10-Q 1 c97707e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2005. [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission file number: 000-24293 LMI AEROSPACE, INC. (Exact name of registrant as specified in its charter)
MISSOURI 43-1309065 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3600 MUELLER ROAD ST. CHARLES, MISSOURI 63302-0900 (Address of principal executive offices) (Zip Code)
(636) 946-6525 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Title of class of common stock Number of shares outstanding as of August 5, 2005. ------------------------------ -------------------------------------------------- Common Stock, par value $.02 per share 8,250,165
LMI AEROSPACE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDING JUNE 30, 2005 PART I. FINANCIAL INFORMATION
Page No. ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004. 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004. 5 Notes to Condensed Consolidated Financial Statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ITEM 4. CONTROLS AND PROCEDURES. 18 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 21 SIGNATURE PAGE EXHIBIT INDEX
2 PART I FINANCIAL INFORMATION LMI AEROSPACE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) (Unaudited)
(Unaudited) June 30, 2005 December 31, 2004 ------------- ----------------- Assets Current assets: Cash and cash equivalents $ 195 $ 414 Trade accounts receivable, net of allowance of $154 at June 30, 2005 and $213 at December 31, 2004 10,792 9,093 Inventories 23,594 23,687 Prepaid expenses and other current assets 1,249 981 Deferred income taxes 2,043 2,043 ------------ ------------ Total current assets 37,873 36,218 Property, plant and equipment, net 17,702 18,947 Goodwill 5,653 5,653 Customer intangible assets, net 3,246 3,408 Other assets 899 1,155 ------------ ------------ Total assets $ 65,373 $ 65,381 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 5,551 $ 5,857 Accrued expenses 2,842 2,728 Income taxes payable 1,009 67 Current installments of long-term debt and capital lease obligations 1,782 1,973 ------------ ------------ Total current liabilities 11,184 10,625 Long-term debt and capital lease obligations, less current installments 15,109 17,583 Subordinated debt 1,000 1,000 Deferred income taxes 1,821 1,821 ------------ ------------ Total long-term liabilities 17,930 20,404 Stockholders' equity: Common stock, $.02 par value per share; authorized 28,000,000 shares; issued 8,736,427 shares in both periods 175 175 Preferred stock, $.02 par value per share; authorized 2,000,000 shares; none issued in both periods -- -- Additional paid-in capital 26,171 26,171 Treasury stock, at cost, 494,312 shares at June 30, 2005 and 499,712 share at December 31, 2004 (2,345) (2,371) Retained earnings 12,258 10,377 ------------ ------------ Total stockholders' equity 36,259 34,352 ------------ ------------ Total liabilities and stockholders' equity $ 65,373 $ 65,381 ============ ============
See accompanying notes 3 LMI AEROSPACE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share and per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net sales $ 24,008 $ 21,875 $ 47,981 $ 40,415 Cost of sales 18,383 17,548 37,134 33,417 ----------- ----------- ----------- ----------- Gross profit 5,625 4,327 10,847 6,998 Selling, general and administrative expenses 3,486 3,562 6,940 7,307 ----------- ----------- ----------- ----------- Income (loss) from operations 2,139 765 3,907 (309) Other income (expense): Interest expense (422) (563) (842) (1,008) Other, net (4) 8 (1) 8 ----------- ----------- ----------- ----------- Income (loss) before income taxes 1,713 210 3,064 (1,309) Provision for income taxes 664 75 1,171 75 ----------- ----------- ----------- ----------- Net income (loss) $ 1,049 $ 135 $ 1,893 $ (1,384) =========== =========== =========== =========== Amounts per common share: Net income (loss) per common share $ 0.13 $ 0.02 $ 0.23 $ (0.17) =========== =========== =========== =========== Net income (loss) per common share assuming dilution $ 0.13 $ 0.02 $ 0.23 $ (0.17) =========== =========== =========== =========== Weighted average common shares outstanding 8,239,942 8,181,786 8,238,866 8,181,786 =========== =========== =========== =========== Weighted average diluted stock options outstanding 95,822 -- 106,897 -- =========== =========== =========== ===========
See accompanying notes 4 LMI AEROSPACE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six Months Ended June 30, 2005 2004 ---------- ---------- Operating activities: Net income (loss) $ 1,893 $ (1,384) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,241 2,320 Non-cash loss on sale of equipment 4 18 Changes in operating assets and liabilities: Trade accounts receivable (1,699) (623) Inventories 93 116 Prepaid expenses and other assets (320) (688) Income taxes 964 1,254 Accounts payable (306) 1,628 Accrued expenses 115 812 ---------- ---------- Net cash provided by operating activities 2,985 3,453 Investing activities: Additions to property, plant and equipment (570) (666) Proceeds from sale of equipment 17 5 ---------- ---------- Net cash provided by (used by) investing activities (553) (661) Financing activities: Net borrowings on revolving line of credit (1,590) 1,093 Principal payments on long-term debt (1,075) (3,353) Proceeds from exercise of stock options 14 -- ---------- ---------- Net cash (used by) provided by financing activities (2,651) (2,260) Effect of exchange rate changes on cash -- (28) ---------- ---------- Net increase (decrease) in cash and cash equivalents (219) 504 Cash and cash equivalents, beginning of year 414 441 ---------- ---------- Cash and cash equivalents, end of quarter $ 195 $ 945 ========== ========== Supplemental disclosures of cash flow information: Interest paid $ 856 $ 869 Income taxes paid (refunded), net $ 190 $ (1,187)
