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 March 31, 2003
|_| 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: 0-24293
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 63301
(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.
Title of class of Number of Shares outstanding
Common Stock as of May 12, 2003
------------------ ----------------------------
Common Stock, par value $.02 per share 8,181,786
LMI AEROSPACE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDING March 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED).
Condensed Consolidated Balance Sheets as of December 31, 2002
and March 31, 2003
Condensed Consolidated Statements of Operations for the three months
ending March 31, 2002 and 2003
Condensed Consolidated Statements of Cash Flows for the three
months ending March 31, 2002 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 4. CONTROLS AND PROCEDURES.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE PAGE
EXHIBIT INDEX
LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31, March 31, 2003
2002 (unaudited)
----------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,182 $ 596
Trade accounts receivable, net 11,392 11,600
Inventories 25,181 26,198
Prepaid expenses 978 1,253
Deferred income taxes 1,389 1,389
Income taxes receivable 1,501 2,080
----------------------------------------
Total current assets 41,623 43,116
Property, plant, and equipment, net 25,986 25,012
Goodwill, net 5,653 5,653
Customer intangible assets, net 4,267 4,184
Other assets 336 371
----------------------------------------
$ 77,865 $ 78,336
========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,107 $ 6,167
Accrued expenses 2,846 2,929
Current installments of long-term
debt and capital lease
obligations 4,616 11,425
----------------------------------------
Total current liabilities 13,569 20,521
Long-term debt and capital lease
obligations, less current
installments 24,621 19,057
Deferred income taxes 1,939 1,949
----------------------------------------
Total long-term liabilities 26,560 21,006
Stockholders' equity:
Common stock of $.02 par value;
authorized 28,000,000 shares;
issued 8,736,427 at
December 31, 2002
and at March 31, 2003 175 175
Additional paid-in capital 26,171 26,171
Treasury Stock, at cost, 554,641
and 554,641 shares at
December 31, 2002 and
March 31, 2003,
respectively (2,632) (2,632)
Accumulated other comprehensive
income (loss) (17) 13
Retained earnings 14,039 13,082
---------------------------------------
Total stockholders' equity 37,736 36,809
---------------------------------------
$ 77,865 $ 78,336
=======================================
See accompanying notes.
LMI Aerospace, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
For the Three Months Ended March 31,
2002 2003
--------------------------------------------
Net sales $ 17,908 $ 20,842
Cost of sales 14,102 18,623
--------------------------------------------
Gross profit 3,806 2,219
Selling, general and administrative expenses 2,792 3,310
--------------------------------------------
Income (loss) from operations 1,014 (1,091)
Other expense:
Interest (262) (440)
Other, net (9) -
--------------------------------------------
Income (loss) before income taxes 743 (1,531)
Provision for (benefit of) income taxes 279 (574)
--------------------------------------------
Income (loss) before cumulative effect of change in (957)
accounting principle 464
Cumulative effect of change in accounting principle, net of
income tax benefit of $663 1,104 -
--------------------------------------------
Net loss $ (640) $ (957)
============================================
Amounts per common share basic and dilutive:
Income (loss) before cumulative effect of change in accounting
principle $ 0.06 $ (0.12)
Cumulative effect of change in accounting principle (0.14) -
--------------------------------------------
Net loss per common share $ (0.08) $ (0.12)
============================================
Weighted average common shares outstanding 8,023,930 8,181,786
============================================
Weighted average common shares outstanding -
assuming dilution 8,146,983 8,181,786
============================================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
For the Three Months Ended March 31.
2002 2003
----------------------------------------------------
Operating activities
Net loss $ (640) $ (957)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 980 1,219
Goodwill impairment charges 1,104 -
Changes in operating assets and liabilities:
Trade accounts receivable (1,793) (210)
Inventories (585) (1,016)
Prepaid expenses and other assets (613) (326)
Income taxes (25) (611)
Accounts payable 876 60
Accrued expenses (196) 125
----------------------------------------------------
Net cash used by operating activities (892) (1,716)
Investing activities
Additions to property, plant, and equipment (480) (416)
Proceeds from sale of equipment - 301
----------------------------------------------------
Net cash used by investing activities (480) (115)
Financing activities
Net borrowings (repayments) on revolving line of credit (596) 2,583
Principal payments on long-term debt - (1,338)
Treasury stock transactions, net 16 -
----------------------------------------------------
Net cash from (used by) financing activities (580) 1,245
Net decrease in cash and cash equivalents (1,952) (586)
Cash and cash equivalents, beginning of year 4,645 1,182
----------------------------------------------------
Cash and cash equivalents, end of quarter $ 2,693 $ 596
====================================================
See accompanying notes.
