ANNUAL
REPORT
2017
Welcome to Somero Enterprises, Inc.
WE ARE THE LEADING
PROVIDER OF ADVANCED
CONCRETE PLACING
SOLUTIONS.
Contents
Strategic report
01 Highlights
02 At a Glance
04 Investment Case
06 President and Chief Executive
Officer’s Review
10 Market Overview
12 Our Business Model
14 Our Vision & Strategy
16 Strategy in Action
20 Financial Review
24 Chairman’s Statement
Corporate governance
26 Board of Directors
27 Directors’ Report
32 Corporate Governance
35 Directors’ remuneration report
Financial statements
38 Report of Independent Auditors
39 Consolidated Balance Sheets
40 Consolidated Statements of
Comprehensive Income
41 Consolidated Statements of Changes
in Stockholders’ Equity
42 Consolidated Statements of
Cash Flows
43 Notes to the Consolidated Financial
Statements
StrateGic report
corporate Governance
Financial StatementS
Financial highlights
Revenue
US$ 85.6m
+8.0%
Adjusted EBITDA(1, 2)
US$ 28.0m
+14.0%
2017
2016
2015
2014
85.6
79.4
70.2
59.3
2017
2016
2015
2014
28.0
24.6
20.0
15.0
Diluted adjusted net
income per share(1,3)
US$ 0.31
+15.0%
Cash flows from operations
US$ 19.8m
+14%
2017
2016
2015
2014
0.31
0.27
0.22
0.17
2017
2016
2015
2014
19.8
17.0
14.5
12.3
Ordinary dividend per share
US$ 0.155
+40.0%
Net cash(4)
US$ 19.0m
-6.0%
0.155
0.111
2017
2016
2015
0.069
2014
0.055
2017
2016
2015
2014
12.6
6.6
19.0
20.2
Financial highlights
• Annual revenues grew to a record US$ 85.6m,
up 8% from 2016
• Healthy profit conversion and cash flow generation:
– Adjusted EBITDA increased 14% to a record
US$ 28.0m (2016: US$ 24.6m)
– Adjusted EBITDA margin improved to 33%
(2016: 31%)
– Cash flow from operating activities increased
16% to US$ 19.8m (2016: US$ 17.0m)
• Strong, secure financial position:
– Debt-free balance sheet
– Strong cash flow generation leading to a net cash
position at 31 December 2017 of US$ 19.0m
despite US$ 13.9m of dividend payments
• Increased dividend payout ratio to 50% of adjusted
earnings for 2017:
– Final dividend of 12.75 US cents per share
declared for a total 2017 dividend of 15.5 US
cents per share, a 40% increase over last year
– Supplemental dividend of 3.6 US cents per share
declared to be paid with final 2017 dividend
Operational highlights
• Growing contribution from international markets and
healthy demand across entire product line:
– Four of six regions grew in 2017 led by Europe,
North America, Latin America and Rest of World
territories
– Sales of Ride-on screeds grew 29% to
US$ 18.6m (2016: US$ 14.4m)
– 3-D Profiler System® revenues grew 11%
to US$ 6.8m (2016: US$ 6.1m)
– Other revenues, driven by sales of parts and
accessories grew 12% to US$ 18.7m
(2016: US$ 16.7m)
• New products contributed meaningfully to growth
• Planned move into a new leased facility in
Chesterfield, UK in Q2 2018 to accommodate growth
Notes:
1. The Company uses non-US GAAP financial measures
to provide supplemental information regarding the
Company’s operating performance. See further
information regarding non-GAAP measures below.
2. Adjusted EBITDA as used herein is a calculation of the
Company’s net income plus tax provision, interest expense,
interest income, foreign exchange loss, other expense,
depreciation, amortization, 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.
visit us online at
www.somero.com/investors
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 01
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.
Customers in
90+
countries
Revenue
US$ 85.6m
What we do
Our concrete placing and leveling equipment
employs proprietary laser-guided technology to
achieve a high level of precision in horizontal
concrete surface flatness at a higher rate of
efficiency than conventional, manual methods.
By using Somero equipment, concrete flooring
contractors can attain the highest level of flat-floor
precision at the lowest cost.
Somero pioneered the Laser Screed® machine
market in 1986 and has led the market ever since
through continued innovation, growing our product
offering from a single model to a portfolio of
13 products. Our proprietary designs are protected
by 62 patents and patent applications.
With minimal direct competition, we offer
customers equipment with unsurpassed quality
and performance and unparalleled global service,
technical support, training and education.
Locations
North America
Fort Myers, Florida:
Global headquarters and Somero
Concrete Institute training facility
Houghton, Michigan:
Production, operations and support
United Kingdom
Chesterfield:
Sales and service office
India
New Delhi:
Sales and service office
China
Shanghai:
Sales, service and Somero Concrete
College training facility
02 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Our applications
Somero equipment is used to place and screed the concrete
slab in all commercial building types, including all floors in
multi-story buildings.
Our equipment has been used in construction projects for
a wide array of the world’s largest organizations including
Amazon, Walmart, Costco, Home Depot, B&Q, Carrefour,
IKEA, Mercedes-Benz, Coca-Cola, FedEx, Tesla and Prologis.
Driven by customer feedback, the
S-22EZ released in November 2017
introduced a wide range of features
and enhancements aimed to increase
the performance, ease of use and
efficiency of operation of the largest
machine in our portfolio.
Warehousing
Assembly
plants
Commercial
construction
Exterior
paving
Parking
structures
Retail
centers
Patents and patent applications
62
Products in portfolio
13
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 03
Investment case
BUILT ON OUR
CORE STRENGTHS
01.
industry leader in
introducing customer
driven, technologically
advanced new products
02.
minimal direct competition
03.
Significant barriers to
entry based on technology,
education, and global
technical support
04 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Somero’s S-15r opened up a whole new dimension to the work
we can perform, the time frame we can get it done, and the
quality we can achieve. Before the machine, it might take us
three or four days to pour a parking lot. now we achieve it in
one day. What you can achieve with 15 guys doing it by hand
can now be comfortably performed with 8 or 9.
Charlie Caligiuri
Founder and President
Caligiuri Concrete LLC, Des Moines, Iowa
04.
Skilled management
team with extensive
industry experience
05.
attractive growth opportunity from
international markets and from
new products:
– Solid growth and market dynamics
06.
Strong and consistent
financial performance:
– Superior margins
– Strong conversion of revenue growth
in developed markets
– Strong potential for growth in
emerging markets
– Proven track record of introducing
new products to the market
into free cash flow
– Strong, unleveraged balance sheet
– Disciplined return of cash to
shareholders through dividends
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 05
President and Chief Executive Officer’s review
RECORD REVENUES,
PROFITS AND CASH FLOWS
Overview
A lot of hard work goes into delivering such
outstanding results, and I am so proud of our
employees who once again rose to the challenge.
In 2017, growth was well-balanced across our global
markets with revenues generated from our non-US
markets growing to 32% of total revenues in 2017,
and four of our six regions increasing compared to
2016 with North America, Europe, Latin America
and our Rest of World territories all contributing to
growth. On a product basis, our growth was led by
our sales of Ride-on screeds, 3-D Profiler Systems®,
and Other revenues which include sales of parts,
accessories and our new SP-16 Concrete Hose
Line-Pulling and Placing System. We are pleased
with the diversification in revenues across our
markets and product range, as the Company has
benefitted from an expanded global footprint and
from efforts to expand the product range to meet
the needs of customers regardless of project type
or size.
