SOM Somero Enterprise Inc.

For immediate release

29 August 2024

Somero^® Enterprises, Inc.

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

Interim Results for the six months ended June 30, 2024

Financial Highlights

Operational Highlights

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, President & CEO of Somero, said:

"I am pleased with how the Company has navigated the challenges presented by the first half of the year. While revenue decline in North America and Australia impacted performance, our focus on operational efficiency and the enduring nature of our long-term growth drivers ensure we are well placed for when conditions improve.

"The launch of two new products in the period demonstrates our commitment to our long-term growth strategy, and the introduction of our first electric powered laser screed is an exciting milestone for the business. A third new product will be released in the second half, and we will continue to leverage these innovations to deepen our international presence.

"Looking ahead, the resilience of the non-residential market gives us confidence that, as external challenges subside, our performance will improve. Given our history of successfully navigating challenging market conditions, and our proven ability to swiftly adapt, I am confident that we will emerge from this testing period even stronger."

For further information, please contact:

Notes to Editors:

Somero Enterprises provides industry-leading concrete-levelling equipment, training, education and support to customers in over 90 countries. The Company's cutting-edge technology allows its customers to install high-quality horizontal concrete floors faster, flatter and with fewer people. Somero® equipment that incorporates laser-technology and wide-placement methods is used to place and screed the concrete slab in all building types and has been specified for use in a wide range of commercial construction projects for numerous global blue-chip companies.

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

For more information, visit www.somero.com

Chairman's and Chief Executive Officer's Statement

Overview

The Board is pleased with the Company's ability to adapt swiftly and meaningfully to sustain profitability to mitigate external factors, while remaining steadfast in executing its long-term growth strategy of introducing new products and deepening its penetration in international markets. Taking into consideration the magnitude and persistency of factors outside of Somero's control impacting the pace of trading in North America and the inclement weather in North America and Australia, the Board believes the overall performance in H1 2024 was sound.  Group H1 2024 revenues totaled US$ 51.8m (H1 2023: US$58.9m), with the 12% decline driven by the trading decline in North America and Australia.

Leveraging the Company's flexible cost structure, which enabled it to quickly adjust to the changing circumstances, H1 2024 adjusted EBITDA margin remained healthy at 23.8% (H1 2023: 29.5%).  H1 2024 adjusted EBITDA was US$ 12.4m (H1 2023: US$ 17.3m), with the decline primarily due to lower volume and to a lesser degree to strategically added headcount to support the new Belgium service, repair and training facility. The Company was able to partly offset cost inflation affecting wages and material costs with  price increases and operational efficiency gains. As a result of all these factors, H1 2024 gross margin remained within the targeted range at 54.6% (H1 2023: 57.0%). Operating cash flow in H1 2024 was US$ 2.9m (H1 2023: US$ 8.8m), translating to a June 30, 2024 cash balance of US$ 20.8m, notwithstanding the dividend payment of US$ 11.4m in May 2024.  The Company is taking steps to minimize inventory levels in the second half of the year and maintain accounts receivable at moderate levels which is anticipated to have a positive impact on year-end cash. 

Regional Review

North America

H1 2024 North American sales declined 8% from H1 2023 to US$ 38.8m mostly driven by lower sales of Boomed screeds.  Customers in the US continue to report healthy project levels, however they are not operating at full capacity due to project start delays and pauses caused by elevated interest rates, labor shortages and concrete rationing, as reported in the 30 July 2024 Trading Update. Underlying non-residential market demand remains positive driven by onshoring of manufacturing, electric vehicle and battery plants, and chip manufacturing, which provide long-term demand for our products. Furthermore, the long-standing and worsening shortage of skilled labor necessitating the need for automation and work productivity continues to drive demand for our products in the territory.   

