Somero Regulatory News (SOM)

6 Sep 2007 07:01

Somero Enterprises Inc.06 September 2007 Embargoed for 7.00am, 6 September 2007 THIS ANNOUNCEMENT MAY NOT BE RELEASED, PUBLISHED OR DISTRIBUTED IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA OR TO US PERSONS (AS DEFINED IN REGULATION S UNDER THE US SECURITIES ACT OF 1933, AS AMENDED) OR TO RESIDENTS, NATIONALS OR CITIZENS OF CANADA, JAPAN OR AUSTRALIA. Somero Enterprises, Inc. (R) Interim results for the six months to 30 June 2007 Strong growth from international expansion strategy Somero Enterprises, Inc. (R), ("Somero" or "the Company"), is pleased to reportits interim results for the six months to 30 June 2007. Somero is a NorthAmerican manufacturer of patented laser guided equipment used for the spreadingand levelling of high volumes of concrete for floors in the commercialconstruction industry. Expanding into new geographic markets, Somero'sinnovative, proprietary products help contractors worldwide achieve a high levelof precision in flat floor construction which reduces construction time andimproves cost savings. Financial Highlights • Revenue increased 18% at $34.4m (2006: $29.1m) • Improved balance between US and international sales, with international now accounting for 40.8% of Company revenues, up from 25.1 in the prior period • EBITDA1 increased 17% to $9.3m (2006: $7.9m) • Pre-tax income increased 15% to $5.4m (2006: $4.6m) • Net income before Amortisation2 and the early repayment of debt increased 47% to $6.0m (2006: $4.1m) • Refinancing of debt at a significantly lower interest rate (LIBOR + 1.4% compared to the former rate of LIBOR + 3.5%), plus repayment of $5.2m of bank debt, reducing debt to $15.8m at 30 June 2007 • Proposed interim dividend of $0.03 per share Business highlights • Operating in strong markets • Non residential construction industry remains strong • US and European replacement market remains strong • Investigation of suitability of new markets in China and the Middle East appear encouraging with expansion strategy now in place • International expansion supported by investment in sales resource and training • Significant investment in additional sales personnel, office openings and marketing in the US, Europe and emerging markets • Dedicated sales manager in place in UAE and search underway for sales manager in China • Somero Sales College continues to evolve with classes planned for Europe in the second half • Growth in all product revenue lines • 60 large line units sold (1H06: 51 units) and 214 small line units sold (1H06: 210) • New products launch 1 September 2007 - improved PowerRake and CopperHead • Additional new products in prototyping • Positive outlook • Trading remains in line with expectations • Non-residential construction worldwide continues strong • Europe and Rest of World sales will continue to exceed prior yearsales Commenting, Jack Cooney, President and CEO of Somero, said: "It is pleasing to report that demand in the non-residential construction marketin which we operate has remained strong, both in the US and internationally.Our international expansion strategy has helped to provide us with newopportunities for growth and our investigation of wholly new geographic marketsfor us - such as the Middle East and China - have also produced positiveresults. As we invest in sales and training to support the expansion of ourbusiness, we remain committed to continuing to enhance and expand Somero'sproduct offering and to maintaining our focus on cash flow and cost control. "We view the outlook for the remainder of the year positively. Trading remainsin line with expectations and we are confident that sales for the currentfinancial year will continue to exceed prior year levels." Financial Dynamics +44 (0)20 7831 3113Harriet Keen / Matt Dixon Jefferies +44 (0)207 968 8000Charles Cameron / Nandan Shinkre Notes 1 References to EBITDA are to Somero's operating income plusdepreciation expense and amortisation expense of intangibles plus non cashstock-based compensation expense. 2 References to Net Income before Amortisation defined as Net Incomeplus Amortisation of Intangibles plus Early Extinguishment of Debt (see noteunder net income reconciliation to EBITDA for a discussion of the non-GAAPmeasures used). About Somero Somero(R) designs, manufactures and sells equipment that automates the processof spreading and leveling large volumes of concrete for commercial flooring andother horizontal surfaces, such as paved parking lots. Somero's innovative,proprietary products, including the Large Laser Screed(R), employ laser-guidedtechnology to achieve a high level of precision. Its products have been sold primarily to concrete contractors for use innon-residential construction projects in over 50 countries. Laser screedingequipment has been specified for use in constructing warehouses, assemblyplants, retail centres and in other commercial construction projects requiringextremely flat concrete slab floors by a variety of companies, such as Costco,Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, theUnited States Postal Service, and Toys 'R' Us. Somero's headquarters are located in New Hampshire, USA. It operates amanufacturing facility in Michigan, USA, and has a sales and service office inChesterfield, England. Somero has 146 employees, and markets and sells itsproducts through a direct sales force, external sales representatives, andindependent dealers in North America, Latin America, Europe, the Middle East,South Africa, Asia and Australia. Somero is listed on the Alternative InvestmentMarket of the London Stock Exchange and its trading symbol is SOM.L. This announcement does not constitute or form part of any offer or invitation tosell, or any solicitation of any offer to purchase, any securities of SomeroEnterprises, Inc. (the "Company"). This announcement may not be released, published or distributed in or into theUnited States, Canada, Japan