SomnoMed Annual Report 2016

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FY2016 Annual Report · SomnoMed

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ANNUAL
REPORT
2016

SOMERO ENTERPRISES®, INC.
IS A LEADING PROVIDER OF
TECHNOLOGICALLY ADVANCED
CONCRETE PLACING SOLUTIONS.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Visit us online at
www.somero.com/investors

Contents

Highlights
At a Glance
Investment Case
Chairman’s Statement

Strategic Report
2
4
6
8
10 Market Overview
Business Model
12
Vision and Strategy
14
President and Chief Executive Officer’s Statement
16
Case Studies
20
Financial Review
26

Corporate Governance
Board of Directors
30
Directors’ Report
31
Corporate Governance
36
Directors’ Remuneration Report
39

Financial Statements
42
43
44
45
46

Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements

Somero Enterprises, Inc.
Annual Report and Accounts 2016

HIGHLIGHTS

2016 RESULTS

Revenue
US$ 79.4m
+13.0%

Net cash (4)
US$ 20.2
+60.0%

Somero Enterprises, Inc.
Annual Report and Accounts 2016

2014201520162520515100US$12.620.26.6201420152016806020400US$70.279.459.3Adjusted EBITDA (1, 2)
US$ 24.6m
+23.0%

Dividend per share
US$ 0.111
+61.0%

Diluted adjusted net income per share (1, 3)
US$ 0.27
+23.0%

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Financial Highlights
• Annual revenues grew to a record US$ 79.4m, up 13% from 2015,

driven by strength in the Company’s core geographic markets and strong
demand for new products

• Revenue growth converted efficiently into profit and cash flows:

– Adjusted EBITDA increased 23% to a record US$ 24.6m

(2015: US$ 20.0m)(1) (2)

– Adjusted EBITDA margin improved to 31% (2015: 29%) driven

by gross margin expansion and operating cost controls

– Profits before tax grew 22% to US$ 21.3m

(2015: US$ 17.4m)

– Cash flow from operating activities increased

17% to US$ 16.9m (2015: US$ 14.5m)

• Balance sheet continues to strengthen:

– Net cash at 31 December 2016 grew to US$ 20.2m,

a US$ 7.6m increase over 2015(4)

– The Company fully paid off its US$ 1.0m mortgage

in January 2017

• Increased dividend payout ratio to 40% of adjusted earnings for 2016

– Final dividend of 8.6 US cents per share declared for a total 2016
dividend of 11.1 US cents per share, a 61% increase over last year

Operational Highlights
• Broad geographic growth and solid demand across the product line:

– 6 of 11 geographic markets grew in 2016 led by North America, Europe,

Australia and China which grew US$ 7.4m, US$ 2.3m,
US$ 1.3m and US$ 0.3m, respectively compared to 2015

– Boomed and Ride-on screed product lines grew US$ 2.2m and

US$ 1.9m, respectively compared to 2015

– 3-D Profiler System® revenues grew US$ 1.7m compared to 2015

– Other revenues, driven by sales of parts, accessories and the

STS-11M Topping Spreader, grew US$ 3.8m from 2015

• New product pipeline continues to contribute significantly to growth:

– S-940 and S-10A Laser Screed® machine sales combined for

US$ 10.6m in 2016 revenue, which represented US$ 4.6m in net
growth from 2015

– Launched the entry-level S-158 Laser Screed machine in China in Q4

2016

– Launched the SP-16 Concrete Hose Line-Pulling and Placing System

and next generation 3-D Profiler System at the World of Concrete Trade
Show in January 2017

• Completed construction of 14,000 sq. ft. Global Headquarters and

Training Facility in Fort Myers, Florida in April 2016:

– Construction underway of a hands-on training facility on the Fort Myers
campus that will be the future home of the Somero Concrete Institute
scheduled to open in Q2 2017

1. The Company uses non-US Generally Accepted Accounting Principles (GAAP) financial measures in
order to provide supplemental information regarding the Company’s operating performance. See
further information regarding non-GAAP measures below.

2. Adjusted EBITDA as used herein is a calculation of the Company’s net income plus tax provision,

interest expense, interest income, foreign exchange loss, other expense, depreciation, amortization,
and stock based compensation.

3. Adjusted net income as used herein is a calculation of net income plus amortization of intangibles and

excluding the tax impact of stock option and (RSU) settlements and other special items.

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

deferred financing costs.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

2014201520160.200.150.050.100US$0.0690.1110.0552014201520160.300.250.050.100.200.150US$0.220.270.172014201520160.300.200.1000.022US$20.015.024.6

AT A GLANCE

FASTER. FLATTER.
FEWER®

Somero provides industry-leading concrete-leveling equipment, training, education
and support to customers in over 90 countries. By using Somero technology,
our customers can install high-quality horizontal concrete floors faster, flatter and
with fewer people.

Our Mission
Somero is passionate about our customers’ success.
Somero’s innovative equipment, training, education
and support help our customers achieve their
business and profitability goals, earning their loyalty
and retaining them as a customer for life.

Our Vision
Somero’s vision is for our innovative, cutting edge
technology and processes to be in use wherever a
ready-mix truck is discharging concrete for a
horizontal concrete slab.

Our Unique Strengths
Somero pioneered the Laser Screed® machine
market in 1986 and has since led through continued
innovation by growing our product offering from a
single product in 1986 to a broad portfolio of 13
products and by developing proprietary designs that
are protected by a portfolio of 63 patents and patent
applications. Somero offers customers equipment
with unsurpassed quality and performance and
unparalleled global service, technical support,
training and education. Somero operates in markets
across the globe with minimal direct competition.

Our Customers
Somero’s customers are a specialized group
consisting of concrete contractors who specialize
in commercial projects all over the globe. Somero
products have been sold in over 90 countries
across every time zone. Our target customer is the
commercial concrete flooring contractor, of any size,
who is ready to move to the next level of profitability
with their business. The keys to our success are the
quality of our equipment, the high level of service,
education and training we provide, and the
investments we make in developing long-standing
customer relationships.

Our Applications
Somero equipment is used to place and screed the
concrete slab in all building types, including all floors
in multi-story buildings. Somero equipment has been
specified for use in the construction of warehouses,
manufacturing assembly plants, exterior paving and
parking structures, retail centers, and other
commercial construction projects that require
extremely flat concrete-slab floors. Somero
equipment has been used in construction projects
for a wide array of the world’s largest organizations
including Costco, Walmart, Home Depot, B&Q,
Carrefour, IKEA, Mercedes-Benz, Coca-Cola, FedEx,
the United States Postal Service, Lowe’s, Toys ‘R’
Us, Tesla and Prologis.

Warehouses

Assembly
plants

Commercial
construction

Exterior
paving

Parking
structures

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Our Products
Somero’s equipment employs laser-guided proprietary
technology to achieve a high level of precision in
concrete surface flatness at a higher rate of efficiency
than conventional methods. By using Somero
equipment, flooring contractors can attain the
highest level of flat-floor precision at the lowest cost.
Somero’s innovative, proprietary products include the
CopperHead®, Mini Screed™ C, S-840, S-15R, S-22E,
S-485, S-940, S-10A, and the S-158 Laser Screed®
machines; STS-11M Topping Spreader; as well as the
3-D Profiler System® software, the Somero Floor
Levelness System™, and the SP-16 Concrete Hose
Line-Pulling and Placing System.

Our Locations
Somero’s Global Headquarters and Training Facility, and the
future home of the Somero Concrete Institute, is located in
Fort Myers, Florida while the Company’s Operations and
Support Center is located in Houghton, Michigan. Somero
also maintains a Sales, Service and Training Facility that is
home to the Somero Concrete College in Shanghai, China as
well as sales and service offices located in Chesterfield,
England and New Delhi, India.

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LOCATIONS

USA

INDIA

CHINA

Somero Enterprises, Inc.
Annual Report and Accounts 2016

INVESTMENT CASE

OUR INVESTMENT
CASE IS BASED ON
6 CORE STRENGTHS

Industry leader in
introducing customer
driven, technologically
advanced new products

Minimal direct
competition

Significant barriers
to entry based on
technology, education,
and global technical
support

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Skilled management
team with extensive
industry experience

Attractive global
geographic growth
opportunity:
– Solid growth and market
dynamics in developed
markets

– Strong potential for
growth in emerging
markets

Strong and consistent
financial performance:
– Superior margins
– Strong conversion of

revenue growth into free
cash flow

– Strong, unleveraged

balance sheet

– Disciplined return of cash
to shareholders through
dividends

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CHAIRMAN’S STATEMENT

RECORD
RESULTS

Somero delivered excellent results in 2016, achieving record revenues
of US$ 79.4m, a 13% increase over 2015, and profits before tax
of US$ 21.3m, a 22% increase over 2015. In 2016, 6 of our 11
geographic markets grew compared to 2015 led by our core markets of
North America, Europe, and China.

Performance and dividend
Somero delivered excellent results in 2016, achieving
record revenues of US$ 79.4m, a 13% increase over
2015, and profits before tax of US$ 21.3m, a 22%
increase over 2015. In 2016, 6 of our 11 geographic
markets grew compared to 2015 led by our core
markets of North America, Europe, and China along
with a significant contribution from Australia. On a
product basis, we saw broad-based demand in 2016
which led to sales growth in our Boomed and Ride-on
screeds and 3-D Profiler System® product categories,
as well as growth in Other revenues which was
attributable to strong sales of parts, accessories and
the STS-11M Topping Spreader. Growth in both the
Boomed and Ride-on screed machine categories
highlight the wide range of project types, large and
small, that drove demand for our equipment in 2016.
Importantly, this growth translated into a record level of
profit and free cash flow for the Company, a result of
disciplined cost control and working capital
management. While we are pleased to deliver these
exceptional results to our shareholders, we are equally
pleased that each of our Somero employees
understands these results are only possible with an
unrelenting commitment to deliver innovative products,
solutions and services to our customers.

Based on the stellar 2016 performance, the Company’s
sound financial position, and the Board’s confidence in
the Company’s future, we are pleased to report that the
Board has approved increasing the dividend payout ratio
to 40% of adjusted net income for 2016. The increase
results in a final 2016 dividend of 8.6 US cents per share
which has been approved by the Board and will be
payable on 17 April 2017 to shareholders on the register
at 31 March 2017. Together with the interim dividend
paid in October 2016 of 2.5 US cents per share, the
2016 full year dividend payment to shareholders is 11.1
US cents per share, a 61% increase from 2015.

Strategic progress
Our entire organization is focused and aligned on what
makes Somero a truly exceptional business: (1) our
commitment to provide our customers access to
unparalleled industry expertise, service, training and
support, and (2) our commitment to develop innovative
products and solutions that help our customers improve
their processes, quality and efficiency. Our objective is
to prioritize investment in these value drivers. In 2016,
we completed our new Global Headquarters and
Training Facility in Fort Myers to provide a state-of-the-
art venue for customer training and product
demonstration. In 2017, we plan to take the next step
by constructing a hands-on training facility located on
our Fort Myers campus. This added investment is
expected to enable Somero to launch the Somero
Concrete Institute in the second quarter of 2017. We
expect the Somero Concrete Institute to provide a
comprehensive educational opportunity for students
from across the globe to become certified in concrete
placing and finishing, reinforcing Somero’s commitment
to training and education, and helping address the
growing shortage of skilled labor in the North American
concrete contractor industry. We also plan to continue
to invest in identifying new, innovative products and
solutions that help our customers achieve their
profitability goals, such as with our SP-16 Concrete
Hose Line-Pulling and Placing System which launched
in January 2017 at the World of Concrete Trade Show in
Las Vegas.

Dividend increase since 2015

+61%11.1 US cents per share

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Our people
The dedication and hard work of Somero’s 178
employees around the globe is fundamental to our
success. We could not deliver these record-setting
results for our shareholders without our most valuable
asset, our employees. On behalf of the Board, I would
like to thank all our employees across the globe for their
tireless commitment and passion for our customers’
success. In return, I look forward to working with the
Board to ensure we create the most productive and
rewarding work environment possible so each of our
employees can realize their full potential.

In China, the interest level in our products remains
healthy and we are excited by the growth opportunity in
front of us. In particular, we see solid interest in our
S-158 entry level product, which opens up the
productivity oriented market segment to us that we
expect to help us grow our customer base and offer
future up-sell opportunities. We also continue to see
traction with our market development efforts to promote
wide-placement methods and flatness, levelness
standards. These factors, along with our very low
market penetration in China, point to solid growth
prospects for 2017 and beyond.

Current trading and outlook
The solid momentum in North America at the end of
2016 has carried over into 2017 driven by demand for
replacement equipment, technology upgrades, and
interest in new products. We remain encouraged by the
solid level of non-residential construction activity in the
US, a view that is supported by reports from our
customers of lengthy project backlogs that extend well
into 2017. Proposals for US corporate tax reform and
fiscal policy programs to invest in US infrastructure are
additional factors reinforcing our confidence in North
American growth prospects.

In Europe, the 2016 acceleration of recovery from the
recessionary low point in 2011 is expected to carry
forward into 2017, driven by demand for replacement
equipment, technology upgrades, and interest in new
products, much like we see in the US which is
encouraging for the future.

