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,
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.
Number of Shares outstanding
Title of class of Common Stock as of November 6, 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 SEPTEMBER 30, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Condensed Consolidated Balance Sheets as of December 31, 2002 and
September 30, 2003
Condensed Consolidated Statements of Operations for the three months
ending and the nine months ending September 30, 2002 and 2003
Condensed Consolidated Statements of Cash Flows for the nine months
ending September 30, 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.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31, September 30, 2003
2002 (unaudited)
-----------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,182 $ 1,095
Trade accounts receivable, net 11,392 8,445
Inventories 25,181 26,294
Prepaid expenses 978 1,097
Deferred income taxes 1,389 1,389
Income taxes receivable 1,501 1,522
-----------------------------------------
Total current assets 41,623 39,842
Property, plant and equipment, net 25,986 23,222
Goodwill 5,653 5,653
Customer intangible assets, net 4,267 3,892
Other assets 336 163
-----------------------------------------
$ 77,865 $ 72,772
=========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,107 $ 3,959
Accrued expenses 2,846 2,161
Current installments of long-term debt and capital lease
obligations 4,616 20,486
-----------------------------------------
Total current liabilities 13,569 26,606
Long-term debt and capital lease obligations, less current
installments 24,621 8,764
Deferred income taxes 1,939 1,963
-----------------------------------------
Total long-term liabilities 26,560 10,727
Stockholders' equity:
Common stock of $.02 par value; authorized 28,000,000 shares;
issued 8,736,427 175 175
Additional paid-in capital 26,171 26,171
Treasury Stock, at cost, 554,641 shares (2,632) (2,632)
Accumulated other comprehensive income (loss) (17) 28
Retained earnings 14,039 11,697
-----------------------------------------
Total stockholders' equity 37,736 35,439
-----------------------------------------
$ 77,865 $ 72,772
=========================================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
---------------------------------------------------------------------
Net sales $ 21,258 $ 17,566 $ 59,522 $ 57,273
Cost of sales 17,726 14,823 48,087 49,882
---------------------------------------------------------------------
Gross profit 3,532 2,743 11,435 7,391
Selling, general and administrative expenses 3,402 2,938 9,242 9,497
Restructuring charges - 441 - 441
---------------------------------------------------------------------
Income (loss) from operations 130 (636) 2,193 (2,547)
Other income (expense):
Interest (426) (407) (1,018) (1,234)
Other, net (211) 6 (200) 35
---------------------------------------------------------------------
Income (loss) before income taxes (507) (1,037) 975 (3,746)
Provision for (benefit of) income taxes (87) (393) 468 (1,405)
---------------------------------------------------------------------
Income (loss) before cumulative effect of change in (644) (2,341)
accounting principle (420) 507
Cumulative effect of change in accounting principle, net
of income tax benefit of $663 - - (1,104) -
---------------------------------------------------------------------
Net loss $ (420) $ (644) $ (597) $ (2,341)
=====================================================================
Amounts per common share:
Income (loss) before cumulative effect of change in
accounting principle $ (0.05) $ (0.08) $ 0.06 $ (0.29)
Cumulative effect of change in accounting principle - - (0.13) -
---------------------------------------------------------------------
Net loss per common share $ (0.05) $ (0.08) $ (0.07) $ (0.29)
=====================================================================
Amounts per common share - assuming dilution:
Income (loss) before cumulative effect of change
in accounting principle $ (0.05) $ (0.08) $ 0.06 $ (0.29)
Cumulative effect of change in accounting principle - - (0.13) -
---------------------------------------------------------------------
Net loss per common share - assuming dilution $ (0.05) $ (0.08) $ (0.07) $ (0.29)
=====================================================================
=====================================================================
Weighted average common shares outstanding 8,061,368 8,181,786 8,042,079 8,181,786
=====================================================================
=====================================================================
Weighted average common shares outstanding - assuming
assuming dilution 8,061,368 8,181,786 8,042,079 8,181,786
=====================================================================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
For the Nine Months Ended September 30,
2002 2003
----------------------------------------------------
Operating activities
Net loss $ (597) $ (2,341)
Adjustments to reconcile net loss to
net cash provided by (used by) operating activities:
Depreciation and amortization 3,122 3,665
