On Thursday, the day before the Japanese earthquake, the Dow Jones Industrial Average saw its biggest drop since August. Markets tumbled while fears surged -- about jobs, Spain and Saudi Arabia.
But what does this mean for you, the investor?
Was this just a one-day wonder, a buying opportunity, a small but passing cloud on an otherwise sunny horizon? Or was it something more ominous?
The market's next move is always a mystery. It could go up 500 points next week or down 500 points, or stay in range. You shouldn't let one day's price movement govern your financial decisions. It's never sensible to panic. And sure, this could be just a passing storm.
Yet there are reasons to be concerned about what just happened. Maybe I'm being too nervous here. I hope so. When the market sells off, I usually like to find reasons to buy stocks more cheaply. But here are 10 reasons why this 228-point slump in the Dow makes me sit up and take notice.
1. It happened when the price of oil was falling.
For weeks, the market has been worried that the rising price of oil was going to knock the economy back into the hole. But the price of light sweet crude fell $2 a barrel on Thursday to $102, and it fell another 1.3 percent to $101.30 a barrel on Friday following the Japanese disaster). That followed a $1 fall earlier this week. It's still above the critical $100-a-barrel figure that may spell economic trouble. Nonetheless, some relief on oil should have been good news. If the market sells off at the same time it suggests investors may be reevaluating the fundamentals of the recovery.
It wasn't just isolated to a few exchanges here or in Europe or in the Middle East. Exchanges fell around the world. Wall Street was down 1.9%. Shanghai and Tokyo both fell about 1.5%. Brazil's Bovespa was down 1.8%. London fell 1.5%. Even gold fell. The Standard & Poor's 500-stock index is now down about 4% from the peak seen last month. Since then it's tried three times to get its mojo back, and it's failed each time. Not cheerful.
3. The financial cockroaches are back.
The European debt crisis. Our continuing jobs gloom. Oh, and let's not forget the rocketing national debt that is financing the entire stock-market boom. In past months I've been watching with amazement as Wall Street -- and a lot of investors -- have been trying to sweep these under the carpet. But they won't stay there. On Thursday, markets were spooked when Moody's downgraded Spain's government debt. But why is anyone surprised? Had investors been paying attention, they would have known that the market for default risk was already sending serious warning signals about Spain and Portugal's credit -- not to mention that of Greece.
4. One of the smartest bulls I know has suddenly turned very edgy.
He's a European hedge fund manager who turned bullish in January 2009 -- on high-risk financials, no less -- and has stayed upbeat for most of the past two years. He was a raging bull last summer. Even a handful of weeks ago, he thought we'd see more momentum. Today? He's singing a slightly different tune. One of his biggest worries now is China -- in particular the strength of its economy and its sudden, surprise trade deficit last month. He's still looking for opportunities, as always, but I thought he'd be buying aggressively in this correction. He isn't. (Another manager I know thinks there is some juice left in the rally, as first-quarter earnings roll in. But she expects to turn more cautious after that.)
Too far? From the lows of two years ago, the S&P 500 has almost exactly doubled. By any measure, it's been a remarkable boom. The Russell 2000 index of smaller stocks has soared 130%. So has the S&P Mid Cap 400 index of medium-sized companies, taking it to a new record high. But look at the fundamentals. Over that time economic growth has been sluggish. The economy today is no bigger, in real terms, than it was three years ago. The true jobs picture remains a disaster, and far worse than the official data will tell you. Wages have been stagnant. Yes, companies have boosted profits -- to near-record levels -- by slashing costs. But how far can that take you? (Perhaps in the end there will just be one, very productive guy left with a job. It would be Apple's Steve Jobs, of course. But then, alas, he'd have to buy all those new iPads himself.)