In Latin America, we are expecting stable performance
from Mexico and Chile, and we have begun to see
modestly increased activity in Brazil, and are optimistic
for a satisfactory contribution to growth from the other
countries in the region. In our other markets, including
the Middle East, Australia, India, Scandinavia, Korea,
and Southeast Asia, we expect to see significant
opportunities in 2017 and are encouraged by the
market climate across this broad territory.

The Board believes the Company is well-positioned to
capitalize on the many opportunities we see across our
portfolio of markets and products and we remain
confident Somero is poised to deliver another year of
profitable growth to our shareholders in 2017.

Larry Horsch
Non-Executive Chairman
March 15, 2017

Somero Enterprises, Inc.
Annual Report and Accounts 2016

MARKET OVERVIEW

GLOBAL MARKET
OPPORTUNITY

Demand for Somero’s equipment is driven by factors that
apply across all the regions we serve – the need for quality
floors and a shortage of skilled workers.

NORTH AMERICA

EUROPE

Market Dynamics

• Second largest installed base of

equipment

• Accelerating improvement from

the recessionary low-point in 2011,
though region’s recovery has lagged
behind North America.

• Largest market
• Strong recovery in equipment pricing
and sales since recessionary low point
in 2011

• Non-residential construction industry
fundamentals remain sound in the US
• Proposed corporate tax reform and fiscal
policy proposals driving infrastructure
investment, positive factors for US
construction industry outlook
• Cement consumption from non-
residential building construction
increased 10.9% in 2016(1)

Estimated 2018 global cement consumption2

3.5%

5.6%

Drivers of Growth

• US non-residential construction spend
forecast to grow by 4%–7% annually
through to 2020(3)

• Technology upgrades of aging fleet of

installed equipment

• Fleet additions
• New product introductions
• Shortage of skilled labor in concrete

construction industry

• Continued recovery of non-

residential construction market
across mainland Europe

• Technology upgrades
• Fleet additions
• New product introductions
• Shortage of skilled labor in concrete

construction industry

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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CHINA

REST OF WORLD

Market Dynamics

• Greatest market opportunity for growth

outside North America

• Massive quantity of cement consumption
– forecast to represent over 50% of 2018
world cement consumption compared to
3.5% for North America(2)

• Current market penetration very low

• Current market penetration very low
• Most significant opportunity in
region is India, with cement
consumption second only to China
and forecast to represent over 15%
of 2018 world cement consumption
(more than 4 times that of North
America)(2)

• Significant opportunities in the

Middle East, Southeast Asia, Latin
America and Australia

Estimated 2018 global cement consumption2

50.4%

40.5%

Drivers of Growth

• Large multinational projects requiring

• Increased demand for higher-quality

high-quality floors adhering to Western
standards

• Broader domestic acceptance of

wide-placement and Western flatness,
levelness floor specifications

• Increased availability of long-term
financing options for customers

• New product introductions
• Increasing shortage of skilled labor

concrete floors

• Large multi-national corporations

requiring Western standards

• Increasing shortage of skilled labor

1. Percentage derived from Portland Cement Association
Market Intelligence Fall Cement Outlook report dated
November 2016.

2. Percentage derived from Portland Cement Association
Market Intelligence World Cement Consumption report
dated May 2015.

3. Estimates obtained from FMI Research Services Group 2017

US Markets Construction Overview Report.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

BUSINESS MODEL

SIGNIFICANT PROGRESS
TOWARDS OUR OBJECTIVE

In 2014, Somero outlined its strategic objective to reach $90m in revenues
in 2018. We have made significant progress towards this target, growing
revenues to US$ 79m in 2016. Our objective in view, we are more focused
than ever on executing our strategy.

Our model

Somero Customers

Small, medium and large concrete contractors
and self-performing general contractors.

Somero operates in markets across the
globe, selling products in 90+ countries
with minimal direct competition.

Key benefits to our customers

Increases quality
Productivity
Profit
Direct access to Somero expertise,

training and support

Multi-faceted value proposition

It all starts with “Why?”
Our mission revolves around a simple question, “Why?”.
For every Somero employee the answer is clear. We work
hard to deliver world-class products and services because
we’re passionate about our customers’ success and we
strive to ensure our customers achieve their business and
profitability goals.

Our customers see this passion day-in and day-out, and
as a result, we earn their loyalty and are able to retain
them as a customer for life.

How we pursue our mission makes us unique
Our technology and equipment enables our customers to
install every concrete slab faster, flatter
and with fewer people.

Somero technology was developed based on a deep
understanding of the industry and direct customer
engagement that, to this day, drives us to develop
innovative products and services that enable our
customers to produce higher-quality floors and increase
their productivity and ultimately their bottom line.

Somero’s business is far more than simply selling
equipment. Providing customers access to unparalleled
industry expertise, training and support is core to our
success as an educator and innovator in the
concrete industry.

What we provide
Somero offers customers equipment with unsurpassed
quality and performance combined with unparalleled
global service, technical support, training and education.

Somero offers a wide portfolio of products that cover
concrete slab placements in all types of construction
projects. In addition to equipment and software products,
Somero also sells parts, accessories and provides service
and training to customers to keep their machines up and
running and operating optimally.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Applications

Somero laser-guided technology and wide-
placement methods have been specified for
use in a wide range of construction
projects including:

– Warehousing
– Industrial/

Manufacturing
– Schools/Hospitals

– Commercial
– Retail
– Parking Structures

Multi-faceted value proposition

Building owners and end users

Somero equipment has been used in
construction projects for a wide array of
the world’s largest organizations including
Walmart, Home Depot, B&Q, Carrefour,
IKEA, Mercedes-Benz, Coca-Cola, FedEx,
Tesla and Prologis.

Key outcomes for building owners and end users

Operational efficiency
Improved physical appearance
àLower floor maintenance cost
àLower forklift repair cost

Key differentiators/competitive advantages

Innovative Product Leadership

Industry Expertise, Training and Support

– Pioneered Laser Screed® machine market in 1986
– Product portfolio grown to 13 products
– Designs protected by 63 patents/applications
– Product development fueled by customer engagement

– Proven commitment to exceptional classroom/job-site training
– 24/7 direct global support (in 10 minutes, all major languages)
– Overnight spare parts delivery, next day world travel
– Somero Concrete College & Institute

Somero Enterprises, Inc.
Annual Report and Accounts 2016

VISION AND STRATEGY

ROADMAP FOR
SUSTAINABLE
GROWTH

Our vision

Somero’s vision is for our innovative, cutting edge technology
and processes to be in use wherever a ready-mix truck is
discharging concrete for a horizontal concrete slab.

Our strategy

Our strategy is to leverage these strengths to grow our business
through geographic expansion and product innovation.

Geographic expansion

Product innovation

Somero is a truly global business, supplying over
90 countries with our unique products and
services. Replicating our success in the North
American market across the globe is a key element
of our strategy. Supporting this commitment to
grow the business globally is our investment in our
international employees. Since 2007, the vast
majority of our staffing increases have been
employees based outside of North America. We’ll
continue to make selective investments to expand
our global sales and support coverage as we
pursue this strategy.

2016 was another productive year for our
Engineering team as we launched a new low-cost
entry level machine, S-158 Laser Screed Machine,
in China in the fourth quarter 2016, we completed
the design of the SP-16 Concrete Hose Line-
Pulling and Placing System and the next
generation 3-D Profiler System, both of which were
launched at the World of Concrete Trade Show in
Las Vegas. Somero will continually search for
opportunities to leverage our core technology and
design capabilities to introduce innovative new
products to the industry.

See Market Overview on page 10

See Case Study on page 24

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

PRESIDENT AND CHIEF EXECUTIVE OFFICER’S STATEMENT

CONTINUED
MOMENTUM

Strong performance in the US and Europe, and
contribution from new products has put us ahead
of our five-year growth plan projections.

Overview
I am very pleased to report that 2016 was an
exceptional year for Somero. Our financial results were
outstanding as we ended the year with record
revenues, profits, and the strongest balance sheet and
net cash(1) position in the Company’s history. We also
made meaningful investments in order to execute our
growth strategy in the years to come. We finished
construction and moved into our new 14,000 square
foot Global Headquarters and Training Facility in Fort
Myers, we broke ground on a new hands-on training
facility on our Fort Myers campus, we completed
development of three new products, and most
importantly, we added key talent to the organization
to help lead the Company forward. As good a year as
2016 was, we are even more excited about the
opportunities that lie ahead.

Region reviews
The performance in the North American market
continues to be strong, reflecting a healthy commercial
construction environment supported by the new
political establishment. Market estimates indicate that
in 2016 North American cement consumption from
non-residential building construction grew an estimated
10.9%(2) compared to 2015 which is consistent with the
extensive project backlogs our customers have
reported. Also in 2016, North American sales increased
a robust 15% compared to 2015 to reach US$ 56.6m,
driven by an abundance of commercial construction
activity combined with a growing shortage of skilled
labor in the concrete contractor industry that in turn
increased demand for Somero equipment. New
products have also been a key contributor to growth in
North America as the new S-10A and S-940 Laser
Screed machines have gained considerable traction in
the market.

Our European market accelerated its recovery in 2016
with sales growing 40% compared to 2015 to reach
US$ 8.0m. Importantly, this growth was well-balanced
across our product line and on a geographic basis, with
particularly solid trading activity in Italy, Poland, UK,
Spain and the Czech Republic.

The China market stabilized in 2016 contributing US$
6.4m in sales for the year, a 5% increase compared to
2015. The positive underlying market fundamentals and
long-term growth prospects in China remain intact and
we have seen continued traction from our training and
educational efforts to advance awareness, acceptance
and demand for higher-quality floors through wide-
placement methods. We took several important steps in
2016 to position ourselves for future growth in China: we
recruited an experienced manager based in Shanghai to
lead our sales team in China; we successfully brought
our training and educational efforts to the job-site by
hosting a Mega Product Demonstration on a high-
visibility job with one of our largest customers; and, late
in 2016, we introduced our newly designed entry-level
S-158 Laser Screed machine and the S-940 Laser
Screed machine to the China market, two products that
we believe will attract new productivity-oriented
customers, which is an important, incremental market
segment. Finally, while not new in 2016, our long-term
financing program continues to be a success with our
equipment shut-off capability proving to be an effective
tool to secure timely payments from customers who
require a financing option. All sales under the long-term
financing program that began in Q4 2015 have either
been paid in full or are current on scheduled payments
as of 31 December 2016, and the Company has earned
over US$ 0.2m in interest income in 2016 from
financing these sales.

Sales in Australia improved substantially in 2016,
growing 130% from 2015 to reach US$ 2.3m. The
considerable improvement in Australia was driven in
part by improved economic conditions combined with
the strengthening of the Australian dollar in 2016.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Sales in the Middle East grew 7% from 2015 to reach
US$ 2.9m for the year, another healthy year for the
region. Driving the performance in 2016 were strong
contributions from Turkey, the United Arab Emirates,
and Saudi Arabia.

In Latin America, while sales declined 15% from 2015
to US$ 1.7m for the year, the second half of 2016 was
considerably improved from the start of the year,
reflecting noticeably improved activity levels across the
region, including modest improvement in Brazil.

In Southeast Asia, sales declined to US$ 0.4m in 2016
from US$ 1.3m in 2015. However, despite the sluggish
performance in 2016, we continue to view Southeast
Asia as a significant future growth opportunity given our
very low current market penetration and the growing
demand for higher-quality floors in the region.

While sales in India in 2016 declined to US$ 0.1m from
US$ 0.6m in 2015, we exited the year with a solid
pipeline of opportunities, some of which were delayed
as a result of the Indian banking system reforms that
slowed bank financing approvals. We also view India as
a significant future growth opportunity for Somero and
will continue to develop the market through marketing
activities and by hosting educational seminars for
potential customers, engineers, architects and building
owners that promote the benefits of higher-quality
concrete floors.

As expected, sales in Russia improved only modestly
to US$ 0.2m in 2016 given the continued unstable
economic and geo-political climate in the country.

Cashflow and Balance Sheet
Driven by record revenues and profits combined with
effective working capital management, 2016 was also
a year of record operating cash flows for Somero.
Operating cash flows grew to US$ 16.9m, up from
US$ 14.5m in 2015, and year-end 2016 net cash
balances increased to US$ 20.2m from US$ 12.6m
a year ago(1). The growth in net cash is remarkable
considering in 2016 we also paid US$ 4.2m in
dividends to shareholders and invested US$ 4.4m
in capital expenditures related largely to our expansion
projects. On top of this, I am particularly pleased that
we have also increased our dividend payout ratio to
40% of adjusted net income to return even more of our
profits to shareholders beginning with the dividend to
be paid in April 2017. The Board plans to review the
Company’s cash position alongside cash requirements
for current business needs and future investment
during the first half of 2017. The Board will then assess
the level of excess cash that may be subject to
distribution back to shareholders through a special
dividend later in 2017.