Finally, having retired all our debt in 2017, we enter
2018 with the strongest balance sheet in our history.
This provides needed flexibility to make strategic
investments that will support long-term growth.
We will continue to strike an appropriate balance
between optimizing profits and returning capital
to shareholders by making meaningful long-term
investments to grow the business, such as the
construction and launch of the Somero Concrete
Institute in 2017. As we continue to explore new
product opportunities and work to increase
penetration in our international markets, we believe
having the financial flexibility to make well-timed
investments will be critical in the coming years.
While 2017 was a remarkable year, we are excited to
explore a wide-range of significant new opportunities
in 2018.
Profits before tax
US$ 25.7m
Region Reviews
In 2017, sales in North America grew 2% compared
to 2016 to reach US$ 57.8m, with strong H2 trading
reflecting the strength in the underlying commercial
construction industry and the strong pipeline of
projects that remain in front of our US customer
base. The market drivers for the North American
market continue to be demand for replacement
equipment, technology upgrades, fleet additions,
and new products such as the SP-16 Concrete Hose
Line-Pulling and Placing System. The high volume of
commercial construction activity in 2017 combined
with a growing shortage of skilled labor added to the
demand for Somero equipment and the labor
savings our equipment provides.
Cash flow from operations
US$ 19.8m
In Europe, 2017 sales grew 53% compared to 2016
to reach US$ 12.2m with well-balanced demand
across the region and particularly strong trading in
the UK, Italy, Poland, Spain and the Czech Republic.
Importantly, sales across our product range was also
balanced with notable growth in the Boomed screed
and Ride-on screed product lines.
In China, while 2017 sales declined 14% compared
to 2016 to US$ 5.5m, H2 2017 trading improved
year-over-year due to the positive impact from
marketing and demand-generation initiatives.
In our view, China represents a significant market
opportunity in which Somero currently has very
small market penetration. The market fundamentals
and long-term growth prospects in the commercial
construction industry in China remain positive
and Somero intends to continue its training and
educational efforts to advance acceptance and
demand for higher-quality floors through
wide-placement methods. This quality segment
of the China market will be Somero‘s area of focus
in 2018. In addition, we will continue to grow our
customer base by offering competitive entry-level
machines, such as the S-158C, that target the
productivity-oriented market and provide future
up-sell opportunities. Finally, our long-term financing
program in China supported by our equipment
shut-off capability remains a positive and
effective program.
06 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
In Latin America, sales increased 35% from 2016
to US$ 2.3m for the year driven by strong project
activity in Mexico in H1 2017, along with good
contributions from Chile, and Panama throughout
the year.
While sales in the Middle East were down 28%
compared to 2016 to US$ 2.1m, the activity level
in the region was strong throughout the year despite
several opportunities slipping into 2018. The Middle
Eastern countries with meaningful contributions to
2017 sales were Turkey, the United Arab Emirates,
and Saudi Arabia.
In our Rest of World region, 2017 sales were
particularly strong with a 50% increase from 2016
to US$ 5.7m. While the region covers a wide range
of territories, the most significant contributors to
growth were India, Scandinavia and Korea. For India,
a meaningful future market opportunity for Somero,
the positive results were driven by the addition of
in-country sales leadership in 2017.
Cashflow and Balance Sheet
Somero’s cash generation remains healthy, and
2017 was a year of record operating cash flows.
The Company managed working capital effectively
throughout the year, and even with the year-end
increase to accounts receivable driven by
particularly strong sales in December 2017, the
overall increase in net working capital investment
was in line with the growth in sales. For the year,
operating cash flows grew to US$ 19.8m, up from
US$ 17.0m in 2016. This cash flow allowed the
Company to fully retire its debt in early 2017, to raise
the dividend pay-out ratio on the final 2016 dividend
paid in April 2017 and to pay a US$ 7.5m special
dividend in August 2017. In total, Somero paid
US$ 13.9m in dividends to shareholders for the year.
In addition to the increased dividends, in 2017
Somero funded US$ 0.8m construction of the
Somero Concrete Institute and settled US$ 5.3m
in stock options and restricted stock units for cash.
Following these outflows, the Company ended
the year with a US$ 19.0m net cash(1) balance.
Reflecting the Board’s confidence in the continued
growth prospects of the Group, the Board has
resolved to further raise the dividend pay-out ratio
to 50% of adjusted net income to return even more
of profits to shareholders beginning with the 2017
final dividend to be paid in April 2018. Furthermore,
as detailed above, the Board has adopted a
supplementary dividend policy and has declared
a supplemental dividend of US$ 2.0m or 3.6 US
cents per share to be paid alongside the 2017
final dividend.
2017 was a truly exceptional year for Somero as
we set another record for revenues, profits, cash
flows, and returned nearly US$ 14m in dividends
to our shareholders.
Jack Cooney
President and Chief Executive Officer
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 07
President and Chief Executive Officer’s review continued
People
During the year we successfully drove greater
efficiencies throughout our operations and support
functions, while delivering a period of record results.
These efficiency gains have offset the investments
to bring new talent into the organization, with this
rebalancing providing the right support for our
continued growth. As a result, our employee count
decreased by 1 compared to year-end 2016 with
177 employees at year end. In 2018 we expect to
add resources to the organization, particularly in the
sales, customer support and product development
areas, while also working to increase our operational
efficiency and scale. We remain highly selective in
the quality and fit of the individuals we hire and
devote a large part of the hiring process to
identifying individuals that embrace the Somero
culture and core values.
Product Development
Somero’s goal is to introduce at least one new
product every year, and in 2017 we met this goal
with the introduction of the S-22EZ at the end of
2017 that was formally introduced to the market at
the January 2018 World of Concrete Trade Show in
Las Vegas, USA. The S-22EZ adds improvements
to the legacy S-22E Boomed screed centered on
increasing the weight and balance of the machine
and improving its ease of use and ease of
maintenance. As with all our product improvements,
the changes to the S-22E were the result of ideas on
ways to deliver even better products and solutions
that came directly from our strong customer
relationships. Additionally in 2017, products that
were developed the previous year, the S-158C and
SP-16 Concrete Hose Line-Pulling and Placing
System machine, contributed meaningfully to
growth with a combined US$ 1.1m contribution
to 2017 sales.
With a secure financial position and a broad range
of opportunities available that Somero is well-placed
to capitalize on, the Board has made the decision
to moderately increase investment to enable us to
accelerate product development initiatives over the
next year. Somero’s technical expertise, resources,
scale and close customer relationships provides us
with a unique opportunity to enter into related
market segments. We are confident in our ability
to accelerate product development alongside
continuing to deliver profitable growth for our
shareholders, and look forward to updating the
market in due course.
Progress Towards our 2018
Strategic Objective
We have completed the fourth year of our five-year
plan that targets reaching revenue of US$ 90m in
2018. With one year remaining on the plan, and
based on solid fundamentals in the US, Europe
and meaningful growth opportunities across our
remaining international markets, we remain
confident in our ability to meet our strategic target
in 2018.
