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LMIA > SEC Filings for LMIA > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for LMI AEROSPACE INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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.

We are organized into two reportable segments: the Aerostructures segment and the Engineering Services segment. Our Aerostructures segment fabricates, machines, finishes, integrates, assembles and kits machined and formed close tolerance aluminum, specialty alloy, composite components and higher level assemblies for use by the aerospace and defense industries. Our Engineering Services segment 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.

On August 7, 2012, we acquired Kirkland, Washington-based TASS, a premier after-market engineering and support services firm. TASS is included in the Engineering Services segment and delivers high-end engineering solutions to aircraft manufacturers, airlines, MRO services companies and leasing companies worldwide. We believe the acquisition of TASS, whose expertise lies in engineering for aircraft repairs and modifications and providing airline fleet management services, will provide us with a global presence in the rapidly growing after-market engineering arena and build on our long and successful history with Boeing products. TASS also provides the Company with the ability to internally source product support for parts manufactured by the Company to the global airline fleet.

On December 28, 2012, we acquired Kansas City, Missouri-based Valent, a provider of complex, structural components, major sub-assemblies and machined parts for OEMs and Tier 1 airframe manufacturers in the aerospace and defense industries. Valent is included in the Aerostructures segment and provides significant content for several major commercial, business jet and military platforms including the Boeing 737, 747-8, 777, 787, V-22, F-15, F-18 and Gulfstream G650. We believe the acquisition will position the Company as an industry leading aerostructure supplier with significant scale. The resulting increased scale, complementary product offerings and enhanced project management capabilities of the acquisition are expected to drive further growth from existing platforms by offering our customers more diversified product and service offerings, deepened customer relationships and greater leverage of our extensive manufacturing and supply chain network. In addition, we believe Valent's assembly and high-end precision machining capabilities will allow the Company to compete for larger and more complex design-build projects.

Results of Operations

The results below include the results of operations of Valent in the Aerostructures segment and TASS in the Engineering Services segment since their acquisition dates.

The following table illustrates our sales percentages to our primary industries and markets over the last three years.

Market                             2012        2011        2010
Large commercial aircraft            36.7 %      38.4 %      39.7 %
Corporate and regional aircraft      32.0 %      30.8 %      29.7 %
Military                             26.0 %      22.0 %      23.8 %
Other (1)                             5.3 %       8.8 %       6.8 %
Total                               100.0 %     100.0 %     100.0 %

(1) Includes technology, testing, commercial consulting services and various other products.

Year ended December 31, 2012 compared to year ended December 31, 2011

The following table provides the comparative data for 2012 and 2011:


Table of Contents

                                                         2012
                                                   ($ in millions)
                                                 Engineering
                              Aerostructures     Services        Elimination     Total
Net sales                     $       175.0      $     105.6     $      (2.0 )   $ 278.6
Cost of sales                         127.1             85.3            (2.1 )     210.3
Gross profit                           47.9             20.3             0.1        68.3
S, G, & A and other charges            32.4              9.8               -        42.2
Income from operations        $        15.5      $      10.5     $       0.1     $  26.1



                                                         2011
                                                   ($ in millions)
                                                 Engineering
                              Aerostructures     Services        Elimination     Total
Net sales                     $       168.1      $      87.5     $      (1.6 )   $ 254.0
Cost of sales                         123.2             72.9            (1.7 )     194.4
Gross profit                           44.9             14.6             0.1        59.6
S, G, & A and other charges            26.6              8.1               -        34.7
Income from operations        $        18.3      $       6.5     $       0.1     $  24.9

Aerostructures Segment

Net Sales.  Net sales were $175.0 million in 2012, an increase of 4.1% from
$168.1 million in 2011. The following table summarizes the segment's total sales
and the percentage of the segment's total sales represented by the market served
for each of the years ended December 31, 2012 and December 31, 2011,
respectively:

   Category                           2012         % of Total      2011         % of Total
                                         ($ in millions)
   Large commercial aircraft         $  72.6             41.5 %   $  65.9             39.2 %
   Corporate and regional aircraft      57.6             32.9 %      53.4             31.8 %
   Military                             35.7             20.4 %      36.3             21.6 %
   Other                                 9.1              5.2 %      12.5              7.4 %
   Total                             $ 175.0            100.0 %   $ 168.1            100.0 %

