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Section 2Business ReviewFinancial Review continuedLarge line sales increased from US$17.7m for the 12 monthsended 31 December 2005 to US$25.4m for the 12 monthperiod ended 31 December 2006. This increase in revenuewas driven by a 32.3% increase in unit volume (from 71 unitsto 94 units) and increases in average selling prices. Thehigher unit volume was driven primarily by increasedreplacement demand in the United States and increasedinternational sales.Small line sales increased from US$12.5m for the 12 monthsperiod 31 December 2005 to US$15.9m for the 12 monthperiod ended 31 December 2006. This increase was drivenlargely by the August 2005 introduction of the PowerRake,which generated US$5.3m in revenues in the 12 monthsended 31 December 2006 from the sale of 127 units.Increased sales of CopperHeads also contributed to revenuegrowth, with 256 units sold during the 12 months ended31 December 2006 (generating revenues of US$10.7m),compared with 246 units sold during the 12 months ended31 December 2005 (generating revenues of US$10.1m).These increases have resulted from changes made in 2005to the small line sales team structure to create specialistsmall line demonstration teams, which has led to an increasein the number of demonstrations performed.Other revenues, including sales of spare parts, refurbishedmachines and accessories, increased from US$12.1m duringthe 12 months ended 31 December 2005 to US$14.6m duringthe 12 months ended 31 December 2006. This revenuegrowth resulted primarily from the increased installed baseof machines and support kits and accessories available forthe CopperHead and PowerRake products. Included in othersales were the sales of seven sets of the new HoseHogproduct. The HoseHog was introduced in August of 2006.International sales growth has also contributed to increasesin sales revenue. Sales to customers located in North Americacomprises the majority of Somero’s revenue, constituting72.1% and 72.3% of total revenue for the 12 months ended31 December 2006 and 2005, respectively, while sales tocustomers in Europe, South Africa and the Middle Eastcombined contributed 21.8% and 20.7%, respectively. Theremaining sales in these periods were to customers in Asia,Australia, Central America and South America. The Companyhas been focused on expanding international sales, withrevenues outside North America increasing to US$15.6mduring the 12 months ended 31 December 2006, an increaseof 33.3% over revenues of US$11.7m during the 12 monthsended 31 December 2005. Sales in Europe, South Africa andthe Middle East generated US$12.2m during the 12 monthsended 31 December 2006, compared with US$8.8m duringthe 12 months ended 31 December 2005. Sales of the LargeLaser Screed and the small line product in these regionsincreased by 34.8% and 36.1% respectively between thesetwo periods. Sales in Asia, Australia and Central and SouthAmerica represented US$3.4m during the 12 months ended31 December 2006, as compared to US$3.0m during the12 months ended 31 December 2005. This increase was drivenby an increase in sales of Large Laser Screed to five unitsduring the 12 months ended 31 December 2006, comparedwith three units during the corresponding period of 2005.Despite the focus on international expansion, NorthAmerican (the United States and Canada) sales experiencedthe highest total growth of any individual region duringthese periods. Sales to customers in North America wereUS$40.3m during the 12 months ended 31 December 2006,a 31.8% increase over North American sales of US$30.6mduring the 12 months ended 31 December 2005.Gross ProfitSomero’s gross profit for the 12 months ended 31 December2006 was US$30.2m, a 39.1% increase over US$21.7m forthe 12 months ended 31 December 2005. As a percentageof revenue, gross profit increased to 54.0% for the 12 monthsended 31 December 2006, from 51.3% for the 12 monthsended 31 December 2005. The increase in gross profit as apercentage of revenue has been due to increased salesvolumes, increasing list prices, an improvement in productmix with an increasing percentage of total revenues derivedfrom sales of recently-introduced products that have highermargins, such as the CopperHead, PowerRake, HoseHog andspare parts, and management’s strategy of implementingmanufacturing cost reduction initiatives.Operating ExpensesOperating expenses were US$18.3m for the 12 months ended31 December 2006, a 31.1% increase over US$14.0m for the12 months ended 31 December 2005. The increase in operatingexpenses, which consists of selling, engineering and generaland administrative expenses, resulted primarily from higheramortisation expenses (an increase of US$0.8m), an increasein total sales and the new costs of being a public company,with operating expenses equalling 32.8% and 33.0% ofrevenues for the 12 months ended 31 December 2006 andfor the 12 months ended 31 December 2005, respectively.Selling expense increased by US$2.6m, or 40.2%, to US$9.1mfor the 12 months ended 31 December 2006, as comparedwith US$6.5m for the 12 months ended 31 December 2005.The increase in selling expense was primarily due to increasedsales, which resulted in increased commissions, additionalsales support required for the increased sales of the small lineCopperhead and PowerRake products, both of which requiremore product demonstration efforts in the sales process,and increased support and commissions for a higher mixof external international sales representatives.Engineering expense increased by US$0.1m, or 6.7%,to US$1.2m for the 12 months ended 31 December 2006from US$1.1m for the 12 months ended 31 December 2005.The main increase was due to the hiring of an additionalemployee in the second half 2005 engaged in future productdevelopment, including the development of the HoseHog,which was launched in August 2006.16Somero Enterprises, Inc.Annual Report and Accounts 2006
