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| LIMC > SEC Filings for LIMC > Form 10-K on 9-Mar-2009 | All Recent SEC Filings |
9-Mar-2009
Annual Report
Background
Prior to our initial public offering on July 18, 2007, we operated as a wholly-owned subsidiary of TAT. We were incorporated in Delaware on February 28, 2007 as a successor to Limco-Airepair, Inc., which was incorporated as an Oklahoma corporation in 1995 upon the merger of three aerospace companies that had been acquired by TAT from 1992 through 1995. Prior to the consolidation of Limco-Airepair, Inc. into our company, the Company transferred all of its assets and liabilities associated with its Oklahoma operations to our wholly-owned subsidiary, Limco-Airepair Inc., a newly formed Delaware corporation.
Prior to our acquisition of Piedmont in July 2005, our business was focused on providing MRO services for heat transfer components. With the acquisition of Piedmont, we expanded the scope of our MRO services to also include APUs, propellers and landing gear and added our parts services business.
Our consolidated financial statements have been prepared on the historical cost basis and present our financial position, results of operations and cash flows as derived from TAT historical financial statements. TAT had historically provided us with certain services including general and administrative services for employee benefit programs, insurance, legal, treasury and tax compliance. Currently, TAT provides only certain insurance coverages that are then reimbursed by the Company. The financial information included in our financial statements does not necessarily reflect what our financial position and results of operations would have been had we operated as a stand-alone entity during the periods covered, and may not be indicative of our future operations or financial position.
Overview
We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry. Our four FAA certified repair stations provide aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military. We specialize in MRO services for components of aircraft, such as heat transfer components, auxiliary power units, or APUs, propellers, landing gear and pneumatic ducting. In conjunction with our MRO services we are also an original equipment manufacturer, or OEM, of heat transfer equipment for airplane manufacturers and other selected related products. Our parts services division offers inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.
MRO Services
We provide services for the components segment of the MRO services market. Our MRO services segment includes the repair and overhaul of heat transfer components, APUs, propellers, landing gear and pneumatic ducting, among other components. Generally, manufacturer specifications, government regulations and military maintenance regimens require that aircraft components undergo MRO servicing at regular intervals or as necessary. Aircraft components typically require MRO services, including repairs and installation of replacement units, after three to five years of service or sooner if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range from one to five years depending on the bargaining power of the purchaser. Warranty claims are generally the responsibility of the OEM during the warranty period. Our business opportunity usually begins upon the conclusion of the warranty period for these components and subsystems.
We are licensed by Hamilton Sundstrand, a leading provider of aerospace products, to provide MRO services for all of its air-to-air heat transfer products and by Honeywell Aerospace, or Honeywell, a leading manufacturer of aerospace products and an aerospace services provider, to provide MRO services for three of its APU models. Our repair stations are certified by the FAA and the European Aviation Safety Agency, or EASA. In conjunction with our MRO services, we also manufacture heat transfer equipment used in commercial, regional, business and military aircraft, complete environmental control systems and cooling systems for electronics.
Parts Services
Our parts services division provides a number of services for commercial, regional and charter airlines and business aircraft owners, including inventory management and parts services. We presently assist several of these customers with their parts procurement needs by using our knowledge of the aircraft component industry to quickly acquire necessary aircraft components in a cost-effective manner. We have a knowledgeable and experienced staff of customer service representatives and offer our customers 24 hour service and same day shipping. We currently supply parts to approximately 600 commercial, regional and charter airlines and business aircraft owners.
Our management believes that our revenues and sources of revenues are among the key performance indicators for our business. Our revenues from our two principal lines of business for the two years ended December 31, 2008 were as follows:
2008 2007
% of % of
Total Total
Revenues Revenues Revenues Revenues
Revenues:
MRO Services $ 54,276 75.8 % $ 49,392 70.8 %
Parts services 17,289 24.2 % 20,384 29.2 %
Total revenues $ 71,565 100.0 % $ 69,776 100.0 %
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The following table reflects the geographic breakdown of our revenues for two years ended December 31, 2008:
2008 2007
% of % of
Total Total
Revenues Revenues Revenues Revenues
North America $ 49,448 69.1 % $ 48,632 69.7 %
Europe 13,980 19.5 % 14,895 21.3 %
Asia 3,324 4.6 % 3,805 5.5 %
Other 4,813 6.7 % 2,444 3.5 %
$ 71,565 100.0 % $ 69,776 100.0 %
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Our cost of revenues for MRO services consists of component and material costs, direct labor costs, shipping expenses, overhead related to manufacturing and depreciation of manufacturing equipment. Our cost of revenues for parts services consists primarily of the cost of the parts and shipping expenses. Our gross margin is affected by the proportion of our revenues generated from MRO services (including the sale of OEM products) and parts services.
Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs.
General and administrative expenses consist of compensation and related expenses for executive, finance, legal, and administrative personnel; professional fees; and other general corporate expenses and related costs for facilities and equipment.
Critical Accounting Policies
The preparation of the financial statements in accordance with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses and related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.
Certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's subjective judgments are described below to facilitate better understanding of our business activities. We base our judgments on our experience and assumptions that we believe are reasonable and applicable under the circumstances.
Revenue recognition
Revenues from the sale of our services and products are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, provided the collection of the resulting receivable is probable, the price is fixed or determinable and we no longer have any significant obligation with respect to such sale. We do not grant a right of return.
Revenues from MRO services are recognized when customer-owned material is shipped back to the customer. Revenues from parts sales are recognized when the part is shipped to the customer and title passes to the customer.
Revenues from maintenance contracts are recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract. We estimate the costs that are expected to be incurred based on our experience with the aggregate costs incurred and to be incurred on contracts of this nature. The costs incurred related to our maintenance contracts are not incurred on a straight-line basis, as the timing to provide our maintenance services is dependent on when parts under these contracts require maintenance.
Goodwill, Other Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Of the $4.8 million of goodwill on our balance sheet as of December 31, 2008, approximately $4.3 million was a result of our acquisition of Piedmont. The identifiable intangible assets relating to the Piedmont acquisition, other than goodwill, included in our balance sheet are customer relationships and other intangible assets. The value we assigned to these intangible assets, using the income approach based on the present value of the cash flows attributable to each asset, was approximately $2.9 million. The amounts allocated to these intangible assets are being amortized on a straight-line basis over periods ranging from 3 to 10 years.
We review goodwill and other intangible assets for potential impairment annually and when events or changes in circumstances indicate the carrying value of the goodwill or the other intangible assets may be impaired, in which case we may obtain an appraisal from an independent valuation firm to determine the amount of impairment, if any. In addition to the possible use of an independent valuation firm, we perform internal valuation analyses and consider other publicly available market information. We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. In the fourth quarter of fiscal 2008, we completed our annual impairment testing of goodwill using the methodology described in the notes to our consolidated financial statements, and determined there was no impairment of our goodwill. If actual results are not consistent with our assumptions and estimates, we may be exposed to a goodwill impairment charge.
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109"). We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized. To the extent that our decisions and assumptions and historical reporting are determined not to be compliant with applicable tax laws we may be subject to adjustments in our reported income for tax purposes as well as interest and penalties.
Allowances for Doubtful Accounts
We perform ongoing credit evaluations of our customers' financial condition and we require collateral as deemed necessary. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables, historical bad debt experience and the general economic environment. Management applies considerable judgment in assessing the realization of receivables, including assessing the probability of collection and the current credit worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the average cost and first-in, first-out (FIFO) methods. We write down obsolete or slow moving inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions and sale forecasts. If actual market conditions are less favorable than we anticipate, additional inventory write-downs may be required.
Warranty Costs
We provide warranties for our products and services ranging from one to five years, which vary with respect to each contract and in accordance with the nature of each specific product. We estimate the costs that may be incurred under our warranty and record a liability in the amount of such costs at the time the product is shipped. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. As of December 31, 2008 and 2007 , the aggregate amount of our warranty costs was not material.
