Item 1. Business
ITEM
1. BUSINESS
Introduction
We
believe we are one of the leading manufacturers of precision components and assemblies for large aerospace and defense prime contractors.
Our products include landing gears, flight controls, engine mounts and components for aircraft jet engines, ground turbines and other
complex machines. The ultimate end-user for most of our products is the U.S. Government, international governments, and commercial global
airlines. Whether it is a small individual component for assembly by others or complete assemblies we manufacture ourselves, our high
quality and extremely reliable products are used in mission critical operations that are essential for safety of military personnel and
civilians.
We
specialize in the aerospace and defense markets, operating within a hierarchical network of suppliers. At the top of the supply chain
pyramid, is the prime contractor, also known as an Original Equipment Manufacturer (“OEM”). A prime contractor designs, develops
and produces the final product for the end-user. We play a critical role in this ecosystem, operating as a “Tier One” supplier,
delivering our products directly to prime contractors, or as a “Tier Two” supplier, providing larger complex components to
others. In some cases, we ship products directly to the U.S. Government. Our strategic position has made us a key partner for many prominent
defense prime contractors and global commercial aviation manufacturers, often leading us to become the exclusive or primary supplier
for certain high precision parts and assemblies. We often receive Long-Term Agreements (“LTAs”) from our customers, demonstrating
their commitment to us.
We
are renowned for our unwavering commitment to genuine quality and exceptional reliability. Our rich history dates to 1941, producing
parts for World War II fighter aircraft. Since then, we have maintained an impeccable record with no known incidents of part failure
leading to a mission failure resulting in a fatality. In an era plagued by foreign counterfeit parts, we strategically operate all our
facilities within the United States. Our two state-of-the-art manufacturing centers located in Long Island, New York, and Barkhamsted,
Connecticut, allow for rigorous oversight of production and adherence to stringent quality standards. Spanning over 150,000 square feet,
our manufacturing centers serve as the operational hubs for our three legal subsidiaries, Air Industries Machining, (“AIM”)
Nassau Tool Works (“NTW”) and Sterling Engineering Company (“STE”).
For
the past several years, despite facing significant financial and operational challenges, we have strategically invested substantial amounts
in new capital equipment, tooling, and processes to bolster our competitive position. Additionally, we expanded our sales and marketing
efforts, with a sharp focus on expanding relationships with customers and cultivating new ones. Fiscal 2023 marked a year of progress
and positioning for growth.
We finished 2023 with $51.5 million of net sales.
Our backlog, which represents the value of all funded orders received, stood at $98.3 million an increase of 14.7% as compared to our
backlog on December 31, 2022. Our marketing efforts bore fruit and we secured our first order with a new foreign-based defense and aerospace
prime customer. Despite absorbing a sudden and unexpected increase of interest rates related to our outstanding indebtedness, we were
able to make significant investments in capital equipment and related processes. On the bottom-line, we reported a net loss of $2.1 million.
As we enter fiscal 2024, we believe our future is looking brighter.
Moving forward, our business strategy is geared
towards competing and winning contracts that enable us to achieve sustainable and profitable business growth and delivering high quality
reliable products to our customers. At its core, lies a highly trained and close- knit team of over 180 individuals committed to driving
excellence and precision in every aspect of our operations. We are firmly focused on securing new contract awards, improving operations
and successful execution. With total unfilled contract values amounting to $191.9 million (including our $98.3 million in backlog and
all potential orders against LTA agreements previously awarded to us), as of December 31, 2023, we are confident in our ability to boost
sales in 2024, attain profitability and improve our financial position.
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Customer
Profiles
In
2023 and 2022, approximately 82.3% and 82.6% of our net sales were attributed to customers who use our products for end-use on military
aircraft. The rest of our net sales are attributable to commercial aviation uses and, to a much lesser extent, ground power electricity
generation and other uses.
We
have cultivated long-standing relationships with many large and well-known customers including:
●
RTX Corporation (“RTX” ) - a multinational aerospace and defense conglomerate and a major player in the aerospace and defense industry. We sell to several business units and/or subsidiaries of RTX, including Collins Aerospace (which includes Collins Landing Systems and Collins Aerostructures) and Pratt Whitney. RTX was formerly known as Raytheon Technologies Corporation and prior to that United Technologies Corporation.
