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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 2004.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission file number: 000-24293
LMI AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1309065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 MUELLER ROAD
ST. CHARLES, MISSOURI 63302-0900
(Address of principal executive offices) (Zip Code)
(636) 946-6525
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares outstanding as of
Title of class of common stock November 12, 2004.
------------------------------ ----------------------------------
Common Stock, par value $.02 per share 8,181,786
1
LMI AEROSPACE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDING SEPTEMBER 30, 2004
PART I. FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003. 3
Condensed Consolidated Statements of Operations for the three months and nine months ended
September 30, 2004 and 2003. 4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004
and 2003. 5
Notes to Condensed Consolidated Financial Statements.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES. 24
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 27
SIGNATURE PAGE 28
EXHIBIT INDEX 29
2
LMI AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004 December 31, 2003
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 260 $ 441
Trade accounts receivable, net of allowance of $193 at
September 30, 2004 and $245 at December 31, 2003 10,964 9,158
Inventories 23,396 24,159
Prepaid expenses 1,190 787
Deferred income taxes 2,206 2,206
Income taxes receivable 226 1,933
-------- --------
Total current assets 38,242 38,684
Property, plant and equipment, net 19,638 22,248
Goodwill 5,653 5,653
Customer intangible assets, net 3,504 3,792
Other assets 776 142
-------- --------
Total assets $ 67,813 $ 70,519
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,527 $ 4,570
Accrued expenses 3,420 2,126
Current installments of long-term debt and capital lease
obligations 16,585 6,069
-------- --------
Total current liabilities 25,532 12,765
Long-term debt and capital lease obligations, less current
installments 6,653 21,756
Deferred income taxes 2,095 2,206
-------- --------
Total long-term liabilities 8,748 23,962
Stockholders' equity:
Common stock, $.02 par value per share; authorized
28,000,000 shares; issued 8,736,427 shares in both
periods 175 175
Preferred stock, $.02 par value per share; authorized
2,000,000 shares; none issued in both periods -- --
Additional paid-in capital 26,171 26,171
Treasury stock, at cost, 554,641 shares in both periods (2,632) (2,632)
Accumulated other comprehensive income (loss) -- 20
Retained earnings 9,819 10,058
-------- --------
Total stockholders' equity 33,533 33,792
-------- --------
Total liabilities and stockholders' equity $ 67,813 $ 70,519
======== ========
See accompanying notes.
3
LMI AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 23,032 $ 17,566 $ 63,447 $ 57,273
Cost of sales 18,272 14,823 51,689 49,882
----------- ----------- ----------- -----------
Gross profit 4,760 2,743 11,758 7,391
Selling, general and administrative expenses 3,140 2,938 9,762 9,497
Restructuring charges 52 441 737 441
----------- ----------- ----------- -----------
Income (loss) from operations 1,568 (636) 1,259 (2,547)
Other income (expense):
Interest expense (798) (407) (1,806) (1,234)
Other, net 414 6 422 35
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,184 (1,037) (125) (3,746)
Provision for (benefit of) income taxes 39 (393) 114 (1,405)
----------- ----------- ----------- -----------
Net income (loss) $ 1,145 $ (644) $ (239) $ (2,341)
=========== =========== =========== ===========
Amounts per common share basic and dilutive:
Net income (loss) per common share $ 0.14 $ (0.08) $ (0.03) $ (0.29)
=========== =========== =========== ===========
Weighted average common shares outstanding 8,181,786 8,181,786 8,181,786 8,181,786
=========== =========== =========== ===========
See accompanying notes.
4
LMI AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended September 30,
2004 2003
-------- -------
Operating activities:
Net loss $ (239) $(2,341)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 3,499 3,665
Gain on sale of Versaform Canada Corporation (523) --
Loss on sale of equipment 44 --
Changes in operating assets and liabilities:
Trade accounts receivable (2,002) 2,918
Inventories 716 (1,113)
Prepaid expenses and other assets (1,140) 132
Income taxes 1,648 (64)
Accounts payable 991 (2,148)
Accrued expenses 1,281 (618)
------- -------
Net cash provided by operating activities 4,275 431
Investing activities:
Additions to property, plant and equipment (823) (832)
Proceeds from sale of Versaform Canada Corporation 964 --
Proceeds from sale of equipment 10 301
------- -------
Net cash provided by (used by) investing activities 151 (531)
Financing activities:
Net borrowings on revolving line of credit 977 3,607
Principal payments on long-term debt (5,564) (3,594)
------- -------
Net cash (used by) provided by financing activities (4,587) 13
Effect of exchange rate changes on cash (20) --
------- -------
Net decrease in cash and cash equivalents (181) (87)
Cash and cash equivalents, beginning of year 441 1,182
------- -------
Cash and cash equivalents, end of quarter $ 260 $ 1,095
Supplemental disclosures of cash flow information:
Interest paid $ 1,298 $ 1,269
Income taxes refunded, net $(1,645) $(1,314)
Supplemental Schedule of Non-cash Investing and Financing Activities
At August 31, 2004, the Company sold 100% of its stock in Versaform Canada
Corporation, whereby all of the assets and certain liabilities were
transferred to a private group of investors, as follows:
Accounts receivable, net 196
Inventories 47
Prepaid expenses 22
Net Property plant and equipment 249
Accounts payable 34
Accrued expenses 26
Income taxes payable 13
The sale resulted in cash proceeds of $753, plus an additional note
receivable of $96 from the buyers and $115 held in escrow, which is
expected to be released in the fourth quarter of 2004.
See accompanying notes.
5
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
LMI Aerospace, Inc. (the "Company") fabricates, machines and integrates formed,
close tolerance aluminum and specialty alloy components for use by the aerospace
and laser equipment industries. The Company is a Missouri corporation with
headquarters in St. Charles, Missouri. The Company maintains facilities in St.
Charles, Missouri; Auburn, Washington; Tulsa, Oklahoma; Wichita, Kansas; Irving,
Texas; Sun Valley and Oceanside, California, and Pooler, Georgia.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair representation have been included. Operating
results for the nine months ending September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. These financial statements should be read in conjunction with the
condensed consolidated financial statements and accompanying footnotes included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003, as filed with the Securities and Exchange Commission.
The Company's losses from operations in recent years together with its inability
in 2002 and 2003 to meet certain covenants under its loan agreement have raised
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is ultimately dependent on
its ability to improve operating performance such that it can operate
profitably, sustain positive operating cash flows and support its required
financial covenants with its primary lender. Management is currently seeking
alternative financing arrangements and pursuing the sale of certain assets to
replace its current lender and secure additional funds. However, there is no
assurance that the Company will continue to improve its operating results,
obtain alternative financing or consummate the sale of assets. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been
prepared on the going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business,
although the report of our independent certified public accountants as of and
for the year ended December 31, 2003 expresses substantial doubt as to the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
OPERATING RESULTS AND MANAGEMENT'S PLAN
In response to the substantial doubt about the Company's ability to continue as
a going concern, management has reduced the Company's cost structure, improved
the Company's processes and systems and implemented strict controls over capital
spending. Management believes these activities will continue to improve the
Company's results of operations, cash flows from operations and its future
6
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
prospects. As a result of all the factors cited, management of the Company
believes that the Company should be able to sustain its operations and continue
as a going concern. However, the ultimate outcome of this uncertainty cannot be
presently determined. Accordingly, there remains doubt as to whether the Company
will be able to continue as a going concern.
