10-Q 1 form10q.htm LMI AEROSPACE INC 10-Q 09-30-2016 Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016.
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________

Commission file number: 000-24293

LMI AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Missouri
 
43-1309065
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
411 Fountain Lakes Blvd.
 
 
St. Charles, Missouri
 
63301
(Address of principal executive offices)
 
(Zip Code)
(636) 946-6525
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x                  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On November 3, 2016, there were 13,632,641 shares of our common stock, par value $0.02 per share, outstanding.
 



LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDING SEPTEMBER 30, 2016

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



2


 PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements.
LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,803


$
10,504

Accounts receivable, net
54,815


48,491

Inventories
123,779


114,775

Prepaid expenses and other current assets
3,733


4,147

Total current assets
184,130


177,917

 





Property, plant and equipment, net
96,354


100,969

Goodwill
62,482


86,784

Intangible assets, net
39,648


46,582

Other assets
2,824


3,728

Total assets
$
385,438


$
415,980

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,892


$
13,156

Accrued expenses
21,122


30,015

Current installments of long-term debt and capital lease obligations
2,587


2,362

Total current liabilities
45,601


45,533

 





Long-term liabilities:





Long-term debt and capital lease obligations, less current installments
247,801


247,633

Other long-term liabilities
3,179


4,322

Deferred income taxes


536

Total long-term liabilities
250,980


252,491

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.02 par value per share; authorized 28,000,000 shares; issued 13,632,641 and 13,287,688 shares at September 30, 2016 and December 31, 2015, respectively
273


266

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



Additional paid-in capital
99,563


97,617

Accumulated other comprehensive loss
(332
)

(211
)
Treasury stock, at cost, 39,419 shares at December 31, 2015


(418
)
Retained (deficit) earnings
(10,647
)

20,702

Total shareholders’ equity
88,857


117,956

Total liabilities and shareholders’ equity
$
385,438


$
415,980


See accompanying notes to condensed consolidated financial statements.

3


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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
79,840

 
$
84,114

 
$
230,182

 
$
246,730

Service revenue
9,833

 
11,519

 
30,815

 
38,928

Net sales
89,673

 
95,633

 
260,997

 
285,658

Cost of sales and service revenue

 

 
 
 
 
Cost of product sales
64,839

 
67,514

 
184,520

 
197,211

Cost of service revenue
8,988

 
11,493

 
28,865

 
35,853

Cost of sales
73,827

 
79,007

 
213,385

 
233,064

Gross profit
15,846

 
16,626

 
47,612

 
52,594




 


 
 
 
 
Selling, general and administrative expenses
10,143

 
8,979

 
33,764

 
33,980

Goodwill and intangible asset impairment

 

 
28,368

 

Restructuring expense
3

 
1,575

 
1,190

 
2,368

Income (loss) from operations
5,700

 
6,072

 
(15,710
)
 
16,246



 

 
 
 
 
Other (expense) income:

 

 
 
 
 
Interest expense
(5,591
)
 
(5,653
)
 
(16,067
)
 
(16,802
)
Other, net
41

 
(136
)
 
(306
)
 
(89
)
Total other expense
(5,550
)
 
(5,789
)
 
(16,373
)
 
(16,891
)



 


 
 
 
 
(Loss) income before income taxes
150

 
283

 
(32,083
)
 
(645
)
(Benefit) provision for income taxes
(159
)
 
249

 
(734
)
 
408




 


 
 
 
 
Net income (loss)
309

 
34

 
(31,349
)
 
(1,053
)
Other comprehensive income (loss):

 

 
 
 
 
Change in foreign currency translation adjustment
(33
)
 
(32
)
 
(121
)
 
(31
)
Total comprehensive income (loss)
$
276

 
$
2

 
$
(31,470
)
 
$
(1,084
)



 


 
 
 
 
Amounts per common share:

 

 
 
 
 
Net income (loss) per common share
$
0.02

 
$

 
$
(2.39
)
 
$
(0.08
)



 


 
 
 
 
Net income (loss) per common share assuming dilution
$
0.02

 
$

 
$
(2.39
)
 
$
(0.08
)



 


 
 
 
 
Weighted average common shares outstanding
13,176,538

 
12,907,938

 
13,092,869

 
12,851,456




 


 
 
 
 
Weighted average dilutive common shares outstanding
13,233,926

 
13,050,238

 
13,092,869

 
12,851,456


See accompanying notes to condensed consolidated financial statements.

4


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

 
Nine Months Ended 
 September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net loss
$
(31,349
)

$
(1,053
)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:



Depreciation and amortization
14,536


15,018

Amortization of debt issuance cost
1,432

 
1,479

Goodwill and intangible asset impairment
28,368

 

Stock based compensation
1,089


1,424

Deferred taxes
(723
)
 
(78
)
Other non-cash items
31


(94
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,514
)

(3,238
)
Inventories
(9,472
)

(4,993
)
Prepaid expenses and other assets
831


435

Current income taxes
180


(75
)
Accounts payable
9,032


(1,754
)
Accrued expenses
(7,758
)

(1,354
)
Net cash (used) provided by operating activities
(317
)

5,717

Investing activities:



Additions to property, plant and equipment
(7,671
)

(15,305
)
Proceeds from sale of property, plant and equipment
27


260

Net cash used by investing activities
(7,644
)

(15,045
)
Financing activities:



Proceeds from issuance of debt
1,465

 

Principal payments on long-term debt and notes payable
(12,108
)

(1,814
)
Advances on revolving line of credit
38,500


93,500

Payments on revolving line of credit
(28,500
)

(89,500
)
Payments for debt issuance cost
(97
)
 
(309
)
Net cash (used) provided by financing activities
(740
)

1,877

Net decrease in cash and cash equivalents
(8,701
)

(7,451
)
Cash and cash equivalents, beginning of period
10,504


7,927

Cash and cash equivalents, end of period
$
1,803


$
476

Supplemental disclosure of non-cash transactions:



Defined contribution plan funding in Company stock
$
1,472


$
710


See accompanying notes to condensed consolidated financial statements.

5

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015, as filed with the Securities and Exchange Commission on March 17, 2016.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes.  Actual results could differ from these estimates.

Recent Accounting Standards

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

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. As the Company carries a full valuation allowance against its net deferred tax assets, we do not expect that this standard will have a material impact on our financial statements. The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. The Company plans to adopt the new standard effective January 1, 2017.

6

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




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. We are currently evaluating the impact of this standard on our consolidated statement of cash flows.
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 September 30, 2016.  There were no transfers between levels during 2016 and 2015.
 
 
 
2016
 
Assets and Liabilities at Fair Value
 
Total
 
as of September 30, 2016
 
Gains
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Losses)
Non-recurring Fair Value Measurements:
 

 
 

 
 

 
 

 
 
Asset:
 
 
 
 
 
 
 
 
 
Intangible assets, net (1)
$
39,648

 
$

 
$

 
$
39,648

 
$
4,066

Goodwill (1)
$
62,482

 
$

 
$

 
$
62,482

 
$
24,302

(1) The fair value of goodwill is tested at least annually for impairment. During the quarter ended June 30, 2016, a triggering event occurred that required the Company to perform an interim impairment analysis for the goodwill and intangible assets within the Engineering Services reporting unit. This analysis determined the related goodwill and intangible assets were impaired and a loss of $28,368 was recorded in the quarter.


7

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



 
 
 
2015
 
Assets and Liabilities at Fair Value
 
Total
 
as of December 31, 2015
 
Gains
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Losses)
Non-recurring Fair Value Measurements:
 

 
 

 
 

 
 

 
 
Asset:
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
46,582

 
$

 
$

 
$
46,582

 
$

Goodwill (1)
$
86,784

 
$

 
$

 
$
86,784

 
$

(1) The Company performed its annual impairment analysis of goodwill during the fourth quarter of 2015 and determined no adjustments to the carrying value were necessary.