Europe

Europe continues to deliver strong results, reporting sales of US$ 7.1m in H1 2024, up slightly from US$ 7.0m in H1 2023. The Company's investments in customer facing resources and capabilities continues to deliver good results from new customer acquisitions and penetration of new and existing products, alongside continued strong parts and service revenue. Moreover, the European market, which is more environmentally conscious, has embraced the first Somero electric powered laser screed, the S-940e, which meaningfully contributed to H1 2024 results in this territory.  The Company remains focused on attracting new customers by leveraging entry-level equipment such as the SRS-4 and the newly launched SRS-6 in the boomed screed category and the EcoScreed in the ride-on category.  Furthermore, a third new product planned to be released in H2 2024 is expected to also be well received in Europe.

Australia

Australia is also a target international market where we see meaningful opportunity for growth through increased market penetration across our product offering.  However, in H1 2024, sales declined 40% to US$ 3.2m, from the US$ 5.3m in H1 2023., with inclement weather in H1 2024 having a significant impact on trading. Nevertheless, new customer acquisitions remained high. We continue to focus on growing revenue in this territory by broadening awareness and educating the marketplace about Somero's value proposition premised on delivering quality and productivity.

Rest of World

Our Rest of World region, which includes Latin America, the Middle East, India, Southeast Asia, Korea and China, reported H1 2024 sales of US$ 2.7m, representing a 39% decrease compared to H1 2023. The main contributors to H1 2024 revenues were Latin America and India, which reported respective sales of US$ 1.3m and US$ 1.1m, compared to US$ 1.6m and US$ 1.1 in H1 2023, respectively. Middle East reported sales of US$ 0.1m in H1 2024, down from as strong H1 2023 of US$ 1.1m. As previously stated, given the relatively small base of business in each region, trading will fluctuate from period to period. The Company intends to maintain the resources allocated to the regions and add personnel as appropriate.   

Product Review

Demand for our product categories is impacted by the type and size of projects, and applications, which are ultimately driven by end users. Large Boomed screeds are suitable for large footprint projects such as warehousing, medical facilities and manufacturing facilities, while Ride-on screeds are suitable for smaller footprint projects and smaller concrete slabs.  Different applications drive demand for other equipment, such as exterior applications for the 3D Profiler Systems and the Somero Broom+Cure^TM. As these variables shift, our product mix fluctuates accordingly. 

Revenue from sales of Boomed screeds decreased compared to H1 2023, driven by the factors in the US noted in the 30 July 2024 Trading Update and in the section above.  Nonetheless, there continues to be healthy support for large Boomed screeds driven by onshoring efforts, an increase in electric vehicle and battery plants and US legislation including the CHIPS Act, a statute providing roughly US$ 280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States. There also continues to be healthy demand for our Ride-on screeds, including smaller concrete slab pours necessitated by the shortage and rationing of concrete. Ride-on screeds decreased 4.5% from H1 2023 contributing US$ 10.7m to H1 2024 revenues. Sales of 3D Profiler System contributed US$ 4.3m to H1 2024 revenue, consistent with H1 2023. Sales of Remanufactured machines increased 21% in H1 2024 compared to H1 2023 due to heightened availability as a result of a higher level of trade-ins at the end of 2023.  Given the price point and product offering, Remanufactured machines are very attractive to new market entrants and offer an economical option for projects that require secondary back-up machines on-site. Although Remanufactured machines generally yield gross margins in the range of 20% - 25%, the program allows us to monetize trade-ins.  Other revenues decreased 11% mostly driven by weaker sales of the Line Dragon. The products within the Other category, other than parts, which were down in H1 2024 compared to H1 2023, address niche applications and therefore demand will vary from period to period.

Products released since 2019, the SkyScreed® 36, S-PS50, SkyStrip®, SRS-6, S-940e and the Somero Broom+Cure^TM, combined to contribute US$ 3.1m in H1 2024 revenues, up from H1 2023 of US$ 0.8m.  Most of the growth in this category was driven by the SRS-6 and the S-940e. Both products have gained immediate traction and are expected to deliver greater results in H2 2024 as availability becomes more widespread.  As noted above, a third new product is planned for release in H2 2024. Our new products are inventions, some of which address entirely new market segments and customer bases, and therefore market acceptance can be gradual, and trading can be somewhat volatile. Nevertheless, we are confident in the value proposition of the offerings and will continue to work to increase the market penetration.

