LMI Aerospace, Inc.
LMI AEROSPACE INC (Form: 10-Q, Received: 05/10/2017 06:03:46)

 
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 March 31, 2017.
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
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

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 May 1, 2017 , there were 13,694,093 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 MARCH 31, 2017

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

Table of Contents


  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)
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
723


$
2,491

Accounts receivable, net
59,117


51,269

Inventories
130,259


122,761

Prepaid expenses and other current assets
4,566


3,586

Total current assets
194,665


180,107

 





Property, plant and equipment, net
101,175


99,515

Goodwill
62,482


62,482

Intangible assets, net
38,064


38,852

Other assets
2,454


2,676

Total assets
$
398,840


$
383,632

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
31,859


$
29,378

Accrued expenses
20,594


25,543

Current installments of long-term debt and capital lease obligations
2,725


2,655

Total current liabilities
55,178


57,576

 





Long-term liabilities:





Long-term debt and capital lease obligations, less current installments
260,479


237,398

Other long-term liabilities
2,412


3,117

Total long-term liabilities
262,891


240,515

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.02 par value per share; authorized 28,000,000 shares; issued 13,701,350 and 13,625,205 shares at March 31, 2017 and December 31, 2016, respectively
274


273

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



Additional paid-in capital
101,630


99,955

Accumulated other comprehensive loss
(260
)

(282
)
Accumulated deficit
(20,873
)

(14,405
)
Total shareholders’ equity
80,771


85,541

Total liabilities and shareholders’ equity
$
398,840


$
383,632


See accompanying notes to condensed consolidated financial statements.

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

 
Three Months Ended 
 March 31,
 
2017
 
2016
Sales and service revenue
 
 
 
Product sales
$
78,572

 
$
75,862

Service revenue
5,248

 
11,469

Net sales
83,820

 
87,331

Cost of sales and service revenue

 

Cost of product sales
65,363

 
60,336

Cost of service revenue
6,016

 
10,765

Cost of sales
71,379

 
71,101

Gross profit
12,441

 
16,230




 


Selling, general and administrative expenses:
 
 
 
Selling, general and administrative expenses
10,834

 
11,853

Merger expense
2,534

 

Restructuring expense
(20
)
 
947

Total selling, general and administrative expenses
13,348

 
12,800

(Loss) income from operations
(907
)
 
3,430



 

Other (expense) income:

 

Interest expense
(5,218
)
 
(5,263
)
Other, net
(333
)
 
(90
)
Total other expense
(5,551
)
 
(5,353
)



 


Loss before income taxes
(6,458
)
 
(1,923
)
Provision (benefit) for income taxes
10

 
(164
)
Net loss
(6,468
)
 
(1,759
)
 
 
 
 
Other comprehensive income (loss):
 
 
 
Change in foreign currency translation adjustment
22

 
(13
)
Total comprehensive loss
$
(6,446
)
 
$
(1,772
)



 


Amounts per common share:

 

Net loss per common share
$
(0.49
)
 
$
(0.14
)



 


Net loss per common share assuming dilution
$
(0.49
)
 
$
(0.14
)



 


Weighted average common shares outstanding
13,213,051

 
12,975,485




 


Weighted average dilutive common shares outstanding
13,213,051

 
12,975,485


See accompanying notes to condensed consolidated financial statements.

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

 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating activities:
 
 
 
Net loss
$
(6,468
)

$
(1,759
)
Adjustments to reconcile net loss to net cash used by operating activities:



Depreciation and amortization
4,462


4,900

Amortization of debt issuance cost
469

 
478

Stock based compensation
273


345

Other non-cash items
(47
)

(65
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,862
)

(6,475
)
Inventories
(7,654
)

(4,740
)
Prepaid expenses and other assets
(910
)

(387
)
Current income taxes
5


(38
)
Accounts payable
4,781


7,388

Accrued expenses
(3,419
)

(6,891
)
Net cash used by operating activities
(16,370
)

(7,244
)
Investing activities:



Additions to property, plant and equipment
(8,101
)

(2,418
)
Proceeds from sale of property, plant and equipment


6

Net cash used by investing activities
(8,101
)

(2,412
)
Financing activities:



Proceeds from issuance of debt

 
1,465

Principal payments on long-term debt and notes payable
(666
)

(874
)
Advances on revolving line of credit
53,000


2,000

Payments on revolving line of credit
(29,500
)

(2,000
)
Other, net
(131
)
 

Net cash provided by financing activities
22,703


591

Net decrease in cash and cash equivalents
(1,768
)

(9,065
)
Cash and cash equivalents, beginning of period
2,491


10,504

Cash and cash equivalents, end of period
$
723


$
1,439

Supplemental disclosure of non-cash transactions:



Defined contribution plan funding in Company stock
$
1,535


$
1,472


See accompanying notes to condensed consolidated financial statements.

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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017




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 recurring adjustments considered necessary for a fair statement have been included.  Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 . 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, as amended, of LMI Aerospace, Inc. (the "Company”, "us", "we", "our") for the year ended December 31, 2016 , as filed with the Securities and Exchange Commission on April 4, 2017.

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.

Pending Merger

On February 16, 2017, the Company entered into a Merger Agreement with Sonaca S.A. relating to the proposed acquisition of the Company.  As a result of the pending merger, the Company incurred $2,534 in legal and other transaction costs in the first quarter of 2017.  These costs were reflected in the selling, general, and administrative section on a separate line of the Condensed Consolidated Statements of Comprehensive Income (Loss).
 
Additional information regarding the merger transaction may be found in the Company's definitive proxy statement and form of proxy filed with the SEC on Schedule 14A on April 24, 2017, which was also mailed to shareholders of the Company on or about April 28, 2017.

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). The new standard is effective for reporting periods beginning after December 15, 2017 and the Company plans to adopt the standard in the first quarter of 2018. The standard supersedes existing revenue recognition guidance, including industry-specific guidance, and provides 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. 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 adoption of the new standard may have a material impact on our income statement and balance sheet but we have not completed the quantification of that impact at this time.

The Company performed a preliminary review of its significant contracts and has identified differences that would result from applying the new standard to those contracts. Based on this review, we currently expect that the timing of the recognition of revenue and related costs may change for a significant portion of our business. Some of our contracts on which we currently recognize revenue when risk of loss is transferred to the customer may recognize revenue as costs are incurred under the new standard. In addition, some long-term production contracts for which we currently recognize cost at an average expected margin over the life of the contract may recognize costs attributable to each individual unit as control is transferred to the customer. under the new standard. Adoption of the new standard will not change the total amount of revenue recognized on these contracts, only

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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



the timing of when revenue is recognized. These changes also have the potential to significantly alter the amount of deferred contract costs in inventory reported on our balance sheet.

The Company is currently evaluating the transition method to be used and is implementing changes to business processes, systems and controls to support adoption of the standard.

In February 2016, the FASB issued ASU 2016-02, "Leases." The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The new standard also expands the required quantitative and qualitative disclosures surrounding leases. The provisions of this new guidance are effective as of the beginning of the Company’s first quarter of 2019. This new standard will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. The standard requires excess tax benefits or deficiencies for share-based payments be recorded in the period shares vest as income tax expense or benefit, rather than within Additional Paid-in Capital. Cash flows related to excess tax benefits will be included in operating activities and will no longer be separately classified as a financing activity. The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company adopted the new standard on January 1, 2017 which did not result in a material impact to our financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments." The guidance addresses the classification of cash flow related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. Early application is permitted and the Company adopted the new standard on January 1, 2017. The adoption of this standard did not result in a material impact to our financial statements.
All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our Condensed Consolidated Financial Statements.
2.
Assets and Liabilities Measured at Fair Value

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

Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  There have been no changes in the methodologies used at March 31, 2017 .  There were no transfers between levels during 2017 and 2016.
 
 
 
2017
 
Assets and Liabilities at Fair Value
 
Total
 
as of March 31, 2017
 
Gains
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Losses)
Non-recurring Fair Value Measurements:
 

 
 

 
 

 
 

 
 
Asset:
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
38,064

 
$

 
$

 
$
38,064

 
$

Goodwill (1)
$
62,482

 
$

 
$

 
$
62,482

 
$

(1) The fair value of goodwill is tested at least annually for impairment.