See accompanying notes. 5 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005 1. ACCOUNTING POLICIES DESCRIPTION OF BUSINESS LMI Aerospace, Inc. (the "Company") fabricates, machines and integrates formed, close tolerance aluminum and specialty alloy components for use by the aerospace and technology 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 Vista, California; and Savannah, Georgia. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results for the six months ending June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the condensed consolidated financial statements and accompanying footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission. 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. 6 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005 STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provides the pro forma disclosures required by Statements of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. No stock-based employee compensation expense is recognized in the statement of operations, as all options granted had an exercise price equal to the fair value of the underlying common stock on the date of grant. Had the Company determined compensation cost based on the fair value of the underlying common stock at the grant date under SFAS No. 123, net income and earnings per share amounts would have been as follows:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net income (loss) $ 1,049 $ 135 $ 1,893 $ (1,384) Total stock-based employee compensation expense determined under fair value based method, net of tax effect 2 2 18 12 ---------- ---------- ---------- ---------- Pro forma net income (loss) $ 1,047 $ 133 $ 1,875 $ (1,372) ========== ========== ========== ========== Net income (loss) per common share - basic and assuming dilution(1) As reported $ 0.13 $ 0.02 $ 0.23 $ (0.17) Pro forma $ 0.13 $ 0.02 $ 0.23 $ (0.17)
---------- (1) Options to purchase 37,000 and 207,260 shares of common stock were outstanding at June 30, 2005 and June 30, 2004 respectively, but were not included in the computations of diluted EPS because the options' exercise price was greater than the Year to Date average market price of the common shares. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. 7 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005 2. INVENTORIES Inventories consist of the following:
June 30, 2005 December 31, 2004 ------------- ----------------- Gross inventory Raw materials $ 5,395 $ 4,603 Work in progress 6,107 6,931 Finished goods 14,286 14,458 ------------ ------------ Total gross inventory 25,788 25,992 Reserves Lower of cost or market (373) (288) Obsolescence & slow moving (1,821) (2,017) ------------ ------------ Total reserves (2,194) (2,305) Net inventory $ 23,594 $ 23,687 ------------ ------------
3. GOODWILL AND INTANGIBLES As required by SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs an annual goodwill impairment test on a reporting segment basis. A fair value approach is utilized by management regarding projected cash flows and other factors to determine the fair value of the respective assets. If required, an impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its fair value. In the fourth quarter of 2004, the Company performed the required annual impairment test under SFAS No. 142 and concluded that the remaining goodwill balance, which relates to the Machining and Technology segment only, was not further impaired. The remaining goodwill was $5,653 at June 30, 2005 and December 31, 2004. CUSTOMER RELATED INTANGIBLES The carrying amount of customer related intangibles at June 30, 2005 and December 31, 2004 were as follows:
Gross Accumulated Useful Amount Amortization Life ------------ ------------ -------- Versaform Corporation $ 3,975 $ 729 15 years ------------ ------------ June 30, 2005 $ 3,975 $ 729 ============ ============ Versaform Corporation $ 3,975 $ 596 Stretch Forming Corporation 329 300 ------------ ------------ December 31, 2004 $ 4,304 $ 896 ============ ============
Customer related intangibles amortization expense was $86 and $96 for the three months ended June 30, 2005 and 2004, respectively, and $162 and $192 for the six months ended June 30, 2005 and 2004, respectively. 8 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005 4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT Long-term debt and revolving line of credit consists of the following:
June 30, December 31, 2005 2004 ---------- ------------ Term Loans: Real Estate $ 3,462 $ 3,645 Equipment 4,130 4,720 Revolving line of credit 9,000 10,590 Note payable to director, principal and interest payable monthly at 7% -- 181 Notes payable, principal and interest payable monthly, at fixed rates, ranging from 6.99% to 8.88% 299 420 ---------- ---------- Total debt 16,891 19,556 Less current installments 1,782 1,973 ---------- ---------- Total 15,109 $ 17,583 ========== ========== Subordinated notes due December 2007 payable to certain directors, interest payable monthly at 12% $ 1,000 $ 1,000 ========== ==========