3.
Accounts Receivable, Net

Accounts receivable, net consists of the following:
 
September 30, 2016
 
December 31, 2015
Trade receivables
$
48,905

 
$
42,307

Unbilled revenue
4,435

 
4,869

Other receivables
1,776

 
1,561

 
55,116

 
48,737

Less: Allowance for doubtful accounts
(301
)
 
(246
)
Accounts receivable, net
$
54,815

 
$
48,491


Under contract accounting, unbilled revenues arise when the sales or revenues based on performance attainment, though appropriately recognized, cannot be billed yet under terms of the contract as of the balance sheet date. Included in unbilled revenue at September 30, 2016 and December 31, 2015 are $872 and $858, respectively, related to unpriced change orders or claims that are subject to negotiation. The final resolution of these unpriced items could result in either a favorable or unfavorable change in the revenue recognized to date on the associated contracts.

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

The Company records changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition topic of the FASB Accounting Standards Codification.  Cumulative catch-up adjustments had the following impacts to operating income for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
2015
 
2016
2015
Favorable adjustments
 
$
436

$
96

 
$
726

$
554

Unfavorable adjustments
 
(377
)
(2,183
)
 
(590
)
(2,214
)
Net favorable operating income adjustments
 
$
59

$
(2,087
)
 
$
136

$
(1,660
)

At September 30, 2016 and December 31, 2015, the Company had recognized a loss reserve of $2,154 and $1,992, 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:

8

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



 
September 30, 2016
 
December 31, 2015
Raw materials
$
13,579

 
$
12,513

Work in progress
25,528

 
22,681

Manufactured and purchased components
22,584

 
19,224

Finished goods
27,355

 
28,169

Product inventory
89,046

 
82,587

Capitalized contract costs
34,733

 
32,188

Total inventories
$
123,779

 
$
114,775



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 September 30, 2016 and December 31, 2015, the Company had no contracts with loss reserves accounted for as a reduction of inventory.

Capitalized contract costs at September 30, 2016 and December 31, 2015 include $5,522 and $5,970 respectively, related to an agreement the Company signed with Spirit Aerosystems ("Spirit".) This agreement extended the performance period of the statements of work for certain contracts with Spirit and gave the Company preferred supplier status on certain future contracts. This consideration is being amortized as a reduction to revenue over the life of the related contracts. The remaining capitalized contract costs relate primarily to four early-stage long-term contracts. The Company expects these costs will not be realized within one year but believes these amounts will be fully recovered over the life of the related contracts.

The following table illustrates the market to which capitalized contract cost at September 30, 2016 and December 31, 2015 related:
 
September 30, 2016
 
December 31, 2015
Large commercial aircraft
$
9,787

 
$
11,528

Corporate and regional aircraft
20,368

 
16,721

Military
4,578

 
3,939

Total capitalized contract cost
$
34,733

 
$
32,188



5.
Goodwill and Intangible Assets

Goodwill

The following table summarizes the net carrying amount of goodwill by segment at September 30, 2016 and December 31, 2015, respectively:
 
 
 
 
 
Engineering
 
 
 
 
 
Aerostructures
 
Services
 
Total
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
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
)
 
(26,439
)
 
(130,212
)
 
(105,910
)
Net Goodwill
$
62,482

 
$
62,482

 
$

 
$
24,302

 
$
62,482

 
$
86,784

 
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 third quarter of 2016 that would require the Company to perform an impairment evaluation.

9

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



In the second quarter of 2016, the Company significantly downgraded the full-year 2016 sales and operating income forecast for its Engineering Services business due to continued decline in demand. This downward adjustment to the forecast, combined with lower than expected operating results for the second quarter of 2016, was deemed to be a triggering event requiring an interim impairment evaluation for the Engineering Services reporting unit in accordance with ASC 350. The interim step one analysis performed, which used a combination of discounted cash flows and market value approaches to determine the fair value of the Engineering Services reporting unit, indicated the fair value was less than the carrying value of its net assets. The required step two valuation analysis, prepared as of June 30, 2016, indicated that the $24,302 of goodwill related to Engineering Services was fully impaired. The resulting impairment charge was recorded in the quarter ended June 30, 2016 and is reflected in the Engineering Services segment within the Goodwill and Intangible Asset Impairment line of the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2016.
Intangible Assets

Intangible assets primarily consist of trademarks and customer intangibles.  The carrying values were as follows:
 
September 30, 2016
 
December 31, 2015
Trademarks
$
778

 
$
778

Customer intangible assets
68,991

 
68,991

Other
1,274

 
1,274

Accumulated amortization and impairment
(31,395
)
 
(24,461
)
Intangible assets, net
$
39,648

 
$
46,582


Intangibles amortization expense was $796 and $1,089 for the three months ended September 30, 2016 and 2015, respectively, and $2,868 and $3,269 for the nine months ended September 30, 2016 and 2015, respectively. The accumulated amortization balances at September 30, 2016 and December 31, 2015, respectively, were $778 and $778 for trademarks, $29,636 and $22,816 for customer intangible assets, and $981 and $867 for other intangible assets.

In conjunction with the interim impairment analysis conducted during the current-year as discussed above, the Company also evaluated the recoverability of the customer intangible assets related to the Engineering Services reporting unit under ASC 360. As a result of this analysis, an impairment charge of $4,066 was recognized in the Engineering Services segment within the Goodwill and Intangible Asset Impairment line of the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2016.

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.


10

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



6.
Long-term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:
 
September 30, 2016
 
December 31, 2015
 
 
 
 
Second priority senior secured notes at a fixed rate of 7.375% at September 30, 2016
$
224,175

 
$
234,175

Revolver under credit agreement, variable
10,000

 

Industrial Revenue Bonds at fixed rates of 2.80% to 5.00% at September 30, 2016 and December 31, 2015
6,569

 
6,901

Capital leases, at fixed rates ranging from 3.00% to 4.50% and 3.00% to 7.73% at September 30, 2016 and December 31, 2015
10,657

 
11,708

Notes payable, principal and interest payable monthly, at fixed rates ranging from 2.45% to 2.56% at September 30, 2016 and December 31, 2015
2,491

 
1,750

Debt issuance cost
(3,504
)
 
(4,539
)
Total debt
$
250,388

 
$
249,995

Less current installments
2,587

 
2,362

Total long-term debt and capital lease obligations
$
247,801

 
$
247,633


At September 30, 2016, 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 September 30, 2016 of 1.0075, was $225,856. During the quarter ended September 30, 2016, the Company repurchased and retired $10,000 of the outstanding notes at a premium of 1.01875 plus accrued interest. 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 September 30, 2016, the Company had $10,000 in outstanding borrowings under the facility. Under the agreement, the co-collateral agents may establish a reserve against the facility. At September 30, 2016, the reserve established was $15,000, which reduced the maximum availability to $75,000. Based on the amount of eligible assets at September 30, 2016 and outstanding letters of credit of $1,525, available borrowings were further reduced to $44,291. 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 nine months ended September 30, 2016, the actual interest rate incurred for the revolving credit facility was 5.8% on average outstanding borrowings of $1,821.

The Company is required to pay a commitment fee of between 0.375% and 0.5% per annum on the unused portion of the revolving credit facility, depending on the average revolver usage during the period as compared to the total available borrowings under the facility. At September 30, 2016, the commitment fee was 0.5%.


11

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



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 September 30, 2016, 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.

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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Numerators
 
 
 
 
 
 
 
 
Net income (loss)
 
$
309

 
$
34

 
$
(31,349
)
 
$
(1,053
)
Denominators
 
 

 
 

 
 
 
 
Weighted average common shares - basic
 
13,176,538

 
12,907,938

 
13,092,869

 
12,851,456

 
 
 
 
 
 
 
 
 
Dilutive effect of restricted stock
 
57,388

 
142,300

 

 

 
 
 
 
 
 
 
 
 
Weighted average common shares - diluted
 
13,233,926

 
13,050,238

 
13,092,869

 
12,851,456

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.02

 
$

 
$
(2.39
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
$
0.02

 
$

 
$
(2.39
)
 
$
(0.08
)
    

For the nine months ended September 30, 2016, 81,734 restricted shares 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

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



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, 2016
 
253,434

 
$
14.54

Granted
 

 

Vested
 
(53,846
)
 
17.89

Forfeited
 
(18,580
)
 
14.21

Outstanding at September 30, 2016
 
181,008

 
$
13.58


Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $58 and $224 for the three months ended September 30, 2016 and 2015, respectively, and $401 and $1,154 for the nine months ended September 30, 2016 and 2015, respectively.

Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2005 Plan were $1,254 and $1,762 at September 30, 2016 and December 31, 2015, respectively.  These costs are expected to be recognized over a weighted average period of 1.3 years and 1.6 years, at September 30, 2016 and December 31, 2015, respectively.

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, 2016
 
61,801

 
$
9.79

Granted
 
269,875

 
8.51

Vested (1)
 
(55,672
)
 
9.79

Forfeited
 
(6,899
)
 
9.43

Outstanding at September 30, 2016
 
269,105

 
$
8.52

(1) Excludes 6,129 shares for which service requirements are met that remain subject to deferral at September 30, 2016 pursuant to the LMI Aerospace, Inc. Non-Qualified Deferred Compensation Plan for Senior Executives and Outside Directors.



13

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



Common stock compensation expense related to restricted stock awards granted under the 2015 Plan was $271 and $151 for the three months ended September 30, 2016 and 2015, respectively, and $695 and $151 for the nine months ended September 30, 2016 and 2015, respectively.

Total unrecognized compensation costs related to non-vested, share-based awards granted or awarded under the 2015 Plan were $1,223 and $303 at September 30, 2016 and December 31, 2015, respectively.  These costs are expected to be recognized over a weighted average period of 1.9 years and 0.5 years at September 30, 2016 and December 31, 2015, respectively.

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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales:
 
 
 
 
 
 
 
Aerostructures
$
80,433

 
$
85,119

 
$
232,846

 
$
249,661

Engineering Services
9,474

 
10,826

 
29,239

 
36,818

Eliminations
(234
)
 
(312
)
 
(1,088
)
 
(821
)
 
$
89,673

 
$
95,633

 
$
260,997

 
$
285,658

 
 
 
 
 
 
 
 
Income from operations:
 

 
 

 
 

 
 

Aerostructures
$
5,667

 
$
8,918

 
$
13,193

 
$
20,063

Engineering Services (1)
89

 
(2,805
)
 
(28,570
)
 
(3,803
)
Eliminations
(56
)
 
(41
)
 
(333
)
 
(14
)
 
$
5,700

 
$
6,072

 
$
(15,710
)
 
$
16,246

(1) The nine months ended September 30, 2016 include a charge of $23,402 related to goodwill impairment and a charge of $4,066 related to intangible asset impairment. (See Note 4, Goodwill and Intangible Assets, to the Condensed Consolidated Financial Statements)

10.
Customer Concentration

Direct sales, through both of the Company’s business segments, to our largest customer, Spirit Aerosystems (“Spirit”), accounted for 40.7% and 34.4% of the Company’s total revenues for the three months ended September 30, 2016 and 2015, respectively. Direct sales to Spirit accounted for 38.6% and 34.8% of the Company’s total revenues for the nine months ended September 30, 2016 and 2015, respectively. Accounts receivable balances related to Spirit were 33.9% and 28.6% of the Company’s total accounts receivable balance at September 30, 2016 and December 31, 2015, 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 13.5% and 15.9% of the Company’s total revenues for the three months ended September 30, 2016 and 2015, respectively. Direct sales to Gulfstream accounted for 11.6% and 14.3% of the Company’s total revenues for the nine months ended September 30, 2016 and 2015, respectively. Accounts

14

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



receivable balances resulting from direct sales to Gulfstream were 13.3% and 15.5% of the Company’s total accounts receivable balance at September 30, 2016 and December 31, 2015, respectively.

Direct sales, through both of the Company’s business segments, to our third largest customer, The Boeing Company, (“Boeing”), accounted for 12.1% and 12.6% of the Company’s total revenues for the three months ended September 30, 2016 and 2015, respectively.  Direct sales to Boeing accounted for 11.4% and 11.4% of the Company’s total revenues for the nine months ended September 30, 2016 and 2015, respectively. Accounts receivable balances related to Boeing were 9.4% and 10.2% of the Company’s total accounts receivable balance at September 30, 2016 and December 31, 2015, respectively.

11.
Income Taxes

The Company records income tax expense or benefit each quarter based on its estimated full-year effective tax rate. Income tax benefits of $159 and $734 were recognized in the three and nine months ended September 30, 2016, respectively. Income tax expense of $249 and $408 were recognized in the three and nine months ended September 30, 2015, respectively. The Company continues to carry a full valuation allowance on its net deferred tax assets, which totaled $20,273 and $14,461 at September 30, 2016 and December 31, 2015, respectively.

12.
Restructuring

The Company committed to and implemented various restructuring plans in 2015 and 2016. Included in those plans were the 2016 relocation of its sheet-metal fabrication operation in Wichita, Kansas and the 2015 relocation of its machining operations in St. Charles, Missouri to other facilities within the Company. In 2015, the Company also closed its Coweta, Oklahoma manufacturing facility in addition to Engineering offices in Greenville, South Carolina and Melbourne, Australia. In addition, the Company implemented other employment separation activities 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 associated with these restructuring activities:

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
St. Charles machine parts operations relocation
$

 
$

 
$

 
$
378

Wichita, Kansas sheet-metal operations relocation
49

 

 
296

 

Coweta machining facility closure

 
64

 

 
64

Greenville office closure

 
501

 
(26
)
 
501

Australia office closure

 
34

 

 
34

Other employment separation activities
(46
)
 
976

 
920

 
1,391

  Total
$
3

 
$
1,575

 
$
1,190

 
$
2,368

 
 
 
 
 
 
 
 
Expense incurred by segment:
 
 
 
 
 
 
 
Aerostructures
$
3

 
$
336

 
$
1,216

 
$
1,114

Engineering Services

 
1,239

 
(26
)
 
1,254

Total
$
3

 
$
1,575

 
$
1,190

 
$
2,368


The Company expects to recognize an additional $22 of restructuring expenses in the fourth quarter of 2016 related to the Wichita, Kansas sheet-metal operations relocation.


15

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



Cash payments were made associated with restructuring plans of $188 and $1,165 in the three months ended September 30, 2016 and 2015, respectively, and $870 and $2,175 in the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes the Company's restructuring activities during the nine months ended September 30, 2016:

 
 
Employee
 
 
 
 
 
 
Severance
 
Other
 
Total
 
 
 
 
 
 
 
Accrued restructuring balance as of December 31, 2015
 
$
162

 
$
93

 
$
255

  Accrual additions
 
1,216

 
(26
)
 
1,190

  Cash payments
 
(803
)
 
(67
)
 
(870
)
Accrued restructuring balance as of September 30, 2016
 
$
575

 
$

 
$
575


Accrued restructuring of $575 at September 30, 2016 is expected to be paid over the next two quarters.


13.
Legal Contingencies

The Company is not named as a defendant in a lawsuit that is outside the normal course of business.  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.

16

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



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.


