LMI AEROSPACE INC - FORM 10-Q - November 6, 2015

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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, 2015.
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
 
43-1309065
(State or other jurisdiction of incorporation or organization)
 
(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 2, 2015, there were 13,256,922 shares of our common stock, par value $0.02 per share, outstanding.
 


LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDING SEPTEMBER 30, 2015

PART I.  FINANCIAL INFORMATION
 
Page
No.
 
 
 
Item 1.
Financial Statements (Unaudited).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 



2

 PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements.
LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
(Unaudited)
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
476


$
7,927

Accounts receivable, net
61,389


58,234

Inventories
118,877


114,279

Prepaid expenses and other current assets
10,830


10,255

Deferred income taxes
3,775


3,913

Total current assets
195,347


194,608







Property, plant and equipment, net
101,102


99,482

Goodwill
86,784


86,784

Intangible assets, net
47,671


50,940

Other assets
8,971


10,622

Total assets
$
439,875


$
442,436







Liabilities and shareholders’ equity



Current liabilities:



Accounts payable
$
17,961


$
21,755

Accrued expenses
24,634


26,072

Current installments of long-term debt and capital lease obligations
3,557


3,424

Total current liabilities
46,152


51,251







Long-term liabilities:





Long-term debt and capital lease obligations, less current installments
267,607


265,554

Other long-term liabilities
3,101


3,289

Deferred income taxes
4,155


4,207

Total long-term liabilities
274,863


273,050







Shareholders’ equity:



Common stock, $0.02 par value per share; authorized 28,000,000 shares; issued 13,287,688 and 13,089,003 shares at September 30, 2015 and December 31, 2014, respectively
266


262

Preferred stock, $0.02 par value per share; authorized 2,000,000 shares; none issued at either date
—


—

Additional paid-in capital
97,239


95,460

Accumulated other comprehensive loss
(201
)

(170
)
Treasury stock, at cost, 30,767 and 28,396 shares at September 30, 2015 and December 31, 2014, respectively
(333
)

(359
)
Retained earnings
21,889


22,942

Total shareholders’ equity
118,860


118,135

Total liabilities and shareholders’ equity
$
439,875


$
442,436


See accompanying notes to condensed consolidated financial statements.

3

LMI Aerospace, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands, except share and per share data)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
84,114

 
$
81,693

 
$
246,730

 
$
245,349

Service revenue
11,519

 
15,642

 
38,928

 
53,674

Net sales
95,633

 
97,335

 
285,658

 
299,023

Cost of sales and service revenue

 

 
 
 
 
Cost of product sales
67,514

 
61,535

 
197,211

 
195,170

Cost of service revenue
11,493

 
13,757

 
35,853

 
45,215

Cost of sales
79,007

 
75,292

 
233,064

 
240,385

Gross profit
16,626

 
22,043

 
52,594

 
58,638




 


 
 
 
 
Selling, general and administrative expenses
8,979

 
14,615

 
33,980

 
41,770

Restructuring expense
1,575

 
765

 
2,368

 
2,288

Income from operations
6,072

 
6,663

 
16,246

 
14,580



 

 
 
 
 
Other (expense) income:

 

 
 
 
 
Interest expense
(5,653
)
 
(5,946
)
 
(16,802
)
 
(23,800
)
Other, net
(136
)
 
(75
)
 
(89
)
 
205

Total other expense
(5,789
)
 
(6,021
)
 
(16,891
)
 
(23,595
)



 


 
 
 
 
Income (loss) before income taxes
283

 
642

 
(645
)
 
(9,015
)
Provision (benefit) for income taxes
249

 
(754
)
 
408

 
(2,557
)



 


 
 
 
 
Net income (loss)
34

 
1,396

 
(1,053
)
 
(6,458
)
Other comprehensive income (loss):

 

 
 
 
 
Change in foreign currency translation adjustment
(32
)
 
(112
)
 
(31
)
 
(18
)
Reclassification adjustment for losses on interest rate hedges included in net earnings, net of tax of $0, $0, $0 and $157
—

 
—

 
—

 
278

Total comprehensive income (loss)
$
2

 
$
1,284

 
$
(1,084
)
 
$
(6,198
)



 


 
 
 
 
Amounts per common share:

 

 
 
 
 
Net income (loss) per common share
$
0.00

 
$
0.11

 
$
(0.08
)
 
$
(0.51
)



 


 
 
 
 
Net income (loss) per common share assuming dilution
$
0.00

 
$
0.11

 
$
(0.08
)
 
$
(0.51
)



 


 
 
 
 
Weighted average common shares outstanding
12,907,938

 
12,740,034

 
12,851,456

 
12,704,568




 


 
 
 
 
Weighted average dilutive common shares outstanding
13,050,238

 
12,887,363

 
12,851,456

 
12,704,568


See accompanying notes to condensed consolidated financial statements.

4

 LMI Aerospace, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net loss
$
(1,053
)

$
(6,458
)
Adjustments to reconcile net loss to net cash provided by operating activities:



Depreciation and amortization
15,018


17,002

Stock based compensation
1,424


1,442

Debt issuance cost write-off
—

 
8,464

Payments to settle interest rate derivatives
—

 
(793
)
Deferred taxes
(78
)
 
147

Other non-cash items
(94
)

(87
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,238
)

8,187

Inventories
(4,993
)

2,079

Prepaid expenses and other assets
1,914


2,003

Current income taxes
(75
)

(2,899
)
Accounts payable
(1,754
)

785

Accrued expenses
(1,354
)

6,144

Net cash provided by operating activities
5,717


36,016

Investing activities:



Additions to property, plant and equipment
(15,305
)

(10,302
)
Proceeds from sale of property, plant and equipment
260


981

Net cash used by investing activities
(15,045
)

(9,321
)
Financing activities:



Proceeds from issuance of debt
—

 
250,000

Principal payments on long-term debt and notes payable
(1,814
)

(231,898
)
Advances on revolving line of credit
93,500


60,000

Payments on revolving line of credit
(89,500
)

(96,000
)
Payments for debt issuance cost
(309
)
 
(7,881
)
Other, net
—


(28
)
Net cash provided (used) by financing activities
1,877


(25,807
)
Net (decrease) increase in cash and cash equivalents
(7,451
)

888

Cash and cash equivalents, beginning of period
7,927


1,572

Cash and cash equivalents, end of period
$
476


$
2,460

Supplemental disclosure of noncash transactions:



Defined contribution plan funding in Company stock
$
710


$
848


See accompanying notes to condensed consolidated financial statements.

5
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




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 nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the  Annual Report on Form 10-K of LMI Aerospace, Inc. (the "Company”) for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 16, 2015.

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.

Recent Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). On July 9, 2015 the FASB voted to approve a one year delay of the effective date and to permit companies to voluntarily adopt the new standard as of the original effective date. The new standard is effective for reporting periods beginning after December 15, 2017. The standard will supersede existing revenue recognition guidance, including industry-specific guidance, and will provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The standard requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The provisions of this new guidance are effective as of the beginning of the Company’s first quarter of 2018. The Company is currently evaluating the transition method to be used and the impact of adoption of this standard on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results and when the component or group of components meets the criteria to be classified as held for sale, is disposed by sale or is disposed of by other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). ASU 2014-8 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014.  The Company has no present activity that would be impacted by this new standard.

In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest", which requires that debt issuance costs related to a debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. FASB ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015 and requires the Company to apply the new guidance on a retrospective basis upon adoption. The adoption of FASB ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.

6
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our Condensed Consolidated Financial Statements.

2.
Accounts Receivable, Net

Accounts receivable, net consists of the following:
 
September 30, 2015
 
December 31, 2014
Trade receivables
$
49,741

 
$
53,081

Unbilled revenue
6,004

 
4,036

Other receivables (1)
5,870

 
1,581

 
61,615

 
58,698

Less: Allowance for doubtful accounts
(226
)
 
(464
)
Accounts receivable, net
$
61,389

 
$
58,234

(1) At September 30, 2015, includes $4,266 related to the settlement of a lawsuit in the third quarter of 2015. See Note 14, "Legal Contingencies," in the Notes to the Condensed Consolidated Financial Statements.

Under contract accounting, unbilled revenues 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. Included in unbilled revenue at September 30, 2015 and December 31, 2014 are $195 and $549, respectively, related to unpriced change orders or claims that are subject to negotiation. The final resolution of these unpriced items could result in either a favorable or unfavorable change in the revenue recognized to date on the associated contracts.

Accounts receivable expected to be collected after one year is not material.

The Company records changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition topic of the FASB Accounting Standards Codification.  Cumulative catch-up adjustments had the following impacts to operating income for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
2014
 
2015
2014
Favorable adjustments
 
$
96

$
4,898

 
$
554

$
5,620

Unfavorable adjustments
 
(2,183
)
(545
)
 
(2,214
)
(727
)
Net favorable (unfavorable) operating income adjustments
 
$
(2,087
)
$
4,353

 
$
(1,660
)
$
4,893


The unfavorable cumulative catch-up adjustments recorded in the third quarter of 2015 primarily related to higher projected engineering costs, identified in the third quarter of 2015, which are required to meet customer specifications on the Mitsubishi Regional Jet design-build program. The adjustment related to this program was $1,738 and was recorded as a reduction of revenue in the Consolidated Statements of Comprehensive Income (Loss).

The favorable cumulative adjustments recorded in the third quarter of 2014 related to the reversal of a loss reserve. This adjustment was recognized after the Company settlement of an unpriced change order and secured more favorable future material pricing with respect to this contract. The impact of reversing the loss reserve was $4,602 and $5,267 for the three and nine months ended September 30, 2014 and was recorded in the cost of goods sold section of the Consolidated Statements of Comprehensive Income (Loss).


3.
Inventories


7
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



Inventories consist of the following:
 
September 30, 2015
 
December 31, 2014
Raw materials
$
14,606

 
$
16,712

Work in progress
23,915

 
22,960

Manufactured and purchased components
20,016

 
21,296

Finished goods
29,253

 
32,403

Product inventory
87,790

 
93,371

Capitalized contract costs
31,087

 
20,908

Total inventories
$
118,877

 
$
114,279



Inventories include capitalized contract costs relating to programs and contracts with long-term production cycles.  The Company believes these amounts will be fully recovered over the life of the contracts. Anticipated losses on contracts are recognized, when required, and reported as a reduction of related contract costs recorded in inventory or accounts receivable and as additional cost of sales or as a reduction to revenue. The company is engaged in a contract accounted for using the cost to cost method where estimated costs exceed the total contract revenue. A provision for the remaining estimated loss on this contract of $121 and $0 was reported as a reduction of accounts receivable in the Condensed Consolidated Balance Sheet at September 30, 2015 and December 31, 2014, respectively.

