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, 1997
( ) 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 612-227-7515
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 March 31, 1997, 2,551,717 shares of common stock, par value $.20
per share, were outstanding.
AERO SYSTEMS ENGINEERING, INC.
(Subsidary of Celsius, Inc.)
Form 10-Q
Quarter Ended March 31, 1997
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operation 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1997 1996
------ --------- -----------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 100 $ 135
Accounts Receivable, net 3,134 5,139
Costs and Estimated Earnings in
Excess of Billings on
Uncompleted Contracts 5,630 3,977
Inventories
Materials and Supplies 665 685
Projects in Process 741 407
Prepaid Expenses 70 96
Deferred Income Tax Benefit 467 467
Income Tax Receivable 100 100
------- -------
Total Current Assets 10,907 11,006
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,174 6,131
Wind Tunnels & Instrumentation 2,650 2,591
Building Improvements 1,298 1,298
------- -------
13,633 13,531
Less Accumulated Depreciation 7,619 7,363
------- -------
Property, Plant, and Equipment, net 6,014 6,168
Investments 0 496
Non-Compete Agreement, net 70 84
------- -------
Total Long Term Assets 6,084 6,748
Total Assets $16,991 $17,754
======= =======
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
LIABILITIES 1997 1996
----------- --------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 129 $ 126
Current Maturites of Long-Term
Debt to Affiliated Companies 800 800
Notes Payable - Banks 6,000 5,436
Accounts Payable:
Trade 1,420 1,260
Affiliated companies 45 63
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 539 392
Accrued Warranty and Losses 661 691
Accrued Salaries and Wages 668 797
Income Taxes Payable 0 5
Other Accrued Liabilities 1,097 899
------- -------
Total Current Liabilities 11,359 10,469
OTHER LIABILITIES
Deferred Revenue 0 496
Deferred Income Taxes 467 467
Long Term Debt to Affiliated Company,
Less Current Maturities 800 1,200
Capital Lease Obligations,
Less Current Maturities 438 471
STOCKHOLDERS' EQUITY
Common Stock - Authorized 3,000,000
Shares of $.20 Par Value; Issued
2,551,717 on March 31, 1997
and December 31, 1996 510 510
Additional Contributed Capital 517 517
Retained Earnings 2,900 3,624
------- -------
Total Stockholders' Equity 3,927 4,651
------- -------
Total Liabilities and
Stockholders' Equity $16,991 $17,754
======= =======
Note: The balance sheet at December 31, 1996 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.
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
1997 1996
------- -------
Earned Revenue $ 3,643 $ 5,927
Cost of Earned Revenue 2,985 4,169
------- -------
Gross Profit 658 1,758
Operating Expenses 1,209 1,544
------- -------
Operating Profit(Loss) (551) 214
Other Income (Expense)
Interest Income -- 2
Interest Expense (192) (196)
Other 19 (9)
------- -------
(173) (203)
------- -------
(Loss) Before Income Taxes (724) 11
Income Tax Expense (Benefit) -- --
------- -------
Net (Loss) $ (724) $ 11
======= =======
NET LOSS PER SHARE $ (0.28) $ 0.00
======= =======
Dividends per Share None None
<TABLE>
<CAPTION>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
1997 1996
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (724) $ 11
Adjustment to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and Amortization 270 262
(Increase) Decrease in Assets:
Accounts Receivable 2,005 962
Cost and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts (1,653) 488
Inventories (314) (141)
Prepaid Expenses 26 50
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 176 (1,782)
Billings in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts 147 (164)
------- -------
Net Cash Provided (Used) by
Operating Activities (67) (314)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (102) (59)
------- -------
Net Cash Used in Investing Activities (102) (59)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit Agreement 564 685
Payment of Note Payable
Principal Payments under Capital
Lease Obligations (30) (16)
Principal Payments on Borrowings
From Affiliates (400) (400)
------- -------
Net Cash Provided (Used) by
Financing Activities 134 269
------- -------
NET CHANGE IN CASH (35) (104)
CASH AT BEGINNING OF YEAR 135 141
------- -------
CASH AT END OF QUARTER $ 100 $ 37
======= =======
</TABLE>
AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
March 31, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
March 31, March 31,
1997 1996
--------- ---------
Costs Incurred on Uncompleted
Contracts $23,162 $28,487
Estimated Earnings Thereon 8,807 8,122
------- -------
Total Earned Revenue on
Uncompleted Contracts 31,969 36,609
Less Billings Applicable thereto 26,878 31,227
------- -------
$ 5,091 $ 5,382
======= =======
Included in Accompanying Balance
Sheet Under Following Captions:
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts $ 5,630 $ 7,190
Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts 539 1,808
------- -------
$ 5,091 $ 5,382
======= =======
NOTE C - CONTINGENCIES AND COMMITMENT
Letter of Credit
Standby letters of credit totaling $ 5,838,592 were outstanding
on March 31, 1997 to various customers in exchange for advance
payments or warranty performance bonds on contracts.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
First quarter 1996 (All dollar amounts are in thousands)
Worldwide revenue for the first quarter 1997 totaled $ 3,643 which was a 39%
decrease from $ 5,927 in the first quarter of last year. Net loss after taxes
for the first quarter was $ 724 as compared to first quarter income of $ 11 last
year.
