LMI Aerospace, Inc. Announces Third Quarter 2013 Results

ST. LOUIS, Nov. 12, 2013 (GLOBE NEWSWIRE) — LMI Aerospace, Inc. (Nasdaq:LMIA), a leading provider of design engineering services and supplier of structural assemblies, kits and components to the aerospace and defense markets, today announced its financial results for the third quarter ended September 30, 2013.

Highlights

Record sales year to date of $316.2 million, including sales for Valent and TASS acquisitions
Earnings per share of $0.16 per fully diluted share
Recent changes in Aerostructures management and Texas plant to close
Firm backlog as of September 30, 2013, was $463.8 million

Third Quarter Results

Net sales for the third quarter of 2013 increased 48.2 percent to $104.7 million, compared to $70.6 million in the third quarter of 2012, primarily as a result of the inclusion of Valent Aerostructures, LLC (“Valent”) in the 2013 period. Net income for the third quarter of 2013 was $2.1 million, or $0.16 per diluted share, compared to $5.6 million, or $0.48 per diluted share, in the third quarter of 2012. Dilution from the Valent acquisition and continued weakness in Engineering Services revenues and profits accounted for this decline. The following table illustrates the company’s net income for the quarter, excluding the impact of the Valent acquisition for comparative purposes.

“Sales of our legacy Aerostructures products continued to grow during the quarter, but Valent sales fell from the second quarter of 2013 and Engineering sales also decreased from the third quarter of 2012 and the second quarter of 2013,” said Ronald S. Saks, Chief Executive Officer of LMI. “During the third quarter, Valent and Engineering Services orders continued to decline, resulting in full year 2013 sales now expected to be below the estimates discussed in our second quarter press release. Valent sales opportunities continue to be impacted by a lack of new work from our largest customer. Based on recent discussions with this customer, we do expect significant sales opportunities for Aerostructures, but we have not included these opportunities in our guidance. Regarding Engineering Services revenue, we thought that sales had stabilized last quarter, but in the last month it has become apparent that sales to the large commercial aircraft sector would remain depressed in the fourth quarter of 2013 and into the first two quarters of 2014. However, regionalization of Engineering Services demand presents opportunities to our Engineering Services segment for the second half of 2014 and suggests that sales of services to the large commercial aircraft sector, on both domestic and foreign aircraft, should rise during 2014. We have not considered the impact of sequestration, union negotiations at a key customer or pricing negotiations currently in progress, all of which which may affect our sales forecast for Aerostructures or Engineering Services,” added Saks.

Aerostructures Segment

Aerostructures

The acquisition of Valent provided $30.2 million of sales, while organic growth of $10.9 million in the legacy Aerostructures business resulted in increased total segment sales of $41.1 million during the third quarter of 2013. In the large commercial aircraft market, Valent contributed $18.1 million of sales, including $15.2 million for the Boeing 737 platform. For legacy Aerostructures, increased Boeing 767 wing modification kit and Boeing 737 product demand were large factors in the rise in net sales of large commercial aircraft products. Increased production rates on the G650 platform resulted in higher sales of corporate and regional products and tooling for the KC-390 aircraft was primarily responsible for the growth in military sales.

The overall Aerostructures segment generated gross profit of $17.3 million, or 20.3 percent of net sales, in the third quarter of 2013 versus $12.9 million, or 29.3 percent of net sales, in the third quarter of 2012. Valent achieved a gross margin of 15.4 percent, which diluted the gross profit margin for the segment, largely due to a decline in demand at a processing facility. In addition, production inefficiencies from disruption on several development programs and startup costs at a greenfield machining center contributed to the decline in gross profit percentage in the legacy business.

Selling, general and administrative expenses (“SG&A”) were $11.3 million in the third quarter of 2013, compared to $7.5 million in the third quarter of 2012, with all $3.8 million of the increase attributable to Valent.

Engineering Services Segment

Net sales of large commercial aircraft services grew by $2.6 million, including a net increase of $1.9 million from the TASS business acquired in the third quarter of 2012.

Design maturation on both the Bombardier’s Learjet 85 and the Boeing KC-46 tanker programs drove the decline in the corporate and regional and military categories.

Gross profit for the segment was $3.3 million, or 16.3 percent of net sales, for the third quarter of 2013 down from $5.8 million, or 21.3 percent of net sales, for the prior year quarter. Lower revenues and a cumulative catch-up charge on the Embraer KC-390 contributed to the decline in gross profit.

SG&A for the segment decreased from $2.6 million in the third quarter of 2012 to $2.5 million in the third quarter of 2013.

Non-Segment

Interest expense increased to $4.3 million, primarily due to the debt incurred by the company to fund the acquisition of Valent and working capital needs. The effective income tax rate for the third quarter of 2013 was 11.9 percent, including adjustments to reflect the retroactive changes in certain state tax laws and higher levels of federal and state tax credits than had originally been estimated.