We continue to dedicate significant organizational time and resources to engage customers directly to develop a pipeline of ideas for solutions that address pain points. H1 2024 was an active period in this regard, with extensive jobsite visits and innovation council sessions both in the US and internationally. Additionally, we are exploring new technological advancements and investigating the impact they could have on our current and future product offering.  

Cashflow and Balance Sheet

Somero reported operating cash flow in H1 2024 of US$ 2.9m, down from US$ 8.8m reported in H1 2023, primarily due to lower profits and an increase in working capital. The increased working capital in H1 2024 came mostly from a higher level of ending inventory as a result of lower sales unit volume and product mix. Based on the revised full year revenue expectation, the Company has taken actions to adjust incoming inventory levels in H2 2024.  Additionally, working capital was impacted by the timing of estimated income taxes for 2023 and 2024.

The Company spent US$ 1.6m in H1 2024 on capital expenditures (2023: US$ 1.7m), relating to office renovations at the Michigan, USA facility, on-going product software programs, and other activities in the ordinary course of business. The Company also paid dividends in H1 2024 totaling US$ 11.4m (2023: US$ 14.2m), reflecting the Company's ongoing commitment to disciplined return of cash to shareholders, as well as repurchasing US$ 1.9m in common stock under the 2023 and 2024 share buyback programs.

The Company ended H1 2024 with US$ 20.8m in net cash down from the US$ 33.3m reported at the end of 2023, primarily reflecting the US$ 11.4m dividend payment, but still providing ample liquidity to support the business activities and allow it to continue making strategic investments. The balance sheet remains debt-free with access to an unutilized US$ 25.0m secured revolving line of credit. All of which provide a secure financial position to fund future growth.

Dividend and Share Buyback Program

Based on the results in H1 2024, our strong financial position and confidence in the outlook for the remainder of 2024, we are pleased to report that the Board has decided to declare an interim 2024 dividend of US$ 0.08 per share, maintaining a balance between interim ordinary dividend and final ordinary dividend comparable to prior year. The dividend, representing a total payment of approximately US$ 4.4m, will be payable on October 18, 2024 to shareholders on the register as of September 20, 2024. The common stock ex-dividend date is 19 September 2024.

In H1 2024, the Company repurchased a total of 435,593 shares of common stock under the Company's share buyback program put in place to offset dilution from on-going equity award programs. It is intended that any shares repurchased will be immediately cancelled and the Company will make further announcements to the market as and when share purchases are made.

Our People

On behalf of the Board, we would like to thank all our global employees for their performance in H1 2024. A core strength of the Somero team is its ability to quickly adjust to changing conditions while always delivering the highest level of products and service to our customers. This core strength that underpins the Company's highly flexible cost model that enables it to deliver healthy profits. On 3 May 2024, the Company announced a senior management appointment and succession plan appointing Jesse Aho as Chief Operating Officer of Global Operations and New Product Development. The Board and management team remain as committed as ever to providing all our employees with a rewarding and challenging working environment that is full of opportunity.

Environmental, Social and Governance

The Board closely monitors environmental, social and governance topics that materially impact our stakeholders. These topics are routinely discussed to ensure Somero strikes the appropriate balance of meeting shareholder expectations and addressing the concerns of key stakeholders necessary to ensure sustainability of the business. A primary material topic is the environmental impact of our business including the use of our equipment in the construction process. The release of the S-940e represents Company's first step in the electrification evolution and remains committed to making further progress to support environmental, social and governance matters.

Outlook

The overall non-residential construction market remains healthy with support from on-shoring, manufacturing, electric vehicle and battery plants, and chip factories, underscored by customers reporting robust project backlogs and positive outlooks. We do not see any indications of fundamental changes in the non-residential construction market, and the factors that have impacted the pace of work have not caused project cancellations as reported by our customers.  