In January 2015, the Company signed an agreement with a key customer to form a strategically aligned partnership. This agreement extended the performance period of the statements of work for certain contracts with the customer and gives the Company preferred supplier status on certain future contracts. In accordance with the contract terms, the Company made cash consideration payments of $4,800 in January 2015 and $1,700 in June 2015. The payments were recorded as an increase to capitalized contract costs and are being amortized as a reduction to revenue over the life of the associated contracts.

4.
Goodwill and Intangible Assets

Goodwill

The following table summarizes the net carrying amount of goodwill by segment at September 30, 2015 and December 31, 2014, respectively:
 
 
 
 
 
Engineering
 
 
 
 
 
Aerostructures
 
Services
 
Total
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Balance at:
 
 
 
 
 
 
 
 
 
 
 
Gross Goodwill
$
141,953

 
$
141,953

 
$
50,741

 
$
50,741

 
$
192,694

 
$
192,694

Accumulated impairment loss
(79,471
)
 
(79,471
)
 
(26,439
)
 
(26,439
)
 
(105,910
)
 
(105,910
)
Net Goodwill
$
62,482

 
$
62,482

 
$
24,302

 
$
24,302

 
$
86,784

 
$
86,784

 

8
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



A goodwill impairment charge of $26,439 was recorded in the fourth quarter of 2014 related to the Engineering Services reporting unit. The impairment charge resulted from a persistent decline in revenues and profitability in 2014. In the first nine months of 2015, the reporting unit generated positive cash flow but did not meet overall expectations in terms of revenues, profits or cash flow. On August 7, 2015, the Company committed to a restructuring plan that will result in the closing of its Melbourne, Australia and Greenville, South Carolina engineering offices in addition to the elimination of additional management positions within the Engineering Services reporting unit. See Note 13, Restructuring, to the Condensed Consolidated Financial Statements under Part I, Item 8, "Financial Statements," for additional disclosure related to these items. If, despite these additional cost reduction efforts, the reporting unit's revenue and profitability were to continue to decline, it could lead to a triggering event and additional potential impairment for intangible assets and goodwill for the reporting unit in the future.

The carrying value of goodwill is assessed annually, during the fourth quarter, unless a triggering event occurs. Following an assessment an impairment charge is recorded if appropriate.  In the three and nine months ended September 30, 2015, no triggering event occurred that would cause the Company to assess the carrying value of goodwill.

Intangible Assets

Intangible assets primarily consist of trademarks and customer intangibles.  The carrying values were as follows:
 
September 30, 2015
 
December 31, 2014
Trademarks
$
778

 
$
778

Customer intangible assets
68,991

 
68,991

Other
1,274

 
1,274

Accumulated amortization
(23,372
)
 
(20,103
)
Intangible assets, net
$
47,671

 
$
50,940


Intangibles amortization expense was $1,089 and $1,131 for the three months ended September 30, 2015 and 2014, respectively and $3,269 and $3,393 for the nine months ended September 30, 2015 and 2014, respectively. The accumulated amortization balances at September 30, 2015 and December 31, 2014, respectively, were $753 and $679 for trademarks, $21,791 and $18,716 for customer intangible assets, and $828 and $708 for other intangible assets.

Intangible assets related to the acquisition of Valent are amortized on the straight-line method as this approximates the pattern of economic benefit of each intangible asset.  All other remaining intangible assets are not material.

5.
Other Assets

Other assets consist of the following:
 
September 30, 2015
 
December 31, 2014
Debt issuance cost, net
$
7,353

 
$
8,600

Other
1,618

 
2,022

  Total other assets
$
8,971

 
$
10,622


In connection with the financing of its long-term indebtedness, the Company incurred debt issuance costs of $10,001. These costs are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the indebtedness.

9
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



6.
Long-term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:
 
September 30, 2015
 
December 31, 2014
 
 
 
 
Second priority senior secured notes at a fixed rate of 7.375% at September 30, 2015
$
245,000

 
$
245,000

Revolver under credit agreement, variable
4,000

 
—

Missouri IRBs at fixed rate of 2.80% at September 30, 2015 and December 31, 2014
7,011

 
7,334

Capital leases, at fixed rates ranging from 2.04% to 7.73% at September 30, 2015 and December 31, 2014
12,125

 
13,288

Notes payable, principal and interest payable monthly, at fixed rates up to 2.56% at September 30, 2015 and December 31, 2014, respectively
3,028

 
3,356

Total debt
$
271,164

 
$
268,978

Less current installments
3,557

 
3,424

Total long-term debt and capital lease obligations
$
267,607

 
$
265,554


At September 30, 2015, the Company had $245,000 in outstanding second-priority senior secured notes maturing on June 19, 2019. Obligations under these notes are secured by substantially all of the Company’s assets and bear interest at 7.375%, paid semi-annually in January and July.

The Company's revolving credit agreement provides for a revolving credit facility of up to $90,000.  Under the agreement, the co-collateral agents may establish a reserve against the facility. At September 30, 2015, the reserve established was $15,000, which reduced the maximum availability to $75,000. Based on the amount of eligible assets at September 30, 2015 and outstanding letters of credit of $1,138, available borrowings were further reduced to $54,781. The maximum amount, less reserves, available for borrowing at levels below $30,000 is based on a sum of 45% of eligible receivables, 30% of eligible inventories and an additional amount of eligible equipment up to 20% of total borrowings under the facility. The maximum amount, less reserves, available for borrowing at levels above $30,000 is based on a sum of 75% of eligible receivables, 45% of eligible inventories and an additional amount of eligible equipment up to 20% of total borrowings under the facility. Borrowings under the facility are secured by a first lien on substantially all of the Company’s assets and bear interest at either the LIBOR rate plus a margin of 3.00% to 3.50% or the alternate base rate, which is the highest of the following plus a margin of 2.00% to 2.50%, respectively, with the applicable margins for the revolving credit facility subject to a grid based on the average availability ratio of the Company for the most recently completed quarter:

•Prime rate,
•Federal funds rate plus 0.5%, or,
•The adjusted Eurodollar rate for an interest period of one month plus 1.0%.

For both the three and the nine months ended September 30, 2015, the actual interest rate incurred for the revolving credit facility was 4.6%.

The Company is required to pay a commitment fee of between 0.375% and 0.5% per annum on the unused portion of the revolving credit facility, depending on the average revolver usage during the period as compared to the total available borrowings under the facility. At September 30, 2015, the commitment fee required was 0.5%.

The revolving credit loan facility matures on the earlier of the fifth year anniversary date of June 19, 2019 or the date that is 91 days prior to the maturity date of the senior secured notes unless the notes are repaid, refinanced or otherwise satisfied in full. The maturity dates are subject to acceleration upon occurrence of an event of default. An event of default under the revolving credit agreement includes, among other things, failure to pay any material indebtedness, acceleration of payments by any lender prior to scheduled maturity, or judgments rendered against the Company requiring payments at or above certain levels.


10
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



The credit agreement contains a covenant that requires us to comply with a maximum first priority debt to EBITDA ratio on a quarterly basis. In addition, the agreement also contains certain restrictive covenants that limit and in some circumstances prohibit our ability to, among other things, incur additional debt, sell, lease or transfer our assets, make investments, guarantee debt or obligations, create liens, and enter into certain merger, consolidation or other reorganization transactions.  These restrictive covenants prohibit the Company from paying dividends. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand any current or future downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors that have less debt and are not subject to such restrictions.

At September 30, 2015, the Company was in compliance with all of its covenants and expects to be in compliance with its covenants in future periods.  If the Company fails to meet any covenants in the credit agreement, the Company would not be in compliance with its credit agreement and the lenders would be entitled to exercise various rights, including causing the amounts outstanding under the revolving credit facility to become immediately due and payable.

7.
Derivative Financial Instruments

On June 19, 2014, the Company terminated and settled its interest rate derivatives in conjunction with the settlement of its then existing credit agreement, which had a variable interest rate. This settlement resulted in a charge of $793 to interest expense in the Condensed Consolidated Statements of Comprehensive Income (Loss) in the nine months ended September 30, 2014. Prior to this termination and in compliance with the credit agreement, the Company purchased option and swap derivative contracts to hedge against the potential impact on earnings from an increase in market interest rates associated with the interest payments on its variable rate term credit facility.  The objective of the hedge transactions was to reduce the variability of cash flows due to changes in the designated benchmark interest rate on the term debt.  As the derivatives were settled prior to December 31, 2014, no assets or liabilities were recognized in the Condensed Consolidated Balance Sheet at either date presented.

The Company designated and accounted for these swaps and purchased options as cash flow hedges of interest rate risk.  The Company reported the gain or loss, net of taxes, from the effective portion of the hedge as a component of Accumulated Other Comprehensive Income (“AOCI”) deferring it and reclassifying it into earnings in the same period or periods in which the hedged transaction affects earnings and in the same line item on the Condensed Consolidated Statements of Comprehensive Income (Loss) as the impact of the hedged transaction.  The cumulative amounts reported in AOCI related to these derivatives were reclassified from AOCI to interest expense on the Condensed Consolidated Statements of Comprehensive Income (Loss) in the nine months ended September 30, 2014. The Company did not use these derivative instruments for trading or speculative purposes.

The following amounts are included in OCI and earnings for the three and nine months ended September 30, 2015 and September 30, 2014:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest Rate Derivatives in Cash Flow Hedging Relationship
 
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in AOCI, net of tax, on Derivative (Effective Portion)
 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Amount of (Gain) Loss Reclassified from AOCI into Income (Effective Portion)
 
$
—

 
$
—

 
$
—

 
$
793

 
 
 
 
 
 
 
 
 


11
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



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,
 
 
2015
 
2014
 
2015
 
2014
Numerators
 
 
 
 
 
 
 
 
Net income (loss)
 
$
34

 
$
1,396

 
$
(1,053
)
 
$
(6,458
)
Denominators
 
 

 
 

 
 
 
 
Weighted average common shares - basic
 
12,907,938

 
12,740,034

 
12,851,456

 
12,704,568

 
 
 
 
 
 
 
 
 
Dilutive effect of restricted stock
 
142,300

 
147,329

 
—

 
—

 
 
 
 
 
 
 
 
 
Weighted average common shares - diluted
 
13,050,238

 
12,887,363

 
12,851,456

 
12,704,568

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.00

 
$
0.11

 
$
(0.08
)
 
$
(0.51
)
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
$
0.00

 
$
0.11

 
$
(0.08
)
 
$
(0.51
)
    

For the nine months ended September 30, 2015 and September 30, 2014, 216,872 and 145,710 shares, respectively, are not included in the calculation of diluted earnings per share, as their inclusion would have been anti-dilutive. These securities could be dilutive in future periods.

12
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



9.
Stock-Based Compensation

On July 7, 2005, the Company’s shareholders approved the LMI Aerospace, Inc. 2005 Long-term Incentive Plan (the “ 2005 Plan”). The 2005 Plan provided 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 were subject to a time-based vesting schedule.