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2003
1. Accounting Policies
Basis of Presentation
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; Seattle, Washington; Tulsa, Oklahoma; Wichita, Kansas;
Irving, Texas; Sun Valley and Oceanside, California; and Langley, British
Columbia.
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 three months ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2003. These
financial statements should be read in conjunction with the consolidated
financial statements and accompanying footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 as filed with the SEC.
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 disclosure
provisions of Statements of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123") and SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS No. 148").
Accordingly, no compensation cost has been recognized for stock options granted
at fair market value. Had the Company determined compensation cost based on the
fair value at the grant date under SFAS No. 123, net income and earnings per
share amounts would have been as follows:
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2003
Three Months Ended March 31,
2002 2003
---------------------------------------
Net loss $ (640) $ (957)
Total stock based employee
compensation expense determined
under fair value based method,
net of tax effect (16) (14)
---------------------------------------
Pro forma net loss $ (656) $ (971)
=======================================
Net loss per common share
As reported (0.08) (0.12)
Pro forma (0.08) (0.12)
2. Acquisitions
Versaform
On May 16, 2002, the Company acquired all of the outstanding stock of Versaform
Corporation and BC 541775, Ltd., a holding company that owned 100% of the common
stock of Versaform Canada Corporation (collectively, "Versaform") for
approximately $11,787 consisting of cash and a note payable of $ 1,300.
Versaform forms large sheet metal and extrusion components predominantly for the
corporate, regional, and military aerospace markets from two facilities in
Oceanside, California and one facility in Langley, British Columbia, Canada. The
acquisition was accounted for as a purchase business combination and the results
of operations are included in the Company's financial statements after May 16,
2002.
Based on the terms of the purchase agreement, the Company is obligated to pay
additional consideration if sales to a specific customer exceed certain annual
thresholds over the three years following the acquisition. As of March 31, 2003,
sales to the specific customer did not meet these thresholds and is not expected
to meet the thresholds for the remainder of the three year contingency period.
The purchase agreement allows for certain adjustments to the purchase price for
reimbursement of working capital existing at the closing date, for which the
Company has filed a claim and recorded a receivable from the seller of $196. The
Company expects to resolve the purchase price adjustment during 2003.
3. Goodwill and Intangibles
The Company adopted Statements of Financial Accounting Standards No. 142,
Goodwill and Other Intangibles ("SFAS No. 142") on January 1, 2002, and
performed its transitional impairment test of goodwill. The Company concluded in
2002 that its business was comprised of two reporting segments, Sheet Metal and
Machining and Technology (see Note 6 to the Consolidated Financial Statement).
The Company further concluded that its reporting segments constituted reporting
units under SFAS No. 142. The Company determined that the carrying value of its
Sheet Metal segment exceeded its fair value, which indicated potential
impairment of the Sheet Metal segment's goodwill of $1,767. The Company engaged
valuation experts to assist in performing a review of the fair value of the
Sheet Metal segment's tangible and intangible assets, including goodwill, as of
January 1, 2002. Based upon the valuation completed in the fourth quarter of
2002, relying primarily on a discounted cash flow valuation technique, the
Company recorded a $1,767 charge ($1,104 net of tax) for the impairment of the
Sheet Metal segment's goodwill. The charge is reflected as the cumulative effect
of adopting the new accounting standard as of January 1, 2002.
Goodwill at December 31, 2002 and March 31, 2003 relates to the Machining and
Technology segment.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2003
4. Inventories
Inventories consist of the following:
December 31, March 31, 2003
2002
----------------------------------------
Raw materials $ 4,469 $ 4,462
Work in process 5,576 5,449
Finished goods 15,136 16,287
----------------------------------------
$ 25,181 $ 26,198
========================================
During the second half of 2002 and the first quarter of 2003, the Company
encountered production difficulties and inefficiencies on new programs with two
significant customers due to several factors including inadequate tooling, poor
performance of a critical subcontractor, and changes in customer acceptance
criteria. The Company recorded a lower of cost or market reserve on work in
process primarily related to these programs of $1,957 at December 31, 2002,
including costs to complete of $696. The Company has presented claims for
certain costs incurred and has requested re-pricing of several components. As
the claim has not been accepted or approved by the customer, no claim recovery
has been recorded in the March 31, 2003 financial statement. At March 31, 2003,
the Company had lower of cost on market reserves of $1,608 primarily related to
these programs.
