           --------  ------- 
 

Notes:

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

2. ROW includes the China, Australia, Latin America, Korea, India and Southeast Asia

3. Boomed Screeds include the S-22E, S-22EZ, S-15R, S-10A and SRS-4.

4. Ride-on Screeds include the S-840, S-940, S-485, and S-158C.

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

6. Other includes parts, accessories, services and freight, as well as other equipment such as the Somero Broom + Cure (TM) , STS-11M Topping Spreader, Copperhead, and Mini Screed C.

 
 Units by product 
  line                            H1 2020   H1 2019 
--------------------------       --------  -------- 
 Boomed screeds                        43        56 
 Ride-on screeds                       63        75 
 Remanufactured machines               20        12 
 3-D Profiler System                   32        22 
 Somero Line 
  Dragon (R)                           48        36 
 SkyScreed (R)                          1         1 
 Other (1)                             18        15 
-------------------------------  --------  -------- 
 Total                                225       217 
-------------------------------  --------  -------- 
 

Notes:

1. Other includes equipment such as the Somero Broom + Cure, STS-11M Topping Spreader, Copperhead, and Mini Screed C.

Sales to customers located in North America contributed 79% of total revenue (H1 2019: 70%), sales to customers in EMEA (Europe, Middle East, Scandinavia, and Russia) contributed 13% (H1 2019: 17%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, India and China) contributed 8% (H1 2019: 13%).

Sales in North America totaled US$ 27.8m (H1 2019: US$ 27.2m) up 2%, driven by strong contribution from new products led by the SRS-4 and Somero Line Dragon, as well as 3-D Profiler Systems and remanufactured machines. Sales to customers in EMEA were US$ 4.5m (H1 2019: US$ 6.7m) which declined 33% driven by declines in sales across all product categories, particularly Ride-on screeds and Other. Sales to customers in ROW were US$ 3.0m (H1 2019: US$ 5.1m) decreasing by 41% driven by declines in sales across most of the product categories.

 
                            US$ in millions 
                          ------------------ 
 Regional sales            H1 2020   H1 2019 
-------------------       --------  -------- 
 North America                27.8      27.2 
 Europe                        4.1       5.5 
 China                         1.8       2.5 
 Middle East                   0.2       0.2 
 Latin America                 0.2       0.7 
 Rest of World(1)              1.2       2.9 
 Total                        35.3      39.0 
------------------------  --------  -------- 
 

Notes:

(1) Includes Australia, India, Southeast Asia, Korea and Russia.

Gross profit

Gross profit declined to US$ 19.3m (2019: US$ 21.9m), with gross margins slipping slightly to 54.7% compared to 56.0% in H1 2019 primarily due to decreased manufacturing overhead absorption.

Operating expenses

Operating expenses excluding depreciation, amortization and stock-based compensation for H1 2020 were US$ 11.0m (H1 2019: US$ 11.1m).

Debt

As of June 30, 2020, the Company had no outstanding debt and there were no changes to the Company's US$ 10.0m secured revolving line of credit which will mature in February 2021.

Other income (expense)

Other income (expense) was US$ 0.1m of other expense, compared to other income of US$ 0.3m in 2019, due to a gain on an exchange of assets in H1 2019.

Provision for income taxes

The provision for income taxes decreased to US$ 1.7m, at an overall effective tax rate of 23%, compared to a provision of US$ 2.4m in H1 2019, at an overall effective tax rate of 23%.

Earnings per share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock units. Earnings per common share has been computed based on the following:

 
                                                     Six months ended June 
                                                                        30 
                                                        2020          2019 
                                                     US$ 000       US$ 000 
                                                ------------  ------------ 
  Income available to stockholders                     5,753         8,053 
 
  Basic weighted shares outstanding               56,371,231    56,317,130 
  Net dilutive effect of stock options 
   and restricted stock units                        607,155       487,306 
  Diluted weighted average shares outstanding     56,978,386    56,804,436 
 =============================================  ============  ============ 
 
 
                                                   Per Share     Per Share 
                                                         US$           US$ 
  Basic earnings per share                              0.10          0.14 
  Diluted earnings per share                            0.10          0.14 
  Basic adjusted net income per share                   0.10          0.14 
  Diluted adjusted net income per share                 0.10          0.14 
 