All outstanding share-based grants are in the form of restricted stock. A summary of the activity for non-vested restricted stock awards under the 2005 Plan is presented below:
 
 
 
Restricted Stock Awards
 
Shares
 
Weighted
Average Grant Date Fair Value
Outstanding at January 1, 2015
 
296,782

 
$
16.58

Granted
 
131,703

 
13.22

Vested
 
(131,986
)
 
17.57

Forfeited
 
(34,411
)
 
15.35

Outstanding at September 30, 2015
 
262,088

 
$
14.56


Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $224 and $765 for the three months ended September 30, 2015 and 2014, respectively and $1,154 and $1,442 for the nine months ended September 30, 2015 and 2014, respectively.

Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2005 Plan were $2,023 and $2,036 at September 30, 2015 and December 31, 2014, respectively.  These costs are expected to be recognized over a weighted average period of 1.8 years and 1.2 years, at September 30, 2015 and December 31, 2014, respectively.

As of July 7, 2015 the Company was no longer able to grant awards under the 2005 Plan.

On June 24, 2015, the Company's shareholders approved the LMI Aerospace, Inc. 2015 Incentive Compensation Plan (the “2015 Plan”), which became effective on July 1, 2015. Under the 2015 Plan, the Company, through the Compensation Committee of the Board of Directors, may, at its discretion, grant stock options, restricted shares of common stock, and other various stock-based awards to directors, officers, employees and consultants. A total of 750,000 shares of the Company’s common stock have been reserved for issuance under the 2015 Plan.

All outstanding share-based grants are in the form of restricted stock. A summary of the activity for non-vested restricted stock awards under the 2015 Plan is presented below:
 
 
 
Restricted Stock Awards
 
Shares
 
Weighted
Average Grant Date Fair Value
Outstanding at January 1, 2015
 
—

 
$
—

Granted
 
61,801

 
9.79

Vested
 
—

 
—

Forfeited
 
—

 
—

Outstanding at September 30, 2015
 
61,801

 
$
9.79



13
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



Common stock compensation expense related to restricted stock awards granted under the 2015 Plan was $151 and $0 for the three months ended September 30, 2015 and 2014, respectively and $151 and $0 for the nine months ended September 30, 2015 and 2014, respectively.

Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2015 Plan were $454 and $0 at September 30, 2015 and December 31, 2014, respectively.  These costs are expected to be recognized over a weighted average period of 0.8 years at September 30, 2015.


10.
Business Segment Information
The Company is organized into two reportable segments: the Aerostructures segment and the Engineering Services segment.  Through its Aerostructures segment, the Company primarily fabricates, machines, finishes, integrates, assembles and kits formed close tolerance aluminum, specialty alloy and composite components and higher level assemblies for use by the aerospace and defense industries. It manufactures more than 40,000 products for integration into a variety of aircraft platforms manufactured by leading original equipment manufacturers and Tier 1 aerospace suppliers. Through its Engineering Services segment, the Company provides a complete range of design, engineering and program management services, supporting aircraft product lifecycles from conceptual design, analysis and certification through production support, fleet support and service life extensions via a complete turnkey engineering solution.

Corporate assets, liabilities and expenses related to the Company's corporate offices, except for interest expense and income taxes, primarily support, and are recorded in, the Aerostructures segment. The table below presents information about reported segments on the same basis used internally to evaluate segment performance:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales:
 
 
 
 
 
 
 
Aerostructures
$
85,119

 
$
82,914

 
$
249,661

 
$
249,101

Engineering Services
10,826

 
14,714

 
36,818

 
51,235

Eliminations
(312
)
 
(293
)
 
(821
)
 
(1,313
)
 
$
95,633

 
$
97,335

 
$
285,658

 
$
299,023

 
 
 
 
 
 
 
 
Income from operations:
 

 
 

 
 

 
 

Aerostructures
$
8,918

 
$
7,888

 
$
20,063

 
$
14,010

Engineering Services
(2,805
)
 
(1,216
)
 
(3,803
)
 
666

Eliminations
(41
)
 
(9
)
 
(14
)
 
(96
)
 
$
6,072

 
$
6,663

 
$
16,246

 
$
14,580

11.
Customer Concentration

Direct sales, through both of the Company’s business segments, to our largest customer, Spirit Aerosystems (“Spirit”), accounted for 34.4% and 34.4% of the Company’s total revenues for the three months ended September 30, 2015 and 2014, respectively. Direct sales to Spirit accounted for 34.8% and 33.7% of the Company's total revenues for the nine months ended September 30, 2015 and 2014, respectively. Accounts receivable balances related to Spirit were 26.9% and 33.3% of the Company’s total accounts receivable balance at September 30, 2015 and December 31, 2014, respectively.

Direct sales, through both of the Company’s business segments, to our second largest customer, Gulfstream Aerospace Corporation, a General Dynamics company (“Gulfstream”), accounted for 15.9% and 14.3% of the Company’s total revenues for the three months ended September 30, 2015 and 2014, respectively.  Direct sales to Gulfstream accounted for 14.3% and 15.3% of the Company's total revenues for the nine months ended September 30, 2015 and 2014, respectively. Accounts receivable balances related to Gulfstream were 15.7% and 13.1% of the Company’s total accounts receivable balance at September 30, 2015 and December 31, 2014, respectively.


14
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



Direct sales, through both of the Company’s business segments, to our third largest customer, The Boeing Company, (“Boeing”), accounted for 12.6% and 10.0% of the Company’s total revenues for the three months ended September 30, 2015 and 2014, respectively. Direct sales to Boeing accounted for 11.4% and 10.9% of the Company's total revenues for the nine months ended September 30, 2015 and 2014, respectively. Accounts receivable balances resulting from direct sales to Boeing were 6.2% and 7.4% of the Company’s total accounts receivable balance at September 30, 2015 and December 31, 2014, respectively.

12.
Income Taxes

The Company records income tax expense or benefit each quarter based on its estimated full-year effective tax rate. Income tax expense of $249 and $408 were recognized in the three and nine months ended September 30, 2015, respectively. Income tax benefit of $754 and $2,557 were recognized in the three and nine months ended September 30, 2014, respectively. The Company's tax benefit in the three and nine months ended September 30, 2014 reflects a net tax benefit of $2,582 related to the decision to carry back the net operating loss recognized in 2013. The Company continues to carry a full valuation allowance on its net deferred tax assets, which totaled $13,588 and $12,676 at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the Company has recorded a receivable of $7,069 primarily related to the filing of the 2014 federal tax return.

13.
Restructuring

The Company committed to and implemented various restructuring plans in 2014 and 2015. Included in those plans were the closure of the Precise Machine facility in Fort Worth, Texas, and the relocation of the machining operations in both Savannah, Georgia and St. Charles, Missouri to other facilities within the Company. Other employment separation activities were also implemented as part of the Company's overall reorganization and cost reduction initiatives. In addition, in the third quarter of 2015, the Company committed to the closing of its Melbourne, Australia and Greenville, South Carolina engineering offices, the elimination of additional management positions within the Engineering Services segment and the closure of its Coweta, Oklahoma manufacturing facility. The expense associated with these plans was reflected in the selling, general, and administrative section on a separate line of the Condensed Consolidated Statements of Comprehensive Income (Loss). The following table summarizes the incurred charges associated with these restructuring activities:

 
Three months ended
 
Nine months ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
Precise Machine facility closure
$
—

 
$
(18
)
 
$
—

 
$
287

Savannah machining operations relocation
—

 
—

 
—

 
47

St. Charles machine parts operations relocation
—

 
—

 
378

 
—

Coweta machining facility closure
64

 
—

 
64

 
—

Greenville office closure
501

 
—

 
501

 
—

Australia office closure
34

 
—

 
34

 
—

Other employment separation activities
976

 
783

 
1,391

 
1,954

  Total
$
1,575

 
$
765

 
$
2,368

 
$
2,288


The Savannah, Georgia and Precise plans were completed in the second quarter of 2014. The St. Charles and Greenville plans were completed in the second and third quarter of 2015, respectively. The Company expects the Coweta and Australia plans to be completed in the fourth quarter of 2015.

Cash payments were made associated with these restructuring plans of $1,165 and $253 in the three months ended September 30, 2015 and September 30, 2014, respectively and $2,175 and $1,441 in the nine months ended September 30, 2015 and September 30, 2014, respectively.


15
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



The following table summarizes the incurred and expected charges associated with these restructuring activities:

Expense

Remaining

Total Expense

Incurred through

Expense to be

Expected to be

September 30, 2015

Incurred

Incurred






Employee severance arrangement - Precise
$
615

 
$
—

 
$
615

Employee severance arrangement - Savannah
47

 
—

 
47

Employee severance arrangement - St. Charles
378

 
—

 
378

Employee severance arrangement - Coweta
64

 
28

 
92

Employee severance arrangement - Greenville
376

 
—

 
376

Employee severance arrangement - Australia
34

 
—

 
34

Other employee severance arrangements
3,529

 
—

 
3,529

Lease termination costs - Precise
124

 
—

 
124

Lease termination costs - Greenville
125

 
—

 
125

Other restructuring expenses
115

 
—

 
115

  Total
$
5,407


$
28


$
5,435



The following table summarizes the Company's restructuring activities during the nine months ended September 30, 2015:

 
Employee
 
Severance
 
 
Accrued restructuring balance as of December 31, 2014
$
739

  Accrual additions
2,368

  Cash payments
(2,175
)
Accrued restructuring balance as of September 30, 2015
$
932


Accrued restructuring of $932 at September 30, 2015 is expected to be paid over the next three quarters.

14.
Legal Contingencies

The Company has been named as a defendant in certain pending lawsuits in the normal course of business (collectively, the “Pending Lawsuits”).  It is the policy of management to disclose the amount or range of reasonably possible losses.  In the opinion of management, after consulting with legal counsel, any losses resulting from Pending Lawsuits should not have a material effect on the Company’s financial position, cash flows or results of operations. The Company is also the subject of other proceedings as further described below.

16
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




Regulatory Actions
In August 2013, the Environmental Protection Agency (“EPA”) and the U.S. Dept. of Justice (“DoJ”) commenced an investigation into allegations of low pH wastewater releases claimed to have occurred between 2009 and 2013 at Ozark Mountain Technologies ("OMT"), a subsidiary of LMI (the “Waste Water Allegations”). On April 24, 2015, the Company settled the Waste Water Allegations pursuant to a settlement agreement with DoJ (“Plea Agreement”). Per the terms of the Plea Agreement, OMT plead guilty to one count of negligently violating the Federal Water Pollution Control Act and paid a fine of $694 in the quarter ended June 30, 2015. In connection with the Plea Agreement, DoJ agreed that no further federal criminal or civil prosecution will be brought against OMT relative to certain other possible instances of environmental non-compliance that the Company voluntarily reported to the EPA in December 2013 as part of the EPA’s Audit Policy.