Expansion Update
In September 2017, the Company announced
that the Board had approved plans to build a
US $1.3m expansion to the Company’s Fort Myers
headquarters with a target to complete in H1 2018
to accommodate planned future growth of the
business. Following the high level of activity and
potential site development requirements, the
Company is reviewing the plans to ensure that
this expansion covers all of the anticipated
business needs.
Also, with the significant growth we have
experienced in our European region, the Company
is moving into a larger, leased facility in Chesterfield,
UK near our current leased site. The Company
expects the move will be completed in Q2 2018, and
the larger facility will better accommodate the added
personnel and increased sales volume in our UK
and larger European region. The Company does not
expect to incur material capital expenditure from the
move, nor incur meaningful increased operating
costs from the new facility.
08 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Conclusion
2017 was an outstanding year for Somero.
The Company delivered a strong financial
performance which provided a significant return
of cash to shareholders through dividends and
further strengthened the Company’s financial
position. Most importantly, we took real strides
to advance our long-term strategy of growing the
business globally and through innovative, new
products. Our talented management team led the
way and met the challenge of managing business
growth while keeping focused on improving the
products, solutions and services we offer our
customers. I am proud of our team’s performance
this year and understand the significant effort
from each team member to deliver these
outstanding results.
While 2017 was a great year for the Company, we
see many opportunities ahead as we work to develop
new products and market segments and to increase
penetration in our international markets. This will
bring new challenges for the Company, but I believe
that the execution of our strategy has positioned us
well to capitalize on these opportunities and I am
certain our management team is up to the task.
All the while, as we work to grow the business,
I look forward to delivering another year of progress
for our shareholders.
Jack Cooney
President and Chief Executive Officer
March 14, 2018
Note:
1. Net Cash is defined as total cash and cash equivalents less
borrowings under bank obligations exclusive of deferred
financing costs.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 09
Market overview
GLOBAL MARKET
OPPORTUNITY
north america
europe
Market Dynamics
• Largest market
• Commercial construction industry fundamentals
remain sound in the US
• Healthy economy supported by corporate tax
reform are positive factors for US construction
industry outlook
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
• Healthy economic and commercial construction
outlook across the European region
Estimated 2018 global cement
consumption(1)
Estimated 2018 global cement
consumption(1)
3.5%
5.6%
Drivers of Growth
• US non-residential construction spend forecast
to grow by 4%–6% annually through to 2020(2)
Drivers of Growth
• Accelerating commercial construction activity
across mainland Europe
• New technology to upgrade fleet of installed
• New technology to upgrade installed base
equipment
• Fleet additions
• New product introductions
• Shortage of skilled labor in concrete
construction industry
of equipment
• Fleet additions
• New product introductions
• Shortage of skilled labor in concrete
construction industry
10 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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.
china
rest of World
Market Dynamics
• Most significant opportunity for long-term growth
outside North America
• Cement consumption forecast to represent over
50% of 2019 world cement consumption
• Current market penetration very low
Market Dynamics
• Current market penetration very low
• Most significant opportunity in region is India that
is forecast to represent 15.9% of 2018 world
cement consumption
• Significant opportunities in the Middle East,
Southeast Asia, Latin America and Australia
Estimated 2018 global cement
consumption(2)
Estimated 2018 global cement
consumption(2)
50.4%
40.5%
Drivers of Growth
• Large multinational projects requiring
Drivers of Growth
• Accelerating Commercial construction activity
high-quality floors adhering to Western standards
• Broader domestic acceptance of wide-placement
across mainland Europe
• New technology to upgrade installed base
•
and Western flatness, levelness floor
specifications
Increased availability of long-term financing
options for customers
• New product introductions
•
Increasing shortage of skilled labor
of equipment
• Fleet additions
• New product introductions
• Shortage of skilled labor in concrete
construction industry
Notes:
1. Estimates obtained from Portland Cement Association Market Intelligence World Cement
Consumption report dated May 2015.
2. Estimates obtained from FMI Research Services Group 2018 Construction Outlook Report.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 11
Our business model
A SIMPLE,
PROVEN MODEL
Why
It all starts with “Why?” Our mission revolves around this
simple question. 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
How we pursue our mission makes us unique.
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 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 running and operating optimally.
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.
Applications
Somero laser-guided technology and wide-placement
methods have been specified for use in a wide range of
construction projects including:
Building owners and end users
Somero equipment has been used in construction
projects for a wide array of the world’s largest
organizations including Amazon, Costco, Walmart,
Home Depot, B&Q, Carrefour, IKEA, Mercedes-Benz,
Coca-Cola, FedEx, Tesla and Prologis.
What makes us different
Innovative Product Leadership
Pioneered Laser Screed®
machine market in 1986
Designs protected by 62 patents
and patent applications
Product portfolio grown to 13
products
Product development fueled by
customer engagement
12 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
The use of Somero equipment and service delivers
significant benefits to our customers and the owners
and end-users of the completed construction projects,
a true win-win proposition.
Global customers
4,000+
Warehousing
Assembly
plants
Commercial
construction
Exterior
paving
Parking
structures
Retail
centers
Golden Trowel® Awards for
industrial concrete floor
production won using Somero
equipment since 2007(1)
69
N
O
I
T
I
S
O
P
O
R
P
E
U
L
A
V
D
E
T
E
C
A
F
-
I
T
L
U
M
Key benefits to our customers
• Increases quality
• Productivity
• Profit
• Direct access to Somero
expertise, training and support
Key outcomes for building
owners and end users
• Operational efficiency
• Improved physical appearance
• Lower floor maintenance cost
• Lower forklift repair cost
What makes us different
Industry Expertise, Training and Support
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
Note:
1. The Golden Trowel® Award is given annually to commercial concrete contractors that achieve the highest industry
standards in concrete floor construction and produce the flattest and most level floor slabs in the world.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 13
Our vision & strategy
ROADMAP FOR
SUSTAINABLE
GROWTH
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.
Strategic priorities
Our strategy is to grow
our business by expanding
and deepening our global
footprint and through
continued product
innovation.
14 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
International expansion
A key element of our growth strategy is to expand our global
footprint and deepen our global market penetration.
Supporting this commitment is our investment in hiring
international employees. Since 2007, the vast majority of our
staffing increases have been employees based outside of
North America.
Product innovation
Since our beginning as a single product company in 1986,
Somero has continued to develop proprietary designs and
technology growing our portfolio to 13 innovative products with
62 patents and patent applications protecting these designs.
In late 2017, we introduced the S-22EZ, another example of
funneling customer feedback into tangible improvements that
increase the value proposition of our products.
See more information on pages 16-17
See more information on pages 18-19
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 15
Strategy in action
INTERNATIONAL
EXPANSION
16 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Non-US markets represent
32%of total revenues
a deepening international footprint
Somero applies lessons learned from building
a successful business in North America to our
international markets.
While the world is full of many cultural differences,
we believe the importance of quality, flat and level
floors and efficiency in the construction process
applies to our customers, building owners and
end-users in all our markets.
We also believe there is no substitute for having
strong local teams who work closely with customers,
understand the local market, and provide teaching
and education to all stakeholders, including design
firms, building owners, and building end-users, at
our training facilities, in seminars, and at job-sites.
Petronas Lubricants International Pvt Ltd India Plant job site
training event, Mumbai, India.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 17
Strategy in action
PRODUCT
INNOVATION
18 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Pioneering the industry,
leading through
innovation since
1986
a history of product leadership
Product innovation for Somero means two things,
new products and better products, and in both
cases the effort is customer driven.
