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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-230
_____
For the thirteen weeks ended November 26, 1993
_________________
AEL INDUSTRIES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1353403
____________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
305 Richardson Road, Lansdale, Pennsylvania
19446
____________________________________________________________________
(Address of principal executive offices and Zip Code)
(215) 822-2929
____________________________________________________________________
(Registrant's telephone number, including area code)
N/A
____________________________________________________________________
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all re-
ports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
_______ _______
The number of shares outstanding of each class of common stock is as
follows:
Class Outstanding at January 3, 1994
__________________________________ ______________________________
Class A common stock, $1 par value 3,330,905
Class B common stock, $1 par value 434,717
Page 1 of 13
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AEL INDUSTRIES, INC.
FORM 10-Q
THIRTEEN WEEKS ENDED NOVEMBER 26, 1993
INDEX
<TABLE>
<CAPTION> PAGE NO.
_______
<S> <C>
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - November 26, 1993 and
February 26, 1993
Consolidated Statements of Opera- 4
tions Thirteen and Thirty-Nine
Weeks Ended November 26, 1993 and
November 27, 1992
Consolidated Statements of Cash 5
Flows - Thirty-Nine Weeks Ended
November 26, 1993 and November 27,
1992
Notes to Condensed Consolidated 6
Financial Statements
Management's Discussion and 8
Analysis of Results of Oper-
ations and Financial Condition
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports
on Form 8-K 12
Signature 13
</TABLE>
Page 2 of 13
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PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
November 26, February 26,
1993 1993
_____________ _____________
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $11,723 $4,168
Marketable securities 1,543 12,123
Receivables, including unbilled amounts
of $19,525 at November 26, 1993 and
$22,423 at February 26, 1993:
U. S. Government 25,350 37,360
Other 3,483 2,277
_____________ _____________
28,833 39,637
Refundable income taxes 134 533
Inventories 5,160 3,634
Deferred income taxes 2,571 3,646
Other current assets 431 639
_____________ _____________
Total current assets 50,395 64,380
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $50,789 at November 26, 1993
and $46,088 at February 26, 1993) 44,936 44,477
Other assets 5,552 5,789
_____________ _____________
$100,883 $114,646
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,078 $4,460
Accrued salaries, wages and employee benefits 5,644 5,995
Other current liabilities 8,613 13,269
Current portion of long-term debt 3,842 6,978
_____________ _____________
Total current liabilities 20,177 30,702
Long-term debt, net of current portion 21,402 25,141
Other liabilities 1,685 2,483
Commitments and contingent liabilities
Note 4
Shareholders' equity 57,619 56,320
_____________ _____________
$100,883 $114,646
============= =============
</TABLE>
See accompanying notes
Page 3 of 13
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AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
November 26, 1993 November 27, 1992 November 26, 1993 November 27, 1992
_________________ _________________ _________________ _________________
<S> <C> <C> <C> <C>
Sales and service revenue $27,292 $28,154 $85,777 $80,149
Operating costs and expenses:
Cost of products and services 19,992 21,796 64,186 59,750
Administrative and selling expenses 4,179 4,643 12,868 14,096
Bid and proposal costs 1,716 1,247 4,112 4,034
Research and development costs 617 777 1,581 1,761
________________ ________________ ________________ ________________
26,504 28,463 82,747 79,641
________________ ________________ ________________ ________________
Operating income (loss) 788 (309) 3,030 508
Interest expense (431) (619) (1,296) (1,882)
Investment income 104 208 374 665
Other income (expense), net (35) 23 (153) (270)
________________ ________________ ________________ ________________
Income (loss) before income taxes and
cumulative effect of change in accounting
principle 426 (697) 1,955 (979)
Income tax provision (benefit) 686 (126)
________________ ________________ ________________ ________________
Income (loss) before cumulative effect of
change in accounting principle 426 (697) 1,269 (853)
Cumulative effect of change in accounting
for income taxes 2,540
________________ ________________ ________________ ________________
Net income (loss) $426 ($697) $1,269 $1,687
================ ================ ================ ================
Earnings per share:
Income (loss) before cumulative effect of
change in accounting principle $0.12 ($0.18) $0.34 ($0.21)
Cumulative effect of change in accounting
for income taxes 0.64
________________ ________________ ________________ ________________
Net income (loss) $0.12 ($0.18) $0.34 $0.43
================ ================ ================ ================
Weighted average shares outstanding 3,785,000 3,899,000 3,764,000 3,918,000
================ ================ ================ ================
</TABLE>
See accompanying notes
Page 4 of 13
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AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Weeks
Ended Ended
November 26, 1993 November 27, 1992
_________________ _________________
<S> <C> <C>
Cash flows from operating activities:
Net income $1,269 $1,687
Adjustments to reconcile net income
to net cash provided (absorbed) by operating activities:
Depreciation 4,898 4,996
Amortization of other assets 306 306