5. Long-Term Debt and Revolving Line of Credit
Long-term debt and revolving line of credit consists of the following:
December 31, March 31,
2002 2003
-----------------------------------------
Term Loans:
Tempco $ 11,705 $ 11,197
Versaform 10,738 10,345
Revolving line of credit 4,417 7,000
Note payable to Director, principal and interest payable
monthly at 7% 1,003 939
Notes payable, principal and interest payable monthly, at
fixed rates, ranging from 6.99% to 10.00% 1,212 950
Capital lease obligations 162 51
-----------------------------------------
29,237 30,482
Less current installments 4,616 11,425
-----------------------------------------
$ 24,621 $ 19,057
=========================================
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2003
The Company has a loan agreement ("Loan Agreement") with Union Planters Bank,
NA. The Loan Agreement consists of a revolving line of credit ("Revolver"), a
term loan to finance the purchase of Tempco ("Tempco Term Loan"), and a term
loan to finance the purchase of Versaform ("Versaform Term Loan"). The Company's
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 EBITDA and tangible worth.
On April 14, 2003, the Company obtained a waiver of covenant violations at
December 31, 2002 and an amendment to the Loan Agreement. The amended Loan
Agreement extended the maturity of the line of credit to January 2004, increased
the capacity under the line of credit by $3 million and the interest rate by
..25% and eased the quarterly financial covenant requirements through December
31, 2003.
The Company's Revolver allows for a $10,000 line of credit, subject to a
borrowing base calculation, to fund various corporate needs. Interest is payable
monthly based on a quarterly cash flow leverage calculation and the LIBOR rate
at March 31, 2003. This facility matures in January 2004. The credit facility
prohibits the payment of cash dividends on common stock without the prior
written consent of Union Planter. The Company had $7,000 outstanding under this
line at March 31, 2003 at an interest rate of 3.59%.
The Company drew $14,250 on the Tempco Term Loan on April 2, 2001. The Tempco
Term Loan requires monthly principal and interest payments over three years
using a seven year amortization and bears interest at ninety day LIBOR plus 3%,
subject to a cap of 8.5% and a floor of 7.0%. The interest rate was 7.0% at
March 31, 2003. The Company has not drawn upon the additional funding of the
Tempco Term Loan as of March 31, 2003.
The Versaform Term Loan was issued for $11,000 on May 14, 2002. The Versaform
Term Loan requires monthly principal and interest payments over three years
using a seven year amortization and bears interest at the ninety day LIBOR plus
3%. The interest rate was 4.3% at March 31, 2003.
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%. This note is secured by 65% of the
stock of the Company's Canadian subsidiary.
The Company entered into 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.
The Company entered into capital lease agreements for the purchase of certain
equipment. The leases are payable in monthly installments including interest
ranging from 4.98% - 9.15% through August 2005.
6. Business Segment Information
As set forth in the criteria of statement of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, ("SFAS No. 131"), the Company
is organized into two reportable segments: Sheet Metal and Machining and
Technology. 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.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2003
The table below presents information about reported segments for quarters ended
March 31, on the basis used internally to evaluate segment performance:
Three Months Ended March 31,
2002 2003
---------------------------------------
Net sales:
Sheet Metal $ 12,154 $ 17,164
Machining and Technology 5,754 3,678
---------------------------------------
$ 17,908 $ 20,842
=======================================
Income (loss) before income taxes:
Sheet Metal $ (235) $ (1,506)
Machining and Technology 978 (25)
---------------------------------------
$ 743 $ (1,531)
=======================================
Upon adoption of SFAS No. 142 on January 1, 2002, the Company recorded a $1,767
charge ($1,104 net of tax) for the impairment of the Sheet Metal segment's
goodwill. (See Note 3)
7. Comprehensive Loss
Comprehensive loss includes adjustments to net loss for the decrease in the fair
value of available-for-sale securities deemed not to be other than temporary and
the change in foreign currency translations, is as follows:
--------------------------------------
Three Months Ended March 31,
2002 2003
--------------------------------------
Net loss $ (640) $ (957)
Other comprehensive income (loss):
Unrealized loss on investments (115) -
Foreign currency translation
adjustments - 31
--------------------------------------
Comprehensive loss $ (755) $ (926)
======================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. LMI Aerospace, Inc. (the "Company") makes
forward-looking statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this 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, 2002,
as filed with the Securities and Exchange Commission on April 15, 2003.