6. There's no "margin of safety" left in stocks.
While Wall Street was backing off a cliff Thursday morning, I was interviewing one of the brightest and most original thinkers in the market -- James Montier, strategist for tony fund shop GMO and author of "Behavioral Finance." Mr. Montier pointed out that stocks are now so expensive, they leave investors with almost no "margin of safety" in case things go wrong. Anyone investing now, he said, is taking a big bet on sunny skies and plain sailing ahead. It can happen, but life is not always so kind. "We're not completely 'priced for perfection,' but we're not far off," Mr. Montier said. And, he added, the risk curve was wrong as well: Based on GMO's calculations, investors in small-cap stocks at these levels actually face worse returns than investors in large-cap stocks. As small caps are more volatile, they should offer better returns to compensate.
7. Wall Street looks unappealing by the numbers.
The dividend yield on the S&P 500 is well below 2%. According to data compiled by Yale economics professor Robert Shiller, stocks are a thumping 24 times cyclically-adjusted earnings. That's extremely high. The historical average is about 16. In the past, today's levels have been associated with bubbles and hot markets, and have generally been followed, sooner or later, by a correction. A similar conclusion is reached by comparing equity prices to the cost of replacing company assets, a metric known as "Tobin's q." It also says Wall Street is heavily overvalued. Maybe worst of all: It is just extremely hard to find any cheap stocks out there. If I saw some great bargains, I'd say, "Don't worry about the market, buy this terrific company on six times earnings." But these types of opportunities are so thin on the ground right now. No one measure has all the answers. But plenty of metrics are signaling, at least, caution.
8. The public was just starting to buy stocks again.
Oh, brother. The U.S. private investor, who spent most of the 2009-10 rally getting out of stocks, started piling in again earlier this year. According to the Investment Company Institute, investors cashed out a net $31 billion from equity mutual funds between the start of March 2009 and the end of last year. But since Jan. 1, they have shoveled a net $33 billion back in. History has frequently shown that the public gets in -- and out -- at the wrong times, buying near peaks and selling near troughs. Is it happening again? I wish I felt better about this.
9. The insiders have been getting out.
Executives and directors across the market have been cashing out stock at a fast clip. "The pace and volume of insider sales hit a four-year high during Q4 '10," reported InsiderScore, a firm that tracks such data. While many of the top brass may have been locking in capital gains before a possible tax hike in 2011, it said, the pace of insider selling actually speeded up after the December tax deal, which gave a last-minute reprieve on taxes. And that suggests "it was valuations and opportunity -- not the Taxman -- that were the main catalysts for the record surge in insider selling," said InsiderScore. "Each sector and market cap group experienced heavy selling." So far this year insider selling has remained at a strong pace, too.
10. Sentiment had become giddy.
Jim Cramer on his TV show "Mad Money" has on occasion recently decried "all the negativity that's out there." I like Mr. Cramer, with whom I once worked, but he must be hanging out with an unusually gloomy group of people. I can hardly see any bears anywhere. They're in hiding from a two-year-old bull. As reported not long ago, fund managers had turned downright euphoric about the stock market. Hedge fund managers are now once again betting heavily on rising stocks -- and rising oil -- with borrowed money. Equity analysts have been hiking their forecasts. Oh, and the hot stocks were back -- like Salesforce.com, which recently hit 100 times forecast earnings. That's a hefty multiple for an $18 billion company. Whether Salesforce stock turns out well or ill over the longer term, you can hardly deny that its investors are cheerfully -- some might say remarkably -- optimistic.
None of this is a reason to start panicking. But these are grounds for investors to be
LMI Aerospace Announces Results for the Fourth Quarter and Full-Year 2010
Company Updates Guidance for 2011
ST. LOUIS, March 11, 2011 (GLOBE NEWSWIRE) -- LMI Aerospace, Inc. (Nasdaq:LMIA), a leading provider of design engineering services, structural assemblies, kits and components to the aerospace, defense and technology markets, today announced financial results for the fourth quarter and full-year 2010.