Large commercial aircraft generated net sales of $72.6 million in 2012 compared to $65.9 million in 2011, an increase of 10.2%. Sales related to the 747 platform increased $4.7 million to $17.8 million in 2012 from $13.1 million in 2011 as new work statement and production rates increased for this aircraft. Wing modification kits related to the 737 platform increased $3.7 million to $7.5 million in 2012 from $3.8 million in 2011. Sales related to the 787 platform increased $1.3 million to $2.8 million in 2012 from $1.5 million in 2011. The 777 program increased $1.6 million with sales in 2012 of $9.8 million compared to $8.2 million in 2011, due to increases in production rates and additions to the Company's work statement. Sales related to the 737, excluding wing modification programs, were the same for both years at $23.0 million. The increases have been partially offset by a $6.3 million decline to $6.2 million in 2012 from $12.5 million in 2011 in the wing modification kits related to the 757 and 767 platforms as demand slowed for these aftermarket products.

Net sales of components for corporate and regional aircraft were $57.6 million during 2012 compared to $53.4 million in 2011, an increase of 7.9%. This increase was primarily driven by increases in the production levels of and our work statement with respect to the G650 aircraft at Gulfstream, resulting in net sales reaching $13.3 million in 2012 compared to $8.0 million in 2011, a $5.3 million increase in sales. The increase was also driven by higher net sales for the G280 Gulfstream aircraft which increased $1.9 million to $3.3 million in 2012 from $1.4 million in 2011. These increases were partially offset by a decrease in net sales related to tooling for the Mitsubishi Regional Jet program, which generated $0.8 million in 2012 compared to $4.0 million in 2011, a $3.2 million decrease as program delays continue. The large cabin G450 and G550 aircraft at Gulfstream continued to perform strongly with net sales of $37.4 million in 2012 compared to $37.5 million in 2011.

Military products generated net sales of $35.7 million in 2012 compared to $36.3 million in 2011, a decrease of 1.7%. This decrease was primarily due to volume decreases in the Blackhawk helicopter program, which generated $28.4 million in 2012 compared to $30.4 million in 2011, a decrease of $2.0 million and a $1.9 million decline in other military projects. These decreases were offset by the new Embraer KC-390 program which had $1.9 million in revenue in 2012 and an increase in the Apache helicopter program of $1.5 million from $0.8 million in 2011 to $2.3 million in 2012.


Table of Contents

Other products generated net sales of $9.1 million in 2012 compared to $12.5 million in 2011, a decrease of 27.2%. This decrease was primarily due to the Company discontinuing sales related to one program at the Company's Mexicali plant during 2012 which generated $2.9 million in 2011, but did not continue into 2012.

Cost of Goods Sold. Cost of goods sold for 2012 was $127.1 million (72.6% of net sales) compared to $123.2 million (73.3% of net sales) for 2011. The $3.9 million increase in cost of sales was primarily driven by higher sales in 2012 compared to 2011. Production efficiencies helped to offset higher costs.

Gross Profit. Gross profit for 2012 was $47.9 million (27.4% of net sales) compared to $44.9 million (26.7% of net sales) for 2011. The improvement in gross profit resulted from the increased sales mentioned above and increased production levels to support higher sales levels and future production rate increases. The increase in production caused fixed costs to be allocated to a larger amount of production, thus decreasing product costs and increasing gross profit percentage.

Selling, General and Administrative Expenses and Other Charges. Selling, general and administrative expenses were $32.4 million (18.5% of net sales) in 2012 compared to $26.6 million (15.8% of net sales) in 2011. The increase was mainly due to $5.4 million of costs incurred related to acquisitions in 2012, with Valent specifically accounting for $4.9 million of those costs. The increase in costs from the acquisitions exceeded the increase in sales, increasing the total selling general and administrative expenses expressed as a percentage of sales.

Engineering Services Segment

Net Sales. Net sales were $105.6 million in 2012, an increase of 20.7% from
$87.5 million in 2011.  The following table summarizes the segment's total sales
and the percentage of the segment's total sales represented by the market served
for each of the years ended December 31, 2012 and December 31, 2011,
respectively:

Category                           2012         % of Total      2011        % of Total
                                      ($ in millions)
Large commercial aircraft         $  29.7             28.1 %   $ 31.1             35.5 %
Corporate and regional aircraft      31.5             29.8 %     25.0             28.6 %
Military                             37.0             35.1 %     20.3             23.2 %
Other                                 7.4              7.0 %     11.1             12.7 %
Total                             $ 105.6            100.0 %   $ 87.5            100.0 %

