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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012.
or
o
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
(State or other jurisdiction of incorporation or organization)
 
43-1309065
(I.R.S. Employer Identification No.)
 
411 Fountain Lakes Blvd.
   
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
o
 
Accelerated filer
 
x
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On November 1, 2012, there were 12,002,139 shares of our common stock, par value $0.02 per share, outstanding.
 


 
1

 
 
LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q
 
PART I.  FINANCIAL INFORMATION
 
 
Page
No.
Item 1.
 
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
13
     
Item 3.
19
     
Item 4.
19
     
PART II.  OTHER INFORMATION
     
Item 1.
20
     
Item1A.  
20
     
Item 2.
20
     
Item 3.
20
     
Item 4.
20
     
Item 5.
20
     
Item 6.
20
     
21
   
22
 
 
PART I
FINANCIAL INFORMATION
 
 
LMI Aerospace, Inc.
(Amounts in thousands, except share and per share data)
(Unaudited)
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
 Assets
           
Current assets:
           
Cash and cash equivalents
  $ 109     $ 7,868  
Trade accounts receivable, net of allowance of $261 at September 30, 2012 and $359 at December 31, 2011
    51,599       42,720  
Inventories
    57,823       51,081  
Prepaid expenses and other current assets
    2,900       2,595  
Deferred income taxes
    2,954       4,085  
Total current assets
    115,385       108,349  
                 
Property, plant and equipment, net
    36,228       27,340  
Goodwill
    55,730       49,102  
Intangible assets, net
    18,357       17,642  
Other assets
    1,861       2,173  
Total assets
  $ 227,561     $ 204,606  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 12,954     $ 13,224  
Accrued expenses
    15,983       11,108  
Current installments of long-term debt
    1,133       29  
Total current liabilities
    30,070       24,361  
                 
Long-term liabilities:
               
Long-term debt, less current installments
    1,277       -  
Other long-term liabilities
    3,463       3,541  
Deferred income taxes
    7,892       8,919  
Total long-term liabilities
    12,632       12,460  
                 
Shareholders’ equity:
               
Common stock, $0.02 par value per share; authorized 28,000,000 shares: issued 12,095,101 and 12,123,992 shares at September 30, 2012 and December 31, 2011, respectively
    242       242  
Preferred stock, $0.02 par value per share; authorized 2,000,000 shares; none issued at either date
    -       -  
Additional paid-in capital
    75,651       74,823  
Accumulated other comprehensive loss
    (16 )     -  
Treasury stock, at cost, 95,962 shares at September 30, 2012 and 249,082 shares at December 31, 2011
    (455 )     (1,182 )
Retained earnings
    109,437       93,902  
Total shareholders’ equity
    184,859       167,785  
Total liabilities and shareholders’ equity
  $ 227,561     $ 204,606  

See accompanying notes to condensed consolidated financial statements.
 
 
 LMI Aerospace, Inc.
(Amounts in thousands, except share and per share data)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales and service revenue
                       
Product sales
  $ 42,794     $ 42,704     $ 125,180     $ 119,102  
Service revenue
    27,842       22,063       81,532       69,912  
Net sales
    70,636       64,767       206,712       189,014  
Cost of sales and service revenue
                               
Cost of product sales
    32,757       31,316       89,331       85,822  
Cost of service revenue
    19,295       18,119       65,312       58,057  
Cost of sales
    52,052       49,435       154,643       143,879  
Gross profit
    18,584       15,332       52,069       45,135  
                                 
Selling, general and administrative expenses
    10,050       8,681       28,011       25,855  
Income from operations
    8,534       6,651       24,058       19,280  
                                 
Other income (expense):
                               
Interest expense
    (270 )     (255 )     (764 )     (510 )
Other, net
    174       (289 )     281       (851 )
Total other expense
    (96 )     (544 )     (483 )     (1,361 )
                                 
Income before income taxes
    8,438       6,107       23,575       17,919  
Provision for income taxes
    2,799       2,029       8,039       5,606  
                                 
Net income
    5,639       4,078       15,536       12,313  
Other comprehensive income
                               
Foreign currency translation adjustment
    (16 )     -       (16 )     -  
                                 
Total comprehensive income
  $ 5,623     $ 4,078     $ 15,520     $ 12,313  
                                 
Amounts per common share:
                               
Net income per common share
  $ 0.48     $ 0.35     $ 1.33     $ 1.07  
                                 
Net income per common share assuming dilution
  $ 0.48     $ 0.35     $ 1.31     $ 1.05  
                                 
Weighted average common shares outstanding
    11,736,392       11,584,510       11,675,453       11,547,558  
                                 
Weighted average dilutive common shares  outstanding
    11,857,611       11,755,055       11,827,867       11,732,989  

See accompanying notes to condensed consolidated financial statements.

 
 LMI Aerospace, Inc.
(Amounts in thousands)
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Operating activities:
           
Net income
  $ 15,536     $ 12,313  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    5,767       5,351  
Intangible asset impairment
    -       1,163  
Contingent consideration write-off
    -       (1,235 )
Restricted stock compensation
    1,205       912  
Inventory reserves
    (346 )     722  
Deferred taxes
    (626 )     (35 )
Other noncash items
    (172 )     (5 )
Changes in operating assets and liabilities, net of acquisition:
               
Trade accounts receivable
    (7,025 )     (5,787 )
Inventories
    (6,396 )     (4,730 )
Prepaid expenses and other assets
    310       (968 )
Current income taxes
    1,294       1,780  
Accounts payable
    (2,950 )     2,226  
Accrued expenses
    3,440       2,482  
Net cash provided by operating activities
    10,037       14,189  
Investing activities:
               
Additions to property, plant and equipment
    (12,506 )     (7,723 )
Acquisition, net of cash acquired
    (9,863 )     -  
Other, net
    88       (9 )
Net cash used by investing activities
    (22,281 )     (7,732 )
Financing activities:
               
Advances from long-term debt and notes payable
    1,996       -  
Principal payments on long-term debt and notes payable
    (73 )     (152 )
Advances on swingline under credit agreement
    4,324       -  
Payments on swingline under credit agreement
    (3,866 )     -  
Changes in outstanding checks in excess of bank deposits
    2,031       -  
Other, net
    73       46  
Net cash provided by (used by) financing activities
    4,485       (106 )
Net (decrease) increase in cash and cash equivalents
    (7,759 )     6,351  
Cash and cash equivalents, beginning of year
    7,868       1,947  
Cash and cash equivalents, end of quarter
  $ 109     $ 8,298  

See accompanying notes to condensed consolidated financial statements.
 