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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



 
 
 
2016
 
Assets and Liabilities at Fair Value
 
Total
 
as of December 31, 2016
 
Gains
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Losses)
Non-recurring Fair Value Measurements:
 

 
 

 
 

 
 

 
 
Asset:
 
 
 
 
 
 
 
 
 
Intangible assets, net (1)
$
38,852

 
$

 
$

 
$
38,852

 
$
(4,066
)
Goodwill (2)
$
62,482

 
$

 
$

 
$
62,482

 
$
(24,302
)
(1) The fair value of intangibles relating to the acquisition of Valent Aerostructures LLC was determined by third parties in connection with the purchase and recorded at those values. The intangibles relating to the Engineering Services reporting unit were deemed impaired during 2016 and a $4,066 impairment charge was recorded in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016.
(2) The Company performed its annual impairment analysis of goodwill related to the Aerostructures reporting units during the fourth quarter of 2016 and determined no adjustments to the carrying value were necessary. The value of the goodwill relating to the Engineering Services reporting unit was deemed fully impaired during 2016 and a $24,302 impairment charge was recorded in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016.

3.
Accounts Receivable, Net

Accounts receivable, net consists of the following:
 
March 31, 2017
 
December 31, 2016
Trade receivables
$
54,454

 
$
44,927

Unbilled revenue
3,310

 
4,318

Other receivables
1,736

 
2,372

 
59,500

 
51,617

Less: Allowance for doubtful accounts
(383
)
 
(348
)
Accounts receivable, net
$
59,117

 
$
51,269


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 March 31, 2017 and December 31, 2016 are $1,009 and $926 , 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 March 31,
 
 
2017
2016
Favorable adjustments
 
$
303

$
83

Unfavorable adjustments
 
(282
)
(168
)
Net favorable (unfavorable) operating income adjustments
 
$
21

$
(85
)


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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



At March 31, 2017 and December 31, 2016 , the Company had recognized a loss reserve of $3,938 and $3,895 , respectively, on the Mitsubishi Regional Jet design-build program. Adjustments related to this program were recorded as a reduction to revenue in the Consolidated Statements of Comprehensive Income (Loss).

4.
Inventories

Inventories consist of the following:
 
March 31, 2017
 
December 31, 2016
Raw materials
$
17,050

 
$
12,822

Work in progress
25,855

 
23,795

Manufactured and purchased components
22,585

 
20,922

Finished goods
27,897

 
28,346

Product inventory
93,387

 
85,885

Capitalized contract costs
36,872

 
36,876

Total inventories
$
130,259

 
$
122,761



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. In accordance with ASC 605-35-45-1&2, the provisions for anticipated losses on contracts are accounted for as additional contract cost and recognized as part of cost of sales. Provisions for losses are recorded as a reduction of related contract costs recorded in inventory. At March 31, 2017 and December 31, 2016 , the Company had no contracts with loss reserves accounted for as a reduction of inventory.

The following table illustrates the market to which capitalized contract cost at March 31, 2017 and December 31, 2016 related:
 
March 31, 2017
 
December 31, 2016
Large commercial aircraft
$
10,693

 
$
10,852

Corporate and regional aircraft
21,179

 
21,081

Military
5,000

 
4,943

Total capitalized contract cost
$
36,872

 
$
36,876



5.
Goodwill and Intangible Assets

Goodwill

The following table summarizes the net carrying amount of goodwill by segment at March 31, 2017 and December 31, 2016 , respectively:
 
Aerostructures
 
Engineering Services
 
Total
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance at:
 
 
 
 
 
 
 
 
 
 
 
Gross Goodwill
$
141,953

 
$
141,953

 
$
50,741

 
$
50,741

 
$
192,694

 
$
192,694

Accumulated impairment loss
(79,471
)
 
(79,471
)
 
(50,741
)
 
(50,741
)
 
(130,212
)
 
(130,212
)
Net Goodwill
$
62,482

 
$
62,482

 
$

 
$

 
$
62,482

 
$
62,482

 

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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



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. A triggering event did not occur in the first quarter of 2017 that would require the Company to perform an impairment evaluation.
Intangible Assets