 
 Consolidated Balance Sheets 
  As of June 30, 2020 and December 31, 2019 
 * unaudited                                                             As of       As of 
                                                                                  December 
                                                                      June 30,         31, 
                                                                          2020        2019 
                                                                       US$ 000     US$ 000 
                                                                --------------  ---------- 
 Assets 
 Current assets: 
    Cash and cash equivalents                                           28,854      23,757 
    Accounts receivable - net                                            8,819      11,979 
    Inventories - net                                                   13,817      12,289 
    Prepaid expenses and other assets                                    1,462       1,291 
--------------------------------------------------------------  --------------  ---------- 
 Total current assets                                                   52,952      49,316 
 Accounts receivable, non-current - net                                    961         904 
 Property, plant, and equipment - net                                   14,689      13,714 
 Financing lease right-of-use assets-net                                   431         557 
 Operating lease right-of-use assets-net                                 1,045       1,213 
 Intangible assets - net                                                 1,621       1,698 
 Goodwill                                                                3,294       3,303 
 Deferred tax asset                                                        655         564 
 Other assets                                                              262         261 
--------------------------------------------------------------  --------------  ---------- 
 Total assets                                                           75,910      71,530 
==============================================================  ==============  ========== 
 
 Liabilities and stockholders' equity 
 Current liabilities: 
    Accounts payable                                                     1,778       2,227 
    Accrued expenses                                                     5,064       5,960 
    Dividends payable                                                   11,664           - 
    Financing lease liability - current                                    141         148 
    Operating lease liability - current                                    197         247 
    Income tax payable                                                   1,302       1,078 
--------------------------------------------------------------  --------------  ---------- 
    Total current liabilities                                           20,146       9,660 
--------------------------------------------------------------  --------------  ---------- 
 Financing lease liability - long-term                                     187         262 
 Operating lease liability - long-term                                     863         982 
 Other liabilities                                                       1,497       1,587 
 Total liabilities                                                      22,693      12,491 
--------------------------------------------------------------  --------------  ---------- 
 
 Stockholders' equity 
     Preferred stock, US$.001 par value, 50,000,000                          -           - 
      shares authorized, no shares issued and outstanding 
     Common stock, US$.001 par value, 80,000,000 shares 
      authorized, 56,425,598 and 56,425,598 shares issued 
      and 56,386,874 and 56,348,068 shares outstanding 
      at June 30, 2020 and December 31, 2019, respectively                  26          26 
     Less: treasury stock, 38,724 shares as of June 
      30, 2020 and 77,530 shares as of December 31, 2019 
      at cost                                                            (102)       (191) 
     Additional paid in capital                                         17,165      17,001 
     Retained earnings                                                  39,012      44,923 
     Other comprehensive loss                                          (2,884)     (2,720) 
  Total stockholders' equity                                            53,217      59,039 
--------------------------------------------------------------  --------------  ---------- 
 Total liabilities and stockholders' equity                             75,910      71,530 
==============================================================  ==============  ========== 
 
   See Notes to unaudited consolidated financial statements. 
 
 
 Consolidated Statements of Comprehensive Income 
  For the six months ended June 30, 2020 and 2019 
 * unaudited                                           Six months ended 
                                                                June 30 
                                                                   2019 
                                                      2020      US$ 000 
                                                   US$ 000       Except 
                                                Except per    per share 
                                                share data         data 
                                              ------------  ----------- 
 Revenue                                            35,266       39,012 
 Cost of sales                                      15,961       17,160 
--------------------------------------------  ------------  ----------- 
 Gross profit                                       19,305       21,852 
--------------------------------------------  ------------  ----------- 
 
 Operating expenses 
    Sales, marketing and customer support            5,175        5,533 
    Engineering and product development                963        1,046 
    General and administrative                       5,649        5,126 
    Total operating expenses                        11,787       11,705 
--------------------------------------------  ------------  ----------- 
 
 Operating income                                    7,518       10,147 
 Other income (expense) 
  Interest expense                                    (22)         (21) 
  Interest income                                      109          116 
  Foreign exchange impact                             (80)         (54) 
  Other                                               (60)          266 
 Income before income taxes                          7,465       10,454 
--------------------------------------------  ------------  ----------- 
 
 Provision for income taxes                          1,712        2,401 
 
 Net income                                          5,753        8,053 
--------------------------------------------  ------------  ----------- 
 
 Other comprehensive income 
  Cumulative translation adjustment                  (164)          108 
 Comprehensive income                                5,589        8,161 
--------------------------------------------  ------------  ----------- 
 
 Earnings per common share 
 Earnings per share - basic                           0.10         0.14 
 Earnings per share - diluted                         0.10         0.14 
 
 Weighted average number of common shares 
 outstanding 
 Basic                                          56,371,231   56,317,130 
 Diluted                                        56,978,386   56,804,436 
 
   See Notes to unaudited consolidated financial statements. 
 
