LMI Aerospace (LMIA) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008.

or

¨   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 (State or other jurisdiction of incorporation or organization)	43-1309065 (I.R.S. Employer Identification No.)
411 Fountain Lakes Blvd. St. Charles, Missouri (Address of principal executive offices)	63301 (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 ý                                No ¨

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                               ¨                      Accelerated filer                                          ý

Non-accelerated filer                                 ¨                      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 ¨                                No ý

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

On April 30, 2008, there were 11,496,549 shares of our common stock, par value $0.02 per share outstanding.

LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDING MARCH 31, 2008

	PART I.  FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements (unaudited).
	Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007.	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007.	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007.	5
	Notes to Condensed Consolidated Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	17
Item 4.	Controls and Procedures.	18
	PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings.	19
Item 1A.	Risk Factors.	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	Submission of Matters to a Vote of Security Holders.	19
Item 5.	Other Information.	19
Item 6.	Exhibits.	19
SIGNATURE PAGE		20
EXHIBIT INDEX		21

2

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited).

LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
	(Unaudited)
	March 31, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	88		$	82
Trade accounts receivable, net of allowance of $347 at March 31,
2008 and $292 at December 31, 2007		34,651			29,588
Inventories, net		46,463			40,940
Prepaid expenses and other current assets		2,397			2,135
Deferred income taxes		3,483			3,483
Income taxes receivable		297			630
Total current assets		87,379			76,858
Property, plant and equipment, net		20,027			19,733
Goodwill		48,561			48,670
Intangible assets, net		19,069			19,428
Other assets		1,364			1,429
Total assets	$	176,400		$	166,118
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,867		$	10,681
Accrued expenses		10,573			9,899
Short-term deferred gain on sale of real estate		233			233
Current installments of long-term debt and capital lease obligations		840			789
Total current liabilities		21,513			21,602
Long-term deferred gain on sale of real estate		3,715			3,773
Long-term debt and capital lease obligations, less current installments		34,519			29,106
Deferred income taxes		6,810			6,810
Total long-term liabilities		45,044			39,689
Stockholders’ equity:
Common stock, $.02 par value per share; authorized 28,000,000
shares; issued 11,878,737 shares and 11,820,057 shares at
March 31, 2008 and December 31, 2007, respectively		238			236
Preferred stock, $.02 par value per share; authorized 2,000,000
shares; none issued in both periods		-			-
Additional paid-in capital		67,759			67,244
Treasury stock, at cost, 380,488 shares at March 31, 2008 and
385,688 shares at December 31, 2007		(1,805	)		(1,830	)
Retained earnings		43,651			39,177
Total stockholders’ equity		109,843			104,827
Total liabilities and stockholders’ equity	$	176,400		$	166,118

See accompanying Notes to Condensed Consolidated Financial Statements.

3

LMI Aerospace, Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except share and per share data)

(Unaudited)

	Three Months Ended
60;                                                         March 31,
	2008			2007
Net sales	$	60,417		$	32,176
Cost of sales		44,794			23,905
Gross profit		15,623			8,271
Selling, general and administrative expenses		8,056			5,009
Income from operations		7,567			3,262
Other income (expense):
Interest income (expense), net		(543	)		206
Other, net		(3	)		6
Income before income taxes		7,021			3,474
Provision for income taxes		2,545			1,233
Net income	$	4,476		$	2,241
Amounts per common share:
Net income per common share	$	0.40		$	0.20
Net income per common share assuming dilution	$	0.40		$	0.20
Weighted average common shares outstanding		11,172,857			11,150,899
Weighted average dilutive common shares outstanding		11,292,151			11,275,337

See accompanying Notes to Condensed Consolidated Financial Statements.

