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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 September 30, 2000
( ) 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.
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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 September 30, 2000, 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 September 30, 2000
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 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------------- ------------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 35 $ 48
Accounts Receivable, net 3,976 8,305
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 6,439 4,768
Inventories:
Materials and Supplies 1,074 842
Projects in Process 314 249
Prepaid Expenses 76 116
Deferred and Prepaid Income Taxes 727 727
------------------- ------------------
Total Current Assets 12,641 15,055
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 8,154 7,832
Wind Tunnels & Instrumentation 2,978 2,967
Building Improvements 1,499 1,338
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16,142 15,648
Less Accumulated Depreciation 10,909 10,019
------------------- ------------------
Property, Plant, and Equipment, net 5,233 5,629
Total Assets $ 17,874 $ 20,684
=================== ==================
</TABLE>
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES 2000 1999
------------------- ------------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 59 $ 79
Notes Payable 3,373 3,647
Accounts Payable:
Trade 1,463 916
Affiliated Companies 149 8
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,695 5,238
Accrued Warranty and Losses 796 793
Accrued Salaries and Wages 915 847
Other Accrued Liabilities 2,275 4,093
------------------- ------------------
Total Current Liabilities 12,725 15,621
OTHER LIABILITIES
Deferred Income Taxes 623 623
Capital Lease Obligations,
Less Current Maturities 132 171
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
September 30, 2000 and December 31, 1999. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,614 2,489
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Total Stockholders' Equity 4,394 4,269
------------------- ------------------
Total Liabilities and Stockholders' Equity $ 17,874 $ 20,684
=================== ==================
</TABLE>
Note: The balance sheet at December 31, 1999 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 CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 8,751 $ 7,841 $ 23,589 $ 22,952
Cost of Earned Revenue 7,017 5,991 18,630 19,071
-------------- -------------- -------------- --------------
Gross Profit 1,734 1,850 4,959 3,881
Operating Expenses 1,228 1,292 4,452 3,848
-------------- -------------- -------------- --------------
Operating Profit (Loss) 506 558 507 33
Other Income (Expense)
Interest Expense (153) (165) (373) (574)
Other (13) (1) (9) 13
-------------- -------------- -------------- --------------
(166) (166) (382) (561)
-------------- -------------- -------------- --------------
Income (Loss) Before Income Taxes 340 392 125 (528)
Income Tax Expense 0 (3) 0 (13)
-------------- -------------- -------------- --------------
Net Income (Loss) $ 340 $ 389 $ 125 $ (541)
============== ============== ============== ==============
NET INCOME ( LOSS) PER SHARE $ 0.08 $ 0.09 $ 0.03 $ (0.12)
============== ============== ============== ==============
Dividends per Share None None None None
</TABLE>
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 125 $ (541)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 889 776
(Increase) Decrease in Assets:
Accounts Receivable 4,329 2,097
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (1,671) 231
Inventories (297) 39
Prepaid Expenses 40 (71)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,059) (1,677)
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts (1,543) 2,402
-------------- ----------------
Net Cash Provided (Used) by
Operating Activities 813 3,256
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (493) (716)
-------------- ----------------
Net Cash Used in Investing Activities (493) (716)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (274) (2,032)
Principal Payments under Capital Lease Obligations (59) (64)
Principal Payments on Borrowings From Affiliates 0 (400)
-------------- ----------------
Net Cash Provided (Used) by Financing Activities (333) (2,496)
-------------- ----------------
NET CHANGE IN CASH (13) 44
CASH AT BEGINNING OF YEAR 48 16
-------------- ----------------
CASH AT END OF QUARTER $ 35 $ 60
============== ================
</TABLE>
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AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
September 30, 2000
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 nine-month period ending
September 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000. 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, 1999.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Costs Incurred on Uncompleted Contracts $ 40,032 $ 37,325
Estimated Earnings Thereon 11,836 7,589
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Total Earned Revenue on Uncompleted Contracts 51,868 44,914
Less Billings Applicable Thereto 49,124 42,252
------------------- -------------------
$ 2,744 $ 2,662
=================== ===================
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 6,439 $ 6,480
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,695 3,818
------------------- -------------------
$ 2,744 $ 2,662
=================== ===================
</TABLE>
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $5,318,038 were outstanding on September
30, 2000 to various customers as bid bonds or in exchange for down
payments or warranty performance bonds.