 
 
 
 Consolidated Statements of Changes in Stockholders' Equity 
  For the six months ended June 30, 2020 
 * unaudited 
 
 
 
                         Common stock                   Treasury stock 
 
                                        Additional                        Retained           Other           Total 
                               Amount      paid-in              Amount    earnings   Comprehensive   Stockholders' 
                                US$        capital                 US$         US$   income (loss)          equity 
                      Shares    000        US$ 000     Shares      000         000         US$ 000         US$ 000 
                              -------  -----------             -------  ----------  --------------  -------------- 
 Balance - 
  December 
  31, 2019        56,425,598       26       17,001     77,530    (191)      44,923      (2,720)             59,039 
---------------  -----------  -------  -----------  ---------  -------  ----------  --------------  -------------- 
 Cumulative 
  translation 
  adjustment               -        -            -          -        -           -       (164)               (164) 
 Net income                -        -            -          -        -       5,753         -                 5,753 
 Stock-based 
  compensation             -        -          465          -        -           -         -                   465 
 Dividend                  -        -            -          -        -    (11,664)         -              (11,664) 
 Treasury stock            -        -         (89)   (38,806)       89           -         -                     - 
 RSUs settled 
  for cash                 -        -        (223)          -        -           -         -                 (223) 
 Investment in 
  subsidiary               -        -           11          -        -           -         -                    11 
 Balance - June 
  30, 2020        56,425,598       26       17,165     38,724    (102)      39,012      (2,884)             53,217 
---------------  -----------  -------  -----------  ---------  -------  ----------  --------------  -------------- 
 

See Notes to unaudited consolidated financial statements.

 
 
   Consolidated Statements of Cash Flows 
   For the six months ended June 30, 2020 and 2019 
 *unaudited                                            Six months ended June 
                                                                          30 
                                                           2020         2019 
                                                        US$ 000      US$ 000 
                                                    -----------  ----------- 
 Cash flows from operating activities: 
  Net income                                              5,753        8,053 
  Adjustments to reconcile net income 
  to net cash provided by operating activities: 
     Deferred taxes                                        (91)        (216) 
     Depreciation and amortization                          563          549 
     Non-cash lease expense                                 105          123 
     Bad debt                                                58           60 
     Stock-based compensation                               465          361 
     Gain on non-cash payment for intangible 
      asset                                                   -        (171) 
     Loss on disposal of property and equipment              10           16 
  Working capital changes: 
     Accounts receivable                                  3,045      (2,435) 
     Inventories                                        (1,528)      (1,971) 
     Prepaid expenses and other assets                    (171)         (12) 
     Other assets                                           (1)         (22) 
     Accounts payable, accrued expenses 
      and other liabilities                             (1,423)        (697) 
     Income taxes payable                                   224          762 
     Net cash provided by operating activities            7,009        4,400 
--------------------------------------------------  -----------  ----------- 
 
 Cash flows from investing activities: 
  Property and equipment purchases                      (1,463)        (587) 
  Payments for intangible assets                              -        (138) 
  Business acquisition, net of cash acquired                  -      (2,000) 
  Net cash used in investing activities                 (1,463)      (2,725) 
--------------------------------------------------  -----------  ----------- 
 
 Cash flows from financing activities: 
  Payment of dividend                                         -     (14,198) 
  RSUs settled for cash                                   (223)        (593) 
  Payments under financing capital leases                  (73)         (82) 
    Investment in subsidiary                                 11            - 
  Net cash used in financing activities                   (285)     (14,873) 
--------------------------------------------------  -----------  ----------- 
 
 Effect of exchange rates on cash and 
  cash equivalents                                        (164)          108 
 Net increase (decrease) in cash and 
  cash equivalents                                        5,097     (13,090) 
--------------------------------------------------  -----------  ----------- 
 
 Cash and cash equivalents: 
 Beginning of period                                     23,757       28,233 
--------------------------------------------------  -----------  ----------- 
 End of period                                           28,854       15,143 
--------------------------------------------------  -----------  ----------- 
 
 See Notes to unaudited consolidated 
  financial statements. 
 