Net sales of services for large commercial aircraft were approximately $29.7 million in 2012 compared to $31.1 million in 2011, a decrease of 4.5%. The decrease was largely due to the winding down of several programs: the Boeing 747-8 program decreased $3.7 million, the Airbus A350 program decreased $1.4 million, the 787 programs decreased $2.5 million and the Boeing Integrated Test program decreased $1.2 million. These declines were offset by the inclusion of $6.1 million of sales from the TASS subsidiary since the acquisition on August 7, 2012, and increased revenues from the nacelle systems development program of $1.4 million. TASS revenues were primarily from sales to Boeing.

Net sales of services supporting corporate and regional aircraft were approximately $31.5 million during 2012 compared to $25.0 million in 2011, an increase of 26.0%. The increase in sales was primarily related to support of the Bombardier Learjet L-85 of $10.8 million, $2.4 million for sales related to space travel and $1.3 million for sales to Triumph. This increase was offset by a $3.0 million reduction in support requirements on the Mitsubishi Regional Jet program and a $3.4 million reduction on another program due to design maturation.

Military programs had net sales in 2012 of approximately $37.0 million compared to $20.3 million in 2011, an increase of 82.3%. The increase from 2011 resulted primarily from increased services in support of the Boeing Tanker program of $13.0 million and the Embraer KC 390 program of $4.7 million, partially offset by the absence of $2.9 million in revenues from the Joint Strike Fighter program which was completed in 2011.

Sales related to the design and delivery of tooling on various programs supporting commercial aircraft were $7.4 million in 2012 compared to $11.1 million in 2011, a decrease of 33.3%. This decrease was primarily due to a $2.5 million decrease in revenue in 2012 on 787 shipping fixtures and a decline of $0.9 million in revenues for other Boeing tooling projects.

Cost of Goods Sold. Cost of goods sold for 2012 was $85.3 million (80.8% of net sales) compared to $72.9 million (83.3% of net sales) for 2011. Our increased sales demand led us to hire additional project engineers, which resulted in an increase of $8.1 million in salary and fringe costs. Also, the acquisition of TASS resulted in an additional $3.6 million in salary and fringe costs.


Table of Contents

Gross Profit. Gross profit for this segment was $20.3 million (19.2% of net sales) for 2012 compared to $14.6 million (16.7% of net sales) for 2011. The increase in gross profit percentage was primarily driven by an increase in revenue, which reduced fixed costs as a percentage of sales. Additionally, there were reductions in direct sub-contract services in 2012 compared to 2011. These improvements were slightly offset by direct labor costs that were a higher percentage of sales in 2012 compared to 2011.

Selling, General and Administrative Expenses and Other Charges. Selling, general and administrative expenses were $9.8 million (9.3% of net sales) in 2012 compared to $8.1 million (9.3% of net sales) for 2011, an increase of $1.7 million. The increase was primarily due to the inclusion of TASS's selling, general, and administrative expenses.

Non-segment Expenses

Interest Expense. Interest expense was $1.8 million for 2012 compared to $0.7 million for 2011. The increase was primarily due to the refinancing of our credit facility on December 28, 2012 which resulted in a $0.6 million charge to expense related to deferred financing costs for the closed credit facility, and also from interest incurred of $0.2 million on the borrowings to acquire Valent.

Other Income (Expense), Net . Other income was $0.4 million for 2012 compared to other expense of $0.7 million for 2011. This change was primarily due to the absence of $0.8 million of non-recurring costs related to abandoned financing transactions that were present in 2011. The increase in income was also driven by realized net foreign currency transaction gains in 2012 of $0.2 million compared to $0.2 million of expense in 2011.

Income Tax Expense . Income tax expense for 2012 was $8.2 million compared to $7.1 million for 2011. During 2012 our effective income tax rate was 33.1% compared to 30.3% in 2011 with the increase primarily due to research and development tax credits that were not extended for 2012 prior to December 31, 2012. The income tax rate for 2013 will include the tax benefit for research and development tax credits for 2012 and 2013 and as such, we expect our rate to be between 33% and 34%.

