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AIRI > SEC Filings for AIRI > Form 10-Q on 13-Nov-2013All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the audited and unaudited financial statements and the notes to those statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in our Form 10-K for the year ended December 31, 2012, which was filed on March 29, 2013, that could cause actual results to differ materially from those anticipated in these forward-looking statements.


On August 30, 2013, we changed our state of incorporation from Delaware to Nevada as a result of the merger of our corporate parent and predecessor, Air Industries Group, Inc., a Delaware corporation ("Air Delaware"), with and into its newly formed wholly-owned subsidiary, Air Industries Group, a Nevada corporation and the surviving entity pursuant to an Agreement and Plan of Merger. The reincorporation was approved by the stockholders of Air Delaware at its 2013 Annual Meeting of Stockholders. Air Industries Group is deemed to be the successor issuer of Air Industries Delaware under Rule 12g-3 of the Securities Exchange Act of 1934, as amended.

Business Overview

We are an aerospace company operating primarily in the defense industry, though the proportion of our business represented by the commercial sector is increasing. We design and manufacture structural parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, Nacelle Struts which transmit the thrust of a jet engine to the body of the aircraft and other components. We also provide sheet metal fabrication of aerostructures, tube bending and welding services. Our products are currently deployed on a wide range of high profile military and commercial aircraft including Sikorsky's UH-60 Blackhawk helicopter, Lockheed Martin's F-35 Joint Strike Fighter, Northrop Grumman's E2D Hawkeye, Pratt & Whitney's Gear fan jet engine, the US Navy F-18 and USAF F-16 fighter aircraft, and in the commercial sector, Boeing's 777, Airbus' 380 commercial airliners, and other commercial airliners.

Table of Contents

In June 2012 we acquired the business and operations now conducted by Nassau Tool Works, Inc ("NTW") in an asset acquisition (the "NTW Acquisition"). We acquired the business and operations of Decimal Industries, Inc. ("Decimal") in an asset acquisition on July 1, 2013 (the "Decimal Transaction"). The assets and business of Decimal will become part of our subsidiary, Welding Metallurgy, Inc. ("WMI"). On November 6, 2013 we acquired 100% of the stock of Miller Stuart Inc., ("MS"). For the immediate future MS will be operated as a separate business unit. Consequently, during the third quarter of 2013 we had three principal operating subsidiaries - Air Industries Machining Corp. ("AIM"), WMI and NTW.

AIM has manufactured components and subassemblies for the defense and commercial aerospace industry for over 40 years. WMI has provided specialty welding services and metal fabrications to the defense and commercial aerospace industry since 1979. The predecessor of NTW was founded in 1959 and its principal business is the fabrication and assembly of landing gear components and complete landing gear for fighter aircraft for the US and foreign governments. Decimal was founded in 1968, and it principal business is the fabrication of precision sheet metal assemblies for the aerospace industry. Miller Stuart was founded in 1966 and is a manufacturer of aerospace components whose customers include major aircraft manufacturers and the US Military. Miller Stuart specializes in electromechanical systems, harness and cable assemblies, electronic equipment and printed circuit boards.

The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline their supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class service but also by increasing our ability to produce more complex and complete assemblies for our customers.

Our ability to operate profitably is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely satisfactory basis at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. Thus, when submitting bids we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.

While our revenues are largely determined by the number of contracts we are awarded, the volume of product delivered and price of product under each contract, our costs are determined by a number of factors. The principal factors impacting our costs are the cost of materials and supplies, labor, financing and the efficiency at which we can produce our products. The cost of materials used in the aerospace industry is highly volatile. In addition, the market for the skilled labor we require to operate our plants is highly competitive.

A very large percentage of the products we produce are used on military as opposed to civilian aircraft. These products can be replacement spare parts for aircraft already in the fleet of the armed services, or for the production of new aircraft. Recent reductions to the Defense Department budget commonly referred to as Sequestration have reduced the demand for both production and replacement spares. This reduced demand has reduced our sales. The impact has been felt most severely at AIM, and to a lesser degree at our other subsidiaries. In response to the reduction in military sales, we are focusing greater efforts on the civilian aircraft market. For example, we were recently awarded a multi-year contract valued at $27 million by a leading aerostructures manufacturer to provide Nacelle thrust struts. These components will be used in a new geared turbofan jet engine manufactured by one of the world's leading providers of aircraft engines. This engine is expected to be used on several new commercial jetliners.

Table of Contents

Results of Operations

The following discussion of our results of operations constitutes management's review of the factors that affected our financial and operating performance for the three and nine months ended September 30, 2013 and September 30, 2012. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report.

For the nine months ended September 30, 2013, and 2012, we had three operating segments, AIM, WMI and NTW, and separately reported our corporate overhead. We completed the NTW Acquisition on June 20, 2012. The results of NTW from the date of acquisition are included and reflected in the discussion below. The Decimal Acquisition was completed on July 1, 2013. The results of the business acquired from Decimal for the period July 1 to September 30, 2013 are included in the results for WMI. Inasmuch as we acquired MS on November 6, 2013, it has yet to have an impact on our financial results.

Three months ended September 30, 2013 and 2012:

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