In November, 2013, the Attorney General of the State of Missouri (the “Missouri AG”) contacted LMI regarding alleged violations of certain state environmental regulations involving the discharge of pollutants and water contaminants claimed to have occurred in 2011 by OMT (the “Missouri AG Matter”).  On February 25, 2015, the Missouri AG filed a Petition against OMT alleging pollution of state waters, violation of pretreatment regulations and violation of water quality standards.  In the quarter ended June 30, 2015, OMT settled the Missouri AG Matter and in July of 2015 paid civil penalties of $175.
The fine and civil penalties paid in connection with both settlements described above were consistent with the previously established, respective, loss contingencies as disclosed in the Company’s 2014 Form 10-K, Item 3 - Legal Proceedings.
Civil Action
In December 2012, OMT became an indirect subsidiary of LMI as a result of LMI’s acquisition of Valent Aerostructures, LLC (“Valent”) from the former equity owners of Valent, including Tech Investments, LLC and Tech Investments II, LLC (together, “Tech”). Also as a result of the transaction, Tech became the beneficial owners of approximately 5.5% of LMI’s common stock. Pursuant to the terms of the purchase agreement, as amended (the “Valent Purchase Agreement”), $5,000 of the purchase price remained subject to an indemnification escrow arrangement (the “Escrow Funds”) and 783,798 shares of LMI’s common stock issued as part of the purchase price were subject to indemnification lock-up agreements (the “Locked-Up Shares”). On September 22, 2015, LMI and the former equity owners of Valent (the “Parties”) submitted to mediation and executed an agreement setting forth terms of a settlement with respect to the resolution of certain indemnification claims and other disputes involving, among other things, the OMT matters discussed above, and on November 5, 2015, the Parties executed the definitive settlement documents (the agreement and documents collectively being referred to as the “Settlement Agreements”). The claims and disputes resolved by the settlement had become the subject of legal proceedings that commenced with the filing of a declaratory action by Tech in December 2014 (the “Tech Lawsuit”).  Pursuant to the terms of the Settlement Agreements, (a) the Tech Lawsuit will be dismissed with prejudice, (b) $3,109 of the Escrow Funds will be disbursed to the Company and the remaining amount of Escrow Funds will be retained by Tech, (c) Tech has assumed an approximate $1,167 payment obligation of the Company to a predecessor owner of OMT that remained under a purchase agreement the Company acquired as part of the Company’s acquisition of Valent; (d) the Locked-up Shares will be released to Tech, excluding any portion needed to secure Tech’s obligation described in subsection (c) above; and (e) all parties entered into a mutual release of claims and disputes other than those based on certain environmental representations of the former equity owners of Valent under the Valent Purchase Agreement. The settlement also resulted in the Company assuming other liabilities of $484, recording the write-off of a previously recorded receivable of $389 and recording other expenses of $68. The net impact of the settlement resulted in a gain of $3,325 which is recorded in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

15.
Condensed Consolidating Financial Statements


LMI Aerospace, Inc. excluding its subsidiaries (“LMIA”) is the parent company, issuer and obligor of the second-priority senior notes due June 19, 2019 (the “Notes”). The payment obligations of LMIA under the Notes are guaranteed and secured by LMIA and all of its subsidiaries other than minor subsidiaries as further described below.


17
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



These Notes are guaranteed on a second-priority senior secured basis, jointly and severally, by LMIA (“Guarantor Parent”) and all of its existing and future 100% owned subsidiaries (collectively, the “Guarantor Subsidiaries”) other than minor subsidiaries. Such guaranties are full and unconditional. LMIA conducts substantially all of its business through and derives virtually all of its income from its subsidiaries. Therefore, its ability to make required principal and interest payments with respect to its indebtedness depends on the earnings of subsidiaries and its ability to receive funds from its subsidiaries.

The Notes are secured on a second-priority basis by liens on substantially all of LMIA’s and the Guarantor Subsidiaries’ assets, subject to certain exceptions and permitted liens. The liens securing the notes are contractually subordinated to the liens that secure indebtedness under the revolving credit facility as a result of the lien subordination provisions of the intercreditor agreement to the extent of the value of the collateral securing such indebtedness as well as being subordinated by other existing indebtedness, including industrial revenue bonds, capital leases and other notes payable, to the extent of the value of the collateral that secures such existing indebtedness. As a consequence of this lien subordination and existing indebtedness the Notes and the guarantees are effectively subordinated to the extent of the value of the collateral that secures them. Decisions regarding the maintenance and release of the collateral secured by the collateral agreement are made by the lenders under the modified revolving credit facility, and neither the indenture trustee nor the holders of the Notes have control of decisions regarding the release of collateral.
We have not presented separate financial statements and separate disclosures have not been provided concerning the Guarantor Subsidiaries due to the presentation of condensed consolidating financial information set forth in this Note, consistent with the Securities and Exchange Commission (the “SEC”) interpretations governing reporting of subsidiary financial information.
Supplemental condensed consolidating financial information of the Company, including such information for the Guarantor Subsidiaries, is presented below. Investments in subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and inter-company balances and transactions.

18
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




CONDENSED CONSOLIDATING BALANCE SHEET
as of September 30, 2015
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
476

 
$
—

 
$
476

Trade accounts receivable, net
2,063

 
59,326

 
—

 
61,389

Intercompany receivables
178,197

 
156,183

 
(334,380
)
 
—

Inventories
—

 
118,877

 
—

 
118,877

Prepaid expenses and other current assets
8,342

 
2,488

 
—

 
10,830

Deferred income taxes
—

 
3,924

 
(149
)
 
3,775

Total current assets
188,602

 
341,274

 
(334,529
)
 
195,347

 
 
 
 
 
 
 
 
Property, plant and equipment, net
3,818

 
97,284

 
—

 
101,102

Investments in subsidiaries
378,500

 
—

 
(378,500
)
 
—

Goodwill
—

 
86,784

 
—

 
86,784

Intangible assets, net
—

 
47,671

 
—

 
47,671

Deferred income taxes
149

 
—

 
(149
)
 
—

Other assets
7,346

 
1,625

 
—

 
8,971

Total assets
$
578,415

 
$
574,638

 
$
(713,178
)
 
$
439,875

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
465

 
$
17,496

 
$
—

 
$
17,961

Accrued expenses
11,626

 
13,008

 
—

 
24,634

Intercompany Payables
197,753

 
136,627

 
(334,380
)
 
$
—

  Deferred income taxes
149

 
—

 
(149
)
 
—

Current installments of long-term debt and capital lease obligations
148

 
3,409

 
—

 
3,557

Total current liabilities
210,141

 
170,540

 
(334,529
)
 
46,152

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
249,110

 
18,497

 
—

 
267,607

Other long-term liabilities
304

 
2,797

 
—

 
3,101

Deferred income taxes
—

 
4,304

 
(149
)
 
4,155

Total long-term liabilities
249,414

 
25,598

 
(149
)
 
274,863

 
 
 
 
 
 
 
 
Total shareholders’ equity
118,860

 
378,500

 
(378,500
)
 
118,860

Total liabilities and shareholders’ equity
$
578,415

 
$
574,638

 
$
(713,178
)
 
$
439,875


19
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2014
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
7,058

 
$
869

 
$
—

 
$
7,927

Trade accounts receivable, net
1,310

 
56,924

 
—

 
58,234

Intercompany receivables
145,980

 
145,223

 
(291,203
)
 
$
—

Inventories
—

 
114,279

 
—

 
114,279

Prepaid expenses and other current assets
8,325

 
1,930

 
—

 
10,255

Deferred income taxes
—

 
4,031

 
(118
)
 
3,913

Total current assets
162,673

 
323,256

 
(291,321
)
 
194,608

 
 
 
 
 
 
 
 
Property, plant and equipment, net
3,148

 
96,334

 
—

 
99,482

Investments in subsidiaries
368,587

 
—

 
(368,587
)
 
—

Goodwill
—

 
86,784

 
—

 
86,784

Intangible assets, net
—

 
50,940

 
—

 
50,940

Deferred income taxes
118

 
—

 
(118
)
 
—

Other assets
8,743

 
1,879

 
—

 
10,622

Total assets
$
543,269

 
$
559,193

 
$
(660,026
)
 
$
442,436

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
1,339

 
$
20,416

 
$
—

 
$
21,755

Accrued expenses
13,679

 
12,393

 
—

 
26,072

Intercompany Payables
164,158

 
127,045

 
(291,203
)
 
$
—

  Deferred income taxes
118

 
—

 
(118
)
 
—

Current installments of long-term debt and capital lease obligations
335

 
3,089

 
—

 
3,424

Total current liabilities
179,629

 
162,943

 
(291,321
)
 
51,251

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
245,174

 
20,380

 
—

 
265,554

Other long-term liabilities
331

 
2,958

 
—

 
3,289

Deferred income taxes
—

 
4,325

 
(118
)
 
4,207

Total long-term liabilities
245,505

 
27,663

 
(118
)
 
273,050

 
 
 
 
 
 
 
 
Total shareholders’ equity
118,135

 
368,587

 
(368,587
)
 
118,135

Total liabilities and shareholders’ equity
$
543,269

 
$
559,193

 
$
(660,026
)
 
$
442,436


20
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended September 30, 2015
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
4

 
$
84,099

 
$
11

 
$
84,114

Service revenues
7,640

 
11,545

 
(7,666
)
 
11,519

Net sales
7,644

 
95,644

 
(7,655
)
 
95,633

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
27

 
67,476

 
11

 
67,514

Cost of service revenues
7,991

 
11,166

 
(7,664
)
 
11,493

Cost of sales
8,018

 
78,642

 
(7,653
)
 
79,007

Gross profit
(374
)
 
17,002

 
(2
)
 
16,626

Selling, general and administrative expenses

 
8,979

 


 
8,979

Restructuring expense
—

 
1,575

 
—

 
1,575

(Loss) income from operations
(374
)
 
6,448

 
(2
)
 
6,072

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(5,389
)
 
(264
)
 
—

 
(5,653
)
Other, net
(1
)
 
(135
)
 
—

 
(136
)
Income (loss) from equity investments in subsidiaries
3,541

 
—

 
(3,541
)
 
—

Total other expense
(1,849
)
 
(399
)
 
(3,541
)
 
(5,789
)
(Loss) income before income taxes
(2,223
)
 
6,049

 
(3,543
)
 
283

(Benefit) provision for income taxes
(2,227
)
 
2,476

 
—

 
249

Net (loss) income
4

 
3,573

 
(3,543
)
 
34

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
—

 
(32
)
 
—

 
(32
)
Total comprehensive (loss) income
$
4

 
$
3,541

 
$
(3,543
)
 
$
2


21
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended September 30, 2014
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
(68
)
 
$
81,724

 
$
37

 
$
81,693

Service revenues
9,172

 
15,620

 
(9,150
)
 
15,642

Net sales
9,104

 
97,344

 
(9,113
)
 