 
LMI Aerospace, Inc.
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
1. 
Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 of America for complete financial statements.  The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.  In the opinion of management, all adjustments considered necessary for a fair representation have been included.  Operating results for the three months and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  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, 2011, 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 of America 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 these estimates.
 
Reclassifications

Certain reclassifications have been made to prior period financial statements in order to conform to current period presentation.
 
Recent Accounting Standards

In July 2012, an update was made by the Financial Accounting Standards Board (“FASB”) to reduce the cost and complexity related to testing of indefinite-lived intangible asset impairment.  This amendment allows an entity the option to make a qualitative evaluation about the likelihood of indefinite-lived intangible asset impairment to determine whether it is necessary to perform the quantitative test.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued.  The Company performs its annual indefinite-lived intangible asset impairment test during the fourth quarter.  The adoption is not anticipated to have a significant impact on the Company’s consolidated financial statements.
 
2. 
Acquisition
 
On August 7, 2012, the Company acquired all of the shares of capital stock of TASS Inc. (“TASS”), an after-market engineering and support services firm.  Headquartered in Kirkland, Washington, TASS delivers engineering solutions to aircraft manufacturers, airlines, Maintenance, Repair and Overhaul companies and leasing companies worldwide.  TASS has 60 employees with offices in Kirkland, WA, the United Kingdom and Australia.  The acquisition was funded by internal cash and by entering into a $1,000 note payable and was accounted for under the acquisition method of accounting.  Operating results of TASS have been included in the Company’s Engineering Services segment from the date of acquisition, and acquisition related costs of $383 were included in selling, general and administrative expense.  The pro-forma operating results, as if the Company had completed the acquisition at the beginning of the periods presented, are not material to the Company’s operations and are not presented.

Management believes the acquisition of TASS, together with other initiatives, will augment the Company’s long and successful history with Boeing products and provide the Company with a global presence in the aftermarket engineering arena.  TASS also provides the Company the ability to internally source product support for parts manufactured by the Company in the global airline fleet.  

 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
The Company performed a preliminary valuation analysis to determine amounts allocated to the acquired assets and assumed liabilities, including various intangible assets.  The following table summarizes the purchase price allocation for TASS at the date of acquisition and is included in the Engineering Services segment:

Cash acquired
  $ 617  
Accounts receivable
    1,979  
Other assets
    175  
Fixed assets
    196  
Intangible assets
    2,247  
Goodwill
    6,628  
Current liabilities assumed
    (1,362 )
Cost of acquisition
  $ 10,480  
 
Of the $2,247 acquired intangible assets, $1,876 was assigned to customer relationships with an original estimated useful life of 11.9 years; and the remaining $371 consists of trademarks and other intangibles and have a weighted average useful life of 2.9 years.  The fair value of the customer relationships was determined using the discounted cash flow method.  The fair value of the trademarks was determined using the relief from royalty method.  

3.
Assets and Liabilities Measured at Fair Value

Fair Value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  A fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).  The three levels of the fair value hierarchy are described below:

 
Level 1:
Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2:
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
 
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  Fair values of the Company’s long-term obligations approximate their carrying values as the applicable interest rates approximate the current market rates.

Following is a description of the valuation methodologies used for assets measured at fair value, which is included in cash and cash equivalents.  Money market fund was fully liquidated during the third quarter to fund the TASS acquisition. There have been no changes in the methodologies used at September 30, 2012.
 
 
Assets at Fair Value as of December 31, 2011
 
 Recurring Fair Value Measurement:
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Money market fund (1)
  $ 7,503     $ 7,503     $ -     $ -  
                                 
Non-recurring Fair Value Measurements:
                               
Intangible assets, net (2)
  $ 17,642     $ -     $ -     $ 17,642  
 
 
(1)
Institutional Money Market: Valued at the closing price reported on the active markets on which the individual securities are traded (Level 1).
 
(2)
During the first quarter of 2011, a triggering event occurred with regard to a certain proprietary technology intangible asset as a result of a failure to conclude a possible sale of a product line.  The Company did not have plans to utilize this technology in the near term and believed the current market for the product line to be limited; thus, utilizing the income approach with a level 3 valuation, the Company expected zero cash flows.  As such, a full impairment loss of $1,163 was recognized as of March 31, 2011.  The impairment loss was recognized in the Aerostructures segment in the selling, general and administrative expenses line of the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2011.

 
7

 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
4. 
Accounts Receivable, Net

Accounts receivable, net consists of the following:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Trade receivables
  $ 38,278     $ 35,482  
Unbilled revenue
    12,168       6,347  
Other receivables
    1,414       1,250  
      51,860       43,079  
Less: Allowance for doubtful accounts
    (261 )     (359 )
Accounts receivable, net
  $ 51,599     $ 42,720  

Under contract accounting, unbilled revenue on long-term contracts arise when the sales or revenues based on performance  attainment, though appropriately recognized, cannot be billed yet under terms of the contract as of the balance sheet date.  Accounts receivable expected to be collected after one year are not material.
 
5. 
Inventories

Inventories consist of the following:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Raw materials
  $ 10,521     $ 9,437  
Work in progress
    10,918       9,387  
Manufactured and purchased components
    13,884       15,051  
Finished goods
    18,460       14,744  
Product inventory
    53,783       48,619  
Capitalized contract costs
    4,040       2,462  
Total inventories
  $ 57,823     $ 51,081  
 
Inventoried costs include capitalized contract costs relating to programs and contracts with long-term production cycles, substantially all of which is expected to be realized within one year.  The Company believes these amounts will be fully recovered.
 