Cumulative effect of change in accounting for
income taxes (2,540)
Deferred income taxes 588 673
Accrued retirement benefits (322) (8)
Decrease in receivables 10,804 159
Increase in refundable income taxes, inventories and
other current assets, net (919) (141)
Decrease in accounts payable, accrued
liabilities and other current liabilities (7,389) (4,685)
________________ ________________
Net cash provided by operating activities 9,235 447
________________ ________________
Cash flows from investing activities:
Additions to property, plant and equipment (5,358) (6,336)
Purchases of marketable securities (31,369)
Liquidations of marketable securities 10,572 20,666
Other (49) 78
________________ ________________
Net cash provided (absorbed) by investing activities 5,165 (16,961)
________________ ________________
Cash flows from financing activities:
Reductions in long-term debt (6,875) (625)
Other 30 (52)
________________ ________________
Net cash absorbed by financing activities (6,845) (677)
________________ ________________
Increase (decrease) in cash and equivalents 7,555 (17,191)
Cash and equivalents at beginning of period 4,168 20,516
________________ ________________
Cash and equivalents at end of period $11,723 $3,325
================ ================
</TABLE>
See accompanying notes
Page 5 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and, therefore, do not include all information necessary
for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting prin-
ciples. In the opinion of management, all adjustments necessary for
a fair presentation of the results of the interim periods have been
made. All adjustments were of a normal, recurring nature except for
the cumulative effect of a change in accounting for income taxes, re-
corded in the first quarter of fiscal year 1993, as described in
footnote 2.
The condensed consolidated financial statements should be read
in conjunction with the Registrant's Annual Report on Form 10-K for
the fiscal year ended February 26, 1993.
2. Effective February 29, 1992, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". The cumulative effect of the accounting change as of the be-
ginning of fiscal year 1993 was $2,540,000 or $.64 per share, pri-
marily resulting from recording tax benefits related to contract loss
provisions recorded in prior years and adjusting tax rates on previ-
ously recorded tax assets and liabilities. The cumulative effect,
recorded in the quarter ended May 29, 1992, also includes the recog-
nition of a valuation allowance of $200,000 to reflect the potential
loss of state tax benefits.
3. Under fixed price contracts, the Company may encounter, and on
certain programs from time to time has encountered, cost overruns
caused by increased material, labor, or overhead costs, design or
production difficulties and various other factors such as technical
and manufacturing complexity, which must be, and in such cases have
been, borne by the Company. Adjustments to contract cost estimates
are made in the periods in which the facts requiring such revisions
become known. When the revised estimate indicates a loss, such loss
is provided for currently in its entirety. In addition, the Company
from time to time commits to invest its own funds, particularly in
the case of high-technology seed programs. The estimated costs of
such investments in excess of the related contract values are pro-
vided for currently in their entirety upon receipt of such contracts
by the Company. During the quarter and nine months ended November
26, 1993, adjustments to contract cost estimates had net unfavorable
impacts on income of $900,000 and $3,900,000, respectively, compared
with net unfavorable impacts of $1,500,000 and $1,600,000 for
adjustments of the same nature during the comparable periods ended
November 27, 1992. In addition to the impact of contract cost
adjustments, an investment provision of $300,000 was recorded in the
current year quarter and an investment provision of $400,000 was
recorded in the nine months ended November 27, 1992.
Other current liabilities at November 26, 1993 and February 26,
1993 include allowances for contract losses and other contract allow-
ances aggregating $3,100,000 and $4,400,000, respectively.
Page 6 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. The Company is a party to lawsuits and other legal matters
arising out of the general conduct of its business. One such action
relates to the U.S. Environmental Protection Agency (EPA) which, in
1989, placed a site that includes the Company's Richardson Road
property on the National Priorities List for detailed study and
cleanup of alleged environmental contamination. The Company con-
tinues to cooperate with the EPA in the study of this site. In the
opinion of management, except for the matters described below, these
lawsuits and legal matters will not have a materially adverse effect
on consolidated financial position.
From time to time, the Company is also subject to claims and
investigations arising from its business with the U. S. Government.
In the fourth quarter of fiscal year 1993, the Company established an
allowance of $2,200,000 based on an agreement to settle civil claims
pertaining to the pricing of a 1985 fixed-price contract modifica-
tion. The Company paid $1,100,000 in July 1993 and will pay
$1,100,000 in July 1994. In an unrelated matter, the Company has
provided documents, relating to its AN/MLQ-T4 Ground Jammer program,
to the Department of Defense pursuant to a subpoena issued by its
Inspector General in September 1992. At this time, management is
unable to determine when the Government will complete its
investigation regarding the Ground Jammer program or whether it will
seek any remedies as a result of its investigation.
