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| LMIA > SEC Filings for LMIA > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
Overview
We are a leading provider of design engineering services, structural, assemblies, kits and components to the aerospace, defense, and technology markets. We primarily sell our products and services to the large commercial, military, corporate and regional aircraft, and technology markets. Historically, our business was primarily dependent on the large commercial aircraft market, specifically with one principal customer. In order to diversify our product and customer base, we implemented an acquisition and marketing strategy in the late 1990's that has broadened the number of industries to which we sell our products and services and, within the aerospace industry, diversified our customer base to reduce our dependence on any one principal customer. Our acquisition of D3 Technologies, Inc. in 2007 was in furtherance of our growth strategy of increasing the array of value-added services and solutions that we offer to our customers. We believe that 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.
In accordance with the criteria set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we are organized into two reportable segments: the Aerostructures segment and the Engineering Services segment. The Aerostructures segment fabricates, machines, assembles, and kits formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, semiconductor and medical products industries. The Engineering Services segment, comprised of the operations of D3 Technologies, Inc. provides engineering solutions to commercial and military aviation, aerospace, military weapons systems, marine and industrial markets.
The following table illustrates our sales percentages to our primary industries and markets over the last three years.
Market 2008 2007 2006
Corporate and regional aircraft 34.7 % 34.3 % 38.6 %
Large commercial aircraft 36.3 % 35.4 % 30.7 %
Military 22.5 % 22.5 % 21.5 %
Technology 3.0 % 4.3 % 5.0 %
Other (1) 3.5 % 3.5 % 4.2 %
Total 100.0 % 100.0 % 100.0 %
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(1) Includes commercial consulting services, and various aerospace products.
Results of Operations
Year ended December 31, 2008 compared to year ended December 31, 2007
The following table provides the comparative data for 2008 and 2007:
2008
($ in millions)
Engineering
Aerostructures Services Elimination Total
Net sales $ 150.8 $ 89.9 $ (1.2 ) $ 239.5
Cost of sales 108.1 71.4 (1.2 ) 178.3
Gross profit 42.7 18.5 - 61.2
S, G, & A (1) 26.4 9.1 - 35.5
Income from operations $ 16.3 $ 9.4 $ - $ 25.7
2007
($ in millions)
Engineering
Aerostructures Services (2) Elimination Total
Net sales $ 138.1 $ 30.4 $ - $ 168.5
Cost of sales 98.5 25.1 - 123.6
Gross profit 39.6 5.3 - 44.9
S, G, & A 20.4 3.1 - 23.5
Income from operations $ 19.2 $ 2.2 $ - $ 21.4
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(2) For the five-month period commencing with our acquisition of D3 Technologies, Inc. on July 31, 2007 and ending on December 31, 2007.
Aerostructures Segment
Net Sales. Net sales were $150.8 million in 2008, an increase of 9.2% from
$138.1 million in 2007. The following table summarizes the segment's total sales
and the percentage of the segment's total sales represented by the market
served:
Category 2008 % of Total 2007 % of Total
($ in millions)
Corporate and regional aircraft $ 55.0 36.5 % $ 49.5 35.8 %
Large commercial aircraft 43.8 29.0 % 44.1 31.9 %
Military 40.2 26.7 % 33.1 24.0 %
Technology 7.3 4.8 % 7.3 5.3 %
Other 4.5 3.0 % 4.1 3.0 %
Total $ 150.8 100.0 % $ 138.1 100.0 %
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Net sales for corporate and regional aircraft were $55.0 million during 2008 compared to $49.5 million in 2007, an increase of 11.1%. This increase was primarily attributable to increased production rates on Gulfstream Aerospace Corporation aircraft. Sales to this customer in 2008 and 2007 were $46.2 million and $43.4 million, respectively. Subsequent to year end, Gulfstream Aerospace Corporation announced a reduction in production rates of large cabin aircraft by approximately 25%, which we expect to have a material impact upon our 2009 sales.