or Australia or to US Persons (as defined inRegulation S under the US Securities Act of 1933, as amended (the "US SecuritiesAct")) or to residents, nationals or citizens of Canada, Japan or Australia.The distribution of this announcement in certain other jurisdictions may also berestricted by law and persons into whose possession this announcement or anydocument or other information referred to herein comes should inform themselvesabout and observe any such restriction. Any failure to comply with theserestrictions may constitute a violation of the securities laws of any suchjurisdiction. No securities of the Company have been registered under the US Securities Act.No securities of the Company may be offered or sold in the United States or toUS persons (as defined in Regulation S under the US Securities Act) exceptpursuant to an effective registration statement under the US Securities Act orpursuant to an available exemption from the registration requirements under theUS Securities Act. No securities of the Company have been registered under the applicablesecurities laws of Australia, Canada or Japan and may not be offered or soldwithin Australia, Canada or Japan or to, or for the account or benefit ofcitizens or residents of Australia, Canada or Japan. ENDS CEO/Chairman Statement The first half of 2007 was very good with strong growth in the European and Restof World markets. Sales agents and a maturing organization drove a 103% revenueincrease in European countries over the comparative period. Overall, both largeline and small line equipment sales were strong as the acceptance of their valueproposition increases. The sales and support infrastructure in Europe has been strengthened withadditional agents in Belgium, Holland, the Baltics and Sweden. Our new full-timesub agent, with responsibilities in Greece, Turkey, Albania and South Africabegan on 1 May 2007. The flatting of sales in the US was due to two principal factors, both of whichwere Company specific, rather than market related in the first half. The firstof these was a strong comparative period, where sales for the year to 31December 2006 were up 45% on the prior year. A more steady rate of growth suchas that seen in the first half of the current financial year is much more inline with our expectations for our US business. The second factor related tothe retention and recruitment of sales people, with small line sales growthslowed by employee departures and the longer than expected recruitment andtraining time for qualified sales and field demonstration personnel. The thirdfactor was the deliberate managing down of our dealer network in favour of apredominantly direct sales model which, in general, has proved to beconsiderably more effective in sales generation. Prompt action was taken to address this and we have committed additionalresources toward the development of the Somero Sales College to shorten thetraining cycle and get high level personnel performing out in the field morequickly. We are confident that our Sales College is the most effective means ofimproving retention rates going forward, supported by our ongoing recruitmentinitiatives, principally because of the unique nature of the product andservices we sell where comprehensive training of new sales people is required.This view is consistent with our decision to gradually dismantle our dealernetwork in the US (which accounts for a small minority of sales) as we continueto build up our direct sales force over time. Rest of World sales growth of 66% was driven by strong growth in Australia, andthe establishment of distributor channels in South America and South Africa. Emerging Markets A central component of our business strategy has been our entry into and growthwithin emerging and international markets. Two senior managers were assigned tohire or reallocate sales personnel, open offices and hire agents in a number ofnew territories. Our own investigation of new geographic markets concluded that there was ashortage of concrete flooring specialists. A three-pronged strategy is underwayfor China and the Middle East. • Identify international logistics companies, development companies and building operators to target with a view to ensuring Western specifications are carried through to new markets. • Target local contractors who are tendering for projects for these major international players and local contractors with a Western joint venture partner; and • Develop a package whereby we can provide in-depth floor construction training, beyond the operator training that we currently provide. This may be developed in-house or via strategic alliance with partners. Interim Dividend The Board proposes to pay an interim dividend of $0.03 per share, payable on 8October 2007 to shareholders on the register as at 21 September 2007. Current trading and outlook It is pleasing to report that demand in the non-residential construction marketin which we operate has remained strong both in the US and internationally. Ourinternational expansion strategy has helped to provide us with new opportunitiesfor growth and our investigation of wholly new geographic markets for us - suchas the Middle East and China - have also produced positive results. As weinvest in sales and training to support the expansion of our business, we remaincommitted to continuing to enhance and expand Somero's product offering and tomaintaining our focus on cash flow and cost control. We expect a gradual improvement in small line sales in the US following theactions we have taken in relation to recruitment, training and retention ofstaff and will continue to invest in sales, marketing and new office openings inemerging markets as the year progresses. We view the outlook for the remainder of the year positively. Trading remainsin line with expectations and we are confident that sales for the currentfinancial year will continue to exceed prior year levels. Jack