People
During 2016, we increased our staffing by 13 to reach
178 employees at the end of the year as we made key
investments to bring new talent into the organization to
drive and support our growth. We will continue to work
on striking the right balance between investing in new
talent and leveraging our operational scale. We are
highly selective in the quality and fit of the individuals
we hire and devote a large part of the hiring process to
determine if a candidate fits the Somero culture,
embraces our core values, and will be a significant,
productive contributor.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

PRESIDENT AND CHIEF EXECUTIVE OFFICER’S STATEMENT CONTINUED

“I am excited at the opportunities that lie ahead for
Somero in 2017. We are financially stronger than
ever, have the broadest portfolio in our history and
have made significant investments to increase our
global reach.”

Expansion Update
In April 2016, we completed construction and moved
into our new 14,000 square-foot Global Headquarters
and Training Facility in Fort Myers, Florida. The new
Training Facility provides us with a state of the art
classroom environment that we have already used to
train and educate nearly 150 customer operators since
we first opened the new facility. In addition, due to
increasing industry demand for enhanced training and
education, we have accelerated plans to construct a
hands-on training environment on our Fort Myers
campus. This will become part of the Somero Concrete
Institute which is planned to launch in Q2 2017. This
investment highlights Somero’s continued commitment
to the industry, and further distinguishes Somero as an
industry leader in training and education. We expect to
complete the project by the end of Q1 2017 for a total
building cost of US$ 0.7m.

Conclusion
This was a record setting year for Somero in terms of
our financial performance, but that is only part of the
story. We have also made real strides in executing our
strategy to grow the business globally through
innovative new products, expanding our operational
and training capabilities to meet the future needs of our
customers, and adding critical new talent to the
organization. We have done this while also delivering
remarkable financial results, strengthening our balance
sheet and increasing our dividend to return more cash
to our shareholders.

Product Development
Each year, Somero invests approximately 2% of sales
on product development with a goal of introducing at
least one new product every year. The efficiency of our
product development effort is due to our customer-
focused approach that relies on a high level of
customer engagement through focus groups, surveys,
and feedback we routinely gather through interactions
with our direct sales and support staff. 2016 was
another efficient year as our Engineering team
completed development of three new products: our
entry-level S-158 Laser Screed machine targeted for
the Chinese market, our new SP-16 Concrete Hose
Line-Pulling and Placing System and our next
generation 3-D Profiler System. All three new products
have been well-received by the market, with the S-158
launching at the end of 2016 in China, and the SP-16
and next generation 3-D Profiler System launching in
January 2017 at the World of Concrete Trade Show in
Las Vegas, Nevada. Additionally, in 2016 we gained
significant sales traction with products that were
developed in the previous year, the S-10A and the
S-940 Laser Screed machines. These two products
contributed, on a combined basis, US$ 10.6m in sales
in 2016, which represented US$ 4.6m in net growth
from 2015.

Progress Towards our 2018 Strategic Objective
This was the third year of our five-year plan that targets
reaching revenues of US$ 90m in 2018. We have now
roughly met 75% of the target by reaching just over
US$ 79m in revenues in 2016 with two years of the
plan remaining. Given solid fundamentals in the US and
European markets, strong growth prospects in China,
and meaningful additional growth opportunities across
our portfolio of products and geographic markets, we
remain confident in our ability to meet our strategic
target in 2018.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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These achievements would not be possible without our
talented management team leading the effort. I want to
personally highlight the tremendous performance of our
Managers in 2016 who each excelled at managing
another year of rapid growth while keeping focus on
improving the products, solutions, and levels of service
we offer our customers. Somero’s success begins with
our employees’ passion and dedication to ensuring our
customers achieve their business and profitability goals.
I am most proud that we have not lost sight of that.

We anticipate another exciting year ahead for Somero,
and are looking forward to capitalizing on the significant
opportunities ahead. Through the investments we have
made in 2016 and plan to make in 2017, we believe we
are well-positioned to capitalize on expected growth in
our core markets of the US, Europe and China, capture
revenues from new products and new markets, and
continue to extend and deepen our global footprint.
Most importantly, we look forward to delivering another
year of remarkable results for our shareholders.

Jack Cooney
President and Chief Executive Officer
March 15, 2017

1. Net cash is defined as total cash and cash equivalents less borrowings under

bank obligations exclusive of deferred financing costs.

2. Percentage derived from Portland Cement Association Market Intelligence Fall

Cement Outlook report dated November 2016.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CASE STUDY

CHINA

Providing our Customers Tools for
Success through Education and Training

Somero’s entry into the China market began with concentrated efforts
to educate the concrete industry about the benefits of producing
high-quality, flat, and level concrete floors. This included focusing on
the efficiencies and cost savings attainable by using wide-placement
methods in concrete floor placement. As we’ve experienced in other
markets, encouraging the industry to adopt higher-quality standards
and wide-placement methods ultimately benefits Somero, our
customers, building owners and end-users, and the entire industry.

Our educational efforts continually evolve as we further develop
our services. Initially, our team of Sales Engineers concentrated on
conducting seminars focused on expanding awareness of wide-
placement theory and the benefits of quality, flat and level floors.
In 2015, we established the Somero Concrete College in Shanghai,
to provide in-depth training and hands-on experiences essential to
reinforcing concepts presented in our early seminars.

In May 2016, we furthered our efforts by traveling to a job-site to host a
week-long Mega Product Demonstration. The ‘Mega-Demo’ was held
in conjunction with one of our largest and most successful customers
in China, Shenyang Nester on a 500,000 square foot GLP Prologis
warehouse project in Jiaozhou, Qingdao, Shandong Province. With over
150 attendees consisting of current and potential customers, design
firms, and commercial developers, this event was the perfect
opportunity for attendees to see our theories in practice.

Shenyang Nester highlights Somero’s strategy to grow the market by
providing customers in China with the needed equipment, training, and
education for them to build businesses. We believe this will, in turn,
increase future demand for Somero equipment. Shenyang Nester
started in the industry as a material applicator. In 2014, the owner of
Shenyang Nester made the decision to expand his business and
become a concrete flooring contractor with a purchase of their first
Somero machine, an S-840 Laser Screed machine. Since that time,
with the support and training provided by Somero, Shenyang Nester
has become one of China’s most respected concrete flooring
contractors. He has completed numerous projects for multinational
corporations, and employs 80 full-time employees.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Provided nearly

4,500

hours of training and
education to Chinese
customers in 2016

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

CASE STUDY

SOMERO CONCRETE
INSTITUTE

Building on the success of our educational endeavors at the Somero
Concrete College in Shanghai, China, Somero is proud to announce the
development of the Somero Concrete Institute (SCI). Somero has a long
and proven commitment to providing exceptional training, both in the
classroom and on the job site, in order to ensure our customers’
success upon their investment in a Laser Screed machine. In 2016,
Somero successfully trained and certified nearly 470 individuals in the
US alone on the proper use and maintenance of our equipment. The
launch of the SCI in 2017 is a natural extension of our commitment to
training and education.

Late in 2016, driven by strong industry demand, Somero decided to
accelerate plans to launch the SCI to provide a solution to the growing
shortage of skilled labor in the North American concrete contractor
industry. Partnering with leaders in the industry, including the
American Concrete Institute and the American Society of Concrete
Contractors, Somero is developing a broad curriculum for the SCI that
will go far beyond training on proper maintenance and operation of
Somero Laser Screed equipment. The SCI will cover a range of topics
spanning all phases of a project, including job site management,
concrete mix design, and methods and techniques in preparing,
pouring and finishing concrete. Offering both theoretical classes and
hands-on instruction, the SCI will provide a comprehensive educational
opportunity for all different types of adult learners from across the
globe to become certified in concrete placing and finishing.

A key element of the SCI is training and experience with live placement
of concrete. As such, Somero broke ground in late 2016 with a
freestanding facility on our Fort Myers campus where students will be
able to pour concrete and gain valuable hands-on training in a
controlled environment. Construction of the new facility will be
completed at the end of Q1 2017 and the first classes of the SCI are
scheduled to take place in Q2 2017.

470

Customer operators trained
and certified on Somero
equipment in the U.S. in 2016

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

CASE STUDY

PRODUCT
DEVELOPMENT

Driven by Customer Engagement

Somero was founded on innovation. We revolutionized the concrete flooring
industry when we introduced the first Laser Screed machine in 1986.
Since our beginnings as a single product company, we have continued to
develop proprietary designs and technology to grow our product portfolio to
13 innovative products, all geared towards helping our customers improve
their processes, efficiency and quality so they can achieve their business
and profitability goals. Along the way we’ve accumulated a portfolio of 63
patents and patent applications to protect these designs.

2016 was another highly productive year for our product development
effort as we completed development on three new products: Our entry-
level S-158 Laser Screed machine for China launched in Q4 2016, and our
SP-16 Concrete Hose Line-Pulling and Placing System and next generation
3-D Profiler System, both launched at our largest industry trade show, the
World of Concrete held in Las Vegas, Nevada in January 2017.

As a direct sales and support organization, Somero understands the
benefits of involving our customers in the product development effort. We
also understand that to do this effectively it’s critical to funnel all the ideas
and creative energy on the front end into focused efforts on new products
and services that are solidly supported by a business case. The payoff of
turning customers’ ideas into tangible products with a strong value
proposition is how we build incredible customer loyalty and engagement.

In 2016, in addition to developing new product designs, we also took the
next step to elevate our product development process by establishing the
Somero Innovation Council. We approached a broad group of industry
experts to join the Innovation Council to create a structured forum where
we can regularly discuss industry trends, opportunities to create value, and
most importantly to review new product concepts that form the basis of our
future product roadmap.

We kicked off the Innovation Council in December 2016 with our first-ever
Innovation Summit held in Naples, Florida. The session was facilitated by
Phillips & Company whose diverse portfolio of clients includes blue-chip
companies such as Verizon, Ziploc and Paramount. The Summit was a
highly successful day-long ideation session focused on discussing market
opportunities and generating potential product ideas. At the end of the
session the Council had generated over 50 different product concepts to
add to our pipeline of ideas which we will continue to explore.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

$10.6m

in Revenues from New Products
in 2016

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

FINANCIAL REVIEW

Summary of Financial Results

Revenue
Cost of sales

Gross profit

Operating expenses
Sales, marketing and customer support
Engineering
General and administrative

Total operating expenses

Operating income
Other income (expense)
Interest expense
Interest income
Foreign exchange loss
Other

Income before income taxes
Provision for income taxes

Net income

Other data
Adjusted EBITDA (1) (2) (4)
Adjusted net income (1) (3) (4)
Depreciation expense
Amortization of intangibles
Capital expenditures

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

79,353
34,270

70,222
31,059

45,083

39,163

10,056
1,071
12,768

9,438
1,031
11,121

23,895

21,590

21,188

17,573

(95)
267
(117)
34

(191)
20
(43)
–

21,277
7,019

17,359
5,809

14,258

11,550

24,579
15,637
1,121
1,545
4,435

20,034
12,966
719
1,545
4,162

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 its net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation,

amortization, and stock based compensation.

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

other special items.

4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company’s operating performance. The non-US GAAP

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

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Net income to adjusted EBITDA reconciliation and Adjusted net income reconciliation

Adjusted EBITDA reconciliation
Net income
Tax provision
Interest expense
Interest income
Foreign exchange loss
Other
Depreciation
Amortization
Stock based compensation

Adjusted EBITDA

Adjusted net income reconciliation
Net income
Amortization
Tax impact of stock option & RSU settlements

Adjusted net income

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

14,258
7,019
95
(267)
117
(34)

1,121
1,545
725

11,550
5,809
191
(20)
43
–
719
1,545
197

24,579

20,034

14,258
1,545

11,550
1,545

(166)

(129)

15,637

12,966

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

2. Adjusted EBITDA as used herein is a calculation of its net income plus tax provision, interest expense, interest income, foreign exchange loss, other expense, depreciation,

amortization, and stock based compensation.

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

other special items.

4. The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company’s operating performance. The non-US GAAP

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

FINANCIAL REVIEW continued

Revenues
The Company’s consolidated revenues increased by 13% to US$ 79.4m (2015: US$ 70.2m). Company revenues consist primarily of
sales from Boomed screed products, which include the S-22E, S-15R and S-10A Laser Screed machines, sales from Ride-on screed
products, which are drive through the concrete machines that include the S-840, S-485, S-940 and S-158 Laser Screed machines,
Remanufactured machines sales, 3-D Profiler System, and Other Revenues which consist primarily of revenue from sales of parts and
accessories, sales of other equipment, service, training and shipping charges. The overall increase for the year was driven by sales of
Boomed screeds, Ride-on screeds, 3-D Profiler Systems, along with an increase in Other revenues.

Boomed screed sales increased to US$ 36.3m (2015: US$ 34.1m) as a result of increased volume and price increases, Ride-on screed
sales increased to US$ 14.4m (2015: US$ 12.5m) also due to higher volume and price increases, 3-D Profiler System sales increased to
US$ 6.1m (2015: US$ 4.4m) due to increased unit sales and Other revenues increased to US$ 16.7m (2015: US$ 12.9m) primarily due
to increased sales of parts and accessories and increased sales of other equipment including the STS-11M Topping Spreader.