4 

LMI Aerospace, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

				Three Months Ended March 31,
					2008		2007
Operating activities:
Net income				$	4,476	$	2,241
Adjustments to reconcile net income to
	net cash used by operating activities:
		Depreciation and amortization			1,603		857
		Charges for bad debt expense			61		221
		Charges for inventory obsolescence and valuation			339		332
		Restricted stock compensation			516		93
		Changes in operating assets and liabilities:
			Trade accounts receivable		(5,124)		(4,341)
			Inventories		(5,862)		(3,063)
			Prepaid expenses and other assets		(208)		5
			Current income taxes		2,865		1,070
			Accounts payable		(814)		(883)
			Accrued expenses		(1,818)		(505)
Net cash used by operating activities					(3,966)		(3,973)
Investing activities:
Additions to property, plant and equipment					(1,535)		(1,900)
Proceeds from sale of real estate					-		5,920
Purchase of debt securities					-		(16,017)
Proceeds from matured debt securities					-		2,250
Other, net					56		(170)
Net cash used by investing activities					(1,479)		(9,917)
Financing activities:
Proceeds from issuance of debt and origination of capital leases					73		380
Net advances on revolving line of credit					5,582		-
Principal payments on long-term debt and notes payable					(228)		(54)
Proceeds from exercise of stock options					24		-
Net cash provided by financing activities					5,451		326
Net increase (decrease) in cash and cash equivalents					6		(13,564)
Cash and cash equivalents, beginning of year					82		24,411
Cash and cash equivalents, end of quarter				$	88	$	10,847
Supplemental disclosures of cash flow information:
Interest paid				$	223	$	26
Income taxes (refunded) paid, net				$	(320)	$	98

See accompanying Notes to Condensed Consolidated Financial Statements.

5

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

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.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included.  Operating results for the three months ending March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and all highly liquid investment instruments with an initial maturity of three months or less.

Income Taxes

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.

The Company had no unrecognized tax benefits as of March 31, 2008. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of March 31, 2008. The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of its income tax expense within its consolidated statement of operations. The Company has no interest or penalties relating to income taxes recognized in the balance sheet as of March 31, 2008. As of March 31, 2008, returns for the calendar years 2002 through 2007 remain subject to examination by U.S. and various state tax jurisdictions.

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.

6 

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

Reclassification

Certain prior period information has been reclassified to conform to the current period presentation.

2.  Acquisition and New Credit Agreement

On July 31, 2007, the Company acquired all of the outstanding capital stock of D3 Technologies, Inc. (“D3 Technologies”), a premier design and engineering services firm, for $65,000 in cash plus transaction costs.  The operating results of D3 Technologies are included in the Company’s results from the date of the acquisition.

Concurrent with the acquisition, the Company entered into a new credit agreement, replacing the Company’s then existing credit agreement, providing for a senior secured revolving credit facility in an aggregate principal amount of up to $80,000. Borrowings under the credit facility are secured by substantially all of the Company’s assets and bear interest at either the “base rate” (the higher of the federal funds rate plus one-half of one percent or the prime commercial lending rate) plus the applicable interest margin ranging from 0.125% to 1.0%, depending upon the Company’s then total leverage ratio, or the LIBOR rate plus an applicable interest margin ranging from 1.125% to 2.0% depending upon the Company’s then total leverage ratio.  At March 31, 2008, the “base rate” was 5.25% and the applicable margin was 0.125%, the LIBOR rate ranged from 2.85% to 3.12% for various notes the Company carried, and the applicable margin was 1.125%. The maturity date of the credit facility, which is subject to acceleration upon breach of the financial covenants (consisting of a maximum total leverage ratio and a minimum fixed charge coverage ratio) and other customary non-financial covenants contained in the credit agreement, is July 31, 2012. On January 30, 2008, the credit facility was amended to extend the maximum period permitted to fix interest rate under LIBOR from six months to one year.

The purchase price for D3 Technologies was funded in part with $38,500 of borrowings under the credit agreement and the remainder with the Company’s existing cash.