As discussed in the Company's Annual Report on Form 10-K, the Company has
undertaken a plan to reduce operating expenses, increase efficiencies and align
its cost structure with current levels of demand for its products. On July 23,
2003, as outlined in Note 7 of the Condensed Consolidated Financial Statements
included as part of this Quarterly Report on Form 10-Q, the Company announced
the details of a restructuring plan for its St. Charles operations, which
includes the rationalization of the work force and the closure of two of the
four St. Charles facilities. In addition, in December 2003, the Company
announced an additional restructuring program at its Wichita facility which
included the reduction of workforce and the sale of an LMI owned building and
excess equipment.
On March 30, 2004, the Company and Union Planters Bank N.A. ("Union Planters")
entered into a Thirteenth Amendment to Loan Agreement ("Thirteenth Amendment"),
amending the Loan Agreement dated as of August 15, 1996 (the "Loan Agreement")
between Leonard's Metal, Inc., the predecessor in interest to the Company, and
Magna Bank, National Association, the predecessor in interest to Union Planters.
The primary purposes of the Thirteenth Amendment were to (a) extend the maturity
of the Company's Revolving Line of Credit provided under the Loan Agreement
("Revolving Credit Loan") from March 31, 2004 to March 31, 2005, and (b) waive a
default arising under the Loan Agreement providing for the maintenance of a
minimum consolidated EBITDA amount (the "EBITDA Covenant") for the period ended
December 31, 2003. The Thirteenth Amendment contemplates the full repayment of
all indebtedness under the Loan Agreement by March 31, 2005 through the sale of
one or more businesses of the Company and/or the procurement of alternative
financing.
Please see Note 4 of the Condensed Consolidated Financial Statements included as
part of this Quarterly Report on Form 10-Q for more detailed information
relating to the Company's debt and the Thirteenth Amendment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations and provides the pro forma disclosures
required by Statements of Financial Accounting Standards No. ("SFAS") 123,
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. No stock-based employee
compensation expense is recognized in the statement of operations, as all
options granted had an exercise price equal to the fair value of the underlying
common stock on the date of grant. Had the Company determined compensation cost
based on the fair value of the underlying common stock at the grant date under
SFAS No. 123, net income and earnings per share amounts would have been as
follows:
7
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) $ 1,145 $ (644) $ (239) $(2,341)
Total stock-based employee compensation
expense determined under fair value based
method, net of tax effect 1 (14) 13 (51)
------- ------- ------- -------
Pro forma net income (loss) $ 1,146 $ (658) $ (226) $(2,392)
======= ======= ======= =======
Net income (loss) per common share - basic and
assuming dilution (1)
As reported $ 0.14 $ (0.08) $ (0.03) $ (0.29)
Pro forma $ 0.14 $ (0.08) $ (0.03) $ (0.29)
1 Options to purchase 369,893 shares of common stock at exercise prices
ranging from $2.00 to $5.93 per share were outstanding at September 30,
2004 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the
common shares.
2. INVENTORIES
Inventories consist of the following:
September 30, 2004 December 31, 2003
------------------ -----------------
Gross inventory
Raw materials $ 3,874 $ 3,877
Work in progress 7,005 6,238
Finished goods 15,287 16,864
-------- --------
Total gross inventory 26,166 26,979
Reserves
Lower of cost or market (283) (647)
Obsolescence & slow moving (2,487) (2,173)
-------- --------
Total reserves (2,770) (2,820)
Net inventory $ 23,396 $ 24,159
======== ========
8
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
The Company performed an in-depth analysis of inventory obsolescence and slow
moving products at the end of the fourth quarter of 2003. This analysis was
based on the current markets for the Company's products and the change in the
buying patterns of the Company's major customers. The result of this analysis
was the recording in the fourth quarter of 2003 of an additional obsolescence
reserve of $1,421. The Company's reserve for obsolescence and slow moving
products totaled $2,487 at September 30, 2004 and $2,173 at December 31, 2003.
In the fourth quarter of 2002, the Company established a lower of cost or market
(LOCOM) reserve to accrue losses on components which had inadequate pricing,
high levels of scrap and high amounts of inefficient labor; on September 30,
2004 and December 31, 2003, this reserve was at $283 and $647, respectively.
The total for both the reserve for obsolescence and slow moving products and the
reserve for LOCOM was $2,770 and $2,820 for September 30, 2004 and December 31,
2003, respectively.
3. GOODWILL AND INTANGIBLES
As required by SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"),
the Company performs an annual goodwill impairment test on a reporting segment
basis. A fair value approach is utilized by management regarding projected cash
flows and other factors to determine the fair value of the respective assets. If
required, an impairment charge is recognized for the amount by which the
carrying amount of goodwill exceeds its fair value.
In the fourth quarter of 2003, the Company performed the required annual
impairment test under SFAS No. 142 and concluded that the remaining goodwill
balance, which relates to the Machining and Technology segment only, was not
further impaired. The remaining goodwill was $5,653 at September 30, 2004 and
December 31, 2003.
CUSTOMER RELATED INTANGIBLES
The carrying amount of customer related intangibles at September 30, 2004 and
December 31, 2003 were as follows:
Gross Accumulated Useful
Amount Amortization Life
------ ------------ ---------
Versaform $3,975 $ 530 15 years
Stretch Forming Corp. 329 270 3.5 years
------ ------
September 30, 2004 $4,304 $ 800
====== ======
Versaform $3,975 $ 332
Stretch Forming Corp. 329 180
------ ------
December 31, 2003 $4,304 $ 512
====== ======
Customer related intangibles amortization expense was $288 for the nine months
ended both September 30, 2004 and September 30, 2003 and was $385 for the year
ended December 31, 2003.
9
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
Long-term debt and revolving line of credit consists of the following:
September 30, December 31,
2004 2003
------------- ------------
Term Loans:
Tempco $ 5,813 $ 9,670
Versaform 7,988 9,167
Revolving line of credit 8,661 7,684
Note payable to director, principal and interest payable
monthly at 7% 289 614
Notes payable, principal and interest payable monthly, at
fixed rates, ranging from 6.99% to 10.00% 487 679
Capital lease obligations -- 11
------- -------
Total debt 23,238 27,825
Less current installments 16,585 6,069
------- -------
Total long term debt $ 6,653 $21,756
======= =======
The Loan Agreement with Union Planters consists of the Revolving Credit Loan, a
term loan to finance the Company's purchase of Tempco ("Tempco Term Loan") and a
term loan to finance the Company's purchase of Versaform ("Versaform Term
Loan"). The Loan Agreement is secured by all the domestic assets of the Company
and requires compliance with certain non-financial and financial covenants,
including minimum levels of tangible net worth and the EBITDA Covenant.
