Alabama Aircraft Industries, Inc. Reports Third Quarter Financial Results and Resignation of Its Chairman

Alabama Aircraft Industries, Inc. (Pink Sheets: AAII), a leading provider of aircraft maintenance and modification services to military customers, today announced its operating results for the third quarter and nine months ended September 30, 2009. Net income for the third quarter of 2009 was $0.5 million, or $0.11 per share, compared to a net loss for the third quarter of 2008 of $1.7 million, or $0.42 per share. Revenue from continuing operations for the third quarter of 2009 was $12.6 million versus revenue of $6.8 million in the third quarter of 2008, an increase of 85.5%. Loss from continuing operations for the third quarter of 2009 was $0.1 million compared to a loss from continuing operations of $1.1 million for the third quarter of 2008.

Net income for the first nine months of 2009 was $1.9 million, or $0.46 per share, compared to a net loss for the first nine months of 2008 of $3.4 million, or $0.81 per share. Revenue from continuing operations for the nine months ended September 30, 2009 was $45.5 million, compared to revenue from continuing operations of $38.9 million for the nine months ended June 30, 2008, an increase of 17.0%. Income from continuing operations for the first nine months of 2009 was $1.5 million, compared with a loss from continuing operations of $0.9 million for the first nine months of 2008.

Ronald Aramini, Alabama Aircraft’s President and Chief Executive Officer, stated "We are pleased to be profitable for the third quarter and for the first nine months of 2009. Revenue increased 85% in the third quarter of 2009 versus the third quarter of 2008 and increased 17% in the first nine months of 2009 as compared to the first nine months of 2008. We are especially pleased with the growth of revenue and backlog in our C-130 and P-3 programs. Management has focused a lot of effort on diversifying our operations among several programs and some upcoming proposals should provide an opportunity for further growth and diversification. We continue to focus on managing our resources efficiently, operating our programs wisely and maintaining profitable operations. We continue to be optimistic about the Company’s potential in the upcoming years.”

Mr. Aramini further stated "There have been no recent developments in the KC-135 re-competition. We anticipate that the appeal by the United States Air Force ("USAF”) and Boeing of the Court of Federal Claims ruling will be resolved in late 2009 or early 2010. We firmly believe the Court’s ruling, which set aside the award of the KC-135 contract to Boeing, was correct and that the ruling will not be overturned. We continue to provide the USAF with high quality and competitive prices on its fleet of KC-135 tankers. With regard to our case against GE Capital Aviation Services, Inc. ("GECAS”), all verdicts, post-trial hearings and rulings with the Circuit Court for Dale County, Alabama have now been completed with favorable findings to the Company. No appeals have been filed with the Supreme Court of Alabama to date. The Company will receive 60% of any favorable verdict (accounting for contingency fees) once it is finalized, with all appeals exhausted.”

Mr. Aramini also announced "It is with regret that we announce that Mr. Michael Tennenbaum has decided to step down as Chairman of the Company’s Board of Directors effective December 31, 2009, after ten years of service, in order to devote more time on the operations and investments of Tennenbaum Capital Partners. Mr. Tennenbaum has provided valuable guidance and leadership through some very challenging years. We will move into the next decade a stronger and better positioned company as a result of his hard work and dedication, and for that we are grateful. Mr. Harold "Skip” Bowling, who is currently the vice-chairman of the Company, will assume the role as chairman on January 1, 2010. Mr. Bowling has worked closely with Mr. Tennenbaum and the Company this past decade, chairing the Strategic Action and Compensation Committees of the Board. Mr. Bowling’s 43-year career with Lockheed Martin gives him a unique ability to lead Alabama Aircraft into the next decade and we look forward to working with him in his new capacity.”

Third Quarter 2009 vs. 2008 Results

Summary of comparative results for the third quarter ended September 30, 2009 and 2008:

* A description of the Company’s use of non-GAAP information is provided below under "Use of Non-GAAP Financial Measures.” A reconciliation of the income (loss) from continuing operations to EBITDA from continuing operations is provided at the end of this press release. The Company defines "operating income (loss) from continuing operations”, as shown in the above table, as revenue from continuing operations less cost of revenue, less selling, general and administrative ("SG&A”) expenses.

