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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-7390
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Aero Systems Engineering, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 651-227-7515
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of March 31, 2001, 4,401,625 shares of common stock, par value $.20 per
share, were outstanding.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended March 31, 2001
Page
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 12
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2001 2000
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 26 $ 48
Accounts Receivable, net 4,243 6,361
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 6,423 4,997
Inventories:
Materials and Supplies 1,201 1,103
Projects in Process 564 380
Prepaid Expenses 56 58
Deferred and Prepaid Income Taxes 676 666
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Total Current Assets 13,189 13,613
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 8,390 8,325
Wind Tunnels & Instrumentation 3,029 2,978
Building Improvements 1,489 1,489
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16,419 16,303
Less Accumulated Depreciation 11,461 11,119
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Property, Plant, and Equipment, net 4,958 5,184
Total Assets $ 18,147 $ 18,797
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED BALANCE SHEETS
(continued)
March 31, December 31,
LIABILITIES 2001 2000
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 40 $ 51
Notes Payable 6,709 6,976
Accounts Payable:
Trade 1,407 1,636
Affiliated Companies 52 0
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,966 2,061
Accrued Warranty and Losses 472 463
Accrued Salaries and Wages 959 898
Other Accrued Liabilities 1,545 1,422
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Total Current Liabilities 13,150 13,507
OTHER LIABILITIES
Deferred Income Taxes 570 570
Capital Lease Obligations,
Less Current Maturities 110 120
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
March 31, 2001 and December 31, 2000. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,537 2,820
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Total Stockholders' Equity 4,317 4,600
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Total Liabilities and Stockholders' Equity $ 18,147 $ 18,797
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Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
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2001 2000
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Earned Revenue $ 5,739 $ 6,760
Cost of Earned Revenue 4,396 5,367
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Gross Profit 1,343 1,393
Operating Expenses 1,403 1,758
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Operating Profit(Loss) (60) (365)
Other Income (Expense)
Interest Expense (227) (101)
Other 4 --
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(223) (101)
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Income (Loss) Before Income Taxes (283) (466)
Net Income (Loss) $ (283) $ (466)
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NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.11)
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Dividends per Share None None
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
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2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (283) $ (466)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation 342 280
(Increase) Decrease in Assets:
Accounts Receivable 2,118 1,891
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (1,426) 214
Inventories (282) (194)
Prepaid Expenses (8) (194)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 16 346
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts (95) (1,225)
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Net Cash Provided (Used) by
Operating Activities 382 652
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (116) (60)
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Net Cash Used in Investing Activities (116) (60)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (267) (581)
Principal Payments under Capital Lease Obligations (21) (20)
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Net Cash Used by Financing Activities (288) (601)
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NET CHANGE IN CASH (22) (9)
CASH AT BEGINNING OF YEAR 48 48
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CASH AT END OF QUARTER $ 26 $ 39
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AERO SYSTEMS ENGINEERING , INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
March 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ending
March 31, 2001 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2001. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 2000.
Certain prior year balances have been reclassified to conform to the
current quarter's presentation.
NOTE B - DERIVATIVES AND HEDGING
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, during the first quarter of 2001. In doing so, the company
did not incur any material transition adjustments. All derivatives are
recognized on the balance sheet at their fair value. On the date a
derivative contract is entered into, the derivative is designated as a
fair value or cash flow hedge.
The Company formally documents all relationships between hedging
instruments and the hedged items, as well as its risk-management
objectives and strategy for undertaking various hedge transactions. The
Company formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items.
The Company uses foreign currency forward exchange contracts to hedge
against the effect of exchange rate fluctuations on certain foreign
currency denominated contracts.
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $5,139,840 were outstanding on March 31,
2001 to various customers as bid bonds or in exchange for down payments
or warranty performance bonds.
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AERO SYSTEMS ENGINEERING , INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited, 000's omitted)
March 31, 2001
NOTE D - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
March 31, March 31,
2001 2000
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Costs Incurred on Uncompleted Contracts $ 45,719 $ 39,030
Estimated Earnings Thereon 12,923 7,670
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Total Earned Revenue on Uncompleted Contracts 58,642 46,700
Less Billings Applicable thereto 54,185 46,412
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$ 4,457 $ 288
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Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 6,423 $ 4,301
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,966 4,013
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$ 4,457 $ 288
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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Financial Condition
First quarter 2001 (All dollar amounts are in thousands.)
Worldwide revenue for first quarter 2001 totaled $5,739, which was a 15%
decrease from $6,760 in first quarter of last year. Net loss for first quarter
was $283 as compared to the first quarter loss of $466 last year.
Backlog of orders as of March 31, 2001 was $26,215 as compared with $27,710 and
$18,619 as of December 31, 2000 and March 31, 2000, respectively. This 41%
increase from first quarter 2000 is mostly the result of the receipt of a major
wind tunnel order from a customer in Singapore during the second quarter of
2000, causing a significant increase to backlog.
The revenue decrease was mostly attributable to the delay and the uncertainty of
U.S. government approval of the export license application for the major wind
tunnel project for a customer in Singapore. The export license was submitted for
approval during the fourth quarter of 2000, and at the time of this filing, the
Company remains optimistic that the export license will ultimately be granted.
Due to this delay, work on the project has been very limited, resulting in lower
revenue and margin recognition. The loss in the first quarter was also partially
the result of increased interest expense due to the higher line of credit
balance.
Cost of earned revenue for first quarter, which includes manufacturing and
engineering costs, was 77% of revenue as compared to 79% during the same period
of last year. This decrease is mostly the result of improved project margins on
the wind tunnels and Aerotest Lab projects during the first quarter 2001.