Notes to the Consolidated Financial Statements

As of June 30, 2020 and December 31, 2019

   1.   Organization and description of business 

Nature of business

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

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 June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was approximately US$ 1,015,000 and US$ 961,000, respectively. Bad debt expense for the six months ended June 30, 2020 and 2019, was US$ 58,000 and US$ 60,000, respectively.

Inventories

Inventories are stated using the first in, first out ("FIFO") method, at the lower of cost or net realizable value ("NRV"). Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts. As of June 30, 2020 and December 31, 2019, the provision for obsolete and slow moving inventory was US$ 207,000 and US$ 346,000, respectively.

Business combinations and purchase accounting

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

Intangible assets and goodwill

Intangible assets consist primarily of customer relationships, trademarks and patents, and are carried at their fair value when acquired, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to seventeen, which is their estimated period of economic benefit.

Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date. Goodwill represents the excess cost of the business combination over the Company's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005 and the purchase of the Line Dragon, LLC business assets in January 2019. The Company did not incur a goodwill impairment loss for the periods ended June 30, 2020 nor December 31, 2019.

Revenue recognition

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

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

ASC 606 was adopted using the full retrospective approach and the change in accounting principle from ASC 605 to ASC 606 did not materially impact the amount of revenue recognized in the Company's financial statements. Prior to the adoption of this standard the Company recognized revenue in accordance with ASC 605-10, "Revenue Recognition in Financial Statements". Revenue was recognized when persuasive evidence of an arrangement existed, delivery or service had occurred, the sale price was fixed or determinable and receipt of payment was probable.

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

During the six months ended June 30, 2020, there was US$ 525,800 of revenue recognized during the period from customer deposit liabilities (deferred contract revenue). As of June 30, 2020 there are US$ 438,000 in customer deposit liabilities for advance payments received during the period for contracts expected to ship following the end of the period. As of June 30, 2020 and December 31, 2019, there are no significant contract costs such as sales commissions or costs deferred. Interest income on financing arrangements is recognized as interest accrues, using the effective interest method.

Leases

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

Warranty liability

The Company provides warranties on all equipment sales ranging from 60 days to three years, depending on the product. Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience.

 
                               US$ 000 
                              -------- 
 Balance, January 1, 2019        (613) 
 Warranty charges                  416 
 Accruals                        (734) 
----------------------------  -------- 
 Balance, December 31, 2019      (931) 
 
 Balance, January 1, 2020        (931) 
 Warranty charges                  115 
 Accruals                        (125) 
----------------------------  -------- 
 Balance, June 30, 2020          (941) 
============================  ======== 
 
 

Property, plant, and equipment

Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 3 to 10 years for machinery and equipment.

Income taxes

The Company determines income taxes using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items reflected in the financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not that such assets will be unrecoverable.

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns and records a liability for uncertain tax positions. This involves a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement.

Use of estimates

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

Stock-based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award. Compensation expense related to stock-based payments was US$ 465,000 and US$ 361,000 for the six months ended June 30, 2020 and 2019, respectively. In addition, the Company settled US$ 223,000 and US$ 593,000 in restricted stock units for cash and conversion to common shares during the six months ended June 30, 2020 and 2019, respectively.

Transactions in and translation of foreign currency

The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. The preparation of the consolidated financial statements requires the translation of these financial statements to USD. Balance sheet amounts are translated at period-end exchange rates and the statement of comprehensive income accounts are translated at average rates. The resulting gains or losses are charged directly to accumulated other comprehensive income. The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency. Gains and losses from transactions are included as foreign exchange gain (loss) in the accompanying consolidated statements of comprehensive income.

Comprehensive income

Comprehensive income is the combination of reported net income and other comprehensive income ("OCI"). OCI is changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income.