17

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




CONDENSED CONSOLIDATING BALANCE SHEET
as of September 30, 2016
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,590

 
$
213

 
$

 
$
1,803

Trade accounts receivable, net
631

 
54,184

 

 
54,815

Intercompany receivables
284,892

 
277,828

 
(562,720
)
 

Inventories

 
123,779

 

 
123,779

Prepaid expenses and other current assets
1,512

 
2,221

 

 
3,733

Total current assets
288,625

 
458,225

 
(562,720
)
 
184,130

 
 
 
 
 
 
 
 
Property, plant and equipment, net
6,343

 
90,011

 

 
96,354

Investments in subsidiaries
370,244

 

 
(370,244
)
 

Goodwill

 
62,482

 

 
62,482

Intangible assets, net

 
39,648

 

 
39,648

Other assets
1,651

 
1,173

 

 
2,824

Total assets
$
666,863

 
$
651,539

 
$
(932,964
)
 
$
385,438

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
653

 
$
21,239

 
$

 
$
21,892

Accrued expenses
8,572

 
12,550

 

 
21,122

Intercompany payables
336,966

 
225,754

 
(562,720
)
 

Current installments of long-term debt and capital lease obligations
88

 
2,499

 

 
2,587

Total current liabilities
346,279

 
262,042

 
(562,720
)
 
45,601

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
230,813

 
16,988

 

 
247,801

Other long-term liabilities
914

 
2,265

 

 
3,179

Deferred income taxes

 

 

 

Total long-term liabilities
231,727

 
19,253

 

 
250,980

 
 
 
 
 
 
 
 
Total shareholders’ equity
88,857

 
370,244

 
(370,244
)
 
88,857

Total liabilities and shareholders’ equity
$
666,863

 
$
651,539

 
$
(932,964
)
 
$
385,438


18

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2015
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,251

 
$
253

 
$

 
$
10,504

Trade accounts receivable, net
1,220

 
47,271

 

 
48,491

Intercompany receivables
196,496

 
203,128

 
(399,624
)
 
$

Inventories

 
114,775

 

 
114,775

Prepaid expenses and other current assets
2,224

 
1,923

 

 
4,147

Total current assets
210,191

 
367,350

 
(399,624
)
 
177,917

 
 
 
 
 
 
 
 
Property, plant and equipment, net
5,430

 
95,539

 

 
100,969

Investments in subsidiaries
387,868

 

 
(387,868
)
 

Goodwill

 
86,784

 

 
86,784

Intangible assets, net

 
46,582

 

 
46,582

Other assets
2,135

 
1,593

 

 
3,728

Total assets
$
605,624

 
$
597,848

 
$
(787,492
)
 
$
415,980

 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
1,393

 
$
11,763

 
$

 
$
13,156

Accrued expenses
17,009

 
13,006

 

 
30,015

Intercompany payables
237,548

 
162,076

 
(399,624
)
 

Current installments of long-term debt and capital lease obligations
85

 
2,277

 

 
2,362

Total current liabilities
256,035

 
189,122

 
(399,624
)
 
45,533

 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current installments
229,752

 
17,881

 

 
247,633

Other long-term liabilities
1,881

 
2,441

 

 
4,322

Deferred income taxes

 
536

 

 
536

Total long-term liabilities
231,633

 
20,858

 

 
252,491

 
 
 
 
 
 
 
 
Total shareholders’ equity
117,956

 
387,868

 
(387,868
)
 
117,956

Total liabilities and shareholders’ equity
$
605,624

 
$
597,848

 
$
(787,492
)
 
$
415,980


19

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended September 30, 2016
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
(19
)
 
$
79,841

 
$
18

 
$
79,840

Service revenues
9,767

 
9,831

 
(9,765
)
 
9,833

Net sales
9,748

 
89,672

 
(9,747
)
 
89,673

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales

 
64,857

 
(18
)
 
64,839

Cost of service revenues
9,492

 
9,054

 
(9,558
)
 
8,988

Cost of sales
9,492

 
73,911

 
(9,576
)
 
73,827

Gross profit
256

 
15,761

 
(171
)
 
15,846

Selling, general and administrative expenses

 
10,143

 

 
10,143

Goodwill and intangible

 

 

 

Restructuring expense
(47
)
 
50

 

 
3

(Loss) income from operations
303

 
5,568

 
(171
)
 
5,700

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(5,369
)
 
(222
)
 

 
(5,591
)
Other, net

 
41

 

 
41

Income (loss) from equity investments in subsidiaries
5,513

 

 
(5,513
)
 

Total other expense
144

 
(181
)
 
(5,513
)
 
(5,550
)
(Loss) income before income taxes
447

 
5,387

 
(5,684
)
 
150

(Benefit) provision for income taxes

 
(159
)
 

 
(159
)
Net (loss) income
447

 
5,546

 
(5,684
)
 
309

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

 
(33
)
 

 
(33
)
Total comprehensive (loss) income
$
447

 
$
5,513

 
$
(5,684
)
 
$
276


20

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




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

 
$
84,099

 
$
11

 
$
84,114

Service revenues
7,640

 
11,545

 
(7,666
)
 
11,519

Net sales
7,644

 
95,644

 
(7,655
)
 
95,633

Cost of sales and service revenue
 
 
 
 
 
 
 

Cost of product sales
27

 
67,476

 
11

 
67,514

Cost of service revenues
7,991

 
11,166

 
(7,664
)
 
11,493

Cost of sales
8,018

 
78,642

 
(7,653
)
 
79,007

Gross profit
(374
)
 
17,002

 
(2
)
 
16,626

Selling, general and administrative expenses

 
8,979

 

 
8,979

Restructuring expense

 
1,575

 

 
1,575

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

 
(2
)
 
6,072

Other income (expense):
 
 
 
 
 
 
 

Interest expense
(5,389
)
 
(264
)
 

 
(5,653
)
Other, net
(1
)
 
(135
)
 

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

 

 
(3,541
)
 

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

 
(3,543
)
 
283

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

 

 
249

Net (loss) income
4

 
3,573

 
(3,543
)
 
34

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

 
(32
)
 

 
(32
)
Total comprehensive (loss) income
$
4

 
$
3,541

 
$
(3,543
)
 
$
2




















21

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Nine Months Ended September 30, 2016

 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
43

 
$
230,153

 
$
(14
)
 
$
230,182

Service revenues
31,952

 
30,836

 
(31,973
)
 
30,815

Net sales
31,995

 
260,989

 
(31,987
)
 
260,997

Cost of sales and service revenue
 
 
 
 
 
 
 
Cost of product sales
80

 
184,426

 
14

 
184,520

Cost of service revenues
32,017

 
28,849

 
(32,001
)
 
28,865

Cost of sales
32,097

 
213,275

 
(31,987
)
 
213,385

Gross profit
(102
)
 
47,714

 

 
47,612

Selling, general and administrative expenses

 
33,764

 

 
33,764

Goodwill and intangible asset impairment

 
28,368

 

 
28,368

Restructuring expense
404

 
786

 

 
1,190

(Loss) income from operations
(506
)
 
(15,204
)
 

 
(15,710
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(15,415
)
 
(652
)
 

 
(16,067
)
Other, net
4

 
(310
)
 

 
(306
)
Income (loss) from equity investments in subsidiaries
(15,553
)
 

 
15,553

 

Total other expense
(30,964
)
 
(962
)
 
15,553

 
(16,373
)
(Loss) income before income taxes
(31,470
)
 
(16,166
)
 
15,553

 
(32,083
)
(Benefit) provision for income taxes

 
(734
)
 

 
(734
)
Net (loss) income
(31,470
)
 
(15,432
)
 
15,553

 
(31,349
)
Other comprehensive income (expense):
 
 
 
 
 
 
 
Change in foreign currency translation adjustment

 
(121
)
 

 
(121
)
Total comprehensive (loss) income
$
(31,470
)
 
$
(15,553
)
 
$
15,553

 
$
(31,470
)


















22

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Nine Months Ended September 30, 2015

 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Sales and service revenue
 
 
 
 
 
 
 
Product sales
$
207

 
$
246,699

 
$
(176
)
 
$
246,730

Service revenues
26,729

 
38,942

 
(26,743
)
 
38,928

Net sales
26,936

 
285,641

 
(26,919
)
 
285,658

Cost of sales and service revenue
 
 
 
 
 
 
 
Cost of product sales
214

 
197,173

 
(176
)
 
197,211

Cost of service revenues
27,440

 
35,155

 
(26,742
)
 
35,853

Cost of sales
27,654

 
232,328

 
(26,918
)
 
233,064

Gross profit
(718
)
 
53,313

 
(1
)
 
52,594

Selling, general and administrative expenses

 
33,980

 

 
33,980

Restructuring expense
318

 
2,050

 