Highlights
Sales of $223.4 million for full-year 2010; fourth quarter 2010 revenue down slightly from prior year but up from third quarter 2010
Free cash flow of $2.3 million for the fourth quarter and $19.7 million for the full-year 2010
Fourth quarter tax benefit of $1.2 million
Revenue guidance for fiscal 2011 increased to between $259 million and $271 million as Engineering Services should benefit from Boeing's recent award to build tanker aircraft
Both segments are hiring to support expected growth
Fourth Quarter Results
Net sales for the fourth quarter of 2010 decreased 1.6 percent to $54.7 million compared to $55.6 million in the fourth quarter of 2009. Net income for the fourth quarter of 2010 was $3.1 million, or $0.26 per diluted share, compared to $0.8 million, or $0.07 per diluted share, in the fourth quarter of 2009. The fourth quarter of 2009 includes a pretax impairment charge of $3.4 million related to the company's Tempco Engineering subsidiary. Excluding this charge, net income would have been $2.9 million, or $0.26 per diluted share.
For the full-year 2010, net sales were $223.4 million versus $241.2 million in the prior year. Net income was $12.9 million, or $1.11 per diluted share, in 2010 compared to $10.2 million, or $0.90 per diluted share, in 2009 after the above impairment charges.
"During 2010, our emphasis in our Aerostructures segment was on operational execution and securing new long-term agreements with certain key customers," Ronald Saks, Chief Executive Officer of LMI, said. "Targeted operating improvements in delivery, quality and customer service were achieved. And, we did secure long-term agreements with Gulfstream, Triumph and FACC. When added to the long-term agreements previously secured from Boeing, Spirit AeroSystems and Sikorsky and for certain aftermarket products, these long-term agreements add visibility to customer demands on about 80 percent of our expected 2011 revenue for periods ending from 2013 to 2016."
"In the fourth quarter of 2010," Saks continued, "sales at our Aerostructures segment continued at the modest pace we experienced for the full year and were below our original expectations. Delays in shipments of Boeing model 747-8 components, lower aftermarket sales and some customer inventory adjustments accounted for the difference. Our Engineering Services segment's sales met our original targets, which were reduced from 2009 because of fewer new customer development projects, likely caused by the uncertainties created by the global recession."
"However, in the fourth quarter of 2010," Saks stated, "we began to experience considerably more customer interest in placing work in both segments, and we received customer forecasts requiring increased production rates on several models in the large commercial aircraft and regional and business jet segments. This expected increase in production is now requiring that we invest significant capital in new equipment and facilities and hire additional employees in both segments over the next twelve to eighteen months. More recently, the U.S. government award to Boeing of tanker aircraft design and production, as well as added demand for engineering services from the regional and business jet segment, have firmed demand for our engineering services."
Net sales for the Aerostructures segment for the fourth quarters of 2010 and 2009 were as follows:
Category
Q4 2010
% of Total
Q4 2009
% of Total
($ in millions)
Corporate and regional aircraft
$11.6
32.9%
$10.8
28.6%
Large commercial aircraft
13.3
37.7%
16.7
44.2%
Military
7.8
22.1%
8.1
21.4%
Other
2.6
7.3%
2.2
5.8%
Total
$35.3
100.0%
$37.8
100.0%
Net sales of corporate and regional aircraft increased, as deliveries on Gulfstream programs grew. Large commercial aircraft net sales were down, as deliveries of aftermarket wing products fell by $3.6 million from the prior year.
Net sales for the Engineering Services segment for the fourth quarters of 2010 and 2009 were as follows:
Category
Q4 2010
% of Total
Q4 2009
% of Total
($ in millions)
Corporate and regional aircraft
$5.5
28.4%
$3.6
20.1%
Large commercial aircraft
7.2
37.1%
6.1
34.1%
Military
3.6
18.6%
8.0
44.7%
Other
3.1
15.9%
0.2
1.1%
Total
$19.4
100.0%
$17.9
100.0%
New work on a weight improvement program for a new corporate jet drove net sales for corporate and regional aircraft higher. Net sales of engineering support for large commercial aircraft grew on the 787-9 and A350, more than offsetting a decline in 747-8 billings, as the design for that plane matures. Military programs were down from the prior year, as efforts on the CH-53 helicopter ended earlier in 2010. Other sales grew due to tooling packages for the 787-9 and the Global Hawk.