NEW CREDIT FACILITY On November 29, 2004 the Company negotiated a new lending agreement (the "Credit Facility") with Wells Fargo Business Credit, Inc. ("Wells Fargo"). The Credit Facility is structured as follows: o A revolving line of credit (the "Revolver") of up to $18,000, subject to a borrowing base calculation. At June 30, 2005, the Company had $9,000 outstanding under the Revolver. The borrowing base calculation at June 30, 2005 allowed the Company to borrow up to $14,287. The Revolver requires monthly payments of interest at Wells Fargo's prime lending rate (6.00% at June 30, 2005) and matures on November 15, 2007. o An equipment term loan (the "Equipment Loan") of $4,720 payable monthly over three years in equal monthly principal installments of $98. The Equipment Loan requires monthly interest payments at Wells Fargo's prime lending rate plus 4%. This rate can be reduced to Wells Fargo's prime lending rate plus 0.5% if the Company is able to meet the covenants under the Credit Facility and pays a fee of $100. o A real estate term loan (the "Real Estate Loan") of $3,645 payable in equal monthly principal installments of $30 over three years, using a ten year amortization table. The Real Estate Loan requires interest at Wells Fargo's prime lending rate plus 4%. This rate can be reduced to Wells Fargo's prime lending rate plus 0.5% if the Company is able to maintain sufficient liquidity and reduce the borrowing base calculations by $1,800 over the first year of the Real Estate Loan. Under each of the Revolver, the Equipment Loan and the Real Estate Loan, the Company has an option to fix the interest rate for a period not to exceed 90 days. The Credit Facility is secured by all the assets of the Company and requires the Company to meet certain non-financial and financial covenants, including minimum levels of net income and net worth and limits on capital expenditures. The Credit Facility 9 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005 In connection with the Credit Facility, the Company issued an aggregate of $1,000 of subordinated notes to certain of its directors. These subordinated notes provide for no principal payments and quarterly interest payments at 12% per annum and mature on December 31, 2007. Prepayments are allowed only if certain financial transactions or measurements are accomplished. 5. BUSINESS SEGMENT INFORMATION As set forth in the criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company is organized into two reportable segments: the Sheet Metal segment and the Machining and Technology segment. The Sheet Metal segment fabricates, finishes and integrates close tolerance aluminum and specialty alloy components primarily for the aerospace industry. The Machining and Technology segment machines close tolerance aluminum and specialty alloy components for the aerospace, semiconductor and medical products industries. The accounting policies of the segments are the same as those described in Note 1 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q. Sales between segments are insignificant. Corporate assets, liabilities and expenses related to the Company's corporate offices are allocated to the segments, except for income taxes. The table below presents information about reported segments on the basis used internally to evaluate segment performance:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net sales: Sheet Metal $ 20,641 $ 17,472 $ 41,047 $ 32,222 Machining and Technology 3,367 4,405 6,934 8,193 ---------- ---------- ---------- ---------- $ 24,008 $ 21,875 $ 47,981 $ 40,415 ========== ========== ========== ========== Income (loss) from operations: Sheet Metal $ 2,443 $ 103 $ 4,275 $ (1,375) Machining and Technology (304) 662 (368) 1,066 ---------- ---------- ---------- ---------- $ 2,139 $ 765 $ 3,907 $ (309) ========== ========== ========== ========== Interest expense: Sheet Metal $ -- $ 145 $ 3 $ 257 Machining and Technology -- 144 -- 311 Corporate 422 274 839 440 ---------- ---------- ---------- ---------- $ 422 $ 563 $ 842 $ 1,008 ========== ========== ========== ========== Depreciation and amortization: Sheet Metal $ 829 $ 1,013 $ 1,707 $ 1,897 Machining and Technology 97 99 194 196 Corporate 165 45 340 227 ---------- ---------- ---------- ---------- $ 1,091 $ 1,157 $ 2,241 $ 2,320
10 LMI AEROSPACE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2005
Three Months Ended Six Months Ended June 30 June 30 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Capital expenditures: Sheet Metal $ 274 $ 632 $ 502 $ 629 Machining and Technology 11 7 14 16 Corporate 44 7 54 21 ---------- ---------- ---------- ---------- $ 329 $ 376 $ 570 $ 666 ========== ========== ========== ==========
June 30, 2005 December 31, 2004 ------------- ----------------- Goodwill: Machining and Technology $ 5,653 $ 5,653 ------------ ------------ $ 5,653 $ 5,653 ============ ============ Total assets: Sheet Metal $ 46,969 $ 45,017 Machining and Technology 14,337 15,981 Corporate 4,067 4,383 ------------ ------------ $ 65,373 $ 65,381 ============ ============
6. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes adjustments to net income (loss) for the change in foreign currency translations related to the Company's former Canadian subsidiary which was sold in 2004 as follows:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net income (loss) $ 1,049 $ 135 $ 1,893 $ (1,384) Other comprehensive income (loss): Foreign currency translation adjustments -- (25) -- (28) ---------- ---------- ---------- ---------- Comprehensive income (loss) $ 1,049 $ 110 $ 1,893 $ (1,412) ========== ========== ========== ==========
