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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 May 27, 1994
____________
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 July 1, 1994
__________________________________ ______________________________
Class A common stock, $1 par value 3,336,687
Class B common stock, $1 par value 434,717
Page 1 of 11
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AEL INDUSTRIES, INC.
FORM 10-Q
THIRTEEN WEEKS ENDED May 27, 1994
INDEX
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - May 27, 1994 and
February 25, 1994
Consolidated Statements of Opera- 4
tions Thirteen Weeks Ended May 27,
1994 and May 28, 1993
Consolidated Statements of Cash 5
Flows - Thirteen Weeks Ended
May 27, 1994 and May 28, 1993
Notes to Condensed Consolidated 6
Financial Statements
Management's Discussion and 7
Analysis of Results of Oper-
ations and Financial Condition
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports
on Form 8-K 10
Signature 11
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Page 2 of 11
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PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
May 27, February 25,
1994 1994
_____________ _____________
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $6,220 $10,414
Marketable securities 553 1,428
Receivables, including unbilled amounts
of $29,171 at May 27, 1994 and
$26,985 at February 25, 1994:
U. S. Government 38,425 35,717
Other 3,796 4,202
_____________ _____________
42,221 39,919
Inventories 3,115 4,375
Deferred income taxes 2,958 2,646
Other current assets 526 238
_____________ _____________
Total current assets 55,593 59,020
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $53,782 at May 27, 1994
and $52,375 at February 25, 1994) 44,015 44,323
Other assets 5,719 5,813
_____________ _____________
$105,327 $109,156
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,352 $4,795
Accrued salaries, wages and employee benefits 5,490 5,811
Other current liabilities 15,267 13,631
Current portion of long-term debt 3,842 5,542
_____________ _____________
Total current liabilities 28,951 29,779
Long-term debt, net of current portion 16,234 19,599
Other liabilities 1,724 1,713
Commitments and contingent liabilities
Note 3
Shareholders' equity 58,418 58,065
_____________ _____________
$105,327 $109,156
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</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
Weeks Ended Weeks Ended
May 27, 1994 May 28, 1993
________________ ________________
<S> <C> <C>
Sales and service revenues $30,574 $30,731
Operating costs and expenses:
Cost of products and services 23,088 23,277
Administrative and selling expenses 4,509 4,635
Bid and proposal costs 1,615 1,365
Research and development costs 577 405
________________ ________________
29,789 29,682
________________ ________________
Operating income 785 1,049
Interest expense (369) (489)
Investment income 84 151
Other income (expense), net (20) 87
________________ ________________
Income before income taxes 480 798
Income tax provision 144 360
________________ ________________
Net income $336 $438
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Net income per share $.09 $.12
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Weighted average shares outstanding 3,816,000 3,764,000
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</TABLE>
See accompanying notes
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AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Weeks
Ended Ended
May 27, 1994 May 28, 1993
________________ ________________
<S> <C> <C>
Cash flows from operating activities:
Net income $336 $438
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,616 1,648
Amortization of other assets 101 103
Deferred income taxes (215) 234
Accrued retirement benefits 11 (4)
Other (104)
(Increase) decrease in receivables (2,302) 6,085
(Increase) decrease in inventories and other
current assets 972 (2,055)
Increase (decrease) in accounts payable, accrued
liabilities and other current liabilities 872 (3,842)
________________ ________________
Net cash provided (absorbed) by operating
activities 1,287 2,607
________________ ________________
Cash flows from investing activities:
Additions to property, plant and equipment (1,333) (2,137)
Liquidations of marketable securities 875 4,436
Other 25 8
________________ ________________
Net cash provided (absorbed) by investing activities (433) 2,307
________________ ________________
Cash flows from financing activities:
Reductions in long-term debt (5,065) (6,706)
Other 17 4
________________ ________________
Net cash absorbed by financing activities (5,048) (6,702)
Decrease in cash and equivalents (4,194) (1,788)
Cash and equivalents at beginning of period 10,414 4,168
________________ ________________
Cash and equivalents at end of period $6,220 $2,380
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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
principles. In the opinion of management, all adjustments necessary
for a fair presentation of the results of the interim periods have
been made and are of a normal, recurring nature.
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 25, 1994.
2. 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
provided for currently in their entirety upon receipt of such
contracts by the Company. During the quarter ended May 27, 1994,
adjustments to contract cost estimates had a net unfavorable impact
on income of $2,100,000, compared with a net unfavorable impact of
$1,400,000 for adjustments of the same nature during the comparable
period ended May 28, 1993.
Other current liabilities at May 27, 1994 and February 25, 1994
include allowances for contract losses and other contract allowances
aggregating $4,000,000 and $3,900,000, respectively.
3. From time to time, the Company may be involved in lawsuits,
investigations and other legal proceedings arising from the ordinary
conduct of its business with the U.S. Government and others. 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
continues to cooperate with the EPA in the study of this site. In
the opinion of management, except for the matter described below,
these legal proceedings will not have a material adverse effect on
consolidated financial position.
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 or whether it will seek any remedies as a
result of its investigation.
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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
understanding of the Company's consolidated results of operations for
the thirteen weeks (quarter) ended May 27, 1994, as compared with the
thirteen weeks (quarter) ended May 28, 1993, and its consolidated
financial condition at May 27, 1994. The discussion should be read
in conjunction with the condensed consolidated financial statements
and notes thereto which appear elsewhere in this Form 10-Q.