Earnings per share

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

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

 
                                                               Six months ended 
                                                                        June 30 
 
                                                           2020         2019 
                                                          US$ 000      US$ 000 
                                                       -----------  ----------- 
 Net income                                                  5,753        8,053 
 
 Basic weighted shares outstanding                      56,371,231   56,317,130 
 Net dilutive effect of stock options and restricted 
  stock units                                              607,155      487,306 
-----------------------------------------------------  -----------  ----------- 
 Diluted weighted average shares outstanding            56,978,386   56,804,436 
=====================================================  ===========  =========== 
 

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 1       Level 2         Level 3 
                          US$ 000         US$ 000       US$ 000         US$ 000 
 ----------------------  --------  --------------  ------------  -------------- 
 Year ended December 31, 
  2019 
 Asset: Non-recurring 
            Goodwill        3,303                                         3,303 
 Period ended June 30, 2020 
 Asset: Non-recurring 
             Goodwill       3,294                                         3,294 
 

3. Inventories

Inventories consisted of the following:

 
 
 
                                         June 
                                          30,   December 31, 
                                         2020           2019 
                                          US$ 
                                          000        US$ 000 
                                      -------  ------------- 
 Raw material                           5,326          4,267 
 Finished goods and work in process     4,591          3,154 
 Remanufactured                         3,900          4,868 
------------------------------------  -------  ------------- 
 Total                                 13,817         12,289 
====================================  =======  ============= 
 

4. Acquisition

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

The purchase was treated as a business combination as it met certain criteria stipulated in ASC 805 - Business Combinations. The Company expects the acquisition of the Line Dragon assets will complement its SP-16 Line Pulling & Placing System product offering. The acquisition of Line Dragon is strategically significant in revenue for the Company, however at the time of the acquisition and June 30, 2020, the Company concluded that historical results of the acquisition were not material to the Company's consolidated financial results and therefore additional pro-forma disclosures are not presented.

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

5. Goodwill and intangible assets

Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The Company is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a unit may be below its carrying value. The following table reflects other intangible assets:

 
                                                    Weighted                                        December 
                                                     average                June 30,                     31, 
                                                Amortization                    2020                    2019 
                                                      Period                 US$ 000                 US$ 000 
                                             ---------------  ----------------------  ---------------------- 
 Capitalized cost       Patents                     12 years                  19,247                  19,247 
  Intangible Assets                                                           7,434                   7,434 
                                                                              26,681                  26,681 
----------------------   ---------------                      ----------------------  ---------------------- 
 Accumulated 
  amortization           Patents                    12 years                  18,602                  18,578 
                         Intangible Assets                                     6,458                   6,405 
                                                                              25,060                  24,983 
----------------------   ---------------                      ----------------------  ---------------------- 
 Net carrying costs      Patents                    12 years                     645                     669 
                         Intangible Assets                                       976                   1,029 
                                                                               1,621                   1,698 
======================   ===============                      ======================  ====================== 
 
 

Amortization expense associated with the intangible assets in each of the six months ended June 30, 2020 and 2019 was approximately US$ 77,000 and US$ 69,000, respectively.

6. Property, plant, and equipment

Property, plant, and equipment consist of the following:

 
 
 
                                                               December 
                                                    June 30,        31, 
                                                        2020       2019 
                                                     US$ 000    US$ 000 
                                                   ---------  --------- 
 Land                                                    864        864 
 Building and improvements                            14,410     13,149 
 Machinery and equipment                               5,450      5,414 
-------------------------------------------------  ---------  --------- 
                                                      20,724     19,427 
-------------------------------------------------  ---------  --------- 
 Less: accumulated depreciation and amortization     (6,035)    (5,713) 
                                                      14,689     13,714 
=================================================  =========  ========= 
 

Depreciation expense for the six months ended June 30, 2020 and 2019 was approximately US$ 486,000 and US$ 480,000, respectively.

7. Line of credit and note payable

In February 2016, the Company entered into an amended credit facility which consists of a US$ 10.0m secured revolving line of credit that will mature in February 2021. The interest rate on the revolving credit line is based on the one-month LIBOR rate plus 1.25%. The Company's credit facility is secured by substantially all its business assets. No amounts were drawn under the secured revolving credit line as of June 30, 2020 and December 31, 2019.

Interest expense for the six months ended June 30, 2020 and 2019 was approximately US$ 21,900 and US$ 20,600, respectively, and relates primarily to interest costs on leased vehicles.

8. Retirement program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company's matching contributions vest immediately. The Company contributed approximately US$ 370,000 to the savings and retirement plan during the six months ended June 30, 2020 and contributed US$ 348,000 during the six months ended 2019.