Cooney Chief Executive Officer Stuart Doughty Chairman Business and Financial Review SUMMARY OF FINANCIAL RESULTS SOMERO ENTERPRISES, INC. For the Six Months Ended June 30,Figures in US$ Thousands 2007 2006 REVENUE $ 34,374 $ 29,076COST OF SALES 14,604 13,268 GROSS PROFIT 19,770 15,808 OPERATING EXPENSESSelling Expenses 5,619 4,484Engineering Expenses 847 598General and Administrative Expenses 5,612 4,151Total Operating Expenses 12,078 9,233 OPERATING INCOME 7,692 6,575 OTHER INCOME (EXPENSE)Interest Expense (2,425) (1,934)Interest Income 36 35Foreign Exchange Gain 50 167Other - (196) INCOME BEFORE INCOME TAXES 5,353 4,647 PROVISION FOR INCOME TAXES 2,042 1,758NET INCOME $ 3,311 $ 2,889EPS Diluted (3) $ 0.10 $ 0.10EPS Diluted - Net Income Before Amortisation and Extinguishment (3) $ 0.17 $ 0.14Other Data:EBITDA (1)(2) 9,284 7,934Net Income Before Amortization and Cost of Early Extinguishment of Debt 5,984 4,073 Depreciation Expense 191 175Amortization of Intangibles 1,192 1,184Loss on Early Extinguishment of Debt 1,481 -Capital Expenditures 216 263 Notes: 1). "EBITDA" and "Net Income Before Amortisation and Cost of EarlyExtinguishment of Debt" are not measurements of the Company's financialperformance under GAAP and should not be considered as an alternative to netincome, operating income or any other performance measures derived in accordancewith GAAP or as an alternative to GAAP cash flow from operating activities as ameasure of profitability or liquidity. EBITDA and Net Income Before Amortisationand Early Extinguishment of Debt are presented herein because managementbelieves they are useful analytical tools for measuring the profitability andcash generation of the business. EBITDA is also used to determine pricing andcovenant compliance under the Company's credit facility and as a measurement forcalculation of management incentive compensation. The Company understands thatalthough EBITDA is frequently used by securities analysts, lenders and others intheir evaluation of companies, its calculation of EBITDA may not be comparableto other similarly titled measures reported by other companies. 2). EBITDA as used herein is a calculation of Operating Income plus DeprecationExpense, Amortisation of Intangibles and non-cash stock based compensation. 3) Diluted earnings per share represents income available to shareholdersdivided by the weighted average shares outstanding plus additional common sharesthat would have been outstanding if dilutive potential common shares had beenissued. Dilutive common shares outstanding at June 30, 2007 were approximately34,450,000. The Company had 95,000 shares outstanding at June 30, 2006 andissued a stock split of 315.79:1 in November 2006. There were no dilutiveshares at June 30, 2006 and the adjusted shares for the stock split would havebeen approximately 30,000,000. Diluted Earnings per share on "Net Income BeforeAmortisation and Cost of Early Extinguishment of Debt" is not a GAAP measurementand has been presented because Management believes it is a useful analyticaltool. Net Income to EBITDA reconciliation and Net income before amortisation Reconciliation SOMERO ENTERPRISES INC. For the six months Ended June 30,Figures in US$ Thousands 2007 2006 EBITDA ReconciliationNET INCOME $ 3,311 $ 2,889 Tax Provision 2,042 1,758 Interest Expense 2,425 1,934 Interest Income (36) (35) Foreign Exchange Gain (50) (167) Other Expense - 196 Depreciation 191 175 Amortisation 1,192 1,184 Stock Based Compensation 209 -EBITDA $ 9,284 $ 7,934 Net Income before Amortization ReconciliationNet Income $ 3,311 $ 2,889 Amortization $ 1,192 $ 1,184 Cost of early extinguishment of debt $ 1,481Net Income before Amortization and loss on early extinguishment of debt $ 5,984 $ 4,073 Notes: References to "Net Income Before Amortisation and Early Extinguishment of Debt"in this document are to Somero's net income plus amortization of intangiblesplus costs associated with early extinguishment of debt. Although net incomebefore amortisation and early extinguishment of debt is not a measure ofoperating income, operating performance or liquidity under US GAAP, thisfinancial measure is included because management believes it will be useful toinvestors when comparing Somero's results of operations by eliminating theeffects of amortisation of intangibles that have occurred as a result of thewrite-up of assets in connection with the Somero Acquisition. Net income beforeamortisation and early extinguishment of debt should not, however, be consideredin isolation or as a substitute for operating income as determined by US GAAP,or as an indicator of operating performance, or of cash flows from operatingactivities as determined in accordance with US GAAP. Since net income beforeamortisation and early extinguishment of debt is not a measure determined inaccordance with US GAAP and is thus susceptible to varying calculations, netincome before amortisation and early extinguishment of debt, as presented, maynot be comparable to other similarly titled measures of other companies. Areconciliation of net income to EBITDA and Net Income Before Amortisation andEarly Extinguishment of Debt" is presented above. Revenues Somero's consolidated revenues for the six months ended 30 June 2007 wereUS$34.4m, which represented an 18.2% increase from US$29.1m in consolidatedrevenues for the six months ended 30 June 2006. Somero's revenues consistprimarily of sales of new large line products (the SXP Large Laser Screed),sales of new small line products (the CopperHead and PowerRake) and otherrevenues, which consist of, among other things, revenue from sales of spareparts, refurbished machines, topping spreaders and accessories. The overallincrease in revenues for the six months ended 30 June 2007 as compared to thesix months ended 30 June 2006 was driven by growth in each of large line sales,small line sales and other revenues. The table below shows the breakdown betweenlarge line sales, small line sales and other revenues during the six monthsended 30 June 2007 and the six months ended 30 June 2006. 