The following table presents unaudited pro forma consolidated operating results for the Company for the three months ended March 31, 2007, as if D3 Technologies had been acquired as of the beginning of the period presented:

Net sales	$	50,948
Net income	$	2,716
Basic earnings per share	$	0.24
Diluted earnings per share	$	0.24

The following table summarizes the purchase price allocation for D3 Technologies at the date of acquisition:

Tangible assets, exclusive of cash	$	13,195
Intangible assets, net of deferred taxes		12,056
Goodwill		42,908
Liabilities assumed		(9,067	)
Cost of acquisition, net of cash acquired	$	59,092

7

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

3.  Inventories

Inventories consist of the following:

		March 31, 2008		December 31, 2007
Raw materials		$	7,227	$	6,764
Work in progress			9,781		9,470
Manufactured and purchased components			12,075		8,982
Finished goods			17,380		15,724
	Total inventories	$	46,463	$	40,940

These amounts include reserves for obsolete and slow-moving inventory of $1,424 and $1,263 and a reserve for lower of cost or market of $174 and $136 at March 31, 2008 and December 31, 2007, respectively.

4.  Goodwill and Intangible Assets

Goodwill balance at March 31, 2008 and December 31, 2007 consists of $42,908 from acquisition of D3 Technologies in July 2007 and $5,653 from acquisition of Tempco Engineering, Inc. in April 2001. The balance related to D3 Technologies was determined based on the purchase price allocation performed as of July 31, 2007. See Note 2 above for allocation of purchase price of D3 Technologies. As of March 31, 2008, there were no events or changes in circumstances which indicate that the carrying amount of goodwill may not be recoverable.

The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The carrying value of goodwill and intangible assets with indefinite lives are assessed at least annually and an impairment charge is recorded if appropriate.

Intangible Assets

Customer intangible assets resulted from acquisitions of D3 Technologies, Versaform Corporation and Technical Change Associates, Inc. and have an original estimated useful life of 5 to 15 years.  The trademarks that resulted from acquisition of D3 Technologies were determined to have an indefinite life. The carrying values were as follows:

		March 31, 2008			December 31, 2007
Trademarks		$	4,222		$	4,222
Customer Intangible Assets			17,331			17,330
Accumulated Amortization			(2,484	)		(2,124	)
	Intangible assets, net	$	19,069		$	19,428

Customer-related intangibles amortization expense was $360 and $102 for the three months ended March 31, 2008 and 2007, respectively.

8

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

5.  Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:

		March 31, 2008		December 31, 2007
Capital Lease Obligations		$	667	$	734
Revolving line of credit			33,616		28,034
Notes payable, principal and interest payable monthly at
	fixed rates, ranging from 1.67% to 10.70% at March 31,
	2008 and 1.67% to 7.20% at December 31, 2007		1,076		1,127
	Total debt	$	35,359	$	29,895
Less current installments			840		789
	Total	$	34,519	$	29,106

In connection and concurrently with its acquisition of D3 Technologies on July 31, 2007, the Company entered into a new credit agreement.  See Note 2 above.

The Company has also entered into various notes payable and capital lease agreements for the purchase of certain equipment and software. The notes are secured by certain equipment and software and payable in monthly installments including interests ranging from 1.67% - 10.70% through March, 2012. The capital lease agreements expire between October, 2008 and March, 2012.

6.  Earnings Per Common Share

Basic net income per common share is based upon 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 stock options and restricted stock, using the treasury stock and if converted methods.  The number of dilutive shares as of March 31, 2008 and 2007 attributable to stock options was 89,920 and 94,544, respectively.  The number of dilutive shares attributable to restricted stock as of March 31, 2008 and 2007 was 29,374 and 29,894, respectively.

7.  Stock-Based Compensation

The LMI Aerospace, Inc. 2005 Long-term Incentive Plan (the “Plan”) was approved by the Company’s shareholders on July 7, 2005 and is the Company’s only compensation plan under which shares of the Company’s common stock are authorized for issuance to employees or directors. The Plan provides 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 stock-based awards and cash bonus awards.

SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), requires that compensation expense be recognized for all share-based payments based on the grant date fair value. The Company did not grant any options for the three months ended March 31, 2008 and 2007, respectively.

9

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

A summary of stock option activity under the Company’s share-based compensation plans for the three months ended March 31, 2008 is presented below:

Stock Options	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2008	131,790	$	3.23
Granted	-		-
Exercised	(5,200)		4.57
Forfeited or expired	(800)		3.11
Outstanding at March 31, 2008	125,790	$	3.17	2.9	$	2,038

All outstanding stock options were exercisable at March 31, 2008.  The total intrinsic value of options exercised during the three months ended March 31, 2008, based upon the market price on exercise date, was approximately $100.   No options were exercised during the three months ended March 31, 2007.