Somero understands the benefit of involving our
customers in the product development effort.
We ask for and receive significant feedback from
customers on how to provide better products and
services and funnel these ideas into tangible new
products that are solidly supported by a business
case. We believe this builds incredible customer
loyalty and engagement.
In late 2017, we introduced the S-22EZ with features
and enhancements to our legacy model that were
the direct result of customer feedback. The
increased performance, ease of use, and efficiency
of maintenance and operation strengthen the value
proposition of the machine.
Also in 2017, we continued our efforts to identify
attractive market segments where we can leverage
our core technology and expertise to develop a
compelling product or service. Over the past
2 years, by adding key personnel and creating
customer focus groups such as the Somero
Innovation Council, to guide us, we are pleased
with the volume of promising opportunities we
have identified.
S-22EZ, EZ Clean Screed Head designed to reduce
clean-up time.
Somero Innovation Council meeting in Naples, Florida.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 19
Financial review
Summary of Financial Results
revenue
cost of sales
Gross profit
operating expenses
Sales, marketing and customer support
Engineering and product development
General and administrative
Total operating expenses
operating income
other income (expense)
Interest expense
Interest income
Foreign exchange impact
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,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
85,634
36,870
79,353
34,270
48,764
45,083
10,426
1,222
11,683
10,056
1,071
12,768
23,331
23,895
25,433
21,188
(80)
262
477
(354)
(95)
267
(117)
34
25,738
7,322
21,277
7,019
18,416
14,258
28,000
17,504
1,199
901
1,959
24,579
15,637
1,121
1,545
4,435
Notes:
1. Adjusted EBITDA and Adjusted net income are not measurements of the Company’s financial performance under US GAAP and should not be considered as an alternative to
net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a
measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring
the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company’s credit facility and as a
measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts,
lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
2. Adjusted EBITDA as used herein is a calculation of net income plus tax provision, interest expense, interest income, foreign exchange 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 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.
20 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Net income to Adjusted EBITDA reconciliation and Adjusted net income reconciliation
adjusted eBitDa reconciliation
Net income
Tax provision
Interest expense
Interest income
Foreign exchange impact
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,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
18,416
7,322
80
(262)
(477)
354
1,199
901
467
14,258
7,019
95
(267)
117
(34)
1,121
1,545
725
28,000
24,579
18,416
901
(1,813)
14,258
1,545
(166)
17,504
15,637
Notes:
1. Adjusted EBITDA and Adjusted net income are not measurements of the Company’s financial performance under US GAAP and should not be considered as an alternative to net
income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a
measure of profitability or liquidity. Adjusted EBITDA and Adjusted net income are presented herein because management believes they are useful analytical tools for measuring
the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company’s credit facility and as a
measurement for calculation of management incentive compensation. The Company understands that although Adjusted EBITDA is frequently used by securities analysts,
lenders, and others in their evaluation of companies, its calculation of Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
2. Adjusted EBITDA as used herein is a calculation of net income plus tax provision, interest expense, interest income, foreign exchange 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.
Revenues
The Company’s consolidated revenues increased by 8% to US$ 85.6m (2016: US$ 79.4m). Company revenues consist primarily of sales from Boomed
screed products, which include the S-22E, S-22EZ, 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-158C 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 Ride-on screeds, 3-D Profiler Systems, along with an increase in Other revenues.
Ride-on screed sales increased to US$ 18.6m (2016: US$ 14.4m) due to higher volume and price increases, 3-D Profiler System sales increased to
US$ 6.8m (2016: US$ 6.1m) due to increased unit sales and Other revenues increased to US$ 18.7m (2016: US$ 16.7m) primarily due to increased
sales of parts and accessories and increased sales of other equipment including the Mini C and SP-16.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 21
Financial review continued
Revenue breakdown
by geography
north america US$
in millions
emea(1) US$
in millions
roW(2) US$
in millions
total US$ in millions
2017
2016
Boomed screeds(3)
Ride-on screeds(4)
Remanufactured machines
3-D Profiler System
Other(5)
Total
2017
24.0
11.6
3.5
6.5
12.2
57.8
2016
27.0
10.4
3.7
5.4
10.1
56.6
2017
2016
2017
2016
net sales
9.1
4.4
–
–
2.5
6.0
2.3
0.4
0.2
2.8
2.8
2.6
2.1
0.3
4.0
3.3
1.7
1.8
0.5
3.8
35.9
18.6
5.6
6.8
18.7
% of net
sales
41.9%
21.7%
6.6%
7.9%
21.9%
Net sales
36.3
14.4
5.9
6.1
16.7
% of Net
sales
45.7%
18.1%
7.5%
7.7%
21.0%
16.0
11.7
11.8
11.1
85.6
100.0%
79.4
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-22EZ, S-15R and S-10A.
4. Ride-On Screeds include the S-840, S-940, S-485 and S-158C.
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
3-D Profiler System
Total
2017
120
189
39
66
414
2016
130
159
42
61
392
Sales to customers located in North America contributed 68% of total revenue (2016: 71%), sales to customers in EMEA (Europe, India, Middle East,
Scandinavia and Russia) contributed 19% (2016: 15%) and sales to customers in ROW (Southeast Asia, Australia, Latin America and China)
contributed 13% (2016: 14%).
Sales in North America were US$ 57.8m (2016: US$ 56.6m) up 2% driven by higher sales of Ride-on screeds, 3D Profiler Systems, and an increase in
Other revenues. Sales in EMEA were US$ 16m (2016: US$ 11.7m) which is up 37% primarily due to an increase in Boom screed and Ride-on screed
sales. Sales in ROW were US$ 11.8m (2016: US$ 11.1m) which is up 6% driven by an increase in sales of Ride-on screeds and other revenues.
Regional sales
North America
Europe
China
Middle East
Latin America
Rest of World
Total
US$ in millions
2017
57.8
12.2
5.5
2.1
2.3
5.7
85.6
2016
56.6
8.0
6.4
2.9
1.7
3.8
79.4
22 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Gross profit
Gross profit increased to US$ 48.8m (2016: US$ 45.1m), with gross margins improving to 56.9% (2016: 56.8%) supported by price increases,
product cost reductions and productivity gains.
Operating expenses
Operating expenses decreased by US$ 0.6m to US$ 23.3m (2016: US$ 23.9m). This decrease is due to lower amortization expense in the current
year as the intangible asset being amortized became fully amortized during the year.
Other income (expense)
Other income increased to US$ 0.3m, compared to other income of US$ 0.1m in 2016, due to an increase in foreign exchange gains offset partly
by loss on disposal of fixed assets which comprises the majority of other expense in 2017.
Provision for income taxes
The provision for income taxes was US$ 7.3m in 2017 compared to US$ 7.0m in 2016. Overall, Somero’s effective tax rate changed from 33.0%
in 2016 to 28.4% in 2017.