6. 
Goodwill and Intangible Assets
 
Goodwill

Goodwill balances at September 30, 2012 consisted of $42,908 from the acquisition of D3 Technologies, Inc. (“D3”) in July 2007, $6,194 from the acquisition of Integrated Technologies, Inc. (“Intec”) in January 2009 and $6,628 from the acquisition of TASS in August 2012.  Goodwill balances at December 31, 2011 consisted of the D3 and Intec amounts.  The D3 and Intec goodwill balances are not deductible for tax purposes.  The TASS goodwill balance is deductible for tax purposes.

 
8

 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
Intangible Assets
 
Intangible assets primarily consist of trademarks and customer intangibles resulting from the acquisitions of TASS, Intec and D3.  The trademark of $4,222 that resulted from the acquisition of D3 was determined to have an indefinite life.  The remaining trademarks resulted from the acquisition of Intec and TASS and have a weighted average estimated useful life of 4.9 years.  Customer intangibles have a weighted average estimated useful life of 15.1 years.  Other intangible assets have a weighted average estimated useful life of 4.5 years.  The carrying values were as follows:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Trademarks
  $ 4,836     $ 4,582  
Customer intangible assets
    23,391       21,515  
Other
    699       582  
Accumulated amortization
    (10,569 )     (9,037 )
Intangible assets, net
  $ 18,357     $ 17,642  
 
Intangibles amortization expense was $544 and $496 for the three months ended September 30, 2012 and 2011, respectively, and $1,532 and $2,689 for the nine months ended September 30, 2012 and 2011, respectively.  The expense for the nine months ended September 30, 2011 includes $1,163 for the impairment loss discussed in Note 3.  Estimated annual amortization expense for the balance of 2012 and the next five years and thereafter is as follows:
 
 
Year ending December 31,
     
2012 (1)
  $ 569  
2013
    2,176  
2014
    2,053  
2015
    1,887  
2016
    1,718  
2017
    1,499  
Thereafter
    4,233  
Nonamortizeable
    4,222  
    $ 18,357  
 
 
(1)
Represents amortization expense for the remainder of 2012.

The carrying value of goodwill and intangible assets with indefinite lives is assessed at least annually, during the fourth quarter, unless a triggering event occurs, and an impairment charge is recorded if appropriate.  There were no triggering events in the third quarter of 2012.
 
7. 
Long-term Debt

Long-term debt consists of the following:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Notes payable, principal and interest payable monthly, at fixed rates, 2.56% to 3.25% at September 30, 2012 and 6.48% to 6.70% at December 31, 2011
  $ 1,953     $ 29  
Swingline under credit agreement
    457       -  
Total debt
    2,410       29  
Less current installments
    1,133       29  
Total
  $ 1,277     $ -  

 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
The Company has entered into a note payable for the purchase of certain equipment.  The note is secured by the equipment and payable in monthly installments including interest at 2.56% through May 2019.  The Company has also entered into a $1,000 note payable related to the purchase of TASS which is payable in full in August 2013 plus interest at 3.25%.
 
The Company has a senior secured revolving credit facility in an aggregate principal amount of up to $125,000 subject to certain borrowing capacity limitations, including a limit based on a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”).  The Company’s available borrowing capacity as of September 30, 2012 was $118,616.  Borrowings under the credit facility are secured by substantially all of the Company’s assets and bear interest at either the LIBOR rate plus an applicable margin of 1.75% to 2.75% or the highest of the following plus 0.75% to 1.75%, depending in each case upon the total leverage ratio:

 
·
Prime rate,
 
·
Federal funds rate plus 0.5% or
 
·
In most circumstances, LIBOR for an interest period of one month plus 1%.

The maturity date of the credit facility is September 12, 2016.  The maturity date is subject to acceleration upon breach of the financial covenants (consisting of a maximum total leverage ratio and senior leverage ratio and a minimum fixed charge coverage ratio) and other customary non-financial covenants contained in the credit agreement.  As of September 30, 2012, the Company was in compliance with all of its financial and non-financial covenants.
 
8. 
Earnings Per Common Share
 
Basic net income per common share is based upon the weighted average number of common shares outstanding.  Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect of restricted stock, using the if-converted methods.  The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Numerators
                       
Net income
  $ 5,639     $ 4,078     $ 15,536     $ 12,313  
Denominators
                               
Weighted average common shares - basic
    11,736,392       11,584,510       11,675,453       11,547,558  
                                 
Dilutive effect of restricted stock
    121,219       170,545       152,414       185,431  
                                 
Weighted average common shares - diluted
    11,857,611       11,755,055       11,827,867       11,732,989  
                                 
Basic earnings per share
  $ 0.48     $ 0.35     $ 1.33     $ 1.07  
                                 
Diluted earnings per share
  $ 0.48     $ 0.35     $ 1.31     $ 1.05  
 
9. 
Stock-Based Compensation

On July 7, 2005, the Company’s shareholders approved the LMI Aerospace, Inc. 2005 Long-Term Incentive Plan (the “Plan”).  The Plan provides for the grant of non-qualified stock options, incentive stock options, shares of restricted stock, restricted stock units, stock appreciation rights, performance awards and other share-based grants and cash bonus awards to employees and directors.  All share-based grants or awards are subject to a time-based vesting schedule.  The Company has only issued restricted stock in the periods presented.
 
 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
A summary of the activity for non-vested restricted stock awards as of September 30, 2012 and changes during the nine-month period is presented below:
 
   
2012
 
Restricted Stock Awards
 
Shares
   
Weighted Average
Grant Date Fair
Value
 
Outstanding at January 1
    278,410     $ 16.42  
Granted
    108,646       19.19  
Vested
    (139,807 )     16.21  
Forfeited
    (1,011 )     23.07  
Outstanding at September 30
    246,238     $ 17.74  

Common stock compensation expense related to restricted stock awards granted under the Plan was $462 and $354 for the three months ended September 30, 2012 and 2011, respectively, and $1,205 and $912 for the nine months ended September 30, 2012 and 2011, respectively.

Total unrecognized compensation costs related to non-vested share-based compensation awards granted or awarded under the Plan were $2,573 and $1,716 at September 30, 2012 and December 31, 2011, respectively.  These costs are expected to be recognized over a weighted average period of 1.1 years and 0.8 year, respectively.
 