Page 7 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis provides information
which management believes is relevant to an assessment and under-
standing of the Company's consolidated results of operations for the
thirteen weeks (quarter) and thirty-nine weeks (nine months) ended
November 26, 1993, as compared with the thirteen weeks (quarter) and
thirty-nine weeks (nine months) ended November 27, 1992, and its con-
solidated financial condition at November 26, 1993. The discussion
should be read in conjunction with the condensed consolidated finan-
cial statements and notes thereto which appear elsewhere in this Form
10-Q.
Results of Operations
Sales and service revenues of $27,292,000 for the quarter ended
November 26, 1993 reflect a slight decrease from the $28,154,000 in
revenues reported for the quarter ended November 27, 1992. Sales and
service revenues of $85,777,000 for the nine months ended November
26, 1993, however, reflect a 7% increase from the $80,149,000 in
revenues reported for the nine months ended November 27, 1992. Both
the quarter and nine month period ended November 26, 1993 were
favorably impacted by higher revenues from avionics
installation/integration programs which contributed 32% of revenues
in the current year, compared with 30% in the prior year. The
current year was also favorably impacted by higher revenues from the
APR-39A radar warning receiver program, the Band 9/10 electronic
countermeasures program, and the Type 18 ADF electronic surveillance
measures program. The APR-39A program contributed 11% and 9% of
revenues for the quarter and nine months ended November 26, 1993, up
from 2% and 3% for the comparable periods in the prior year. The
Band 9/10 program contributed 10% of the current year's revenues in
both the quarter and nine month period, compared with 9% and 6% for
the comparable periods in the prior year. However, revenues from two
other electronic countermeasures programs, TACJAM A and a program
with a foreign government, decreased in the current year. The TACJAM
A program's contributions to revenues dropped from 16% and 12% in the
prior year quarter and nine months to 5% and 6% in the current year
quarter and nine months.
Operating income for the quarter ended November 26, 1993 was
$788,000 compared to an operating loss of $309,000 for the prior year
quarter. Although sales and service revenues for the current year
quarter decreased slightly from the prior year quarter, operating
results improved significantly primarily due to a decrease in
unfavorable contract cost estimate adjustments, and reductions in
administrative and selling expenses and research and development
costs, partially offset by an increase in bid and proposal costs.
Spending reductions related to continued corporate restructuring
initiated in fiscal year 1993 have resulted in improved gross margin
performance as well as lower administrative and selling expenses in
the current year. The increase in bid and proposal costs reflects
the Company's increased bidding activity for development programs
associated with long-term production contracts.
Page 8 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating income for the nine months ended November 26, 1993
was $3,030,000 compared to $508,000 for the nine months ended
November 27, 1992. The increase in sales and service revenues for
the nine months ended November 26, 1993 had a corresponding favorable
impact on operating profit. In addition, continuing efforts to
contain costs have led to a substantial reduction in overhead
spending and administrative and selling expenses in the nine month
period ended November 26, 1993. Partially offsetting these favorable
items was an increase in unfavorable program cost estimate
adjustments which totalled $3,900,000 for the nine months ended
November 26, 1993 compared with $1,600,000 for the comparable prior
year period.
Interest expense for the quarter and nine months ended November
26, 1993 decreased $188,000 and $586,000, respectively, from the com-
parable periods of the prior year primarily due to lower average debt
levels in the current year. In April 1993, the Company repaid
$6,600,000 of its $20,000,000, 10.03% unsecured note payable. In-
vestment income for the quarter and nine months ended November 26,
1993 decreased $104,000 and $291,000, respectively, from the compar-
able periods of the prior year primarily due to the liquidation of
marketable securities to meet the $6,600,000 debt repayment. Also,
marketable securities were liquidated to fund capital expenditures
including a significant building addition at the Company's Richardson
Road facility which was completed in August 1993. Other income for
the nine month periods ended November 26, 1993 and November 27, 1992
included $498,000 and $368,000, respectively, for royalties received
under a license agreement with a foreign vendor.
The income tax provision (benefit) for the nine month periods
ended November 26, 1993 and November 27, 1992 were based upon esti-
mated annual effective tax rates of 35% and 13%, respectively. The
13% tax rate in fiscal year 1993 resulted from expected tax losses
which were to provide benefits at less than the statutory tax rate.
The decrease in the estimated annual effective tax rate for fiscal
1994 from 45% as of August 27, 1993 to 35% as of November 26, 1993
was due to an increase in deferred tax benefits to be recognized in
accordance with new federal tax laws enacted. The Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" in the first quarter of fiscal year 1993 and
accordingly recorded the cumulative effect of the accounting change
at the beginning of that quarter. The cumulative effect of the
accounting change was $2,540,000, or $.64 per share, primarily
resulting from the recording of tax benefits related to contract loss
provisions recorded in prior years and adjusting tax rates on previ-
ously recorded tax assets and liabilities.