On January 5, 2004 the Company extended the term of its Loan Agreement to March
31, 2004, received a waiver for certain non-financial covenants and agreed to a
fee of $75. Subsequently, on March 30, 2004, the Company and Union Planters
entered into the Thirteenth Amendment. The primary purposes of the Thirteenth
Amendment were to (a) extend the maturity of the Company's Revolving Credit Loan
from March 31, 2004 to March 31, 2005 and (b) waive a default arising under the
EBITDA Covenant for the period ended December 31, 2003.
In addition, under the terms of the Thirteenth Amendment:
- The maximum principal amount of the Revolving Credit Loan was
increased from approximately $9,088 to $9,700 through September 30,
2004 and $9,000 thereafter, subject to a borrowing base calculation
and further subject to a newly established inventory reserve
requirement and a more restrictive requirement for eligible
receivables, which, notwithstanding the increased borrowing maximum
amount provided by the Thirteenth Amendment, could reduce the amount
of borrowing available under the Revolving Credit Loan.
- The interest rate on the Revolving Credit Loan was changed from
LIBOR plus 2.5% to prime plus 1.0%. (The prime rate was 4.75% at
September 30, 2004.) Moreover, because the Company had not executed
and delivered a letter of intent regarding (i) the sale of the stock
or of all or substantially all of the assets of certain of its
subsidiaries, and/or (ii) the procurement by the Company of debt
financing providing the Company with sufficient funds to repay in
full the Company's obligations to Union Planters ("Letter of
Intent") on or before June 30, 2004, the interest rate on the
Revolving Credit Loan was increased to prime plus 1.5% and was
further increased to prime plus 2.0% as the Company had not paid all
of its obligations to
10
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
Union Planters in full on or before September 30, 2004. The interest
rate on the Tempco Term Loan provided under the Loan Agreement,
which, as of September 30, 2004, had a total outstanding principal
balance of approximately $5,813, was changed from LIBOR plus 3.0%,
subject to a floor of 7.0% and a ceiling of 8.5%, to prime plus
2.0%, subject to a floor of 7.0%. The interest rate on the Versaform
Term Loan provided under the Loan Agreement, which, as of September
30, 2004, had a total outstanding principal balance of approximately
$7,988, was changed from LIBOR plus 3.0% to prime plus 2.0%.
Moreover, because the Company had not executed and delivered a
Letter of Intent on or before June 30, 2004, the interest rate on
the Tempco Term Loan and the Versaform Term Loan was increased to
prime plus 2.5% and was further increased to prime plus 3.0% as the
Company had not paid all of its obligations to Union Planters in
full on or before September 30, 2004.
- Because the Company did not enter into one or more Letters of Intent
by June 30, 2004, a fee of $125 will be payable on the earliest of
March 31, 2005, the date the Company repays all of its obligations
to Union Planters or the date on which Union Planters accelerates
all of the Company's obligations. This fee has been accrued and was
recorded by the Company in interest expense in the second quarter of
2004.
- As the Company had not paid all of its obligations in full to Union
Planters by September 30, 2004, it incurred an additional fee of
$350 payable to Union Planters ($100 on October 1, 2004 and $250 on
the earliest of March 31, 2005, the date the Company repays all of
its obligations to Union Planters or the date on which Union
Planters accelerates all of the Company's obligations). This fee has
been accrued and was recorded by the Company in interest expense in
the third quarter of 2004.
- If the Company fails to pay all of its obligations in full to Union
Planters by December 30, 2004, an additional fee of $200 will be
payable to Union Planters ($100 on December 31, 2004 and $100 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
Thus, increased interest rates and additional fees will apply during the
remaining term of the Loan Agreement (through March 31, 2005) if the
indebtedness under the Loan Agreement is not repaid in full through alternative
financing and/or sales of assets by certain prescribed dates. The Company has
engaged Lincoln Partners LLC, a Chicago, Illinois based investment banking firm,
to assist in these efforts.
At December 31, 2003, the Company's Revolving Credit Loan allowed for a $9,088
line of credit, subject to a borrowing base calculation, to fund various
corporate needs. Interest was payable monthly based on a ninety day LIBOR plus
2.25% and was 3.67% at December 31, 2003. The Company had $7,684 outstanding on
this line at December 31, 2003. This facility was amended in January 2004 to
extend maturities to March 31, 2004 and included an increase in interest to
LIBOR plus 2.5%. On March 30, 2004, the Company further amended the Loan
Agreement to extend the Revolving Credit Loan maturity to March 31, 2005 and
establish the Revolving Credit Loan line at $9,700 until September 30, 2004, and
$9,000 thereafter, each subject to a borrowing base. The Revolving Credit Loan
interest was amended to prime plus 1.0% with possible adjustments as described
above. The Company's revolving credit line at September 30, 2004 was at $8,661,
with an additional line capacity of $339. The credit facility prohibits the
payment of cash dividends on common stock without the prior written consent of
Union Planters.
The Company borrowed $14,250 (Tempco Term Loan) on April 2, 2001 to finance the
Tempco acquisition. The Tempco Term Loan required monthly principal and interest
payments over three years
11
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
using a seven-year amortization and bearing interest at the ninety day LIBOR
plus 3.0%, subject to a cap of 8.5% and a floor of 7.0%. On March 30, 2004 the
Company amended this note establishing a maturity of March 31, 2005 and interest
at prime plus 2.0% with possible adjustments as described above. The interest
rate was 7.0% at September 30, 2004 and December 31, 2003. Additionally, per the
Thirteenth Amendment, pre payments of $2,330 have been made on the Tempco Term
Loan with proceeds of certain tax refunds and from the sale of Versaform Canada
Corporation.
The Versaform Term Loan was issued for $11,000 on May 15, 2002. The Versaform
Term Loan required monthly principal and interest payments over three years
using a seven-year amortization and bears interest at the ninety-day LIBOR plus
3.0%. The interest rate was 7.0% at September 30, 2004 and 4.2% at December 31,
2003. On March 30, 2004 the Company amended this note increasing interest to
prime plus 2.0% with possible adjustments as described above. The March 30, 2004
amendment did not change the original maturity of October 15, 2005 as stated in
the Versaform Term Loan agreement.
The Company entered into a note payable for $1,300 with the prior owner of
Versaform in connection with the acquisition. The prior owner has since become a
member of the board of directors of the Company. This note is payable monthly
over three years and bears interest at 7.0%.
The Company entered into other various notes payable for the purchase of certain
equipment. The notes are payable in monthly installments including interest
ranging from 6.99% - 10.0% through November 2006. The notes payable are secured
by equipment.
5. BUSINESS SEGMENT INFORMATION
As set forth in the criteria of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company is organized into two reportable
segments: the Sheet Metal segment and the Machining and Technology segment. The
Sheet Metal segment fabricates, finishes and integrates close tolerance aluminum
and specialty alloy components primarily for the aerospace industry. The
Machining and Technology segment machines close tolerance aluminum and specialty
alloy components for the aerospace, semiconductor and medical products
industries.
The accounting policies of the segments are the same as those described in Note
1 of the Condensed Consolidated Financial Statements included as part of this
Quarterly Report on Form 10-Q. Sales between segments are insignificant.