The Company anticipates improvement in H2 2024 trading in compared to H1 2024, driven by a combination of new product revenue growth, including the launch of a third new machine, and an expectation of improved weather conditions. This confidence is supported by our primary means of gauging market health, which is direct feedback from customers. 

As such, the Board remains confident that 2024 results will fall in line with the revised market expectations published following our 30 July 2024 Trading Update, with revenues of approximately US$ 110.0m, EBITDA of approximately US$ 30.0m, and year-end cash of approximately US$ 27.0m.

Larry Horsch

Non-Executive Chairman

Jack Cooney

President & Chief Executive Officer

August 29, 2024

​

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.

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 12% to approximately US$ 51.8 (H1 2023: US$ 58.9m). The Company's revenues consist primarily of sales from Boomed Screed products, which include the S-28EZ, S22-EZ, S-15R, S-10A, SRS-6 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, S940e and S-158C Laser Screed machines, remanufactured machines sales, 3-D Profiler Systems, SkyScreed®, 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 primarily driven by lower volume of the Boomed Screeds, particularly the S-28EZ, and 3-D Profiler System.

Boomed Screed sales decreased to approximately US$ 19.0m (H1 2023: US$ 24.4m) as unit volume decrease to 60 units (H1 2023: 84 units),  Ride-on screed sales decreased to approximately US$ 10.7m (H1 2023:  US$ 11.2m) due to a decrease in volume to 86 units (H1 2023: 94), remanufactured machine sales increased to approximately US$ 4.0m (H1 2023: US$ 3.4m) due to an increase in volume to 20 units (H1 2023: 14), 3-D Profiler System sales remained consistent at US$ 4.3m, there were no sales of the SkyScreed® in H1 2024 and H1 2023.  Other revenues decreased to approximately US$ 13.8m (H1 2023: US$ 15.6m) mostly due to a decrease in parts sales and Line Dragon unit volume. The following table shows the breakdown during the six months ended June 30, 2024 and 2023:

Notes:

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

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

3. Boomed Screeds include the S-22EZ, S-28EZ, S-15R, S-10A, SRS-4 and SRS-6.

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

5. Other includes parts, accessories, services, and freight, as well as other equipment such as the Somero Line Dragon®, Somero Broom+Cure^TM, STS-11M Topping Spreader, Copperhead, Mini Screed C and S-PS50.

Notes:

1. Other includes equipment such as the Somero Line Dragon®, Somero Broom+Cure^TM, STS-11M Topping Spreader, Copperhead, Mini Screed C and S-PS50.

Sales to customers located in North America contributed 75% of total revenue (H1 2023: 72%), sales to customers in EMEA (Europe, Middle East, and Scandinavia) contributed 14% (H1 2023: 14%) and sales to customers in ROW (Southeast Asia, Australia, Latin America, India and China) contributed 11% (H1 2023: 14%).

Sales in North America totaled approximately US$ 38.8m (H1 2023: US$ 42.2m) down 8%, primarily driven by a decrease in Boomed Screeds.  Sales to customers in EMEA were approximately US$ 7.2m (H1 2023: US$ 8.1m) down 11%, driven by a decrease in Boomed Screeds in the Middle East.  Sales to customers in ROW were approximately US$ 5.8m (H1 2023: US$ 8.6m) decreasing by 32% driven by a decrease across most product categories in Australia and Latin America.

Notes:

(1) Includes India, Middle East, China, Southeast Asia, Korea and Latin America. 

Gross profit

Gross profit decreased to approximately US$ 28.3m (2023: US$ 33.6m), with gross margins decreased to 54.6% compared to 57.0% in H1 2023, reflecting higher input and logistical costs and lower volume scale, partly offset by a price increase.

Operating expenses

Operating expenses excluding depreciation, amortization and stock-based compensation for H1 2024 were approximately US$ 16.4m (H1 2023: US$ 16.5m), which is primarily reflective of lower incentive compensation and sales commissions, partly offset by higher expenses related to the new Belgium facility.