6 Months Ended 6 Months Ended June 30, 2007 (unaudited) June 30, 2006 (unaudited) (in Percentage (in Percentage thousands) of net sales thousands) of net salesLarge line Sales $ 17,109 49.8% $ 13,525 46.5%Small Line Sales $ 9,532 27.7% $ 8,633 29.7%Other Revenues $ 7,733 22.5% $ 6,918 23.8%Total $ 34,374 100% $ 29,076 100% Large line sales increased from US$13.5 for the 6 months ended 30 June 2006 toUS$17.1m for the 6 months ended 30 June 2007. This increase in revenue wasdriven by a 17.6% increase in unit volume (from 51 units to 60 units) andincreases in average selling prices. The higher unit volume was driven entirelyby increased international sales. Small line sales increased from US$8.6m for the six months ended 30 June 2006 toUS$9.5m for the six months ended 30 June 2007. Sales of CopperHeads andPowerRakes unit sales increased from 210 units sold during the six months ended30 June 2006 compared with 214 units sold during the six months ended 30 June2007. These increases in unit volume were entirely from international sales. Other revenues, including sales of spare parts, refurbished machines, toppingspreaders and accessories, increased from US$6.9m during the 6 months ended 30June 2006 to US$7.7m during the 6 months ended 30 June 2007. This revenue growthresulted primarily from the increased sales of topping spreaders. Growth outside North America has been responsible for the increases in salesrevenue. Sales to customers located in North America comprise the majority ofSomero's revenue, constituting 59.2% and 74.9% of total revenue for the sixmonths ended 30 June 2007and 2006 respectively, while sales to customers inEurope, South Africa and the Middle East combined contributed 30.1% and 17.5%,respectively. North American (the United States and Canada) sales experienced aslight slowdown from US$21.8m during the six months ended 30 June 2006 toUS$20.4m in 2007, principally due to issues related to the retention andrecruitment of sales people in the US. The remaining sales in these periods wereto customers in Asia, Australia, Central America and South America. The Company has been focused on expanding sales outside North America, withrevenues increasing to US$14.0 during the six months ended 30 June 2007, anincrease of 92.0% over revenues of US$7.3m during the during the six monthsended 30 June 2006. Sales in Europe, South Africa and the Middle East generatedUS$10.3m during the six months ended 30 June 2007, compared with US$5.1m duringthe during the six months ended 30 June 2006. Sales of the Large Laser Screedand the small line product outside North America increased by 117.4% and 73.6%respectively between these two periods. Sales in Asia, Australia and Centraland South America represented US$3.7m during the six months ended 30 June 2007,as compared to US$2.2m during the six months ended 30 June 2006. This increasewas driven by an increase in sales of Large line to 8 units and small line to 28units during the six months ended 30 June 2007, compared with units Large lineof 5 and Small line of 11 of during the corresponding period of 2006. Gross Profit Somero's gross profit for the six months ended 30 June 2007 was US$19.8m, a25.1% increase over US$15.8m for the six months ended 30 June 2006. As apercentage of revenue, gross profit increased to 57.5% for the six months ended30 June 2007, from 54.4% for the six months ended 30 June 2006. The increase in gross profit as a percentage of revenue has been due toincreased sales volumes, increasing list prices, an improvement in product mixand management's strategy of implementing manufacturing cost reductioninitiatives. Operating Expenses Operating expenses were US$12.1m for the six months ended 30 June 2007, a 30.8%increase over US$9.2m for the six months ended 30 June 2006. The increase inoperating expenses, which consists of selling, engineering and general andadministrative expenses, resulted primarily from an increase in total sellingexpenses due to increased headcount of 12, an increase in product developmentcosts and the new costs of being a public company which was US$.9m for the sixmonths ended 30 June 2007. Operating expenses were 35.1% and 31.8% of revenuesfor the 6 months ended 30 June 2007 and for the six months ended 30 June 2006,respectively. Debt Restructuring The Company entered into new financing with Citizens Bank New Hampshire, awholly owned subsidiary of Royal Bank of Scotland at a lower Libor rate thanprior financing. The RBS financing consisted of a US$10m term loan and a US$14mavailable revolver line. At June 2007 the Company bank debt was US$15.8m,reduced by US$5.2 from a debt of US$21m as at 31 December 2006 (see footnote 5to the financial statements). Earnings per Share Basic earnings per share represents income available to common stockholdersdivided by the weighted average number of shares outstanding during the period.Diluted earnings per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed issuance. Potentialcommon shares that may be issued by the Company relate to outstanding stockoptions. Earnings per common share have been computed based on the following: June 30, 2007 2006Income available to shareholders 3,311 2,889 Basic weighted average shares outstanding 34,282 30,000 Net dilutive effect of stock options 168 - Diluted weighted average shares outstanding 34,450 30,000 The Company had 95,000 shares outstanding at 30 June 2006 and issued a stocksplit of 315.79:1 in 2006, prior to its initial public offering. Share and pershare amounts have been adjusted to reflect the stock split for the periodsended 30 June 2007 and 2006 Earnings per Share Earnings per share at 30 June 2007 and 30 June 2006 and is as follows: June 30, 2007 2006 Basic earnings per share $ 0.10 $ 0.10Diluted earnings per share $ 0.10 $ 0.10Before