97,335

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
40

 
61,458

 
37

 
61,535

Cost of service revenues
9,106

 
13,803

 
(9,152
)
 
13,757

Cost of sales
9,146

 
75,261

 
(9,115
)
 
75,292

Gross profit
(42
)
 
22,083

 
2

 
22,043

Selling, general and administrative expenses
421

 
14,194

 
—

 
14,615

Restructuring expense
533

 
232

 
—

 
765

(Loss) income from operations
(996
)
 
7,657

 
2

 
6,663

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(5,662
)
 
(284
)
 
—

 
(5,946
)
Other, net
11

 
(86
)
 
—

 
(75
)
Income (loss) from equity investments in subsidiaries
4,874

 
—

 
(4,874
)
 
—

Total other expense
(777
)
 
(370
)
 
(4,874
)
 
(6,021
)
(Loss) income before income taxes
(1,773
)
 
7,287

 
(4,872
)
 
642

(Benefit) provision for income taxes
(3,054
)
 
2,300

 
—

 
(754
)
Net (loss) income
1,281

 
4,987

 
(4,872
)
 
1,396

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
—

 
(112
)
 
—

 
(112
)
Reclassification adjustment for losses on interest rate hedges included in net earnings
—

 
—

 
—

 
—

Total comprehensive (loss) income
$
1,281

 
$
4,875

 
$
(4,872
)
 
$
1,284


22
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Nine Months Ended September 30, 2015
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
207

 
$
246,699

 
$
(176
)
 
$
246,730

Service revenues
26,729

 
38,942

 
(26,743
)
 
38,928

Net sales
26,936

 
285,641

 
(26,919
)
 
285,658

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
214

 
197,173

 
(176
)
 
197,211

Cost of service revenues
27,440

 
35,155

 
(26,742
)
 
35,853

Cost of sales
27,654

 
232,328

 
(26,918
)
 
233,064

Gross profit
(718
)
 
53,313

 
(1
)
 
52,594

Selling, general and administrative expenses
—

 
33,980

 
—

 
33,980

Restructuring expense
318

 
2,050

 
—

 
2,368

Acquisitions expense
—

 
—

 
—

 
—

(Loss) income from operations
(1,036
)
 
17,283

 
(1
)
 
16,246

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(16,029
)
 
(773
)
 
—

 
(16,802
)
Other, net
(1
)
 
(88
)
 
—

 
(89
)
Income (loss) from equity investments in subsidiaries
9,914

 
—

 
(9,914
)
 
—

Total other expense
(6,116
)
 
(861
)
 
(9,914
)
 
(16,891
)
(Loss) income before income taxes
(7,152
)
 
16,422

 
(9,915
)
 
(645
)
(Benefit) provision for income taxes
(6,069
)
 
6,477

 
—

 
408

Net (loss) income
(1,083
)
 
9,945

 
(9,915
)
 
(1,053
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
—

 
(31
)
 
—

 
(31
)
Total comprehensive (loss) income
$
(1,083
)
 
$
9,914

 
$
(9,915
)
 
$
(1,084
)

23
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Nine Months Ended September 30, 2014
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
617

 
$
245,327

 
$
(595
)
 
$
245,349

Service revenues
28,474

 
53,688

 
(28,488
)
 
53,674

Net sales
29,091

 
299,015

 
(29,083
)
 
299,023

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
699

 
195,066

 
(595
)
 
195,170

Cost of service revenues
28,330

 
45,372

 
(28,487
)
 
45,215

Cost of sales
29,029

 
240,438

 
(29,082
)
 
240,385

Gross profit
62

 
58,577

 
(1
)
 
58,638

Selling, general and administrative expenses
421

 
41,349

 
—

 
41,770

Restructuring expense
967

 
1,321

 
—

 
2,288

(Loss) income from operations
(1,326
)
 
15,907

 
(1
)
 
14,580

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(22,972
)
 
(828
)
 
—

 
(23,800
)
Other, net
81

 
124

 
—

 
205

Income (loss) from equity investments in subsidiaries
9,571

 
—

 
(9,571
)
 
—

Total other expense
(13,320
)
 
(704
)
 
(9,571
)
 
(23,595
)
(Loss) income before income taxes
(14,646
)
 
15,203

 
(9,572
)
 
(9,015
)
(Benefit) provision for income taxes
(8,171
)
 
5,614

 
—

 
(2,557
)
Net (loss) income
(6,475
)
 
9,589

 
(9,572
)
 
(6,458
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
—

 
(18
)
 
—

 
(18
)
Reclassification adjustment for losses on interest rate hedges included in net earnings
278

 
—

 
—

 
278

Total comprehensive (loss) income
$
(6,197
)
 
$
9,571

 
$
(9,572
)
 
$
(6,198
)



24
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2015
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(1,083
)
 
$
9,945

 
$
(9,915
)
 
$
(1,053
)
Adjustments for non-cash items
(7,572
)
 
13,927

 
9,915

 
16,270

Net changes in operating assets and liabilities, net of acquired businesses
(1,616
)
 
(7,884
)
 
—

 
(9,500
)
Intercompany activity
1,379

 
(1,379
)
 
—

 
—

Net cash (used)/provided by operating activities
(8,892
)
 
14,609

 
—

 
5,717

Investing activities:
 

 
 

 
 

 
 

Additions to property, plant and equipment
(1,606
)
 
(13,699
)
 
—

 
(15,305
)
Proceeds from sale of equipment
—

 
260

 
—

 
260

Net cash used by investing activities
(1,606
)
 
(13,439
)
 
—

 
(15,045
)
Financing activities:
 

 
 

 
 

 
 

Principal payments on long-term debt and notes payable
(251
)
 
(1,563
)
 
—

 
(1,814
)
Advances on revolving line of credit
93,500

 
—

 
—

 
93,500

Payments on revolving line of credit
(89,500
)
 
—

 
—

 
(89,500
)
Payments for debt issuance cost
(309
)
 
—

 
—

 
(309
)
Net cash provided (used) by financing activities
3,440

 
(1,563
)
 
—

 
1,877

Net (decrease) increase in cash and cash equivalents
(7,058
)
 
(393
)
 
—

 
(7,451
)
Cash and cash equivalents, beginning of period
7,058

 
869

 
—

 
7,927

Cash and cash equivalents, end of period
$
—

 
$
476

 
$
—

 
$
476



25
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2015



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2014
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(6,475
)
 
$
9,589

 
$
(9,572
)
 
$
(6,458
)
Adjustments for non-cash items
2,195

 
14,408

 
9,572

 
26,175

Net changes in operating assets and liabilities, net of acquired businesses
21,296

 
(4,997
)
 
—

 
16,299

Intercompany activity
6,794

 
(6,794
)
 
—

 
—

Net cash (used)/provided by operating activities
23,810

 
12,206

 
—

 
36,016

Investing activities:
 

 
 

 
 

 
 

Additions to property, plant and equipment
(704
)
 
(9,598
)
 
—

 
(10,302
)
Acquisitions, net of cash acquired
—

 
—

 
—

 
—

Proceeds from sale of equipment
4

 
977

 
—

 
981

Net cash used by investing activities
(700
)
 
(8,621
)
 
—

 
(9,321
)
Financing activities:
 

 
 

 
 

 
 

Proceeds from issuance of debt
250,000

 
—

 
—

 
250,000

Principal payments on long-term debt and notes payable
(228,180
)
 
(3,718
)
 
—

 
(231,898
)
Advances on revolving line of credit
60,000

 
—

 
—

 
60,000

Payments on revolving line of credit
(96,000
)
 
—

 
—

 
(96,000
)
Payments for debt issuance cost
(7,881
)
 
—

 
—

 
(7,881
)
Other, net
(28
)
 
—

 
—

 
(28
)
Net cash provided (used) by financing activities
(22,089
)
 
(3,718
)
 
—

 
(25,807
)
Net (decrease) increase in cash and cash equivalents
1,021

 
(133
)
 
—

 
888

Cash and cash equivalents, beginning of period
405

 
1,167

 
—

 
1,572

Cash and cash equivalents, end of period
$
1,426

 
$
1,034

 
$
—

 
$
2,460



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. The Company makes forward-looking statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q, which represent the Company’s expectations or beliefs about future events and financial performance.  When used in this report, the words “expect,” “believe,” “anticipate,” “goal,” “plan,” “intend,” “estimate,” “may,” “will” or similar words are intended to identify forward-looking statements.  These forward-looking statements are 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 “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “2014 Form 10-K”) and otherwise described in the Company’s periodic filings and current reports filed with the Securities and Exchange Commission (the “SEC”).

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

26

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 SEC.

This Quarterly Report on Form 10-Q should be read completely, in conjunction with our 2014 Annual Report on 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 SEC 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  2014 Form 10-K.
Overview

We are a leading supplier of structural assemblies, kits and components and design engineering services to the aerospace and defense markets.  We primarily sell our products and services to the large commercial, corporate and regional, and military aircraft markets.    We believe that OEMs 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.

The Company is organized into two reportable segments: the Aerostructures segment and the Engineering Services segment.  Through its Aerostructures segment, the Company primarily fabricates, machines, finishes, integrates, assembles and kits formed close tolerance aluminum, specialty alloy and composite components and higher level assemblies for use by the aerospace and defense industries. It manufactures more than 40,000 products for integration into a variety of aircraft platforms manufactured by leading original equipment manufacturers and Tier 1 aerospace suppliers. Through its Engineering Services segment, the Company provides a complete range of design, engineering and program management services, supporting aircraft product lifecycles from conceptual design, analysis and certification through production support, fleet support and service life extensions via a complete turnkey engineering solution.

Results of Operations

Three months ended September 30, 2015 compared to three months ended September 30, 2014

Consolidated Operations

Cost of goods sold for the Aerostructures segment consists primarily of direct labor, materials, subcontract costs and manufacturing overhead, including indirect labor costs, depreciation, rent, supplies and other indirect costs.  Cost of goods for the Engineering Services segment consists primarily of direct labor, subcontract costs and overhead, including rent, maintenance, and indirect costs. Selling, general, and administrative expenses for both segments consist primarily of labor, rent, depreciation and amortization, professional services and other administrative expenses.