● Lockheed
Martin Corporation (“Lockheed Martin”) - Lockheed Martin is a leading
global security and aerospace company with its principal customers being agencies of the
U.S. Government. We sell directly to one of its legal subsidiaries, Sikorsky Aircraft Corporation
(“Sikorsky”).
●
General Electric Aerospace (“GE”) – We supply GE Aerospace with high precision components that are used in jet turbine aircraft engines that are used on several commercial aircraft platforms.
●
GE Verona – We supply GE Verona with precision components that are used in ground-based turbines for electrical power generation.
●
The U.S. Government – We supply certain components and assemblies directly to the Defense Logistics Agency (“DLA”), a combat support agency within the U.S. Department of Defense (“DoD”). The DLA’s mission is to manage the end-to-end global defense supply chain and deliver readiness to the warfighter. It supports all five U.S. military services, federal, state, and local agencies, as well as partner and allied nations. The DLA procures items from us and provides them, as it deems fit, to other suppliers who assemble them into finished products.
In
2023, our sales and marketing strategy to expand our customer base yielded significant results, as we secured an initial $700,000 order
from a foreign-based defense and aerospace prime ranked among the world’s leading suppliers of finished landing gears. Our initial
order from them was for specialized components with initial deliveries slated to commence in the fourth quarter of 2024. As we continue
to develop and strengthen this relationship, we are optimistic about securing additional orders over time.
Platform
and Program Profiles
Most
of our machined components and assemblies are integral to high-profile platforms and named programs. Platforms generally refer to equipment
that is utilized in missions or operations whereas programs are broader initiatives and can encompass the development and production
of new platforms, upgrades to existing systems and other initiatives. The following platforms and programs (ranked in descending order
by their 2023 net sales), accounted for 85.2% and 81.0% of our net sales in 2023 and 2022, respectfully:
● F-18
Hornet: The F-18 Hornet, the U.S. Navy’s primary fighter aircraft, primarily operates from aircraft carriers and enjoys
international use, notably in Finland and Australia. Originating in the late 1960s, it has seen numerous upgrades and enhancements over
the years. We manufacture complete landing gear components for several variants, supplying these to the U.S. government or Tier 1 or
other suppliers for spares that go on the aircraft that where originally produced by Boeing.
●
The E-2D Hawkeye: We provide the main and nose landing gear, as well as the arresting gear for the E-2D Hawkeye, a twin-engine, tactical aircraft utilized for providing advanced airborne warning and control for carrier-based operations. Often referred to as the “digital quarterback,” it conducts battlefield management and command and control operations for aircraft carrier strike groups. While primarily used by the U.S. Navy, a small number have been sold to U.S. allies, notably Japan.
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●
UH-60
Black Hawk Helicopter : We supply flight critical components, such as the primary flight control assembly and the
tail-rotor gearbox, for the UH-60 Black Hawk Helicopter. Serving as the primary helicopter for the U.S. Army, it fulfills essential
roles in transport, troop movement, medical evacuation and cargo lift operations. Manufactured by Sikorsky, it includes many
variants and is also utilized by other branches of the U.S military and U.S. allied countries. Since entering service in 1979, over
4,000 helicopters have been produced. Deployment of new helicopters is projected to continue through at least 2027, with ongoing
sustainment activities anticipated for many years thereafter.
●
Pratt & Whitney Geared Turbo-Fan Engine (“GTF”): Used in commercial aviation, the GTF represents a new generation of jet engines that offer improved fuel efficiency, reduced emissions, and lower noise levels compared to traditional turbofan engines. We manufacture Thrust Struts, a critical component that essentially absorbs and distributes the forward thrust produced by the jet engine, ensuring that the force is evenly applied across the structure of the aircraft to maintain stability and integrity during takeoff, cruising and landing. We supply our Thrust Struts to Collins Aerostructures for integration into Geared Turbofan engines, utilized by smaller airlines such as those operating the Airbus A220 and Embraer E2 aircraft. Demand for these engines is anticipated to increase over the next few years.