Net income
Net income increased to US$ 18.4m from US$ 14.3m in 2016 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$ 17.5m from US$ 15.6m in 2016. 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:
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,
2017
US$ 000
18,416
56,233,912
401,697
56,635,609
Year ended
December 31,
2016
US$ 000
14,258
56,178,723
1,708,228
57,886,951
The Company had 56,242,121 shares outstanding at December 31, 2017. Earnings per share at December 31, 2017 and 2016 are as follows:
Basic earnings per share
Diluted earnings per share
Basic adjusted net income per share
Diluted adjusted net income per share
Year ended
December 31,
2017
per Share
US$
Year ended
December 31,
2016
Per Share
US$
0.33
0.33
0.31
0.31
0.25
0.25
0.28
0.27
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 23
Chairman’s statement
CONTINUING
OUR MOMENTUM
Performance and Dividend
I am pleased to report that Somero has delivered
another year of outstanding results for our shareholders
in 2017. It was a very successful year, with record sales
and profits, growing contributions from our international
markets, new product launches contributing
meaningfully to growth, a significant and meaningful
return of cash to shareholders through dividends, and
most importantly, continued progress on identifying new
product and new market opportunities.
I am also delighted to report that with the Company’s
impressive 2017 results, healthy financial position, and
the Board’s confidence in the business outlook, the
Board has approved increasing the dividend payout ratio
to 50% of 2017 adjusted net income. The increased
payout results in a final 2017 dividend of 12.75 US cents
per share payable on April 20, 2018 to shareholders on
the register at April 3, 2018. Together with the interim
dividend paid in October 2017 of 2.75 US cents per
share, the 2017 full year regular dividend payment to
shareholders is 15.5 US cents per share, a 40%
increase from 2016.
In addition, upon completing the review of the
Company’s year-end cash position and cash
requirements for the coming year, the Board has also
decided to adopt a supplementary dividend policy.
Going forward, the Board will look to maintain a target
net cash balance of at least US$ 15.0m, measured at
each year end and intends to distribute 50% of the
excess of net cash over the year-end target in the form
of a supplemental dividend. The cash reserve figure
has been raised from US$ 10.0m previously held to
be acceptable, reflecting the increased scale of the
business and capital requirements for future investment.
The Board believes this policy strikes the appropriate
balance between maintaining an adequate cash reserve
to manage the business and providing a disciplined
return of capital to shareholders. This policy will be
subject to periodic review.
The Board has therefore approved a supplemental
dividend of 3.6 US cents per share that will be paid at
the same time as the final 2017 dividend. The combined
regular and supplemental dividend to be paid on April
20, 2018 will be 16.35 US cents per share, a significant
and meaningful return of cash to our shareholders.
Sales growth
US$ 6.2m
Strategic Progress
2017 was important year of progress. Revenues from
our international markets contributed meaningfully to
growth during the year representing US$ 5.0m in net
growth for 2017. In 2017, 32% of total revenues came
from regions outside of North America combined,
up from 29% in 2016. We are focused on driving
international growth and further diversifying the
Company’s geographic revenue base. We will do this by
adding additional resources, such as we did in Europe
and India in 2017, and by continuing to promote
adoption of wide-placement theory and quality concrete
flooring standards across the globe.
Ordinary dividend increase
+40%
to 15.5 US cents per share
We have also enhanced our product development
process. In 2017, Somero allocated more resources to
developing innovative, new solutions for our customers
with focus on identifying new market segments, such as
structural high-rise buildings, where the Company can
leverage its core technology. 2017 also represented a
full-year of meetings of the Somero Innovation Council,
which is comprised of a broad group of industry experts
that provide input on new product concepts. The
Somero Innovation Council has been an invaluable
resource to understand customer challenges and needs,
and ultimately to identify potential innovative solutions.
Somero new product development is and always has
been a customer led process. We understand customer
involvement throughout the development cycle is critical
to ensure our ideas turn into tangible products that
create meaningful value for our customers.
Lastly, Somero took another step forward in its
commitment to training and education in the
concrete contractor industry with the launch of the
Somero Concrete Institute (“SCI”) in 2017. The SCI
combines classroom education with hands-on training
in the placement and finishing of concrete floors.
The SCI is a unique endeavor, and we believe a
strategically important one as well, to help address
the significant shortage of skilled labor in the
concrete contractor industry.
24 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
it was a very successful year, with record
sales and profits, growing contributions
from our international markets, new product
launches, and most importantly, continued
progress on identifying new product and
new market opportunities.
Larry Horsch
Non-Executive Chairman
Our People
Somero’s 177 employees around the globe are the engine
that drives the Company. Somero is a people business
built on strong employee and customer relationships.
Our passionate and dedicated workforce is the foundation
of our success, and the Board remains committed to
ensuring we create the most productive and rewarding
work environment possible for each of our employees.
Current Trading and Outlook
The high level of activity in North America during
the latter part of 2017 has continued in 2018. We
continue to see strong interest in our equipment and
remain encouraged by the positive non-residential
construction outlook in the US for 2018. The expected
positive impact from US corporate tax reform is an
additional factor reinforcing our confidence in North
American growth prospects.
In Europe, the strong performance of 2017 is also
expected to carry forward into 2018. Similar to conditions
we see in the North American market, European interest
in our equipment remains strong, driven by demand for
replacement equipment, technology upgrades and new
products. Our confidence in the growth prospects in
Europe is supported by improved economic conditions
across the territory.
In China, healthy interest in our products continues and
we expect to see improvement in 2018 driven in part by
our marketing and demand generation initiatives that
gained traction in H2 2017. Although it has taken longer
than expected to gain a significant foothold in this region,
longer-term we see a sizable opportunity in the quality-
oriented market segment and plan to continue our market
development efforts to promote wide-placement methods
and flatness, levelness standards to target this segment.
In addition, we will continue to grow our customer base by
offering competitive entry-level machines, such as the
S-158C, that targets the productivity-oriented market and
provides future up-sell opportunities.
In Latin America, we expect solid performance from
Mexico and growth opportunities from the other countries
in the region. In our other regions, including the Middle
East and our Rest of World territory, we expect to see
significant opportunities in 2018 and beyond and,
importantly, are encouraged by the positive economic
climate across this broad territory.
The Board believes the Company has many meaningful
growth opportunities in 2018 across its broad portfolio of
markets and products and is confident that Somero is
poised to deliver another year of profitable growth to
shareholders in 2018.
Larry Horsch
Non-Executive Chairman
March 14, 2018
Somero’s SP-16, featuring
remote-controlled hose handlers,
enhances productivity, generates
labor savings, and reduces the risk
of injury associated with moving
concrete pump hoses on the job site.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 25
Thomas M. Anderson
Non-Executive Director
Mr. Anderson, age 67, 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. Along with his affiliation with
Somero, Mr. Anderson stays active in the concrete industry with
an investment in Southwest Concrete Pumping based in Colorado.
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 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.
Mr. Scheuer received a Bachelor of Science degree from
DePaul University and an MBA from Northwestern University
J.L. Kellogg School of Management.
Board of Directors
Lawrence L. Horsch
Non-Executive Chairman of the Board
Mr. Horsch, age 83, 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. 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 71, 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 47, 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.
Howard E. Hohmann
Executive Vice President of Sales Worldwide, Director
Mr. Hohmann, age 56, 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.
26 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Directors’ Report
The directors present their Annual Report and the audited financial statements for the year ended December 31, 2017.
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$ 13.9m were paid in 2017. A 12.75 US cents per share
dividend was declared for the period ending December 31, 2017, with a record date of April 3, 2018, payable on April 20, 2018.