Gross profit for the fourth quarter of 2010 was $11.9 million, or 21.8 percent of net sales, compared to $12.7 million, or 22.8 percent of net sales, in the prior year quarter. The Aerostructures segment generated gross profit of $8.7 million, or 24.6 percent of net sales, in the fourth quarter of 2010 versus $9.0 million, or 23.7 percent of net sales, in the fourth quarter of 2009. Fourth quarter 2010 Aerostructures segment gross margin was helped by a $0.4 million cumulative benefit on our aftermarket wing modification program but was reduced by $0.7 million of start up costs on two programs and higher than expected workers compensation costs.
Gross profit for the Engineering Services segment was $3.2 million, or 16.5 percent of sales, for the quarter ended December 31, 2010, compared to $3.7 million, or 20.7 percent of net sales, for the prior year quarter. During the fourth quarter of 2010, the company recognized a charge of $0.5 million on its MJET program due to unplanned efforts to meet critical design review requirements.
Selling, general and administrative expenses (SG&A) were $8.4 million, or 15.4 percent of net sales, for the fourth quarter of 2010, up from $7.8 million, or 13.9 percent of net sales, excluding the impact of goodwill impairments, for the year ago quarter. SG&A for the Aerostructures segment was $6.5 million in the fourth quarter of 2010 compared to $6.0 million in the fourth quarter of 2009. The increase in Aerostructures SG&A relates to hiring to support the growth that we expect in 2011 and higher professional fees. The Engineering Services segment had SG&A of $1.9 million in the fourth quarter of 2010, up from $1.7 million in the prior year quarter, largely related to increases in payroll and fringe benefit costs.
Net interest expense was $142,000 in the fourth quarter of 2010, down from $345,000 in the prior year quarter because there were no draws on the credit facility in the fourth quarter of 2010. The effective income tax rate for the last quarter of 2010 was 10.5 percent compared to 36.5 percent in the year-ago quarter. The fourth quarter tax rate was impacted by a $0.5 million tax benefit associated with recent tax legislation extending the research and development tax credit as well as $0.7 million of additional tax benefits from an available manufacturing deduction and additional tax credits.
Free cash flow in the fourth quarter was $2.3 million. The company generated free cash flow for the full-year 2010 of $19.7 million and had no debt outstanding on its revolving line of credit at the end of the year. Cash flow has continued to be strong in early 2011.
Backlog at December 31, 2010, was $221.5 million compared to $218.7 million at the end of 2009.
Outlook for 2011
The company also updated its guidance for 2011, adding to revenue expectations for the Engineering Services segment. The government's recent selection of Boeing's 767 as the refueling tanker should provide additional opportunities for this segment during 2011. On a consolidated basis, the company now expects revenue to range between $259 million and $271 million and gross profit to be between 23.6 percent and 24.7 percent. The company expects to increase our SG&A range to $33.8 million to $35.2 million, as we expect additional head count and professional fees to support our growth initiatives. Net interest expense is expected to be between $550,000 and $650,000 for the year, and the effective tax rate is expected to be approximately 34 percent. Capital expenditures are planned to range between $12.0 and $14.0 million. Depreciation, amortization and stock compensation expense is expected to be approximately $9.0 million. Free cash flow for 2011 is expected to be approximately $15.0 million. The expectations for each segment are as follows:
Aerostructures
Net sales of between $175.0 million and $181.0 million
Gross profit of between 26.5 percent and 27.5 percent
SG&A of between $26.0 million and $27.0 million
Engineering Services
Net sales of between $84.0 million and $90.0 million
Gross profit of between 17.5 percent and 19.0 percent
SG&A of between $7.8 million and $8.2 million
"As we look forward, we believe the next few years offer us significant opportunities to grow our company organically," Saks said. "Our customers are expected to transfer work because of unprecedented production rate increases and may also provide meaningful opportunities to provide design and build services on new projects. We also expect to grow our capabilities by making acquisitions of composite and machining providers during this period. The benefits to be derived from higher production rates and growth in our legacy engineering services business should assist us in financing the investments necessary to support higher production rates and should also add to the long-term value of LMI, benefiting all of our stakeholders."