 
2,368

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

 
(1
)
 
16,246

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(16,029
)
 
(773
)
 

 
(16,802
)
Other, net
(1
)
 
(88
)
 

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

 

 
(9,914
)
 

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

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

 

 
408

Net (loss) income
(1,083
)
 
9,945

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

 
(31
)
 

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

 
$
(9,915
)
 
$
(1,084
)


23

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2016
 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(31,470
)
 
$
(15,432
)
 
$
15,553

 
$
(31,349
)
Adjustments for non-cash items
21,104

 
39,181

 
(15,553
)
 
44,732

Net changes in operating assets and liabilities, net of acquired businesses
(7,466
)
 
(6,234
)
 

 
(13,700
)
Intercompany activity
11,022

 
(11,022
)
 

 

Net cash (used)/provided by operating activities
(6,810
)
 
6,493

 

 
(317
)
Investing activities:
 

 
 

 
 

 
 

Additions to property, plant and equipment
(1,790
)
 
(5,881
)
 

 
(7,671
)
Proceeds from sale of equipment
3

 
24

 

 
27

Net cash used by investing activities
(1,787
)
 
(5,857
)
 

 
(7,644
)
Financing activities:
 

 
 

 
 

 
 

Proceeds from issuance of debt

 
1,465

 

 
1,465

Principal payments on long-term debt and notes payable
(10,064
)
 
(2,044
)
 

 
(12,108
)
Advances on revolving line of credit
38,500

 

 

 
38,500

Payments on revolving line of credit
(28,500
)
 

 

 
(28,500
)
Payments for debt issuance cost

 
(97
)
 

 
(97
)
Net cash provided (used)/provided by financing activities
(64
)
 
(676
)
 

 
(740
)
Net (decrease) increase in cash and cash equivalents
(8,661
)
 
(40
)
 

 
(8,701
)
Cash and cash equivalents, beginning of period
10,251

 
253

 

 
10,504

Cash and cash equivalents, end of period
$
1,590

 
$
213

 
$

 
$
1,803



24

LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
September 30, 2016



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2015

 
LMIA(Guarantor Parent)
 
Guarantor Subsidiaries
 
Consolidating/Eliminating Entries
 
Consolidated
Operating activities:
 
 
 
 
 
 
 
Net (loss)/income
$
(1,083
)
 
$
9,945

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

 
9,915

 
16,270

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

 
(9,500
)
Intercompany activity
1,379

 
(1,379
)
 

 

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

 

 
5,717

Investing activities:
 

 
 

 
 

 
 

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

 
(15,305
)
Proceeds from sale of equipment

 
260

 

 
260

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

 
(15,045
)
Financing activities:
 

 
 

 
 

 
 

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

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

 

 

 
93,500

Payments on revolving line of credit
(89,500
)
 

 

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

 

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

 
(1,563
)
 

 
1,877

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

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

 
869

 

 
7,927

Cash and cash equivalents, end of period
$

 
$
476

 
$

 
$
476






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, 2015 (the “2015 Form 10-K”) and otherwise described in the Company’s periodic filings and current reports filed with the Securities and Exchange Commission (the “SEC”).

25



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 2015 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 2015 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 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.

In the second quarter of 2016, the Company significantly downgraded the full-year 2016 sales and operating income forecast for its Engineering Services business due to continued decline in demand. This downward adjustment to the forecast, combined with lower than expected operating results for the second quarter of 2016, led the Company to conduct an interim impairment test. This analysis resulted in the Company recording a goodwill impairment charge of $24.3 million and an intangible asset impairment charge of $4.1 million in the second quarter of 2016. This non-cash impairment charge is not expected to result in any impact to the Company's liquidity, future operations or ability to comply with its debt covenants.
Results of Operations

Three months ended September 30, 2016 compared to three months ended September 30, 2015

Consolidated Operations

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


26



The following table is a summary of the Company's operating results for the three months ended September 30, 2016 and 2015, respectively:
 
Three Months Ended 
 September 30, 2016
 
($ in millions)
 
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
80.4

 
$
9.5

 
$
(0.2
)
 
$
89.7

Cost of sales
65.7

 
8.3

 
(0.1
)
 
73.9

Gross profit
14.7

 
1.2

 
(0.1
)
 
15.8

S, G, & A
9.0

 
1.1

 

 
10.1

Income from operations
$
5.7

 
$
0.1

 
$
(0.1
)
 
$
5.7

  
Three Months Ended 
 September 30, 2015
  
($ in millions)
  
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
85.1

 
$
10.8

 
$
(0.3
)
 
$
95.6

Cost of sales
68.5

 
10.8

 
(0.3
)
 
79.0

Gross profit
16.6

 

 

 
16.6

S, G, & A
7.7

 
2.8

 

 
10.5

Income from operations
$
8.9

 
$
(2.8
)
 
$

 
$
6.1


Aerostructures Segment

Net Sales.  Net sales were $80.4 million for the third quarter of 2016, a 5.5% decrease from $85.1 million in the third quarter of 2015.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the third quarter of 2016 and 2015 and the percentage of the segment’s total net sales for each period represented by each category:
 
 
Three Months Ended September 30,
Category
 
2016
 
% of Total
 
2015
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
47.2

 
58.7
%
 
$
45.1

 
53.0
%
Corporate and regional aircraft
 
18.9

 
23.5
%
 
23.6

 
27.7
%
Military
 
8.8

 
10.9
%
 
8.9

 
10.5
%
Other
 
5.5

 
6.9
%
 
7.5

 
8.8
%
Total
 
$
80.4

 
100.0
%
 
$
85.1

 
100.0
%

Net sales of large commercial aircraft products increased 4.7% in the third quarter of 2016 when compared to the third quarter of 2015. The most significant increase in revenue in the category was attributable to sales on the Bombardier C-Series platform which contributed $2.1 million in additional sales volume when compared to the prior-year period. Increased content and higher production rates on the Boeing 787 platform, which generated $8.1 million in the third quarter of 2016 compared to $7.0 million in the third quarter of 2015, also contributed to the increase in sales. We expect the Bombardier C-Series and Boeing 787 platforms to generate similar levels of revenue throughout 2016. These increases in revenue were partially offset by a decline in sales on the Boeing 747 platform to $1.5 million in the third quarter of 2016 from $2.7 million in the third quarter of 2015.

Net sales of components for corporate and regional aircraft decreased 19.9% during the third quarter of 2016. The decline in sales in the corporate and regional jet market was primarily attributable to lower tooling demand of $3.1 million on the Gulfstream G500/600 program and lower overall demand of $2.5 million on the Gulfstream G450/550 program, from $5.5 million and $6.1 million, respectively, in the third quarter of 2015 to $2.4 million and $3.6 million, respectively in the third quarter of 2016. Sales on a new Honda Jet program partially offset these decreases and contributed $1.5 million in the third quarter of 2016.



27


Net sales of military products decreased 1.1% during the third quarter of 2016.  The decrease is primarily due to a $0.7 million reduction in revenue on the Sikorsky Blackhawk program which was partially offset by a $0.5 million increase in sales on the Boeing Apache program in the third quarter of 2016 when compared to the third quarter of 2015.

Cost of Goods Sold.  Cost of goods sold for the third quarter of 2016 was $65.7 million compared to $68.5 million for the third quarter of 2015. The reduction in cost of goods sold in the third quarter of 2016 was primarily attributable to lower sales volume and a $0.6 million reduction in incentive compensation expense.

Gross Profit.  Gross profit for the third quarter of 2016 was $14.7 million (18.3% of net sales) compared to $16.6 million (19.5% of net sales) in the third quarter of 2015. The reduction in gross profit margin in the second quarter of 2016 was primarily attributable to lower sales and unfavorable product mix, partially offset by a reduction in incentive compensation expense of $0.6 million and benefits realized from restructuring and cost savings activities completed during 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $9.0 million (11.2% of net sales) for the third quarter of 2016, compared to $7.7 million (9.0% of net sales) for the third quarter of 2015.  The change in selling, general and administrative expenses was primarily due to a net gain of $3.3 million recorded in the third quarter of 2015 related to the settlement of a lawsuit. In addition, incentive compensation costs and salaries and related fringes were lower in the third quarter of 2016 by $0.9 million and $0.4 million, respectively, when compared to the prior-year period.