Revenue breakdown by geography

North America US$

in millions

EMEA(1) US$
in millions

ROW(2) US$
in millions

Total US$ in millions

2016

2015

Boomed screeds (3)
Ride-on screeds (4)
Remanufactured machines
3D Profiler System
Other (5)

Total

2016

2015

2016

2015

2016

2015

Net sales

% of Net
sales

Net sales

% of Net
sales

27.0
10.4
3.7
5.4
10.1

56.6

27.3
8.3
2.6
3.8
7.2

49.2

6.0
2.3
0.4
0.2
2.8

11.7

3.5
3.0
0.6
0.3
2.2

9.6

3.3
1.7
1.8
0.5
3.8

3.3
1.2
3.1
0.3
3.5

36.3
14.4
5.9
6.1
16.7

45.7%
18.1%
7.5%
7.7%
21.0%

34.1
12.5
6.3
4.4
12.9

48.6%
17.8%
9.0%
6.2%
18.4%

11.1

11.4

79.4 100.0%

70.2 100.0%

Notes:
1. EMEA includes the Europe, India, Middle East, Scandinavia and Russia markets.
2. ROW includes the China, Australia, Latin America, Korea, and Southeast Asia markets.
3. Boomed Screeds include the S-22E, S-15R, and S-10A.
4. Ride-On Screeds include the S-840, S-940, S-485, and S-158.
5. Other includes parts, accessories, services and freight, as well as other equipment such as the STS-11M, Copperhead, and Mini Screed C.

Units by product line

Boomed screeds
Ride-on screeds
Remanufactured machines
3D Profiler System

Total

2016

130
159
42
61

392

2015

109
146
43
47

345

Sales to customers located in North America contributed 71% of total revenue (2015: 70%), sales to customers in EMEA (Europe, India,
Middle East, Scandinavia, and Russia) contributed 15% (2015: 14%) and sales to customers in ROW (Southeast Asia, Australia, Latin
America, and China) contributed 14% (2015: 16%).

Sales in North America were US$ 56.6m (2015: US$ 49.2m) up 15% driven by higher sales of Ride-on screeds, Remanufactured
machines, and an increase in Other revenues. Sales in EMEA were US$ 11.7m (2015: US$ 9.6m) which is up 22% primarily due to an
increase in Boom screed sales. Sales in ROW were US$ 11.1m (2015: US$ 11.4m) down modestly due to a decline in Remanufactured
sales offset partly by an increase in sales of Ride-on screeds.

Regional sales

North America
Europe
China
Middle East
Australia
Latin America
Scandinavia
Southeast Asia
Korea
Russia
India

Total

Somero Enterprises, Inc.
Annual Report and Accounts 2016

US$ in millions

2016

56.6
8.0
6.4
2.9
2.3
1.7
0.5
0.4
0.3
0.2
0.1

79.4

2015

49.2
5.7
6.1
2.7
1.0
2.0
0.5
1.3
1.0
0.1
0.6

70.2

Gross profit
Gross profit increased to US$ 45.1m (2015: US$ 39.2m), with gross margins improving to 56.8% (2015: 55.8%) due to price increases,
product cost reductions and productivity gains.

Operating expenses
Operating expenses increased by 11% to US$ 23.9m (2015: US$ 21.6m). This increase was driven by increased commissions and
insurance associated with higher sales volume, higher personnel costs due to wage inflation and increased average headcount, increased
benefits costs, and increased bonuses in 2016.

Other income (expense)
Other income increased to US$ 0.1m, compared to other expense of US$ 0.2m in 2015, due to a decrease in interest expense and an
increase in interest income offset partly by an increase in foreign exchange loss.

Provision for income taxes
The provision for income taxes was US$ 7.0m in 2016 as compared to US$ 5.8m in 2015. Overall, Somero’s effective tax rate changed
from 33.5% in 2015 to 33.0% in 2016.

Net income
Net income increased to US$ 14.3m from US$ 11.6m in 2015 due primarily to increased sales volume, gross margin improvement and
operating cost controls. On an adjusted basis, excluding amortization and tax benefits associated settlements of RSUs and stock options,
adjusted net income increased to US$ 15.6m from US$ 13.0m in 2015. Basic earnings per share represents income available to
common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share
reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential
common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been
computed based on the following:

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Income available to stockholders

Basic weighted shares outstanding
Net dilutive effect of stock options and restricted stock units

Diluted weighted average shares outstanding

Year ended
December 31, 2016
US$ 000’s

Year ended
December 31,2015
US$ 000’s

14,258

11,550

56,178,723
1,708,228

56,145,563
1,545,716

57,886,951

57,691,279

The Company had 56,203,602 shares outstanding at December 31, 2016. Earnings per share at December 31, 2016 and 2015 are
as follows:

Basic earnings per share
Diluted earnings per share
Basic adjusted earnings per share
Diluted adjusted earnings per share

Year Ended
December 31, 2016
Per Share
US$

Year Ended
December 31, 2015
Per Share
US$

0.25
0.25
0.28
0.27

0.21
0.20
0.23
0.22

Somero Enterprises, Inc.
Annual Report and Accounts 2016

BOARD OF DIRECTORS

Lawrence L. Horsch
Non-Executive Chairman of the Board
Mr. Horsch, age 82, came to Somero in October 2009 with
extensive experience having served on 26 company boards,
invested in 30 venture projects and conducted four corporate
turnarounds. He co-founded SciMed Life Systems prior to its
merger with Boston Scientific Corporation, after which he served
on the Boston Scientific Corporation board. Mr. Horsch currently
serves as the Chairman of Leuthold Funds Inc. and Pioneer Sales
Group, and in the past five years has also served on the board
of Medical CV Inc. and Gillette Children’s Specialty Healthcare.
Mr. Horsch has been a business consultant since 1990. He is
a graduate of the University of St. Thomas, received an MBA
in Finance from Northwestern University, and is a Chartered
Financial Analyst.

John T. (Jack) Cooney
President, Chief Executive Officer and Director
Mr. Cooney, age 70, joined Somero in December 1997 and has
served as its Chief Executive since that time. He has been a
director of the company since August 2005. Mr. Cooney has
33 years of experience in various senior management and sales
and marketing positions. From 1995 to 1997, Mr. Cooney served
as the chief executive officer of Advance Machine Company,
a US$145m industrial equipment manufacturer located in
Minneapolis, Minnesota, USA. From 1990 to 1995, he was the
vice president of sales and marketing, as well as the vice president
of manufacturing, at Ganton Technologies, an aluminum die caster
and precision machine business located in Wisconsin, USA.
Mr. Cooney has an Associate’s degree in Industrial Engineering
from Central New England College and a Master of Business
Administration degree from College of St. Thomas.

John Yuncza
Chief Financial Officer, Secretary and Director
Mr. Yuncza, age 46, joined Somero in May 2015 to serve as Chief
Financial Officer. Mr. Yuncza has over 20 years of experience in
various finance and senior management roles. Most recently,
Mr. Yuncza served as Chief Financial Officer of Datamax-O’Neil, a
subsidiary of Dover Corporation. Prior to his role at Datamax-O’Neil,
Mr. Yuncza held a variety of senior financial roles at Pegasus
Communications, Legg Mason Wood Walker, Fifth Third Bancorp in
addition to serving as an Audit Manager at KPMG LLP. Mr. Yuncza
earned a Bachelor of Science degree from St. Joseph’s University
in Philadelphia and an MBA from the Yale School of Management.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Howard E. Hohmann
Executive Vice President of Sales Worldwide, Director
Mr. Hohmann, age 55, joined Somero in 1997 and currently serves
as Executive Vice President of Sales, Marketing and Customer
Service Worldwide. Mr. Hohmann also developed and managed
Somero’s Field Support Team and was part of its Product
Development Team. Mr. Hohmann brings nearly three decades of
career expertise in the concrete industry, previously working as
Founder, Owner & President of one of the eastern United States’
largest and most successful concrete contractors, placing all
aspects of concrete floors from coast to coast. Mr. Hohmann was
also a concrete flooring consultant, teaching procedures, practices
and designs, alongside the inventors of the Somero Laser Screed.
Additionally, he has developed and managed sales in emerging
markets, and managed both marketing and inside sales
departments. Mr. Hohmann also served in the U.S. Marine Corps.

Thomas M. Anderson
Non-Executive Director
Mr. Anderson, age 65, retired after 30 years of service as president
and chief executive officer of Schwing America, Inc. to become the
president and managing partner of Schwing Bioset, Inc. He also
served as the managing partner of Concrete Pump Repair from
1989 to 2013. Mr. Anderson participated in compensation decisions
for all three companies. He is also a partner in Engineered Chassis
Systems, a specialty truck manufacturer. He spent 22 years on the
board of directors of the American Concrete Pumping Association
and five years as the president of the Concrete Pump Manufacturers
Association. Mr. Anderson previously served on the board of
directors of Somero Enterprises, Inc. from 1997 to 1999 prior to
the sale of the Company to Dover Corporation.

Robert Scheuer
Non-Executive Director
Mr. Scheuer, age 59, has served in a series of senior executive
roles at Dover Corporation, an $8 billion Fortune 500 company.
Most recently, from 2011 to 2014, Mr. Scheuer was Chief Financial
Officer and Vice President of Finance of Dover Engineered
Systems, a $3.8 billion business segment of Dover Corporation. In
this role, Mr. Scheuer provided strategic guidance to the 14
operating company CEOs/CFOs in the segment and directed over
140 global employees in FP&A, budgeting, forecasting,
acquisitions, compliance, accounting and reporting. Prior to this
role, from 2007 to 2011 Mr. Scheuer served as Chief Financial
Officer and Vice President of Finance of Dover Industrial Products,
a $2.4 billion business segment of Dover Corporation and from
1998 to 2007 as Chief Financial Officer and Vice President of
Finance of Dover Industries, a $1.2 billion business segment of
Dover Corporation. Prior to his tenure at Dover Corporation, from
1986 to 1998, Mr. Scheuer served in a variety of leadership roles
at Kraft Foods, Inc., most recently as Controller of the Grocery
Products Division, a $1.7 billion multi-brand portfolio with 6 major
product lines.

DIRECTORS’ REPORT

The directors present their Annual Report and the audited financial statements for the year ended December 31, 2016.

Activities
The principal activity of the Company is to design, assemble and sell equipment that automates the process of spreading and leveling
large volumes of concrete for flooring and other horizontal surfaces, as well as to provide education, training and support services for its
customers throughout the world. Somero’s Operations and Support Offices are located in Michigan, USA with Global Headquarters and
Training Facilities in Florida, USA along with an established Sales, Service and Training Facility that is home to the Somero Concrete
College in Shanghai, China. In addition, Somero maintains sales and service offices located in Chesterfield, UK and New Delhi, India.

Review of business
A fair review of the Company’s progress for the period reported, its future prospects and a description of the principal risks and
uncertainties facing the Company are set out in the Chairman’s Statement, the Chief Executive’s Statement, the Financial Review, the
Directors’ Report and the Corporate Governance Report.

The Directors’ Report is prepared for the members of the Company and should not be relied upon by any other party for any other
purpose. The Directors’ Report (including the Chairman’s Statement, the Chief Executive’s Statement, the Financial Review and the
Corporate Governance Report) contain certain forward-looking information and statements in relation to the Company’s operations,
economic performance and financial conditions. These statements are made by the directors in good faith based on the information
available to them at the time of the approval of this report and, although they believe that the expectations reflected in such forward-
looking statements are reasonable, they should be treated with caution due to their inherent uncertainties, including both economic
and business risk factors underlying such forward-looking statements or information.

Results and dividends
The audited results for the year are set out in detail below. Dividends equal to US$ 4.2m were paid in 2016. An 8.6 US cents per share
dividend was declared for the period ending December 31, 2016, with a record date of
March 31, 2017, payable on April 17, 2017.

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Share Capital

L Horsch
J Cooney
J Yuncza
H Hohmann
T Anderson
R Scheuer

Ordinary Shares

January 1,
2016

December 31,
2016

92,000
2,814,634
–
7,046
–
–

92,000
1,414,634
39,613
47,703
–
25,000

Somero stock is traded on the LSE AIM exchange and is therefore quoted in Pounds Sterling. The market price of the shares at
December 31, 2016 was 224.8p. The range during the 2016 period of trading was 118.5p to 230.0p.