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 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 to the consolidated financial
statements). 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, 2002.
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 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. The following table illustrates the Company's sales for the first
quarter of the 2003 fiscal year as compared to the first quarter of the 2002
fiscal year.
Market 1st Qtr 2002 1st Qtr 2003
% of Total % of Total
------------------ --------------------
Commercial Aircraft 37.4% 25.1%
Corporate and regional aircraft 10.6% 29.7%
Military products 25.6% 21.4%
Technology products 15.9% 12.2%
Other (1) 10.5% 11.6%
------------------ -------------------
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. On May 16, 2002, the Company acquired Versaform
Corporation ("Versaform") and its affiliates, on June 12, 2002, Stretch Forming
Corporation ("SFC") and on September 30, 2002, Southern Stretch Forming and
Fabrication, Inc. ("SSFF"). The Versaform acquisition significantly increased
the Company's presence in the corporate and regional aircraft market, while
adding some 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 market.
Tempco operates and is managed as an autonomous unit, and accordingly 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.
RESULTS OF OPERATIONS
Quarter Ended March 31, 2003 compared to March 31, 2002
Sheet Metal Segment
Net Sales. Net sales for the first quarter of 2003 were $17.2 million, an
increase of 41.0% from $12.2 million in the same quarter of 2002. The
acquisition of Versaform in May 2002 added $3.7 million. Excluding the effect of
this acquisition, the Sheet Metal segment generated net sales of $13.5 million
in the first quarter of 2003, an increase of 10.7% from 2002.
Net sales for use on Boeing commercial aircraft, excluding the acquisition of
Versaform, were $4.9 million in 2003, a decrease of 26.9% from $6.7 million in
2002. This decline is due to production rate declines and inventory management
at Boeing and its prime subcontractors.
The segment's net sales to the corporate and regional aircraft market were $6.1
million in 2003, an increase of 221.1% from $1.9 million in 2002. This increase
in net sales was predominantly driven by shipments of product for use on
Gulfstream aircraft of $4.7 million in 2003, up 261.5% from $1.3 million in
2002. The acquisition of Versaform added $2.1 million in net sales to
Gulfstream. Excluding the acquisition of Versaform, net sales for use on
Gulfstream aircraft were $2.6 million in 2003, an increase of 100.0% from 2002.
The increase is attributable to orders the Company received in the second
quarter of 2002 resulting from Gulfstream's decision to close its Bethany,
Oklahoma facility. Subsequent to the end of the quarter, Gulfstream announced a
four-week shut-down of its initial phase of manufacturing operations in
Savannah, Georgia beginning June 30, 2003 as a result of decreased demand. The
Company expects that sales volume to Gulfstream will be reduced as a result of
this plant shutdown, but has not received sufficient information to estimate the
impact this event will have on future operations.
Net sales of product used in military products were $3.7 million in 2003, an
increase of 54.2% from $2.4 million in 2002. The acquisition of Versaform
contributed $0.4 million of this increase, principally on a refurbishment
program for the B-52. Excluding the acquisition, the Company's net sales for
Lockheed Martin's F-16 and C-130 aircraft were $2.7 million in 2003, up from
$2.1 million in 2002.
Gross Profit. The Sheet Metal segment generated gross profit of $1.6 million
(9.3% of net sales) in 2003 compared to $2.2 million (18.0% of net sales) in
2002. The acquisition of Versaform provided $0.9 million (24.3% of Versaform's
net sales) of gross profit. The decline in gross profit excluding the
acquisition is attributable to continued difficulties with certain products used
in military and corporate and regional aircraft. The Company is negotiating the
re-pricing of certain products and a claim for excess costs incurred to produce
certain military products. At this time negotiations have not reached a stage
that would allow the Company to record the benefit of any recovery for either
re-pricing or the claim. The Company has begun discussions with a customer in
the corporate and regional market to cease production of certain components or
change both the pricing and scope of work performed.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.9 million in 2003, an increase of 16.0% from
$2.5 million in 2002. The acquisition of Versaform added $0.6 million in 2003.