Intangible assets primarily consist of trademarks and customer intangibles.  The carrying values were as follows:
 
March 31, 2017
 
December 31, 2016
Trademarks
$
778

 
$
778

Customer intangible assets
68,991

 
68,991

Other
1,274

 
1,274

Accumulated amortization and impairment
(32,979
)
 
(32,191
)
Intangible assets, net
$
38,064

 
$
38,852


Intangibles amortization expense was $788 and $1,036 for the three months ended March 31, 2017 and 2016 , respectively. The accumulated amortization balances at March 31, 2017 and December 31, 2016 , respectively, were $778 and $778 for trademarks, $31,155 and $30,399 for customer intangible assets, and $1,046 and $1,014 for other intangible assets.

Intangible assets related to the acquisition of Valent Aerostructures, LLC 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.

6.
Long-term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:
 
March 31, 2017
 
December 31, 2016
 
 
 
 
Second priority senior secured notes at a fixed rate of 7.375% at March 31, 2017
$
224,175

 
$
224,175

Revolver under credit agreement, variable rate
23,500

 

Industrial Revenue Bonds at a fixed rate of 2.80% at March 31, 2017 and December 31, 2016
6,342

 
6,456

Capital leases, at fixed rates ranging from 3.00% to 4.50% at March 31, 2017 and December 31, 2016
9,925

 
10,293

Notes payable, principal and interest payable monthly, at fixed rates ranging from 2.45% to 5.00% at March 31, 2017 and December 31, 2016
2,194

 
2,377

Debt issuance cost
(2,932
)
 
(3,248
)
Total debt
$
263,204

 
$
240,053

Less current installments
2,725

 
2,655

Total long-term debt and capital lease obligations
$
260,479

 
$
237,398


At March 31, 2017 , the Company had $224,175 in outstanding second-priority senior secured notes maturing on July 15, 2019. The Company records these notes at cost. The fair value of these notes, based on the last market price transaction in the quarter ended March 31, 2017 of 1.03625, was $232,301 . 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 .  At March 31, 2017 , the Company had $23,500 in outstanding borrowings under the facility. Under the agreement, the co-collateral agents may establish a reserve against the facility. At March 31, 2017 , the reserve established was $15,000 , which reduced the maximum availability to $75,000 . Based on the amount of eligible assets at March 31, 2017 , reduced by outstanding revolving credit

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LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



borrowings and outstanding letters of credit of $1,325 , the remaining amount available for revolving credit facility borrowings was $50,175 . 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 the three months ended March 31, 2017 , the actual interest rate incurred for the revolving credit facility was 4.8% on average outstanding borrowings of $18,267 .

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 March 31, 2017 , the commitment fee was 0.5% .

The revolving credit facility matures on the earlier of July 15, 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.

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 March 31, 2017 , 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 the 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.


11

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



7.
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 treasury stock method.  The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.
        
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Numerators
 
 
 
 
Net loss
 
$
(6,468
)
 
$
(1,759
)
Denominators
 
 

 
 

Weighted average common shares - basic
 
13,213,051

 
12,975,485

 
 
 
 
 
Dilutive effect of restricted stock
 

 

 
 
 
 
 
Weighted average common shares - diluted
 
13,213,051

 
12,975,485

 
 
 
 
 
Basic loss per share
 
$
(0.49
)
 
$
(0.14
)
 
 
 
 
 
Diluted loss per share
 
$
(0.49
)
 
$
(0.14
)
    
For the three months ended March 31, 2017 and March 31, 2016, restricted shares of 256,793 and 83,603 , respectively, were 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

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



8.
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 under the 2005 Plan 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, 2017
 
168,550

 
$
13.53

Granted
 

 

Vested
 
(27,767
)
 
13.98

Forfeited
 
(18,912
)
 
14.53

Outstanding at March 31, 2017
 
121,871

 
$
13.08


Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $70 and $161 for the three months ended March 31, 2017 and 2016 , respectively.

Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2005 Plan were $291 and $513 at March 31, 2017 and December 31, 2016 , respectively.  These costs are expected to be recognized over a weighted average period of 0.9 years at March 31, 2017 .