10. 
Business Segment Information

The Company is organized into two reportable segments: the Aerostructures segment and the Engineering Services segment.  The Aerostructures segment fabricates, machines, finishes, integrates, assembles and kits formed close-tolerance aluminum, specialty alloy, composite components and higher level assemblies for use by the aerospace, defense and technology industries.  The Engineering Services segment, comprised of the operations of D3 and the recently acquired TASS, provides a complete range of design, engineering and program management services, supporting aircraft lifecycles from conceptual design, analysis and certification through production support, fleet support and service life extensions via a complete turnkey engineering solution.

 
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2012
 
Corporate assets, liabilities and expenses related to the Company’s corporate offices, except for interest expense and income taxes, primarily support the Aerostructures segment and are classified as such.  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,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net sales:
                       
Aerostructures
  $ 44,032     $ 44,045     $ 129,349     $ 124,324  
Engineering Services
    27,227       20,759       78,844       66,322  
Eliminations
    (623 )     (37 )     (1,481 )     (1,632 )
    $ 70,636     $ 64,767     $ 206,712     $ 189,014  
                                 
Income from operations:
                               
Aerostructures
  $ 5,427     $ 5,165     $ 15,074     $ 13,918  
Engineering Services
    3,175       1,487       9,053       5,457  
Eliminations
    (68 )     (1 )     (69 )     (95 )
    $ 8,534     $ 6,651     $ 24,058     $ 19,280  
                                 
     
September 30,
     
December 31,
                 
     
2011
     
2011
                 
                                 
Total assets:   $ 144,784      $ 132,032                   
Aerostructures     82,777        72,574                   
Engineering   $ 227,561      $ 204,606                   
 
11. 
Customer Concentration

Direct sales, through both of its business segments, to the Company’s largest customer, The Boeing Company (“Boeing”), accounted for 20.8% and 17.8% of the Company’s total revenues for the three months ended September 30, 2012 and 2011, respectively.  Direct sales to Boeing accounted for 20.7% and 17.5% of the Company’s total revenues for the nine months ended September 30, 2012 and 2011, respectively.  Accounts receivable balances based on direct sales related to Boeing were 14.3% and 15.6% of the Company’s total accounts receivable balance at September 30, 2012 and December 31, 2011, respectively.
   
Direct sales, through its Aerostructures segment, to the Company’s second largest customer, Gulfstream Aerospace Corporation, a General Dynamics company (“Gulfstream”), accounted for 16.7% and 16.1% of the Company’s total revenues for the three months ended September 30, 2012 and 2011, respectively.  Direct sales to Gulfstream accounted for 16.6% of the Company’s total revenues for the nine months ended September 30, 2012 and 2011, respectively.  Accounts receivable balances related to Gulfstream were 9.2% and 5.4% of the Company’s total accounts receivable balance at September 30, 2012 and December 31, 2011, respectively.

Direct sales, through both of its business segments, to the Company’s third largest customer, Spirit Aerosystems (“Spirit”), accounted for 13.8% and 12.0% of the Company’s total revenues for the three months ended September 30, 2012 and 2011, respectively.  Direct sales to Spirit accounted for 13.1% and 13.8% of the Company’s total revenues for the nine months ended September 30, 2012 and 2011, respectively.  Accounts receivable balances related to Spirit were 13.6% and 16.5% of the Company’s total accounts receivable balance at September 30, 2012 and December 31, 2011, respectively.

Direct sales, through both of its business segments, to the Company’s fourth largest customer, Bombardier Inc. (“Bombardier”), accounted for 10.0% and 7.4% of the Company’s total revenues for the three months ended September 30, 2012 and 2011, respectively.  Direct sales to Bombardier accounted for 10.5% and 6.0% of the Company’s total revenues for the nine months ended September 30, 2012 and 2011, respectively.  Accounts receivable balances related to Bombardier were 8.5% and 9.3% of the Company’s total accounts receivable balance at September 30, 2012 and December 31, 2011, respectively.
 
12. 
Income Taxes
 
The Company’s effective tax rate for the three month and nine month periods ended September 30, 2012 was 33.2% and 34.1%, respectively.  The Company’s effective tax rate for the three month and nine month periods ended September 30, 2011 was 33.2% and 31.3%, respectively. 

 

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 based on estimates, projections, beliefs and assumptions and are not guarantees of future events or results.  Such statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”) and otherwise described in the Company’s periodic filings and current reports filed with the Securities and Exchange Commission.

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, in conjunction with our 2011 Form 10-K 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 Quarterly Report on 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 of America, 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 Operations” contained in the Company’s 2011 Form 10-K.

Recent Events

On August 7, 2012, the Company acquired all of the shares of capital stock of TASS Inc. (“TASS”), an after-market engineering and support services firm.  Headquartered in Kirkland, Washington, TASS delivers engineering solutions to aircraft manufacturers, airlines, Maintenance, Repair and Overhaul services companies and leasing companies worldwide.  TASS has 60 employees with offices in Kirkland, WA, the United Kingdom and Australia.  The acquisition was funded by internal cash and by entering into a note payable and was accounted for under the acquisition method of accounting.  Operating results of TASS have been included in the Company’s Engineering Services segment from the date of acquisition, and acquisition related costs were expensed. 
 
Overview

We are a leading provider of design engineering services and supplier of structural assemblies, kits and components to the aerospace, defense and technology markets.  We primarily sell our products and services to the large commercial aircraft, corporate and regional aircraft, and military markets.  Historically, our business was primarily dependent on the large commercial aircraft market, specifically with one principal customer.  In order to diversify our product and customer base, we implemented an acquisition and marketing strategy in the late 1990s that has broadened the number of industries to which we sell our products and services and, within the aerospace industry, diversified our customer base to reduce our dependence on any one principal customer.  Our acquisitions of D3 in 2007, Intec in 2009 and TASS in 2012 were in furtherance of our growth strategy of increasing the array of value-added services and solutions that we offer to our customers.  We believe that original equipment manufacturers and Tier 1 aerospace companies will continue the trend of selecting their suppliers based upon the breadth of more complex and sophisticated design and manufacturing capabilities and value-added services and the ability of their suppliers to manage large production programs.