Large commercial aircraft generated net sales of $43.8 million in 2008 compared to $44.1 million in 2007, a decrease of 0.7%. Net sales of certain aircraft models were negatively impacted by the strike by employees of The Boeing Company, which affected the last four months of 2008. In particular, we generated net sales for the Boeing 737 of $22.3 million in 2008, down 13.9% from $25.9 million in 2007, and net sales for the Boeing 777 of $3.8 million in 2008, down 22.4% from $4.9 million in 2007. These declines were partially offset by sales for the Boeing 747, which generated $10.6 million in 2008, up 21.8% from $8.7 million in 2007, and the Boeing 767, which generated $4.4 million, up 193.3% from $1.5 million in 2007.
Net sales of military products were $40.2 million in 2008 compared to $33.1 million in 2007, an increase of 21.5%. During the third quarter of 2007, we settled a claim with a customer that generated $1.2 million of net sales. Excluding this settlement, sales of military products experienced an increase of 26.0% in 2008 compared to $31.9 million in 2007. This increase in net sales resulted from net sales for the Sikorsky Black Hawk program, which generated $30.2 million of net sales in 2008, up 64.1% from $18.4 million in 2007. This increase was partially offset by net sales for the Boeing Apache helicopter, which generated $5.8 million in 2008, down 4.9% from $6.1 million in 2007.
Net sales of technology products were $7.3 million in both 2008 and 2007. This result was due to flat net sales of products used in semiconductor equipment.
Other net sales are primarily consulting services for lean manufacturing, commercial sheet metal and machined components and various aerospace products that are not easily identifiable to the appropriate aircraft and market.
Gross Profit. Gross profit for 2008 was $42.7 million (28.3% of net sales) compared to $39.6 million (28.7% of net sales) for 2007. Excluding the one-time benefit of the claim settlement discussed above, net of costs related to such settlement of $0.2 million, gross profit for 2007 was $38.6 million (28.0% of net sales). Gross profit was positively impacted by our higher production rates with aerospace customers which provided better coverage of fixed costs, but was reduced by slightly lower margin on newer assembly work on the Sikorsky Black Hawk program as well as increased salaries and wages.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $26.4 million (17.5% of net sales) in 2008 compared to $20.4 million (14.8% of net sales) in 2007. This 29.4% increase includes a non-cash charge of $2.3 million for the impairment of goodwill relating to Tempco Engineering, Inc. and a charge of $0.3 million for the remaining balance of customer intangibles from the acquisition of TCA in 2006. The Company ceased operations of TCA as of December 31, 2008. The remaining increase was primarily due to higher professional fees and recruiting costs.
Engineering Services Segment
Our Engineering Services segment was created with the acquisition of D3 Technologies, Inc. on July 31, 2007. The 2007 results for this segment are for the five-month period ended December 31, 2007.
Net Sales. The following table specifies the amount of the Engineering Services segment's net sales by market and the percentage of the segment's total net sales represented by each market for the twelve month period ended December 31, 2008 and the five month period ended December 31, 2007.
Five Months
Ended
December 31,
Category 2008 % of Total 2007 % of Total
($ in millions)
Corporate and regional aircraft $ 28.2 31.4 % $ 8.3 27.3 %
Large commercial aircraft 43.1 47.9 % 15.4 50.7 %
Military 13.6 15.1 % 4.8 15.8 %
Tooling and Other 5.0 5.6 % 1.9 6.2 %
Total $ 89.9 100.0 % $ 30.4 100.0 %
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Approximately $87.1 million, or 96.9% of the segment's 2008 net sales; and approximately $28.6 million or 94.1% of the 2007 five month period net sales were recorded under reimbursement type contracts for engineering services. The Engineering Services segment generates net sales from labor hours worked at varying, pre-negotiated rates and other direct costs plus an administrative fee. Net sales under these reimbursement contracts are primarily for commercial, corporate, and military markets. In 2008, the segment's net sales of services supporting corporate and regional aircraft were approximately $28.2 million or 31.4% of total sales, while the same category had $8.3 million, or 27.3% of total net sales for the five month period ending December 31, 2007. The majority of these sales resulted from services provided in the development of new aircraft programs. Net sales for services for commercial aircraft were approximately $43.1 million, or 47.9% of net sales. In the last five months of 2007, the segment's net sales for services for large commercial aircraft were $15.4 million or 50.7 % of total net sales. These revenues are primarily from programs supporting the Boeing 747, 767, 777, and 787 platforms. Military programs had net sales of approximately $13.6 million, or 15.1% of 2008 net sales. The five month 2007 net sales for the military category were $4.8 million, or 15.8% of the total net sales. The military revenues were derived from support provided on multiple Navy programs, Lockheed Martin's F-35, and various other programs. Approximately $5.0 million, or 5.6% of 2008 net sales, and $1.9 million, or 6.2% of net sales for the five month period in 2007, were categorized as tooling or other. These sales represented services primarily related to design and delivery of tooling on various programs supporting commercial aircraft.