11 STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company makes forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Quarterly Report on Form 10-Q, which represent the Company's expectations or beliefs about future events and financial performance. When used in this report, the words "expect," "believe," "anticipate," "goal," "plan," "intend," "estimate," "may," "will" or similar words are intended to identify forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 31, 2005. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. In addition, actual results could differ materially from those suggested by the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on the forward-looking statements. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should, however, review additional disclosures made by the Company from time to time in its periodic filings with the Securities and Exchange Commission. This Quarterly Report on Form 10-Q should be read completely and with the understanding that the Company's actual future results may be materially different from what the Company expects. All forward-looking statements made by the Company in this Form 10-Q and in the Company's other filings with the Securities and Exchange Commission are qualified by these cautionary statements. The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. (See Note 1 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q). The Company believes that certain significant accounting estimates 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 estimates 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, 2004. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW LMI Aerospace, Inc., its direct and indirect wholly-owned subsidiaries and other required consolidated entities are collectively referred to as "the Company." Also, unless the context otherwise requires, the terms "we," "us," or "our" refer to the Company. The following "Management's Discussion and Analysis of Financial Condition and Results of Operations," commonly referred to as MD&A, is intended to help the reader understand the Company, our operations, and our business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes as well as our Annual Report on Form 10-K for the year ended December 31, 2004. OUR BUSINESS We are 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 us 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. We manufacture more than 30,000 aerospace components for integration into a variety of civilian and military aircraft platforms manufactured by leading original equipment manufacturers and prime subcontractors. We also produce components and assemblies for laser equipment used by semiconductor and medical equipment manufacturers in the technology industry and sheet metal products for various companies in the commercial sheet metal industry. In addition to manufacturing quality components, we provide our customers with value-added services related to the design, production and finishing of its components. Historically, our business was primarily dependent on the commercial aircraft market, with Boeing Company as our principal customer. In order to diversify our products and customer base, we implemented an acquisition and marketing strategy in the late 1990's that has broadened the number of industries to which we sell our components, and, within the aerospace industry, diversified our base to reduce our dependence on Boeing Company. The following table specifies our sales by market as a percentage of total sales for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004:
Six Months Ended Six Months Ended Market June 30, 2005 June 30, 2004 ------ ---------------- ---------------- Corporate and regional aircraft 42.0% 30.2% Commercial aircraft 27.0 27.9 Military products 17.6 20.2 Technology products 3.8 13.1 Other (1) 9.6 8.6 -------------- -------------- Total 100.0% 100.0% ============== ==============
(1) Includes commercial sheet metal and various aerospace products. Beginning in 2001, we began an aggressive acquisition campaign that resulted in the consummation of four transactions through 2002. In April 2001, we acquired Tempco Engineering Inc. ("Tempco") and its affiliates, which expanded our aerospace product line and introduced the Company to the technology industry. We 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 our presence in the corporate and regional aircraft market while adding various military products to our product line. The 13 SFC acquisition further supplemented our military product line. Finally, our acquisition of SSFF increased our 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 our 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 our other businesses are referred to as the Sheet Metal segment. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004 The following table is a summary of our operating results for the three months ended June 30, 2005 and June 30, 2004:
($ in millions) Three Months Ended Three Months Ended June 30, 2005 June 30, 2004 ----------------------------------------- ---------------------------------------- Sheet Machining & Sheet Machining & Metal Technology Total Metal Technology Total ---------- ----------- ---------- ---------- ----------- ---------- Net sales $ 20.6 $ 3.4 $ 24.0 $ 17.5 $ 4.4 $ 21.9 Cost of sales 15.2 3.2 18.4 14.2 3.3 17.5 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 5.4 0.2 5.6 3.3 1.1 4.4 S, G & A 3.0 0.5 3.5 3.2 0.4 3.6 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations $ 2.4 $ (0.3) $ 2.1 $ 0.1 $ 0.7 $ 0.8 ========== ========== ========== ========== ========== ==========
SHEET METAL SEGMENT Net Sales. The following table specifies the amount of the Sheet Metal segment's net sales by category for the quarters ended June 30, 2005 and June 30, 2004 and the percentage of the segment's total net sales for each period represented by each category.