Apart from the stockholdings listed below the Company has not been notified of any stockholdings which are 3%
or more of the total issued ordinary shares of the Company.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

DIRECTORS’ REPORT continued

Stockholders who hold more than 3% as of December 31, 2016

Artemis Investment Management
Hargreave Hale
Unicorn Asset Management
Henderson Global Investors
Close Asset Management
River & Mercantile Asset Management
Blackrock Investment Management
Lazard Freres Gestion

Director stock options

Amount

% holding

8,414,208
7,250,009
4,000,000
3,760,423
3,683,507
2,842,348
2,804,476
2,400,000

14.97%
12.90%
7.12%
6.69%
6.55%
5.06%
4.99%
4.27%

Director

L Horsch
J Cooney
J Cooney
J Cooney
T Anderson

January 1, 2016

Award/(Exercise)

Cancelled

December 31,
2016

Exercise price
US$

Earliest date
exercisable

154,268
249,394
1,000,000
62,715
85,704

–
–
–
–
–

154,268
249,394
1,000,000
62,715
85,704

0.47
0.24
0.47
0.47
0.47

2/16/2011
1/19/2010
2/16/2011
1/3/2012
2/16/2011

Expiry date

2/17/2020
1/20/2019
2/17/2020
1/4/2021
2/17/2020

Director restricted stock units

Director

L Horsch
L Horsch
L Horsch
L Horsch
J Cooney
J Cooney
J Cooney
J Cooney
T Anderson
T Anderson
T Anderson
T Anderson
J Yuncza
J Yuncza
B Scheuer

January 1, 2016

Award/(Exercise)

Cancelled

December 31,
2016

Weighted average
grant date fair
market value

Vesting date

Fully vested date

6,148
1,958
9,312
–
149,046
59,977
64,271
–
4,391
1,398
6,650
–
32,639
–
–

(6,148)
–
–
8,395
(149,046)
–
–
60,049
(4,391)
–
–
5,995
–
35,178
1,770

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

–
1,958
9,312
8,395
–
59,977
64,271
60,049
–
1,398
6,650
5,995
32,639
35,178
1,770

–
1.88
1.85
2.10
–
1.93
1.87
2.10
–
1.88
1.85
2.10
2.16
2.10
2.10

–
2/5/2017
1/27/2018
3/24/2019
–
1/29/2017
1/21/2018
3/24/2019
–
2/5/2017
1/27/2018
3/24/2019
5/18/2018
3/24/2019
3/24/2019

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Risks and uncertainties
The key risks and uncertainties facing the Company are considered
as part of the Company’s established process for identifying,
evaluating and managing risk. Impacts of significant risks and their
mitigation are monitored at Board meetings throughout the year
and are subject to annual review by the Audit Committee. The key
risks facing the business and the processes in place to manage
those risks are:

Product replacement demand
The Company’s financial performance is also dependent on the
replacement and refurbishment of older products as they reach the
end of their expected life cycles. Somero equipment is in a period
of demand for replacement as older machines reach the end of
their lifecycles. Somero’s level of replacement demand is also
dependent on its ability to continue developing enhanced models
with advanced technology that encourage customers to replace
older machines.

Bank obligations
In February 2016, the Company amended its agreement with
Citizens Bank, which renewed its loan facilities so that they mature
between April 2018 and February 2021. The Company
successfully met its bank covenants in each quarter in 2016. In
January 2017, the Company paid off the remaining outstanding
principal totaling US$ 1.0m on its commercial real estate mortgage
along with accrued interest using cash on-hand. There was no
prepayment penalty. There were no changes to the Company’s
US$ 10.0m secured revolving line of credit which will expire in
February 2021.

Geographic expansion
Somero’s financial performance is impacted by its ability to
successfully enter and penetrate geographic markets outside the
US. Currently, China and Europe represent Somero’s primary
markets outside the US. Somero has primarily focused efforts on
China and Europe, with a secondary focus on Latin America,
Australia, Middle East, Southeast Asia, and India. Somero
continues to promote acceptance of the Company’s technology,
methods and products through education and marketing efforts in
emerging markets.

Interest rates
Somero’s financial performance is also linked to prevailing interest
rates; see “Liquidity and Capital Resources” below. In February
2016, the Company amended its agreement with the bank, which
renewed its loan facilities so that they mature between April 2018
and February 2021. In January 2017, the Company paid off the
remaining outstanding principal totaling US$ 1.0m on its
commercial real estate mortgage along with accrued interest using
cash on hand.

Liquidity and capital resources
Liquidity
The Company’s principal liquidity needs are for payroll, lease
obligations, purchases of component parts and other inventory
items, payments for professional services from third party
providers, and interest and principal payments on its long-term
debt. The Company’s primary sources of liquidity are cash
balances, cash provided by operations and its available revolving
line of credit with Citizens Bank of up to US$ 10.0m. Operations
are primarily funded through existing cash.

Employee retention
The Company has a number of programs in place to retain key
employees including a savings and retirement match for employees,
restricted stock units (RSUs) for employees, Stock Options for key
employees, and a compensation program to attract and retain key
employees.

Economic and industry conditions
Somero’s financial performance is affected by a number of factors,
including the cyclical nature of the non-residential concrete
construction industry, as well as the varying economic conditions of
its geographic markets Somero’s primary geographic markets are
North America, Europe and China, however, the Company has a
growing presence in Southeast Asia, Eastern Europe, Australia, the
Middle East, Africa and Latin America. Demand in these markets
continues to fluctuate in response to overall economic conditions
and to the amount of private sector spending on commercial
construction projects.

Product development
Somero invests approximately 2.0% of sales on product
development and introduces new products each year. Somero’s
product development effort is a customer driven process focused
on customer needs and value requirements. In 2016, Somero
introduced three new products: the entry-level S-158 Laser Screed
machine targeted for the Chinese market, the SP-16 Concrete Hose
Line-Pulling and Placing System and the next generation 3-D
Profiler System. In 2016, Somero also gained significant sales
traction with products that were developed in the previous year, the
S-10A and the S-940 Laser Screed machines. These two products
contributed, on a combined basis, US$ 10.6m in sales in 2016, which
represented US$ 4.6m in net growth from 2015.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

DIRECTORS’ REPORT continued

Capital resources
Currently, the Company’s capital expenditure plans include construction
of a hands-on training facility on the Company’s Fort Myers, Florida
campus, investment in tools and equipment to increase the efficiency of
the assembly and remanufacturing processes, and regular replacement
of information technology equipment. One element of Somero’s strategy
is to identify and acquire businesses that have complementary products
and services. Somero may finance such future acquisitions from
internally generated funds, bank borrowings, public or private securities
offerings, or some combination of these methods. In addition, the
Company may issue debt or equity securities as some or all of the
consideration for such acquisitions.

Somero cannot predict the level of financing that may be required
in connection with future acquisitions. As of December 31, 2016,
the Company had US$ 1.0m in aggregate principal outstanding in
term loans under its Citizens Bank Financing Agreement, and has
not drawn any amounts under the revolving portion of its Citizens
Bank Financing Agreement. This principal was paid off in full in In
January 2017, along with accrued interest, using cash on hand.

The strong performance and relationship with its bank enabled the
Company to amend its loan facilities so that they mature between
April 2018 and February 2021. The amended facility will allow
management to focus on implementation of its strategic plan,
successfully introduce new products into the market and maximize
opportunities from investments in emerging markets.

The Company’s financing agreement with Citizens Bank imposes
various restrictions and covenants on the Company which could
potentially limit its ability to respond to market conditions, to
provide for unanticipated capital investments or to take advantage
of business opportunities. The restrictive covenants include
limitations on the incurrence of additional indebtedness, limitations
on the creation of liens and limitations on asset sales and other
fundamental changes, limitations on payment of dividends and
limitations on the redemption or repurchase of outstanding capital
stock, among other restrictions. The covenants also include
financial measures such as a minimum debt service ratio,
minimum net tangible asset ratio and a maximum funded debt to
EBITDA ratio. The Company was in compliance with all debt
covenants at the end of 2016. The directors believe that funds
generated from operations, together with existing cash, will be
sufficient to meet the Company’s debt obligations over the next 12
months. The directors also expect that existing cash, available
funds from the financing agreement with Citizens Bank, and funds
generated from operations will be sufficient to meet anticipated
operating requirements and to fund planned capital expenditures
for the remainder of 2017.

Somero had capital expenditures of US$ 4.4m in 2016 and US$
4.2m in 2015. The majority of this expenditure was related to
construction of the new Global Headquarters and Training Facilities
in Florida, expansion of the Operations and Support facility in
Michigan, computer hardware and software upgrades, vehicle
purchases and information technology upgrades. The directors will,
from time to time, evaluate opportunities to sell equity or debt
securities, and/or obtain credit facilities from lenders, which could
result in dilution to the Company’s stockholders and increased
interest expense.

Other financial arrangements
Quantitative and qualitative disclosure about market risk
The Company is exposed to market risk from changes in interest
rates and foreign currency exchange rates because it funds its
operations through long- and short-term borrowings and receives
revenues and incurs expenses in a variety of foreign currencies.
The Company does not currently hedge against the risk of
exchange rate fluctuations. A summary of the Company’s primary
market risk exposures follows.

Foreign currency risk
The Company’s foreign sales and results of operations are subject
to the impact of foreign currency fluctuations because it receives
revenues and incurs expenses in a variety of foreign currencies.
However, the vast majority of products and services are priced in
US dollars to significantly reduce the exposure to foreign currency
risk.

Payments to creditors
The Company’s policy is to set payment terms when agreeing the terms
of each transaction. It is the Company’s general policy to pay suppliers
according to the set terms, to ensure suppliers are informed of the terms
of payment and to abide by these terms whenever possible.

Corporate social responsibility
Somero Enterprises believes, as a good corporate citizen, it must care
about the communities it is involved in, keep the environment healthy,
provide a safe and rewarding place to work and behave ethically in all its
business dealings.

Donations
During the year, the Company made no political donations.
Charitable donations were made in the amount of US$ 36,198 for
2016.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Employment policies
The Company supports equal opportunities in employment and
advancement and opposes all forms of unlawful or unfair
discrimination on the grounds of color, race, religion, age,
nationality, gender or marital status. Full and fair consideration is
given to applications for employment from disabled people. As an
Equal Opportunity Employer, all our benefits are accessible to every
staff member, and we encourage and support personal and
professional development.

The Company has well established structures to communicate with
employees at every level and to encourage their involvement
regarding the Company’s performance and future activities. As an
organization, Somero Enterprises, Inc. prides itself on its honesty,
integrity and high professional standards to deliver its services to its
customers and in dealing with its staff and the public. It also
demands the maintenance of these high standards in everything
that it does. To this end, the Company has devised this policy and
procedure in order to give encouragement and support to
employees in coming forward and reporting certain types of
conduct or activities that fall short of these high standards.

Under the Public Interest Disclosure Act 1998, employees who
report wrongdoing of certain kinds have specific protection. The
Company aims to ensure that by adherence to this policy and
through proper use of the procedure, as far as possible, any such
report shall be made internally in the first instance by making it
possible for all employees to approach an appropriate person
within the Company in order to draw their concerns to the attention
of someone who has authority to act. This policy and procedure is
aimed at ensuring that any employee who wishes to voice a
concern regarding potential or actual wrongdoing on the part of the
Company or anyone with whom the Company is associated feels
sufficiently comfortable to do so.

Director training
The directors have continued to receive formal AIM compliance
training from the initial listing on the AIM
to the present date.

Health and safety
The Board considers health and safety a key priority and believes it
essential to conduct business to ensure the health, safety and
welfare of all our employees and all other persons who may be
affected by our activities. This includes members of the public,
customers and trade contractors we may employ. We maintain ISO
9001 certification for quality.

Environment
It is our intention to take all reasonable measures to conduct our
business activities so that damage to the environment and pollution
is minimized.

John Yuncza
Company Secretary
March 15, 2017

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

CORPORATE GOVERNANCE

While the Company is not required to comply with the provisions of
the Combined Code and the UK Corporate Governance Code, it is
the intention of the directors that the Company will indeed comply
with both codes. With the exception of the following matters, the
Company is in compliance with the June 2008 edition of FRC
Combined Code on Corporate Governance and the April 2016 UK
Corporate Governance Code.

A.1.2 Senior independent director has not been named.

B.6.1 The Board has not undertaken a formal evaluation of its own
performance and that of its committees and individual directors. As
suggested by the Combined Code, as of the end of 2016,
relationships with the majority of all major shareholders have been
maintained on a regular basis keeping them fully informed
regarding the trading of the Company and any new developments.

C.3.6 Allowing for the size of the Company, there is currently no
internal audit function as suggested by the Combined Code. The
finance function continues to carry out regular and random internal
checks on all systems and procedures to ensure internal
compliance. We do not feel the need, therefore, to appoint separate
staff to carry out an internal audit function.

Auditor payments related to 2016 were US$ 139,000 and for 2015
were US$ 143,000.

Board of Directors
The Company is controlled through the Board of Directors which is
comprised of six members, three of whom are non-executive directors.
The Board considers that the Non-Executive Chairman of the Board, Mr.
Horsch, as well as Messrs. Anderson and Scheuer, who have been
appointed as non-executive directors, are each independent in
character and judgment and accordingly considers each of them to be
an independent director for the purposes of the Combined Code.

The Company holds monthly Board meetings and more frequent
meetings as required. There is a separation of roles and responsibilities
of the Chairman and the Chief Executive. As the Non-Executive
Chairman, Mr. Horsch is responsible for leadership of the Board,
ensuring its effectiveness on all aspects of its role and setting its agenda,
ensuring that the directors receive accurate, timely and clear
information, and appropriate induction and training, ensuring effective
communication with shareholders, facilitating the effective contribution
of non-executive directors in particular, and ensuring constructive
relations between the executive and non-executive directors. Non-
executive directors are responsible for constructively challenging and
helping to develop proposals on strategy, scrutinizing the performance of
management in meeting agreed goals and objectives, and monitoring
the reporting of performance, satisfying themselves on the integrity of
financial information, and that financial controls and systems of risk
management are robust and defensible, and responsible for determining
the appropriate levels of remuneration of executive directors, and having
a prime role in appointing, and where necessary removing, executive
directors, and in succession planning. The directors are provided with
regular and timely information on the financial performance of the
Company together with other reports from functional areas within the
Company as requested.