General and administrative expense increased US$1.7m,or 26.3% to US$3.0m for the 12 months ended 31 December2006 from US$6.4m for the 12 months ended 31 December2005. A substantial amount of the increase in general andadministrative expense resulted from increased amortisationof intangible assets resulting from the write-up of thoseintangible assets from historical book value in connectionwith the Somero Acquisition in August 2005. Depreciationand amortisation increased from US$2.1m to US$2.8m fromthe 12 months ended 31 December 2005 to the 12 monthsended 31 December 2006, resulting primarily from increasedamortisation attributable to the write-up of the book valueof intangible assets following the Somero Acquisition.Further details can be found in the Company’s AdmissionDocument prepared for its listing on AIM in November 2006.Other Income (Expense)Other income (expense) was US$(3.6)m for the 12 monthsended 31 December 2006, compared to US$(1.5)m for the12 months ended 31 December 2005. Other income (expense)consists of interest income and expense, foreign exchangegains and losses, gains and losses on disposal of assets, andother expenses consisting primarily of management feespaid to Gores. The increase in other income (expense) hasresulted primarily from increased interest expense.Interest expense was US$3.7m for the 12 months ended31 December 2006 compared to US$1.5m in the 12 monthsended 31 December 2005, resulting primarily from increasedindebtedness following the Somero Acquisition and, to a lesserextent, rising interest rates during the 2006. Subsequent tothe year end on 16 March, Somero has entered into a newfinancing agreement with Citizens Bank New Hampshire,a wholly owned subsidiary of The Royal Bank of ScotlandGroup plc which reduced the rates to 6.55% (fixed for fiveyears) for US$10.0m of the debt, LIBOR plus 1.40% for arevolving portion, and allows for reductions of loan principalwith excess cash on a revolving basis. The new financing willresult in US$1.3m in unamortised loan origination fees beingwritten off in the first half of 2007.Foreign exchange gain was US$0.2m for the 12 monthsended 31 December 2006, compared with a foreign exchangeloss of US$0.1m for the 12 months ended 31 December 2005resulting primarily from sales made to Europe, combinedwith a weakening US Dollar compared to the Pound Sterlingand the Euro.Other expense was US$0.3m for the 12 months ended31 December 2006, compared with US$0.3m for the12 months ended 31 December 2005, primarily resultingfrom management fees of US$0.3m paid to Gores duringthat period.Provision for Income TaxesProvision for income taxes increased by US$0.6m, or 28.1%,to US$2.9m in the 12 months ended 31 December 2006,as compared with US$2.2m for the 12 months ended31 December 2005. Overall, Somero’s effective tax ratedecreased from 35.5% to 34.7% due to a decrease in stateincome tax due to apportionment changes, and total taxesin the UK were higher in 2006 at a lower statutory rate thanthe US (32% to 34%).Net IncomeNet income increased by US$1.3m, or 33.1%, to US$5.4min the 12 months ended 31 December 2006 as comparedwith US$4.0m for the 12 months ended 31 December 2005.The primary cause of the increase in net income wasincreased sales and gross margin offset by increasedoperating expenses.Earnings Per ShareBasic earnings per share represents income available tocommon stockholders divided by the weighted averagenumber of shares outstanding during the period. Dilutedearnings per share reflect additional common shares thatwould have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to incomethat would result from the assumed issuance. Potentialcommon shares that may be issued by the Company relateto outstanding stock options. Earnings per common sharehave been computed based on the following:2005 2006US$ 000 US$ 000Net income 962 5,381Basic weighted averageshares outstanding 30,000 30,714Net dilutive effect ofstock options – 47Diluted weighted averageshares outstanding 30,000 30,761The Company had 95,000 shares outstanding at31 December 2005 and issued a stock split of 315.79:1in 2006, prior to its initial public offering. Share and pershare amounts have been adjusted to reflect the stock splitfor the periods ended 31 December 2005 and 2006.Earnings Per Share and DividendEarnings per share at 31 December 2006 is as follows:Basic earnings per share 0.18Diluted earnings per share 0.17Before amortisation of intangibles earnings per share 0.25The Company’s Board of Directors resolved to declare adividend of $0.0033 per share of common stock payableto the shareholders of record on 27 April 2007 and payableon 14 May 2007. This dividend relates to the period from1 November 2006 (company flotation on the AIM) to thefiscal year end at 31 December 2006.US$17Somero Enterprises, Inc.Annual Report and Accounts 2006
Page 2 and 3: Section 1 Overview01 Who We Are02 A
Page 4 and 5: Section 1OverviewAt a GlanceBusines
Page 6 and 7: Section 1OverviewChairman’s State
Page 8 and 9: Section 2Business ReviewPresident a
Page 10 and 11: Section 2Business ReviewWm Morrison
Page 12 and 13: Section 2Business ReviewThe complic
Page 14 and 15: Section 2Business ReviewBase slabs
Page 16 and 17: Section 2Business ReviewFinancial R
Page 20 and 21: Section 3Management and GovernanceB
Page 22 and 23: Section 3Management and GovernanceD
Page 26 and 27: Section 3Management and GovernanceC
Page 28 and 29: Section 3Management and GovernanceC
Page 32 and 33: Section 4Financial Statements: Some
Page 62 and 63: Section 5Additional InformationAdvi
Page 64: Somero Enterprises, Inc.82 Fitzgera

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