Year ended December 31, 2011 compared to year ended December 31, 2010

The following table provides the comparative data for 2011 and 2010:

                                                          2011
                                                    ($ in millions)
                                                 Engineering
                              Aerostructures     Services        Elimination       Total
Net sales                     $       168.1      $      87.5     $        (1.6 )   $ 254.0
Cost of sales                         123.2             72.9              (1.7 )     194.4
Gross profit                           44.9             14.6               0.1        59.6
S, G, & A and other charges            26.6              8.1                 -        34.7
Income from operations        $        18.3      $       6.5     $         0.1     $  24.9



                                                           2010
                                                     ($ in millions)
                                                   Engineering
                              Aerostructures       Services        Elimination       Total
Net sales                     $          149.3     $      74.6     $        (0.5 )   $ 223.4
Cost of sales                            110.6            61.8              (0.5 )     171.9
Gross profit                              38.7            12.8                 -        51.5
S, G, & A and other charges               25.0             7.4                 -        32.4
Income from operations        $           13.7     $       5.4     $           -     $  19.1

Aerostructures Segment

Net Sales. Net sales were $168.1 million in 2011, an increase of 12.6% from $149.3 million in 2010. The following table summarizes the segment's total sales and the percentage of the segment's total sales represented by the market served for each of the years ended December 31, 2011 and December 31, 2010, respectively:


Table of Contents

Category                           2011        % of Total       2010        % of Total
                                                     ($ in millions)
Large commercial aircraft         $  65.9             39.2 %   $  59.5             39.9 %
Corporate and regional aircraft      53.4             31.8 %      45.3             30.3 %
Military                             36.3             21.6 %      34.7             23.2 %
Other                                12.5              7.4 %       9.8              6.6 %
Total                             $ 168.1            100.0 %   $ 149.3            100.0 %

Large commercial aircraft generated net sales of $65.9 million in 2011 compared to $59.5 million in 2010, an increase of 10.8%. Sales related to the 747 platform increased $1.3 million to $13.1 million in 2011 from $11.8 million in 2010. Sales related to the 767 platform, excluding wing modification products, increased $1.3 million from $2.2 million in 2010 to $3.5 million in 2011, and increases were noted in the 777 program of $1.4 million with sales in 2011 of $8.2 million compared to $6.8 million in 2010, due to increases in production rates and additions to the Company's work statement. Wing modification programs increased by $1.1 million to $16.3 million in 2011 from $15.2 million in 2010, primarily due to additions to the Company's work statement received in 2011. Sales related to the 737, excluding wing modification programs, increased $0.9 million to $23.0 million in 2011 from $22.1 million in 2010 due to production rate increases.

Net sales of components for corporate and regional aircraft were $53.4 million during 2011 compared to $45.3 million in 2010, an increase of 17.9%. This increase was primarily driven by the new G650 aircraft at Gulfstream with net sales reaching $8.0 million in 2011 compared to $2.4 million in 2010, a $5.6 million increase in sales. This increase was also driven by work performed for the Mitsubishi Regional Jet program, which generated net sales of $4.0 million in 2011 compared to $1.4 million in 2010, a $2.6 million increase. The large cabin G450 and G550 aircraft at Gulfstream continued to perform strongly with net sales of $37.5 million in 2011 compared to $37.1 million in 2010, an increase of $0.4 million. These increases were offset by a $0.9 million decrease to, $2.4 million in 2011 from $3.3 million in 2010, in sales to various divisions of Bombardier. This decrease was due to our decision to cease producing drop hammer components.

Military products generated net sales of $36.3 million in 2011 compared to $34.7 million in 2010, an increase of 4.6%. This increase was primarily due to volume increases in the Blackhawk helicopter program, which generated net sales of $30.4 million in 2011 compared to $29.4 million in 2010, an increase of $1.0 million.

Other products generated net sales of $12.5 million in 2011 compared to $9.8 million in 2010, an increase of 27.6%. This increase was primarily due to $2.9 million in sales related to one program at the Company's Mexicali plant during 2011 compared to $0.8 million in 2010, an increase of $2.1 million. The Company discontinued this program in 2012. The increase in other products was also the result of an increase of $1.3 million in sales by Intec, to $6.9 million in 2011 from $5.6 million in 2010. These increases were offset by a $0.8 million decrease in technology product sales, to $2.5 million in 2011 from $3.3 million in 2010.

Cost of Goods Sold. Cost of goods sold for 2011 was $123.2 million (73.3% of net sales) compared to $110.6 million (74.1% of net sales) for 2010. The $12.6 million increase in cost of sales was primarily driven by higher sales in 2011 compared to 2010. Production efficiencies helped to offset these higher costs.