Third quarter 2009 revenue from continuing operations increased $5.8 million from the third quarter of 2008. Revenue from the KC-135 Program Depot Maintenance ("PDM”) program increased by $3.2 million during the third quarter of 2009 versus the third quarter of 2008. The KC-135 program, which accounted for 72% of revenue in the third quarter of 2009 and 89% of revenue in the third quarter of 2008, allows for the Company to provide services on PDM aircraft, drop-in aircraft, and other aircraft related areas. During the third quarter of 2009, the Company delivered one PDM aircraft, which is consistent with the one PDM aircraft delivered during the third quarter of 2008. Revenue increased on the KC-135 program in the third quarter of 2009 versus the third quarter of 2008 due to an increase in the number of KC-135 aircraft in work. The Company delivered one P-3 aircraft in the third quarter of 2009 versus no P-3 aircraft deliveries in the third quarter of 2008, resulting in an increase in P-3 revenue of $2.2 million. The Company has been successful in pursuing additional contracts to perform maintenance services on P-3 aircraft and has seen a growth in P-3 inductions with five P-3s in work at the end of the third quarter of 2009 versus none in work at the end of the third quarter of 2008. Revenue decreased $0.5 million in the third quarter of 2009 versus the third quarter of 2008 under contracts to perform non-routine maintenance work on other aircraft, primarily USAF C-130 aircraft, due to a reduction of aircraft inducted. During the first quarter 2009, the Company was awarded a contract for de-paint services on USAF C-130 aircraft which resulted in an increase in revenue of $0.9 million in the third quarter of 2009 as compared to the third quarter of 2008.

Gross profit increased from $0.1 million to $1.7 million during the third quarter of 2009 compared to the third quarter of 2008. Gross profit from the KC-135 program increased $1.0 million due to more aircraft in work during the third quarter of 2009. Gross profit on the P-3 program increased $0.5 million in the third quarter of 2009 as compared to the third quarter of 2008 due to efficiency gains in the production line and due to one delivery of a P-3 aircraft in the third quarter of 2009. Gross profit decreased $0.1 million during the third quarter of 2009 versus the third quarter of 2008 on non-routine maintenance work performed on C-130 aircraft due the induction of three C-130 aircraft at rates below the cost rate for the Company under a contract expiring on September 30, 2009. Work performed on the contract for de-paint services on C-130 aircraft resulted in additional gross profit of $0.3 million.

Selling, general and administrative ("SG&A”) expenses incurred during the third quarter of 2009 were consistent with SG&A expenses incurred during the third quarter of 2008. Routine SG&A expenses were higher in the third quarter of 2009 but were offset by a reduction in legal fees related to the KC-135 legal actions. SG&A expenses were 11.1% of revenue in the third quarter of 2009 as compared to 20.6% of revenue in the third quarter of 2008.

Total interest expense increased $52,000 in the third quarter of 2009 as compared to the third quarter of 2008. The increase in interest expense was due to the amortization of a $400,000 debt extension fee paid by the Company in the first quarter of 2009, which was partially refunded to the Company in the second quarter of 2009.

The Company recorded $178,000 of income tax expense in the third quarter of 2009 due to amending the Company’s 2007 income tax returns. The 2007 income tax returns were amended because the IRS granted the Company a waiver request resulting in a deferral of required contributions for the 2007 plan year. The reclassification of the pension deduction from 2007 to 2008 resulted in additional income tax due for the 2007 tax year.

The Company received an additional $90,000 of proceeds in the third quarter of 2009 from the sale of Space Vector. The Company also recorded an income tax benefit of $450,000 in the third quarter of 2009 due to the projected carryback of capital losses generated from the sale of Space Vector.

Nine Months 2009 vs. 2008 Results

Summary of comparative results for the nine months ended September 30, 2009 and 2008:

* A description of the Company’s use of non-GAAP information is provided below under "Use of Non-GAAP Financial Measures.” A reconciliation of the income (loss) from continuing operations to EBITDA from continuing operations is provided at the end of this press release. The Company defines "operating income (loss) from continuing operations”, as shown in the above table, as revenue from continuing operations less cost of revenue, less selling, general and administrative ("SG&A”) expenses.

The Company’s revenue from continuing operations for the first nine months of 2009 increased $6.6 million from the first nine months of 2008. Revenue from the KC-135 PDM program increased $5.2 million during the first nine months of 2009 versus the first nine months of 2008. The KC-135 program accounted for 84% of revenue in the first nine months of 2009 and 85% of revenue in the first nine months of 2008. During the first nine months of 2009, the Company delivered eight PDM aircraft which was consistent with the eight PDM aircraft delivered during the first nine months of 2008. Revenue increased on the KC-135 program in the first nine months of 2009 versus the first nine months of 2008 due to more KC-135 aircraft in work throughout the period. The Company delivered two P-3 aircraft in the first nine months of 2009 versus one P-3 aircraft in the first nine months of 2008. P-3 revenue increased $2.4 million as a result of delivering one more aircraft in the first nine months of 2009 than in the first nine months of 2008 and due to the increase in P-3 aircraft in work during the first nine months of 2009. Revenue decreased $3.2 million under contracts to perform non-routine maintenance work on other aircraft, primarily USAF C-130 aircraft, due to fewer aircraft in work during the first nine months of 2009. The Company’s award of a contract for de-paint services on USAF C-130 aircraft resulted in an increase in revenue of $2.2 million in the first nine months of 2009 as compared to the first nine months of 2008.

