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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 August 26, 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 September 30, 1994
__________________________________ _________________________________
Class A common stock, $1 par value 3,347,052
Class B common stock, $1 par value 434,717
Page 1 of 11
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AEL INDUSTRIES, INC.
FORM 10-Q
TWENTY-SIX WEEKS ENDED AUGUST 26, 1994
INDEX
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - August 26, 1994 and
February 25, 1994
Consolidated Statements of Oper- 4
ations Thirteen and Twenty-Six
Weeks Ended August 26, 1994 and
August 27, 1993
Consolidated Statements of Cash 5
Flows - Twenty-Six Weeks Ended
August 26, 1994 and August 27,
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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<TABLE>
PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
August 26, February 25,
1994 1994
_____________ _____________
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $7,023 $10,414
Marketable securities 534 1,428
Receivables, including unbilled amounts
of $24,608 at August 26, 1994 and
$26,985 at February 25, 1994:
U. S. Government 32,537 35,717
Other 4,724 4,202
_____________ _____________
37,261 39,919
Inventories 2,215 4,375
Deferred income taxes 2,694 2,646
Other current assets 470 238
_____________ _____________
Total current assets 50,197 59,020
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $55,166 at August 26, 1994
and $52,375 at February 25, 1994) 43,442 44,323
Other assets 5,673 5,813
_____________ _____________
$99,312 $109,156
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,111 $4,795
Accrued salaries, wages and employee benefits 5,667 5,811
Other current liabilities 11,018 13,631
Current portion of long-term debt 3,842 5,542
_____________
Total current liabilities 22,638 29,779
Long-term debt, net of current portion 16,131 19,599
Other liabilities 1,744 1,713
Commitments and contingent liabilities
Note 3
Shareholders' equity 58,799 58,065
_____________ _____________
$99,312 $109,156
============ ============
See accompanying notes
</TABLE> Page 3 of 11
<TABLE>
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<CAPTION>
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 26, 1994 August 27, 1993 August 26, 1994 August 27, 199
________________ ________________ ________________ ______________
<S> <C> <C> <C> <C>
Sales and service revenue $30,911 $27,754 $61,485 $58,485
Operating costs and expenses:
Cost of products and services 23,712 20,917 46,800 44,194
Administrative and selling expenses 4,177 4,054 8,686 8,689
Bid and proposal costs 1,600 1,031 3,215 2,396
Research and development costs 406 559 983 964
________________ ________________ ________________ ______________
29,895 26,561 59,684 56,243
________________ ________________ ________________ ______________
Operating income 1,016 1,193 1,801 2,242
Interest expense (307) (376) (676) (865)
Investment income 58 119 142 270
Other expense, net of other income (261) (205) (281) (118)
________________ ________________ ________________ ______________
Income before income taxes 506 731 986 1,529
Income tax provision 152 326 296 686
________________ ________________ ________________ ______________
Net Income $354 $405 $690 $843
================ ================ ================ ==============
Net income per share $0.09 $0.10 $0.18 $0.22
================ ================ ================ ==============
Weighted average shares outstanding 3,820,000 3,751,000 3,818,000 3,755,000
================ ================ ================ ==============
See accompanying notes
Page 4 of 11
</TABLE>
<TABLE>
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Twenty-Six Twenty-Six
Weeks Weeks
Ended Ended
August 26, 1994 August 27, 1993
________________ ________________
<S> <C> <C>
Cash flows from operating activities:
Net income $690 $843
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 3,188 3,281
Amortization of other assets 206 204
Deferred income taxes 67 606
Accrued retirement benefits 31 (334)
Other (181)
Decrease in receivables 2,658 8,177
(Increase) decrease in inventories and other current assets 1,928 (2,278)
Decrease in accounts payable, accrued
liabilities and other current liabilities (5,441) (6,211)
________________ ________________
Net cash provided by operating activities 3,146 4,288
________________ ________________
Cash flows from investing activities:
Additions to property, plant and equipment (2,352) (3,761)
Liquidations of marketable securities 894 7,978
Other 45 9
________________ ________________
Net cash provided (absorbed) by investing
activities (1,413) 4,226
________________ ________________
Cash flows from financing activities:
Reductions in long-term debt (5,168) (6,810)
Other 44 8
________________ ________________
Net cash absorbed by financing activities (5,124) (6,802)
Increase (decrease) in cash and equivalents (3,391) 1,712
Cash and equivalents at beginning of period 10,414 4,168
________________ ________________
Cash and equivalents at end of period $7,023 $5,880
================= ================
See accompanying notes
Page 5 of 11
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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 and six months ended
August 26, 1994, contract cost estimates and profitability
adjustments resulted in net charges to income of $1,200,000 and
$3,300,000, respectively, compared with net charges of $1,600,000 and
$3,000,000 for adjustments of the same nature during the comparable
periods ended August 27, 1993.