The following table summarizes information about stock options outstanding at March 31, 2008:

Range of Exercise Prices	Number of Outstanding Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$1.31 - $1.95	12,000	6.3	$1.31
$1.96 - $2.90	73,990	2.5	2.55
$2.91 - $4.35	12,400	2.6	3.51
$4.36 - $6.06	27,400	2.7	5.49
Total	125,790	2.9	$3.17

                  A summary of the activity for non-vested restricted stock awards as of March 31, 2008 and changes during the three-month period is presented below:

Restricted Stock Awards	Shares	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2008	273,876	$	21.27
Granted	62,100		25.38
Vested	(13,739)		15.78
Forfeited	-		-
Outstanding at March 31, 2008	322,237	$	22.29

Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $604 and $93 for the three-month periods ended March 31, 2008 and 2007, respectively.

10

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

Total unrecognized compensation costs related to non-vested share-based compensation awards granted under the Plan were $5,582 and $490 at March 31, 2008 and 2007, respectively. These costs are expected to be recognized over a weighted average period of 2.7 years and 1.6 years, respectively.

8.  Business Segment Information

As a result of acquiring D3 Technologies and in accordance with the criteria set forth in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,”the Company is organized into two reportable segments: the Aerostructures segment and the Engineering Services segment.  The Aerostructures segment, comprised of all of the Company’s operations other than those of D3 Technologies, fabricates, machines, assembles and kits formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, semiconductor and medical products industries. The Engineering Services segment, comprised of the operations of D3 Technologies, provides engineering solutions to commercial and military aviation, aerospace, military weapons systems, marine and industrial markets.

The accounting policies of the segments are the same as those described in Note 1.  Sales between segments are insignificant. Corporate assets, liabilities and expenses related to the Company’s corporate offices, except for interest expense and income taxes, primarily support the Aerostructures segment. The table below presents information about reported segments on the basis used internally to evaluate segment performance:

11 

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

March 31, 2008

		Three Months Ended March 31,
		2008		2007
Net sales:
	Aerostructures	$	37,110	$	32,176
	Engineering Services		23,307		-
		$	60,417	$	32,176
Income from operations:
	Aerostructures	$	4,904	$	3,262
	Engineering Services		2,663		-
		$	7,567	$	3,262
Depreciation and Amortization:
	Aerostructures	$	1,015	$	857
	Engineering Services		588		-
		$	1,603	$	857
Interest income (expense):
	Aerostructures	$	-	$	-
	Engineering Services		-		-
	Corporate		(543)		206
		$	(543)	$	206
Capital expenditures:
	Aerostructures	$	1,302	$	1,900
	Engineering Services		233		-
		$	1,535	$	1,900

		March 31, 2008		December 31, 2007
Goodwill:
	Aerostructures	$	5,653	$	5,653
	Engineering		42,908		43,017
			48,561		48,670
Total assets:
	Aerostructures	$	100,322	$	95,125
	Engineering		76,078		70,993
			176,400		166,118

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9.  Customer Concentration

Direct sales to the Company’s largest customer accounted for 22.4% and 33.8% of the Company’s total revenues at March 31, 2008 and 2007, respectively. Accounts receivable balances related to the largest customer based on direct sales were 23.2% and 23.7% of the accounts receivable balance at March 31, 2008 and December 31, 2007, respectively.

Direct sales to the Company’s second largest customer accounted for 20.5% and 15.6% of the Company’s total revenues at March 31, 2008 and 2007, respectively. Accounts receivable balances related to the second largest customer based on direct sales represented 14.3% and 23.4% of the accounts receivable balance at March 31, 2008 and December 31, 2007, respectively.

Direct sales to the Company’s third largest customer accounted for 19.1% and 11.5% of the Company’s total revenues at March 31, 2008 and 2007, respectively. Accounts receivable balances related to the third largest customer based on direct sales were 10.8% and 10.6% of the accounts receivable balance at March 31, 2008 and December 31, 2007, respectively.