27

The following table is a summary of the Company's operating results for the three months ended September 30, 2015 and 2014, respectively:
 
Three Months Ended 
 September 30, 2015
 
($ in millions)
 
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
85.1

 
$
10.8

 
$
(0.3
)
 
$
95.6

Cost of sales
68.5

 
10.8

 
(0.3
)
 
79.0

Gross profit
16.6

 
—

 
—

 
16.6

S, G, & A
7.7

 
2.8

 
—

 
10.5

Income from operations
$
8.9

 
$
(2.8
)
 
$
—

 
$
6.1

  
Three Months Ended 
 September 30, 2014
  
($ in millions)
  
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
82.9

 
$
14.7

 
$
(0.3
)
 
$
97.3

Cost of sales
62.5

 
13.1

 
(0.3
)
 
75.3

Gross profit
20.4

 
1.6

 
—

 
22.0

S, G, & A
12.5

 
2.8

 
—

 
15.3

Income from operations
$
7.9

 
$
(1.2
)
 
$
—

 
$
6.7


Aerostructures Segment

Net Sales.  Net sales were $85.1 million for the third quarter of 2015, a 2.7% increase from $82.9 million in the third quarter of 2014.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the third quarter of 2015 and 2014 and the percentage of the segment’s total net sales for each period represented by each category:
 
 
Three Months Ended September 30,
Category
 
2015
 
% of Total
 
2014
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
45.1

 
53.0
%
 
$
41.6

 
50.2
%
Corporate and regional aircraft
 
23.6

 
27.7
%
 
21.4

 
25.8
%
Military
 
8.9

 
10.5
%
 
13.0

 
15.7
%
Other
 
7.5

 
8.8
%
 
6.9

 
8.3
%
Total
 
$
85.1

 
100.0
%
 
$
82.9

 
100.0
%

Net sales of large commercial aircraft products increased 8.4% in the third quarter of 2015 when compared to the third quarter of 2014. The most significant increase in revenue in the category was attributable to increased content and higher production rates on the Boeing 787 platform, which generated $7.0 million in the third quarter of 2015 compared to $3.5 million in the third quarter of 2014. We expect the Boeing 787 platform to generate similar levels of revenue throughout 2015. In addition, sales on Boeing 737, 767 and 777 platforms increased $0.9 million, $0.6 million and $0.4 million, respectively to $25.0 million, $1.4 million, and $4.8 million, respectively, in the third quarter of 2015 from $24.1 million, $0.8 million and $4.4 million, respectively, in the third quarter of 2014. These increases were partially offset by decreases in the sale of wing modification products which generated revenue of $2.4 million in the third quarter of 2015 compared to $3.9 million in the third quarter of 2014.

Net sales of components for corporate and regional aircraft increased 10.3% during the third quarter of 2015. The increase in revenue was primarily attributable to an increase in tooling sales on the Gulfstream G600 programs of $3.4 million in the third quarter of 2015, which generated $5.5 million in sales in the third quarter of 2015 compared to $2.1 million in the third quarter of 2014. This increase was partially offset by a decrease in revenue on the Gulfstream G450/G550 program of $1.2 million, which generated sales of $6.1 million in the third quarter of 2015 compared to $7.3 million in the third quarter of 2014.

Net sales of military products decreased 31.5% during the third quarter of 2015.  The decrease is primarily due to reductions in revenues on the Boeing Apache and Sikorsky Black Hawk helicopter programs of $0.8 million and $1.4 million, respectively, from


28

$1.1 million and $6.0 million, respectively, in the third quarter of 2014 to $0.3 million and $4.6 million, respectively in the third quarter of 2015. Revenues related to the Lockheed F-35 and Boeing V-22 programs also decreased from $0.8 million and $1.1 million, respectively, in the third quarter of 2014 to $0.04 million and $0.5 million, respectively, in the third quarter of 2015.

Cost of Goods Sold.  Cost of goods sold for the third quarter of 2015 was $68.5 million compared to $62.5 million for the third quarter of 2014. In the third quarter of 2014, the Company reversed a loss reserve of $4.6 million due to price increases received for engineering changes and improved hardware costs. This reduction in cost of goods sold in the third quarter of 2014 was partially offset by accelerated depreciation on assets requiring replacement in our Cuba, Missouri facility of $0.5 million in addition to unfavorable product mix. Gross profit in the third quarter of 2015 was favorably impacted by increased sales volume.

Gross Profit.  Gross profit for the third quarter of 2015 was $16.6 million (19.5% of net sales) compared to $20.4 million (24.6% of net sales) in the third quarter of 2014. The change in gross profit margin was primarily the result of the favorable impact of a loss reserve reversal of $4.6 million on a long-term contract in the third quarter of 2014. Gross profit in the third quarter of 2015 was favorably impacted by realized cost savings related to restructuring plans implemented during 2014 and early 2015. In addition, an increase in third quarter 2015 sales volume, primarily related to tooling sales which were at higher margins when compared to those recognized in the third quarter of 2014, favorably impacted the quarter.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $7.7 million (9.1% of net sales) for the third quarter of 2015, compared to $12.5 million (15.1% of net sales) for the third quarter of 2014.  The Company recorded a net gain in the third quarter of 2015 of $3.3 million related to the settlement of a lawsuit. See Note 14, "Legal Contingencies," in the Notes to the Condensed Consolidated Financial Statements. Additionally, salaries and related expenses resulting from previously implemented cost reduction plans declined $0.5 million in the third quarter of 2015. An impairment expense of $0.4 million related to an asset held for sale and environmental expenses of $0.5 million were recorded in the third quarter of 2014.

Engineering Services Segment

Net Sales.  The Engineering Services segment generates revenue primarily through the billing of employee time spent on customer projects.  Net sales for the Engineering Services segment were $10.8 million for the third quarter of 2015 as compared to $14.7 million for the third quarter of 2014, a decrease of 26.4%.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the third quarter in each of 2015 and 2014 and the percentage of the segment’s total net sales represented by each category.
 
 
Three Months Ended September 30,
Category
 
2015
 
% of Total
 
2014
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
6.4

 
59.3
%
 
$
6.6

 
44.9
%
Corporate and regional aircraft
 
0.8

 
7.4
%
 
4.4

 
29.9
%
Military
 
2.9

 
26.9
%
 
2.7

 
18.4
%
Other
 
0.7

 
6.4
%
 
1.0

 
6.8
%
Total
 
$
10.8

 
100.0
%
 
$
14.7

 
100.0
%

Net sales of services for large commercial aircraft were $6.4 million in the third quarter of 2015, down 3.0% from $6.6 million in the third quarter of 2014. The decrease in this category was primarily attributable to a decline in sales on the Airbus 350 platform, which contributed $0.7 million of revenue in the third quarter of 2014 and $0.2 million in revenue in the third quarter of 2015.

Net sales of services related to corporate and regional aircraft were $0.8 million in the third quarter of 2015 compared to $4.4 million for the third quarter of 2014, a decrease of 81.8%.  The decrease in revenue was primarily related to the Bombardier Learjet L-85 program, which contributed $2.7 million in revenue and was canceled in late 2014. In addition, revenue on the Mitsubishi Regional Jet program was adversely impacted in the third quarter of 2015 by a cumulative catch up adjustment of $1.9 million.

Net sales of services for military programs were $2.9 million in the third quarter of 2015, up 7.4% from $2.7 million in the third quarter of 2014.  The Lockheed Martin HAVOC and a program with the U.S Navy contributed increases of $0.7 million and $0.3 million, respectively, in the third quarter of 2015 when compared to the third quarter of 2014. These increases were partially offset by a decrease in revenue of $0.9 million on the Bell V-280 program in the third quarter of 2015 when compared to the third quarter of 2014.


29


Net sales related to design and delivery of tooling on various programs supporting commercial and military aircraft were $0.7 million for the third quarter of 2015 compared to $1.0 million in the third quarter of 2014. Tooling sales on various Boeing programs decreased $0.1 million in the third quarter of 2015 when compared to the third quarter of 2014.

Cost of Goods Sold. Cost of goods sold for the third quarter of 2015 was $10.8 million compared to $13.1 million for the third quarter of 2014.  The decrease in cost of goods sold was primarily due to reductions in direct labor, which is the result of lower demand for this segment.

Gross Profit.  Gross profit for the third quarter of 2015 was $0.04 million (0.4% of net sales) compared to $1.6 million (10.9% of net sales) in the third quarter of 2014.  The decrease in gross profit was primarily attributable to unfavorable cumulative long-term revenue adjustments on the Mitsubishi Regional Jet program of $1.9 million identified in the third quarter of 2015 in addition to the decline in sales and fixed-cost utilization.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the third quarter of 2015 were $2.8 million, or 26.3% of net sales, compared to $2.8 million, or 19.0% of net sales, for the third quarter of 2014. An increase of restructuring cost of $0.8 million in the third quarter of 2015 when compared to the third quarter of 2014 was offset by savings realized from prior cost reduction activities when compared to the third quarter of 2014. Restructuring expenses recognized in the third quarter of 2015 related to the closure of the Greenville, South Carolina and Melbourne, Australia offices in addition to the elimination of other management positions within this segment. Implementation of these plans is expected to generate annual savings of $3.0 million

Non-segment Expenses

Interest Expense.  Interest expense was $5.7 million for the third quarter of 2015 and $5.9 million for the third quarter of 2014.  

Income Tax Expense.  During the third quarter of 2015, the Company recorded an income tax expense of $0.2 million compared to an income tax benefit of $0.8 million in the third quarter of 2014.  The Company's tax expense in the three months ended September 30, 2015 primarily reflects the taxes due in states where the Company generated taxable income. The Company's tax benefit in the three months ended September 30, 2014 includes a tax benefit of approximately $0.3 million associated with the decision to carry back the net operating loss recognized in 2013.

Results of Operations

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014

Consolidated Operations

The following table is a summary of the Company's operating results for the nine months ended September 30, 2015 and 2014, respectively:
 
Nine Months Ended September 30, 2015
 
($ in millions)
 
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
249.6

 
$
36.8

 
$
(0.8
)
 
$
285.6

Cost of sales
200.1

 
33.7

 
(0.8
)
 
233.0

Gross profit
49.5

 
3.1

 
—

 
52.6

S, G, & A
29.4

 
6.9

 
—

 
36.3

Income from operations
$
20.1

 
$
(3.8
)
 
$
—

 
$
16.3



30

  
Nine Months Ended September 30, 2014
  
($ in millions)
  
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
249.1

 
$
51.2

 
$
(1.3
)
 
$
299.0

Cost of sales
198.5

 
43.1

 
(1.2
)
 
240.4

Gross profit
50.6

 
8.1

 
(0.1
)
 
58.6

S, G, & A
36.6

 
7.4

 
—

 
44.0

Income from operations
$
14.0

 
$
0.7

 
$
(0.1
)
 
$
14.6


Aerostructures Segment

Net Sales.  Net sales were $249.6 million for the first nine months of 2015, a 0.2% increase from $249.1 million in the first nine months of 2014.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the first nine months of 2015 and 2014 and the percentage of the segment’s total net sales for each period represented by each category:
 
 
Nine Months Ended September 30,
Category
 
2015
 
% of Total
 
2014
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
132.6

 
53.1
%
 
$
122.9

 
49.3
%
Corporate and regional aircraft
 
65.4

 
26.2
%
 
69.7

 
28.0
%
Military
 
30.8

 
12.3
%
 
36.8

 
14.8
%
Other
 
20.8

 
8.4
%
 
19.7

 
7.9
%
Total
 
$
249.6

 
100.0
%
 
$
249.1

 
100.0
%

Net sales of large commercial aircraft products increased 7.9% in the first nine months of 2015 when compared to the first nine months of 2014. The most significant increase in revenue in the category was attributable to increased content and higher production rates on the Boeing 787 platform, which generated $20.9 million in the first nine months of 2015 compared to $11.0 million in the first nine months of 2014. We expect the Boeing 787 platform to generate similar levels of revenue throughout 2015. In addition, sales on Boeing 737, 747, and 767 platforms increased $3.3 million, $0.7 million and $1.2 million, respectively, to $75.4 million, $9.1 million and $3.6 million, respectively, in the first nine months of 2015 from $72.1 million, $8.4 million and $2.4 million, respectively, in the first nine months of 2014. These increases were partially offset by decreases in the sale of wing modification products, which generated revenue of $5.7 million in the first nine months of 2015 compared to $11.0 million in the first nine months of 2014.