 
Results of Operations
 
Three months ended September 30, 2012 compared to three months ended September 30, 2011

Consolidated Operations

The following table is a summary of our operating results for the three months ended September 30, 2012 and 2011, respectively:
            
   
Three Months Ended
 
   
September 30, 2012
 
   
($ in millions)
 
   
Aerostructures
   
Engineering
Services
   
Elimination
   
Total
 
Net sales
  $ 44.0     $ 27.2     $ (0.6 )   $ 70.6  
Cost of sales
    31.1       21.4       (0.5 )     52.0  
Gross profit
    12.9       5.8       (0.1 )     18.6  
S, G, & A
    7.5       2.6       -       10.1  
Income from operations
  $ 5.4     $ 3.2     $ (0.1 )   $ 8.5  
                                 
   
Three Months Ended
 
   
September 30, 2011
 
   
($ in millions)
 
   
Aerostructures
   
Engineering
Services
   
Elimination
   
Total
 
Net sales
  $ 44.0     $ 20.8     $ -     $ 64.8  
Cost of sales
    32.1       17.3       -       49.4  
Gross profit
    11.9       3.5       -       15.4  
S, G, & A
    6.7       2.0       -       8.7  
Income from operations
  $ 5.2     $ 1.5     $ -     $ 6.7  
 
Aerostructures Segment
 
Net Sales.  Net sales for the Aerostructures segment for the third quarter of 2012 and 2011 were $44.0 million.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the third quarter of 2012 and 2011 and the percentage of the segment’s total net sales for each period represented by each category.
        
   
Three Months Ended September 30,
 
Category
 
2012
   
% of Total
   
2011
   
% of Total
 
   
($ in millions)
 
Large commercial aircraft
  $ 17.7       40.2 %   $ 17.0       38.6 %
Corporate and regional aircraft
    15.2       34.5 %     13.8       31.4 %
Military
    8.8       20.0 %     9.9       22.5 %
Other
    2.3       5.3 %     3.3       7.5 %
Total
  $ 44.0       100.0 %   $ 44.0       100.0 %
 
Large commercial aircraft generated net sales of $17.7 million for the third quarter of 2012 compared to $17.0 million for the third quarter of 2011, an increase of 4.1%.  Boeing production levels have increased related to the 737, 747 and 787 platforms to $5.8 million, $4.8 million and $0.9 million, respectively, in the third quarter of 2012 from $5.2 million, $3.4 million and $0.2 million, respectively, in the third quarter of 2011.  Net sales of aftermarket wing modification products were $1.4 million for the third quarter of 2012, down from $3.6 million for the third quarter of 2011 due to lower demand which is expected to continue during 2012.
 
Net sales of components for corporate and regional aircraft were $15.2 million for the third quarter of 2012 compared to $13.8 million for the third quarter of 2011, an increase of 10.1%.  This increase was primarily driven by increased production demand for the G650 aircraft at Gulfstream with net sales reaching $3.9 million in the quarter ended September 30, 2012 compared to $2.1 million in the third quarter of 2011.  Net sales related to the G450/G550 aircraft were $9.7 million in the third quarter of 2012, an increase from $9.3 million in the third quarter of 2011.  Net sales related to the G280 aircraft increased to $1.1 million in the third quarter of 2012 compared to $0.6 million in the third quarter of 2011 as demand for this aircraft has increased.  These increases were partially offset by a $1.1 million decrease in net sales related to tooling for the Mitsubishi Regional Jet program from the third quarter of 2011 to the third quarter of 2012.
 
 
Military products generated $8.8 million of net sales for the third quarter of 2012 compared to $9.9 million for the third quarter of 2011, a decrease of 11.1%.  Net sales related to the Blackhawk program decreased to $7.3 million in the third quarter of 2012 from $8.6 million in the third quarter of 2011 due to decreased demand with one of the Company’s customers, which we expect to continue into future periods.

Other products generated $2.3 million in net sales in the third quarter of 2012 compared to $3.3 million in the third quarter of 2011, a decrease of 30.3%.  The decrease was primarily due to the discontinuance of one program in 2012 at the Company’s Mexicali plant that had $1.0 million in sales during the third quarter of 2011.

Cost of Goods Sold.  Cost of goods sold includes the Company’s labor, material and overhead costs associated with the manufacture of inventory sold to customers.  Cost of goods sold for the third quarter of 2012 was $31.1 million compared to $32.1 million for the third quarter of 2011.  The $1.0 million decrease in cost of sales was primarily driven by production efficiencies.

Gross Profit.  Gross profit for the third quarter of 2012 was $12.9 million (29.3% of net sales) compared to $11.9 million (27.0% of net sales) in the third quarter of 2011.  Production efficiencies have led to this increased improvement in margin.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $7.5 million (17.0% of net sales) for the third quarter of 2012 compared to $6.7 million (15.2% of net sales) for the third quarter of 2011.  Included in these expenses for the third quarter of 2012 is $0.5 million in acquisition expenses primarily related to TASS.  The balance of the increase in selling, general and administrative expenses is related to personnel costs that increased to $4.1 million for the third quarter of 2012 from $3.7 million for the third quarter of 2011.

Engineering Services Segment

Net Sales.  Net sales for the Engineering Services segment were $27.2 million for the third quarter of 2012 as compared to $20.8 million for the third quarter of 2011, an increase of 30.8%.  The Engineering Services segment generates revenue primarily through the billing of our employees’ time spent on customer projects and has experienced increased demand due to growth in the number of new programs currently in development in the Company’s Aerostructures segment.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the third quarter of 2012 and 2011 and the percentage of the segment’s total net sales represented by each category.
 
