1
================================================================================
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 June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-7390
Aero Systems Engineering, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
------------------------------- -------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 651-227-7515
------------
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 [ ]
As of June 30, 2001, 4,401,625 shares of common stock, par value $.20 per share,
were outstanding.
================================================================================
2
Page 2
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended June 30, 2001
Page
----
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
3
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 2001 2000
------ ---------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 25 $ 48
Accounts Receivable, net 3,375 6,361
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 6,593 4,997
Inventories:
Materials and Supplies 1,055 1,103
Projects in Process 620 380
Prepaid Expenses 50 58
Deferred and Prepaid Income Taxes 676 666
------- -------
Total Current Assets 12,394 13,613
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 8,471 8,325
Wind Tunnels & Instrumentation 3,100 2,978
Building Improvements 1,489 1,489
------- -------
16,571 16,303
Less Accumulated Depreciation 11,803 11,119
------- -------
Property, Plant, and Equipment, net 4,768 5,184
Total Assets $17,162 $18,797
======= ========
4
Page 4
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED BALANCE SHEETS
(continued)
June 30, December 31,
LIABILITIES 2001 2000
----------- ---------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 40 $ 51
Notes Payable 7,487 6,976
Accounts Payable:
Trade 1,383 1,636
Affiliated Companies 105 0
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 817 2,061
Accrued Warranty and Losses 469 463
Accrued Salaries and Wages 970 898
Other Accrued Liabilities 997 1,422
------- -------
Total Current Liabilities 12,268 13,507
OTHER LIABILITIES
Deferred Income Taxes 570 570
Capital Lease Obligations,
Less Current Maturities 103 120
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
June 30, 2001 and December 31, 2000. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,441 2,820
------- -------
Total Stockholders' Equity 4,221 4,600
------- -------
Total Liabilities and Stockholders' Equity $17,162 $18,797
======= =======
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.
5
Page 5
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Earned Revenue $ 6,093 $ 8,078 $ 11,832 $ 14,838
Cost of Earned Revenue 4,447 6,246 8,843 11,613
-------- -------- -------- --------
Gross Profit 1,646 1,832 2,989 3,225
Operating Expenses 1,536 1,466 2,939 3,224
-------- -------- -------- --------
Operating Profit 110 366 50 1
Other Income (Expense)
Interest Expense (189) (119) (416) (220)
Other (17) 4 (13) 4
-------- -------- -------- --------
(206) (115) (429) (216)
-------- -------- -------- --------
Income (Loss) Before Income Taxes (96) 251 (379) (215)
Income Tax Expense -- -- -- --
-------- -------- -------- --------
Net Income (Loss) $ (96) $ 251 $ (379) $ (215)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE $ (0.02) $ 0.06 $ (0.09) $ (0.05)
======== ======== ======== ========
Dividends per Share None None None None
6
Page 6
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Six Months Ended
June 30,
------------------------------
2001 2000
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (379) $ (215)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 684 585
(Increase) Decrease in Assets:
Accounts Receivable 2,986 1,809
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (1,596) (322)
Inventories (192) (301)
Prepaid Expenses (2) (181)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (495) 541
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts (1,244) (2,626)
------- -------
Net Cash Provided (Used) by
Operating Activities (238) (710)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (268) (135)
------- -------
Net Cash Used in Investing Activities (268) (135)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement 511 875
Principal Payments under Capital Lease Obligations (28) (39)
------- -------
Net Cash Provided (Used) by Financing Activities 483 836
------- -------
NET CHANGE IN CASH (23) (9)
CASH AT BEGINNING OF YEAR 48 48
------- -------
CASH AT END OF QUARTER $ 25 $ 39
======= =======
7
Page 7
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 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 and six-month
periods ended June 30, 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.
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 $5,623,100 were outstanding on June 30,
2001 to various customers as bid bonds or in exchange for down payments
or warranty performance bonds.
8
Page 8
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 2001
NOTE D - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
June 30, June 30,
2001 2000
-------- --------
Costs Incurred on Uncompleted Contracts $49,355 $43,506
Estimated Earnings Thereon 14,625 9,091
------- -------
Total Earned Revenue on Uncompleted Contracts 63,980 52,597
Less Billings Applicable thereto 58,204 50,371
------- -------
$ 5,776 $ 2,226
======= =======
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 6,593 $ 4,838
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 817 2,612
------- -------
$ 5,776 $ 2,226
======= =======
9
Page 9
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
Second quarter 2001 (All dollar amounts are in thousands.)