●
The CH-53 Helicopter (including the CH53K variant): Developed in the 1960s and manufactured by Sikorsky, the CH-53 is recognized as the largest and most powerful helicopter in the U.S. military. It has evolved through several variants, with hundreds delivered and used by the U.S. Marine Corps. In 2021, we secured a LTA to supply Chaff Pods for the CH-53K, the latest iteration in the CH-53 series. These pods deploy metallized strips to generate false radar targets, safeguarding the helicopters from missile threats. The CH-53K plays a crucial role in the U.S. Marine Corps’ plans to support a wide range of current and future operations. In 2023 we received a purchase order to manufacture Swashplates and Hubs to be used on the CH-53K. Initial deliveries of these parts has commenced.
●
The F-35 Lightning II (also known as the Joint Strike Fighter): Manufactured by Lockheed Martin, the Joint Strike Fighter is a stealth fighter aircraft designed to replace the U.S. Air Force F-15 and the U.S. Navy and Marine Corps F-18 fighters. It includes three variants: the conventional take-off and landing F-35A, the short take-off and vertical landing F-35B, and the carrier based variant F-35C. We have produced landing gear components for all three variants and currently manufacture landing gear components for the US Navy version. The production of this aircraft is expected to continue for many years, with the DoD’s aiming for an inventory objective of 2,456 aircraft, in addition to expected demand from other countries.
●
The F-15 Eagle Tactical Fighter: We provide landing gear components for the F-15 Eagle Tactical Fighter. Originally designed for the U.S. Air Force, it is known as a dedicated air superiority fighter. Currently manufactured by Boeing, it was designed in the late 1960s with over 600 aircraft estimated to be in service. The F-15 has been exported to various countries including Israel, Saudi Arabia and Japan. Although it is anticipated that this plane will be ultimately replaced by the Joint Strike Fighter, we believe it will be flying for years to come. It boasts an impeccable combat record with no known losses in aerial combat. We ship most of our components directly to the U.S. DoD.
Our
Market
The
aerospace and defense industry is dominated by a select few large prime contractors including Airbus, Boeing, General Electric, Lockheed
Martin, Northrop Grumman, and RTX. These primes oversee large platforms and programs for ultimate end-user for the U.S. government, foreign
governments or global aviation companies.
Once
a supplier is chosen and integrated into a platform or selected for a specific program, replacing them becomes a complex challenge. In
many cases, suppliers often become the sole or single source. Being a sole source means being chosen as the exclusive supplier by the
customer, whereas being a single source indicates that, despite the availability of other potential manufacturers, only one supplier
is currently used. This scenario of single or sole sourcing is especially prevalent with legacy aircraft. While prime contractors generally
prefer multiple sources for new aircraft production lines to mitigate single points of failure, utilizing a single vendor can lead to
higher production volumes, lower average unit costs, and opportunities for quality improvements.
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Demand
for both defense and commercial aviation components is based on new production and subsequent maintenance, repair and overhaul (“MRO”).
Flight critical components are frequently replaced on aircraft on a flight time, or flight cycle basis. The demand for MRO and after-market
products can continue for many years, even decades, after the production line for new aircraft is shut down.
At
a high level, we are able to monitor the DoD budget for both new production and operations and maintenance components as well as industry
reports to gauge overall industry spending. While large U.S. Government programs are managed through specific budget lines and oversight
structures, most, if not all, of our machine parts and assemblies are not explicitly identified in the U.S. Government budget. Therefore,
predicting period-to-period demand with precision is challenging. While we primarily rely on our customers to help us project short-term
and long-term demand, the timing of receipt of contract awards and related orders is difficult to predict. Consequently, comparative
period-to-period net sales for any customer or program may not be meaningful.
Sales
and Marketing
Sales
and marketing activities in 2023 indicate a return to normalcy compared to the disruptions caused by COVID-19 in 2022 and 2021. Travel
restrictions no longer hinder our ability to visit customers, and employees are more willing to attend trade shows, facilitating our
communication efforts.
We
primarily rely upon a small team of highly skilled sales and business development professionals with extensive industry experience. Our
goal is to cultivate customer relationships akin to partnerships and the concept of customer alignment. For example, our customers heavily
rely on suppliers to deliver high-quality parts that meet specifications in a timely and cost-effective manner. They regularly assess
suppliers based on various quantitative criteria such as on-time delivery performance, defect rates, adherence to specifications, cost
performance, lead times, order processing time, stockout rates, and similar metrics. Therefore, one of our primary objectives is to maintain
high ratings and leverage these metrics in our sales and marketing activities.