LMI Aerospace, Inc. is a leading provider of design engineering services, structural assemblies, kits and components to the aerospace, defense and technology markets. Through its Aerostructures segment, the company primarily fabricates, machines, finishes, integrates, assembles and kits formed close tolerance aluminum and specialty alloy and composite components and higher level assemblies for use by the aerospace, defense and technology industries. It manufactures more than 30,000 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, operated by its D3 Technologies, Inc. subsidiary, 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.
This news release includes forward-looking statements related to LMI Aerospace, Inc.'s outlook for 2011, which are based on current management expectations. Such forward-looking statements are subject to various risks and uncertainties, many of which are beyond the control of LMI Aerospace, Inc. Actual results could differ materially from the forward-looking statements as a result of, among other things, the factors detailed from time to time in LMI Aerospace, Inc.'s filings with the Securities and Exchange Commission. Please refer to the Risk Factors contained in the company's Annual Report on Form 10-K for the year ended December 31, 2010, and any risk factors set forth in our other subsequent filings with the Securities and Exchange Commission.
LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31,
2010
2009
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$1,947
$31
Trade accounts receivable, net of allowance of $253 and $279 at December 31, 2010 and 2009, respectively
34,006
35,469
Inventories
45,148
45,703
Prepaid expenses and other current assets
2,729
2,849
Deferred income taxes
3,846
3,799
Total current assets
87,676
87,851
Property, plant and equipment, net
21,346
19,322
Goodwill
49,102
49,102
Intangible assets, net
20,827
22,965
Other assets
898
977
Total assets
$179,849
$180,217
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
$7,898
$7,778
Accrued expenses
11,246
8,089
Short-term deferred gain on sale of real estate
233
233
Current installments of long-term debt and capital lease obligations
181
326
Total current liabilities
19,558
16,426
Long-term deferred gain on sale of real estate
3,073
3,307
Long-term debt and capital lease obligations, less current installments
28
17,210
Deferred income taxes
7,427
7,546
Other long-term liabilities
--
1,235
Total long-term liabilities
10,528
29,298
Shareholders' equity:
Common stock, $0.02 par value share: 28,000,000 authorized shares; issued 12,075,030 shares and 11,996,389 shares at December 31, 2010 and 2009, respectively
242
240
Preferred stock, $0.02 par value per share; 2,000,000 authorized shares; none issued at December 31, 2010 and 2009
--
--
Additional paid-in capital
73,440
71,375
Treasury stock, at cost, 301,772 shares and 359,188 shares at December 31, 2010 and 2009, respectively
(1,432)
(1,704)
Retained earnings
77,513
64,582
Total shareholders' equity
149,763
134,493
Total liabilities and shareholders' equity
$179,849
$180,217
LMI Aerospace, Inc.