   
Three Months Ended September 30,
 
Category
 
2012
   
% of Total
   
2011
   
% of Total
 
   
($ in millions)
 
Large commercial aircraft
  $ 7.3       26.8 %   $ 6.3       30.3 %
Corporate and regional aircraft
    8.4       30.9 %     6.2       29.8 %
Military
    9.8       36.0 %     5.2       25.0 %
Other
    1.7       6.3 %     3.1       14.9 %
Total
  $ 27.2       100.0 %   $ 20.8       100.0 %
 

Net sales for services for large commercial aircraft were $7.3 million in the third quarter of 2012, up 15.9% from $6.3 million in the third quarter of 2011.  This increase resulted from the inclusion of TASS sales of $2.2 million in this category in the third quarter of 2012.  This increase was partially offset by the winding down of a Boeing 747-8 project, which decreased revenue by $0.8 million, and Boeing 787 projects, which decreased revenue by $0.9 million, in the third quarter of 2012 compared to the third quarter of 2011.  

Net sales for services supporting corporate and regional aircraft were $8.4 million in the third quarter of 2012 compared to $6.2 million for the third quarter of 2011, an increase of 35.5%.  This increase primarily resulted from the engineering efforts related to work statements for the Bombardier Lear Jet L-85, which generated revenue of $6.4 million in the third quarter of 2012, up from $4.1 million in the third quarter of 2011.

Net sales of services for military programs were $9.8 million in the third quarter of 2012, up 88.5% from $5.2 million in the third quarter of 2011.  This increase was primarily from services in support of the Boeing Tanker program, which increased $3.0 million in the third quarter of 2012 from the third quarter of 2011 and services in support of the KC-390 design-build program, which generated revenue of $1.3 million in the third quarter of 2012.  
 
Net sales related to design and delivery of tooling on various programs supporting commercial aircraft were $1.7 million for the third quarter of 2012, down 45.2%, from $3.1 million in the third quarter of 2011.  This reduction was primarily caused by declining revenues of the project supporting the 787 shipping fixtures, which, because it is maturing, experienced revenues of $0.9 million in the third quarter of 2012 compared to $2.0 million in the third quarter of 2011.

 
Cost of Goods Sold.  Cost of goods sold consists primarily of labor and labor related costs and for the third quarter of 2012 was $21.4 million compared to $17.3 million for the third quarter of 2011.  The $4.1 million increase is partially attributable to the inclusion of the results of TASS, which contributed an additional $1.6 million to this category in the third quarter of 2012 and to an increase in head count and overtime at D3 we enacted in an effort to meet our increased project demands.

Gross Profit.  Gross profit for the third quarter of 2012 was $5.8 million (21.3% of net sales) compared to $3.5 million (16.8% of net sales) in the third quarter of 2011.  The increase in gross profit is due to the increase in revenue in the third quarter of 2012.  In addition, gross profit in 2011 was negatively impacted by lower gross margins on two fixed-price contracts.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the third quarter of 2012 were $2.6 million, or 9.6% of net sales, compared to $2.0 million, or 9.6% of net sales, for the third quarter of 2011.  The $0.6 million increase is attributable to the inclusion of the results of TASS.

Non-segment Expenses

Interest Expense.  Interest expense was $0.3 million for the third quarters of 2012 and 2011.  The acquisition of TASS was paid from excess cash and by entering into a $1.0 million note payable.
 
Income Tax Expense.  During the third quarter of 2012, the Company recorded income tax expense of $2.8 million compared to $2.0 million in the third quarter of 2011.  The effective tax rate for both the third quarter of 2012 and 2011 was 33.2%.
 
Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
 
The following table is a summary of our operating results for the nine months ended September 30, 2012 and 2011, respectively:

   
Nine Months Ended
 
   
September 30, 2012
 
   
($ in millions)
 
   
Aerostructures
   
Engineering
Services
   
Elimination
   
Total
 
Net sales
  $ 129.3       78.8     $ (1.4 )   $ 206.7  
Cost of sales
    92.9       63.1       (1.4 )     154.6  
Gross profit
    36.4       15.7       -       52.1  
S, G, & A
    21.4       6.7       -       28.1  
Income from operations
  $ 15.0     $ 9.0     $ -     $ 24.0  
                                 
   
Nine Months Ended
 
   
September 30, 2011
 
   
($ in millions)
 
   
Aerostructures
   
Engineering
Services
   
Elimination
   
Total
 
Net sales
  $ 124.3     $ 66.3     $ (1.6 )   $ 189.0  
Cost of sales
    90.5       54.9       (1.5 )     143.9  
Gross profit
    33.8       11.4       (0.1 )     45.1  
S, G, & A
    19.9       5.9       -       25.8  
Income from operations
  $ 13.9     $ 5.5     $ (0.1 )   $ 19.3  
 
Aerostructures Segment
 
Net Sales.  Net sales for the Aerostructures segment for the first nine months of 2012 were $129.3 million, up 4.0% from $124.3 million in the first nine months of 2011.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the nine months ended September 30, 2012 and 2011 and the percentage of total net sales for each period represented by each category.
 
 
   
Nine Months Ended September 30,
 
Category
 
2012
   
% of Total
   
2011
   
% of Total
 
   
($ in millions)
 
Large commercial aircraft
  $ 52.3       40.4 %   $ 47.8       38.4 %
Corporate and regional aircraft
    43.6       33.7 %     38.6       31.1 %
Military
    26.2       20.3 %     27.8       22.4 %
Other
    7.2       5.6 %     10.1       8.1 %
Total
  $ 129.3       100.0 %   $ 124.3       100.0 %
 
Net sales of products used in large commercial aircraft were $52.3 million for the first nine months of 2012 compared to $47.8 million for the first nine months of 2011, an increase of 9.4%.  Boeing production levels have increased across all major platforms.  Sales related to the 747, 777 and 787 platforms increased to $13.4 million, $7.0 million and $1.8 million, respectively, in the first nine months of 2012 from $8.3 million, $6.2 million and $0.9 million, respectively, in the first nine months of 2011.  The 737 winglet program also generated $5.1 million in the first nine months of 2012 compared to $2.8 million in the first nine months of 2011.  These increases were partially offset by a $4.7 million decline in net sales of 767 aftermarket wing modification products to $4.0 million in the first nine months of 2012 from $8.7 million in the first nine months of 2011 due to lower demand for retrofit of the existing fleet.
 