Worldwide revenue for the second quarter 2001 totaled $6,093, which was a 25%
decrease from $8,078 in the second quarter of last year. Net loss for the second
quarter was $96 as compared to second quarter net income of $251 for the same
period last year.
Backlog of orders as of June 30, 2001 was $27,303 as compared with $27,710 and
$36,063 as of December 31, 2000 and June 30, 2000, respectively. The change from
December 31, 2000 represents a 1% decrease. The change from June 30, 2000 is
mostly related to the conversion of backlog into revenue for the $23,000 order
received in June 2000 for the supply of a wind tunnel in Singapore.
The revenue decrease was mostly attributable to the delay of U.S. government
approval of the export license application for the wind tunnel project in
Singapore. The export license was submitted for approval during the fourth
quarter of 2000, and as of the date of this Form 10-Q, the Company believes that
the export license will be received shortly. Due to this delay, work on the
project has been very limited, resulting in lower revenue and margin
recognition. The loss in the second quarter was also partially the result of
increased interest expense due to the higher line of credit balance.
Cost of earned revenue for the second quarter, which includes manufacturing and
engineering costs, was 73% of revenue as compared to 77% 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 second quarter.
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 $1,399 were 23% of revenues
during the second quarter of 2001 as compared to $1,116 and 14% of revenues
during the same period of last year. This increase of $283 or 25% was primarily
related to the additional marketing staff added at the end of 2000 and the
increase in bid and proposal activities related to several new proposals.
Research and development expenses were $137 during the second quarter of 2001 as
compared to $350 in the same period in 2000. This decrease of $213 or 61% is
mostly related to the focus of certain resources in the second quarter 2001 on
project and proposal work rather than on R&D activities. During 2001, additional
research and development expenses will be incurred for continued enhancements to
the ASE2000, aero-acoustic analysis and new product initiatives.
10
Page 10
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
Interest expense of $189 was incurred during the second quarter of 2001, as
compared to $119 from the same period in 2000. The average rate of interest on
short-term borrowings has had little change, while the average amount of
borrowings outstanding has increased in the second quarter as compared to the
second quarter of last year.
Capital expenditures for the second quarter of 2001 were $152 as compared to $75
for the same period last year. This increase of $77 is attributed to the
acquisition of new shop and R&D 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 the second quarter 2001 was $3,375 as compared
with the year end 2000 balance of $6,361. This decrease of $2,986 was due mainly
to invoice timing on several large contracts.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the second quarter of 2001 increased $1,596, or 32%, to $6,593 as
compared with the balance at December 31, 2000. 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 increase since
year-end is mostly due to the delay of billing milestones on the Singapore wind
tunnel project as a result of the delay in receiving the export license.
Billings are a function of contract terms and do not necessarily relate to the
percentage of completion of a project.
Notes payable balance was $7,487 at the end of the second quarter 2001 as
compared to the year end balance of $6,976, which is an increase of $511 or 7%.
This increase is primarily the result of the delay in achieving billing
milestones on the Singapore wind tunnel project as a result of the delay of
receipt of the export license.
Accounts payable and accrued expenses at the end of the second quarter decreased
$495 or 11% as compared to the year end balance. This was primarily due to a
decrease in accrued job costs relating to ongoing projects.
Billings in excess of costs and estimated earnings on uncompleted contracts
decreased $1,244, or 60%, to $817 as compared with the balance at December 31,
2000. 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.
The Company operates on a global basis, and, during an average year, it
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 should have the financial ability to generate cash
flows to offset the expected gain or losses when the contracts mature.
11
Page 11
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
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 the Company. A first security interest in
all assets of the Company has been granted to Celsius Inc., and a fee is paid
through Celsius Inc.
ASE currently has a bank line of credit, which enables it to borrow up to a
total of $6,000. As of June 30, 2001, $7,487 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 10%. 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 receipt 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.
12
Page 12
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 June 30, 2001, or during the period from June 30, 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: August 6, 2001
/s/ Charles Loux
----------------------------------------
Charles Loux, President and CEO
/s/ Steven R. Hedberg
----------------------------------------
Steven R. Hedberg, Chief Financial Officer