The Company had a firm orders backlog of approximately
$139,900,000 at November 26, 1993 compared to $156,300,000 at Febru-
ary 26, 1993. Backlog included unfunded amounts representing 13% at
November 26, 1993 and 10% at February 26, 1993.
Page 9 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating results for the remainder of fiscal year 1994 will be
influenced by various internal and external factors. The Company is
presently engaged in several programs involving state-of-the-art
development efforts and, as is the case with most development
efforts, technical and other complexities are often encountered.
These complexities could result in revisions to contract cost
estimates. When revised estimates indicate a loss, such loss is
provided for currently. The Company could also encounter similar
risks on other long-term contracts as well as research and
development efforts, and such factors could impact future operating
results. In addition, the Company continues to seek high-technology
seed programs which are intended to provide a base for the Company's
future operations. Such programs may require contract investment
provisions, or significant Company-sponsored research and development
expenditures, both reflecting the Company's commitment of its own
funds. Ongoing changes in many countries around the world have re-
sulted in the U.S. Government reassessing its approach to national
defense spending. Although it is clear that defense spending will
continue to decline, it is unclear how that spending will be redirec-
ted to build the new national defense architecture that is likely to
emerge. Management is continuing its strategic planning efforts in
order to select products and business areas which will enable the
Company to effectively compete and perform in a very demanding mar-
ketplace. Although the uncertainties of future world events and the
corresponding changes in national defense spending hang over the de-
fense industry, the Company's products, heavily concentrated in the
field of defense electronics, and management's constant thrust to
improve its design, manufacturing and quality systems, provide the
Company with the prerequisites to be competitive. The U.S. Govern-
ment and its suppliers continue to be the most significant customers
to the Company and a significant reduction in one or more of the Com-
pany's major defense programs, existing or anticipated, could ad-
versely affect the Company's operating results.
The Company from time to time is subject to claims and investi-
gations arising from the conduct of its business with the U.S.
Government. Under one such investigation, the Company has supplied
the Inspector General of the Department of Defense with certain docu-
ments related to the AN/MLQ-T4 Ground Jammer program. At this time,
management is unable to determine when the Government will complete
its investigation regarding the Ground Jammer program or whether the
Government will seek remedies as a result of its investigation. This
matter and other ongoing legal matters which may impact future opera-
ting results are described in Note 4 to the condensed consolidated
financial statements.
Liquidity and Capital Resources
The Company's primary source of short-term financing is cost
reimbursements under contracts with the U.S. Government and its sup-
pliers. That financing is supplemented, when necessary, through the
liquidation of short-term investments. Cash flows for the nine
months ended November 26, 1993 were provided through operations and
Page 10 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
liquidation of marketable securities, and were absorbed to repay
long-term debt and fund capital expenditures. At November 26, 1993,
the Company had available cash and equivalents and highly liquid
marketable securities of approximately $13,300,000 and a line of
credit agreement, which expires June 30, 1994, providing for borrow-
ings up to $5,000,000, including $500,000 set aside for foreign cur-
rency transactions.
The ratio of current assets to current liabilities was 2.5 to 1
at November 26, 1993 compared with 2.1 to 1 at February 26, 1993.
The improvement was primarily due to favorable cash flows from
operating activities. The long-term debt to equity ratio of .4 to 1
at November 26, 1993 was essentially unchanged from the ratio at
February 26, 1993. The Company's second installment repayment on its
10.03% unsecured note obligation is due April 1994. The scheduled
repayment is $3,300,000 with an option to accelerate the repayment of
an additional $1,700,000.
During the quarter ended August 27, 1993, the Company
substantially completed construction of a major building addition at
its Richardson Road facility. The total cost incurred to date,
including related expenditures, of approximately $4,300,000 was
funded through the liquidation of marketable securities.
In June 1993, the Company agreed to pay $2,200,000 in settle-
ment of civil claims pertaining to the pricing of a 1985 fixed-price
contract modification. The Company paid $1,100,000 in July 1993 and
will pay the balance in July 1994.
With a substantial amount of highly liquid assets and a strong
working capital position at November 26, 1993, capital resources
should be sufficient to meet the Company's operating needs for the
foreseeable future, as well as long-term debt maturities and other
anticipated cash outlays.
Page 11 of 13
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FORM 10-Q
PART II. OTHER INFORMATION
AEL INDUSTRIES, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the thirteen week period ended November 26, 1993.
Page 12 of 13
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FORM 10-Q
AEL INDUSTRIES, INC.
SIGNATURE
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.
AEL INDUSTRIES, INC.
____________________________________________________________________
(Registrant)
Date: January 5, 1994 /S/ John F. Sharkey
_______________ _______________________
John F. Sharkey
Vice President, Finance
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