Our
sales cycle varies significantly, ranging from a few weeks to several years, depending on the complexity of the product and manufacturing
steps involved. While customers may occasionally engage in spot buys, most of our orders (also known as bookings) stem from LTAs. LTAs
outline the quantity and price of products the customer may order within a specified timeframe. When actual products are needed, the
customer places a funded order against the LTA. The value of this funded order is included in our backlog until we ship it. Although
cancellations of funded orders are possible, customers are usually subject to termination liability, necessitating payment to us for
costs incurred up to the termination date. In certain termination cases, the customer is also required to pay us a reasonable profit.
We
secure new or follow-on LTAs through competitive bidding in response to a customer’s Request for Quotation (“RFQ”).
These proposals detail prices based on quantities, which may vary annually, for shipments over multiple years. The bidding process typically
entails several rounds of submissions and negotiations before an award is granted. For defense products, in certain cases, LTAs may be
awarded or extended without an RFQ, competitive bidding. In such cases, pricing may be determined through cost analysis or audit with
ultimate approval by the customer or the U.S. government.
We
believe our sales and marketing strategy received significant validation in 2023 when we secured an initial $700,000 order from a foreign-based
defense and aerospace prime ranked among the world’s leading suppliers of finished landing gears. While this new customer relationship
is in its early stages, we are dedicating substantial efforts to further develop and strengthen this partnership, with the aim of receiving
significant orders in the future.
Bookings
and Backlog
Bookings represent funded orders we have
secured during a given financial period. In fiscal 2023, bookings were $62,262,000 or a 55% increase compared to $40,166,000 in 2022.
Our “book-to-bill” ratio, which is our bookings divided by net sales, was 1.20x for 2023, a significant improvement over
the 0.75x ratio of 2022. Although bookings are subject to wide variations in timing, resulting in period-to-period comparisons not
necessarily being meaningful, we do use bookings and our book-to-bill as a gauge of future net sales.
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Our backlog, which can be considered our “funded
backlog,” stood at $98.3 million as of December 31, 2023, marking a 14.7% increase from the $85.7 million on December 31, 2022.
It represents the net sales we expect to realize from funded orders received and is equivalent to our remaining performance obligations
pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, at the end of each period.
These funded orders, approved by customers, come from LTAs, spot-buys, or other contracts and are for essential machined components and
assemblies used in the key platforms and programs we serve. Previously, we limited our backlog to items scheduled to ship within an 18-month
period. Our new enhanced definition provides visibility into the value of all firm orders. The bulk of our $98.3 million backlog is expected
to ship over the next 24 months. but does not include possible or probable future orders pursuant to existing LTAs or probable contract
renewals. The total potential net sales under contracts actually awarded to us as of December 31, 2023, was $191.1 million, including
the value of our existing funded backlog of $98.3 million.
Competition
Winning
a new contract award is highly competitive. Not only must we have the capabilities to manufacture to customer design specifications,
but we compete against companies that have greater financial, physical and technical resources. Our ability to win new contracts generally
requires us to become a trusted partner to the customer by having the capabilities to deliver superior quality product, more quickly
and with lower pricing than our competitors. Accordingly, we must continually invest in process improvements and capital equipment.
In recent years, we have strategically made significant
investments to enhance our competitiveness and market position. For example, in fiscal 2023 and 2022, we invested $2,119,000 and $2,361,000
in new property and equipment to support our goals. These investments have increased production efficiency and speed, while maintaining
closer tolerances, and have expanded the size of products we can manufacture. We plan to continue this strategy and anticipate investing
approximately $2,000,000 in 2024 for new or upgraded equipment.
Our competitors include: Monitor Aerospace, a division of GKN Aerospace;
Hydromil, a division of Triumph Aerospace Group; Heroux Devetek and Ellanef Manufacturing, a division of Magellan Corporation.
