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 25, 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 January 3, 1995
__________________________________ _________________________________
Class A common stock, $1 par value 3,350,197
Class B common stock, $1 par value 434,717
Page 1 of 13
AEL INDUSTRIES, INC.
FORM 10-Q
THIRTY-NINE WEEKS ENDED NOVEMBER 25, 1994
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance 3
Sheets - November 25, 1994 and
February 25, 1994
Consolidated Statements of Oper- 4
ations Thirteen and Thirty-Nine
Weeks Ended November 25, 1994 and
November 26, 1993
Consolidated Statements of Cash 5
Flows - Thirty-Nine Weeks Ended
November 25, 1994 and November 26,
1993
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 11
Signature 12
Page 2 of 13
PART I. FINANCIAL INFORMATION FORM 10-Q
AEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
November 25, February 25,
1994 1994
_____________ _____________
ASSETS
Current assets:
Cash and equivalents $3,232 $10,414
Marketable securities 524 1,428
Receivables, including unbilled amounts
of $26,734 at November 25, 1994 and
$28,313 at February 25, 1994:
U. S. Government 36,570 35,717
Other 3,693 4,202
_____________ _____________
40,263 39,919
Inventories 1,136 4,375
Deferred income taxes 2,001 2,646
Other current assets 344 238
_____________ _____________
Total current assets 47,500 59,020
Property, plant and equipment (net of
accumulated depreciation and amorti-
zation of $56,728 at November 25, 1994
and $52,375 at February 25, 1994) 42,993 44,323
Other assets 5,705 5,813
_____________ _____________
$96,198 $109,156
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,128 $4,795
Accrued salaries, wages and employee benefits 5,064 5,811
Other current liabilities 8,114 13,631
Current portion of long-term debt 3,857 5,542
____________ _____________
Total current liabilities 19,163 29,779
Long-term debt, net of current portion 15,846 19,599
Other liabilities 1,754 1,713
Commitments and contingent liabilities
Note 3
Shareholders' equity 59,435 58,065
_____________ _____________
$96,198 $109,156
============= =============
See accompanying notes
Page 3 of 13
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
November 25, 1994 November 26, 1993 November 25, 1994 November 26, 1993
_________________ _________________ _________________ _________________
Sales and service revenue $30,939 $27,292 $92,424 $85,777
Operating costs and expenses:
Cost of products and services 23,556 19,992 70,356 64,186
Administrative and selling expenses 4,338 4,179 13,024 12,868
Bid and proposal costs 1,228 1,716 4,443 4,112
Research and development costs 625 617 1,608 1,581
________________ ________________ ________________ ______________
29,747 26,504 89,431 82,747
________________ ________________ ________________ ______________
Operating income 1,192 788 2,993 3,030
Interest expense (323) (431) (999) (1,296)
Investment income 68 104 210 374
Other expense, net of other income (42) (35) (323) (153)
________________ ________________ ________________ ______________
Income before income taxes 895 426 1,881 1,955
Income tax provision 268 564 686
________________ ________________ ________________ ______________
Net Income $627 $426 $1,317 $1,269
================ ================ ================ ==============
Net income per share $0.16 $0.12 $0.34 $0.34
================ ================ ================ ==============
Weighted average shares outstanding 3,819,000 3,785,000 3,818,000 3,764,000
================ ================ ================ ==============
See accompanying notes
Page 4 of 13
AEL INDUSTRIES, INC. FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Thirty-Nine Thirty-Nine
Weeks Weeks
Ended Ended
November 25, 1994 November 26, 1993
_________________ _________________
Cash flows from operating activities:
Net income $1,317 $1,269
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 4,749 4,898
Amortization of other assets 312 306
Deferred income taxes 594 588
Accrued retirement benefits 41 (322)
Other (133) (58)
Decrease in receivables 984 10,804
(Increase) decrease in inventories and other current assets 1,805 (919)
Decrease in accounts payable, accrued
liabilities and other current liabilities (8,931) (7,389)
________________ ________________
Net cash provided by operating activities 738 9,177
________________ ________________
Cash flows from investing activities:
Additions to property, plant and equipment (3,465) (5,358)
Liquidations of marketable securities 904 10,572
Other 26 9
________________ ________________
Net cash provided (absorbed) by investing
activities (2,535) 5,223
________________ ________________
Cash flows from financing activities:
Reductions in long-term debt (5,438) (6,875)
Other 53 30
________________ ________________
Net cash absorbed by financing activities (5,385) (6,845)
Increase (decrease) in cash and equivalents (7,182) 7,555
Cash and equivalents at beginning of period 10,414 4,168
________________ ________________
Cash and equivalents at end of period $3,232 $11,723
================ ================
See accompanying notes
Page 5 of 13
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 nine months ended
November 25, 1994, contract cost estimates and profitability
adjustments resulted in net charges to income of $600,000 and
$3,900,000, respectively, compared with net charges of $900,000 and
$3,900,000 for adjustments of the same nature during the comparable
periods ended November 26, 1993. In addition to the impact of
contract cost adjustments, an investment provision of $300,000 was
recorded in the prior year quarter and nine months ended November 26,
1993.