amortization of intangibles and Cost of extinguishment of debt $ 0.17 $ 0.14 (See note attached to the "Net Income to EBITDA Reconciliation and Net Incomebefore Amortisation Reconciliation" table for discussion of the non-GAAPmeasures used). SOMERO ENTERPRISES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)AS OF 30 JUNE 2007 AND 31 DECEMBER 2006 (in thousands, except share amounts) 30 June 31 DecemberASSETS 2007 2006 CURRENT ASSETS: Cash and cash equivalents $ 1,776 $ 1,895 Accounts receivable-net 4,838 4,101 Inventories-net 6,525 4,912 Prepaid expenses and other assets 353 584 Income tax receivable - 211 Deferred tax asset 116 152 Total current assets 13,608 11,855 PROPERTY, PLANT AND EQUIPMENT-net 4,736 4,712 INTANGIBLE ASSETS-net 20,425 21,616GOODWILL 16,400 16,400DEFERRED FINANCING COSTS 115 1,349OTHER ASSETS 176 113 TOTAL ASSETS $ 55,460 $ 56,045 LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Notes payable-current portion $ 1,429 $ 2,400 Accounts payable 4,640 2,842 Accrued expenses 2,154 3,125 Income taxes payable 909 - Obligations under capital lease - 657 Total current liabilities 9,132 9,024 Notes payable, net of current portion 14,416 18,600 Deferred income taxes 172 146 TOTAL LIABILITIES 23,720 27,770 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDER'S EQUITY Preferred stock, $.001 par value, 50 million shares authorized, - - no shares issued and outstanding Common stock, $.001 par value, 80 million shares authorized, 34,281,968 shares issued and outstanding at 31 December 2006 and 30 June 2007 4 4 Additional paid in capital 22,135 21,926 Retained earnings 9,541 6,343 Other comprehensive income 60 2 Total stockholder's equity 31,740 28,275 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 55,460 $ 56,045 See notes to condensed consolidated financial statements. SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) FOR THE SIX MONTHS ENDED 30 JUNE 2007 AND 30 JUNE 2006 (in thousands) Six Months Six Months Ended Ended 30 June 2007 30 June 2006 (unaudited) (unaudited) REVENUE $ 34,374 $ 29,076COST OF SALES 14,604 13,268 19,770 15,808GROSS PROFIT OPERATING EXPENSES Selling expenses 5,619 4,484 Engineering expenses 847 598 General and administrative expenses 5,612 4,151 Total operating expenses 12,078 9,233 OPERATING INCOME 7,692 6,575 OTHER INCOME (EXPENSE) Interest expense (2,425) (1,934) Interest income 36 35 Foreign exchange gain 50 167 Other - (196) INCOME BEFORE INCOME TAXES 5,353 4,647 PROVISION FOR INCOME TAXES 2,042 1,758 NET INCOME $ 3,311 $ 2,889 EARNINGS PER COMMON SHARE Basic $ 0.10 $ 0.10 Diluted $ 0.10 $ 0.10 See notes to condensed consolidated financial statements SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (unaudited) FOR THE SIX MONTHS ENDED 30 JUNE 2007 (in thousands, except share data) dditional Other Total Common Stock Paid In Retained Comprehensive Stockholder's Comprehensive Shares Amount Capital Earnings Income Equity Income BALANCE-31 December 2006 34,281,968 $ 4 $ 21,926 $ 6,343 $ 2 $ 28,275 $ 5,386 Cumulative translation $ 23 $ 23 $ 23adjustment Change in fair value ofderivative instruments $ 35 $ 35 $ 35 Net Income $ 3,311 $ 3,311 $ 3,311 Share based compensation $ 209 $ 209 Dividend $ (113) $ (113) $ - BALANCE-30 June 2007 34,281,968 4 22,135 9,541 60 31,740 3,369 See notes to condensed consolidated financial statements. SOMERO ENTERPRISES, INC. AND SUBSIDIARIES (unaudited)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED 30 JUNE 2007 AND THE SIX MONTHS ENDED 30 JUNE 2006 (inthousands) Six Months Six Months Ended Ended 30 June 2007 30 June 2006CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,311 $ 2,889 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes 61 93 Depreciation and amortization 2,629 1,359 Amortization of deferred financing costs 114 238 Gain on sale of assets - (3) Realized gain (loss) on currency exchange 50 (167) Share based compensation 209 - Working capital changes: Accounts receivable (737) (1,228) Inventories (1,613) (237) Prepaid expenses and other assets 231 260 Income taxes receivable 212 - Other assets (29) (62) Accounts payable and other liabilities 828 1,293 Income taxes payable 909 (119) Net cash provided by operating activities 6,175 4,316CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment - 22 Payment for financing costs (125) - Property and equipment purchases (216) (263) Net cash used in investing activities (341) (241)CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from additional financing 22,254 - Repayment of notes payable (27,409) (500) Payment of capital lease (658) (1) Payment of dividends (113) - Payment of deferred offering costs - (326) Net cash provided by (used in) financing activities (5,926) (827)Effect of exchange rates on cash and cash equivalents (27) 146NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (119) 3,394 CASH AND CASH EQUIVALENTS:Beginning of period 1,895 2,391End of period $ $ 1,776 5,931 See notes to condensed consolidated financial statements. Somero ENTERPRISES, INC. and SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) FOR THE SIXMONTHS ENDED 30 JUNE 2007 AND 30 JUNE 2006 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Organization-On 10 August 2005, Somero Enterprises, Inc. acquired certain assetsand assumed certain liabilities from various affiliates of Dover Industries,Inc. (collectively, the "Somero Business"). Somero Enterprises Inc. and itssubsidiaries are herein referred to as the "Company" or "Somero." Nature of Business- The Company designs, manufactures, refurbishes, sells anddistributes concrete leveling, contouring and placing equipment, related partsand accessories, and training services worldwide. The operations are conductedfrom a corporate office in Jaffrey, New Hampshire, a single assembly facilitylocated in Houghton, Michigan, and a European distribution office in the UnitedKingdom. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation-The interim financial data as of 30 June 2007 and 31December 2006 and the six months ended June 30, 2007 and June 30, 2006 isunaudited. The condensed consolidated financial statements, in the opinion ofSomero management, includes all normal recurring adjustments necessary for afair presentation of the statement of results for the interim periods. Thestatements have been prepared in accordance with accounting principles generallyaccepted in the United States of America ("US GAAP") but do not include all ofthe information and note disclosures required by US GAAP. The condensedconsolidated financial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in Somero's AnnualReport and filing with the AIM exchange for the year ended 31 December 2006.The results for the six month period ended 30 June 2007 are not necessarilyindicative of the results to be expected for the year ending 31 December 2007 orfor any other interim period. Principles of Consolidation-The consolidated financial statements include theaccounts of Somero Enterprises, Inc. and its subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation. Cash and Cash Equivalents-Cash includes cash on hand, cash in banks, andtemporary investments with a maturity of three months or less when purchased. Accounts Receivable and Allowances for Doubtful Accounts-Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprimarily of accounts receivable. The Company's accounts receivable are derivedfrom revenue earned from a diverse group of customers primarily located in theUnited States. The Company performs credit evaluations of its commercialcustomers and maintains an allowance for doubtful accounts receivable based uponthe expected ability to collect accounts receivable. Reserves, if necessary,are established for amounts determined to be uncollectible based on specificidentification and historical experience. As of 30 June 2007 and 31 December2006, the allowance for doubtful accounts was approximately $175,000 and$97,000, respectively. Inventories-Inventories are stated at the lower of cost, using the first in,first out ("FIFO") method, or market. Provision for potentially obsolete orslow-moving inventory is made based on management's analysis of inventory levelsand future sales forecasts. Deferred Financing Costs-Deferred financing costs incurred in relation tolong-term debt, are reflected net of accumulated amortization and are amortizedover the expected repayment term of the debt instrument. In March, 2007 theCompany refinanced its debt obligations and expensed approximately $1,245,000 ofdeferred financing costs and incurred approximately $125,000 of new deferredfinancing costs. Intangible Assets and Goodwill- Long-Lived Assets, Including Goodwill and OtherAcquired Intangible Assets Intangible assets consist principally of customer relationships and patents, andare carried at their fair value, less accumulated amortization. Intangibleassets are amortized using the straight-line method over a period of three totwelve years, which is their estimated period of economic benefit. Goodwill isnot amortized but is subject to impairment tests on an annual basis, and theCompany has chosen 31 December as its periodic assessment date. The Company evaluates the carrying value of long-lived assets, excludinggoodwill, at least annually for impairment or when events and circumstancesindicate the carrying amount of an asset may not be recoverable. For the periodsended 30 June 2007 and 31 December 2006, no such events or circumstances wereidentified. The carrying value of a long-lived asset is considered impaired whenthe anticipated undiscounted cash flows from such asset (or asset group) areseparately identifiable and less than the asset's (or asset group's) carryingvalue. In that event, a loss is recognized to the extent that the carrying valueexceeds the fair value of the long-lived asset. Fair value is determinedprimarily using the anticipated cash flows discounted at a rate commensuratewith the risk involved. Revenue Recognition - products-The Somero Business recognizes revenue on salesof equipment, parts and accessories when persuasive evidence of an arrangementexists, delivery has occurred or services have been rendered, the price is fixedor determinable, and collectibility is reasonably assured. For product saleswhere shipping terms are F.O.B. shipping point, revenue is recognized uponshipment. For arrangements which include F.O.B. destination shipping terms,revenue is recognized upon delivery to the customer. Standard products do nothave customer acceptance criteria. Revenues for training are deferred until thetraining is completed unless the training is deemed inconsequential orperfunctory. Warranty Reserve-The Company provides warranties on all equipment sales rangingfrom three months to one year, depending on the product. Warranty reserves areestimated net of the warranty passed through to the Company from vendors,specific identification of issues and historical experience. Property, Plant and Equipment-Property, plant and equipment is stated atestimated market value based on an independent appraisal at the acquisition dateor at cost for subsequent acquisitions, net of accumulated depreciation andamortization. Land is not depreciated. Depreciation is computed on buildingsusing 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 thebuilding), 15 years for improvements, and two to five years for machinery andequipment. Income Taxes-The Company accounts for income taxes in accordance with Statementof Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to temporary differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis and operating loss and tax credit carry forwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Deferred tax assets are reduced by a valuationallowance, if necessary, to the extent that it appears more likely than not,that such assets will be unrecoverable. Use of Estimates-The preparation of financial statements in conformity with USGAAP requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates. Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (the "FASB") issuedSFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies theprinciple that fair value should be based on the assumptions market participantswould use when pricing an asset or liability and establishes a fair valuehierarchy that prioritizes the information used to develop those assumptions.Under the standard, fair value measurements would be separately disclosed bylevel within the fair value hierarchy. SFAS 157 is effective for fiscal yearsbeginning after November 2007, with early adoption permitted. Somero iscurrently in the process of evaluating any potential impact of SFAS 157. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities", which provides companies with anoption to report selected financial assets and liabilities at fair value. Theobjective of SFAS No. 159 is to reduce both the complexity in accounting forfinancial instruments and the volatility in earnings caused by measuring relatedassets and liabilities differently. SFAS No. 159 also establishes presentationand disclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities. SFAS No. 159 is effective fiscal years beginning after November 15,2007. Somero is currently in the process of evaluating any potential impact ofSFAS 159. In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109, effective for fiscal yearsbeginning after December 15, 2006. This interpretation clarifies the accountingfor uncertainty in income taxes recognized in financial statements in accordancewith Statement of Financial Accounting Standards No. 109, Accounting for IncomeTaxes. The adoption of FIN 48, as amended, had no impact on the Companyfinancial condition, results of operations, and cash flows Stock Based Compensation - The Company accounts for its stock option issuancesunder Statement of Financial Accounting Standard No 123R "Share Based Payment"(SFAS 123R) which was issued by the FASB in December 2004. SFAS No. 123Rrequired recognition of the cost of employee serviced received in exchange foran award of equity instruments in the financial statements over the period theemployee is required to perform the services in exchange for the award,(presumptively the vesting period). SFAS no. 123R also requires measurement ofthe cost of employee services in exchange for an award based on the grant-datefair value of the award. Somero adopted SFAS No. 123R in January 2006 whenstock options were awarded certain employees when the Company first listed onthe AIM exchange. The impact of adopting SFAS NO. 123R was an expense of$209,000 for the six months ended June 30, 2007. Translation of Foreign Currencies - The functional currency for the Company'sforeign subsidiary is the UK Pound Sterling. Balance sheet amounts aretranslated at 30 June 2007 exchange rate on the date of the balance sheet andstatement of operations accounts are translated at average rates. The resultinggains or losses are charged directly to accumulate other comprehensive income.The Company is exposed to market risks related to fluctuations in UK PoundSterling and European Union Euros exchange rates because some salestransactions, and the assets and liabilities of its foreign subsidiaries, aredenominated in either Pounds or Euros. Gains and losses from transactionsdenominated in Pounds or Euros currencies and forward exchange contracts areincluded in the Company's net income as foreign exchange gain (loss) in theaccompanying consolidated statements of operations. Comprehensive Income - Comprehensive income, which is the combination ofreported net income and other comprehensive income, was composed of theCompany's net income, fair value of interest rate swap, and foreign exchangegains (losses) for the six months ended 30 June 2007 and 30 June 2006. Totalcomprehensive income for the periods was approximately $3,369,000 and$2,868,000, respectively. Earnings Per Share - Basic earnings per share represents income available tocommon stockholders divided by the weighted average number of shares outstandingduring the period. Diluted earnings per share reflect additional common sharesthat would have been outstanding if dilutive potential common shares had beenissued, as well as any adjustment to income that would result from the assumedissuance. Potential common shares that may be issued by the Company relate tooutstanding stock options. Earnings per common share have been computed basedon the following (in thousands): 2007 2006 Net Income available to shareholders $ 3,311 $ 2,889 Basic Weighted Average Shares Outstanding 34,282 30,000 Net Dilutive Effect of Stock Options 168 Diluted Weighted Average Shares Outstanding 34,450 30,000 The Company had 95,000 shares outstanding at 30 June 2006 and issued a stocksplit of 315.79:1 in November of 2006, prior to its initial public offering.Share and per share amounts have been adjusted to reflect the stock split forthe six months ended 30 June 2006. 3. INVENTORIES Inventories consisted of the following at 30 June 2007 and 31 December 2006 (inthousands): 2007 2006 Raw materials $ 2,960 $ 2,422Finished goods and work in process 3,725 2,679 6,685 5,101Less: reserve for excess and obsolete inventory (160) (189) Total $ 6,525 $ 4,912 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consist of the following at 30 June 2007 and 31December 2006 (in thousands): 2007 2006 Land $ $ 207 207Buildings and improvements 4,229 3,432Machinery and equipment 808 732Property and Equipment held under capital leases 0 657Equipment sold under recourse contracts 179 178 5,423 5,206Less: accumulated depreciation and amortization (687) (494) $ 4,736 $ 4,712 Depreciation expense for the six months ended 30 June 2007 and the 30 June 2006,was approximately $193,000 and $175,000, respectively. 