Unrealized investment loss 274 -
Goodwill impairment charges 1,767 -
Changes in operating assets and liabilities:
Trade accounts receivable (2,512) 2,918
Inventories (2,797) (1,113)
Prepaid expenses and other assets (732) 132
Income taxes (689) (64)
Accounts payable 356 (2,148)
Accrued expenses 206 (618)
----------------------------------------------------
Net cash provided by (used by) operating activities (1,602) 431
Investing activities
Additions to property, plant and equipment (1,946) (832)
Proceeds from sale of equipment - 301
Acquisition of Versaform, net of cash acquired (10,285) -
Acquisition of Stretch Forming assets (860) -
Acquisition of Tempco, net of cash acquired (300) -
Acquisition of SSFF (215) -
----------------------------------------------------
Net cash used by investing activities (13,606) (531)
Financing activities
Net borrowings on revolving line of credit - 3,607
Principal payments on long-term debt (2,050) (3,594)
Treasury stock transactions, net (8) -
Proceeds from issuance of long term debt 13,535 -
Proceeds from exercise of stock options 96 -
----------------------------------------------------
Net cash from financing activities 11,573 13
Net decrease in cash and cash equivalents (3,635) (87)
Cash and cash equivalents, beginning of year 4,645 1,182
----------------------------------------------------
Cash and cash equivalents, end of quarter $ 1,010 $ 1,095
====================================================
See accompanying notes.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 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; Auburn, Washington; Tulsa, Oklahoma; Wichita, Kansas; Irving,
Texas; Sun Valley and Oceanside, California; Pooler, Georgia; and Langley,
British Columbia.
The accompanying unaudited 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 and nine months ended September 30, 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.
Operating Results and Management's Plan
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 8, 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, the Company is reviewing its other plant operations and
expects to undertake further rationalization initiatives during the fourth
quarter of 2003.
Based on the forecasted improvement in operating results and cash flows from the
above rationalization plan, management believes the Company will have sufficient
funding for its operations in 2003. However, if the forecasted improvements are
not achieved, the Company may violate the debt covenants of its bank credit
facility at December 31, 2003 and have to seek alternative sources of financing.
See Note 5 for further discussion of the bank credit facility which had a
balance of $27,763 at September 30, 2003. Further, the Company's revolving line
of credit, matures on January 5, 2004. Management is currently considering
several alternatives to refinance the revolving credit agreement which had a
balance of $8,024 at September 30, 2003. There can be no assurances that the
Company can obtain alternative financing on reasonable and acceptable terms.
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.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2003
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. ("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 market value of the underlying
common stock on the date of grant. 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:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2003 2002 2003
------------------------------------------------------------------------------
Net loss $ (420) $ (644) $ (597) $ (2,341)
Total stock based employee compensation
expense determined under fair value based
method, net of tax effect (16) (14) (137) (51)
------------------------------------------------------------------------------
Pro forma net loss $(436) $ (658) $ (734) $ (2,392)
==============================================================================
Net loss per common share - basic and assuming
dilution
As reported $ (0.05) $ (0.08) $ (0.07) $ (0.29)
Pro forma $ (0.05) $ (0.08) $ (0.09) $ (0.29)
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 owns 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.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2003
The acquisition was accounted for as a purchase business combination, and
accordingly, the results of operations were included in the Company's financial
statements after May 16, 2002.
The intangible asset relates to acquired customer relationships and is being
amortized over 15 years on a straight line basis. 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 September 30, 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 claims in
excess of $100. As disclosed in the Company's Annual Report on Form 10-K, the
Company recorded a claim for reimbursement of certain liabilities existing at
the closing date. This claim was settled for $265 during the third quarter and
paid to the Company in October 2003. The Company collected this receivable
subsequent to the end of quarter. Versaform's sales were approximately $12,000
in 2001.
Southern Stretch Forming and Fabrication, Inc.