($ in millions) Quarter Quarter ended ended June 30, % of June 30, % of Category 2005 Total 2004 Total -------- ---------- ---------- ---------- ---------- Corporate and regional $ 9.8 47.6% $ 7.3 41.7% Commercial aircraft 6.6 32.0 5.7 32.6 Military products 2.5 12.1 3.0 17.1 Other 1.7 8.3 1.5 8.6 ---------- ---------- ---------- ---------- Total $ 20.6 100.0% $ 17.5 100.0% ========== ========== ========== ==========
Net sales for the segment for the quarter ended June 30, 2005 were $20.6 million, a 17.7% increase from $17.5 million in the second quarter of 2004. Net sales for components used on corporate and regional aircraft were $9.8 million for the second quarter of 2005, an increase of 34.2% from $7.3 million in the second quarter of 2004. Net sales of components used on Gulfstream aircraft were $8.2 million in the second quarter of 2005, an increase of 95.2% as compared to $4.2 million in the second quarter of 2004. Increased production rates by Gulfstream and product sales awarded during 2004 were the primary reasons for this increase. This increase was offset by reductions in volume with Bombardier Inc. ("Bombardier") stemming from an agreement for the segment to shift a previously sub-contracted portion of work back to Bombardier and a reduction in demand for components used in auxiliary power units used in corporate and regional aircraft. 14 Commercial aircraft net sales were $6.4 million in the quarter ended June 30, 2005 compared to $5.7 million in the quarter ended June 30, 2004, a 12.3% increase. This increase was primarily from net sales for components used on Boeing Company's ("Boeing") 737 aircraft, which were $3.7 million in the current year second quarter, a 27.6% increase from $2.9 million in the prior year quarter. Net sales on military products were $2.5 million in the second quarter of 2005, a 16.7% decline from $3.0 million in the second quarter of 2004. This reduction resulted primarily from negotiations to return certain poorly performing components on Lockheed Martin Corporation's C-130 program to the segment late in 2004. Gross Profit. Gross profit for the segment was $5.4 million (26.2% of net sales) in the second quarter of 2005 compared to $3.3 million (18.9% of net sales) in the second quarter of 2004, an increase of 63.6%. This increase in gross profit resulted from improved labor efficiencies, as manufacturing labor and fringe benefit costs were $5.9 million for the quarter ended June 30, 2005 compared to $5.8 million for the quarter ended June 30, 2004, while sales for the segment grew 17.7% to $20.6 million from $17.5 million for the same respective periods. Additionally, the growth in net sales provided more beneficial coverage of fixed costs. Selling, General and Administrative Expenses. Selling, general and administrative ("SGA") expenses were $3.0 million (14.6% of net sales) for the segment for the quarter ended June 30, 2005, down from $3.2 million (18.3% of net sales) for the quarter ended June 30, 2004. The prior year amounts included $0.2 million of restructuring expenses related to a re-alignment of production capabilities and reduction of employment levels at the segment's Wichita, Kansas facility. Excluding these restructuring expenses, SGA expenses were unchanged year over year. MACHINING AND TECHNOLOGY SEGMENT Net Sales. The following table specifies the amount of the Machining and Technology segment's net sales by category for the quarters ended June 30, 2005 and June 30, 2004 and the percentage of the segment's total net sales for each period represented by each category:
($ in millions) Quarter Quarter ended ended June 30, % of June 30, % of CATEGORY 2005 Total 2004 Total -------- ---------- ---------- ---------- ---------- Military products $ 1.6 47.1% $ 1.0 22.7% Technology products 1.1 32.4 3.1 70.5 Other 0.7 20.5 0.3 6.8 ---------- ---------- ---------- ---------- Total $ 3.4 100.0% $ 4.4 100.0% ========== ========== ========== ==========
Net sales for the Machining and Technology segment were $3.4 million for the quarter ended June 30, 2005 compared to $4.4 million for the quarter ended June 30, 2004, a decline of 22.7%. Net sales of technology products were $1.1 million for the second quarter of 2005, a decrease of 64.5% from $3.1 million during the second quarter of 2004. This decline is attributable to reduced demand from a customer providing laser equipment to the semi-conductor industry. Net sales for this market had been dropping significantly since the third quarter of 2004, hitting a low in the second quarter of 2005. Net sales of components for military products increased to $1.6 million during the quarter ended June 30, 2005, an increase of 60.0% from $1.0 million in the quarter ended June 30, 2004. This increase was primarily attributable to increased demand for components on the Apache Helicopter and various guidance systems. 