During the year, there were twelve regularly scheduled monthly
Board meetings, two Audit Committee meetings, one Remuneration
Committee meeting, one Nominations Committee meeting, with
perfect attendance.

The Board is responsible for overall Company strategy, acquisition
and divestment policy, approval of major capital expenditure
projects and consideration of significant financing matters. It monitors
the exposure to key business risks, considers environmental and
employee issues and key appointments. It ensures that all directors
receive appropriate training on appointment and then subsequently as
appropriate. A budget is established for this purpose. All directors, in
accordance with the Code, will submit themselves for re-election at least
once every three years.

The Board has three permanent committees, the Audit Committee,
the Remuneration Committee and the Nominations Committee,
with formally delegated roles and responsibilities. Each of these
committees meets regularly, at least once each year.

The Audit Committee is comprised of Messrs. Scheuer, Anderson,
and Horsch, and is chaired by Mr. Scheuer, who has broad and
extensive accounting and audit experience that includes previously
serving as Chief Financial Officer of Dover Engineered Systems, a
US$ 3.8 billion segment of Dover Corporation. The Audit
Committee determines and examines any matters relating to the
financial affairs of the Company, including the terms of engagement
of the Company’s auditors and, in consultation with the auditors,
the scope of the audit. It receives and reviews reports from
management and the Company’s auditors relating to the interim
and annual accounts and the accounting and internal control
systems in use throughout the Company. In addition, it ensures
that the financial performance, position and prospects of the
Company are properly monitored and reported on. The Audit
Committee has unrestricted access to the Company’s auditors.

The Remuneration Committee is comprised of Messrs. Anderson,
Scheuer, and Horsch, and is chaired by Mr. Anderson. The
Remuneration Committee measures the performance of the
executive directors and key members of senior management as a
prelude to recommending their annual remuneration, bonus
awards, and awards of share options to the Board for final
determination. The Remuneration Committee also makes
recommendations to the Board concerning the allocation of share
options to employees.

The Nominations Committee is comprised of Messrs. Horsch,
Anderson, and Scheuer and is chaired by Mr. Horsch. The
Nominations Committee regularly reviews the structure, size and
composition (including the skills, knowledge and experience)
required of the Board compared to its current position and makes
recommendations to the Board with regard to any changes; gives
full consideration to succession planning for directors and other
senior executives in the course of its work, taking into account the
challenges and opportunities facing the Company, and what skills
and expertise are therefore needed on the Board in the future; and
is responsible for identifying and nominating for the approval of the
Board, candidates to fill Board vacancies as and when they arise.
The Nominations Committee supports equal opportunities in
employment and advancement and opposes all forms of unlawful

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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or unfair discrimination on the grounds of color, race, religion, age,
nationality, gender or marital status. Full and fair consideration is
given to applications for employment from disabled people. As an
Equal Opportunity Employer, all our benefits are accessible to every
staff member and we encourage and support personal and
professional development.

In addition to the three permanent committees discussed above, in
accordance with applicable law and best practice the Board
establishes ad hoc committees from time to time to deal with
discrete matters within the Board’s remit in an efficient and
effective manner.

emphasis on early warning systems. Risk management principles
are embedded within all significant projects.

The directors are responsible for the system of internal control and
reviewing its effectiveness. Such a system is designed to manage
rather than eliminate the risk of failure to achieve business
objectives, and can provide only reasonable but not absolute
assurance against material misstatement or loss.

The key risk management activities are described under the
following headings:

The Company adopted a code for directors’ and applicable
employees’ share dealings. The directors will comply with Rule 21
of the AIM rules relating to directors’ dealings and will take all
reasonable steps to ensure compliance by Somero’s applicable
employees. In 2016, the Company updated its dealing code to
ensure compliance with the EU Market Abuse Regulations which
came into effect in 2016 and apply to companies listed on AIM.

Relations with shareholders
The directors are committed to maintaining good communications
with the shareholders and quickly respond to all queries received.

All shareholders have at least 20 working days’ notice of the AGM at
which the majority of directors are introduced and available for
questions. Institutional investors and analysts are invited to briefings by
the Company immediately after the announcement of the Company’s
full year results and all shareholders are encouraged to participate in the
Company’s AGM.

Accountability and Audit
Financial reporting
A review of the performance and financial position of the Company
is included in the financial review. The Board uses this, together
with the Chairman’s Statement, the Chief Executive’s Statement
and the Directors’ Report to present a balanced and
understandable assessment of the Company’s position and
prospects. The statement of directors’ responsibilities for the
financial statements is described under the Board of Directors
section of this annual report.

Internal control
An ongoing process for identifying, evaluating, and managing the
significant risks faced by the Company has been established and
that process is reviewed regularly by the Board and accords with
the Internal Control Guidance to directors on the Combined Code.
Steps continue to be taken to embed internal control and risk
management further into the operations of the business and deal
with areas of improvement coming to management and Board
attention. The Company targets examining one to two key risk areas
each year, with the results reported to the entire Board.

The reporting systems include formal consideration of all significant
business risks at the monthly Board meetings and are still subject to
continuous review by the Board throughout the year. The monthly
management information includes some key risk indicators with the

Strategic control – The Board reviews the Company’s strategic
plans each year. On a regular basis, the Company’s significant risks
are updated and appropriate control strategies and accountabilities
are agreed.

Allocation of responsibilities and control environment – The Board
has set clear terms of reference for each of its committees and the
Company has an organizational structure with clearly defined and
documented delegation of authority to executive management
and reporting systems for financial results, risk exposure and
control assessment.

Financial control – The Company has a comprehensive system for
reporting financial results to the Board.

Quality and integrity of personnel – The Company is committed to
competence and integrity of management and staff at all levels,
through its values statement, comprehensive recruitment, training
and appraisal programs.

IT systems – The Company has established controls and
procedures over the security of data held on computer systems
and has put in place suitable disaster recovery arrangements.

Controls over central functions – A number of the Company’s key
functions, including treasury and taxation, are dealt with centrally.
The Chief Financial Officer reports on an as needed basis to keep
the Board updated.

Internal audit – There is no dedicated resource for internal audit
functions, which is considered sufficient for the Company due to its size.

Role of the Executive Committee – Day-to-day management of the
Company’s activities is delegated to senior management and is
considered sufficient for the Company.

Risk management reporting and Board review – The Board has
overall responsibility for identifying, evaluating and managing major
business risks facing the Company. It annually reviews all operating
unit assessments of business risk exposure and control, including
compliance assessments, and determines appropriate action,
taking into account the recommendations of senior management.

An ongoing review of the effectiveness of the system of internal control
for the year ended December 31, 2016 has been maintained and has
taken account of any material developments since the year end.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CORPORATE GOVERNANCE continued

Audit Committee
A summary of the process the Board (where applicable, through its
committees) has applied in reviewing the effectiveness of the
system of internal control is set out as follows:

During the year, the Audit Committee of the Board, comprising
three non-executive directors:
• meets regularly with the external auditors, with executive

directors attending by invitation;

• receives and considers reports relating to the monitoring of the

adequacy of the Company’s internal controls, the suitability of its
accounting policies and financial reporting and matters arising
from the external auditors work;

• monitors the nature and extent of non-audit work undertaken by

the external auditors; and

• makes recommendations to the Board on these matters.

In forming their opinion of the independence and objectivity of the
external auditors, the Audit Committee takes into account the
safeguards operating within the external auditors and that the level
of auditor fee is sufficient to enable them to fulfill their obligations in
accordance with the audit Letter of Engagement. All audit and
non-audit work performed by our external auditors is in compliance
with the independence rules promulgated by the American Institute
of CPAs (AICPA). The Chairman of the Audit Committee makes a
report to the Board following each committee meeting and the
Board receives the minutes of all Audit Committee meetings.

The following table summarizes audit, tax, and other fees paid by
the Company to its auditor in 2016 and 2015.

Compliance statement
Although not required, the Board reports on compliance with the
Combined Code throughout the accounting period. The Company has
complied throughout the accounting period ended December 31, 2016
with the provisions outlined in Section 1 of the Combined Code. The
exceptions to the Combined Code are noted at the beginning of the
Corporate Governance section of this annual report.

The directors are responsible for preparing the Annual Report and
the financial statements. The directors have chosen to prepare the
accounts for the Company in accordance with United States
Generally Accepted Accounting Principles (US GAAP). The
Company believes it is in full compliance with all laws of the USA
where it is incorporated.

The AIM rules require the directors to prepare such financial
statements for each financial year which give a true and fair view in
accordance with US GAAP of the state of affairs of the Company at
the end of the financial year and of the profit or loss of the
Company for that period and comply with US GAAP. In preparing
those financial statements, the directors are required to:
• select suitable accounting policies and then apply them

consistently;

• make judgments and estimates that are reasonable and

prudent;

• state whether applicable accounting standards have been

followed; and

• prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Company will
continue in business.

Audit
Tax
Other

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

139
43
–

143
35
–

The directors are responsible for the system of internal control, for
safeguarding the assets of the Company, and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.

This report has been approved by the Board and adopted for
submission for ratification by the shareholders. This report is unaudited.

Going concern basis
The Company’s business activities, together with the factors likely to
affect its future development, performance and position are set out in
the Directors’ Report. The financial position of the Company, its cash
flows, liquidity position and borrowing facilities are described in the
Directors’ Report. After making inquiries, the directors have formed a
judgment, at the time of approving the financial statements, that there is
a reasonable expectation that the Company has adequate resources to
continue in operational existence for the foreseeable future. For this
reason the directors continue to adopt the going concern basis in
preparing the financial statements.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

DIRECTORS’ REMUNERATION REPORT

The members of the Remuneration Committee at year-end were Thomas Anderson (Chairman), Robert Scheuer and Larry Horsch. The
Remuneration Committee makes recommendations to the Board, within existing terms of reference, on remuneration policy and
determines, on behalf of the Board, specific remuneration packages for each of the executive directors.

L Horsch
J Cooney
J Yuncza
H Hohmann
T Anderson
R Scheuer

Salary paid 2016 Cash bonus 2016

$91,790
$420,424
$246,298
$238,673
$65,550
$74,500

–
$289,321
$123,816
$256,658
–
–

Equity bonus
common shares
issued 2016

Salary 2017

Bonus opportunity 2017

Options held

–
–
19,613
40,657
–
–

$91,790(1)
$442,255
$259,088
$283,800
$65,550(1)
$74,500(1)

50%-100% of salary
50% of salary(2)
Commission(2)(3)

154,268
1,312,109
–
–
85,704
–

Restricted stock
units held

19,665
184,297
67,817
–
14,043
1,770

Notes:
1. Annual director fee increases have been paid in the form of RSUs.
2. Up to 25% of bonuses and commissions can be paid in the form of company stock.
3. Commission of 1.0%-1.5% on sales that exceed annual base-year target.

Remuneration policy
The Company’s policy is to provide executive remuneration packages which are designed to attract, motivate and retain directors of the
high caliber required and to reward them for enhancing value to stockholders. The performance measurement of the executive directors
and the determination of their annual remuneration package are undertaken by the Remuneration Committee consisting solely of
non-executive directors. The non-executive directors receive RSUs in lieu of salary increases as determined by the full Board.

In framing remuneration policy, the Remuneration Committee has given consideration to the requirements of the Combined Code.

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Components of remuneration
The components of remuneration are:
• basic salary and benefits determined by the Remuneration Committee and reviewed annually;
• performance related bonuses having regard to profitability of the Company; and
• stock option and restricted stock unit incentives.

Basic salary
An executive director’s basic salary is determined by the Remuneration Committee at the beginning of each year and when an individual
changes position or responsibility.

Cash compensation
In the year ended December 31, 2016, the executive directors received bonuses as shown in the table above.

Directors’ contracts
The Company has entered into employment agreements with executive directors and certain members of senior management. The terms
of these agreements range from six to eighteen months and include non-compete and non-disclosure provisions as well as providing for
defined severance payments in the event of termination or change in control. If any existing contract of employment is breached by the
Company in the event of termination, the Company would be liable to pay, as damages, an amount approximating the net loss of salary
and contractual benefits for the unexpired notice period. The Remuneration Committee will seek to ensure that the director fulfills
obligations to mitigate losses and will also give consideration to phased payments where appropriate.

With the approval of the Remuneration Committee, executive directors are entitled, under their service agreements, to perform duties
outside the Company and to receive fees for those duties.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

DIRECTORS’ REMUNERATION REPORT continued

Equity incentives
The Remuneration Committee approves the grant of equity awards to executive directors under the Company’s discretionary equity
incentive schemes. In 2010, the Remuneration Committee adopted Somero’s 2010 Equity Incentive Plan that made 5.6 million stock
options available to be granted, which is 10% of the 56 million shares that were issued and outstanding. At that time, all other equity
incentive plans were abandoned. Other than as disclosed above, the equity awards issued to executive directors do not have any
performance criteria attached to them. At the time they were first issued, it was not felt that performance criteria were appropriate.

For more information, see Note 15 within the Notes to the Financial Statements.