Gross Profit. Gross profit for this segment was $18.5 million (20.6% of net sales) for 2008 and $5.3 million (17.4% of net sales) for the five month period ended December 31, 2007. Costs included in cost of goods sold are primarily direct labor, fringe benefits, subcontract labor, direct costs related to specific contracts, depreciation and facility costs and are part of the negotiated rate structures for reimbursement type contracts. The higher gross profit in 2008 compared to the five months in 2007 is primarily due to the concentration of holidays in the last five months of the year that impact the number of billable hours. In addition, higher profitability was due to favorable negotiations with clients and minimization of indirect charges by direct personnel.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $9.1 million (10.1% of net sales) in 2008 and $3.1 million (10.2% of net sales) for the five month period ended December 31, 2007. These costs primarily include salaries, wages and benefit costs of approximately $4.5 million in 2008 and $1.5 million in 2007, stock based compensation of $1.5 million in 2008 and $0.7 million in 2007, relating to a restricted stock award made on July 31, 2007 and vesting over five years, and amortization of intangibles of $1.0 million in 2008 and $0.4 million in 2007, valued in connection with the acquisition of D3 Technologies, Inc.
Non-segment Expenses
Other Income (Expense), Net. Other expense was $1.8 million for 2008, compared to $0.9 million for 2007. The increased expense resulted from interest expense on borrowings related to the
acquisition of D3 Technologies, Inc., offset by a charge in 2007 for $0.2 million of unamortized prepaid financing costs related to our former credit facility.
Income Tax Expense. Income tax expense for 2008 was $8.6 million compared to $7.4 million for 2007. During 2008, we applied an effective income tax rate of 36.5%, up from 35.9% in 2007. Our 2008 effective tax rate was positively impacted by higher deductions available for manufacturing companies and negatively impacted by a higher effective state income tax rate.
Year ended December 31, 2007 compared to year ended December 31, 2006
The following table provides the comparative data for 2007 and 2006:
2007 2006
($ in millions)
Engineering Engineering
Aerostructures Services (1) Total Aerostructures Services Total
Net sales $ 138.1 $ 30.4 $ 168.5 $ 123.0 $ $ 123.0
Cost of sales 98.5 25.1 123.6 89.5 89.5
Gross profit 39.6 5.3 44.9 33.5 - 33.5
S,G & A 20.4 3.1 23.5 17.3 17.3
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(1) For the five-month period commencing on our acquisition of D3 Technologies, Inc. on July 31, 2007 and ending on December 31, 2007.
Aerostructures Segment
Net Sales. Net sales were $138.1 million in 2007, an increase of 12.3% from
$123.0 million in 2006. The following table summarizes our total sales by the
market served:
% of % of
Category 2007 Total 2006 Total
($ in millions)
Corporate and regional aircraft $ 49.5 35.8 % $ 47.4 38.6 %
Large commercial aircraft 44.1 31.9 37.8 30.7
Military 33.1 24.0 26.5 21.5
Technology 7.3 5.3 6.2 5.0
Other 4.1 3.0 5.1 4.2
Total $ 138.1 100.0 % $ 123.0 100.0 %
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Net sales for corporate and regional aircraft were $49.5 million during 2007 compared to $47.4 million in 2006, an increase of 4.4%. This increase was primarily attributable to higher production rates at Gulfstream Aerospace Corporation.