Corporate assets, liabilities and expenses related to the Company's corporate
offices are allocated to the segments, except for income taxes. The table below
presents information about reported segments on the basis used internally to
evaluate segment performance:
12
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales:
Sheet Metal $ 19,406 $ 14,427 $ 51,628 $ 47,628
Machining and Technology 3,626 3,139 11,819 9,645
-------- -------- -------- --------
$ 23,032 $ 17,566 $ 63,447 $ 57,273
======== ======== ======== ========
Income (loss) from operations:
Sheet Metal $ 1,241 $ (726) $ (134) $ (2,606)
Machining and Technology 327 90 1,393 59
-------- -------- -------- --------
$ 1,568 $ (636) $ 1,259 $ (2,547)
======== ======== ======== ========
Interest expense:
Sheet Metal $ 150 $ 132 $ 407 $ 407
Machining and Technology 130 187 441 582
Corporate 518 88 958 245
-------- -------- -------- --------
$ 798 $ 407 $ 1,806 $ 1,234
======== ======== ======== ========
Depreciation and amortization:
Sheet Metal $ 966 $ 1,009 $ 2,863 $ 3,044
Machining and Technology 100 99 296 295
Corporate 113 100 340 326
-------- -------- -------- --------
$ 1,179 $ 1,208 $ 3,499 $ 3,665
======== ======== ======== ========
Capital expenditures:
Sheet Metal $ 145 $ 179 $ 774 $ 643
Machining and Technology 2 2 18 78
Corporate 10 15 31 111
-------- -------- -------- --------
$ 157 $ 196 $ 823 $ 832
======== ======== ======== ========
September 30, 2004 December 31, 2003
------------------ -----------------
Goodwill:
Sheet Metal $ -- $ --
Machining and Technology 5,653 5,653
Corporate -- --
------- -------
$ 5,653 $ 5,653
======= =======
Total assets:
Sheet Metal $47,761 $49,896
Machining and Technology 15,461 15,016
Corporate 4,591 5,607
------- -------
$67,813 $70,519
======= =======
13
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
6. COMPREHENSIVE LOSS
Comprehensive loss includes adjustments to net loss for the change in foreign
currency translations as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) $ 1,145 $ (644) $ (239) $(2,341)
Other comprehensive income (loss):
Foreign currency translation
adjustments 8 (28) (20) 45
------- ------- ------- -------
Comprehensive income (loss) $ 1,153 $ (672) $ (259) $(2,296)
======= ======= ======= =======
The Company's August 31, 2004 sale of Versaform Canada Corporation resulted in
the disposition of the foreign currency translation adjustment accumulated in
other comprehensive income. The Company thus realized a $20 loss as an offset to
the net gain on the sale.
7. RESTRUCTURING CHARGES
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit and
Disposal Activities, in 2003. SFAS No. 146 requires companies to recognize costs
associated with exit and disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. Costs covered include
lease termination costs, costs to consolidate facilities and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity.
On July 23, 2003, the Company announced the details of a restructuring plan to
reduce operating expenses and increase efficiencies at its St. Charles, Missouri
location, which included a reduction of work force of approximately 30 people,
the exit of two leased facilities and relocation of a significant amount of its
manufacturing equipment. In December 2003, the Company announced an additional
restructuring program at the Wichita, Kansas plant, including a staged reduction
in workforce of approximately 60 employees, and the sale of a Company-owned
building and excess equipment. The Wichita restructuring program is scheduled to
occur over a nine-month period during which the Company plans to transfer from
its Wichita facility all extrusion stretch work to its Auburn, Washington and
Vista, California locations and its milling work packages to its Tulsa, Oklahoma
and Auburn, Washington facilities and plans to transfer its high pressure
forming work currently produced in Auburn to the Wichita, Kansas plant. Employee
severance costs for the Wichita plant restructuring were paid upon completion of
the service term in 2004 and, therefore, were not accrued in 2003 per SFAS No.
146. The costs incurred for these restructuring plans as of September 30, 2004
were $737, incurred as follows: $591 for moving and relocation and $146 for
severance costs. The Company expects to incur total restructuring costs for both
of these programs of approximately $900 for the year ending December 31, 2004.
All restructuring costs are attributable to the Sheet Metal Segment and are
classified as a separate component of Selling, General and Administrative
expenses.
14
LMI AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2004
8. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
As of September 30, 2004, the Company had a deferred tax asset of $2,206 and a
partially offsetting deferred tax liability of $2,095.
Differences between the effective rate of taxes recorded and income taxes at the
statutory rates are due to anticipated utilization of available net operating
loss carryforwards.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The Company makes forward-looking statements in
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Quarterly Report on Form 10-Q, which represent the
Company's expectations or beliefs about future events and financial performance.
When used in this report, the words "expect," "believe," "anticipate," "goal,"
"plan," "intend," "estimate," "may," "will" or similar words are intended to
identify forward-looking statements. These forward-looking statements are
subject to known and unknown risks, uncertainties and assumptions, including
those referred to in the "Risk Factors" section of the Company's Annual Report
on Form 10-K for the year ended December 31, 2003, as filed with the Securities
and Exchange Commission on April 15, 2004.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed may not occur. In addition, actual results could differ
materially from those suggested by the forward-looking statements. Accordingly,
investors are cautioned not to place undue reliance on the forward-looking
statements. Except as required by law, the Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Investors should, however, review
additional disclosures made by the Company from time to time in its periodic
filings with the Securities and Exchange Commission.
This Quarterly Report on Form 10-Q should be read completely and with the
understanding that the Company's actual future results may be materially
different from what the Company expects. All forward-looking statements made by
the Company in this Form 10-Q and in the Company's other filings with the
Securities and Exchange Commission are qualified by these cautionary statements.
The condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions. (See Note 1 of the Condensed
Consolidated Financial Statements included as part of this Quarterly Report on
Form 10-Q).
The Company believes that certain significant accounting policies have the
potential to have a more significant impact on the financial statements either
because of the significance of the financial statements to which they relate or
because they involve a higher degree of judgment and complexity. A summary of
such critical accounting policies can be found in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.
16
OVERVIEW
The Company is a leader in fabricating, machining, finishing and integrating
formed, close tolerance aluminum and specialty alloy components and sheet metal
products for use by the aerospace, technology and commercial sheet metal
industries. Aerospace components manufactured by the Company include leading
edge wing slats, flaps and lens assemblies; cockpit window frame assemblies;
fuselage skins and supports; and passenger and cargo door frames and supports.
The Company manufactures more than 20,000 aerospace components for integration
into a variety of civilian and military aircraft platforms manufactured by
leading original equipment manufacturers and prime subcontractors. In addition,
the Company produces components and assemblies for laser equipment used by
semiconductor and medical equipment manufacturers in the technology industry.
The Company also produces sheet metal products for various companies in the
commercial sheet metal industry. In addition to manufacturing quality
components, the Company provides its customers with value-added services related
to the design, production and finishing of its components.