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 “Risk Factors” in the Company’s Annual Report on Form 10-K and otherwise described in the Company’s periodic filings and current reports filed with the Securities and Exchange Commission.

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 Securities and Exchange Commission.

This Quarterly Report on Form 10-Q should be read completely 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 Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission 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.)

13

The Company believes that certain significant accounting policies 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 policies can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Overview

We are a leading provider of design engineering services, structural components, assemblies and kits to the aerospace, defense and technology industries. We primarily sell our products and services to the large commercial aircraft, military, corporate and regional aircraft, and technology markets within the aerospace and technology industries.  Historically, our business was primarily dependent on the large commercial market, with Boeing as our principal customer. In order to diversify our product and customer base, we implemented an acquisition and marketing strategy in the late 1990s that has broadened the number of industries to which we sell our products and services and, within the aerospace industry, diversified our customer base to reduce our dependence on Boeing.

Beginning in 2001, we began an aggressive acquisition campaign that resulted in the consummation of several acquisitions. On July 31, 2007, we acquired all of the capital stock of D3 Technologies, a premier design and engineering services firm based in San Diego, California, for $65.0 million in cash plus transaction fees (see Note 2 of the Condensed Consolidated Financial Statements). With our acquisition of D3 Technologies, we now provide a complete range of design, engineering and program management services for the aerospace and defense industries.

As a result of acquiring D3 Technologies and in accordance with the criteria set forth in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,”we are now organized into two reportable segments: the Aerostructures segment and the Engineering Services segment.  The Aerostructures segment fabricates, machines, assembles and kits formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, semiconductor and medical products industries. The Engineering Services segment provides engineering solutions to commercial and military aviation, aerospace, military weapons systems, marine and industrial markets.

Results of Operations

Three months ended March 31, 2008 compared to March 31, 2007

The following table is a summary of our operating results for the three months ended March 31, 2008 and 2007, respectively:

	Three Months Ended						Three Months Ended
	March 31, 2008						March 31, 2007
	($ in millions)
	Aerostructures		Engineering Services		Total		Aerostructures		Engineering Services		Total
Net sales	$	37.1	$	23.3	$	60.4	$	32.2	$	-	$	32.2
Cost of sales		26.3		18.5		44.8		23.9		-		23.9
Gross profit		10.8		4.8		15.6		8.3		-		8.3
S,G & A		6.0		2.1		8.1		5.0		-		5.0
Income from operations	$	4.8	$	2.7	$	7.5	$	3.3	$	-	$	3.3

14 

Aerostructures Segment

Net Sales.  The following table specifies the amount of the Aerostructures segment’s net sales by category for the first quarter of 2008 and 2007 and the percentage of total net sales for each period represented by each category.

Category	Three Months Ended March 31, 2008		% of Total		Three Months Ended March 31, 2007		% of Total
	($ in millions)
Corporate and Regional Aircraft	$	13.4	36.1	%	$	12.3	38.2	%
Large Commercial Aircraft		10.7	28.8			10.7	33.2
Military		9.9	26.7			6.6	20.5
Technology		2.2	6.0			1.7	5.3
Other (1)		0.9	2.4			0.9	2.8
Total	$	37.1	100.0	%	$	32.2	100.0	%

(1)  Includes consulting services and various aerospace products.

Net sales for the first quarter of 2008 were $37.1 million, up 15.2% from $32.2 million in the first quarter of 2007.  The increase in net sales occurred in the Corporate and Regional Aircraft, Military and Technology sectors.

Net sales of components for corporate and regional aircraft were $13.4 million for the first quarter of 2008 compared to $12.3 million for the first quarter of 2007, an increase of $1.1 million or 8.9%.  This increase was primarily attributable to increased production rates on Gulfstream aircraft.

Net sales of products used in large commercial aircraft were $10.7 million for the first quarter of each of 2008 and 2007.  Net sales to this market were driven by production rates on certain models of Boeing aircraft.  In particular, we generated net sales for the Boeing 737 of $6.7 million in the first quarter of 2008, up $0.6 million or 9.8% from $6.1 million in the first quarter of 2007. This increase was partially offset by a $0.6 million decrease in sales for the Boeing 747 from $2.4 million in the first quarter of 2007 to $1.8 million in the first quarter of 2008. Sales for the Boeing 777 also decreased by $0.2 million from $1.3 million in the first quarter of 2007 to $1.1 million in the first quarter of 2008.