Large commercial aircraft generated net sales of $44.1 million in 2007 compared to $37.8 million in 2006, an increase of 16.7%. Increase in net sales to this market was driven by higher production rates on certain models at The Boeing Company. In particular, we generated net sales for the Boeing 737 of $25.9 million in 2007, up 14.6% from $22.6 million in 2006, and net sales for the Boeing 747 of $8.7 million in 2007, up 17.6% from $7.4 million in 2006. In addition, sales for the Boeing 787, which primarily began in the first quarter of 2007, generated $1.8 million for the year.
Net sales of military products were $33.1 million in 2007 compared to $26.5 million in 2006, an increase of 24.9%. During the third quarter of 2007, we settled a claim with a customer which generated $1.2 million of net sales. Excluding this settlement, sales of military products was $31.9 million in 2007, an increase of 20.4% compared to 2006. This increase in net sales resulted from net sales for the Sikorsky Black Hawk program which generated $18.4 million of net sales in 2007, up 49.6% from $12.3 million in 2006. Additionally, net sales for the Boeing Apache helicopter generated $6.1 million in sales in 2007, up 15.1% from $5.3 million in 2006.
Net sales of technology products were $7.3 million in 2007 compared to $6.2 million in 2006, an increase of 17.7%. This increase was due to higher net sales of products used in semiconductor equipment.
Other net sales are primarily consulting services for lean manufacturing, commercial sheet metal and machined components and various aerospace products that are not easily identifiable to the appropriate aircraft and market.
Gross Profit. Gross profit for 2007 was $39.6 million (28.7% of net sales) compared to $33.5 million (27.2% of net sales) for 2006. Excluding the one-time benefit of the claim settlement discussed above, net of costs related to such settlement of $0.2 million, gross profit for 2007 was $38.6 million (28.0% of net sales). Gross profit was positively impacted by our higher production rates with aerospace customers which provided better coverage of fixed costs, but was reduced by increased salaries and wages, primarily from investment in our materiel organization. Specifically, salary, wages and fringe benefits increased 13.7%, from $27.7 million in 2006 to $31.5 million in 2007.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $20.4 million (14.8% of net sales) in 2007 compared to $17.3 million (14.1% of net sales) in 2006. This 17.9% increase was primarily due to higher rent expenses and compensation and fringe benefit costs resulting from increased staffing to support our planned growth.
Engineering Services Segment
Net Sales. The following table specifies the amount of the Engineering Services
segment's net sales by category for the five months ending December 31, 2007 and
the percentage of the segment's total net sales represented by each category.
This segment was created with the acquisition of D3 Technologies, Inc. on July
31, 2007 and includes revenue for the period of August 1 through December 31 of
2007.
Five Months Ended
Category December 31, 2007 % of Total
($ in millions)
Commercial Aircraft $ 15.4 50.7 %
Corporate Aircraft 8.3 27.3
Military 4.8 15.8
Tooling 1.9 6.2
Total $ 30.4 100.0 %
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Approximately $28.6 million, or 94.1% of net sales, of the segment's revenues were recorded under reimbursement type contracts for engineering services which generate net sales from labor hours incurred at varying, pre-negotiated rates and other direct costs plus an administrative fee. Net sales under these reimbursement contracts are primarily for commercial, corporate, and military markets. Net sales for services for commercial aircraft were approximately $15.4 million, or 50.7% of net sales. These revenues are primarily from programs supporting Boeing's 747, 777 and 787 platforms. Net sales for services supporting corporate and regional aircraft were approximately $8.3 million, or 27.3% of net sales, the majority of which related to the development of new aircraft programs. Net sales of
services for military programs were $4.8 million, or 15.8% of net sales. These military revenues were derived from support provided on multiple Navy programs, the Lockheed Martin's F-35 and various other programs. Approximately $1.9 million, or 6.2% of net sales, primarily related to design and delivery of tooling on various programs supporting commercial aircraft.