15 Gross Profit. The segment's gross profit was $0.2 million (5.9% of net sales) in the quarter ended June 30, 2005, down from $1.1 million (25.0% of net sales) in the quarter ended June 30, 2004. This 81.8% decline in gross profit resulted from the reduced coverage of fixed costs by the decline in net sales, principally the decrease in net sales of laser products, and poor efficiency on product produced for certain new customers. Selling, General and Administrative Expenses. SGA expenses were $0.5 million (14.7% of net sales) in the quarter ended June 30, 2005, an increase from $0.4 million (9.1% of net sales) in the quarter ended June 30, 2004. This increase is due to higher salary and fringe benefit costs. NON-SEGMENT EXPENSES Interest Expense. Interest expense for the second quarter of 2005 was $0.4 million compared to $0.6 million in the second quarter of 2004. The second quarter of 2004 included a fee payable to the Company's former lender of $0.1 million. Additionally, debt levels were reduced to $17.9 million at June 30, 2005 from $25.6 million at June 30, 2004 from internally generated cash flow. Income Tax Expense. Income tax expense was $0.7 million for the quarter ended June 30, 2005, compared to $0.1 million for the quarter ended June 30, 2004. The effective tax rate for the current year second quarter was 38.7% compared to 35.7% in the second quarter of the prior year. This difference in rate is primarily attributable to the utilization of certain net operating losses in 2004 that had not previously been valued. SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004 The following table is a summary of the Company's operating results for the six months ended June 30, 2005 and June 30, 2004:
($ in millions) Six Months Ended Six Months Ended June 30, 2005 June 30, 2004 ----------------------------------------- ----------------------------------------- Sheet Machining & Sheet Machining & Metal Technology Total Metal Technology Total ---------- ----------- ---------- ---------- ----------- ---------- Net sales $ 41.1 $ 6.9 $ 48.0 $ 32.2 $ 8.2 $ 40.4 Cost of sales 30.9 6.3 37.2 27.2 6.2 33.4 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 10.2 0.6 10.8 5.0 2.0 7.0 S, G & A 5.9 1.0 6.9 6.4 0.9 7.3 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations $ 4.3 $ (0.4) $ 3.9 $ (1.4) $ 1.1 $ (0.3) ========== ========== ========== ========== ========== ==========
SHEET METAL SEGMENT Net Sales. The following table specifies the amount of the Sheet Metal segment's net sales by category for the six months ended June 30, 2005 and June 30, 2004 and the percentage of the segment's total net sales for each period represented by each category.
($ in millions) Six Months Ended % of Six Months Ended % of Category June 30, 2005 Total June 30, 2004 Total -------- ---------------- ---------- ---------------- ---------- Corporate and regional $ 20.0 48.7% $ 12.2 37.9% Commercial aircraft 12.9 31.4 11.3 35.1 Military products 4.6 11.2 6.1 18.9 Other 3.6 8.7 2.6 8.1 ---------- ---------- ---------- ---------- Total $ 41.1 100.0% $ 32.2 100.0% ========== ========== ========== ==========
16 Net sales for the first six months of 2005 were $41.1 million compared to $32.2 million in the first six months of 2004, an increase of 27.6%. Net sales of corporate and regional aircraft products were $20.0 million in the first half of 2005, up 63.9% from the first six months of 2004. Components for use on Gulfstream aircraft generated net sales of $16.6 million in the first half of 2005 compared to $8.2 million in the first half of 2004. This increase resulted from the combination of increased production rates at Gulfstream and additional product sales awarded to the company during 2004. Net sales of components for commercial aircraft were $12.9 million for the six months ended June 30, 2005 an increase of 14.2% as compared to $11.3 million for the six months ended June 30, 2004. Net sales of components for the Boeing 737, 747 and 777 aircraft were $11.9 million through June 30, 2005, up 14.4% from $10.4 million through June 30, 2004, such increase driven primarily by increased production rates at Boeing. Military products generated net sales of $4.6 million in the six months ended June 30, 2005, down 24.6% from $6.1 million for the six months ended June 30, 2004. This decline resulted from the end of an unprofitable B-52 refurbishment program during the first half of 2004 and the Company's efforts to move unprofitable work on components for the C-130 aircraft to other suppliers. Gross Profit. Gross profit for the first half of 2005 was $10.2 million (24.8% of net sales), an increase of 104% as compared to $5.0 million (15.5% of net sales) for the first half of 2004. This improvement in gross profit was driven by labor efficiency gains from higher net sales, benefits resulting from the restructuring of the segment's St. Charles, Missouri and Wichita, Kansas facilities completed in the first half of 2004, and the movement of certain unprofitable product to other suppliers. Selling, General and Administrative Expenses. SGA expenses for the segment were $5.9 million (14.4% of net sales) for the six months ended June 30, 2005, down 7.8% from $6.4 million (19.9% of net sales) for the six months ended June 30, 2004. The first half of 2004 included restructuring costs related to staffing and facility changes in the segment's St. Charles, Missouri and Wichita, Kansas operations of $0.7 million. MACHINING AND TECHNOLOGY SEGMENT Net Sales. The following table specifies the amount of the Machining and Technology segment's net sales by category for the six months ended June 30, 2005 and June 30,2004 and the percentage of the segment's total net sales for each period represented by each category:
($ in millions) Six Months Ended % of Six Months Ended % of CATEGORY June 30, 2005 Total June 30, 2004 Total ---------------- ---------- ---------------- ---------- Military products $ 3.9 56.5% $ 2.1 25.6% Technology products 1.8 26.1 5.3 64.6 Other 1.2 17.4 0.8 9.8 ---------- ---------- ---------- ---------- Total $ 6.9 100.0% $ 8.2 100.0% ========== ========== ========== ==========