Manufacturing,
Raw Materials and Replacement Parts
Our
production cycle spanning from ordering raw materials to delivering finished products, can vary from several weeks to over a year. Consequently,
for certain products, especially those involving finished assemblies, we must procure significant amounts of raw materials and begin
processing well ahead of actual ship dates. This underscores the importance of efficient subcontract management in meeting customer delivery
deadlines. In some cases, customers may provide us with these raw materials as they may be able to obtain better processing or delivery
schedules from other suppliers.
The price and availability of many raw materials
in the aerospace industry are susceptible to fluctuations in global markets and political conditions. Most raw material suppliers are
hesitant to commit to long-term contracts at fixed prices, posing a substantial risk given our strategy often entails entering into LTA
agreements which require us to commit to long-term price commitments. However, many of our LTAs provide pricing protection when there
is a large increase in the in the cost of raw materials.
Employees
As of March 31, 2024, we employed 180 people.
Of these, 101 were involved in manufacturing and production activities, 25 were in quality control, 45 were in administration, and the
remaining 9 were in sales and procurement. All of our employees are covered under a co-employment agreement with Insperity Services,
LLC, a professional employer organization. This arrangement allows us to provide employees with comprehensive benefits at a lower cost
than we could provide.
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Our
AIM subsidiary has a collective bargaining agreement with the United Service Workers, IUJAT, Local 355 (the “Union”). This
agreement is effective until December 31, 2024 and covers the majority of AIM’s 125 personnel. We are required to make a monthly
contribution to Union’s United Welfare Fund and the United Services Worker’s Security Fund, the sole pension benefit for
covered employees. We are not obligated to provide any future defined benefits. Additionally, the collective bargaining agreement contains
a “no-strike” clause, and a “no-lock-out” clause. We believe we maintain good relationships with the Union and
expect to renew the collective bargaining agreement before it expires.
Regulations
We
believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business. They key regulations impacting our business are further
discussed below:
Environmental
Regulation and Employee Safety : We are subject to regulations administered by the United States Environmental Protection
Agency, the Occupational Safety and Health Administration, various state agencies and county and local authorities acting in cooperation
with federal and state authorities. Among other things, these regulatory bodies impose restrictions that require us to control air, soil
and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and require notification
or reporting of the storage, use and release of certain hazardous chemicals and substances. This regulatory framework imposes compliance
burdens and financial and operating risks on us. Governmental authorities have the power to enforce compliance with these regulations
and to obtain injunctions or impose civil and criminal fines in the case of violations.
The
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several
liabilities on the present and former owners and operators of facilities that release hazardous substances into the environment. The
Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. New York and Connecticut, the states where our production facilities are located, also have stringent laws
and regulations governing the handling, storage and disposal of hazardous substances, counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable
hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the
presence of hazardous chemicals and to train employees in the use of such substances.
Federal
Aviation Administration: We are subject to regulation by the Federal Aviation Administration (“FAA”) under the
provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and
aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to
cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination
of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We have never been
subject to such fines or disqualifications.
Federal
Acquisition Regulations: All our U.S government contracts and those of many of our customers are subject to the procurement
rules and regulations of the Federal Acquisition Regulations. As such, many of our LTA agreements require us to adhere to these rules
and regulations. During and after the fulfillment of a government contract, we may be audited in respect of the direct and allocated
indirect costs attributed to the project. These audits may result in adjustments to our contract costs. Additionally, we may be subject
to U.S. government inquiries and investigations because of our participation in government procurement. Any inquiry or investigation
can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
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More
Information About Our Business and Where to Find It
Our
Internet website is AirIndustriesGroup.com, at which you can find our filings with the SEC, including press releases, annual reports,
quarterly reports, current reports, and any amendments to those filings. We also use our website to disseminate other material information
to our investors. We also make announcements regarding company developments and financial and operating performance through social media
channels such as at LinkedIn.com/company/air-industries-group to communicate with customers and the public about our Company, our products,
services, and other issues. Among other things, we post on our website and social media channels information about our public conference
calls (including the scheduled dates, times and the methods by which investors and others can listen to those calls), and we make available
for replay webcasts of those calls and other presentations for a limited time. Information and updates about our Annual Meetings will
also be posted on our website including on the “Home Page” and in the “Investor Relations” section. None of the
information on our website, blog or any other website identified herein is incorporated by reference in this annual report and such information
should not be considered a part of this annual report.