Condensed Consolidated Statements of Income
(Amounts in thousands, except share and per share data)
Three Months Ended
Year Ending
December 31,
December 31,
2010
2009
2010
2009
(Unaudited)
(Unaudited)
Sales and service revenue
Product sales
$33,982
$ 37,049
$143,919
$157,838
Service revenues
20,730
18,567
79,437
83,358
Net sales
54,712
55,616
223,356
241,196
Cost of sales and service revenue
Cost of product sales
25,792
25,443
106,891
117,999
Cost of service revenues
17,016
17,499
64,965
70,246
Cost of sales
42,808
42,942
171,856
188,245
Gross profit
11,904
12,674
51,500
52,951
Selling, general and administrative expenses
8,401
7,751
32,435
31,678
Impairment of goodwill
--
3,350
--
3,350
Severance and restructuring
--
--
--
312
Income from operations
3,503
1,573
19,065
17,611
Other income (expense):
Interest expense, net
(142)
(345)
(696)
(1,623)
Other, net
48
37
58
10
Total other expense
(94)
(308)
(638)
(1,613)
Income before income taxes
3,409
1,265
18,427
15,998
Provision for income taxes
359
461
5,496
5,843
Net income
$3,050
$ 804
$12,931
$10,155
Amounts per common share:
Net income per common share
$0.27
$0.07
$1.13
$0.90
Net income per common share, assuming dilution
$0.26
$0.07
$1.11
$0.90
Weighted average common shares outstanding
11,452,588
11,330,935
11,420,524
11,305,231
Weighted average dilutive common shares outstanding
11,670,895
11,390,803
11,636,385
11,341,312
LMI Aerospace, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
Year Ended December 31,
2010
2009
(unaudited)
Operating activities:
Net income
$12,931
$10,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
7,289
7,537
Impairment of goodwill
--
3,350
Charges for inventory obsolescence and valuation
1,099
1,940
Restricted stock compensation
1,794
1,672
Deferred tax benefit
(166)
(1,224)
Other noncash items
(240)
(123)
Changes in operating assets and liabilities, net of acquired businesses:
Trade accounts receivable
1,440
(7,971)
Inventories
(544)
15,037
Prepaid expenses and other assets
800
(91)
Current income taxes
(735)
21
Accounts payable
639
(4,768)
Accrued expenses and other liabilities
2,538
(3,118)
Net cash provided by operating activities
26,845
22,417
Investing activities:
Additions to property, plant and equipment
(7,151)
(3,938)
Proceeds from sale of equipment
6
123
Acquisitions, net of cash acquired
--
(9,990)
Other, net
--
(48)
Net cash used by investing activities
(7,145)
(13,853)
Financing activities:
Proceeds from issuance of debt
--
--
Principal payments on long-term debt and notes payable
(327)
(498)
Advances on revolving line of credit
13,520
43,819
Payments on revolving line of credit
(30,520)
(51,819)
Other, net
(457)
(64)
Net cash used by financing activities
(17,784)
(8,562)
Net increase (decrease) in cash and cash equivalents
1,916
2
Cash and cash equivalents, beginning of year
31
29
Cash and cash equivalents, end of year
$1,947
$31
LMI Aerospace, Inc.
Selected Non-GAAP Disclosures
(Amounts in thousands)
(Unaudited)
Three Months Ended
Year Ended
December 31,
December 31,
2010
2009
2010
2009
Non-GAAP Financial Information
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)(1):
Net Income
$3,050
$ 804
$12,931
$10,155
Income tax expense
359
461
5,496
5,843
Interest expense, net
142
345
696
1,623
Depreciation and amortization
1,769
1,970
7,289
7,537
Impairment of goodwill
--
3,350
--
3,350
Stock based compensation
413
382
1,794
1,672
Severance and restructuring costs
--
--
--
312
Acquisition costs
--
--
--
239
TCA wind-up costs
--
--
--
249
Other, net
(48)
(37)
(58)
(10)
Adjusted EBITDA
$5,685
$7,275
$28,148
$30,970
Free Cash Flow (2):
Net cash provided by operating activities
$3,510
$11,481
$26,845
$22,417
Less:
Capital expenditures
(1,220)
(1,290)
(7,151)
(3,938)
Free cash flow
$2,290
$10,191
$19,694
$18,479
1. We believe Adjusted EBITDA is a measure important to many investors as an indication of operating performance by the business. We feel this measure provides additional transparency to investors that augments but does not replace the GAAP reporting of net income and provides a good comparative measure. Adjusted EBITDA is not a measure of performance defined by GAAP and should not be used in isolation or as a substitute for the related GAAP measure of net income.
2. We believe Free Cash Flow is a measure of the operating cash flow of the Company that is useful to investors. Free Cash Flow is a measure of cash generated by the Company for such purposes as repaying debt or funding acquisitions. Free Cash Flow is not a measure of performance defined by GAAP and should not be used in isolation or as a substitute for the related GAAP measure