Restricted stock units
Annually, the Board approves restricted stock unit (“RSU”) awards to executive and non-executive directors under the terms of its 2010 Equity
Incentive Plan. Non-executive directors are awarded RSUs in lieu of annual director’s fee increases, while certain executive directors are awarded
RSUs as part of their annual incentive compensation plans. Awarded RSUs vest three years from the date of the grant and require continued
employment for the period. In 2016, 159,585 RSUs were exercised or forfeited, 148,593 units issued, leaving a balance of 417,353 units as of
December 31, 2016. For more information, see Note 15 within the Notes to the Financial Statements.

Stock options
An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan which was
cancelled. The grants have a three-year vesting and a strike price of 30p, a 100% premium over the market price on the date of grant.
The remaining options will only be issued for new key employees and superior performance. In 2016, 100,000 shares of stock options
were exercised, leaving an outstanding balance of 1,586,361 shares as of December 31, 2016. For more information, see Note 15 within
the Notes to the Financial Statements.

Directors and officers insurance
The Company maintains customary D&O insurance.

Performance graph
The market price of the shares at December 31, 2016 was 224.8p. The range during the 2016 period of trading was 118.5p to 230.0p.

Somero Enterprises, Inc. Closing Share Price Data

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230.00

203.24

176.48

149.72

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

The remuneration of the non-executive directors is determined by the Board within the limits set out in the Articles of Association,
and is based upon independent surveys of fees paid to non-executive directors of similar companies. The remuneration paid to each
non-executive director in the year to December 31, 2016 was subject to Board approval. The letters of appointment and terms are listed
in the following chart.

Director

L Horsch
T Anderson
JT Cooney
H Hohmann
J Yuncza
R Scheuer

Class

II
II
III
III
I
I

Approved by the Board of Directors and signed on behalf of the Board.

Thomas Anderson
Chairman of Remuneration Committee
March 15, 2017

Date of appointment

Termination date

May 20, 2014
May 20, 2014
May 19, 2015
May 19, 2015
June 7, 2016
June 7, 2016

2017 AGM
2017 AGM
2018 AGM
2018 AGM
2019 AGM
2019 AGM

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Somero Enterprises, Inc.
Annual Report and Accounts 2016

As of
December 31,
2016
US$ 000

As of
December 31,
2015
US$ 000

21,216
6,310
8,760
2,428

38,714
254
11,558
901
2,878
3,351
29

13,709
5,969
8,479
2,135

30,292
885
8,266
2,446
2,878
3,529
75

57,685

48,371

16
2,831
5,329
147

8,323
970
223

16
3,705
4,330
1,044

9,095
986
84

9,516

10,165

–

(483)
22,112
28,480
(1,966)

(614)
22,008
18,432
(1,646)

48,169

38,206

57,685

48,371

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015

Assets
Current assets:

Cash and cash equivalents
Accounts receivable – net
Inventories
Prepaid expenses and other assets

Total current assets

Accounts receivable, non-current – net
Property, plant and equipment – net
Intangible assets – net
Goodwill
Deferred tax asset
Other assets

Total assets

Liabilities and stockholders’ equity
Current liabilities:

Notes payable – current portion
Accounts payable
Accrued expenses
Income tax payable

Total current liabilities

Notes payable, net of current portion
Other liabilities

Total liabilities

Stockholders’ equity

Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding
Common stock, US$.001 par value, 80,000,000 shares authorized, 56,425,598 and 56,425,598 shares issued

and 56,203,602 and 56,106,732 shares outstanding at December 31, 2016 and 2015, respectively

Less: treasury stock, 221,996 shares as of December 31, 2016 and 318,866 shares as of December 31, 2015

at cost

Additional paid in capital
Retained earnings
Other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

See notes to consolidated financial statements.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

Revenue
Cost of sales

Gross profit

Operating expenses

Sales, marketing and customer support
Engineering
General and administrative

Total operating expenses

Operating income
Other income (expense)

Interest expense
Interest income
Foreign exchange loss
Other

Income before income taxes
Provision for income taxes

Net income

Other comprehensive income (loss)

Cumulative translation adjustment
Change in fair value of derivative instruments – net of income tax

Total comprehensive income

Earnings per common share
Earnings per share basic
Earnings per share diluted

Weighted average number of common shares outstanding

Basic
Diluted

See notes to consolidated financial statements.

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Year ended
December 31,
2016
US$ 000
except per share data

Year ended
December 31,
2015
US$ 000
except per share data

79,353
34,270

45,083

10,056
1,071
12,768

23,895

21,188

(95)
267
(117)
34

21,277
7,019

14,258

(322)
2

13,938

0.25
0.25

70,222
31,059

39,163

9,438
1,031
11,121

21,590

17,573

(191)
20
(43)
–

17,359
5,809

11,550

(280)
(8)

11,262

0.21
0.20

56,178,723
57,886,951

56,145,563
57,691,279

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

Common Stock

Amount
US$ 000

Additional
Paid-In
Capital
US$ 000

Treasury Stock

Amount
US$ 000

Retained
earnings
US$ 000

Other
Comprehensive
Loss
US$ 000

Total
Stockholders’
Equity
US$ 000

Balance – January 1, 2015

56,425,598

22,336

232,700

(416)

10,194

(1,358)

30,782

Cumulative translation adjustment
Change in fair value of derivative

instruments

Net income
Stock based compensation
Dividend
Treasury stock
RSUs settled for cash
Stock options settled for cash

–

–
–
–
–
–
–
–

–

–
–
–
–
–
–
–

–

(280)

–
–
197
–
–
(275)
(250)

–
–
–
–
86,166
–
–

–
–
–
–
(198)
–
–

–
11,550
–
(3,312)
–
–
–

(8)
–
–
–
–
–
–

(8)
11,550
197
(3,312)
(198)
(275)
(250)

Balance – December 31, 2015

56,425,598

22,008 318,866

(614)

18,432

(1,646)

38,206

Cumulative translation adjustment
Change in fair value of derivative

instruments

Net income
Stock based compensation
Dividend
Treasury stock
RSUs settled for cash
Stock options settled for cash

–

–
–
–
–
–
–
–

–

–
–
–
–
–
–
–

–

–
–
725
–
(131)
(345)
(145)

–
–
–
–
(96,870)
–
–

–

–
–
–
–
131
–
–

–

(322)

–
14,258
–
(4,210)
–
–
–

2
–
–
–
–
–
–

2
14,258
725
(4,210)
–
(345)
(145)

Balance – December 31, 2016

56,425,598

22,112 221,996

(483)

28,480

(1,966)

48,169

See notes to consolidated financial statements.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

Deferred taxes
Depreciation and amortization
Bad debt
Amortization of deferred financing costs
Stock based compensation

Working capital changes:
Accounts receivable
Inventories
Prepaid expenses and other assets
Other assets
Accounts payable, accrued expenses and other liabilities
Income taxes payable

Net cash provided by operating activities

Cash flows from investing activities:

Proceeds from sale of property and equipment
Property and equipment purchases

Net cash used in investing activities

Cash flows from financing activities:

Payment of dividend
RSUs settled for cash
Purchase of treasury stock
Stock options settled for cash
Repayment of notes payable

Net cash used in financing activities

Effect of exchange rates on cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents:
Beginning of year

End of year

See notes to consolidated financial statements.

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December 31,
2016
US$ 000

Year ended
December 31,
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US$ 000

14,258

11,550

178
2,666
400
32
725

(110)
(281)
(293)
(3)
264
(897)

150
2,264
381
33
197

(1,909)
(89)
(128)
6
1,036
1,019

16,939

14,510

71
(4,435)

–
(4,162)

(4,364)

(4,162)

(4,210)
(345)
–
(145)
(48)

(3,312)
(275)
(198)
(250)
(266)

(4,748)

(4,301)

(320)

(288)

7,507

5,759

13,709

7,950

21,216

13,709

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016 AND 2015

1. Organization and description of business
Nature of business
Somero Enterprises, Inc. (the “Company” or “Somero”) designs, assembles, remanufactures, sells and distributes concrete leveling,
contouring and placing equipment, related parts and accessories, and training services worldwide. Somero’s Operations and Support
Offices are located in Michigan, USA with Global Headquarters and Training Facilities in Florida, USA. Sales and service offices are
located in Chesterfield, England; Shanghai, China; and New Delhi, India.

2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America. Certain prior year amounts have been reclassified to conform to the current year presentation.

Principles of consolidation
The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.

Cash and cash equivalents
Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased. The
Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by
the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of
FDIC limits.

Accounts receivable and allowances for doubtful accounts
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The
Company’s accounts receivable are derived from revenue earned from a diverse group of customers. The Company performs credit
evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to
collect accounts receivable. Allowances, if necessary, are established for amounts determined to be uncollectible based on specific
identification and historical experience. As of December 31, 2016 and 2015, the allowance for doubtful accounts was approximately
US$ 743,000 and US$ 698,000, respectively. Bad debt expense was US$ 400,000 and US$ 381,000 in 2016 and 2015, respectively.

Inventories
Inventories are stated using the first in, first out (“FIFO”) method at the lower of cost or net realizable value. Provision for potentially
obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts.

Deferred financing costs
Deferred financing costs incurred in relation to long-term debt are reflected net of accumulated amortization and are amortized over the
expected remaining term of the debt instrument. These financing costs are being amortized using the effective interest method. Deferred
financing costs, consisting of loan origination fees, are reflected as an offset to notes payable on the accompanying balance sheets.

Intangible assets and goodwill
Intangible assets consist primarily of customer relationships and patents, and are carried at their fair value when acquired, less
accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is
their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the
Company has chosen December 31 as its periodic assessment date. Goodwill represents the excess cost of the business combination
over the Group’s interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company’s prior sale from Dover
Corporation to The Gores Group in 2005. The Company did not incur a goodwill impairment loss for the year ended December 31, 2016
or 2015. (See Note 4 for more information.)

The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the
carrying amount of an asset may not be recoverable. For the year ended December 31, 2016, the Company tested its other intangible
assets, including customer relationships and technology, for impairment and found no impairment. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from such asset (or asset group) are separately identifiable
and less than the asset’s (or asset group’s) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds
the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. (See Note 4 for more information.)

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Revenue recognition
The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For
product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment. For arrangements which include
F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer. Standard products do not have customer
acceptance criteria. Revenues for training are deferred until the training is completed unless the training is deemed inconsequential
or perfunctory.

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

Balance, January 1
Warranty charges
Accruals

Balance, December 31

2016
US$ 000

2015
US$ 000

(307)
478
(718)

(547)

(193)
409
(523)

(307)

Property, plant, and equipment
Property, plant and equipment is stated at cost net of accumulated depreciation and amortization. Land is not depreciated. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets, which is 31.5 to 40 years for buildings
(depending on the nature of the building), 15 years for improvements, and 2 to 10 years for machinery and equipment.

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

The Company evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for
uncertain tax positions. This involves a two-step approach to recognizing and measuring uncertain tax positions. First, tax positions are
recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination,
including resolution of related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax
benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties related
to unrecognized tax benefits in the provision for income taxes in general and administrative expenses in the accompanying consolidated
financial statements. The Company is subject to a three-year statute of limitations by major tax jurisdictions.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in general and
administrative expenses in the accompanying consolidated financial statements, which there were none in 2016 and 2015.

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

Stock based compensation
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial
statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).
The Company measures the cost of employee services in exchange for an award based on the grant-date fair value of the award.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued

2. Summary of significant accounting policies continued
Transactions in and translation of foreign currency
The functional currency for the Company’s subsidiaries outside the United States is the applicable local currency. Balance sheet amounts
are translated at December 31 exchange rates and statement of operations accounts are translated at average rates. The resulting gains
or losses are charged directly to accumulated other comprehensive income. The Company is also exposed to market risks related to
fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are
denominated in foreign currencies other than the designated functional currency. Gains and losses from transactions are included as
foreign exchange loss in the accompanying consolidated statements of comprehensive income.

Comprehensive income
Comprehensive income is the combination of reported net income and other comprehensive income (“OCI”). OCI is 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. Earnings per common share have been computed based on the following:

Income available to stockholders

Basic weighted shares outstanding
Net dilutive effect of stock options and restricted stock units

Diluted weighted average shares outstanding

Year ended
December 31,
2016
US$ 000’s

Year ended
December 31,
2015
US$ 000’s

14,258

11,550

56,178,723
1,708,228

56,145,563
1,545,716

57,886,951

57,691,279

Fair value
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities
approximate fair value because of the short-term nature of these instruments. The carrying value of our long-term debt approximates fair
value due to the variable nature of the interest rates under our Credit Facility.

The FASB has issued accounting guidance on fair value measurements. This guidance provides a common definition of fair value and a
framework for measuring assets and liabilities at fair values when a particular standard prescribes it.

This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. These valuation
techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value
hierarchy.

• Level 1 – Quoted prices for identical instruments in active markets.
• Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in
markets that are not active; and model-derived other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets and liabilities.