Debt

As of June 30, 2024, the Company had no outstanding debt.  In August 2022, the Company updated its credit facility to a US$ 25.0m secured revolving line of credit, with a maturity date of August 2027.  The interest rate on the revolving credit line is based on the BSBY Index plus 1.25%.  The Company's credit facility is secured by substantially all of its business assets. 

Provision for income taxes

The provision for income taxes decreased to approximately US$ 2.5m, at an overall effective tax rate of 23%, compared to a provision of approximately US$ 3.2m in H1 2023, at an overall effective tax rate of 21%.

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:

See Notes to unaudited consolidated financial statements.

Notes to the Consolidated Financial Statements

As of June 30, 2024 and December 31, 2023

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 in Chesterfield, England; Kampenhout, Belgium; Melbourne, Australia 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.

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.

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 in a number of financial institutions globally, 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.

Restricted Cash

Restricted cash of approximately US$ 325,000 and US$ 258,000 is included in "Cash and cash equivalents" on the consolidated balance sheet as of June 30, 2024 and December 31, 2023. This represents cash deposited by the Company into a guaranteed deposit account and designated as collateral for the building lease in Australia and Belgium, in accordance with the lease agreement.

Accounts receivable and allowances for credit losses

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 credit losses 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, 2024 and December 31, 2023, the allowance for credit losses was approximately US$ 1,648,000 and US$ 1,862,000, respectively.  Provision for credit losses (recovery) for the six months ended June 30, 2024 and 2023, was approximately US$ (203,000) and US$ 96,000, respectively. The opening balance of accounts receivable on January 1, 2023 was US$ 10,729,000, which includes US$ 414,000 of non-current accounts receivable.

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, 2024 and December 31, 2023, the provision for obsolete and slow-moving inventory was approximately US$ 616,000 and US$ 707,000, respectively.

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 twelve years, which is their estimated period of economic benefit.

Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen December 31 as its periodic assessment date.  Goodwill represents the excess cost of the business combination over the Company's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005 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, 2024 nor December 31, 2023.

Revenue recognition

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

As of June 30, 2024 and December 31, 2023, there were approximately US$ 577,000 and US$ 600,000, respectively, of extended service agreement liabilities. The opening balance of extended service agreement liabilities on January 1, 2023 was US$ 582,000. During the six months ended June 30, 2024 and 2023, approximately US$ 363,000 and US$ 304,000, respectively, of revenue was recognized related to the amounts recorded as liabilities on the balance sheets in the prior year (deferred contract revenue).   

As of June 30, 2024 and December 31, 2023, there were approximately US$ 1,964,000 and US$ 1,635,000, respectively, in customer deposit liabilities for advance payments received during the period for contracts expected to ship following the end of the period. The opening balance of customer deposit liabilities for advance payments received on January 1, 2023 was US$ 2,180,000. As of June 30, 2024 and December 31, 2023, 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.

Warranty liability

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

Property, plant, and equipment

Property, plant, and equipment is stated at cost, net of accumulated depreciation and amortization. Land is not depreciated.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings (depending on the nature of the building), 15 years for improvements, and 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 are reflected in the consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated 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.

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 approximately US$ 478,000 and US$ 548,000 for the six months ended June 30, 2024 and 2023, respectively.  In addition, the Company settled approximately US$ 713,000 and US$ 1,155,000  in restricted stock units for cash during the six months ended June 30, 2024 and 2023, 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 impact 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:       

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.

3.  Inventories

Inventories consisted of the following:

4.  Goodwill and intangible assets

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

The following table reflects other intangible assets:

Amortization expense associated with the intangible assets in each of the six months ended June 30, 2024 and 2023 was approximately US$ 71,000 and US$ 68,000, respectively. The amortization expense for each of the next 5 years will be approximately US$ 142,000 and the remaining amortization thereafter will be approximately US$ 339,000.

5.  Property, plant, and equipment

Property, plant, and equipment consist of the following:

Depreciation expense for the six months ended June 30, 2024 and 2023 was approximately US$ 789,000 and US$ 640,000, respectively.