The revenue decrease was attributable to a low volume backlog from year end.
Projects awarded in 1997 are just commencing and have had a minimal impact on
revenue.
Backlog of orders was $ 17,010 as compared with $ 9,457 and $ 17,015 as of
December 31, 1996 and March 31, 1996, respectively. This 80% increase from year
end was related to additional new orders of $ 11,196 in the first quarter of
1997. The investment in proposal efforts in 1996 and in the first quarter of
1997, along with improved market conditions have resulted in increased contract
awards.
Cost of earned revenue for the first quarter, which includes manufacturing and
engineering costs, was 82% as compared to 70% during the same period of last
year. The increase is a result of lower negotiated project margins, and
additional costs incurred to complete projects. For the total year, the Company
expects margins to be comparable to 1996 year to date margin of 78%.
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 $ 1,082 were 30% of revenues
during the first quarter 1997 as compared to $ 1,450 and 24% during the same
period of last year. This decrease of $ 368 or 25% was due to a reduction in the
number of selling, general and administrative staff and lower costs in contract
proposal preparations.
Research and development expenses were $ 127 during the first quarter as
compared to $ 94 in the same period in 1996. This increase of $ 33 or 35% is a
result of the enhancement made to the ASE2000. During 1997, additional R & D
will be incurred for additional enhancements to the ASE2000 in order to maintain
a leadership role in the marketplace.
Capital expenditures were $ 102 as compared to $ 59 for the same period of last
year. This increase of $ 43 is also attributed to work on the enhancements at
the Aero Test Laboratory and internal systems. It is expected that for the
remainder of 1997, additional capital expenditures will be used to complete the
enhancement at the AeroTest Laboratory and additional equipment will be
purchased for R & D projects, engineering departments and the completion of the
computer network.
Interest expense of $ 192 was incurred during the quarter as compared to $ 196
from the same period in the prior year. The average rate of interest on
short-term borrowings has had little change and the average amount of borrowings
outstanding has increased during the first quarter as compared to the first
quarter of last year.
Accounts receivable at the end of the first quarter was $ 3,134 as compared with
the year end balance of $ 5,139. This decrease of $ 2,005 was the result of
collecting several large receivables and a low level of billings.
Accounts payable and accrued expenses at the end of the first quarter increased
$ 176 or 10% as compared to the year end balance. This was primarily due to an
increase in material being ordered for the start of new projects during the
first quarter.
Notes payable to banks balance was $ 6,000 as compared to the year end balance
of $ 5,436 which is an increase of $ 564 or 11%. This increase is primarily the
result of new projects coming in that require materials and have low upfront
cash payments.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the first quarter increased $ 1,653 or 42%, to $ 5,630 as compared
with the year end 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 increase since year end
is due to start up of new contracts and billings 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, generates 50%
- - 65% 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 maturaties 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
gain or losses when the contracts mature.
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 AB Celsius Finance, the financial division of Celsius AB, a
Swedish corporation. Celsius, Inc., a United States corporation, is a
wholly-owned subsidiary of Celsius Invest which is wholly-owned by Celsius 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 AB and a fee is paid through Celsius, Inc.
ASE currently has bank lines of credit which enable it to borrow up to a total
of $6,000. As of March 31, 1997 $ 6,000 was used with no available balance
remaining. 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 being
initiated to increase margins. The Company has received ISO9001 certification,
an international quality systems standard. This is expected to enhance our
marketing effort on an international basis.
Looking ahead throughout the remainder of 1997, the upturn in new orders started
in the first quarter of 1997 is expected to continue. The backlog increased from
$9,457 to $17,010 during the first quarter, and is expected to increase further
during the second quarter. These new orders are expected to provide increased
earned margins in the second half of the year.
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius, Inc.)
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 (Financial Data Schedule ) filed as part of this
Report.
(b) No current reports on Form 8-K were filed during the quarter
ended March 31,1997.
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 thereunto duly authorized.
Date: May 14, 1997
/s/
------------------------------------
Leon Ring
(President)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 3,134
<ALLOWANCES> 0
<INVENTORY> 1,406
<CURRENT-ASSETS> 10,907
<PP&E> 13,633
<DEPRECIATION> 7,619
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<CURRENT-LIABILITIES> 11,359
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0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 16,991
<SALES> 3,643
<TOTAL-REVENUES> 3,643
<CGS> 2,985
<TOTAL-COSTS> 2,985
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