On September 30, 2002, the Company acquired certain assets and assumed certain
liabilities of Southern Stretch Forming and Fabrication, Inc. ("SSFF"). The
former owner of Versaform, currently a director of the Company, held a 50%
interest in SSFF. Following the Company's acquisition of Versaform, the director
purchased the remaining 50% interest in SSFF and sold SSFF to the Company. The
assets consisted primarily of inventory, machinery and equipment. The
acquisition was accounted for as a purchase business combination, and
accordingly, the related results of operations have been included in the
consolidated statement of operations after September 30, 2002. The purchase
price of $444, which includes the assumption of debt and direct costs of the
transaction, consisted of $235 in cash and 90,000 shares of LMI common stock,
with a market value of $209.
The cost to acquire these assets has been allocated to the assets according to
their fair values and consisted of inventory of $115 and equipment and machinery
of $718, and assumed liabilities of $389. Net sales for SSFF for 2001 were
approximately $3,820, of which approximately $1,739 were to the Company.
Stretch Forming Corporation
On June 12, 2002, the Company acquired certain assets of Stretch Forming
Corporation ("SFC"), based in Southern California. The purchase price of $861
was allocated to the assets acquired based on their fair value and consisted of
working capital of $465, equipment of $66, and an intangible asset of $330
related to production backlog, to be amortized over 3 years on a straight line
basis.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2003
3. Goodwill and Intangibles
The Company adopted SFAS No. 142, Goodwill and Other Intangibles 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 September 30, 2003 relates to the Machining
and Technology segment.
4. Inventories
Inventories consist of the following:
December 31, September 30,
2002 2003
--------------------------------------
Raw materials $ 4,469 $ 4,150
Work in process 5,576 5,144
Finished goods 15,136 17,000
--------------------------------------
$ 25,181 $26,294
======================================
During the second half of 2002 and early 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. The Company is
currently engaged in negotiations to recover claims submitted for certain costs
incurred and requests for re-pricing of several components. No benefit from
potential claims on these components has been accrued. At September 30, 2003,
the Company had lower of cost or market reserves of $563 primarily related to
these programs. The decrease in the lower of cost or market reserves is the
result of improved performance on subsequent production of parts that
historically generated losses and re-pricing of certain parts.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2003
5. Long-Term Debt and Revolving Line of Credit
Long-term debt and revolving line of credit consists of the following:
December 31, September 30,
2002 2003
-----------------------------------------
Term Loans:
Tempco $ 11,705 $ 10,179
Versaform 10,738 9,560
Revolving line of credit 4,417 8,024
Note payable to Director, principal and interest payable
monthly at 7% 1,003 722
Notes payable, principal and interest payable monthly, at
fixed rates, ranging from 6.99% to 10.00% 1,212 740
Capital lease obligations 162 25
-----------------------------------------
29,237 29,250
Less current installments 4,616 20,486
-----------------------------------------
$ 24,621 $ 8,764
=========================================
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 certain 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 $3,000 and the interest rate by 0.25%
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. The Company agreed
to reduce the amount available under the Revolver by any proceeds from income
tax carry backs attributable to 2002 losses and specific claims currently being
negotiated. During the second quarter, the Company received $780 for tax loss
carry backs and has reduced the Revolver cap to $9,220. Interest is payable
monthly based on a quarterly cash flow leverage calculation and the prevailing
LIBOR rate. This facility matures in January 2004 and accordingly has been
classified as current installments of long term debt. The credit facility
prohibits the payment of cash dividends on common stock without the prior
written consent of the lender. The Company had $8,024 outstanding under this
line at September 30, 2003 at an interest rate of 3.7%.
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%. This note matures on September 2,
2004 and has accordingly been classified as current installments of long term
debt. The interest rate was 7.0% at September 30, 2003.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 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 4.2% at September 30, 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 SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, 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.