As of July 7, 2015 the Company was no longer able to grant new 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 under the 2015 Plan 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, 2017 (1)
 
274,128

 
$
8.46

Granted
 
9,098

 
8.62

Vested
 

 

Forfeited
 
(15,774
)
 
9.04

Outstanding at March 31, 2017 (1)
 
267,452

 
$
8.46

(1) Includes 6,129 shares for which service requirements are met that remain subject to deferral at March 31, 2017 pursuant to the LMI Aerospace, Inc. Non-Qualified Deferred Compensation Plan for Senior Executives and Outside Directors.

Common stock compensation expense related to restricted stock awards granted under the 2015 Plan was $196 and $174 for the three months ended March 31, 2017 and 2016 , respectively.


13

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2015 Plan were $991 and $1,510 at March 31, 2017 and December 31, 2016 , respectively.  These costs are expected to be recognized over a weighted average period of 1.7 years at March 31, 2017 .

9.
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. This segment 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 March 31,
 
2017
 
2016
Net sales:
 
 
 
Aerostructures
$
79,236

 
$
76,954

Engineering Services
4,881

 
11,059

Eliminations
(297
)
 
(682
)
 
$
83,820

 
$
87,331

 
 
 
 
Income from operations:
 

 
 

Aerostructures
$
598

 
$
3,465

Engineering Services
(1,430
)
 
191

Eliminations
(75
)
 
(226
)
 
$
(907
)
 
$
3,430



10.
Customer Concentration

Direct sales, through both of the Company’s business segments, to our largest customer, Spirit Aerosystems (“Spirit”), accounted for 41.3% and 36.6% of the Company’s total revenues for the three months ended March 31, 2017 and 2016 , respectively. Accounts receivable balances related to Spirit were 38.4% and 31.8% of the Company’s total accounts receivable balance at March 31, 2017 and December 31, 2016 , 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 11.7% and 11.5% of the Company’s total revenues for the three months ended March 31, 2017 and 2016 , respectively. Accounts receivable balances resulting from direct sales to Gulfstream were 10.7% and 12.3% of the Company’s total accounts receivable balance at March 31, 2017 and December 31, 2016 , respectively.

Direct sales, through both of the Company’s business segments, to our third largest customer, The Boeing Company (“Boeing”), accounted for 11.2% and 10.9% of the Company’s total revenues for the three months ended March 31, 2017 and 2016 , respectively. Accounts receivable balances related to Boeing were 11.7% and 8.5% of the Company’s total accounts receivable balance at March 31, 2017 and December 31, 2016 , respectively.


14

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



11.
Income Taxes

The Company records income tax expense or benefit each quarter based on its estimated full-year effective tax rate. An income tax expense of $10 and and income tax benefit of $164 were recognized in the three months ended March 31, 2017 and March 31, 2016, respectively. The Company continues to carry a full valuation allowance on its net deferred tax assets, which totaled $21,540 and $21,027 at March 31, 2017 and December 31, 2016 , respectively.

12.
Restructuring

The Company committed to and implemented various restructuring plans in 2016 and 2017. Included in those plans were the relocation of the sheet-metal fabrication operation in Wichita, Kansas to other facilities within the Company. Other employment separation activities, which were primarily severance related, were also implemented as part of the Company's overall reorganization and cost reduction initiatives. 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 (reversals) associated with these restructuring activities:

 
Three months ended
 
March 31,
 
2017
 
2016
 
 
Wichita, Kansas sheet-metal operations relocation
(20
)
 

Other employment separation activities

 
947

  Total
$
(20
)
 
$
947

 
 
 
 
Expense incurred by segment:
 
 
 
Aerostructures
$
(20
)
 
$
947

Engineering Services

 

Total
$
(20
)
 
$
947


The Company does not expect to recognize any additional restructuring expenses related to these plans, as all have been completed.

Cash payments were made associated with restructuring plans of $203 and $235 in the three months ended March 31, 2017 and 2016 , respectively.

The following table summarizes the Company's restructuring activities during the three months ended March 31, 2017 :

 
 
Employee
 
 
Severance
 
 
 
Accrued restructuring balance as of December 31, 2016
 
$
285

  Accrual reversals
 
(20
)
  Cash payments
 
(203
)
Accrued restructuring balance as of March 31, 2017
 
$
62


Accrued restructuring of $62 at March 31, 2017 is expected to be paid in the second quarter of 2017.