Engineering Services Segment

Net Sales.  The Engineering Services segment generates revenue primarily through the billing of employee time spent on customer projects.  Net sales for the Engineering Services segment were $9.5 million for the third quarter of 2016 as compared to $10.8 million for the third quarter of 2015, a decrease of 12.0%.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the third quarter in each of 2016 and 2015 and the percentage of the segment’s total net sales represented by each category.
 
 
Three Months Ended September 30,
Category
 
2016
 
% of Total
 
2015
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
3.0

 
31.6
%
 
$
6.4

 
59.3
%
Corporate and regional aircraft
 
2.8

 
29.5
%
 
0.8

 
7.4
%
Military
 
2.9

 
30.5
%
 
2.9

 
26.9
%
Other
 
0.8

 
8.4
%
 
0.7

 
6.4
%
Total
 
$
9.5

 
100.0
%
 
$
10.8

 
100.0
%

Net sales of services for large commercial aircraft were $3.0 million in the third quarter of 2016, down 53.1% from $6.4 million in the third quarter of 2015. The decrease in this category was primarily attributable to the completion of the Bombardier C-series program in the first quarter of 2016, which contributed $1.8 million of revenue in the third quarter of 2015 compared to no revenue in the third quarter of 2016. In addition, sales related to maintenance and repair services declined to $2.8 million in the third quarter of 2016 compared to $4.0 million in the third quarter of 2015.

Net sales of services related to corporate and regional aircraft were $2.8 million in the third quarter of 2016 compared to $0.8 million for the third quarter of 2015, up 250.0%.  The change in revenue was primarily related to an unfavorable cumulative catchup adjustment of $1.9 million on the Mitsubishi Regional Jet program in the third quarter of 2015. Revenue on the Bombardier Global 7000/8000 program increased $1.0 million to $1.5 million in the third quarter of 2016 compared to $0.5 million in the third quarter of 2015. The Aerion AS2 program contributed $0.6 million in the third quarter of 2015 compared to $0.1 million in the third quarter of 2016.

Net sales of services for military programs were $2.9 million in both the third quarter of 2016 and the third quarter of 2015.  

Net sales of services related to the design and delivery of tooling on various programs supporting commercial and military aircraft were $0.8 million for the third quarter of 2016 compared to $0.7 million in the third quarter of 2015.



28


Cost of Goods Sold. Cost of goods sold for the third quarter of 2016 was $8.3 million compared to $10.8 million for the third quarter of 2015.  The decrease in cost of goods sold was primarily due to reductions in direct labor, indirect labor and related fringe benefits totaling $2.2 million resulting from lower demand for this segment and cost reduction activities completed in 2015.

Gross Profit.  Gross profit for the third quarter of 2016 was $1.2 million (12.6% of net sales) compared to $0.0 million (0.0% of net sales) in the third quarter of 2015.  The change in gross profit was attributable to the unfavorable cumulative catchup adjustment of $1.9 million recorded the third quarter of 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the third quarter of 2016 were $1.1 million, or 11.6% of net sales, compared to $2.8 million, or 25.9% of net sales, for the third quarter of 2015. The decrease in selling, general and administrative expenses was primarily attributable to restructuring expenses of $1.2 million incurred in the third quarter of 2015 associated with the closure of the Company's Greenville, South Carolina and Melbourne, Australia offices and the elimination of other management positions within the segment. In addition, lower intangible asset amortization and salary and wage expenses of $0.3 million and $0.2 million, respectively, contributed to the reduction in selling, general and administrative expenses in the third quarter of 2016 when compared to the prior-year period.

Non-segment Expenses

Interest Expense.  Interest expense decreased to $5.6 million for the third quarter of 2016 from $5.7 million for the third quarter of 2015.  The reduction in interest expense was attributable to lower average borrowings and was partially offset by a $0.2 million write-off of debt issuance cost related to the retirement of certain of the outstanding senior secured notes during the third quarter of 2016.

Income Tax Expense.  During the third quarter of 2016, the Company recorded an income tax benefit of $0.2 million compared to income expense of $0.2 million in the third quarter of 2015.  
Results of Operations

Nine months ended September 30, 2016 compared to nine months ended September 30, 2015

Consolidated Operations

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

The following table is a summary of the Company's operating results for the nine months ended September 30, 2016 and 2015, respectively:
 
Nine Months Ended 
 September 30, 2016
 
($ in millions)
 
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
232.9

 
$
29.2

 
$
(1.1
)
 
$
261.0

Cost of sales
188.7

 
25.5

 
(0.8
)
 
213.4

Gross profit
44.2

 
3.7

 
(0.3
)
 
47.6

S, G, & A
31.0

 
32.3

 

 
63.3

Income from operations
$
13.2

 
$
(28.6
)
 
$
(0.3
)
 
$
(15.7
)


29


  
Nine Months Ended 
 September 30, 2015
  
($ in millions)
  
Aerostructures
 
Engineering Services
 
Elimination
 
Total
Net sales
$
249.7

 
$
36.8

 
$
(0.8
)
 
$
285.7

Cost of sales
200.2

 
33.7

 
(0.8
)
 
233.1

Gross profit
49.5

 
3.1

 

 
52.6

S, G, & A
29.5

 
6.9

 

 
36.4

Income from operations
$
20.0

 
$
(3.8
)
 
$

 
$
16.2


Aerostructures Segment

Net Sales.  Net sales were $232.9 million for the first nine months of 2016, a 6.7% decrease from $249.7 million in the first nine months of 2015.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the first nine months of 2016 and 2015 and the percentage of the segment’s total net sales for each period represented by each category:
 
 
Nine months ended September 30,
Category
 
2016
 
% of Total
 
2015
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
138.0

 
59.3
%
 
$
132.7

 
53.1
%
Corporate and regional aircraft
 
52.8

 
22.7
%
 
65.4

 
26.2
%
Military
 
26.6

 
11.4
%
 
30.8

 
12.3
%
Other
 
15.5

 
6.6
%
 
20.8

 
8.4
%
Total
 
$
232.9

 
100.0
%
 
$
249.7

 
100.0
%

Net sales of large commercial aircraft products increased 4.0% in the first nine months of 2016 when compared to the first nine months of 2015. The most significant increase in revenue in the category was attributable to sales on the Bombardier C-Series platform which contributed $5.5 million in additional sales volume when compared to the prior-year period. Increased content and higher production rates on the Boeing 787 platform, which generated $24.8 million in the first nine months of 2016 compared to $20.9 million in the first nine months of 2015, also contributed to the increase in sales. These increases were partially offset by a decrease in sales on the Boeing 747 platform from $9.1 million in the first nine months of 2015 to $4.2 million in the first nine months of 2016.

Net sales of components for corporate and regional aircraft decreased 19.3% during the first nine months of 2016. The decrease in revenue was primarily attributable to overall sales on the Gulfstream G450/G550 and tooling on the G500/600 programs, which generated sales of $19.3 million and $9.5 million, respectively, in the first nine months of 2015 compared to $10.0 million and $5.5 million, respectively, in the first nine months of 2016.

Net sales of military products decreased 13.6% during the first nine months of 2016.  The decrease is primarily due to reductions in revenue on the Boeing F-18 and Lockheed Martin F-35 programs of $1.5 million and $1.3 million, respectively, from $3.3 million and $2.0 million, respectively, in the first nine months of 2015 to $1.8 million and $0.7 million, respectively, in the first nine months of 2016. Sales on the Sikorsky Blackhawk program also declined from $14.4 million in the first nine months of 2015 to $13.2 million in the first nine months of 2016.