Share capital
L Horsch
J Cooney
J Yuncza
H Hohmann
T Anderson
R Scheuer
Ordinary Shares
January 1,
2017
December 31,
2017
92,000
1,414,634
39,613
47,703
–
25,000
92,000
1,414,634
52,977
54,067
–
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, 2017 was 229.5p. The range during the 2017 period of trading was 217.5p to 334.0p.
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 2017 | 27
Directors’ Report continued
Stockholders who hold more than 3% as of December 31, 2017
Artemis Investment Management
Canaccord Genuity Group
Unicorn Asset Management
Close Asset Management
River & Mercantile Asset Management
Janus Henderson Investors
Standard Life
Lazard Freres Gestion
JP Morgan Asset Management
Directors, Employees, & Related Parties
Hargreaves Lansdown Asset Management
Jupiter Asset Management
Director stock options
Amount
% holding
6,181,567
6,160,856
4,977,050
3,627,285
2,590,867
2,561,980
2,500,591
2,200,000
1,743,017
1,740,573
1,732,491
1,686,500
10.99%
10.95%
8.85%
6.45%
4.61%
4.56%
4.45%
3.91%
3.10%
3.09%
3.08%
3.00%
Director
L Horsch
J Cooney
J Cooney
J Cooney
T Anderson
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
J Yuncza
B Scheuer
B Scheuer
January 1,
2017 Award/(Exercise)
Cancelled
December 31,
2017
Exercise price
US$
Earliest date
exercisable
Expiry date
154,268
249,394
(154,268)
(249,394)
1,000,000 (1,000,000)
(62,715)
(85,704)
62,715
85,704
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
January 1, 2017 Award/(Exercise)
Cancelled
December 31,
2017
Weighted
average grant
date fair
market value
Vesting date Fully vested date
1,958
9,312
8,395
–
59,977
64,271
60,049
–
1,398
6,650
5,995
–
32,639
35,178
–
1,770
–
(1,958)
–
–
6,681
(59,977)
–
–
38,312
(1,398)
–
–
4,771
–
–
22,444
–
2,204
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9,312
8,395
6,681
–
64,271
60,049
38,312
–
6,650
5,995
4,771
32,639
35,178
22,444
1,770
2,204
–
1.85
2.10
3.46
–
1.87
2.10
3.46
–
1.85
2.10
3.46
2.16
2.10
3.46
2.10
3.46
–
1/27/2018
3/24/2019
3/17/2020
–
1/21/2018
3/24/2019
3/17/2020
–
1/27/2018
3/24/2019
3/17/2020
5/18/2018
3/24/2019
3/17/2020
3/24/2019
3/17/2020
–
1/27/2018
3/24/2019
3/17/2020
–
1/21/2018
3/24/2019
3/17/2020
–
1/27/2018
3/24/2019
3/17/2020
5/18/2018
3/24/2019
3/17/2020
3/24/2019
3/17/2020
28 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Geographic expansion
Somero’s financial performance is impacted by its ability to
successfully enter and penetrate geographic markets outside
the US. Currently, Europe and China represent Somero’s primary
markets outside the US. Somero has primarily focused efforts
on Europe and China, 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.
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:
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 2017. 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.
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 2017, Somero
introduced the S-22EZ, which was an improvement on the legacy
S-22 Boomed screed. The upgrades centered on improving the
performance, ease of use and efficiency of operation of the
machine. In 2017, Somero also gained significant sales traction
with products that were developed in the previous year, the S-158C
and the SP-16 Concrete Hose Line-Pulling and Placing System.
The two products combined contributed US$ 1.1m
to 2017 revenues.
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 life cycles. 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.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 29
Directors’ Report continued
Capital resources
Currently, the Company’s capital expenditure plans include
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, 2017, the Company had not drawn any
amounts under the revolving portion of its Citizens Bank
Financing Agreement.
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 2017. 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 2018.
Somero had capital expenditures of US$ 2.0m in 2017 and
US$ 4.4m in 2016. The majority of this expenditure was related
to construction of the new Somero Concrete Institute building in
Florida, computer hardware and software upgrades 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$ 45,060
for 2017.
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.
30 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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 14, 2018
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 31
Corporate governance
While the Company is not required to comply with the provisions of
the UK Corporate Governance Code (the “Code”), it is the intention
of the directors that the Company will indeed comply with the Code
to the extent they consider it practicable and appropriate and
having regard to the Company’s size, Board structure and
resources. With the exception of the following matters, the
Company is in compliance with the Code.
A.1.2 Senior independent director has not been named.
C.3.6 Allowing for the size of the Company, there is currently no
internal audit function as suggested by the 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 were US$ 176,000 and US$ 139,000 for 2017
and 2016, respectively.
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 Code.
In November 2017, the Board conducted a formal performance
evaluation and considered the balance of skills, experience,
independence and knowledge of the Company on the Board and its
diversity, including gender. Based on the results of the performance
evaluation, the Board adopted a retirement policy in order to provide
access to new qualified directors and to ensure the appropriate
overall Board composition and effectiveness. The Board further
resolved to regularly and informally evaluate its composition against
these objectives.
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, two
Remuneration Committee meetings and three Nominations
Committee meetings.
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
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.
32 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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, 2017 has
been maintained and has taken account of any material
developments since the year end.
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.
In November 2017, the Board adopted a retirement policy stating
that directors shall not be re-nominated for election after reaching
75 years of age, provided that the Board may approve exceptions
to the policy based on a recommendation from the Nominating
Committee. If a director reaches the age of 75 during his or her
term, the director will offer to resign in writing. The Board may
choose to accept, defer, or reject the offer to resign.
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 Guidance on Risk Management Internal Control and Related
Financial and Business Reporting to directors as published by the
Financial Reporting Council. 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 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:
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 33
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
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;
• makes recommendations to the Board on these matters.
• make judgments and estimates that are reasonable and
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 2017 and 2016.
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.
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.
Audit
Tax
Other
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
176
60
–
139
43
–
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.
Compliance statement
Although not required, the Board reports on compliance with
the Code throughout the accounting period. The Company has
complied throughout the accounting period ended December
31, 2017 with the main principles outlined in the Code. The
exceptions to the Code are noted at the beginning of the
Corporate Governance section of this annual report.
34 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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.
Salary paid 2017
$91,790
$442,255
$259,088
$283,800
$65,550
$74,500
Cash bonus
2017
–
$158,048
$138,840
$601,807
–
–
Equity bonus
common shares
issued 2017
Salary 2018
Bonus opportunity 2018
Options held
–
–
13,364
6,364
–
–
$91,790(1)
$464,368
$272,042
$297,990
$65,550(1)
$74,500(1)
50%–100% of salary
50% of salary(2)
Commission(2)(3)
–
–
–
–
–
–
Restricted stock
units held
24,388
162,632
90,261
–
17,416
3,974
L Horsch
J Cooney
J Yuncza
H Hohmann
T Anderson
R Scheuer
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 Code.
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, 2017, 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 2017 | 35
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 2017, 151,444 RSUs were exercised or forfeited, 121,063 units issued, leaving
a balance of 386,972 units as of December 31, 2017. 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 2017, 1,569,221 shares of stock options
were exercised, leaving an outstanding balance of 17,140 shares as of December 31, 2017. 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, 2017 was 229.5p. The range during the 2016 period of trading was 217.5p to 334.0p.