Gross Profit. Gross profit for the segment was $5.3 million (17.4% of net sales). Costs included in cost of goods sold are primarily direct labor, fringe benefits, subcontract labor, direct costs related to specific contracts, depreciation and facility costs and are part of the negotiated rate structures for reimbursement type contracts.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the segment were $3.1 million (10.2% of net sales). These costs primarily include salaries, wages and benefits costs of approximately $1.5 million, $0.7 million of stock based compensation relating to a restricted stock award made on July 31, 2007 and vesting over five years, and amortization of intangibles of $0.4 million valued in connection with the acquisition of D3 Technologies, Inc..
Non-segment Expenses
Other Income (Expense), Net. Other expense was $0.9 million for 2007, compared to $0.2 million for 2006. The increased expense resulted from interest expense on borrowings due to the acquisition of D3 Technologies, Inc. as well as a charge for $0.2 million of unamortized prepaid financing costs related to our former credit facility.
Income Tax Expense. Income tax expense for 2007 was $7.4 million compared to $5.3 million for 2006. During 2007 our effective income tax rate was 35.9%, up from 33.5% in 2006. The lower 2006 effective tax rate was due to recognition of certain tax credits. Our 2007 effective tax rate was positively impacted by additional deductions available for manufacturers and favorable changes in state apportionment while negatively impacted by a higher tax rate for D3 Technologies, Inc. and the reserving of certain credits challenged by the Internal Revenue Service.
Liquidity and Capital Resources
On July 31, 2007, we entered into a new credit agreement. See Note 6 of the Consolidated Financial Statements. The credit agreement provides for a senior secured revolving credit facility in an aggregate principal amount of up to $80 million, of which $25 million was utilized at December 31, 2008. Borrowings under the credit facility are secured by substantially all of our assets and bear interest at either (a) the "base rate" (the higher of the federal funds rate plus one-half of one percent or the prime commercial lending rate) plus an applicable interest margin ranging from 0.125% to 1.0%, depending upon our total leverage ratio at the end of each quarter, or (b) the LIBOR rate plus an applicable interest margin ranging from 1.125% to 2.0% depending upon our total leverage ratio at the end of each quarter. The maturity date of the credit facility, which is subject to acceleration upon breach of the financial covenants (consisting of a maximum total leverage ratio and a minimum fixed charge coverage ratio) and other customary non-financial covenants contained in the credit agreement, is July 31, 2012. On January 30, 2008, the credit facility was amended to extend the maximum period permitted to fix the interest rate under LIBOR from six months to one year. In connection with our acquisition of D3 Technologies, Inc. we borrowed a total of approximately $38.5 million under the credit facility. The foregoing description of the credit agreement does not purport to be complete and is qualified in its entirety by reference to the credit agreement, a copy of which is attached as Exhibit 4.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2007.
In August, 2007, the Company entered into a line of credit agreement providing a revolving credit facility in the amount up to $1 million at the base rate plus 1.125%, of which none was utilized at December 31, 2008.
On December 28, 2006, we entered into an agreement with a third party to sell and lease back certain of our real estate properties for a total sale price of $10.2 million. The sale of one of these properties occurred on December 28, 2006 for a sale price of $4.3 million. On February 13, 2007, the sale of the remaining properties was completed at a price of $5.9 million. The four operating lease agreements resulting from the sales expire on February 28, 2025 and we have the options for three additional five-year renewal terms. The combined initial annual minimum lease payment for the four properties is $0.9 million and will be increased by 2.3% per year. Total gain from the sale of these properties in the amount of $4.2 million was deferred and was recognized over the term of the leases. Proceeds from the sale were included in cash.
We generated cash from operations of $9.0 million in 2008 compared to $3.2 million in 2007 and $6.2 million in 2006. Net cash provided by operating activities for 2008 was favorably impacted by increased net income, depreciation and amortization, non-cash charge of impairment of goodwill, non-cash restricted stock compensation expense and decreased trade accounts receivable. Cash generated from operating activities was negatively impacted by an increase in inventory of $22.7 million. This increase was partially due to delays in delivery that resulted from the Boeing strike and deferral of orders from two customers on the Black Hawk helicopter. In addition, in 2008, we deferred . . .
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