Historically, the Company's business was primarily dependent on the commercial
aircraft market, with Boeing Company as the Company's principal customer. In
order to diversify its products and customer base, the Company implemented an
acquisition and marketing strategy in the late 1990's that has broadened the
number of industries to which the Company sells its components, and, within the
aerospace industry, diversified its customer base to reduce the Company's
dependence on Boeing Company. The following table specifies the Company's sales
by market as a percentage of total sales for the nine months ended September 30,
2004 as compared to the nine months ended September 30, 2003:
Nine Months Ended Nine Months Ended
Market September 2004 September 2003
------------------------------- ----------------- -----------------
Commercial aircraft 26.5% 28.2%
Corporate and regional aircraft 34.7 24.6
Military products 20.1 26.4
Technology products 10.6 10.4
Other (1) 8.1 10.4
----- -----
Total 100.0% 100.0%
===== =====
(1) Includes commercial sheet metal and various aerospace products.
Beginning in 2001, the Company began an aggressive acquisition campaign that
resulted in the consummation of four transactions through 2002. In April 2001,
the Company acquired Tempco Engineering Inc. ("Tempco") and its affiliates,
which expanded the Company's aerospace product line and introduced the Company
to the technology industry. The Company acquired Versaform Corporation
("Versaform") and its affiliates on May 16, 2002, Stretch Forming Corporation
("SFC") on June 12, 2002 and Southern Stretch Forming and Fabrication, Inc.
("SSFF") on September 30, 2002. The Versaform acquisition significantly
increased the Company's presence in the corporate and regional aircraft market
while adding various military products to the Company's product line. The SFC
acquisition further supplemented the Company's military product line. Finally,
the Company's acquisition of SSFF increased the Company's business in the
corporate and regional aircraft market.
Unlike the other acquisitions, Tempco operates and is managed as an autonomous
unit. Accordingly, it is treated as a business segment separate from the
Company's other businesses. The Tempco business, which sells machined components
to both the aerospace and technology industries, is referred to in this
discussion as the Machining and Technology segment, and the Company's other
businesses are referred to as the Sheet Metal segment.
17
RESULTS OF OPERATIONS
Three months ended September 30, 2004 compared to September 30, 2003
The following table is a summary of the Company's operating results for the
three months ended September 30, 2004 and September 30, 2003:
($ in millions) Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Sheet Machining & Sheet Machining &
Metal Technology Total Metal Technology Total
----- ---------- ----- ----- ---------- -----
Net sales $19.4 $ 3.6 $23.0 $14.4 $ 3.2 $17.6
Cost of sales 15.4 2.8 18.2 12.1 2.7 14.8
----- ----- ----- ----- ----- -----
Gross profit 4.0 .8 4.8 2.3 .5 2.8
S,G & A 2.6 .5 3.1 2.6 .4 3.0
Restructuring
expenses .1 -- .1 .4 -- .4
----- ----- ----- ----- ----- -----
Income (loss) from
operations $ 1.3 $ .3 $ 1.6 $ (.7) $ .1 $ (.6)
===== ===== ===== ===== ===== =====
SHEET METAL SEGMENT
NET SALES. The following table specifies the amount of Sheet Metal segment's net
sales by category for the third quarters of 2004 and 2003 and the percentage of
the segment's total net sales for each period represented by each category.
($ in millions)
3rd Qtr % of 3rd Qtr 2003 % of Total
Category 2004 Total
-------- ------ ----- ------------ ----------
Commercial aircraft $ 5.6 28.8% $ 5.1 35.4%
Military products 2.6 13.7 4.6 31.9
Corporate and regional 9.8 50.5 3.1 21.5
Other 1.4 7.0 1.6 11.2
------ ----- ------ -----
Total $ 19.4 100.0% $ 14.4 100.0%
====== ===== ====== =====
Net sales for the Sheet Metal segment were $19.4 million, up 34.7% from $14.4
million in the third quarter of 2003.
The segment generated $9.8 million in net sales for use on corporate and
regional aircraft in the third quarter of 2004, an increase of 216.1% from $3.1
million in the third quarter of 2003. This increase was attributable to
increased production rates at Gulfstream and sales of components recently
awarded to the segment by Gulfstream and Bombardier.
Net sales for use on commercial aircraft were $5.6 million in the third quarter
of 2004 compared to $5.1 million in 2003, an increase of 9.8%. This increase was
primarily attributable to increased production rates on the Boeing 737, which
generated $3.3 million in net sales, an increase of 13.8% from $2.9 million in
the third quarter of 2003. Net sales on other Boeing models were basically
unchanged.
Net sales for use in military programs declined to $2.6 million in the third
quarter of 2004 from $4.6 million in the third quarter of 2003, or 43.5%. The
third quarter of 2003 included net sales of $1.3 million for a B-52
refurbishment program that ended in 2004. Net sales on this program were less
than $0.1 million in the third quarter of 2004. Additionally, the segment began
incurring significant losses in 2002 and 2003 on certain components used on the
Lockheed F-16 and C-130. As part of a negotiation, these components were removed
from the segment's contract and are no longer manufactured by the segment. Net
sales on the F-16 and C-130 programs declined to $1.9 million in 2004 from $2.7
million in 2003.
18
GROSS PROFIT. The segment generated gross profit of $4.0 million (20.6% of net
sales) in the third quarter of 2004 compared to $2.3 million (16.0% of net
sales) in the third quarter of 2003. Cost containment efforts primarily at the
segment's St. Charles and Wichita facilities combined with the growth in net
sales created an improved efficiency. Manufacturing payroll costs and fringe
benefits for the third quarter of 2004 were $5.8 million, down from $6.4 million
while sales increased 34.7% (see explanation above). Additionally, the segment
had historically performed poorly on both the B-52 refurbishment program and
certain components on other military programs, which are no longer produced by
the segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SGA"). The segment's SGA,
excluding restructuring costs, was $2.6 million in the third quarter of 2004,
unchanged from the third quarter of 2003.
RESTRUCTURING CHARGES. The segment continued the later phases of the
restructuring of its Wichita facility in the third quarter of 2004. The segment
incurred costs of $0.1 million in the quarter and expects to incur an additional
$0.2 million in costs by the first quarter of 2005. During the third quarter of
2003, the segment began a restructuring of its St. Charles facility (which
concluded in the first half of 2004), incurring $0.4 million in severance and
re-location costs.
INTEREST EXPENSE. Interest expense for the third quarter of 2004 was $0.1
million, unchanged from the third quarter of 2003. The interest expense for the
segment results from the Versaform Term Loan. Although the principal balance on
the Versaform Term Loan has decreased, interest expense has slightly increased
due to increases in the prime lending rate and rate penalties charged by the
primary lender. (See note 4 to the consolidated financial statements.)
MACHINING AND TECHNOLOGY SEGMENT
NET SALES. The following table specifies the amount of Machining and Technology
segment's net sales by category for the third quarters of 2004 and 2003 and the
percentage of the segment's total net sales for each period represented by each
category:
($ in millions)
3rd Qtr % of Total 3rd Qtr % of
CATEGORY of 2004 of 2003 Total
-------- ------- ---------- ------- -----
Technology products $ 1.4 38.8% $1.8 56.3%
Aerospace products 1.9 51.6 .9 28.1
Other .3 9.6 .5 15.6
----- --- ---- -----
Total $ 3.6 100% $3.2 100.0%
===== === ==== =====
Net sales for the Machining and Technology segment were $3.6 million in the
third quarter of 2004, an increase of 12.5% from $3.2 million in the third
quarter of 2003. Net sales on military programs reached $1.9 million in the
third quarter of 2004, up from $0.9 million in the third quarter of 2003. These
increases were primarily related to increased orders for components used on the
Apache helicopter partially offset by reduced sales on laser equipment which
generated $1.4 million in the third quarter of 2004, down 22.2% from $1.8
million in the third quarter of 2003. This decline was primarily attributable to
a decline in demand for laser products used in semiconductor equipment.