Net sales of components for corporate and regional aircraft decreased 6.2% during the first nine months of 2015. The decrease in revenue was primarily attributable to decreases in sales of $5.1 million and $1.4 million, respectively, on the Gulfstream G450/G550 and G280 programs from $24.4 million and $6.1 million, respectively in the first nine months of 2014 to $19.3 million and $4.7 million, respectively, in the first nine months of 2015. These decreases were partially offset by an increase sales on the Gulfstream G650 program, which generated revenue of $24.8 million in the first nine months of 2015 compared to $22.5 million in the first nine months of 2014.
 
Net sales of military products decreased 16.3% during the first nine months of 2015.  The decrease is primarily due to reductions in revenues on the Boeing V-22, C-17 and Apache programs of $1.2 million, $1.2 million and $1.3 million, respectively, in the first nine months of 2015 compared to the first nine months of 2014. Revenues related to the Black Hawk helicopter also decreased from $16.5 million in the first nine months of 2014 to $14.4 million in the first nine months of 2015.

Cost of Goods Sold.  Cost of goods sold for the first nine months of 2015 was $200.1 million compared to $198.5 million for the first nine months of 2014. Cost of goods sold in 2015 was favorably impacted by cost reduction initiatives implemented throughout the last two years. In the first nine months of 2014, the Company reversed a loss reserve of $5.3 million due to price increases received for engineering changes and improved hardware costs. This reduction in cost of goods sold in 2014 was partially offset by accelerated depreciation of $1.0 million on assets disposed of at several facilities.

Gross Profit.  Gross profit for the first nine months of 2015 was $49.5 million (19.8% of net sales) compared to $50.6 million (20.3% of net sales) in the first nine months of 2014. Gross profit margin in the first nine months of 2014 was favorably impacted by a $5.3 million loss reserve reversal on a long-term contract which was partially offset by cost and inefficiencies related to


31

restructuring activities. Higher production levels and favorable product mix contributed to improvements in gross profit margin in the first nine months of 2015. Gross profit in the first nine months of 2015 was also favorably impacted by realized cost savings related to restructuring plans implemented during 2014 and early 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $29.4 million (11.8% of net sales) for the first nine months of 2015 compared to $36.6 million (14.7% of net sales) for the first nine months of 2014. The change in selling, general and administrative expenses primarily relates to a net gain recorded in the first nine months of 2015 related to the settlement of a lawsuit of $3.3 million. See Note 14, "Legal Contingencies," in the Notes to the Condensed Consolidated Financial Statements. Professional services expense was lower in the first nine months of 2015 by $0.9 million when compared to the first nine months of 2014. In addition, the first nine months of 2015 included a $1.1 million reduction in salary and related fringes when compared to the first nine months of 2014, the result of previously implemented cost reduction plans. The first nine months of 2014 were unfavorably impacted by an impairment expense of $0.4 million related to an asset held for sale.

Engineering Services Segment

Net Sales.  The Engineering Services segment generates revenue primarily through the billing of employee time spent on customer projects.  Net sales for the Engineering Services segment were $36.8 million for the first nine months of 2015 as compared to $51.2 million for the first nine months of 2014, a decrease of 28.0%.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the first nine months of 2015 and 2014 and the percentage of the segment’s total net sales represented by each category.
 
 
Nine Months Ended September 30,
Category
 
2015
 
% of Total
 
2014
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
16.7

 
45.4
%
 
$
25.1

 
49.0
%
Corporate and regional aircraft
 
10.6

 
28.8
%
 
12.8

 
25.0
%
Military
 
7.9

 
21.5
%
 
7.2

 
14.1
%
Other
 
1.6

 
4.3
%
 
6.1

 
11.9
%
Total
 
$
36.8

 
100.0
%
 
$
51.2

 
100.0
%

Net sales of services for large commercial aircraft were $16.7 million in the first nine months of 2015, down 33.5% from $25.1 million in the first nine months of 2014. The decrease in this category was primarily attributable to a decline in sales related to the Airbus 350 platform which decreased from $4.7 million in the first nine months of 2014 to $0.2 million in the first nine months of 2015. In addition, sales on various Boeing programs, maintenance and repair revenues and sales on the Goodrich Nacelle program declined $1.2 million, $2.7 million and $1.3 million, respectively, in the first nine months of 2015 compared to the first nine months of 2014. These decreases were partially offset by an increase in revenue on the Bombardier C-Series program of $2.4 million, which contributed $4.0 million in the first nine months of 2015 compared to $1.6 million in the first nine months of 2014.

Net sales of services related to corporate and regional aircraft were $10.6 million in the first nine months of 2015 compared to $12.8 million for the first nine months of 2014, a decrease of 17.2%.  The decrease in sales is primarily attributable to a $7.9 million decrease in sales on the Bombardier Learjet L-85 program that was canceled in late 2014. This decrease was partially offset by an increase in sales is on the Bombardier Global 7000 program, which contributed $4.7 million in the first nine months of 2015 compared to $2.3 million in the first nine months of 2014. In addition, sales increased on the Aerion AS2 and Arrowhead Global Wing program by $1.5 million and $1.1 million, respectively, when compared to the prior-year period.
 
Net sales of services for military programs were $7.9 million in the first nine months of 2015, up 9.7% from $7.2 million in the first nine months of 2014.  This increase was primarily attributable to sales on a program with the U.S. Navy of $5.8 million in the first nine months of 2015 compared to $4.5 million in the first nine months of 2014. This increase was partially offset by reductions on the Embraer KC-390 program of $0.9 million during the first nine months of 2015 when compared to the first nine months of 2014.

Net sales related to design and delivery of tooling on various commercial aircraft programs were $1.6 million for the first nine months of 2015, down 73.8%, from $6.1 million in the first nine months of 2014. Tooling sales on various Boeing programs and sales on a space program decreased $0.8 million and $1.4 million, respectively, in the first nine months of 2015 when compared to the first nine months of 2014.



32

Cost of Goods Sold. Cost of goods sold for the first nine months of 2015 was $33.7 million compared to $43.1 million for the first nine months of 2014.  The decrease in cost of goods sold was primarily due to reductions in direct labor, which is the result of lower demand for this segment.

Gross Profit.  Gross profit for the first nine months of 2015 was $3.1 million (8.5% of net sales) compared to $8.1 million (15.8% of net sales) in the first nine months of 2014.  The decrease in gross profit was primarily attributable to unfavorable cumulative long-term revenue adjustments of $1.9 million on the Mitsubishi Regional Jet program in the first nine months of 2015 in addition to the decline in sales and lower fixed- cost utilization.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the first nine months of 2015 were $6.9 million, or 18.8% of net sales, compared to $7.4 million, or 14.5% of net sales, for the first nine months of 2014. The decrease in selling, general and administrative expenses primarily related to implemented cost reductions, which were partially offset by increases in restructuring expense of $0.8 million in the first nine months of 2015 when compared to the first nine months of 2014. Restructuring expenses recognized in the third quarter of 2015 related to the closure of the Greenville, South Carolina and Melbourne, Australia offices in addition to the elimination of other management positions within this segment. Implementation of these plans is expected to generate annual savings of $3.0 million

Non-segment Expenses

Interest Expense.  Interest expense was $16.8 million for the first nine months of 2015 and $23.8 million for the first nine months of 2014.  On June 19, 2014, the Company terminated its long-term credit agreement, modified its revolving credit agreement, and issued senior notes. As a result of these transactions, interest expense in the first nine months of 2014 included $9.1 million related to the write-off of debt financing cost and settlement of related interest rate derivatives. Interest expense related to outstanding borrowings has increased in the first nine months of 2015 when compared to the first six months of 2014 due to increased average interest rates. In the first nine months of 2015, the Company's primary indebtedness was senior notes accruing interest at 7.375%. Prior to June 19, 2014, the Company's primary indebtedness was a term loan accruing interest at 4.75%.

Income Tax Expense.  During the first nine months of 2015, the Company recorded an income tax expense of $0.4 million compared to a $2.6 million income tax benefit in the first nine months of 2014.  

The Company's tax benefit in the nine months ended September 30, 2014 primarily reflects a tax benefit of approximately $2.6 million associated with the decision to carry back the net operating loss recognized in 2013.


Non-GAAP Financial Measures

When viewed with the financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, the Company believes earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA provide additional useful information to clarify and enhance the understanding of the factors and trends affecting past performance and future prospects. The Company defines these measures, explains how they are calculated and provides reconciliations of these measures to the most comparable GAAP measure in the tables below. EBITDA and Adjusted EBITDA, as presented in this Form 10-Q, are supplemental measures of performance that are not required by, or presented in accordance with, GAAP.  They are not measurements of financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as alternatives to net cash provided by operating activities as measures of liquidity.  The presentation of these measures should not be interpreted to mean that future results will be unaffected by unusual or nonrecurring items.
 
The Company uses EBITDA and Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate the performance and trends of the business.  The Company presents EBITDA and Adjusted EBITDA because it believes that measures such as these provide useful information with respect to its ability to meet future debt service, capital expenditures, working capital requirements and overall operating performance.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of the Company’s results as reported under GAAP.  Some of these limitations are:
•
They do not reflect the Company’s cash expenditures, future expenditures for capital expenditures or contractual commitments;


33

•
They do not reflect changes in, or cash requirements for, working capital needs;
•
They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
•
They are not adjusted for all non-cash income or expense items that are reflected in the statement of cash flows;
•
They do not reflect the impact on earnings of charges resulting from matters unrelated to ongoing operations; and
•
Other companies in the Company’s industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to the Company to invest in the growth of the business or as a measure of cash that will be available to meet the Company’s obligations.  Furthermore, the definitions of EBITDA and adjusted EBITDA calculated here are different than those contained in the Company’s credit agreement.  You should compensate for these limitations by relying primarily on the GAAP results and using EBITDA and Adjusted EBITDA only supplementary.
 