15

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



13.
Legal Contingencies

The Company is not named as a defendant in a lawsuit that is outside the normal course of business that it deems material.  In accordance with generally accepted accounting principles, management discloses the amount or range of reasonably possible losses in a lawsuit in which the Company is a named defendant.  In the opinion of management, after consulting with legal counsel, any losses resulting from lawsuits in the normal course of business should not have a material effect on the Company’s financial position, cash flows or results of operations.
14.
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 July 15, 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.

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”) rules governing reporting on guarantor 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.


16

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017




CONDENSED CONSOLIDATING BALANCE SHEET
as of March 31, 2017
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
607

 
$
116

 
$

 
$
723

Trade accounts receivable, net
715

 
58,402

 

 
59,117

Intercompany receivables
53,796

 
12,400

 
(66,196
)
 

Inventories

 
130,259

 

 
130,259

Prepaid expenses and other current assets
2,219

 
2,347

 

 
4,566

Total current assets
57,337

 
203,524

 
(66,196
)
 
194,665

 
 
 
 
 
 
 
 
Property, plant and equipment, net
8,009

 
93,166

 

 
101,175

Investments in subsidiaries
285,650

 

 
(285,650
)
 

Goodwill

 
62,482

 

 
62,482

Intangible assets, net

 
38,064

 

 
38,064

Other assets
1,641

 
813

 

 
2,454

Total assets
$
352,637

 
$
398,049

 
$
(351,846
)
 
$
398,840

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
1,572

 
$
30,287

 
$

 
$
31,859

Accrued expenses
11,866

 
8,728

 

 
20,594

Intercompany payables
12,400

 
53,796

 
(66,196
)
 

Current installments of long-term debt and capital lease obligations
67

 
2,658

 

 
2,725

Total current liabilities
25,905

 
95,469

 
(66,196
)
 
55,178

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
244,912

 
15,567

 

 
260,479

Other long-term liabilities
1,049

 
1,363

 

 
2,412

Deferred income taxes

 

 

 

Total long-term liabilities
245,961

 
16,930

 

 
262,891

 
 
 
 
 
 
 
 
Total shareholders’ equity
80,771

 
285,650

 
(285,650
)
 
80,771

Total liabilities and shareholders’ equity
$
352,637

 
$
398,049

 
$
(351,846
)
 
$
398,840


17

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017




CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2016
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,382

 
$
109

 
$

 
$
2,491

Trade accounts receivable, net
660

 
50,609

 

 
51,269

Intercompany receivables
244,792

 
312,332

 
(557,124
)
 
$

Inventories

 
122,761

 

 
122,761

Prepaid expenses and other current assets
1,548

 
2,038

 

 
3,586

Total current assets
249,382

 
487,849

 
(557,124
)
 
180,107

 
 
 
 
 
 
 
 
Property, plant and equipment, net
6,490

 
93,025

 

 
99,515

Investments in subsidiaries
375,738

 

 
(375,738
)
 

Goodwill

 
62,482

 

 
62,482

Intangible assets, net

 
38,852

 

 
38,852

Other assets
1,790

 
886

 

 
2,676

Total assets
$
633,400

 
$
683,094

 
$
(932,862
)
 
$
383,632

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
410

 
$
28,968

 
$

 
$
29,378

Accrued expenses
13,912

 
11,631

 

 
25,543

Intercompany payables
310,644

 
246,480

 
(557,124
)
 

Current installments of long-term debt and capital lease obligations
89

 
2,566

 

 
2,655

Total current liabilities
325,055

 
289,645

 
(557,124
)
 
57,576

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
221,101

 
16,297

 

 
237,398

Other long-term liabilities
1,703

 
1,414

 

 
3,117

Total long-term liabilities
222,804

 
17,711

 

 
240,515

 
 
 
 
 
 
 
 
Total shareholders’ equity
85,541

 
375,738

 
(375,738
)
 
85,541

Total liabilities and shareholders’ equity
$
633,400

 
$
683,094

 
$
(932,862
)
 