Other current liabilities at August 26, 1994 and February 25,
1994 include allowances for contract losses and other contract
allowances aggregating $4,600,000 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) and twenty-six weeks (six months) ended
August 26, 1994, as compared with the thirteen weeks (quarter) and
twenty-six weeks (six months) ended August 27, 1993, and its
consolidated financial condition at August 26, 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 for the quarter and six months ended
August 26, 1994 were $30,911,000 and $61,485,000, increases of 11%
and 5% over revenues reported for the comparable periods ended August
27, 1993. The current year was favorably impacted by higher revenues
from TACJAM-A, an electronic countermeasures program which provided
16% and 15% of total revenues in the current year's quarter and six
month periods, up from 5% and 7% for the comparable periods of the
prior year. In addition, an avionics installation/integration program
with a foreign customer generated 9% of the current year's revenues,
up from only 1% in the prior year. For avionics programs on the
whole, revenues were fairly stable, providing 35% of total revenues
in the current year's quarter and six month periods, compared with
38% and 32% in the corresponding periods of the prior year. Programs
such as the QF-106 avionics program, the Type 18 ADF electronic
surveillance measures program and several radar environmental
simulator programs all contributed less to total revenues in the
current year due to the maturity of those programs. Finally, revenues
from the Band 9/10 electronic countermeasures program fell to 6% of
total revenues in the current year from 10% in the prior year.
Operating income for the quarter and six months ended August
26, 1994 was $1,016,000 and $1,801,000, respectively, down from
$1,193,000 and $2,242,000 reported for the comparable periods ended
August 27, 1993. In comparing the quarters ended August 26, 1994 and
August 27, 1993, the decrease in operating income was primarily due
to an increase of $569,000 in bid and proposal spending, offset by a
reduction of $400,000 in adverse contract cost estimates and
profitability adjustments. In comparing the six month periods ended
August 26, 1994 and August 27, 1993, the decrease in operating income
was primarily due to an increase of $819,000 in bid and proposal
spending combined with an increase of $300,000 in adverse contract
cost estimates and profitability adjustments, offset by the favorable
impact of increased revenues in the current year. The higher bid and
proposal spending in the current year reflects the Company's
continued bidding activity for development programs and other long-
term business opportunities.
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
Interest expense for the quarter and six months ended August
26, 1994 decreased $69,000 and $189,000, respectively, from the
comparable periods 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 and six months ended
August 26, 1994 decreased $61,000 and $128,000, respectively, from
the comparable periods of the prior year primarily due to the
liquidation of marketable securities to meet the aforementioned debt
repayments and to fund capital expenditures. Other income for the
six months ended August 26, 1994 and August 27, 1993 included
$202,000 and $299,000, respectively, for royalties received under a
license agreement with a foreign vendor.
The income tax provision for the six months ended August 26,
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 first six months of fiscal year 1994
was based upon an original estimated annual effective tax rate of 45%
which was subsequently adjusted 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
$99,800,000 (9% unfunded) at August 26, 1994 compared to $121,500,000
(12% unfunded) at February 25, 1994. The firm orders backlog is not
expected to change substantially throughout the balance of the
current 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
Page 8 of 11
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FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 and services, including the development of a line of
wide dynamic range fiber optic links for use in CATV and cellular
communications systems, and expansion of its aircraft modification
business into commercial aviation.
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 six months ended August 26,
1994 were provided through operations and the liquidation of
marketable securities, and were absorbed to repay long-term debt and
fund capital expenditures. At August 26, 1994, the Company had
available cash and equivalents and highly liquid marketable securi-
ties totalling $7,600,000, and a line of credit agreement, which
expires June 30, 1995, providing for borrowings up to $5,000,000, in-
cluding $500,000 set aside for foreign currency transactions.
The ratio of current assets to current liabilities was 2.2 to 1
at August 26, 1994 compared with 2.0 to 1 at February 25, 1994. The
long-term debt to equity ratio of .3 to 1 at August 26, 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.
With a substantial amount of highly liquid assets and a strong
working capital position at August 26, 1994, capital resources should
be sufficient to meet the Company's operating needs for the fore-
seeable future, as well as long-term debt maturities and other
anticipated cash outlays.
Page 9 of 11
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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 twenty-six week period ended August 26, 1994.
Page 10 of 11
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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: October 7, 1994 /S/ John F. Sharkey
_______________ _______________________
John F. Sharkey
Vice President, Finance
Page 11 of 11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AEL
INDUSTRIES, INC. FORM 10-Q FOR PERIOD ENDED AUGUST 26, 1994 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-24-1995
<PERIOD-END> AUG-26-1994
<CASH> 7,023
<SECURITIES> 534
<RECEIVABLES> 37,261
<ALLOWANCES> 0
<INVENTORY> 2,215
<CURRENT-ASSETS> 3,164
<PP&E> 98,608
<DEPRECIATION> 55,166
<TOTAL-ASSETS> 99,312
<CURRENT-LIABILITIES> 22,638
<BONDS> 16,131
<COMMON> 3,780
0
0
<OTHER-SE> 55,019
<TOTAL-LIABILITY-AND-EQUITY> 99,312
<SALES> 61,485
<TOTAL-REVENUES> 61,485
<CGS> 46,800
<TOTAL-COSTS> 46,800
<OTHER-EXPENSES> 983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 676
<INCOME-PRETAX> 986
<INCOME-TAX> 296
<INCOME-CONTINUING> 690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>