The table below presents information about reported segments on the basis used
internally to evaluate segment performance:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2003 2002 2003
------------------------------------------------------------------------------
Net sales:
Sheet Metal $ 16,628 $ 14,427 $ 43,599 $ 47,628
Machining and Technology 4,630 3,139 15,923 9,645
------------------------------------------------------------------------------
$ 21,258 $ 17,566 $ 59,522 $ 57,273
==============================================================================
Income (loss) before income taxes:
Sheet Metal $ (989) $ (940) $ (1,530) $ (3,224)
Machining and Technology 482 (97) 2,505 (522)
------------------------------------------------------------------------------
$ (507) $ (1,037) $ 975 $ (3,746)
==============================================================================
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)
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2003
7. Comprehensive Loss
Comprehensive loss includes adjustments to net loss for changes in the fair
value of available-for-sale securities deemed not to be other than temporary and
the change in foreign currency translations as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2002 2003 2002 2003
--------------------------------------------------------------------
Net loss $ (420) $ (644) $ (597) $ (2,341)
Other comprehensive income (loss):
Unrealized gain on investments 19 - - -
Foreign currency translation adjustments (48) (28) (14) 45
--------------------------------------------------------------------
Comprehensive loss $ (449) $ (672) $ (611) $ (2,296)
====================================================================
8. 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 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 location
which included a reduction of work force of approximately 60 people, the exit of
two leased facilities, and relocation of a significant amount of its
manufacturing equipment. The costs of this plan were $273 for moving and
relocation, $107 for consulting services and $61 for severance costs and were
incurred in the third quarter of 2003. The Company expects to complete this
restructuring by the first quarter of 2004 at a cost of approximately $600. All
costs are attributable to the Sheet Metal Segment.
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 nine months
ended September 30, 2003 as compared to the nine months ended September 30,
2002:
Market Year to Date 2002 Year to Date 2003
% of Total % of Total
---------------------------------------------------------------------------------
Commercial Aircraft 30.6 28.2
Corporate and regional aircraft 24.4 24.6
Military products 23.9 26.4
Technology products 11.5 10.4
Other (1) 9.6 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.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 versus September 30, 2002
Sheet Metal Segment
Net Sales.
3rd Qtr % of 3rd Qtr % of
Category 2002 Total 2003 Total
----------------------------------------------------------------------------------------
Commercial Aircraft $ 5.2 31.3% $ 5.1 35.4%
Military Products 3.3 19.9% 4.6 31.9%
Corporate and Regional 6.3 38.0% 3.1 21.5%
Other 1.8 10.8% 1.6 11.2%
--------------------------------------------------
Total $16.6 100.0% $14.4 100.0%
==================================================
Net sales for the Sheet Metal segment were $14.4 million for the three months
ended September 30, 2003. Increases in sales for military products were driven
by shipments of product for a B-52 refurbishment program. Offsetting this
increase was a decline in net sales for corporate and regional aircraft due to
the July shut down, production rate declines, and inventory adjustments at
Gulfstream and Cessna.
Gross Profit. Gross profit for the quarter ended September 30, 2003 was $2.3
million (15.9% of net sales), a decrease from $2.4 million (14.7% of net sales)
in 2002. Gross profit increased as a percent of net sales because costs of
manufacturing labor and fringes have been reduced during the third quarter of
2003 by $1.0 million compared to the prior year. Additionally, the work force
reductions and manufacturing reorganization initiated at the Company's St.
Charles facility are proceeding as planned. It is not anticipated that the full
benefit of the changes will be realized until late in the first quarter of 2004.
The Company continues to encounter production difficulties on certain products
for the C-130 for which it is preparing a claim to attempt to recover losses
incurred and to re-price product for future deliveries. No benefit from any
potential claim for the C-130 components has been accrued. The benefit of a
claim, if any, will not be recorded until such time as the customer and the
Company agree on a settlement. Additionally, scrap and other start up costs are
hindering performance on the B-52 refurbishment program and a large skin sheet
program for the Boeing 767.
Selling, General and Administrative Expenses ("SGA"). SGA expenses for the third
quarter of 2003 was $1.7 million (11.7% of net sales), down from $2.0 million in
2002 (12.0% of net sales). This decline is primarily attributable to cost
reduction efforts in telecommunications, professional services and certain
variable expenses.
Restructuring Charges. During the third quarter of 2003, the Company adopted a
plan to reduce employment levels and the number of facilities at its St. Charles
operation. The reduction in employment levels will be phased in through October
2003 and the exit of certain leased facilities will not be completed until the
first quarter of 2004. During the third quarter, the Company incurred severance
costs and moving costs of $0.4 million related to this restructuring. The
Company expects to spend a total of $0.6 million to complete this restructuring.