Results of Operations
Sales and service revenues of $30,574,000 for the quarter ended
May 27, 1994 were essentially unchanged from the amount of revenues
reported for the quarter ended May 28, 1993. The avionics
installation/integration programs contributed 34% of revenues in the
current year compared with 27% in the comparable period of the prior
year. In particular, two avionics programs, the ANVIS/HUD program
and a program with a foreign customer, provided significantly higher
revenues in the current year, while revenues from the QF-106 program
declined considerably in the current year. Sales were also
favorably impacted in the current year by higher revenues from
TACJAM-A, an electronic countermeasures program, and the APR-39A
radar warning receiver program. These programs provided 14% and 10%,
respectively, of the current year's revenues compared with 8% and 7%
of the prior year's revenues. Revenues from the Band 9/10 program,
another electronic countermeasures program, decreased to 9% of
consolidated revenues in the current year from 13% in the prior year.
Operating income for the quarter ended May 27, 1994 was
$785,000 as compared with $1,049,000 for the quarter ended May 28,
1993. Gross margins followed sales and service revenues and were
essentially unchanged from the comparable period in the prior year.
A favorable overhead spending performance reflected in the current
year's gross margin was offset by a $700,000 increase in contract
cost estimate and profitability adjustments. Additionally impacting
operating income for the quarter ended May 27, 1994, administrative
and selling expenses decreased $126,000, while bid and proposal costs
and research and development costs increased $250,000 and $172,000,
respectively, from the amounts reported in the quarter ended May 28,
1993.
Interest expense for the quarter ended May 27, 1994 decreased
$120,000 from the comparable period of the prior year due to lower
average borrowing levels. In April 1993 and April 1994, the Company
repaid $6,600,000 and $5,000,000, respectively, of its $20,000,000,
10.03% unsecured note payable. Investment income for the quarter
ended May 27, 1994 decreased $67,000 from the comparable period of
the prior year due primarily to the liquidation of marketable
securities to meet the aforementioned debt repayments and to fund
capital expenditures. Other income for the quarters ended May 27,
1994 and May 28, 1993 included $202,000 and $299,000, respectively,
for royalties received under a license agreement with a foreign
vendor.
Page 7 of 11
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The income tax provision for the quarter ended May 27, 1994 is
based on an annual effective tax rate of 30% which is consistent with
the annual effective tax rate in fiscal year 1994. The income tax
provision for the quarter ended May 28, 1993 was based upon an
original estimated annual effective tax rate of 45% which was
subsequently adjusted in fiscal year 1994 due to the retroactive re-
enactment of federal income tax research credits recorded in the
Company's third quarter of fiscal year 1994.
The Company had a firm orders backlog of approximately
$104,100,000 (13% unfunded) at May 27, 1994 compared to $121,500,000
(12% unfunded) at February 25, 1994. The decline in firm orders
backlog is due to the Government's delays in funding on several of
the Company's major development programs. Additional awards expected
during the second half of fiscal year 1995 should increase backlog by
the end of the fiscal year.
Operating results for the remainder of fiscal year 1995 will be
influenced by various internal and external factors. The Company is
presently engaged in several programs involving complicated
engineering development efforts and, as is the case with most
development efforts, technical and other complexities are often
encountered. These complexities have resulted in increased contract
cost estimates in the past and could have the same result in the
future. The Company could also encounter similar risks on other
long-term contracts 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
resulted 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
redirected. Management is continuing its strategic planning efforts
in order to enhance the Company's ability to be responsive to the
Government's requirements and to select products and business areas
which will enable the Company to effectively compete and perform in a
very demanding marketplace. Although the uncertainties of future
world events and the corresponding changes in national defense
spending hang over the defense industry, the Company's products,
heavily concentrated in the field of defense electronics, and man-
agement's constant thrust to improve its design, manufacturing and
quality systems, provide the Company with the prerequisites to be
competitive. The U.S. Government and its suppliers continue to be
the most significant customers to the Company, and a significant
reduction in one or more of the Company's major defense programs,
existing or anticipated, could adversely effect the Company's future
operating results. In addition to its business with the U.S.
Government, the Company continues to seek commercial applications for
its products.
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company from time to time is subject to claims and
investigations 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
documents related to the AN/MLQ-T4 Ground Jammer program. At this
time, management is unable to determine when the Government will
complete its investigation or whether the Government will seek
remedies as a result if its investigation. This matter and other
ongoing legal matters which may impact future operating results are
described in Note 3 to the 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
suppliers. That financing is supplemented, when necessary, through
the liquidation of short-term investments and borrowings under a line
of credit agreement. Cash flows for the quarter ended May 27, 1994
were provided through operations and liquidation of marketable
securities, and were absorbed to repay long-term debt and fund
capital expenditures. At May 27, 1994, the Company had available
cash and equivalents and highly liquid marketable securities
totalling $6,800,000, and a line of credit agreement, which expires
July 31, 1994, providing for borrowings up to $5,000,000, including
$500,000 set aside for foreign currency transactions. The Company
expects to renew the line of credit agreement at essentially the same
terms and for an amount required to satisfy its needs for the
foreseeable future.
The ratio of current assets to current liabilities was 1.9 to 1
at May 27, 1994 compared with 2.0 to 1 at February 25, 1994. The
long-term debt to equity ratio of .3 to 1 at May 27, 1994 was
essentially unchanged from the ratio at February 25, 1994. The
Company's next installment repayment of $3,300,000 on its 10.03%
unsecured note obligation is due April 1995.
The Company agreed in 1993 to pay the U.S. Government
$2,200,000 in settlement of civil claims pertaining to the pricing of
a 1985 fixed-price contract modification. Pursuant to that
agreement, the Company paid two installments of $1,100,000 in July
1993 and June 1994.
With a substantial amount of highly liquid assets and a strong
working capital position at May 27, 1994, 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.
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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 May 27, 1994.
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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:July 8, 1994 /S/ John F. Sharkey
____________ _______________________
John F. Sharkey
Vice President, Finance
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