Net sales of components for corporate and regional aircraft were $43.6 million for the first nine months of 2012 compared to $38.6 million for the first nine months of 2011, an increase of 13.0%.  This increase was primarily driven by higher production demands on the G650 aircraft at Gulfstream with net sales related to this aircraft reaching $10.1 million for the first nine months of 2012 compared to $5.3 million in the first nine months of 2011.
 
Military products generated $26.2 million of net sales in the first nine months of 2012 compared to $27.8 million in the first nine months of 2011, a decrease of 5.8%.  This decrease was due to a modest decline of the Blackhawk program, which generated net sales of $22.1 million in the first nine months of 2012 compared to $23.7 million in the first nine months of 2011.
 
Other products generated $7.2 million in net sales in the first nine months of 2012 compared to $10.1 million in the first nine months of 2011, a decrease of 28.7%.  This decrease was primarily due to the discontinuance of one program in the first nine months of 2012 at the Company’s Mexicali plant that generated $2.6 million in sales during the first nine months of 2011.
 
Cost of Goods Sold.  Cost of goods sold for the first nine months of 2012 was $92.9 million compared to $90.5 million for the first nine months of 2011.  The $2.4 million increase was primarily due to higher sales and the addition of personnel to meet growth demands.
 
Gross Profit.  Gross profit for the first nine months of 2012 was $36.4 million (28.2% of net sales) compared to $33.8 million (27.2% of net sales) in the first nine months of 2011 as production efficiencies and favorable product mix contributed to this improved margin.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $21.4 million (16.6% of net sales) for the first nine months of 2012 compared to $19.9 million (16.0% of net sales) for the first nine months of 2011.  The increase in selling, general and administrative expenses was primarily due to additions of personnel in anticipation of growth and $0.5 in acquisition costs expensed primarily in the third quarter of 2012.
 
Engineering Services Segment
 
Net Sales.  Net sales for the Engineering Services segment were $78.8 million for the first nine months of 2012 as compared to $66.3 million for the first nine months of 2011, an increase of 18.9%.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the first nine months of 2012 and 2011, respectively, and the percentage of the segment’s total net sales represented by each category.
 
   
Nine Months Ended September 30,
 
Category
 
2012
   
% of Total
   
2011
   
% of Total
 
   
($ in millions)
 
Large commercial aircraft
  $ 21.7       27.5 %   $ 23.8       35.9 %
Corporate and regional aircraft
    24.9       31.6 %     19.1       28.8 %
Military
    27.2       34.5 %     14.3       21.6 %
Other
    5.0       6.4 %     9.1       13.7 %
Total
  $ 78.8       100.0 %   $ 66.3       100.0 %
 
 
Net sales for services for large commercial aircraft were approximately $21.7 million in the first nine months of 2012, down 8.8%, from $23.8 million in the first nine months of 2011.  The decrease primarily resulted from reduced requirements for four programs.  The Airbus 350 platform, Boeing 747-8 platform, and Boeing 787 platform revenues decreased by $1.5 million, $2.9 million, and $0.9 million respectively, in the first nine months of 2012 compared to the first nine months of 2011, and the Boeing integrated testing project’s revenue decreased by $0.9 million in the first nine months of 2012 compared to the first nine months of 2011.  These revenue decreases were partially offset by an increase on the nacelle systems development program to $3.5 million in the first nine months of 2012 from $1.5 million in the first nine months of 2011, and the inclusion of the results of TASS, which added $2.2 million in revenue.

Net sales for services supporting corporate and regional aircraft, the majority of which relates to the development of new and re-designed aircraft, were $24.9 million in the first nine months of 2012 compared to $19.1 million for the first nine months of 2011, an increase of 30.4%.  Net sales for the development of the Bombardier Lear Jet L-85 generated $9.9 million higher revenue in the first nine months of 2012 primarily due to increased engineering efforts.  An increase of $3.2 million in the first nine months of 2012 was also generated by new work statements.  These increases were partially offset in the first nine months of 2012 compared to the first nine months of 2011 by a $2.4 million decline in net sales for the Mitsubishi Regional Jet and a $4.2 million decrease in two other business jet platforms as the design phase of these projects are maturing.
 
Net sales of services for military programs were $27.2 million in the first nine months of 2012, up 90.2%, from $14.3 million in the first nine months of 2011.  The increase is primarily due to an increase in revenues related to the Boeing Tanker program, which generated $15.2 million in the first nine months of 2012 compared to $4.4 million in the first nine months of 2011.  The KC-390 design-build program also added $3.5 million in revenue for the first nine months of 2012.  These increases were partially offset by a decrease in our participation on the Joint Strike Fighter, which generated $2.9 million in revenue in the first nine months of 2011 and none in 2012.

Net sales related to design and delivery of tooling on various programs supporting commercial aircraft were $5.0 million for the first nine months of 2012, down 45.1%, as compared to $9.1 million in the first nine months of 2011.  This decrease was primarily due to the 747 large cargo freighter tooling project, which generated $3.4 million in the first nine months of 2012 compared to $5.6 million in the first nine months of 2011.  Declines of $1.8 million were also noted in work statements related to two additional customers.
 
Cost of Goods Sold.  Cost of goods sold for the first nine months of 2012 was $63.1 million compared to $54.9 million for the first nine months of 2011.  Our increased sales demand led us to hire additional project engineers, which resulted in an increase of $7.0 million in salary and fringe benefit costs in the first nine months of 2012.  Inclusion of the results of TASS also contributed an additional $1.6 million for the first nine months of 2012.  This was offset by a decrease in the first nine months of 2012 of $1.3 million in various subcontract costs.
 
Gross Profit.  Gross profit for the first nine months of 2012 was $15.7 million (19.9% of net sales) compared to $11.4 million (17.2% of net sales) in the first nine months of 2011.  The increase in gross profit from the first nine months of 2012 to the first nine months of 2011 was due to higher sales volume.  In addition, gross profit in the first nine months of 2011 was negatively impacted by a $0.5 million catch-up adjustment on the Mitsubishi Regional Jet due to higher estimated costs to complete.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the first nine months of 2012 were $6.7 million (8.5% of net sales) compared to $5.9 million (8.9% of net sales) in the first nine months of 2011.  Inclusion of the results of TASS contributed $0.6 million in additional expenses for the first nine months of 2012.
 