GROSS PROFIT. The gross profit of the segment was $0.8 million (22.2% of net
sales) in the third quarter of 2004, an increase from $0.5 million (15.6% of net
sales) in the third quarter of 2003. The increased revenue provided better
coverage of fixed costs during the third quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA for the segment was $0.5
million in the third quarter of 2004 compared to $0.4 million in the third
quarter of 2003. This increase was generated by the hiring of an additional
managerial role and bonuses earned during the period.
INTEREST EXPENSE. Interest expense for the segment is generated from the Tempco
Term Loan. Interest expense for the third quarter of 2004 was $0.1 million
compared to $0.2 million in the third quarter of 2003. (See note 4 to the
consolidated financial statements.)
19
NON-SEGMENT EXPENSES
INTEREST EXPENSE. Interest expense not assigned to an operating segment was $0.5
million in the third quarter of 2004 compared to $0.1 million in the third
quarter of 2003. This increase was primarily attributable to a fee of $0.4
million incurred by the Company for failure to refinance its debt in accordance
with its current loan agreement.
OTHER INCOME. Other income for the third quarter of 2004 includes a gain of $0.5
million on the sale of the stock of Versaform Canada Corporation.
INCOME TAXES. Income taxes for the third quarter of 2004 were $0.0 compared to a
benefit of $0.4 million in the third quarter of 2003. The Company's operating
losses in 2002 and 2003 created doubt that it could utilize tax losses available
to offset future earnings. Therefore, no tax benefit was accrued for losses
generated earlier in 2004. Further, the Company still reflects a loss for the
year, therefore, no taxes other than certain state obligations have been
accrued.
20
Nine months ended September 30, 2004 compared to September 30, 2003
The following table is a summary of the Company's operating results for the nine
months ended September 30, 2004 and September 30, 2003:
($ in millions) September 30, 2004 September 30, 2003
------------------ ------------------
Sheet Machining & Sheet Machining &
Metal Technology Total Metal Technology Total
----- ---------- ----- ----- ---------- -----
Net sales $51.6 $11.8 $63.4 $47.6 $ 9.6 $57.2
Cost of sales 42.6 9.0 51.6 41.5 8.3 49.8
----- ----- ----- ----- ----- -----
Gross profit 9.0 2.8 11.8 6.1 1.3 7.4
S,G&A 8.4 1.4 9.8 8.3 1.2 9.5
Restructuring
expenses .7 -- .7 .4 -- .4
----- ----- ----- ----- ----- -----
Income (loss) from
operations $ (.1) $ 1.4 $ 1.3 $(2.6) $ .1 $(2.5)
===== ===== ===== ===== ===== =====
SHEET METAL SEGMENT
NET SALES. The following table specifies the amount of Sheet Metal segment's net
sales by category for the nine months ending September 30, 2004 and September
30, 2003 and the percentage of the segment's total net sales for each period
represented by each category:
($ in millions)
9 Months % of 9 Months % of
Category 2004 Total 2003 Total
-------- ---- ----- ---- -----
Commercial aircraft $ 16.8 32.6% $16.1 33.8%
Military products 8.7 16.9 12.7 26.7
Corporate and regional 22.0 42.6 14.1 29.6
Other 4.1 7.9 4.7 9.9
------ ----- ----- -----
Total $ 51.6 100.0% $47.6 100.0%
====== ===== ===== =====
Net sales for the segment were $51.6 million for the nine months ended September
30, 2004, an increase of 8.4% from $47.6 million for the nine months ended
September 30, 2003.
Net sales for Corporate and Regional aircraft were $22.0 million for the first
nine months of 2004 compared to $14.1 million for the first nine months of 2003.
This increase was generated by production rate increases at Gulfstream and
shipments of new product awards from both Gulfstream and Bombardier.
Net sales of commercial aerospace components were up 4.4% to $16.8 million for
the first nine months of 2004 from $16.1 million for the first nine months of
2003. Net sales for the Boeing 737 were $9.9 million in 2004, up 23.8% from $8.0
million in 2003. Offsetting this increase were decreases on all other Boeing
models, most significantly a reduction in 2004 to $0.1 million on the 757 from
$1.0 million in 2003 as this aircraft was slated for cancellation by Boeing.
Military products generated net sales of $8.7 million in 2004, a decrease of
31.5% from $12.7 million in 2003. Net sales on Lockheed's F-16 and C-130 were
$5.8 million in 2004, down from $8.0 million in 2003. This decrease was caused
by a slow-down in ordering activity on both programs and a negotiated removal of
certain products from the segments contract. Additionally, the segment completed
its obligation on a B-52 refurbishment program which contributed only $0.6
million in the nine months of 2004 compared to $2.4 million in 2003.
GROSS PROFIT. The gross profit of the segment was $9.0 million (17.4% of net
sales) in the first nine months of 2004 compared to $6.1 million (12.8% of net
sales) in the comparable 2003 period. This increase in gross profit resulted
from labor savings created by restructuring the segment's St. Charles and
Wichita facilities and reducing manufacturing labor and fringe costs to $17.5
million from $21.9 million while increasing sales as discuss above.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SGA"). SGA for the segment,
excluding restructuring expenses, was $8.4 million in the first nine months of
2004 compared to $8.3 million in the first nine months of 2003. Reductions in
payroll and other SGA expenses were offset by increased professional fees
primarily related to the Company's response to a subpoena from the Department of
Defense investigation. (See Part II, Item 1. Legal Proceedings.)
RESTRUCTURING CHARGES. The Company incurred $0.7 million in restructuring
expenses in the first three quarters of 2004 primarily related to a reduction in
work force and redistribution of work to other facilities from the segment's
Wichita facility. In the first three quarters of 2003, the Company incurred $0.4
million in severance and relocation expense at the segment's St. Charles
facility.
INTEREST EXPENSE. Interest expense for the segment was unchanged at $0.4
million.
MACHINING AND TECHNOLOGY SEGMENT
NET SALES. The following table specifies the amount of the Machining and
Technology segment's net sales by category for the nine months ending September
30, 2004 and September 30, 2003 and the percentage of the segment's total net
sales for each period represented by each category:
($ in millions)
9 Months % of 9 Months % of
Category 2004 Total 2003 Total
-------- ---- ----- ---- -----
Technology products $ 6.7 56.6% $6.0 62.5%
Aerospace products 4.0 33.8 2.5 26.0
Other 1.1 9.6 1.1 11.5
------ ----- ---- -----
Total $ 11.8 100.0% $9.6 100.0%
====== ===== ==== =====
Net sales for the segment were $11.8 million in the first nine months of 2004,
up 22.9% from $9.6 million in the first nine months of 2003. Net sales on
technology products used in semiconductor and medical equipment were $6.7
million in the nine months ended September 30, 2004, an increase from $6.0
million in the nine months ended September 30, 2003. Increases in net sales on
aerospace products was driven by sales for the Apache helicopter and various
guidance system products, contributing $4.0 million in the first three quarters
of 2004 compared to $2.5 million in the first three quarters of 2003.