6.  Line of credit

In August 2022, the Company updated its credit facility to a US$ 25.0m secured revolving line of credit, with a maturity date of August 2027.  The interest rate on the revolving credit line is based on the BSBY Index plus 1.25%.  The Company's credit facility is secured by substantially all its business assets.  No amounts were drawn under the secured revolving line of credit as of June 30, 2024 and December 31, 2023.    

Interest expense for the six months ended June 30, 2024 and 2023 was approximately US$ 19,900 and US$ 10,800, respectively, and relates primarily to interest costs on leased vehicles.

7.  Retirement program

The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ("IRC"). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company's matching contributions vest immediately.  The Company contributed approximately US$ 563,000 and US$ 579,000 to the savings and retirement plan during the six months ended June 30, 2024 and 2023, respectively.

8.  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 10 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:

As of June 30, 2024, the weighted average remaining lease term for finance and operating leases was 2.4 years and 7.1 years, respectively, and the weighted average discount rate was 7.8% and 6.0%, respectively. As of June 30, 2023, the weighted average remaining lease term for finance and operating leases was 1.5 years and 6.3 years, respectively, and the weighted average discount rate was 4.7% and 5.1%, respectively.  

Maturities of lease liabilities represent the remaining six months for 2024 and the full 12 months of each successive period as follows:

        Total                                                                                                                                           2,516                             462 

9.  Supplemental cash flow and non-cash financing disclosures

10.  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.  On June 30, 2024 and December 31, 2023, the Company had five customers which represented 29% and three customers that represented 32% of total accounts receivable, respectively.

11.  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.

12. Income taxes

The Company's total effective tax rate for the six months ended June 30, 2024 was 23%.  The Company is subject to US federal income tax with a statutory rate of 21%, 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 2019 forward is still open. The Company has no federal, foreign, or state income tax returns currently under examination.

As of June 30, 2024, and December 31, 2023 the Company had income tax payable of approximately US$ 2,000 and US$ 2,099,000, respectively.

On June 30, 2024, the Company had approximately US$ 2,368,000 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 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.

13. Share buyback

In February 2024 and 2023, the Board authorized on-market share buyback programs for such number of its listed shares of common stock as are equal to US$ 2,000,000 for each program.  The maximum price paid per common share was no more than the higher of 105 percent of the average middle market closing price of common share for the five business days preceding the date of the share buyback, the price of the last independent trade and the highest current independent purchase bid.  As of June 30, 2024, the Company purchased 154,074 shares of common stock for an aggregate value of US$ 679,000 pursuant to the share buyback program authorized in 2024, and 281,519 shares of common stock for an aggregate value of US$ 1,236,000, which completed the share buyback program authorized in 2023.  The Company estimates the share buyback program authorized in 2024 will be completed by the end of 2024.  In connection with the Company's share buyback programs authorized in 2024 and 2023, 481,422 shares held in treasury were cancelled in 2024.

14.  Subsequent events

In preparing the consolidated financial statements, the Company has evaluated all subsequent events and transactions for potential recognition or disclosure through August 29, 2024, the date the consolidated financial statements were available for issuance.

Dividend

The Board declared an interim dividend for the six months ended June 30, 2024 of 8.0 US cents per share.   This dividend will be paid on October 18, 2024 to shareholders on the register as of September 20, 2024.

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 or 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/#Help/PrintableForms

All dividends have the option of being paid in either GBP or USD.  Payments in USD can be paid by Check or through Crest. Payments in GBP can be paid via Check, Crest and BACS.  The default option if no election is made will be for a USD payment via check. Should shareholders wish to change their current currency or payment methods, forms are available through Computershare Investor Services PLC at

https://www uk.computershare.com/Investor/#Help/PrintableForms

If shares are held as Depositary Interests through a broker or nominee, the holding company must be contacted and advised of the payment preferences. Such requests are subject to the terms and conditions of the broker or nominee.

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