Interest Expense. Interest expense for the segment in the first quarter of 2003
was $0.2 million. This expense resulted primarily from debt issued to acquire
Versaform. There was no interest expense for the segment in 2002.
Machining and Technology Segment
Net Sales. Net sales from the Machining and Technology segment were $3.7 million
in 2002 compared to $5.8 million in 2002, a decline of 36.2%. Net sales for use
on military platforms were $0.7 million in 2003, down from $2.2 million in 2002.
Reductions in orders and scope of work performed for Northrop Grumman combined
with a reduction of orders for helicopter products created this decrease in net
sales.
Additionally, sales for use in excimer laser applications were $2.5 million,
down approximately $0.3 million from the prior year. Based upon current order
patterns, the Company expects reduced demand from the excimer laser equipment
market this year.
Gross Profit. The segments gross profit was $0.6 million (16.2% of net sales) in
2003, down from $1.6 million (27.6% of net sales). This decrease was due
primarily to lower labor efficiency and an inability to cover the fixed costs of
the segment on reduced net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $0.4 million in 2003, up from $0.3 million in 2002.
This increase is primarily the result of increased payroll cost.
Interest Expense. Interest expense was consistent at $0.2 million for both 2002
and 2003. The interest is related to a term note issued to purchase the assets
of Tempco.
Non-Operating Expenses
Income Taxes. The income tax benefit in the first quarter of 2003 was $0.6
million compared to an expense of $0.3 million in 2002. During the first quarter
of 2003, the Company's effective tax rate was 38.5% compared to 37.4% in 2001.
The increase in effective tax rate is predominantly attributable to higher state
income tax obligations caused by the acquisition of Versaform.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
the Company adopted SFAS No. 142, under which goodwill will no longer be
amortized but instead be tested for impairment. The Company completed the
required transitional impairment test and recorded a $1,767 charge ($1,104 net
of tax) for the impairment of the Sheet Metal segments goodwill as of January 1,
2002. See Note 3 to the Consolidated Financial Statements included as part of
this Form 10-Q for further information.
Liquidity and Capital Resources
The Company's operations used $1.7 million of cash in the first quarter of 2003.
Working capital, excluding cash, increased by $1.9 million while depreciation
and amortization was $1.2 million. The Company experienced a net loss of $1.0
million in the quarter.
The Company purchased $0.4 million of property, plant and equipment during the
first quarter of 2003. These purchases were primarily for a computerized mill
and lathe. The Company is on pace to comply with its loan covenant in its bank
credit agreement requiring the Company not to exceed capital expenditures of
$2.3 million in 2003.
As disclosed in the Company's Annual Report on Form 10-K, the net losses
experienced by the Company in 2002 caused the Company to violate certain
restrictive financial covenants in its bank credit agreement with its primary
lender during the fourth quarter. Additionally, subsequent to year end, the
Company exhausted its available borrowings under its revolving credit facility
of $7.0 million, peaking at $7.5 million. The Company provided forecasts of
operations and cash flows to the bank and, in April 2003, negotiated revised
covenants, secured an increase in its revolving credit facility to $10.0
million, subject to a borrowing base calculation, and extended the maturity date
of the revolving credit facility to January 5, 2004. As a part of the
negotiations, the bank also required an increase in the interest rate on the
revolving credit facility of 0.25%, restrictions on capital expenditures, and a
fee of $25,000. Additionally, the bank required the Company to retain a
financial consultant to work with management to analyze operations and cash
management. The Company has since hired a financial consultant and this analysis
is underway. Independently, in the second quarter of 2003, the Company has
undertaken a plan to reduce operating expenses at all facilities with primary
emphasis on the St. Charles facility. These immediate cost savings include
reductions in overtime worked and controllable expenses. Management will submit
a plan for improving operating performance to the bank by June 15, 2003. This
plan may include, but is not limited to, headcount reductions, downsizing or
closing of facilities, and elimination of or reduction in specific customers or
production processes. The Company has $6.2 million outstanding on the revolving
credit facility as of May 13, 2002.