GROSS PROFIT. The gross profit of the segment was $2.8 million (23.7% of net
sales) in the first nine months of 2004 compared to $1.3 million (13.5% of net
sales) in the first nine months of 2003. This increase was driven by an improved
mix of product sales and better coverage of fixed costs afforded by the
increased revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SGA for the segment was $1.4
million in the nine months ended September 30, 2004, up from $1.2 million in the
nine months ended September 30, 2003. This increase is primarily related to
increased payroll costs of the segment.
INTEREST EXPENSE. Interest expense for the segment was $0.4 million in the first
three quarters of 2004 compared to $0.6 million in the first three quarters of
2003. In the nine months ended September 30, 2004, the Company prepaid $2.3
million on the Tempco Term Loan, thereby reducing interest expense.
NON-SEGMENT EXPENSES
INTEREST EXPENSE. Interest expense not assigned to an operating segment was $1.0
million in the first nine months of 2004 compared to $0.2 million in the first
nine months of 2003. This increase is attributable to $0.6 million in fees for
extending the Loan Agreement with Union Planters and failing to meet certain
hurdles negotiated in the Loan Agreement, increases in the prime lending rate
and increases in the rate spread above prime for failure to meet certain hurdles
negotiated in the Loan Agreement.
22
OTHER INCOME. Other income for the first nine months of 2004 includes a gain of
$0.5 million on the sale of the stock of Versaform Canada Corporation.
INCOME TAXES. Income taxes for the first nine months of 2004 were $0.1 million
compared to a benefit of $1.4 million for the first nine months of 2003. In
certain states where the company was profitable and Canada, the Company has
incurred income taxes in the first nine months of 2004.
23
LIQUIDITY AND CAPITAL RESOURCES
Primarily as a result of our continuing losses, inability to meet our covenants
and lack of liquidity, our independent certified public accountants modified
their opinion on the Company's December 31, 2003 Consolidated Financial
Statement to contain a paragraph wherein they expressed a substantial doubt
about our ability to continue as a going concern. The Company has taken steps to
improve our current liquidity and provide the capital necessary to fund our plan
for future growth. The Company believes that the effect of these steps can be
seen in the $1.8 million increase in net income (loss) between the third quarter
of 2004 and 2003 and a similar $2.1 million increase over the first nine months
of 2004 and 2003. Our efforts to raise alternative capital are discussed below,
and additional information is included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
As of September 30, 2004, the Company generated $4.3 million in cash from
operating activities. The Company's net loss adjusted for non-cash depreciation
and amortization added $3.5 million during such period. Additionally, as of
September 30, 2004, the collection of $1.7 million in income tax refunds
combined with growth in accrued liabilities and accounts payable of $2.3 million
contributed to operating cash flow. Offsetting the cash sources were increases
in accounts receivables of $2.0 million during the first nine months of 2004,
resulting from growth in the Company's sales and a balance due on the sale of a
subsidiary. Investments in refinancing efforts and pre-payments on insurance
policies used $1.1 million of cash during the first three quarters of 2004. Cash
from investing activities was $0.2 million resulting from the sale of Versaform
Canada Corporation, which provided cash of $1.0 million and capital expenditures
of $0.8 million. The cash generated from operating and investing activities were
used to reduce the Company's debt by $4.6 million as of September 30, 2004. The
Company's revolving credit line at September 30, 2004 was at $8.7 million with
an additional line capacity of $.3 million.
In 2003, the Company's failure to meet certain financial covenants with its
primary lender resulted in a renegotiation of its Loan Agreement on January 5,
2004 and again on March 30, 2004.
On March 30, 2004, the Company and Union Planters entered into the Thirteenth
Amendment, amending the Loan Agreement. The primary purposes of the Thirteenth
Amendment were to (a) extend the maturity of the Company's Revolving Credit Loan
provided under the Loan Agreement from March 31, 2004 to March 31, 2005 and (b)
waive a default arising under the Loan Agreement of the EBITDA Covenant for the
period ended December 31, 2003.
In addition, under the terms of the Thirteenth Amendment to Loan Agreement:
- The maximum principal amount of the Revolving Credit Loan was
increased from $9.1 million to $9.7 million through September 30,
2004 and $9.0 million thereafter, subject to a borrowing base
calculation and further subject to a newly established inventory
reserve requirement and a more restrictive requirement for eligible
receivables, which could reduce the amount of borrowing availability
under the Revolving Credit Loan.
- The interest rate on the Revolving Credit Loan was changed from
LIBOR plus 2.5% to prime plus 1.0%. Moreover, because the Company
had not executed and delivered a Letter of Intent on or before June
30, 2004, the interest rate on the Revolving Credit Loan was
increased to prime plus 1.5% and was further increased to prime plus
2.0% as the Company had not paid all of its obligations to Union
Planters in full on or before September 30, 2004. The interest rate
on the Tempco Term Loan provided under the Loan Agreement, which, as
of September 30, 2004, had a total outstanding principal balance of
$5.8 million, was changed from LIBOR plus 3.0%, subject to a floor
of 7.0% and a ceiling of 8.5%, to prime plus 2.0%, subject to a
floor of 7.0%. The interest rate on the Versaform Term Loan provided
under the Loan Agreement, which, as of September 30, 2004, had a
total outstanding principal balance of $8.0 million, was changed
from LIBOR plus 3.0% to prime plus 2.0%. Moreover, because the
Company had not executed and delivered a Letter of Intent on or
before June 30, 2004, the
24
interest rate on the Tempco Term Loan and the Versaform Term Loan
was increased to prime plus 2.5% and was further increased to prime
plus 3.0% as the Company had not paid all of its obligations to
Union Planters in full on or before September 30, 2004. Based on the
amount of the Company's outstanding debt as of September 30, 2004,
the aforementioned effective interest rate increases will result in
additional interest expense of $56,000 per quarter.
- Because the Company did not enter into one or more Letters of Intent
by June 30, 2004, a fee of $0.1 million will be payable on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations. This fee has been
accrued and was recorded by the Company in interest expense in the
second quarter of 2004.
- As the Company had not paid all of its obligations in full to Union
Planters by September 30, 2004, a fee of $0.4 million was payable to
Union Planters ($0.1 million on October 1, 2004 and $0.3 million on
the earliest of March 31, 2005, the date the Company repays all of
its obligations to Union Planters or the date on which Union
Planters accelerates all of the Company's obligations). This fee has
been accrued and was recorded by the company in interest expense in
the third quarter of 2004.
- If the Company fails to pay all of its obligations in full to Union
Planters by December 30, 2004, a fee of $0.2 million will be payable
to Union Planters ($0.1 million on December 31, 2004 and $0.1
million on the earliest of March 31, 2005, the date the Company
repays all of its obligations to Union Planters or the date on which
Union Planters accelerates all of the Company's obligations).