Somero enterprises, inc. closing Share price Data
e
r
a
h
S
r
e
P
e
c
n
e
P
334.00
305.44
276.88
248.32
219.78
191.20
7
b 1
e
F
7
p r 1
A
7
n 1
u
J
7
g 1
u
A
7
c t 1
O
7
c 1
e
D
36 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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, 2017 was subject to Board approval. The letters of appointment and terms are listed
in the following chart.
Director
J Cooney
H Hohmann
J Yuncza
R Scheuer
L Horsch
T Anderson
Class
III
III
I
I
II
II
Approved by the Board of Directors and signed on behalf of the Board.
Thomas Anderson
Chairman of Remuneration Committee
March 14, 2018
Date of appointment
Termination date
May 19, 2015
May 19, 2015
June 7, 2016
June 7, 2016
June 6, 2017
June 6, 2017
2018 AGM
2018 AGM
2019 AGM
2019 AGM
2020 AGM
2020 AGM
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 37
Report of Independent Auditors
To the Board of Directors and Stockholders of Somero Enterprises, Inc.
We have audited the accompanying consolidated financial statements of Somero Enterprises, Inc., a Delaware corporation, which comprise the
consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income, changes in
stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”); this includes the design, implementation and maintenance of internal control
relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Somero
Enterprises, Inc. as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity
with GAAP.
Dallas, Texas
March 14, 2018
38 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Consolidated balance sheets
As of December 31, 2017 and 2016
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
56,242,121 and 56,203,602 shares outstanding at December 31, 2017 and 2016, respectively
Less: treasury stock, 183,477 shares as of December 31, 2017 and 221,996 shares as of December 31, 2016 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.
as of
December 31,
2017
US$ 000
As of
December 31,
2016
US$ 000
19,038
11,026
8,697
2,540
41,301
54
12,306
–
2,878
1,596
268
21,216
6,310
8,760
2,428
38,714
254
11,558
901
2,878
3,351
29
58,403
57,685
–
3,181
6,103
713
9,997
–
513
10,510
16
2,831
5,329
147
8,323
970
223
9,516
–
–
26
(407)
17,169
33,034
(1,929)
26
(483)
22,112
28,480
(1,966)
47,893
48,169
58,403
57,685
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 39
Year ended
December 31,
2017
US$ 000
except per share data
Year ended
December 31,
2016
US$ 000
except per share data
85,634
36,870
48,764
10,426
1,222
11,683
23,331
25,433
(80)
262
477
(354)
25,738
7,322
18,416
37
–
18,453
0.33
0.33
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
56,233,912
56,635,609
56,178,723
57,886,951
Consolidated statements of comprehensive income
For the years ended December 31, 2017 and 2016
revenue
cost of sales
Gross profit
operating expenses
Sales, marketing and customer support
Engineering and product development
General and administrative
Total operating expenses
operating income
other income (expense)
Interest expense
Interest income
Foreign exchange impact
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.
40 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Consolidated statements of changes in stockholders’ equity
For the years ended December 31, 2017 and 2016
common Stock
treasury Stock
Shares
amount
US$ 000
additional
paid-in
capital
US$ 000
Shares
amount
US$ 000
retained
earnings
US$ 000
other
compre-
hensive
loss
US$ 000
total
Stockholders’
equity
US$ 000
Balance – January 1, 2016
56,425,598
26
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
–
–
–
–
14,258
–
(4,210)
–
–
–
(322)
2
–
–
–
–
–
–
(322)
2
14,258
725
(4,210)
–
(345)
(145)
Balance – December 31, 2016
56,425,598
26
22,112
221,996
(483)
28,480
(1,966)
48,169
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
467
–
(76)
(464)
(4,870)
–
–
–
–
–
(38,519)
–
–
–
–
–
–
–
76
–
–
–
–
18,416
–
(13,862)
–
–
–
37
–
–
–
–
–
–
–
37
–
18,416
467
(13,862)
–
(464)
(4,870)
Balance – December 31, 2017
56,425,598
26
17,169
183,477
(407)
33,034
(1,929)
47,893
See notes to consolidated financial statements.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 41
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
18,416
14,258
1,755
2,100
141
38
467
(4,657)
63
(112)
(239)
1,282
566
178
2,666
400
32
725
(110)
(281)
(293)
(3)
278
(897)
19,820
16,953
202
(1,959)
71
(4,435)
(1,757)
(4,364)
(13,862)
(464)
(4,870)
(58)
(1,024)
(4,210)
(345)
(145)
(14)
(48)
(20,278)
(4,762)
37
(320)
(2,178)
7,507
21,216
13,709
19,038
21,216
Consolidated statements of cash flows
For the years ended December 31, 2017 and 2016
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
Stock options settled for cash
Payments under capital leases
Repayment of notes payable
Net cash used in financing activities
Effect of exchange rates on cash and cash equivalents
net increase (decrease) in cash and cash equivalents
cash and cash equivalents:
Beginning of year
End of year
See notes to consolidated financial statements.
42 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
Notes to the Consolidated Financial Statements
As of December 31, 2017 and 2016
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 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,
2017 and 2016, the allowance for doubtful accounts was approximately US$ 859,000 and US$ 743,000, respectively. Bad debt expense was US$
141,000 and US$ 400,000 in 2017 and 2016, 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, 2017 or 2016. (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, 2017, 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.)
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.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 43
Notes to the Consolidated Financial Statements continued
2. Summary of significant accounting policies continued
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
2017
US$ 000
2016
US$ 000
(547)
447
(451)
(551)
(307)
478
(718)
(547)
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, of which there were none in 2017 and 2016.
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act changes existing United States tax law and includes numerous
provisions that will affect businesses. The Act, for instance, introduces changes that impact U.S. corporate tax rates, business-related exclusions,
and deductions and credits. The Act will also have international tax consequences for companies that operate internationally. Although the Act
generally applies to tax years beginning January 1, 2018, certain provisions of the Act apply to tax years ending December 31, 2017.
Prior to this reporting period, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the
presumption of the repatriation of foreign earnings. Upon enactment, the Act imposes a tax on certain historical foreign earnings and profits at various
tax rates. The Company was not able to determine a reasonable estimate of the tax liability for this item for the 2017 reporting period by the time it
issued its 2017 financial statements. The Company did not have the necessary information available, prepared, or analyzed to develop a reasonable
estimate of the tax liability for this item (or evaluate how the Act will impact the Company’s existing accounting position to indefinitely reinvest
unremitted foreign earnings). As a result, the Company did not include an estimate for this item in its 2017 financial statements but will do so in its
financial statements for the first reporting period in which the Company is able to obtain, prepare, and analyze the necessary information to complete
the accounting under ASC Topic 740.
The Act also reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded decreases related to deferred
tax assets of US$ 1,093,000 and to deferred tax liabilities of US$ 448,000, with a corresponding adjustment to deferred income tax expense of
US$ 645,000.
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.
44 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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,
2017
US$ 000
18,416
56,233,912
401,697
56,635,609
Year ended
December 31,
2016
US$ 000
14,258
56,178,723
1,708,228
57,886,951
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.
Year ended December 31, 2016
Asset:
Non-recurring
Goodwill
Recurring
Interest rate swap
Year ended December 31, 2017
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
(2)
2,888
–
US$ 000
2,878
(2)
2,888
–
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 45
Notes to the Consolidated Financial Statements continued
2. Summary of significant accounting policies continued
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, 2017, 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). The Company
plans to adopt the new standard using the full retrospective approach.