• Level 3 –Unobservable inputs for the asset or liability which are supported by little or no market activity and reflect the Company’s

assumptions that a market participant would use in pricing the asset or liability.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Year ended December 31, 2015
Asset:

Non-recurring
Goodwill
Recurring
Interest rate swap

Year ended December 31, 2016
Asset:

Non-recurring
Goodwill
Recurring
Interest rate swap

Quoted prices
in active markets
identical assets
Level 1
US$ 000

Significant other
observable inputs
Level 2
US$ 000

Significant other
unobservable inputs
Level 3
US$ 000

2,878

(4)

2,878

(2)

US$ 000

2,878

(4)

2,878

(2)

New accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity
expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing
so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP.
The standard is effective for annual periods beginning after December 15, 2018, and interim periods therein, using either of the following
transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the
option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending
adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the
standard in 2019.

In April 2015, the FASB released Accounting Standards Update No. 2015-03 – Interest – Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs. To simplify the presentation of debt issuance costs, the update requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of
that debt liability, consistent with debt discounts. The update is effective for financial statements issued for fiscal years beginning after
December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016. The Company has applied the new
guidance for the current period and prior periods reflected on the balance sheet.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. The amendment
applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope
of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update are effective for
fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company has chosen early
adoption. The balance sheet reflects the new guidance for all periods.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 Balance Sheet Classification of Deferred Taxes. To
simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be
classified as non-current in a classified statement of financial position. The amendments in this Update apply to all entities that present a
classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in the Update are
effective for financial statements issued for annual periods beginning after December 15, 2017. The Company has chosen early
adoption. The balance sheet reflects the new guidance for all periods.

In February 2016, the FASB released Accounting Standard Update 2016-02, Leases. The new guidance requires lessees to recognize
lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. Lessees are
required to recognize a single lease cost, amortized on a straight-line basis over the lease term for operating leases. All cash payments
are to be classified as operating activities on the cash flow statement. The update is effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Lessees are required to measure leases under the
new guidance at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating
adoption of the guidance.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued

2. Summary of significant accounting policies continued
New accounting pronouncements continued
In March 2016, the FASB released Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment
Accounting, which amends ASC 718, Compensation – Stock Compensation. Under the new guidance, because there will no longer be
any excess tax benefits from the exercise of stock options recognized in APIC, when applying the treasury stock method for computing
diluted EPS, the assumed proceeds will not include such windfall tax benefits.

The update is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after
December 15, 2018. The Company has chosen early adoption. The diluted EPS information for the years ended December 31, 2016 and
2015 reflect the adoption of this guidance.

3. Inventories
Inventories consisted of the following at December 31, 2016 and 2015:

Raw material
Finished goods and work in process
Remanufactured

Total

Year ended
December 31,
2016
US $ 000

Year ended
December 31,
2015
US $ 000

2,574
3,583
2,603

8,760

2,576
2,259
3,644

8,479

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

The results of the qualitative assessment indicated that Goodwill was not impaired as of December 31, 2016 and 2015, and that the value
of patents was not impaired as of December 31, 2016 and 2015.

The following table reflects other intangible assets:

Capitalized cost
Patents

Accumulated amortization
Patents

Net carrying costs
Patents

Weighted average
Amortization
Period

Year ended
December 31,
2016
US$ 000’s

Year ended
December 31,
2015
US$ 000’s

12 years

18,538

12 years

17,637

16,092

12 years

901

2,446

Amortization expense associated with the intangible assets in each of the years ended December 31, 2016 and 2015 was approximately
US$ 1,545,000. Remaining net intangible assets totaling approximately US$ 901,000 will be fully amortized in 2017.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

5. Property, plant, and equipment
Property, plant, and equipment consist of the following at December 31:

Land
Building and improvements
Machinery and equipment

Less: accumulated depreciation and amortization

2016
US$ 000

864
9,483
5,769

2015
US$ 000

864
6,325
4,599

16,116
(4,558)

11,788
(3,522)

11,558

8,266

Depreciation expense for the years ended December 31, 2016 and 2015 was approximately US$ 1,121,000 and US$ 719,000, respectively.

6. Notes payable
The Company’s debt obligations consisted of the following at December 31:

April 2018 commercial real estate mortgage
February 2021 secured revolving line of credit

Total bank debt

Less debt due within one year

Obligations due after one year

2016
US$ 000’s

2015
US$ 000’s

1,024
–

1,024

1,072
–

1,072

(48)

976

1,024

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The Company’s revolving line of credit is collateralized by all inventories and accounts receivable.
The future payments under the Company’s amended loan and scheduled related loan amortization fees are as follows for the years ended:

2017
2018
Thereafter

Total

2016
US$ 000’s
Term loan
principal

48
976
–

1,024

Loan
origination
fees

Net long term
debt

32
6
–

16
970
–

986

The Company entered into an amended credit facility in February 2016. The new agreement matures between April 2018 and February 2021.
• US$ 1,447,000 April 2018 commercial real estate mortgage
• US$ 10,000,000 February 2021 secured revolving line of credit

The interest rate on the commercial real estate mortgage was an effective 1.87% as of December 31, 2016 and was based on the swap
rate of 1.19% plus the applicable LIBOR margin of 1.25%. The interest rate on the revolving line of credit is based on the 1-month LIBOR
rate plus 1.25%. No amounts were drawn under the secured revolving line of credit in 2016 or 2015. The Company’s credit facility is
secured by substantially all of its business assets.

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$ 350,000 to the savings and retirement plan during 2016 and contributed US$ 397,000 during 2015.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued

8. Operating leases
The Company leases property, vehicles, and office equipment under leases accounted for as operating leases without renewal options.
Future minimum payments are as follows for the years ended:

2017
2018
2019
2020
Thereafter

December 31
US$ 000

293
255
138
–
–

686

9. Capital leases
Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2016. This is included in accrued expenses
on the accompanying balance sheets. Future minimum payments are as follows for the years ended:

2017
2018
2019
2020
Thereafter

10. Supplemental cash flow and non-cash financing disclosures

Cash paid for interest
Cash paid for taxes
Non-cash financing activities – change in fair value of derivative instruments

December 31
US$ 000

58
49
32
21
–

160

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

58
7,747
2

83
4,700
(4)

11. Business and credit concentration
The Company’s line of business could be significantly impacted by, among other things, the state of the general economy, the Company’s
ability to continue to protect its intellectual property rights, and the potential future growth of competitors. Any of the foregoing may
significantly affect management’s estimates and the Company’s performance. At December 31, 2016 and 2015, the Company had two
customers which represented 20% and 11% of total accounts receivable, respectively.

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

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

Somero Enterprises, Inc.
Annual Report and Accounts 2016

13. Income taxes
Income Tax Provision

Current income tax

Federal
State
Foreign

Total current income tax expense

Deferred tax expense

Federal
State
Foreign

Total deferred tax expense

Total tax provision

The components of the net deferred income tax asset at December 31, 2016 and 2015 were as follows:

Bad debt allowance
Inventory reserve
UNICAP – Sec 263A
Prepaid insurance
Prepaid other
Fixed assets
Intangible assets
UK intangibles
Accrued warranty
Stock based compensation expense (options & RSUs)
Italy – NOL
Foreign tax credit

Total net deferred tax assets

Rate reconciliation
Consolidated income before tax
Statutory rate

Statutory tax expense

State taxes
Foreign taxes
Meals and entertainment
Permanent differences due to stock options & RSUs
Permanent differences due to other items
Other

Tax expense

The Company has US$ 246,185 in foreign loss carry forwards with indefinite expiration dates.

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December 31,
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US$ 000

Year ended
December 31,
2015
US$ 000

5,764
774
303

6,841

4,876
468
315

5,659

167
11
–

178

141
9
–

150

7,019

5,809

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

263
109
179
(65)
(104)
(517)
2,343
134
223
473
76
237

3,351

248
147
157
(48)
(94)
(489)
2,766
134
134
261
76
237

3,529

21,277
34%

17,359
34%

7,234

5,902

518
(221)
44
(125)
(409)
(22)

315
(107)
53
(129)
(402)
177

7,019

5,809

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued

14. Revenues by geographic region
The Company sells its product to customers throughout the world. The breakdown by location is as follows:

United States and U.S. possessions
Canada
Rest of World

Total

Year ended
December 31,
2016
US$ 000

Year ended
December 31,
2015
US$ 000

55,805
791
22,757

47,621
1,547
21,054

79,353

70,222

15. Stock based compensation
The Company has stock based compensation plans which are described below. The compensation cost that has been charged against
income for the plans was approximately US$ 725,000 and US$ 197,000 for the years ended December 31, 2016 and 2015, respectively.
The income tax effect recognized for stock based compensation was US$ 0.2m and US$ 0.1m, respectively, for the years ended
December 31, 2016 and 2015.

Stock options
An initial grant was made in February 2010 for 2.3 million stock options as replacements for grants under the old option plan, which was
cancelled when the old plan was abandoned. The grants have a three-year vesting and a strike price of 30p, a 100% premium over the
market price on the date of grant. The remaining stock options will only be issued for new key employees and superior performance.

Options granted under the Plan have a term of up to 10 years and generally vest over a three-year period beginning on the date of the
grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant. The fair value of each
option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based
on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer
companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years
and an average vesting period of 3 years. No new options were granted in 2016 and 2015.

A summary of options activity is presented below:

Options

Outstanding at January 1, 2015
Granted
Exercised
Forfeited

Outstanding at December 31, 2015
Exercisable at December 31, 2015

Outstanding at January 1, 2016
Granted
Exercised
Forfeited

Outstanding at December 31, 2016
Exercisable at December 31, 2016

Stock options

1,840,627
–
(154,266)
–

1,686,361
1,686,361

1,686,361
–
(100,000)
–

1,586,361
1,586,361

Weighted
average
remaining
contractual
term (years)

Weighted-
average
exercise price

Aggregate
intrinsic value

0.44
–
0.47
–

0.44
0.44

0.44
–
0.47
–

0.44
0.44

–

5.02 4,246,248
–
4.13 (350,879)
–

–

4.01 3,895,369
4.01 3,895,369

4.01 3,895,369
–
(227,451)
–

–
3.13
–

3.00 3,667,918
3.00 3,667,918

Options exercised in 2016 and 2015 were settled for cash of US$ 0.1m and US$ 0.3m, respectively. As of December 31, 2016 and 2015,
the Company’s stock options have all been vested with no unrecognized compensation cost related to non-vested stock-based
compensation arrangements granted under the Company’s stock option plan.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

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Restricted Stock Units
The Company also regularly issues restricted stock units to employees and non-executive Directors, subject to Board approval. A
summary of restricted stock unit activity in 2015 and 2016 is presented below:

Outstanding at January 1, 2015
Granted
Vested or settled for cash
Forfeited

Outstanding at December 31, 2015

Outstanding at January 1, 2016
Granted
Vested and settled for cash
Forfeited

Outstanding at December 31, 2016

Grant date fair
market value
US$

450,350 553,999
242,673
123,966
(145,165)
(140,788)
(10,000)
(5,183)

428,345

641,507

428,345
641,507
148,593 313,894
(119,130)
(159,585)
–
–

417,353 836,271

RSUs settled for cash were US$ 0.3m in 2016 and US$ 0.3m in 2015.

As of December 31, 2016, there was US$ 334,000 total unrecognized compensation cost related to non-vested restricted stock units.
Restricted stock unit expense is being recognized over the three-year vesting period. The weighted average remaining vesting period is
1.17 years.

Equity Bonus Plan
In 2015, the Company established the 2015 Equity Bonus Plan, under which eligible senior managers were able to choose to receive
25% of their 2015 annual performance bonus in shares of common stock. In March 2016, the Company issued 96,870 shares of
common stock, valued at $204,000 at the time of grant, for awards under the 2015 Equity Bonus Plan. In November 2016, the Board
approved the 2016 Equity Bonus Plan under which eligible senior managers can elect to receive up to 25% of their 2016 annual
performance bonus in shares of common stock. The Company expects to issue shares for awards under the 2016 Equity Bonus Plan
in 2017.

16. Employee compensation
The Board approved management bonuses and profit sharing dollars totaling US$ 1.5m to be paid in December 2016 and early 2017
based upon the Company meeting certain profitability targets.

17. Subsequent events
Dividend
In recognition of Somero’s strong performance and the Board of Directors’ confidence in the continued growth of the Company, the
Board approved an increase to the dividend payout ratio to 40% of adjusted net income and is pleased to announce a final 2016
dividend of 8.6 US cents per share that will be payable on April 17, 2017 to shareholders on the register at March 31, 2017. Together with
the interim dividend paid in October 2016 of 2.5 US cents per share, this represents a full year dividend to shareholders of 11.1 US cents
per share, a 61% increase over the previous year.

Payoff of Mortgage
On January 31, 2017, the Company paid off the remaining outstanding principal totaling US$ 1.0m on its commercial real estate
mortgage along with accrued interest using cash on hand. There was no prepayment penalty. There were also no changes to the
Company’s US$ 10.0m secured revolving line of credit which will expire in February 2021.

Annual General Meeting
Notice is given that the Annual General Meeting of Stockholders (the “AGM”) of the Company will be held at the offices of finnCap,
60 New Broad Street, London EC2M 1JJ on June 6, 2017 at 11:00 am local time.

Somero Enterprises, Inc.
Annual Report and Accounts 2016

NOTES

Somero Enterprises, Inc.
Annual Report and Accounts 2016

Registered and Head Office
Somero Enterprises, Inc.
14530 Global Parkway
Fort Myers, Florida 33913
USA

Somero.com