Results of Operations
The following table sets forth our statements of operations as a percentage of revenues for the periods indicated:
Years ended December 31,
2008 2007
Revenue:
MRO services 75.8 % 70.8 %
Parts services 24.2 % 29.2 %
Total revenue 100.0 % 100.0 %
Costs and operating expenses:
MRO services 60.6 % 50.5 %
Parts services 19.5 % 23.8 %
Selling and marketing 3.8 % 3.7 %
General and administrative 9.9 % 10.0 %
Amortization of intangibles 0.5 % 0.7 %
Operating income 5.7 % 11.3 %
Interest income 1.8 % 1.3 %
Loss on sale of investments -.3 % 0 %
Other expense -.6 % 0 %
Interest expense 0 % -1.0 %
Income taxes 2.7 % 4.1 %
Net income 3.8 % 7.4 %
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In addition to revenues and the sources of our revenues, our management team views our gross profit margin and the level of inventory compared to revenues as the key performance indicators in assessing our company's financial condition and results of operations. Our management team believes that the upward trend in our MRO revenues is reflective of an industry-wide increase in demand for MRO services, and we currently expect that this trend will continue for the foreseeable future. While our management team believes that demand for parts services will grow, this segment is subject to a high degree of volatility because of the potential impact of large one time parts sales.
Revenues 2008 2007
(in thousands)
MRO services $ 54,276 $ 49,392
Parts services 17,289 20,384
Total revenue $ 71,565 $ 69,776
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2008 vs. 2007
Revenues. Total revenues increased by $1.8 million, to $71.6 million for the year ended December 31, 2008 from $69.8 million for the same period. The increase in revenues was primarily attributable to steady MRO growth and offset by a decline in parts sales for the year.
MRO Revenues. Revenues from MRO services increased by $4.9 million, to $54.3 million for the year ended December 31, 2008 from $49.4 million for the year ended December 31, 2007. The organic growth in MRO services revenues is a result of increased sales to historical customers and, to a lesser degree, sales to new customers.
Parts Services. Parts services revenues decreased by $3.1 million, to $17.3 million for the year December 31, 2008 from $20.4 million for the year ended December 31, 2007. This decrease in sales is attributable to the one-time parts sale during 2007 to Viva Mexico for $2.7 million and a general decline in parts sales.
Costs of revenues and operating expenses 2008 2007 MRO services $ 43,664 $ 35,205 Parts services 13,922 16,603 Total cost of revenues 57,586 51,808 Selling and marketing 2,755 2,613 General and Administrative 7,118 6,981 Amortization of intangibles 326 474 Total operating costs 10,199 10,068 Operating income 3,780 7,900 |
2008 vs. 2007
Cost of revenues. Cost of revenues for MRO services increased by $8.5 million, to $43.7 million for the year ended December 31, 2008 from $35.2 million for the year ended December 31, 2007. Contributing to the increase in cost of revenues for MRO services was a $4.9 million increase in revenue, $1.4 million increase in raw material costs, $1.3 million increase in labor costs related to additional employees and general salary and wage increases and a $1.4 million increase in scrap expense. Materials costs are related to the general increase in raw material costs year over year. Scrap costs relate to new program start-up in the OEM division and we believe should not be recurring. Cost of revenues for parts services decreased by $2.7 million to $13.9 million for the year ended December 31, 2008 from $16.6 million for the year ended December 31, 2007, principally as a result of lower volumes during the year ended December 31, 2008.
Selling and marketing expenses. Selling and marketing expenses increased by $142,000 to $2.8 million for the year ended December 31, 2008 from $2.6 million for the year ended December 31, 2007. The increase in selling and marketing expenses is primarily attributable to higher commissions resulting from increased sales volumes on MRO as well as heightened sales and marketing efforts.
General and administrative expenses. General and administrative expenses increased by $137,000 to $7.1 million for the year ended December 31, 2008 from $7.0 million for the year ended December 31, 2007. The increase in general and administrative expenses is primarily attributable to approximately $837,000 in one-time SOX and public company costs, $110,000 in severance pay, $60,000 in tax audit expenses, and acquisition expenses of $357,000. These expenses were offset by the lack of phantom stock expense of $325,000, IPO bonus expense of $400,000 and increased public company costs and administrative costs during the year ended December 31, 2007. Non-cash compensation expense was $175,000 and included in general and administrative expenses during the year ended December 31, of 2008 compared to $390,000 in the during the year ended December 31, 2007
Operating income. Our operating income decreased by $4.1 million, to $3.8 million for the year ended December 31, 2008 from $7.9 million for the year ended December 31, 2007. The decrease is attributable primarily to higher cost of sales and increased general and administrative costs for the year.