Cost of Goods Sold.  Cost of goods sold for the first nine months of 2016 was $188.7 million compared to $200.2 million for the first nine months of 2015. The reduction in cost of goods sold in the first nine months of 2016 was primarily attributable to lower sales volumes, a reduction in incentive compensation expense of $1.4 million and the benefits of lower manufacturing overhead expenses realized from cost savings initiatives implemented in prior periods.

Gross Profit.  Gross profit for the first nine months of 2016 was $44.2 million (19.0% of net sales) compared to $49.5 million (19.8% of net sales) in the first nine months of 2015. Unfavorable product mix and the impact of lower sales contributed to the reduction in gross profit margin in the first nine months of 2016. This decline in gross profit margin was partially offset by benefits


30


realized from restructuring and cost savings activities completed during 2015 and 2016 in addition to lower incentive compensation costs of $1.4 million.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $31.0 million (13.3% of net sales) for the first nine months of 2016, compared to $29.5 million (11.8% of net sales) for the first nine months of 2015.  The change in selling, general and administrative expenses was primarily due to a net gain of $3.3 million recorded in the first nine months of 2015 related to the settlement of a lawsuit. In addition, incentive compensation costs and salaries and related fringes were lower in the first nine months of 2016 by $1.3 million and $1.7 million, respectively, when compared to the prior-year period.

Engineering Services Segment

Net Sales.  The Engineering Services segment generates revenue primarily through the billing of employee time spent on customer projects.  Net sales for the Engineering Services segment were $29.2 million for the first nine months of 2016 compared to 36.8 million for the first nine months of 2015, a decrease of 20.7%.  The following table specifies the amount of the Engineering Services segment’s net sales by category for the first nine months in each of 2016 and 2015 and the percentage of the segment’s total net sales represented by each category.
 
 
Nine Months Ended September 30,
Category
 
2016
 
% of Total
 
2015
 
% of Total
 
 
($ in millions)
Large commercial aircraft
 
$
10.5

 
36.0
%
 
$
16.7

 
45.4
%
Corporate and regional aircraft
 
9.7

 
33.2
%
 
10.6

 
28.8
%
Military
 
7.6

 
26.0
%
 
7.9

 
21.5
%
Other
 
1.4

 
4.8
%
 
1.6

 
4.3
%
Total
 
$
29.2

 
100.0
%
 
$
36.8

 
100.0
%

Net sales of services for large commercial aircraft were $10.5 million in the first nine months of 2016, down 37.1% from $16.7 million in the first nine months of 2015. The decrease in this category is partially attributable to a decline in sales related to maintenance and repair services, which contributed $11.4 million in revenue for the first nine months of 2015 compared to $8.8 million in revenue for the first nine months of 2016. In addition, revenues on the Bombardier C-series and Boeing 747 programs decreased to $1.2 million and $0.0 million, respectively, in the first nine months of 2016 from $4.0 million and $0.5 million, respectively in the first nine months of 2015.

Net sales of services related to corporate and regional aircraft were $9.7 million in the first nine months of 2016, compared to $10.6 million for the first nine months of 2015, a decrease of 8.5%.  The decrease in this category was primarily attributable to the Aerion AS2 program, which contributed revenue of $0.6 million in the first nine months of 2016 compared to $2.1 million in the first nine months of 2015. Sales on the Arrowhead Global Wing program contributed $1.1 million in the first nine months of 2015 and was completed in that year. Revenues in the first nine months of 2015 were impacted by an unfavorable cumulative catch up adjustment of $1.9 million.

Net sales of services for military programs were $7.6 million in the third quarter of 2016, compared to $7.9 million in the third quarter of 2015. In the first nine months of 2015 the Lockheed Martin HAVOC and the Bell V280 programs contributed revenues of $0.9 million and $0.6 million, respectively. These programs were completed in 2015. These decreases in revenue were partially offset by an increase of $1.1 million on a new military trainer program.

Net sales of services related to design and delivery of tooling on various programs supporting commercial and military aircraft were $1.4 million for the first nine months of 2016 compared to $1.6 million in the first nine months of 2015. This decrease is primarily related to tooling sales on various Boeing programs which declined $0.2 million in the first nine months of 2016 when compared to the prior-year period.

Cost of Goods Sold. Cost of goods sold for the first nine months of 2016 was $25.5 million compared to $33.7 million for the first nine months of 2015.  The decrease in cost of goods sold was primarily due to reductions in direct labor, indirect labor and related fringe benefits of $7.6 million resulting from lower demand for this segment and cost reduction activities completed in 2015.



31


Gross Profit.  Gross profit for the first nine months of 2016 was $3.7 million (12.7% of net sales) compared to $3.1 million (8.4% of net sales) in the first nine months of 2015.  The change in gross profit was attributable to the unfavorable cumulative catchup adjustment of $1.9 million recorded the first nine months of 2015. The decline in sales the first nine months of 2016 contributed to the lower gross profit dollars but was partially offset by a decline in wages and related expenses resulting from cost reduction activities completed in 2015.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the first nine months of 2016 were $32.3 million, or 110.6% of net sales, compared to $6.9 million, or 18.8% of net sales, for the first nine months of 2015. The increase in selling, general and administrative expenses was primarily attributable to a $24.3 million charge for goodwill impairment and a $4.1 million charge for intangible asset impairment. These charges were partially offset by a decline in restructuring expenses of $1.3 million and salary and related expenses of $1.1 million in the first nine months of 2016 when compared to the prior-year period. These decreases in expense relate to cost reduction activities completed in 2015. Excluding the impairment and restructuring charges, selling, general, and administrative expenses were lower in the first nine month of 2016 by $1.6 million when compared to the first nine months of 2015.

Non-segment Expenses

Interest Expense.  Interest expense decreased to $16.1 million for the first nine months of 2016 from $16.8 million for the first nine months of 2015, the result of lower outstanding borrowings.  

Income Tax Expense.  During the first nine months of 2016, the Company recorded an income tax benefit of $0.7 million compared to an expense of $0.4 million in the first nine months of 2015.  Income taxes in the first nine months of 2016 were favorably impacted by $0.5 million related to the impairment of goodwill and intangible assets in our Engineering Services reporting unit. Income tax expense in the first nine months of 2015 includes the recognition of a $0.5 million adjustment resulting from an audit of the Company's 2012 and 2013 tax returns by the Internal Revenue Service.

Non-GAAP Financial Measures

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

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of the Company’s results as reported under GAAP.  Some of these limitations are:
They do not reflect the Company’s cash expenditures, future expenditures for capital expenditures or contractual commitments;
They do not reflect changes in, or cash requirements for, working capital needs;
They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;


32


They are not adjusted for all non-cash income or expense items that are reflected in the statement of cash flows;
They do not reflect the impact on earnings of charges resulting from matters unrelated to ongoing operations; and
Other companies in the Company’s industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

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



33


Reconciliations of net income (loss) to EBITDA and Adjusted EBITDA were as follows:
(In Thousands)
Three Months Ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
309


$
34

 
$
(31,349
)
 
$
(1,053
)
Depreciation and amortization (1)
4,706


5,098

 
14,536

 
15,018

Goodwill and intangible asset impairment (2)

 

 
28,368

 

Interest expense
5,591


5,653

 
16,067

 
16,802

Income tax (benefit) expense
(159
)

249

 
(734
)
 
408

EBITDA
10,447


11,034

 
26,888

 
31,175

Stock-based compensation (3)
639


828

 
2,161

 
2,588

Integration expenses
13


175

 
61

 
348

Restructuring expenses (4)
3


1,575

 
1,190

 
2,368

Other, net (5)
55


(1,934
)
 