5. DEBT OBLIGATIONS Summary-The Company executed a credit facility with a financial institution on16 March 2007 (see section entitled "Credit Facility" below). The proceeds ofthe new term loan and the revolving line of credit were used to pay off in fullthe 31 December 2006 balances. The Company incurred a loss on the earlyextinguishment of debt of approximately $1,481,000 which included deferredfinancing cost of approximately $1,245,000. Company's debt obligation consisted of the following at 30 June 2007 and 31December 2006 (in thousands) 2007 2006Bank debtTerm loans $ 21,000Five year secured term loan 9,643 -Five year secured reducing revolving line of credit 6,202 - Less debt obligations due within one year 1,429 2,400 Obligations due after one year $ 14,416 $ 18,600 Credit Facility-The Company has a credit facility with a financial institution,dated March 16, 2007 was composed of the following: • $14,000,000 five-year secured reducing revolving line of credit • $10,000,000 five-year secured reducing term loan The Company has fixed the interest rate for the term loan and the revolvingfacility through a series of interest rate swaps. The revolver loan's interestrate swap's initial notional amount is $6,000,000, pays a fixed 5.20%, and had a30 June 2007 fair market value of approximately $6,000 which will amortise downby approximately $3,000 in the next twelve months. The term loan's interestrate swap's initial notional amount is $10,000,000, pays a fixed 5.15%, and hada 30 June 2007 fair market value of approximately $50,000 which will amortisedown by approximately $7,000 in the next twelve months. The interest rate swapsare designated as cash flow hedges. The revolver and the term loan interestrates are Libor (fixed by the interest rate swaps) plus an amount determined bythe ratio of "funded debt / last twelve months EBITDA," as defined in the loanagreement. The effective interest rate at 30 June 2007 for the revolving lineof credit was 6.6% and for the term loan 6.55%. The new credit facilities aresecured by substantially all of the Company's assets and contain a number ofrestrictive covenants that among other things limit the ability of the Companyto incur debt, issue capital stock, change ownership and dispose of certainassets. The revolving line of credit available reduces over the five year termand as of 30 June 2007 the borrowed balance is below the credit line available. Future Payments-The future payments by year under the Company's debt obligationsare as follows (in thousands) as of 30 June 2007:2007 $ 7142008 1,4292009 1,4292010 2,531Thereafter 9,742 Total payments $ 15,845 Interest- Interest expense on the credit facilities for the six months ended 30June 2007 and the six months ended 30 June 2006, was approximately $902,000 and$1,879,000, respectively, related to the debt obligation. Interest expenserecorded by the Company's U.K. subsidiary was approximately $70,000 and $13,000for the period 30 June 2007, and the six months ended 30 June 2006 respectively. 6. OPERATING LEASES The Company leases property, vehicles and office equipment under leasesaccounted for as operating leases. Future minimum payments by year undernoncancelable operating leases with initial terms in excess of one year were asfollows (in thousands): 30 June 2007 2007 $ 1012008 1652009 1152010 24After 2010 - Total $ 405 Total rent expense under operating leases for the period ending 30 June 2007 and30 June 2006 was approximately $123,000 and $70,000. 7. COMMITMENTS AND CONTINGENCIES The Company has entered into employment agreements with certain members ofsenior management. The terms of these agreements range from six months to oneyear and include noncompete and nondisclosure provisions as well as providingfor defined severance payments in the event of termination or change in control. 8. INCOME TAXES FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"an interpretation of FASB Statement No. 109, which the Company adopted as ofJanuary 1, 2007. The Interpretation addresses the determination of whether taxbenefits claimed or expected to be claimed on a tax return should be recorded inthe financial statements. Under FIN 48, the Company may recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized inthe financial statements should be measured based on the largest benefit thathas a greater than fifty percent likelihood of being realized upon ultimatesettlement. FIN 48 also provides guidance on derecognition, classification,interest and penalties on income taxes, accounting in interim periods andrequires increased disclosures. The impact of the Company's reassessment of itstax positions in accordance with the requirements of FIN 48 has been determinedto be immaterial. The Company's effective tax rate for the six months ended 30 June 2007 was 38.1%compared to the federal statutory tax rate of 34.0%. The effective tax rate ismore than the statutory tax rate due to the effect of state taxes. The Company adopted the provisions of FIN 48, on January 1, 2007. As a result ofthe implementation of FIN 48, the Company recognized no increase or decrease inthe liability for unrecognized tax benefits which would affect earnings ifrecognized. While the Company believes the Company has adequately provided forall tax positions, amounts asserted by taxing authorities could be greater thanthe Company's accrued position. Accordingly, additional provisions on federaland state tax-related matters could be recorded in the future as revisedestimates are made or the underlying matters are settled or otherwise resolved.The Company recognizes interest accrued related to unrecognized tax benefits ininterest expense. Penalties, if incurred, would be recognized as a component ofother expense. The Company does not believe it is reasonably possible therecorded uncertain tax positions will increase or decrease within the nexttwelve months. This information is provided by RNS The company news service from the London Stock Exchange