Other current liabilities at November 25, 1994 and February 25,
1994 include $3,600,000 and $3,900,000, respectively, for allowances
for contract losses, and $1,300,000 and $4,600,000, respectively,
representing billings in excess of revenues recognized on uncompleted
contracts. In addition, receivables at November 25, 1994 include
unbilled amounts of $2,300,000 for costs subject to future
negotiations with the U.S. Government which may not be billed within
one year.
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.
Page 6 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company continues to cooperate with the Department of
Defense in an investigation which commenced in 1992 regarding the
AN/MLQ-T4 Ground Jammer program. At this time, management is unable
to determine when the Government will complete its inquiry or whether
it will seek any remedies.
Page 7 of 13
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 thirty-nine weeks (nine months)
ended November 25, 1994, as compared with the thirteen weeks
(quarter) and thirty-nine weeks (nine months) ended November 26,
1993, and its consolidated financial condition at November 25, 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 nine months
ended November 25, 1994 were $30,939,000 and $92,424,000, increases
of 13% and 8% over revenues reported for the comparable periods ended
November 26, 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 nine month periods, up from 5% and 6% for the comparable periods
of the prior year. In addition, two avionics installation/integration
programs provided significantly higher revenues in the current year.
One avionics program with a foreign customer generated 8% of the
current year's revenues, up from only 2% in the prior year. The other
avionics program, the ANVIS/HUD program, generated 10% of the current
year's revenues, up from 6% in the prior year. Avionics programs in
the aggregate provided 40% and 37% of total revenues in the current
year's quarter and nine month periods, compared with 33% and 32% in
the corresponding periods of the prior year. On the other hand,
several radar environmental simulator programs and other programs
such as the Type-18 ADF electronic surveillance measures program
contributed less to total revenues in the current year due to program
maturation. Finally, revenues from the Band 9/10 electronic count-
ermeasures program fell to 6% of total revenues in the current year
from 10% in the prior year.
Operating income for the quarter and nine months ended November
25, 1994 was $1,192,000 and $2,993,000, respectively, compared with
$788,000 and $3,030,000 reported for the comparable periods ended
November 26, 1993. In comparing the quarters ended November 25, 1994
and November 26, 1993, the increase in operating income was primarily
due to a decrease of $300,000 in adverse cost estimates and
profitability adjustments, no contract investment provisions in the
current year (a $300,000 provision occurred in the prior year), and a
decrease of $488,000 in bid and proposal spending. These favorable
items were partially offset by overall lower gross margins on
revenues for the current year's quarter and a $159,000 increase in
administrative and selling expenses. Although revenues in the current
year increased over the prior year, the increase, when comparing the
two quarters, was primarily attributable to programs with little or
no gross margin, thereby significantly reducing the impact of
increased revenues on operating income. That same revenue mix factor
which impacted the gross margin comparisons for the quarters had a
Page 8 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
less significant impact on a year to date basis, and, in comparing
the nine month periods in the current and prior years, the increased
revenues in the current year had an overall favorable impact on gross
margins. That favorable impact, however, was offset by increases in
bid and proposal spending and administrative and selling expenses,
resulting in an overall slight decrease in operating income for the
nine month period of the current year.
Interest expense for the quarter and nine months ended November
25, 1994 decreased $108,000 and $297,000, 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 nine months
ended November 25, 1994 decreased $36,000 and $164,000, 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
nine months ended November 25, 1994 and November 26, 1993 included
$243,000 and $498,000, respectively, for royalties received under a
license agreement with a foreign vendor.
The income tax provision for the nine months ended November 25,
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 nine months of fiscal year
1994 was based upon an estimated annual effective tax rate of 35%
which included the impact of an adjustment to the tax rate for 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 $
93,512,000, (5% unfunded) at November 25, 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 and
beyond 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. The Company presently has a program for which certain
unanticipated incurred costs are subject to future negotiations with
the U.S. Government, and the outcome of those negotiations could
impact future operating results. At November 25,1994, the Company had
recorded an unbilled receivable of $2,300,000 for such costs. In
addition, the Company in the past has sought high-technology seed
programs and may do so again in the future. Such programs, which are
intended to provide a base for the Company's future operations, may
Page 9 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. 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 management'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. In one such instance, the Company continues to cooperate
with the Department of Defense in an investigation which commenced
in 1992 regarding the AN/ MLQ-T4 Ground Jammer program. At this
time, management is unable to determine when the Government will
complete its inquiry or whether it will seek any remedies. 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 nine months ended November
25, 1994 were provided through operations and the liquidation of
marketable securities, and were absorbed to repay long-term debt and
fund capital expenditures. At November 25, 1994, the Company had
available cash and equivalents and highly liquid marketable securi-
ties totalling $3,800,000, and a line of credit agreement, which
expires June 30, 1995, providing for borrowings up to $5,000,000.
Page 10 of 13
FORM 10-Q
AEL INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The ratio of current assets to current liabilities was 2.5 to 1
at November 25, 1994 compared with 2.0 to 1 at February 25, 1994. The
long-term debt to equity ratio of .3 to 1 at November 25, 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 the current amount of highly liquid assets, the strong
working capital position and the available borrowing capacity at
November 25, 1994, capital resources should be sufficient to meet the
Company's operating needs and long-term debt maturities for the fore-
seeable future.
Page 11 of 13
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 thirty-nine week period ended November 25, 1994.
Page 12 of 13
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 9, 1995 /S/ John F. Sharkey
_______________ _______________________
John F. Sharkey
Vice President, Finance
Page 13 of 13