Interest Expense. Interest expense for the third quarter of 2003 was $0.1
million, down from $0.2 million in the third quarter of 2002. The benefits of
declining interest rates combined with scheduled reductions in principal on term
notes associated with the Sheet Metal segment generated this reduction.
Machining and Technology Segment
Net Sales.
3rd Qtr % of 3rd Qtr % of
Category 2002 Total 2003 Total
--------------------------------------------------------------------------------------
Technology Products $2.8 60.9% $1.8 58.1%
Aerospace Products 1.3 28.3% 0.9 29.0%
Other 0.5 10.8% 0.4 12.9%
---------------------------------------------
Total $4.6 100.0% $3.1 100.0%
=============================================
Net sales for the Machining and Technology segment were $3.1 million in the
third quarter of 2003, down 32.6% from $4.6 million in the prior year. Net sales
of technology products were $1.8 million in the current quarter, down $1.0
million from the prior year. This decline is primarily attributable to the
overall decline in the demand for equipment used in the production of
semiconductors. Net sales for aerospace products were $0.9 million in the third
quarter of 2003, down from $1.3 million in the prior year.
Gross Profit. The gross profit of the segment was $0.5 million (16.1% of net
sales) in the third quarter of 2003, a decrease from $1.1 million (23.9% of net
sales) in 2002. Overtime and controllable spending were curtailed in the segment
during the third quarter. However, the decline in revenue outpaced the ability
to cut cost and reduced coverage of fixed costs. Subsequent to the end of the
quarter, employment levels were reduced by 6%.
Selling, General and Administrative Expenses. SGA expenses for the quarter ended
September 30, 2003 was $0.4 million, unchanged from the prior year.
Interest Expense. Interest expense for the current quarter was $0.2 million for
the segment, unchanged from the prior year.
Non-Segment Expenses
Interest Expense. Interest expense not assigned to a segment is primarily the
result of the Company's revolving credit agreement which is used to fund both
segments cash needs. Interest expense not assigned to a segment was $0.1 million
in 2003 compared to $0.0 million in 2002.
Income Taxes. The Company's operations generated an income tax benefit of $0.4
million in the third quarter of 2003 compared to a benefit of $0.1 million in
the third quarter of 2002. The Company has an effective tax rate of 38.5% in
2003 compared to 37.5% in 2002. The increase in rate is the result of the
Company's growth in higher income tax states.
Nine months ended September 30, 2003 versus September 30, 2002
Sheet Metal Segment
Net Sales.
9 Months % of 9 Months % of
Category 2002 Total 2003 Total
-------------------------------------------------------------------------
Commercial Aircraft $ 17.8 40.8% $ 16.1 33.8%
Military Products 8.4 19.3% 12.7 26.7%
Corporate and Regional 12.8 29.4% 14.1 29.6%
Other 4.6 10.5% 4.7 9.9%
--------------------------------------------
Total $43.6 100.0% $ 47.6 100.0%
============================================
Net sales for the nine months ended September 30, 2003 were $47.6 million, an
increase of 9.2% from $43.6 million in 2002. The Company acquired Versaform in
May 2002. Excluding the acquisition, sales in 2003 were $36.7 million, a decline
of 3.1% from $37.9 million in 2002.
Net sales on commercial aircraft were $16.1 million in 2003 compared to $17.8
million in 2002. These reductions primarily resulted from declines in net sales
for use on the Boeing 737 which were $8.0 million in 2003 compared to $9.3
million in 2002 and the Boeing 767 which were $1.0 million in 2003 compared to
$2.1 million in 2002. These declines were due to production rate declines and
inventory adjustments at Boeing.
Net sales of military products were $12.7 million, up 51.1% from $8.4 million in
2002. Net sales of components for use on Lockheed's F-16 and C-130 increased to
$7.6 million in 2003 from $6.2 in 2002. Additionally, net sales on a new B-52
refurbishment program generated $2.4 million in 2003.
Corporate and regional aircraft components generated net sales of $14.1 million
in 2003, up from $12.8 million in 2002. Components used on Gulfstream aircraft
were $10.1 million in 2003, an increase from $9.6 million in 2002. Additionally,
net sales on auxiliary power units used on corporate and regional aircraft were
$1.1 million in 2003, up from $0.4 million in 2002.