However, in spite of the above stated limitations, the Company believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating the results of operations because these measures:
•
Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
•
Help investors to evaluate and compare the results of operations from period to period by removing the effect of the capital structure from operating performance; and
•
Are used by the management team for various other purposes in presentations to the Board of Directors as a basis for strategic planning and forecasting.
 
Adjusted EBITDA excludes acquisition and integration charges, as applicable, and provides meaningful information about the operating performance of the businesses apart from other non cash and non-recurring expenses, as well as interest and tax expense.
 
The following financial items have been added back to net income when calculating EBITDA:
•
Interest expense;
•
Income tax expense;
•
Depreciation; and
•
Amortization.
 
The following additional financial items have been added back to net income when calculating Adjusted EBITDA:
•
Stock-based compensation;
•
Integration–related expenses;
•
Restructuring expenses;
•
Other (net).



34

Reconciliations of net income to EBITDA and Adjusted EBITDA were as follows:
 
(In Thousands)
 
(In Thousands)
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
34


$
1,396

 
$
(1,053
)
 
$
(6,458
)
Depreciation and amortization (1)
5,098


5,998

 
15,018

 
17,002

Interest expense (2)
5,653


5,946

 
16,802

 
23,800

Income tax (benefit) expense
249


(754
)
 
408

 
(2,557
)
EBITDA
11,034


12,586

 
31,175

 
31,787

Stock-based compensation (3)
828


1,007

 
2,588

 
2,031

Integration expenses
175


64

 
348

 
557

Restructuring expenses (4)
1,575


765

 
2,368

 
2,288

Other, net (5)
(1,934
)

537

 
(1,974
)
 
791

Adjusted EBITDA
$
11,678


$
14,959

 
$
34,505

 
$
37,454

(1)
Includes amortization of intangibles, amortization of long-term supply agreement consideration and depreciation expense.
(2)
The nine months ended September 30, 2014 includes $793 related to the termination of interest rate derivatives and $8,340 related to the write-off of debt issuance costs associated with the June 19, 2014 modification of the Company's revolving credit agreement and the termination of its long-term credit agreement.
(3)
Includes share-based expense associated with the LMI Aerospace, Inc. 2005 Long-term Incentive Plan, the LMI Aerospace, Inc. 2015 Long-term Incentive Plan, the LMI Profit Sharing and Savings Plan and share-based payments to settle obligations under a consulting agreement.
(4)
The nine months ended September 30, 2015 include expenses related to the relocation of the St. Charles, MO machine parts operations, closure of the Coweta, OK, Greenville, SC and Melbourne, Australia facilities in addition to other employment separation activities. The nine months ended September 30, 2014 include expenses related to the Precise Machine facility closure, relocation of the Savannah, Georgia machining operations, and other employment separation activities.
(5)
In the three and nine months ended September 30, 2015, the Company recorded a net gain of $3.3 million related to a legal settlement. The gain realized from the settlement offsets expenses of $1.9 million that were recorded as a favorable adjustment to EBITDA when incurred in prior quarters.  For consistency, the above table reflects only $1.9 million of the net gain as an unfavorable EBITDA adjustment.  See Note 14, "Legal Contingencies," in the Notes to the Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

At September 30, 2015, the Company's primary source of outstanding indebtedness was second priority senior secured notes that mature in June of 2019. These notes accrue interest at 7.375% and require semi-annual interest payments. The Company's believes that the borrowings under these notes, in addition to available borrowings under its revolving credit facility, will provide the financial flexibility necessary to achieve its long-range strategic goals. For more information on the Company's debt structure, please see Note 6 - Long-term Debt and Capital Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q.

During the first nine months of 2015, operating activities provided $5.7 million in cash, compared to $36.0 million in the first nine months of 2014.  Net cash provided by operating activities for the first nine months of 2015 was unfavorably impacted by a $6.5 million payment of cash consideration to a key customer pursuant to a strategic partnership agreement. In exchange for this payment, the performance period of the statements of work for certain contracts with this customer was extended and the Company was granted preferred supplier status on certain future contracts. In addition, in the nine months ended September 30, 2015, the Company made semi-annual interest payments totaling $19.4 million associated with its outstanding notes. Operating cash flow in the first nine months of 2014 was favorably impacted by collection of a $13.5 million milestone payment on the KC-390 program in addition to a decrease in inventory of $2.1 million primarily related to a reduction in overall inventory spend.



35

Net cash used for investing activities was $15.0 million for the first nine months of 2015, compared to $9.3 million for the first nine months of 2014. Capital spending in the first nine months of 2015 primarily related to the purchase of machinery and equipment to support production contracts in addition to the purchase of equipment primarily for environmental compliance at our Cuba, Missouri plant. Cash used in the first nine months of 2014 included $4.2 million on machinery and equipment in support of new production contracts.

In the nine months ended September 30, 2015, the Company funded operating and investing activities through net borrowings on its revolving credit facility of $4.0 million in addition to making principal payments on long-term debt of $1.8 million. During the quarter ended September 30, 2014, the Company used net free cash flow of $25.7 million to decrease outstanding borrowings by $17.8 million and fund the payment of $8.7 million in debt financing costs related to its issuance of senior notes and the modification of its revolving credit facility.

The Company, in the ordinary course of business, evaluates strategies to enhance our results of operations, financial position, or liquidity. These strategies may include acquisitions, divestitures, opportunities to reduce costs or increase revenues, and other strategic initiatives to increase stockholder value. We are unable to predict which, if any, of these initiatives will be executed. The execution of these initiatives may have a material impact on our future results of operations, financial position, or liquidity.

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 the Company’s 2014 Form 10-K.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk.

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 2014 Form 10-K.
Item 4.
Controls and Procedures.

 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 our disclosure controls and procedures (as defined by Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2015. Based upon 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 us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including our 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. 


36

PART II

OTHER INFORMATION
Item 1.
Legal Proceedings.

We are involved in various legal proceedings that arise in the ordinary course of our business, as well as other matters that are or could become material under SEC regulations.  Information regarding these other matters, as well as all material developments with respect to such matters, are disclosed in Note 15 - Legal Contingencies in the Notes to the Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.





37

Risk Factors.

This Form 10-Q should be read together with Part I, Item 1A “RISK FACTORS” in our 2014 Form 10-K, which describes various risks and uncertainties to which we are or may become subject. 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, 2014 filed with the Securities and Exchange Commission on March 16, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults upon Senior Securities.

None.
Item 4.
Mine Safety Disclosures.

Not Applicable.
Item 5.
Other Information.
Settlement Agreement
On November 5, 2015, the Company and the former members of Valent Aerostructures, LLC entered into a definitive settlement agreement to resolve previously disclosed disputes and legal proceedings between the parties. The material terms of the settlement agreement are set forth in Note 15 - Legal Contingencies - Civil Action, in the Notes to the Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Code of Ethics
On November 5, 2015 the Board of Directors of the Company adopted amendments to certain provisions of the Code of Business Conduct and Ethics of the Company (the “Code of Ethics”). The amendments, among other things, served to enhance and clarify the Company’s policies regarding the reporting of illegal or unethical behavior, and the giving and acceptance of gifts by Company employees and representatives, and by adding provisions that identify and outline the Company’s policies regarding employee harassment and safety.

Item 6.
Exhibits.

See Exhibit Index.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Charles and State of Missouri on the 6th day of November, 2015.

 
LMI AEROSPACE, INC.
 
 
 
/s/ Daniel G. Korte
 
Daniel G. Korte
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
/s/ Clifford C. Stebe, Jr.
 
Clifford C. Stebe, Jr.
 
Chief Financial Officer and Secretary
 
(Principal Financial Officer and Principal Accounting Officer)


39

EXHIBIT INDEX

Exhibit
No.
 
Description
 
 
 
3.1
 
Restated Articles of Incorporation of the Company previously filed as Exhibit 3.1 to the Company’s Form S-1 (File No. 333-51357) filed on April 29, 1998 (the “Form S-1”) and incorporated herein by reference.
 
 
 
3.2
 
Amended and Restated By-Laws of the Company previously filed as Exhibit 3.2 to the Form S-1 and incorporated herein by reference.
 
 
 
3.3
 
Amendment to Restated Articles of Incorporation dated as of July 9, 2001 filed as Exhibit 3.3 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 and filed April 1, 2002 and incorporated herein by reference.
 
 
 
3.4
 
Amendment to the Company’s Amended and Restated Bylaws filed as Exhibit 3.1 to the Company’s Form 8-K filed June 26, 2009 and incorporated herein by reference.
 
 
 
3.5
 
Amendment No. 2 to the Company’s Amended and Restated Bylaws filed as Exhibit 3.1 to the Company’s Form 8-K filed May 6, 2015 and incorporated herein by reference.
 
 
 
4.1
 
Indenture dated as of June 19, 2014, by and among the Company, the Guarantors named therein, and U.S. Bank National Association, as Indenture Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8‑K filed on June 20, 2014).
 
 
 
4.2
 
Forms of 7.375% Senior Secured Notes due 2019 (included as exhibits to the Indenture identified in Exhibit 4.1 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8‑K filed on June 20, 2014).
 
 
 
4.3
 
Notes Collateral Agreement dated as of June 19, 2014, by and among the Company, the domestic Guarantors, and U.S. Bank National Association, as Collateral Agent, incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.4
 
Notes Intellectual Property Security Agreement dated as of June 19, 2014, by and among the Company, certain Guarantors named therein, and U.S. Bank National Association, as Collateral Agent, incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.5
 
Registration Rights Agreement dated as of June 19, 2014, by and among the Company, the Guarantors named therein and RBC Capital Markets, LLC, on behalf of itself and as representative of the other initial purchasers named therein, incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.6
 
Intercreditor Agreement dated as of June 19, 2014, by and between Royal Bank of Canada, as First-Lien Collateral Agent, and U.S. Bank National Association, as Second-Lien Collateral Agent, incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
10.1 Ω
 
Restricted Stock Award Agreement between LMI Aerospace, Inc. and Daniel G. Korte dated July 1, 2015 (performance based vesting), incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q files on August 7, 2015.
 
 
 
10.2
 
Restricted Stock Award Agreement between LMI Aerospace, Inc. and Daniel G. Korte dated July 1, 2015 (time based vesting), incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 7, 2015.
 
 
 
14
 
Code of Ethics, as amended, filed herewith

 
 
 
31.1
 
Rule 13a-14(a) Certification of Daniel G. Korte, Chief Executive Officer filed herewith.
 
 
 


40

31.2
 
Rule 13a-14(a) Certification of Clifford C. Stebe, Jr., Chief Financial Officer filed herewith.
 
 
 
32.1
 
Certification of Daniel G. Korte, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
 
 
 
32.2
 
Certification of Clifford C. Stebe, Jr., Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
 
 
 
101.ins
 
Instance Document
 
 
 
101.sch
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.cal
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.def
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.lab
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.pre
 
XBRL Taxonomy Extension Presentation Linkbase Document

Ω
Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary     of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended




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