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, 2018, and interim periods within fiscal years beginning
after December 15, 2019. 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.
3. Inventories
Inventories consisted of the following at December 31, 2017 and 2016:
Raw material
Finished goods and work in process
Remanufactured
Total
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
3,159
4,007
1,531
8,697
2,574
3,583
2,603
8,760
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, 2017 and 2016, and that the value of patents
was not impaired as of December 31, 2016.
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,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
12 years
18,538
18,538
12 years
18,538
17,637
12 years
–
901
Amortization expense associated with the intangible assets in each of the years ended December 31, 2017 and 2016 was approximately US$ 901,000
and US$ 1,545,000, respectively. Net intangible assets were fully amortized in 2017.
46 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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
2017
US$ 000
864
10,545
5,098
16,507
(4,201)
2016
US$ 000
864
9,483
5,769
16,116
(4,558)
12,306
11,558
Depreciation expense for the years ended December 31, 2017 and 2016 was approximately US$ 1,199,000 and US$ 1,121,000, 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
2017
US$ 000
2016
US$ 000
–
–
–
–
–
1,024
–
1,024
(48)
976
The Company’s revolving line of credit of US$ 10,000,000 is collateralized by all inventories and accounts receivable.
The Company entered into an amended credit facility in February 2016. The new agreement matures February 2021 for the secured revolving line
of credit.
The interest rate on the revolving line of credit is based on the one-month LIBOR rate plus 1.25%. No amounts were drawn under the secured revolving
line of credit in 2017 or 2016. The Company’s credit facility is secured by substantially all its business assets.
The Company fully paid off its commercial real estate mortgage in January 2017.
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$ 462,000 to the savings and retirement
plan during 2017 and contributed US$ 350,000 during 2016.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 47
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:
2018
2019
2020
2021
2022
Thereafter
December 31
US$ 000
384
243
107
105
105
1,046
1,990
9. Capital leases
Interest rates on capital leases are variable and range from 3.6% to 5.9% at December 31, 2017. This is included in accrued expenses on the
accompanying balance sheets. Future minimum payments are as follows for the years ended:
2018
2019
2020
2021
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
Capital lease liabilities assumed
December 31
US$ 000
83
55
17
2
–
157
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
42
4,944
–
190
58
7,747
2
–
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, 2017 and 2016, the Company had two customers which represented
15% and 20% 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.
48 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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, 2017 and 2016 were as follows:
Bad debt allowance
Inventory reserve
Accrued Bonus
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
Permanent differences due to US tax rate change
Other
Tax expense
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
4,336
326
906
5,568
1,688
66
–
1,754
5,764
774
303
6,841
167
11
–
178
7,322
7,019
Year ended
December 31,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
195
25
73
108
(32)
(106)
(660)
1,086
134
134
326
76
237
1,596
263
109
–
179
(65)
(104)
(517)
2,343
134
223
473
76
237
3,351
25,738
34%
21,277
34%
8,751
7,234
259
(171)
61
(1,630)
(456)
645
(137)
7,322
518
(221)
44
(125)
(409)
(22)
7,019
The Company has US$ 246,185 in foreign loss carryforwards with indefinite expiration dates.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 49
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,
2017
US$ 000
Year ended
December 31,
2016
US$ 000
55,504
2,365
27,765
55,805
791
22,757
85,634
79,353
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$ 467,000 and US$ 725,000 for the years ended December 31, 2017 and 2016, respectively. The income tax effect
recognized for stock based compensation was US$ 1.8m and US$ 0.2m, respectively, for the years ended December 31, 2017 and 2016.
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 ten 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 ten years and an average vesting period of three years. No new options were
granted in 2017 and 2016.
A summary of options activity is presented below:
Options
Outstanding at January 1, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Outstanding at January 1, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Weighted
average
remaining
contractual
term (years)
Weighted-
average
exercise price
Aggregate
intrinsic value
0.44
–
0.47
–
0.44
0.44
0.44
–
0.44
–
0.47
0.47
4.01 3,895,369
–
(144,945)
–
–
3.13
–
3.00
3.00
3.00 3,667,918
–
–
2.10 (4,870,392)
–
2.13
2.13
–
61,195
61,195
Stock options
1,686,361
–
(100,000)
–
1,586,361
1,586,361
1,586,361
–
(1,569,221)
–
17,140
17,140
Options exercised in 2017 and 2016 were settled for cash of US$ 4.9m and US$ 0.1m, respectively. As of December 31, 2017 and 2016, 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.
50 | Somero Enterprises, Inc. | Annual Report and Accounts 2017
StrateGic report
corporate Governance
Financial StatementS
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 2016 and 2017 is presented below:
Outstanding at January 1, 2016
Granted
Vested or settled for cash
Forfeited
Outstanding at December 31, 2016
Outstanding at January 1, 2017
Granted
Vested and settled for cash
Forfeited
Outstanding at December 31, 2017
Grant date fair
market value
US$
641,507
313,894
(119,130)
–
Shares
428,345
148,593
(159,585)
–
417,353
836,271
417,353
121,063
(151,444)
–
836,271
419,241
(292,007)
–
386,972
963,505
RSUs settled for cash were US$ 0.5m in 2017 and US$ 0.3m in 2016.
As of December 31, 2017, there was US$ 453,000 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 1.25 years.
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 50% of adjusted net income and is pleased to announce a final 2018 dividend of 12.75 US cents per share that
will be payable on April 20, 2018 to shareholders on the register at April 3, 2018. Together with the interim dividend paid in October 2017 of 2.75 US
cents per share, this represents a full year regular dividend to shareholders of 15.5 US cents per share, a 40% increase over the previous year. In
addition, due to the strength of the Company’s cash position at the end of the 2017, and upon the review of anticipated future cash requirements for
the business, the Board of Directors’ has adopted a new supplementary dividend policy and approved a supplemental dividend of 3.6 US cents per
share that will be paid together with the final 2017 dividend, also payable on April 20, 2018 to shareholders on the register at April 3, 2018. The
combined dividend payment on April 20, 2018 will total 16.35 US cents per share, representing a total dividend payment of US$ 9.2m.
Annual General Meeting
Notice is given that the Annual General Meeting of Stockholders (the “AGM”) of the Company will be held at the Hyatt Regency at 5001 Coconut Road,
Bonita Springs, Florida 34134 on June 12, 2018 at 9:00 am local time.
Equity Bonus Plan
The Company has an Equity Bonus Plan, under which eligible senior managers may choose to receive 25% of their annual performance bonus in
shares of common stock. In March 2016, the Company issued 96,870 shares of common stock, valued at US$ 204,000 at the time of grant, for
awards under the 2015 Equity Bonus Plan. In March 2017, the Company issued 38,519 shares of common stock, valued at US$ 133,000 at the time
of grant, for awards under the 2016 Equity Bonus Plan.
In February 2018, the Board approved the 2017 Equity Bonus Plan, under which eligible senior managers can elect to receive up to 50% of their 2017
annual performance bonus in shares of common stock. The Company expects to issue shares for awards under the 2017 Equity Bonus Plan in 2018.
Somero Enterprises, Inc. | Annual Report and Accounts 2017 | 51
Registered and Head Office
Somero Enterprises, Inc.
14530 Global Parkway
Fort Myers, Florida 33913
USA
www.somero.com