Gross Profit. The segment's gross profit for 2003 was $6.1 million (12.8% of net
sales) compared to $7.1 million (16.4% in net sales) in 2002. This decline is
principally due to start up costs related to a new B-52 program and a sheet skin
program on the Boeing 767, continuing losses on a Lockheed C-130 program, and a
decreased ability to cover fixed costs on lower sales.
Selling, General and Administrative Expenses. SGA expenses for 2003 were $8.3
million (17.4% of net sales) versus $8.1 million (18.7% of net sales) in 2002.
The increase in SGA expenses is primarily the result of a full years expense
from the acquisition of Versaform in May 2002.
Restructuring Charges. During the third quarter of 2003, the Company adopted a
plan to reduce employment levels and the number of facilities included in its
St. Charles location. The reduction in employment levels will be phased in
through October 2003 and the exit of certain leased facilities will not be
completed until the first quarter of 2004. The Company incurred severance costs
and moving costs of $0.4 million related to this restructuring during 2003.
Interest Expense. Interest expense for the segment is primarily related to the
term debt incurred with the acquisition of Versaform in May 2002. Interest
expense for the segment was $0.4 million in 2003 compared to $0.3 million in
2002.
Machining and Technology Segment
Net Sales.
9 Months % of 9 Months % of
Category 2002 Total 2003 Total
------------------------------------------------------------------------
Technology Products $ 9.1 57.2% $ 6.0 62.5%
Aerospace Products 5.2 32.7% 2.5 26.0%
Other 1.6 10.1% 1.1 11.5%
--------------------------------------------
Total $15.9 100.0% $ 9.6 100.0%
============================================
Net sales for the Machining and Technology segment were $9.6 million in 2003,
down 39.6% from $15.9 million in 2002. Net sales of technology components are
predominantly to two customers, each of which is experiencing lower production
rates. Net sales of aerospace products was $2.5 million in 2003, a reduction
from $5.2 million. As mentioned above, the segment experienced an interruption
in normal order flow in the third quarter when Alliant Techsystems purchased the
ordnance division of Boeing.
Gross Profit. The segment's gross profit was $1.3 million (13.5% of net sales),
a decrease from $4.4 million (27.7% of net sales) in 2002.
Selling, General and Administrative Expenses. SGA expenses for 2003 was $1.2
million, unchanged from the prior year.
Interest Expense. Interest expense for 2003 was $0.6 million for the segment, a
decrease from $0.7 million the prior year due to reduced outstanding debt.
Interest expense for the segment is primarily related to term debt issued to
purchase Tempco Engineering in 2001.
Non Segment Expenses
Interest Expense. Interest expense is primarily the result of advances under the
Company's revolving line of credit. Interest expense was $0.2 million in 2003
compared to $0.1 million in 2002. Reductions in net sales provided less coverage
of fixed cost. Additionally, the segments ability to reduce were unable to
offset this decline in net sales.
Income Taxes. The loss generated by the Company in 2003 created an income tax
benefit of $1.4 million compared to an expense of $0.5 million in 2002. The
Company's effective tax rate was 38.5% in 2003 compared to 37.5% in 2002.
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 on an annual basis. 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 generated $0.4 million in cash from operations. Reductions in
accounts receivable of $2.9 million were driven by increased collection efforts
and lower sales volumes during the third quarter. Although the Company's
inventory levels have increased in 2003 by $1.1 million, they declined by $0.8
million from June 30, 2003. The Company reduced accounts payable and accrued
liabilities by $2.8 million during 2003.
During the first nine months of 2003, the Company spent $0.8 million on capital
expenditures. These purchases have primarily been recurring purchases to
maintain sound operating capabilities, a new mill at the Company's Auburn
facility and design and layout costs for a building the Company leased in the
San Diego area to consolidate its three locations there.
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. Additionally, subsequent to year end, the Company exhausted its
available borrowings under its revolving credit facility of $7.0 million. In
April 2003, the Company 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. The revolving credit facility is scheduled to be reduced by
collection of certain income tax and claim proceeds. At September 30, 2003, the
revolving credit agreement had been reduced to [$9.2] million due to collection
of certain income tax refunds.
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. Independently, the Company began a plan to reduce operating
expenses at all facilities with primary emphasis on the St. Charles facility.