9. Leases

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

The components for lease expense were as follows:

 
                                                       Six Months 
                                                            Ended 
                                                    June 30, 2020 
                                                          US$ 000 
                                           ---------------------- 
 Operating lease cost                                         137 
 Finance lease cost: 
     Amortization of right-of-use assets                      105 
     Interest on lease liabilities                              9 
-----------------------------------------  ---------------------- 
 Total finance lease cost                                     114 
=========================================  ====================== 
 

As of June 30, 2020, the weighted average remaining lease term for finance and operating leases was 2.5 years and 11 years, respectively, and the weighted average discount rate was 4.7% and 4.4%, respectively.

Maturities of lease liabilities represent the remaining six months for 2020 and the full 12 months of each successive period as follows:

 
                          Operating                  Finance Leases 
                             Leases 
                            US$ 000                         US$ 000 
                         ----------  ------------------------------ 
 2020                           152                              78 
 2021                           148                             141 
 2022                            96                              90 
 2023                            96                              40 
 2024                            96                               - 
 Thereafter                     763                               - 
                         ----------  ------------------------------ 
     Total                    1,351                             349 
 Less imputed interest        (291)                            (21) 
-----------------------  ----------  ------------------------------ 
 

Total 1,060 328

10. Supplemental cash flow and non-cash financing disclosures

 
                                                             Six months ended 
                                                                      June 30 
 
                                                              2020       2019 
                                                           US$ 000    US$ 000 
                                                    --------------  --------- 
 Cash paid for interest                                         22         20 
 Cash paid for taxes                                         1,571      1,890 
 Finance lease liabilities arising from obtaining 
  right-of-use assets                                         (82)        209 
 Operating lease liabilities arising from 
  obtaining right-of-use assets                              (170)      1,337 
 Non-cash payment for intangible assets                          -        257 
 

11. Business and credit concentration

The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance. At June 30, 2020 and December 31, 2019, the Company had four customers which represented 17% and three customers that represented 22% of total accounts receivable, respectively.

12. Commitments and contingencies

The Company has entered into employment agreements with certain members of senior management. The terms of these are for renewable one-year periods and include non-compete and non-disclosure provisions as well as provide for defined severance payments in the event of termination or change in control.

The Company is also subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its consolidated financial statements.

13. Income taxes

The Company's effective tax rate for the six months ended June 30, 2020 was 23% compared to the federal statutory rate of 21%. The Company is subject to US federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company was formed in 2005. The statute of limitations for all federal, foreign and state income tax matters for tax years from 2014 forward is still open. The Company has no federal, foreign or state income tax returns currently under examination.

At June 30, 2020, the Company had US$ 655,000 in non-current net deferred tax assets recorded on its balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

14. Subsequent events

Dividend

The Board of Directors has decided to accelerate the payment of the final 2019 ordinary dividend of 13.0 US cents per share and the supplemental dividend of 7.7 US cents per share that were declared with the Company's 2019 full year results from on or about February 5, 2021 to October 15, 2020, to shareholders of record close of business on September 25, 2020.

The Board also declared an interim dividend for the six months ended June 30, 2020 of 4.00 US cents per share. This dividend will be paid together with the final 2019 ordinary dividend and the supplemental dividend on October 15, 2020 to shareholders on the register as of September 25, 2020.

The combined dividend payment on October 15, 2020 will total 24.7 US cents per share, representing a total dividend payment of US$ 14.0m.

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

 
 Distribution amount:               $0.247 cents per share 
 Ex-dividend date:                  24 September 2020 
                                   ----------------------- 
 Dividend record date:              25 September 2020 
                                   ----------------------- 
 Final day for currency election:   28 September 2020 
                                   ----------------------- 
 Payment date:                      15 October 2020 
                                   ----------------------- 
 

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

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

Share buyback

In August 2020, the Board authorized a share buyback program, pursuant to which, the Board intends to carry out an on market buyback of such number of its listed shares of common stock as are equal to US$ 1,000,000. The purpose of the program is to mitigate future dilution resulting from share issuances under the Company's equity award programs. It is intended that any shares repurchased will be immediately cancelled. The maximum price paid per Ordinary Share is to be no more than the higher of 105 per cent. of the average middle market closing price of an Ordinary Share for the five business days preceding the date of any share buyback, the price of the last independent trade and the highest current independent purchase bid. The Company previously announced a buyback program alongside the Company's full year 2019 results but cancelled the program on March 30, 2020 as a precautionary measure to preserve cash. Now, with the decision to move ahead with the share buyback, the Company estimates the program will be fulfilled by the end of 2020.

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