The company used cash from operations of $1.0 million in the third quarter of 2013 and funded capital expenditures of $3.4 million, resulting in negative free cash flow of $4.4 million, as anticipated. Inventories grew from investments in long-term contracts and purchases of tooling. The company projects free cash flow to be positive in the fourth quarter as we expect to collect substantial payments on tooling for a development program.

Backlog as of September 30, 2013, was $463.8 million, including $144.4 million in backlog at Valent, compared to $282.4 million at the end of the prior year quarter.

Revised Outlook for 2013

The company also announced that it has updated guidance for 2013, as follows:

Consolidated Operations

Net sales between $421.0 million and $425.5 million
Gross profit between 19.5 percent and 19.7 percent, including a one time $2.5 million charge representing the Valent inventory step up
SG&A between $54.0 million and $54.8 million, including $2.8 million in restructuring costs, trade name impairment expense of $4.2 million, and $1.0 million in acquisition and integration expense, offset by the contingent consideration elimination of $8.0 million
Interest and other expenses between $16.0 million and $16.3 million
Effective income tax rate between 30.5 percent and 31.5 percent
Capital expenditures between $25.0 million and $27.0 million
Depreciation, amortization, trade name impairment and stock compensation expenses between $26.0 million and $27.0 million
The revised expectations for each segment are as follows:

Aerostructures

Net sales between $339.5 million and $343.5 million, including between $120.5 million and $121.5 million for Valent
Gross profit between 20.7 percent and 20.9 percent, including a one time $2.5 million charge representing the Valent inventory step-up
SG&A between $39.5 million and $40.0 million, including $2.8 million in restructuring costs, offset by the contingent consideration elimination of $8.0 million
Engineering Services

Net sales between $81.5 million and $82.0 million
Gross profit between 14.7 percent and 14.9 percent
SG&A between $14.5 million and $14.8 million, including the trade name impairment of $4.2 million
The company provided the following estimates for Adjusted EBITDA guidance for 2013, exclusive of any expected synergies:

Outlook for 2014

The company is providing guidance for 2014 as follows:

Consolidated Operations

Net sales between $418.0 million and $439.0 million
Gross profit between 21.0 percent and 22.0 percent
SG&A between $52.5 million and $56.5 million, including $0.5 million in restructuring expenses
Interest and other expenses between $14.5 million and $15.0 million
Effective income tax rate between 35.0 percent and 35.5 percent
Capital expenditures between $16.0 million and $20.0 million
Depreciation, amortization and stock compensation expense between $22.5 million and $25.5 million
The expectations for each segment are as follows:

Aerostructures

Net sales between $336.0 million and $347.0 million
Gross profit between 22.0 percent and 23.0 percent
SG&A between $43.0 million and $46.0 million, including $0.5 million in restructuring expenses
Engineering Services

Net sales between $82.0 million and $92.0 million
Gross profit between 16.0 percent and 17.5 percent
SG&A between $9.5 million and $10.5 million
The company provided the following estimates for Adjusted EBITDA guidance for 2014, exclusive of any expected synergies:

“Recently we issued a press release announcing the promotion of Ed Dickinson to President of Valent Operations, coincident with the departure of three former owners of Valent,” Saks said. "Charlie Newell, Henry Newell and Bruce Breckenridge assembled a group of companies that became Valent Aerostructures, acquired by LMI in December, 2012. During 2013, we worked together to commence the integration of our two companies and some synergies were created. We appreciate their efforts and believe that Ed can continue this integration process and that we can move quickly to obtain the anticipated benefits of this combination.

“To further cut costs, we also announced that we will be closing one of the LMI plants located in Texas in the first half of 2014. In addition, we have begun to transfer work from other LMI facilities to our Mexicali facility which is reducing inventory and headcount to improve profitability and generate cash. We are also accelerating the pace of consolidation where multiple plants are located in the same city and we are looking to expand other plants so they can reach the critical mass needed to optimize profitability. Together with our lean manufacturing group, our Engineering Services segment continues to work with Aerostructures to reduce the cost of manufacturing on our current work statements. We are setting targets for cost reduction and expect to see improved operating margins at each of our facilities. We are also in-sourcing work, currently purchased from suppliers, to LMI and Valent plants with available capacity in order to realize the synergy targets we have set.

“Collaborative relationships with our key customers continue to deepen and in this environment of increasing production rates, ever higher quality and delivery standards and a desire to share with our customers the cost reductions we achieve, we remain optimistic that we will make steady gains in revenue and profits,” Saks said.

“Our 2013 results have been disappointing, but the vibrancy of our industry and the strength of our customer relationships, together with the skills that our people provide are long term assets we expect to carry us forward as a key large aircraft structures supplier to the major industry OEMs and Tier Is in 2014 and beyond.”

LMI Aerospace, Inc. (“LMI”) is a leading supplier of structural assemblies, kits and components and provider of design engineering services to the aerospace and defense markets. Through its Aerostructures segment, the company primarily fabricates machines, finishes, integrates, assembles and kits machined and formed close tolerance aluminum, specialty alloy and composite components and higher level assemblies for use by the aerospace and defense industries. It 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.