Gross profit increased from $5.9 million to $6.5 million during the first nine months of 2009 compared to the first nine months of 2008. Gross profit on the KC-135 program decreased $0.6 million due to delays in receiving critical parts. The delays in parts has caused inefficiencies in the production line, delays in the delivery of aircraft and the loss of $133,500 award fee on each aircraft delivered. Gross profit on the P-3 program increased $0.7 million in the first nine months of 2009 as compared to the first nine months of 2008 due to efficiency gains in the production line and additional aircraft in work. Gross profit increased $0.1 million during the first nine months of 2009 versus the first nine months of 2008 on non-routine maintenance work performed on C-130 aircraft due to an increase in the contractual price. Work performed on the contract for de-paint services on C-130 aircraft resulted in additional gross profit of $0.5 million.

SG&A expenses decreased $1.0 million during the first nine months of 2009 compared to the first nine months of 2008 due to a reduction in legal fees related to the KC-135 legal actions. SG&A expenses were 12.0% of revenue in the first nine months of 2009 as compared to 16.5% in the first nine months of 2008. During the first nine months of 2008, the Company forgave a related party receivable (including accrued interest) of $0.5 million. During the first nine months of 2009, the Company reversed an allowance for doubtful accounts of $1.4 million due to positive developments in the GECAS case to collect the outstanding receivables.

Total interest expense increased $140,000 in the first nine months of 2009 as compared to the first nine months of 2008. The increase in interest expense is due to the amortization of a $400,000 debt extension fee paid by the Company in the first quarter of 2009 which was partially refunded to the Company in the second quarter of 2009.

The Company recorded $205,000 of income tax expense in the first nine months of 2009 primarily due to amending the Company’s 2007 income tax returns. The 2007 income tax returns were amended because the IRS granted the Company a waiver request resulting in a deferral of required contributions for the 2007 plan year. The reclassification of the pension deduction from 2007 to 2008 resulted in additional income tax due for the 2007 tax year. The Company recorded an income tax benefit of $450,000 in the first nine months of 2009 due to the projected carryback of capital losses generated from the sale of Space Vector.

*Use of Non-GAAP Financial Measures

EBITDA from continuing operations is defined as earnings from continuing operations before interest, taxes, depreciation and amortization. The Company presents EBITDA because its management uses the measure to evaluate the Company's performance. The Company believes EBITDA is also a measure of performance used by some commercial banks, investment banks, investors, analysts and others to make informed investment decisions. EBITDA is an indicator of cash generated to service debt and fund capital expenditures. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as a substitute for or superior to other measures of financial performance reported in accordance with GAAP. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. See the reconciliation of income (loss) from continuing operations to EBITDA from continuing operations at the end of this release.

About Alabama Aircraft Industries

Alabama Aircraft Industries, Inc., located in Birmingham, Alabama, performs maintenance and modification of aircraft for the U.S. Government and military customers. The Company also provides aircraft parts and support and engineering services.

Caution Concerning Forward-Looking Statements

This document contains "forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition generally, as well as specific matters such as the award or loss of contracts, the outcome of pending or future litigation and estimates of backlog. Forward-looking statements are often identified by words such as "expect,” "anticipate,” "intend,” "plan,” believe,” "seek,” "see,” "may,” "should,” "could” or "will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, among other things: the severity and duration of the current economic recession and current financial conditions; the impact of U.S. and foreign government programs to restore liquidity and stimulate national and global economies; the impact of conditions in the financial and credit markets on the availability and cost of capital to us; operational challenges in achieving our strategic objectives and executing our plans, competition in the aircraft maintenance and modification industry; the award or loss of contracts; changes in estimates of backlog; our ability to obtain additional contracts and perform under existing contracts; the final outcome of our legal action with regard to the KC-135 contract; the outcome of pending and future litigation and the costs of defending such litigation; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including regulatory changes that could adversely affect our business; potential environmental and other liabilities; our inability to obtain additional financing; the loss of key personnel; and other factors and risks detailed from time to time in our publicly available statements and reports, which are available at www.pinksheets.com. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligation to update or revise any forward-looking statements and are not responsible for changes made to this release by wire services or Internet services.