$
383,632


18

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three Months Ended March 31, 2017
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
(24
)
 
$
78,572

 
$
24

 
$
78,572

Service revenues
10,890

 
5,248

 
(10,890
)
 
5,248

Net sales
10,866

 
83,820

 
(10,866
)
 
83,820

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales

 
65,363

 


 
65,363

Cost of service revenues
10,803

 
6,079

 
(10,866
)
 
6,016

Cost of sales
10,803

 
71,442

 
(10,866
)
 
71,379

Gross profit
63

 
12,378

 

 
12,441

Selling, general and administrative expenses

 
10,834

 

 
10,834

Merger Expense
2,534

 

 

 
2,534

Restructuring expense

 
(20
)
 

 
(20
)
(Loss) income from operations
(2,471
)
 
1,564

 

 
(907
)
Other income (expense):
 
 
 
 
 
 
 

Interest expense
(4,998
)
 
(220
)
 

 
(5,218
)
Other, net
5

 
(338
)
 

 
(333
)
Income (loss) from equity investments in subsidiaries
1,018

 

 
(1,018
)
 

Total other expense
(3,975
)
 
(558
)
 
(1,018
)
 
(5,551
)
(Loss) income before income taxes
(6,446
)
 
1,006

 
(1,018
)
 
(6,458
)
Provision for income taxes

 
10

 

 
10

Net (loss) income
(6,446
)
 
996

 
(1,018
)
 
(6,468
)
Other comprehensive income (expense):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment

 
22

 

 
22

Total comprehensive (loss) income
$
(6,446
)
 
$
1,018

 
$
(1,018
)
 
$
(6,446
)

19

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three Months Ended March 31, 2016
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
58

 
$
75,804

 
$

 
$
75,862

Service revenues
11,378

 
11,527

 
(11,436
)
 
11,469

Net sales
11,436

 
87,331

 
(11,436
)
 
87,331

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
59

 
60,277

 

 
60,336

Cost of service revenues
11,395

 
10,836

 
(11,466
)
 
10,765

Cost of sales
11,454

 
71,113

 
(11,466
)
 
71,101

Gross profit
(18
)
 
16,218

 
30

 
16,230

Selling, general and administrative expenses

 
11,853

 

 
11,853

Restructuring expense
451

 
496

 

 
947

(Loss) income from operations
(469
)
 
3,869

 
30

 
3,430

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(5,030
)
 
(233
)
 

 
(5,263
)
Other, net
2

 
(92
)
 

 
(90
)
Income (loss) from equity investments in subsidiaries
3,695

 

 
(3,695
)
 

Total other expense
(1,333
)
 
(325
)
 
(3,695
)
 
(5,353
)
(Loss) income before income taxes
(1,802
)
 
3,544

 
(3,665
)
 
(1,923
)
(Benefit) provision for income taxes

 
(164
)
 

 
(164
)
Net (loss) income
(1,802
)
 
3,708

 
(3,665
)
 
(1,759
)
Other comprehensive income (expense):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment

 
(13
)
 

 
(13
)
Total comprehensive (loss) income
$
(1,802
)
 
$
3,695

 
$
(3,665
)
 
$
(1,772
)



















20

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three Months Ended March 31, 2017
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(6,446
)
 
$
996

 
$
(1,018
)
 
$
(6,468
)
Adjustments for non-cash items
1,638

 
2,501

 
1,018

 
5,157

Net changes in operating assets and liabilities, net of acquired businesses
(510
)
 
(14,549
)
 

 
(15,059
)
Intercompany activity
(17,750
)
 
17,750

 

 

Net cash (used)/provided by operating activities
(23,068
)
 
6,698

 

 
(16,370
)
Investing activities:
 

 
 

 
 

 
 

Additions to property, plant and equipment
(2,070
)
 
(6,031
)
 

 
(8,101
)
Proceeds from sale of equipment


 


 

 

Net cash used by investing activities
(2,070
)
 
(6,031
)
 

 
(8,101
)
Financing activities:
 

 
 

 
 

 
 

Principal payments on long-term debt and notes payable
(24
)
 
(642
)
 