Net sales for the Machining and Technology segment were $6.9 million for the first half of 2005, down 15.9% from $8.2 million in the first half of 2004. Net sales of technology products were $1.8 million for the six months ended June 30, 2004, down 66.0% from the six months ended June 30, 2004. Demand for components used in the production of lasers used in the semiconductor market has continued to be weak. The segment's largest technology customer has delayed shipments of orders to balance demand and to better manage working capital. 17 Net sales of military products were $3.9 million for the six months ended June 30, 2005, up 85.7% from $2.1 million for the six months ended June 30, 2004. This increase resulted from additional net sales of Apache helicopter components and products used in various guidance systems. Gross Profit. Gross profit for the first six months of 2005 were $0.6 million (8.7% of net sales) for the segment, down 70.0% from $2.0 million (24.4% of net sales) for the first six months of 2004. The decrease in net sales for technology products for the six months ended June 30, 2004 combined with start up costs related to certain new customers caused this erosion in gross profit. Selling, General and Administrative Expenses. SGA expense was $1.0 million (14.5% of net sales) for the first half of 2005, up from $0.9 million (11.0% of net sales) for the first half of 2004. This increase was primarily attributable to increased salary and wage cost. NON-SEGMENT EXPENSES Interest Expense. Interest expense for the first half of 2005 was $0.8 million compared to $1.0 million for the first half of 2004. Included in the first half of 2004 were special bank fees of $0.1 million. Income Tax Expense. Income tax expense for the six months ended June 30, 2005 were $1.2 million compared to $0.1 million for the six months ended June 30, 2004. The Company's increase in tax expense was due to the increased profitability during the first six months of 2005 compared to the first six months of 2004. LIQUIDITY AND CAPITAL RESOURCES The Company generated operating cash flow of $3.0 million in the first six months of 2005, primarily from net income of $1.9 million plus non-cash depreciation and amortization of $2.3 million. Offsetting this cash source was growth in the Company's accounts receivables of $1.7 million due to an increase in net sales. Additionally, the Company received a temporary cash benefit of $1.0 million from deferring income tax payments to the first quarter of 2006 due to its level of tax obligation for fiscal 2004. The Company used $0.6 million of cash for capital expenditures during the first six months of 2005. The Company has constrained its capital expenditures over the past 2 years and expects to increase spending over the next 2 years to support its growth needs. Total capital expenditures for 2005 are expected to be approximately $2.5 million. Our current lending agreement (the "Credit Facility") requires cash generated to be applied to its revolving line of credit (the "Revolver"). Therefore, the Company carries a small cash balance and feels that its borrowing availability under the Revolver is a better indicator of its financial flexibility. Under the Credit Facility, our assets on June 30, 2005 supported Revolver borrowings of up to $14.3 million. At June 30, 2005, we had $9.0 million outstanding on the Revolver, thereby providing $5.3 million of additional borrowing capacity. Cash generated during the year has been used to pay down the Revolver by $1.6 million and to fund scheduled term debt payments of $1.1 million. We believe our Credit Facility will support our working capital and other cash needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. We are exposed to market risk primarily due to fluctuations in interest rates. We do not utilize any particular strategy or instruments to manage our interest rate risk. Our Credit Facility is comprised of the Revolver, an equipment term loan (the "Equipment Loan") and a real estate term loan (the "Real Estate Loan"). The Credit Facility carries a fluctuating interest rate 18 that now varies based on changes to the prime lending rate of interest of Wells Fargo Business Credit, Inc. ("Wells Fargo"). Accordingly, we are subject to potential fluctuations in our debt service. Based on the amount of our outstanding debt as of June 30, 2005, a hypothetical 1% change in the interest rate of our Credit Facility would result in a change in our annual interest expense of approximately $0.2 million during the next fiscal year. However, under each of the Revolver, the Equipment Loan and the Real Estate Loan, the Company has an option to fix the interest rate for a period not to exceed 90 days, which, while not eliminating interest rate risk, allows the Company to moderate the impact of changes in Wells Fargo's prime lending rate. ITEM 4. CONTROLS AND PROCEDURES. As of June 30, 2005, our Chief Executive Officer and Chief Financial Officer carried out an evaluation with the participation of other members of our management as they deemed appropriate of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in periodic reports that the Company files with the Securities and Exchange Commission is (a) recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and (b) is accumulated and communicated to the Company's management, including its officers, as appropriate to allow timely decisions regarding required disclosure. In connection with our 2004 year-end audit, our independent registered public accounting firm