In addition, the Company has executed a $1.3 million note in favor of a former
owner of Versaform, now a director of the Company, in connection with the
Company's purchase of Versaform. This note is subject to various restrictive
covenants relating to its financial performance. This note, payable monthly over
three years, had a balance at September 30, 2004 of $0.3 million and bears
interest at 7.0%.
The Company has entered into other various notes payable for the purchase of
certain equipment. The notes are payable in monthly installments, including
interest ranging from 6.99% - 10.0%, through November 2006. The notes payable
are secured by equipment.
Please see Note 4 of the Condensed Consolidated Financial Statements included as
part of this Quarterly Report on Form 10-Q for more detailed information
relating to the Company's debt and the Thirteenth Amendment.
As a result of the above-described debt, the Company is required to utilize a
significant portion of its cash generated from operations to meet its debt
service obligations. Furthermore, if the Company were to fail in the future to
comply with the restrictive covenants in the Loan Agreement or in the promissory
note, the Company's operations could be negatively impacted and the Company's
ability to take advantage of potential business opportunities as they arise
could be limited. Moreover, the Company's failure to comply with these
restrictive financial and other covenants could result in a default that, if not
cured or waived, could cause the Company to be required to repay its borrowings
before their due dates. If the Company were unable to make this repayment or
otherwise refinance these borrowings, the Company's creditors could foreclose on
the assets securing its borrowings. Although in the Thirteenth Amendment Union
Planters waived the default arising from a failure of the Company to meet the
EBITDA Covenant, such waiver was limited to and valid only for the specific
purposes given. Union Planters is not obligated solely by reason of such waiver
to agree to any additional waivers.
In addition to the cash requirements for debt service, the Company anticipates
that it will incur significant additional costs in 2004 and 2005 to meet the
increased requirements of Section 404 of the Sarbanes-Oxley Act of 2002
regarding internal controls and procedures. Please see Part II, Item 4. Controls
and
25
Procedures of this Quarterly Report on Form 10-Q for more detailed information
relating to the Company's internal controls and procedures.
Based upon forecasted operating results and cash flows, management believes the
current lending agreement is sufficient to meet its cash needs in 2004.
Management has also developed a plan that includes restructuring or possibly
disposing of segments of our business, increasing sales and raising alternative
capital. However, the Company's losses from operations in recent years have
raised substantial doubt about the Company's ability to continue as a going
concern.
If the Company fails to meet its covenants, fails to comply with the refinancing
or sale of assets contemplated in the Loan Agreement, or is unable to fund its
operations within the limits of the Loan Agreement, no assurance can be given
that additional and/or replacement financing can be obtained on reasonable or
acceptable terms or that the Company will be able to continue as a going
concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern although the report of our independent
certified public accountants as of and for the year ended December 31, 2003
expresses substantial doubt as to the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company does not utilize any particular strategy or instruments to
manage its interest rate risk.
The Company's outstanding credit facility carries an interest rate that varies
in accordance with the prime rate. The Company is subject to potential
fluctuations in its debt service as the prime rate changes. Based on the amount
of the Company's outstanding debt as of September 30, 2004, a hypothetical 1%
change in the interest rate of the Company's outstanding credit facility would
result in a change in annual interest expense of approximately $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES.
As of end of the fiscal quarter ended September 30, 2004, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation, with
the participation of other members of the Company's management as they deemed
appropriate, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in all material respects in ensuring that
material information required to be disclosed in the periodic reports the
Company files with the Securities and Exchange Commission is recorded,
processed, summarized and reported in a timely manner.
This portion of our Quarterly Report on Form 10-Q is our disclosure of the
conclusions of our management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report, based on
management's evaluation of those disclosure controls and procedures. You should
read this disclosure in conjunction with the certifications attached as Exhibits
31.1 and 31.2 to this Quarterly Report on Form 10-Q for a more complete
understanding of the topics presented.
In connection with its 2003 year-end audit, our independent certified public
accountant identified a material weakness relating to our internal controls and
procedures. While we are in the process of implementing a more effective system
of controls and procedures, we have instituted certain interim
26
controls, procedures and other changes to ensure that information required to be
disclosed in this Quarterly Report on Form 10-Q has been recorded, processed,
summarized and reported accurately.
The interim steps that we have taken as a result of the aforementioned control
deficiencies to ensure that all material information about the Company is
accurately disclosed in this Quarterly Report on Form 10-Q included the
application of additional methods and techniques to evaluate the accuracy of
inventory costing and adequacy of inventory reserves.
Based in part on the steps listed above, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that the information that we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported accurately within the time
periods specified in Securities and Exchange Commission rules and forms.
In addition, in order to address further the deficiencies described above and to
improve our internal disclosure and control procedures for future periods, we
will:
1. Review, select and implement available improvements to information
systems for inventory accounting;
2. Perform a review of internal controls and procedures in connection
with Section 404 of Sarbanes Oxley legislative requirements;
3. Perform more detailed quarterly reconciliations and analyses of the
company's inventory accounts;
4. Continue to enhance staffing to provide sufficient resources to
accomplish the foregoing objectives.
These steps will constitute significant changes in internal controls. We will
continue to evaluate the effectiveness of our disclosure controls and internal
controls and procedures on an ongoing basis, and will take further action as
appropriate.
Other than as discussed above, no significant changes were made in the Company's
internal controls or in other factors that could significantly affect these
controls during the third quarter of 2004.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 6, 2004, Versaform, a wholly-owned subsidiary of the Company
acquired on May 16, 2002, was served a subpoena by the federal government.
The subpoena relates to the time period January 1, 1999 through February 6, 2004
and was issued in connection with an investigation by certain government
agencies including the Department of Defense, Office of Inspector General,
Defense Criminal Investigative Service and the Federal Bureau of Investigation.
The subpoena refers to structural components Versaform manufactured for Nordam
Corporation for B-52 engine cowlings, components for auxiliary power units
Versaform manufactured for Hamilton Sundstrand, a United Technologies Company,
and certain tools Versaform manufactured for Lockheed Martin Corporation.
The Company has not been served with any notice of any pending legal action
filed by any government agency. Accordingly, the Company has no knowledge of any
specific allegations of wrongdoing against Versaform by any regulatory
authority.
The Company intends to cooperate fully with the federal government in connection
with any investigation of this matter and has currently provided all information
and support of related manufacturing and sales activity requested.
Other than as noted above, the Company is not a party to any legal proceedings,
other than routine claims and lawsuits arising in the ordinary course of its
business. The Company does not believe such claims and lawsuits, individually or
in the aggregate, will have a material adverse effect on the Company's business.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) The Company filed the following report on Form 8-K during the
quarter ended September 30, 2004 (excluding Items 9 and 12 and Items
7.01 and 2.02):
On June 30, 2004, the Company filed a Current Report on Form 8-K,
announcing its possible move to the Nasdaq Small Cap Market.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of St. Charles and State
of Missouri on the 15th day of November, 2004.
LMI AEROSPACE, INC.
/s/ Ronald S. Saks
----------------------------------------
Ronald S. Saks,
President and Chief Executive Officer
/s/ Lawrence E. Dickinson
----------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
29
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Rule 13a-14(a) Certification of Ronald S. Saks, President and
Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Lawrence E. Dickinson,
Secretary and Chief Financial Officer.
32 Certification pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
30