Gross Profit. Gross profit for 2011 was $44.9 million (26.7% of net sales) compared to $38.7 million (25.9% of net sales) for 2010. The improvement in gross profit resulted from the increased sales mentioned above and increased production levels to support higher sales levels and future production rate increases. The increase in production caused fixed costs to be allocated to a larger amount of production, thus decreasing product costs and improving gross profit percentage. Offsetting these gross improvements was the impact of $1.1 million in loss on a 777 frame program and $0.8 million on a Mexicali program for non-aerospace product.

Selling, General and Administrative Expenses and Other Charges. Selling, general and administrative expenses were $26.6 million (15.8% of net sales) in 2011 compared to $25.0 million (16.7% of net sales) in 2010. Personnel costs increased to $15.3 million in 2011 from $13.9 million in 2010, primarily due to a continued increase in head count to support growth. The increase in revenues caused these fixed costs to be allocated to a larger amount of sales, thus improving the expense percentage. Amortization expense increased by $1.2 million related to the impairment of an intangible, but this increase was offset by a $1.2 million decrease in other miscellaneous expenses that resulted from a reversal of the liability related to the contingent consideration liability to the former shareholders of Intec.

Engineering Services Segment

Net Sales. Net sales were $87.5 million in 2011, an increase of 17.3% from $74.6 million in 2010. The following table summarizes the segment's total sales and the percentage of the segment's total sales represented by the market served for each of the years ended December 31, 2011 and December 31, 2010, respectively:


Table of Contents

Category                           2011       % of Total       2010       % of Total
                                                    ($ in millions)
Large commercial aircraft         $ 31.1             35.5 %   $ 29.2             39.1 %
Corporate and regional aircraft     25.0             28.6 %     21.1             28.3 %
Military                            20.3             23.2 %     18.7             25.1 %
Other                               11.1             12.7 %      5.6              7.5 %
Total                             $ 87.5            100.0 %   $ 74.6            100.0 %

Net sales of services for large commercial aircraft were approximately $31.1 million in 2011 compared to $29.2 million in 2010, an increase of 6.5%. The increase primarily resulted from two programs: a nacelle systems development program that generated $2.5 million more revenue in 2011 and the Boeing Integrated Test program which generated $2.3 million more revenue in 2011. These increases were offset by decreased support provided on the Boeing 747-8 program to $7.7 million in 2011 from $10.1 million in 2010, a $2.4 million decline as the program matured.

Net sales of services supporting corporate and regional aircraft, the majority of which related to the development of new and re-designed aircraft, were approximately $25.0 million during 2011 compared to $21.1 million in 2010, an increase of 18.5%. The increase in sales in this sector was primarily related to an increase in support requirements on the Bombardier Learjet L-85 of $9.1 million. This increase was offset by a $4.1 million reduction in support requirements on the Mitsubishi Regional Jet program and a $3.2 million reduction on the G650 program due to design maturation. A portion of the Mitsubishi Regional Jet decrease is also attributable to a $0.5 million cumulative catch-up adjustment made to revenue due to cost growth on the overall program during the second quarter of 2011.

Military programs had net sales in 2011 of approximately $20.3 million compared to $18.7 million in 2010, an increase of 8.6%. The increase from 2010 resulted primarily from services in support of the new Boeing Tanker program of $7.9 million, which was offset by the completion of requirements on the CH-53 program, which generated $4.7 million in revenues in 2010, and the completion of our current participation on the Joint Strike Fighter, which generated $1.7 million less revenue in 2011 than in 2010.

Sales related to the design and delivery of tooling on various programs supporting commercial aircraft were $11.1 million in 2011 compared to $5.6 million in 2010, an increase of 98.2%. This increase was primarily due to a $4.9 million increase in revenue in 2011 on 787 shipping fixtures and $1.7 million in additional revenues for Boeing tooling projects. These increases were offset by a decline of $1.0 million in Triumph tooling revenues.

Cost of Goods Sold. Cost of goods sold for 2011 was $72.9 million (83.3% of net sales) compared to $61.8 million (82.8% of net sales) for 2010. Our increased sales demand led us to hire additional project engineers, which resulted in an increase of $7.7 million in salary and fringe costs. The remainder of the increase was driven by an aggregate increase of $3.4 million in other direct and indirect project costs.

Gross Profit. Gross profit for this segment was $14.6 million (16.7% of net . . .

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