These immediate cost savings included reductions in overtime worked and
controllable expenses. Management, in conjunction with the financial consultant,
submitted a plan for improving operating performance to the bank on July 1,
2003. This plan included a reduction in employment levels at the Company's St.
Charles facility of approximately 60 people, realignment of reporting
responsibilities and operating metrics, the initiation of a raw material cut to
size contract with a supplier to reduce the administrative and operational
management of raw material, and the consolidation of operations into two
facilities from the four currently occupied. Severance and relocation costs are
estimated to be $0.6 million, principally in the third quarter of 2003.
As noted above, in April, 2003, the Company negotiated certain financial
covenants under its lending arrangement. As of September 30, 2003, the Company
was in compliance with each of these revised covenants. However, the Company's
continued compliance with these revised financial covenants could be adversely
affected by the continued weak environment in the aerospace industry.
Consequently, there can be no assurance that the Company will be able to
continue to comply with the terms of one or more of these revised debt
covenants.
The Company is currently reviewing the operations of all of its manufacturing
locations and the level of its selling and administrative expenses, and plans to
present an updated plan for improving operating performance to its lender in
November 2003. At that time, the Company intends to begin negotiations with its
lender regarding a restructuring of the Company's current lending arrangements.
No assurance can be given that the Company will be successful in restructuring
its working capital and term debt on terms satisfactory to it or, in the
alternative, in obtaining replacement financing on suitable 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 September 30, 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.
Item 4. Controls and Procedures.
As of September 30, 2003, the Company's management, under the supervision of its
Chief Executive Officer and Chief Financial Officer, have evaluated 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 on such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that the information
required to be disclosed by the Company in its reports that it files or submits
under the Securities Exchange Act of 1934, as amended, (i) is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms, and (ii) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
As previously disclosed, the Company's management has identified certain
significant deficiencies in internal control over financial reporting relating
to the Company's accounting for inventory. These deficiencies could adversely
affect the Company's ability to record, process, summarize and report financial
information in a timely manner, and could adversely affect the reliability of
the Company's financial reporting and its preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. 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 over financial reporting noted above:
o Additional analysis and reconciliation procedures have been implemented
related to inventory valuation. The Company has retained an accounting
services firm to review the Company's methods and processes related to
inventory valuation.
o Corporate oversight of the controls and procedures in place over inventory
has been increased and staffing has been added.
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 Act
Section 404, which the Company began in the third quarter of 2003.
o Management has completed the necessary account analysis and review prior to
finalizing inventory valuation in its September 30, 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, are effective in addressing the significant
deficiencies in internal control over financial reporting relating to inventory.
Except for the above disclosure, there have been no other changes in the
Company's internal control over financial reporting that occurred during the
quarter ended September 30, 2003 that have materially affected or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II
OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits:
Exhibit Number Description
10.1 Net Industrial Lease between Nonar Enterprises and
Versaform Corporation, dated as of September 12,
2003
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 the
Sarbanes-Oxley Act of 2002
(b) The Company filed the following reports on Form 8-K during the
quarter ended September 30, 2003:
(i) On July 2, 2003, the Company filed a Report on Form
8-K reporting certain details associated with its
action plan to further improve the Company's
operating performance.
(ii) On July 23, 2003, the Company filed a Report on Form
8-K reporting the termination of 60 employees at its
facility located in St. Charles, Missouri.
(iii) On September 12, 2003, the Company filed a Report on
Form 8-K reporting the Company's having entered into
certain contractual relationships.
(iv) On September 26, 2003, the Company filed a Report on
Form 8-K announcing the resignation of Ernst & Young
as the Company's independent accountant effective
upon completion of the quarterly review of the
Company's financial quarter ending September 30,
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: November 13, 2003 By: /s/ Ronald S. Saks
----------------------------------------
Ronald S. Saks
Chief Executive Officer and President
Date: November 13, 2003 By: /s/ Lawrence E. Dickinson
----------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
EXHIBIT INDEX
Exhibit Number Description
10.1 Net Industrial Lease between Nonar Enterprises and
Versaform Corporation, dated as of September 12,
2003
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 the
Sarbanes-Oxley Act of 2002.