Military products generated $9.9 million of net sales in the first quarter of 2008 compared to $6.6 million in the first quarter of 2007, an increase of $3.3 million or 50.0%.  This increase resulted from net sales for the Sikorsky Blackhawk program which generated $7.0 million of net sales in the first quarter of 2008 compared to $3.3 million in the first quarter of 2007. These increases were partially offset by a slight decrease of net sales for the Boeing Apache helicopter from $1.5 million in the first quarter of 2007 to $1.3 million in the first quarter of 2008.

Technology products generated $2.2 million of net sales for the first quarter of 2008 compared to $1.7 million for the first quarter of 2007, an increase of $0.5 million or 29.4%.  This increase was due to higher net sales of products used in semiconductor equipment.

Gross Profit.  Gross profit for the first quarter of 2008 was $10.8 million (29.1% of net sales) compared to $8.3 million (25.8% of net sales) in the first quarter of 2007.  Gross profit was positively impacted by higher production rates which provided better coverage of fixed costs, but was reduced by slightly lower margins on newer assembly work on the Blackhawk program.

15

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the first quarter of 2008 were $6.0 million (16.2% of net sales) compared to $5.0 million (15.5% of net sales) in the first quarter of 2007.  This increase resulted from higher professional service fees as well as higher salary, wage and fringe benefit costs in the first quarter of 2008 due to increased staffing to support our growth.

Engineering Services Segment

Net Sales.  This segment was created with the acquisition of D3 Technologies on July 31, 2007. The following table specifies the amount of the Engineering Services segment’s net sales by category for the three months ending March 31, 2008 and the percentage of the segment’s total net sales represented by each category.

Category	Three Months Ended March 31, 2008		% of Total
	($ in millions)
Commercial Aircraft	$	11.1	47.6	%
Corporate Aircraft		7.2	30.9
Military		3.5	15.0
Tooling		1.5	6.4
Total	$	23.3	100.0	%

Net sales for the Engineering Services segment were $23.3 million. Approximately $22.2 million or 95.3% of the segment’s revenues were recorded under reimbursement type contracts for engineering services which generate net sales from labor hours incurred at varying, pre-negotiated rates and other direct costs plus an administrative fee.  Net sales under these reimbursement contracts are primarily for commercial, corporate, and military markets. Net sales for services for commercial aircraft were approximately $11.1 million, or 47.6% of net sales. These revenues are primarily from design programs supporting Boeing’s 747-8, 777-Freighter and 787 platforms.  Net sales for services supporting corporate aircraft were approximately $7.2 million, or 30.9% of net sales, the majority of which is on the development of new and re-designed aircraft. Net sales of services for military programs were $3.5 million, or 15.0% of net sales. These military revenues were derived from support provided on multiple Navy programs, F-35 and various other programs.

Approximately $1.1 million, or 4.7% of net sales, primarily related to design and delivery of tooling on various programs supporting commercial aircraft.

Gross Profit.  Gross profit for the segment was $4.8 million (20.6% of net sales).  Costs included in cost of goods sold are primarily direct labor, fringe benefits, subcontract labor, direct costs related to specific contracts, depreciation and facility costs and are part of the negotiated rate structures for reimbursement type contracts.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the segment were $2.1 million (9.0% of net sales).  These costs primarily include salaries, wages and benefits costs of approximately $1.1 million, $0.4 million of stock based compensation relating to a restricted stock award made on July 31, 2007 and vesting over five years, and amortization of intangibles of $0.3 million valued in connection with the acquisition of D3 Technologies.

Non-segment Expenses

Interest Income (Expense), net.  Net interest expense for the first quarter of 2008 was $0.5 million compared to net interest income of $0.2 million for the first quarter of 2007. Interest expense in the first quarter of 2008 was incurred primarily on borrowings related to our acquisition of D3 Technologies on July 31, 2007.