Other income and expense 2008 2007 Interest income $ 1,259 $ 897 Loss on sale of investments (236 ) - Interest and other expense (167 ) (732 ) Provision for income taxes 1,923 2,871 Net Income $ 2,713 $ 5,194 |
2008 vs. 2007
Interest income. Interest income increased by $362,000 to $1.3 million for the year ended December 31, 2008 from $897,000 for the year ended December 31, 2007, principally as a result of an increase in the amount of funds held in interest bearing accounts and short-term investments following our initial public offering.
Loss on sale of investments. Loss on sale of investments was $236,000 for the year ended December 31, 2008. This compared to no loss for the year ended December 31, 2007. This loss relates to the sale of corporate and government bonds during the later part of 2008.
Income and other expense. Interest and other expense was $167,000 for the year ended December 31, 2008 compared to $732,000 for the year ended December 31, 2007. The decrease in interest expense reflects our repayment of our outstanding indebtedness with a portion of the proceeds of our initial public offering during 2007.
Income taxes. Income taxes decreased by $948,000 to $1.9 million for the year ended December 31, 2008 from $2.9 million for the year ended December 31, 2007. The decrease in income tax expense is primarily attributable to decreased pretax income offset by additional tax owed for tax positions taken in previous years and recognized as tax expense in the current year in the amount of $189,000.
Liquidity and Capital Resources
As of December 31, 2008, we had cash and cash equivalents of $21.3 million, and short-term investments of $11.3 million, consisting primarily of government and corporate bonds and auction rate tax exempt securities. Our total working capital was approximately $55.4 million. Our liquidity position resulted from the July 23, 2007, sale of 4,205,000 shares of common stock in our initial public offering from which we received net proceeds of approximately $42 million.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Years ended December 31,
2008 2007
(in thousands)
Net cash provided by (used in) operating activities $ 953 $ (1,069 )
Net cash provided by (used in) investing activities 15,344 (31,705 )
Net cash provided by (used in) financing activities - 33,504
Net increase (decrease) in cash and cash equivalents 16,297 730
Cash and cash equivalents at beginning of year 5,039 4,309
Cash and cash equivalents at end of year 21,336 5,039
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Net cash provided by operating activities was $953,000 for the year ended December 31, 2008. This amount was primarily attributable to $2.9 million in net income, a $564,000 increase in amounts payable TAT for the purchase of heat transfer components a $168,000 increase in accounts payable and $1.2 million of depreciation and amortization expense offset by to a $2.6 million increase in inventories required to support the increase in MRO revenues and the ramp up for a new parts contract, and a $2.3 million increase in accounts receivable.
Net cash provided by investing activities was $15.3 million for the year ended December 31, 2008. We sold $26.4 million in corporate and municipal bonds and we purchased approximately $9.3 million in corporate and municipal bonds and auction rate securities that were reinvested in money markets. We invested $1.7 for the purchase of property and equipment, including test facilities for our APU's.
Net cash provided by financing activities was zero for the year ended December 31, 2008.
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2008 and the effect we expect them to have on our liquidity and cash flow in future periods:
Payments Due by Period
Less More
than 1-3 3-5 than 5
Total 1 Year Years Years Years
(in thousands)
Operating lease obligations $ 613 $ 186 $ 413 $ 83 $ -
Deferred tax liability 835 - - - 835
Total $ 1,448 $ 186 $ 413 $ 83 $ 835
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As of December 31, 2008, our principal commitments consisted of obligations outstanding under operating leases and our deferred tax liability. All of our long-term debt was repaid during 2007 with a portion of the proceeds of our initial public offering. We currently do not have significant capital spending or purchase commitments. In the last three years, we have experienced substantial increases in our expenditures as a result of the growth in our operations and personnel.
Over the next 12 months, we expect cash flows from our operating activities, along with our existing cash and cash equivalents and marketable securities, to be sufficient to fund our operations including our relocation of our Limco-Airepair facility to North Carolina. We intend to assess the need for a long-term line of credit, but do not believe that the current lack of an external source of long-term liquidity will have a material adverse effect on our business or results of operations.
Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our selling and marketing activities, costs . . .
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