Based on forecasted operating results and cash flows, management believes that
cash flow from operations and the expanded capacity under the Revolving Credit
Agreement, as described in Note 5 of the Consolidated Financial Statements, will
be adequate to fund the Company's operations in 2003. The forecasted operating
results and cash flows are dependent on management's ability to improve
performance in the St. Charles plant and accomplish certain expected reductions
in operating expenses. While management believes this forecast is achievable, to
the extent that management does not improve operating performance and reduce
expenses, the Company may have to seek alternative sources of financing. There
can be no assurances that the Company can obtain alternative financing on
reasonable and acceptable terms.
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 fluctuation 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 LIBOR. The Company is subject to potential fluctuations in
its debt service as LIBOR changes. Based on the amount of the Company's
outstanding debt as of March 31, 2003, 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 $0.3 million.
The Company's potential exposure to interest rate market risk recently increased
due to the Company and the Company's primary lender entering into an amendment
to the Company's outstanding credit facility on April 15, 2003. This amendment
to the Company's credit facility, among other things, (i) provided for an
increase in the Company's available line of credit under the credit facility
from a maximum of $7,000,000 to $10,000,000, subject to borrowing base
calculations, and (ii) increased the applicable interest rate on the Company's
borrowings under its line of credit by 0.25%.
Item 4. Controls and Procedures.
Within the 90 day period prior to the filing date of this report, the Company's
Chief Executive Officer and Chief Financial Officer carried out an evaluation
with the participation of other members of 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-14 (c)
and 15d-14 (c) under the Securities Exchange Act of 1934). Based upon and as of
the date of that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
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.
Prior to and during this evaluation, certain significant deficiencies in
internal controls existed related to the accounting for inventory that could
adversely affect the Company's ability to record, process, summarize, and report
financial information. These deficiencies relate primarily to the decentralized
nature of accounting for inventory, including:
o Limited information technology resources for valuation,
o Insufficient review of inventory accounts, and
o Inconsistent application of accounting policies and related
controls by operating units.
The following ongoing initiatives have been undertaken to correct the
deficiencies in internal controls noted above:
o The Company has initiated a project to examine its inventory policies,
document controls and procedures in a written manual, and conform
practices at all of its operating units. This project will be
incorporated into the analysis of internal controls as established
under Sarbanes-Oxley Section 404.
o Corporate oversight of the controls and procedures in place over
inventory has been increased and staffing will be added.
o Management has completed the necessary account analysis and review
prior to finalizing inventory valuation in its March 31, 2003 financial
statements.
Management, including the Chief Executive Officer and Chief Financial Officer,
believes the results of the corrective actions begun by the Company in April
2003 as outlined above will be effective in addressing the significant
deficiencies in internal controls over inventory. Subsequent to the date of the
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that there were no other significant changes in internal
controls.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number Description
99.1 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. Statement of
the Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to the Sarbanes-Oxley
Act of 2002. Statement of the Chief Financial
Officer.
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2003.
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.
LMI AEROSPACE, INC.
Date: May 15, 2003 By: /s/ Lawrence E. Dickinson
----------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
CERTIFICATIONS
I, Ronald S. Saks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LMI Aerospace,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Ronald S. Saks
-------------------------------------
Ronald S. Saks
Chief Executive Officer and President
CERTIFICATIONS
I, Lawrence E. Dickinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LMI Aerospace,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Lawrence E. Dickinson
-------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
EXHIBIT INDEX
Exhibit Number Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Statement of the Chief
Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Statement of the Chief
Financial Officer.
Exhibit 99.1
LMI AEROSPACE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LMI Aerospace, Inc. (the "Company")
on Form 10-Q for the period ending March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Ronald S. Saks,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Ronald S. Saks
- -------------------------------------
Ronald S. Saks
Chief Executive Officer and President
May 15, 2003
This certification is made solely for purposes of 18 U.S.C. Section 1350,
and not for any other purpose.
Exhibit 99.2
LMI AEROSPACE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LMI Aerospace, Inc. (the "Company")
on Form 10-Q for the period ending March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Lawrence E.
Dickinson, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Lawrence E. Dickinson
- -------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
May 15, 2003
This certification is made solely for purposes of 18 U.S.C. Section 1350,
and not for any other purpose.