16

Income Tax Expense.  During the first quarter of 2008, we recorded income tax expense of $2.5 million compared to $1.2 million in the first quarter of 2007.  We applied an effective tax rate of 36.25% to income for the first quarter of 2008 compared to 35.5% for the first quarter of 2007. Our 2008 effective tax rate was positively impacted by higher deductions available for manufacturing companies and negatively impacted by a higher effective state income tax rate.

Liquidity and Capital Resources

During the first quarter of 2008 and 2007, we used $4.0 million of cash in operating activities. Cash was reduced by a $5.1 million increase in accounts receivable and a $5.9 million increase in inventories. The increase in accounts receivable was primarily due to increased billings, shifting of sales to programs with longer payment terms, and a disproportionate invoicing of amounts in March 2008. The change in inventory consists of a $3.1 million increase in purchased components and $1.7 million in finished goods primarily due to production increases to support our expected growth in Blackhawk assemblies.

Net cash used in investing activities was $1.5 million for the first quarter of 2008 compared to $9.9 million for the first quarter of 2007. We spent $1.5 million on capital expenditures primarily for equipment in order to meet current and expected customer demand. In the first quarter of 2007, we invested $16.0 million in debt securities and completed the sale and leaseback of three real estate properties which generated $5.9 million of cash.

Cash provided by financing activities was $5.5 million for the first quarter of 2008 compared to $0.3 million for the first quarter of 2007. Funds provided in 2008 represent net cash advances from our revolving credit facility established in conjunction with our acquisition of D3 Technologies, Inc. on July 31, 2007.

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 our Annual Report on Form 10-K for the year ended December 31, 2007.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk primarily due to fluctuations in interest rates.  Our outstanding credit facility carries a fluctuating interest rate that varies based on changes in the prime lending rate of Wachovia Bank, National Association. Accordingly, we are subject to potential fluctuations in our debt service. Based on the amount of our outstanding debt as of March 31, 2008, a hypothetical 1% change in the interest rate of our outstanding credit facility would result in a change in our annual interest expense of approximately $0.3 million during the next 12-month period. On January 30, 2008, our credit agreement was amended to extend the maximum period permitted to fix the interest rate under LIBOR from six months to one year. While not eliminating interest rate risk, this allows us to moderate the impact of changes in Wachovia’s prime lending rate.

17

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 the Company’s disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended), as of March 31, 2008.  Based upon and as of the date of 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 the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

18

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

We are not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors as previously disclosed in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008.

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

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Submission of Matters to a Vote of Security Holders.

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

See Exhibit Index.

19 

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 9th day of May, 2008.

LMI AEROSPACE, INC.

 /s/ Ronald S. Saks 

Ronald S. Saks,

President and Chief Executive Officer

(Principal Executive Officer)

  /s/ Lawrence E. Dickinson

Lawrence E. Dickinson

Chief Financial Officer and Secretary

(Principal Financial and Principal Accounting

Officer)

20

EXHIBIT INDEX

Exhibit No.	Description
31.1	Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Lawrence E. Dickinson, Secretary and Chief Financial Officer.
32	Certification pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
99.1	First Amendment to Credit Agreement, dated as of January 30, 2008.

21 

Exhibit 31.1

CERTIFICATIONS

I, Ronald S. Saks, certify that:

1.            I have reviewed this quarterly report on Form 10-Q of LMI Aerospace, Inc.;

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.            The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)            Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.            The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent certified public accountants and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2008	/s/ Ronald S. Saks
	Ronald S. Saks President and Chief Executive Officer (Principal Executive Officer)

22

Exhibit 31.2

CERTIFICATIONS

I, Lawrence E. Dickinson, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of LMI Aerospace, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent certified public accountants and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2008	/s/ Lawrence E. Dickinson
	Lawrence E. Dickinson Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)

23

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report of LMI Aerospace, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, does hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 9, 2008	/s/ Ronald S. Saks
	Ronald S. Saks
	President and Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2008	/s/ Lawrence E. Dickinson
	Lawrence E. Dickinson
	Secretary and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)