 
(666
)
Advances on revolving line of credit
53,000

 

 

 
53,000

Payments on revolving line of credit
(29,500
)
 

 

 
(29,500
)
Other, net
(113
)
 
(18
)
 

 
(131
)
Net cash provided (used)/provided by financing activities
23,363

 
(660
)
 

 
22,703

Net (decrease) increase in cash and cash equivalents
(1,775
)
 
7

 

 
(1,768
)
Cash and cash equivalents, beginning of period
2,382

 
109

 

 
2,491

Cash and cash equivalents, end of period
$
607

 
$
116

 
$

 
$
723



21

Table of Contents
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
March 31, 2017



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the three Months Ended March 31, 2016

 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(1,802
)
 
$
3,708

 
$
(3,665
)
 
$
(1,759
)
Adjustments for non-cash items
(2,526
)
 
4,519

 
3,665

 
5,658

Net changes in operating assets and liabilities, net of acquired businesses
(8,787
)
 
(2,356
)
 

 
(11,143
)
Intercompany activity
4,776

 
(4,776
)
 

 

Net cash (used)/provided by operating activities
(8,339
)
 
1,095

 

 
(7,244
)
Investing activities:
 

 
 

 
 

 
 

Additions to property, plant and equipment
(778
)
 
(1,640
)
 

 
(2,418
)
Proceeds from sale of equipment

 
6

 

 
6

Net cash used by investing activities
(778
)
 
(1,634
)
 

 
(2,412
)
Financing activities:
 

 
 

 
 

 
 

Proceeds from issuance of debt

 
1,465

 

 
1,465

Principal payments on long-term debt and notes payable
(22
)
 
(852
)
 

 
(874
)
Advances on revolving line of credit
2,000

 

 

 
2,000

Payments on revolving line of credit
(2,000
)
 

 

 
(2,000
)
Payments for debt issuance cost

 

 

 

Net cash provided (used) by financing activities
(22
)
 
613

 

 
591

Net (decrease) increase in cash and cash equivalents
(9,139
)
 
74

 

 
(9,065
)
Cash and cash equivalents, beginning of period
10,251

 
253

 

 
10,504

Cash and cash equivalents, end of period
$
1,112

 
$
327

 
$

 
$
1,439



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, as amended, for the fiscal year ended December 31, 2016 (the “ 2016 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 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 2016 Form 10-K, as amended, 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 2016 Form 10-K, as amended.
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

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Table of Contents


kits formed close tolerance aluminum, specialty alloy and composite components and higher level assemblies for use by the aerospace and defense industries. This segment 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.

Recent Events

On February 16, 2017, the Company entered into a Merger Agreement with Sonaca S.A. relating to the proposed acquisition of the Company. The Merger Agreement provides that each outstanding share of common stock of the Company will cease to be outstanding at the effective time of the merger and will be converted into the right to receive $14.00 in cash, without interest and subject to any applicable tax withholding. Shareholders of the Company will be asked to vote on the adoption of the Merger Agreement and approval of the merger at a special shareholders’ meeting that will be held on June 8, 2017. The Company expects to satisfy all closing conditions required by the Merger Agreement. Additional information regarding the merger transaction may be found in the Company's definitive proxy statement and form of proxy filed with the SEC on Schedule 14A on April 24, 2017, which was also mailed to shareholders of the Company on or about April 28, 2017.


Results of Operations

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Consolidated Operations

Cost of goods sold for the Aerostructures segment consist primarily of direct labor, materials, subcontract costs and manufacturing overhead, including indirect labor costs, depreciation, rent, supplies and other indirect costs.  Cost of goods sold for the Engineering Services segment consist 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.

The following table is a summary of the Company's operating results for the three months ended March 31, 2017 and 2016 , respectively:
 
Three Months Ended 
 March 31, 2017
 
($ in millions)
 
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
79.2

 
$
4.9

 
$
(0.3
)
 
$
83.8

Cost of sales
66.2

 
5.4

 
(0.2
)
 
71.4

Gross profit
13.0

 
(0.5
)
 
(0.1
)
 
12.4

S, G, & A
12.4

 
0.9

 

 
13.3

Income from operations
$
0.6

 
$
(1.4
)