536

 
(1,974
)
Adjusted EBITDA
$
11,157


$
11,678

 
$
30,836

 
$
34,505

(1)
Includes amortization of intangibles, amortization of long-term supply agreement consideration and depreciation expense.
(2)
An interim impairment evaluation for the Engineering Services reporting unit resulted in a goodwill impairment charge of $24.3 million and an intangible asset impairment charge of $4.1 million for the nine months ended September 30, 2016.
(3)
Includes shared-based expense associated with the LMI Aerospace, Inc. 2005 Long-term Incentive Plan, the LMI Aerospace, Inc. 2015 Incentive Compensation Plan and the LMI Profit Sharing and Savings Plan. The three and nine months ended September 30, 2015 also includes share-based expense associated with the Valent Aerostructures, LLC 401(k) Plan. In addition, the nine months ended September 30, 2015 include expenses associated with share-based payments to settle obligations under a consulting agreement.
(4)
Includes expenses related to general employment separation activities. The nine months ended September 30, 2015 also include expenses related to the closure of the Company's St. Louis machining facility. The three and nine months ended September 30, 2015 also include expenses related to the closure of the Company's Coweta, OK, Greenville, SC and Melbourne, Australia facilities. The three and nine months ended September 30, 2016 also include expenses related to the closure of the Company's Wichita sheet-metal operations.
(5)
In the three and nine months ended September 30, 2015, the Company recorded a net gain of $3.3 million related to a legal settlement. The gain realized from the settlement offsets expenses of $1.9 million that were recorded as a favorable adjustment to EBITDA when incurred in prior quarters.  For consistency, the above table reflects only $1.9 million of the net gain as an unfavorable EBITDA adjustment.

Liquidity and Capital Resources

At September 30, 2016, the Company's primary source of outstanding indebtedness was second priority senior secured notes that mature in July of 2019. These notes accrue interest at 7.375% and require semi-annual interest payments. The Company believes that cash generated from operations combined with its cash and cash equivalent assets, in addition to available borrowings under its revolving credit facility, will provide the financial flexibility necessary to achieve its long-range strategic goals. For more information on the Company's debt structure, please see Note 5 - Long-term Debt and Capital Lease Obligations in the Notes to the Condensed Consolidated Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q.



34


During the first nine months of 2016 and 2015, the Company's operating activities used cash of $0.3 million and provided cash of $5.7 million, respectively. Net cash used by operating activities for the first nine months of 2016 was unfavorably impacted by an increase of $6.5 million in accounts receivable related to the timing of customer payments. Inventory also increased in the first nine months by $9.5 million, as the Company prepares for anticipated higher demand in subsequent quarters. We expect inventory to decline in the fourth quarter of 2016. In addition, in the first nine months of 2016, the Company made both payments totaling $17.3 million for the semi-annual interest due on its outstanding notes. Operating cash flow in the first nine months of 2016 was favorably impacted by an increase in accounts payable of $9.0 million, primarily due to the growth in inventory and the timing of vendor payments.

Net cash provided by operating activities for the first nine months of 2015 was unfavorably impacted by a $6.5 million payment of cash consideration to a key customer. In exchange for this payment, the performance period of the statements of work for certain contracts with this customer was extended and the Company was granted preferred supplier status on certain future contracts. In the first nine months of 2015, the Company made interest payments of $19.4 million associated with its outstanding notes.

Net cash used for investing activities was $7.6 million for the first nine months of 2016, compared to $15.0 million for the first nine months of 2015. Capital spending in the first nine months of 2016 included $2.1 million of purchases to support our increasing content on the Boeing 737 MAX platform at our Washington, Missouri manufacturing facility. Capital spending in the first nine months of 2015 primarily related to the purchase of machinery and equipment to support production contracts in addition to the purchase of equipment for environmental compliance at our Cuba, Missouri plant.

In the nine months ended September 30, 2016, the Company borrowed $1.5 million to fund equipment purchases at our Washington, Missouri facility in support of the Boeing 737 MAX program. In addition, the Company made principal payments of $2.1 million on outstanding debt and used $10.0 million in borrowings on its revolving credit facility to retire higher-rate senior notes. In the nine months ended September 30, 2015, the Company borrowed $4.0 million on its revolving credit facility to fund operating and investing activities, primarily the semi-annual interest on outstanding senior notes and capital purchases, and made principal payments on other long-term debt of $1.8 million.

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

Contractual Obligations and Commitments

For information concerning contractual obligations, see the caption “Contractual Obligations and Commitments” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results” in the Company’s 2015 Form 10-K, as amended.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk.

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year.  For further information, see Part II, Item 7A of the Company’s 2015 Form 10-K, as amended.
Item 4.
Controls and Procedures.

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2016. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting



35


No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 


36


PART II

OTHER INFORMATION
Item 1.
Legal Proceedings.

We are involved in various legal proceedings that arise in the ordinary course of our business but are not involved in any legal proceedings that we deem to be material to the Company or its business.



37


Risk Factors.

This Form 10-Q should be read together with Part I, Item 1A “RISK FACTORS” in our 2015 Form 10-K, which describes various risks and uncertainties to which we are or may become subject. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission on March 17, 2016.

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

None.

Item 3.
Defaults upon Senior Securities.

None.
Item 4.
Mine Safety Disclosures.

Not Applicable.
Item 5.
Other Information.
None.

Item 6.
Exhibits.

See Exhibit Index.


38


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Charles and State of Missouri on the 7th day of November, 2016.

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


39


EXHIBIT INDEX

Exhibit
No.
 
Description
 
 
 
3.1
 
Restated Articles of Incorporation of the Company previously filed as Exhibit 3.1 to the Company’s Form S-1 (File No. 333-51357) filed on April 29, 1998 (the “Form S-1”) and incorporated herein by reference.
 
 
 
3.2
 
Amended and Restated By-Laws of the Company previously filed as Exhibit 3.2 to the Form S-1 and incorporated herein by reference.
 
 
 
3.3
 
Amendment to Restated Articles of Incorporation dated as of July 9, 2001 filed as Exhibit 3.3 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 and filed April 1, 2002 and incorporated herein by reference.
 
 
 
3.4
 
Amendment to the Company’s Amended and Restated Bylaws filed as Exhibit 3.1 to the Company’s Form 8-K filed June 26, 2009 and incorporated herein by reference.
 
 
 
3.5
 
Amendment No. 2 to the Company’s Amended and Restated Bylaws filed as Exhibit 3.1 to the Company’s Form 8-K filed May 6, 2015 and incorporated herein by reference.
 
 
 
4.1
 
Indenture dated as of June 19, 2014, by and among the Company, the Guarantors named therein, and U.S. Bank National Association, as Indenture Trustee and as Collateral Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8‑K filed on June 20, 2014).
 
 
 
4.2
 
Forms of 7.375% Senior Secured Notes due 2019 (included as exhibits to the Indenture identified in Exhibit 4.1 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8‑K filed on June 20, 2014).
 
 
 
4.3
 
Notes Collateral Agreement dated as of June 19, 2014, by and among the Company, the domestic Guarantors, and U.S. Bank National Association, as Collateral Agent, incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.4
 
Notes Intellectual Property Security Agreement dated as of June 19, 2014, by and among the Company, certain Guarantors named therein, and U.S. Bank National Association, as Collateral Agent, incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.5
 
Registration Rights Agreement dated as of June 19, 2014, by and among the Company, the Guarantors named therein and RBC Capital Markets, LLC, on behalf of itself and as representative of the other initial purchasers named therein, incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
4.6
 
Intercreditor Agreement dated as of June 19, 2014, by and between Royal Bank of Canada, as First-Lien Collateral Agent, and U.S. Bank National Association, as Second-Lien Collateral Agent, incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8‑K filed on June 20, 2014.
 
 
 
10.1+
 
Form of Restricted Stock Award Agreement for employees of Registrant, pursuant to the LMI Aerospace, Inc. 2015 Incentive Compensation Plan previously filed as Exhibit 10.1 in the Registrant’s Form 10-Q filed August 8, 2016, filed herewith.
 
 
 
31.1
 
Rule 13a-14(a) Certification of Daniel G. Korte, Chief Executive Officer filed herewith.
 
 
 
31.2
 
Rule 13a-14(a) Certification of Clifford C. Stebe, Jr., Chief Financial Officer filed herewith.
 
 
 
32.1
 
Certification of Daniel G. Korte, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
 
 
 


40


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

+    Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.



41