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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
(All dollar amounts are in thousands.)
Worldwide revenue for the third quarter 2000 totaled $8,751, which was a 12%
increase from $7,841 in revenue for the third quarter of last year. Net income
for the third quarter was $340 as compared to third quarter income of $389 last
year.
Backlog of orders as of September 30, 2000 was $31,423 as compared with $18,759
and $18,096 as of December 31, 1999 and September 30, 1999, respectively. This
67% increase from year-end was mostly related to the receipt of a $23 million
wind tunnel project during the second quarter of 2000. The proposal activity
continues to be strong in all areas of the business. The year to date orders
through September are $36.3 million.
The revenue increase was mostly attributable to the higher backlog going into
the third quarter 2000, and the fact that a major wind tunnel project that had
achieved the percentage of completion required for revenue recognition during
the quarter. The net income of $340,000 in the third quarter of 2000 was mostly
attributable to the impact of increased project activity and the one major wind
tunnel project having achieved the percentage of completion required for
revenue recognition during the quarter.
Cost of earned revenue for the third quarter, which includes
manufacturing and engineering costs, was 80% as compared to 76% during the same
period of last year. This increase is partly the result of slightly lower
project margins, and partly due to recording additional reserves to fully cover
the settlement of construction cost claims on one major contract. This major
contract is now completed.
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 $1,066 were 12% of revenues
during the third quarter of 2000 as compared to $1,165 and 15% during the same
period of last year. This decrease of $99 or 8% was primarily related to reduced
bid and proposal activities.
Research and development expenses were $162 during the third quarter of 2000 as
compared to $127 in the same period in 1999. During 2000, additional R & D will
be incurred for continued enhancements to the ASE2000 in order to maintain a
leadership role in data acquisition and control systems.
Capital expenditures for the third quarter 2000 were $358 as compared to $309
for the same period of last year. It is expected that for the remainder of 2000,
additional capital expenditures will be used to complete the enhancements at the
Aerotest Laboratory, to purchase additional equipment for R & D projects, and
the engineering departments.
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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
Interest expense of $153 was incurred during the third quarter of 2000 as
compared to $165 for the same period in the prior year. The average amounts of
borrowings were lower during the third quarter of 2000 as compared to third
quarter of last year. The average interest rates are slightly higher than
compared to the third quarter of last year.
Accounts receivable at the end of the third quarter 2000 were $3,976 as compared
with the year-end 1999 balance of $8,305. This decrease of $4,329 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 third quarter increased $1,671, or 35%, to $6,439 as compared
with the year-end 1999 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 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 $3,373 as compared to the year-end 1999 balance of
$3,647, which is a decrease of $274 or 8%. This decrease is primarily the result
of improved project cash flows and increased customer down payments.
Accounts payable and accrued expenses at the end of the third quarter decreased
$1,059 or 16% as compared to the year-end 1999 balance. This was primarily due
to several projects nearing completion, with all equipment previously shipped
and installed, therefore reducing vendor commitments. The new projects are now
moving into the procurement phase, which should increase vendor commitments.
Billings in excess of costs and estimated earnings on uncompleted contracts at
the end of the third quarter decreased $1,543 to $3,695 compared to the year-end
1999 balance of $5,238. 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, 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 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 Saab AB, a Swedish corporation. 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
management fee is paid to Celsius Inc.
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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of 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
commenced a tender offer to acquire all of the outstanding shares of Celsius AB.
Saab AB completed the acquisition of Celsius AB during March 2000.
The Company currently has a bank line of credit, which enables it to borrow up
to a total of $6,000. As of September 30, 2000, $3,373 was used, with a $2,627
available balance remaining. 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 12.5 percent
per annum. 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 continued to put pressure on the
margins on new contracts. Productivity improvements and cost reduction programs
are continually being initiated to increase margins. The Company received
ISO9001 certification in 1997, an international quality systems standard. This
is expected to continue to enhance the Company's marketing effort on an
international basis.
Looking ahead throughout the remainder of 2000, the contracts awarded in the
first nine months of the year and the improved backlog should provide a solid
base for the rest of 2000.
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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 September 30, 2000.
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: November 7, 2000
/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