identified certain material weaknesses relating to inventory valuation at our Vista, California location. In January 2005, we undertook three corrective actions specifically designed to address this concern which consisted of (i) the conversion of the operating and financial systems at our Vista, California location for assimilation into our operating and financial systems, (ii) the evaluation and documentation of the procedures at our Vista location, and (iii) providing more management oversight of the accounting for inventories at our Vista, California location. During the second quarter of 2005, we completed the conversion of the operating and financial systems formerly utilized at our Vista, California location. Accordingly, in the judgment of management, this corrective action has been completed and constitutes significant changes in our internal controls. We are currently providing additional managerial oversight for the accounting for inventory at our Vista, California facility and will continue to train selected accounting personnel to perform this function. We are still in the process of evaluating and documenting the procedures related to inventory evaluation at our Vista, California location and expect such undertaking will be completed by year-end 2005. When completed, the corrective action related to such evaluation and documentation will constitute a significant change in our internal controls. We will continue to evaluate the effectiveness of its disclosure controls and procedures and its internal controls on an ongoing basis and will take further action as appropriate. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2005 our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in Securities and Exchange Commission rules and forms. 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On February 6, 2004, Versaform, our wholly-owned subsidiary acquired on May 16, 2002, was served a subpoena by the federal government. The subpoena relates to the time period January 1, 1999 through February 6, 2004 and was issued in connection with an investigation by certain government agencies, including the Department of Defense, Office of Inspector General, Defense Criminal Investigative Service and the Federal Bureau of Investigation. The subpoena refers to structural components Versaform manufactured for Nordam Corporation for B-52 engine cowlings, components for auxiliary power units Versaform manufactured for Hamilton Sundstrand, a United Technologies Company, and certain tools Versaform manufactured for Lockheed Martin Corporation. We have not been served with any notice of any pending legal action filed by any government agency. Accordingly, we have no knowledge of any specific allegations of wrongdoing against Versaform by any regulatory authority. We intend to cooperate fully with the federal government in connection with any investigation of this matter and has currently provided all information and support of related manufacturing and sales activity requested. Other than as noted above, we have not been a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of its business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of the shareholders of the Company was held on July 7, 2005. Of the 8,243,147 shares entitled to vote at such meeting, 8,102,261 shares were present at the meeting in person or by proxy. (b) The individual listed below was elected as a Class I Director of the Company at the meeting, and the number of shares voted for, against and withheld were as follows:
Number of Shares Voted ------------------------- Name For Withheld ---- --- -------- Sanford S. Neuman 7,785,292 316,969
The individuals listed below are Directors whose term of office continued after the meeting: Thomas G. Unger John M. Roeder Paul L. Miller, Jr.* Ronald S. Saks Joseph Burstein Brian D. Geary * Mr. Miller passed away on July 15, 2005. Abstentions with respect to the election of directors were treated as votes withheld. (c) In addition to the election of one Class I Director, the following matters were voted upon: (i) The shareholders ratified the appointment of BDO Seidman, LLP as the Company's independent auditor for the fiscal year ending December 31, 2005. The number of shares voted for, against and withheld were as follows: 20
Number of Shares Voted --------------------------------------- For Against Abstain --- ------- ------- 8,078,865 4,070 19,326
(ii) The shareholders approved the LMI Aerospace, Inc. 2005 Long-Term Incentive Plan. The number of shares voted for, against and withheld were as follows:
Number of Shares Voted ------------------------------------------------------------ For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 5,121,908 196,850 7,295 2,776,208
(d) None. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K. (a) Exhibits: See Exhibit Index. 21 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: August 12, 2005 /s/ Ronald S. Saks ------------------------------------- Ronald S. Saks, President and Chief Executive Officer Date: August 12, 2005 /s/ Lawrence E. Dickinson ------------------------------------- Lawrence E. Dickinson Chief Financial Officer and Secretary 22 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 31.1 Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief Executive Officer. 31.2 Rule 13a-14(a) Certification of Lawrence E. Dickinson, Secretary and Chief Financial Officer. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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