Non-segment Expenses
 
Interest Expense, net.  Net interest expense was $0.8 million for the first nine months of 2012 compared to $0.5 million for the first nine months of 2011.  The net increase is largely due to higher fees on our increased credit facility.
 
Other, net.  Other net increased to $0.3 million of income in the first nine months of 2012 from $0.9 million of expense in the first nine months of 2011.  This change primarily resulted from a $0.7 million non-recurring cost related to potential financing transactions that we decided not to pursue in 2011.
 
Income Tax Expense.  During the first nine months of 2012, we recorded income tax expense of $8.0 million compared to $5.6 million in the first nine months of 2011.  The effective tax rate for the nine months ended September 30, 2012 and 2011 was 34.1% and 31.3%, respectively.  This increase reflects a $0.4 million lower tax expense in 2011 due to a non-taxable gain associated with the write off of contingent consideration discussed in Note 3 related to the Intec acquisition.  Higher effective tax rates are also anticipated for the remainder of 2012 as Congress has not renewed credits that have benefited the Company in prior years. The Company expects its effective tax rate for the full year 2012 to be approximately 34.1% to 34.7%.

 
Liquidity and Capital Resources

During the first nine months of 2012, our operating activities generated $10.0 million in cash, compared to $14.2 million in the first nine months of 2011.  Net cash provided by operating activities for the first nine months of 2012 was favorably impacted by increased profitability but negatively impacted by increases in unbilled revenue and inventory.  These items were offset by increases in the current income tax liability due to increased taxable income, a higher expected income tax rate and increased accrued expenses for payroll related liabilities.

Net cash used in investing activities was $22.3 million for the first nine months of 2012, compared to $7.7 million for the first nine months of 2011.  Cash used in the first nine months of 2012 and 2011, respectively, was primarily for the acquisition of capital equipment  due to investments we made to improve our production capabilities and facility expansion.  Also in the third quarter of 2012, the Company purchased TASS, using $8.8 million in available cash.  The Company expects the remaining purchase price will be funded in future periods upon payment of a $1.0 million note and settlement of acquisition related liabilities.

Net cash provided by financing activities primarily consists of a $0.9 million equipment note that was executed late in the second quarter of 2012 and matures in May 2019, $0.5 million in activity on the swingline under the Company’s credit agreement, a $1.0 million note related to the TASS acquisition that is payable in August 2013 and $2.0 million in outstanding checks in excess of deposits.

The Company has a senior secured revolving credit facility that allows borrowings up to $125.0 million, subject to certain borrowing capacity limitations, including a limit based on a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”).  Our available borrowing capacity at September 30, 2012 was $118.6 million, of which none was utilized.  The maturity date of the credit facility is September 12, 2016.  As of September 30, 2012, the Company was, and expects to continue to be, in compliance with all of its financial and non-financial covenants.

The Company expects to meet its ongoing working capital, debt service, and capital expenditure needs presently and for the next twelve months from a combination of cash on hand, cash flow from operating activities and cash available under the credit facility.  The Company’s capital budget as of September 30, 2012 anticipates capital expenditures for 2012 of approximately $18.0 to $20.0 million.  The Company continues to search for complementary acquisitions and design-build programs which may require other methods of financing.

Contractual Obligations and Commitments

For information concerning contractual obligations, see the caption “Contractual Obligations and Commitments” in “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results” in our Annual Report on Form 10-K for the year ended December 31, 2011.


No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year.  For further information, see Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities Exchange Commission on March 12, 2012.
 

Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2012.  Based upon and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) 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.
 
Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
 PART II

OTHER INFORMATION
 
 
We are not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business.
 
Item 1A.

 There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission on March 12, 2012.
 

None.
 
 
None.
 
 
Not Applicable.

 
None.
 
Item 6.

See Exhibit Index.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Charles and State of Missouri on the 8th day of November, 2012.
 
 
LMI AEROSPACE, INC.
   
 
/s/ Ronald S. Saks
 
Ronald S. Saks
 
Chief Executive Officer
 
(Principal Executive Officer)
   
 
/s/ Lawrence E. Dickinson
 
Lawrence E. Dickinson
 
Vice President, Chief Financial Officer and Secretary
 
(Principal Financial and Principal Accounting Officer)
 

 
Exhibit
No.
 
Description
     
3.1
 
Restated Articles of Incorporation of the Registrant previously filed as Exhibit 3.1 to the Registrant’s Form S-1 (File No. 333-51357) filed on April 29, 1998 (the “Form S-1”) and incorporated herein by reference.
     
3.2
 
Amendment to Restated Articles of Incorporation dated as of July 9, 2001 filed as Exhibit 3.3 to the Registrant’s Form 10-K for the fiscal year ended December 31, 2001 and filed April 1, 2002 and incorporated herein by reference.
     
3.3
 
Amended and Restated By-Laws of the Registrant previously filed as Exhibit 3.2 to the Form S-1 and incorporated herein by reference.
     
3.4
 
Amendment No. 1 to Amended and Restated By-Laws of the Registrant previously filed as Exhibit 3.1 to the Registrant’s Form 8-K filed June 26, 2009 and incorporated herein by reference.
     
4.1
 
Form of the Registrant’s Common Stock Certificate previously filed as Exhibit 4.1 to the Form S-1 and incorporated herein by reference.
     
 
Rule 13a-14(a) Certification of Ronald S. Saks, Chief Executive Officer.
     
 
Rule 13a-14(a) Certification of Lawrence E. Dickinson, Vice President, Chief Financial Officer and Secretary.
     
 
Certification of Ronald S. Saks, Chief Executive Officer,  pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
     
 
Certification of Lawrence E. Dickinson, Vice President, Chief Financial Officer and Secretary, pursuant to Section 906 of Sarbanes- Oxley Act of 2002.
     
101.ins
 
Instance Document
     
101.sch
 
XBRL Taxonomy Extension Schema Document
     
101.cal
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.lab
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.pre
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
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