The Company recognizes revenue using the percentage of completion method for its
long-term contracts. Estimates of revenues earned and expenses to be incurred to
complete the contracts are made in conjunction with the preparation of the
quarterly financial statements. However, final determination of the
profitability of the contracts are subject to settlement of any final claims
which may develop at the time the completed contract is accepted by the customer
as well as risks inherent in estimates which are made during the course of the
contract work.
Selling, general and administrative expenses of $1,296 were 23% of revenues
during first quarter 2001 as compared to $1,562 and 23% during the same period
of last year. This decrease of $266 is the result of lower bid and proposal
activities in first quarter 2001 as compared to first quarter 2000. Bid and
proposal costs in the first quarter 2000 were significantly higher than
typically expended in a quarter due to the timing of a couple of large proposal
submissions.
Research and development expenses were $107 during first quarter of 2001 as
compared to $196 in the same period in 2000. This decrease of $89 or 45% is
mostly related to the focus of certain resources in first quarter 2001 on
project work rather than on R&D activities. During 2001, additional R & D will
be incurred for continued enhancements to the ASE2000, aero-acoustic analysis
and new product initiatives.
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Interest expense of $227 was incurred during the quarter as compared to $101
from the same period in the prior year. The average rate of interest on
short-term borrowings has had little change, while the average amount of
borrowings outstanding has increased in the first quarter as compared to the
first quarter of last year.
Capital expenditures were $116 as compared to $60 for the same period of last
year. This increase of $56 is attributed to the acquisition of new test and
calibration equipment. Additional capital expenditures will be used to acquire
additional equipment for research and development projects, facility
improvements and desktop upgrades.
Accounts receivable at the end of first quarter was $4,243 as compared with the
year end balance of $6,361. This decrease of $2,118 was due mainly to the
collection of several large invoices outstanding at the end of 2000.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of first quarter was $6,423, which is an increase of $1,426 or 29% as
compared with the year-end 2000 balance. The Company recognizes profit on
long-term projects on the percentage of completion basis, which permits earned
revenue to be recognized prior to the time that progress payments are billed.
When this occurs, amounts are added to this asset account for the recognition of
earned revenue prior to the billing of progress payments. The decrease since
year-end is due to the timing of billing milestones related to the contracts.
Billings are a function of contract terms and do not necessarily relate to the
percentage of completion of a project.
Notes payable balance was $6,709 as compared to the year end balance of $6,976,
which is a decrease of $267 or 4%. This decrease is primarily the result of
timing of project expenditures as compared to invoicing milestones.
Accounts payable and accrued expenses at the end of first quarter 2001 increased
$16 or less than 1% as compared to the year end 2000 balance. This was primarily
due to an increase in accrued job costs relating to ongoing projects.
Billings in excess of costs and estimated earnings on uncompleted contracts at
the end of first quarter decreased $95 to $1,966 compared to the year-end 2000
balance of $2,061. The decrease since year-end is due to the timing of billing
milestones related to contracts. Billings are a function of contract terms and
do not necessarily relate to the percentage of completion of a project.
The Company operates on a global basis and, during an average year, generates
approximately 50% of its revenues from international customers. This trend has
continued for the last five years as foreign airlines and government agencies
purchase products that ASE designs and produces. Most of the Company's contracts
are denominated in U.S. dollars. However, a few of them are denominated in the
customer's local currency. Therefore, the Company has entered into several
foreign exchange forward contracts having maturities within the next eighteen
months. The face amounts represent U.S. dollar equivalents of a non-U.S. dollar
denominated forward contract. The amounts at risk are not material, and the
Company has the financial ability to generate cash flows to offset the expected
gains or losses when the contracts mature.
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The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. Funds under these
lines of credit are actually provided by Celsius Inc. and ultimately are
guaranteed by Saab AB. Celsius Inc., a United States corporation, is a wholly
owned subsidiary of Saab AB. Celsius Inc. owns approximately 80% of the
outstanding shares of common stock of ASE. A first security interest in all
assets of ASE has been granted to Celsius Inc., and a fee is paid through
Celsius Inc.
Prior to the first quarter 2000, Celsius Inc., a U.S. company, was a wholly
owned subsidiary of Celsius AB, a Swedish company, but is now ultimately owned
by Saab AB, also a Swedish company. During the fourth quarter of 1999, Saab AB
issued a tender offer to acquire all of the outstanding shares of Celsius AB.
Saab AB completed the acquisition of Celsius AB during March 2000.
ASE currently has a bank line of credit, which enables it to borrow up to a
total of $6,000. As of March 31, 2001, $6,709 was used. Although the line of
credit has a $6,000 limit, Celsius Inc. has allowed the Company to exceed this
limit for short periods of time. The portion over $6,000 is assessed a higher
interest rate of 11%. The Company believes that these bank lines of credit,
along with cash flows from continuing operations, are adequate to support the
Company's cash needs for the immediate future.
Highly competitive market conditions have minimized the margins on new
contracts. Productivity improvements and cost reduction programs are continually
being initiated to increase margins.
Looking ahead throughout the remainder of 2001, the expected approval of the
Singapore export license, the amount of business in backlog and the number of
proposals outstanding should provide a solid base for the remainder of the year.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) No exhibits are included in this filing.
(b) No Current Reports on Form 8-K were filed during the quarter
ended March 31, 2001, or during the period from March 31, 2001 to
the date of filing of this quarterly report on Form 10-Q.
SIGNATURES
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 thereto duly authorized.
Date: May 14, 2001
/s/ Charles Loux
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Charles Loux, President and CEO
/s/ Steven R. Hedberg
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Steven R. Hedberg, Chief Financial Officer
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