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, 2002
( ) 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 March 31, 2002, 4,401,625 shares of common stock, par value $.20 per
share, were outstanding.
Page 2
AERO SYSTEMS ENGINEERING, INC.
Form 10-Q
Quarter Ended March 31, 2002
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
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2002 2001
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 55 $ 97
Accounts Receivable, net 8,625 4,730
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 4,944 4,877
Inventories:
Materials and Supplies 862 966
Projects in Process 599 255
Prepaid Expenses 236 318
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Total Current Assets 15,321 11,243
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 8,683 8,648
Wind Tunnels & Instrumentation 3,132 3,130
Building Improvements 1,495 1,489
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16,821 16,778
Less Accumulated Depreciation 12,504 12,165
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Property, Plant, and Equipment, net 4,317 4,613
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Total Assets $ 19,638 $ 15,856
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Page 4
AERO SYSTEMS ENGINEERING, INC.
CONDENSED BALANCE SHEETS
(continued)
March 31, December 31,
LIABILITIES 2002 2001
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 137 $ 146
Notes Payable 1,875 1,700
Notes Payable with related parties 300 300
Accounts Payable:
Trade 2,071 2,147
Related parties 45 48
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,085 1,691
Accrued Warranty and Losses 525 460
Accrued Salaries and Wages 1,003 866
Income Tax Payable 117 48
Other Accrued Liabilities 3,814 1,969
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Total Current Liabilities 12,972 9,375
OTHER LIABILITIES
Long-term debt with related parties 1,500 1,500
Capital Lease Obligations,
Less Current Maturities 102 110
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
March 31, 2002 and December 31, 2001. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 3,284 3,091
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Total Stockholders' Equity 5,064 4,871
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Total Liabilities and Stockholders' Equity $ 19,638 $ 15,856
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Note: The balance sheet at December 31, 2001 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.
Page 5
AERO SYSTEMS ENGINEERING, INC.
CONDENSED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
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2002 2001
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Earned Revenue $ 8,927 $ 5,739
Cost of Earned Revenue 7,116 4,396
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Gross Profit 1,811 1,343
Operating Expenses 1,424 1,403
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Operating Profit(Loss) 387 (60)
Other Income (Expense)
Interest Expense (91) (227)
Other (3) 4
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(94) (223)
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Income (Loss) Before Income Taxes 293 (283)
Income Tax Expense 100 -
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Net Income (Loss) $ 193 $ (283)
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NET INCOME (LOSS) PER SHARE $ 0.04 $ (0.06)
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Dividends per Share None None
Page 6
AERO SYSTEMS ENGINEERING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Three Months Ended
March 31,
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2002 2001
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 193 $ (283)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation 339 342
(Increase) Decrease in Assets:
Accounts Receivable (3,895) 2,118
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (67) (1,426)
Inventories (240) (282)
Prepaid Expenses 82 (8)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 2,037 16
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 1,394 (95)
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Net Cash Provided (Used) by
Operating Activities (157) 382
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (43) (116)
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Net Cash Used in Investing Activities (43) (116)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement 175 (267)
Principal Payments under Capital Lease Obligations (17) (21)
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Net Cash Provided (Used) by Financing Activities 158 (288)
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NET CHANGE IN CASH (42) (22)
CASH AT BEGINNING OF YEAR 97 48
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CASH AT END OF QUARTER $ 55 $ 26
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Page 7
AERO SYSTEMS ENGINEERING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
March 31, 2002
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, 2002 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2002. 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, 2001.
NOTE B - INCOME TAXES
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate. The income tax rate in 2001
is not comparable to the current year rate due to the termination of
the intercompany tax sharing agreement in September 2001.
NOTE C - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
March 31, March 31,
2002 2001
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Costs Incurred on Uncompleted Contracts $ 41,594 $ 45,719
Estimated Earnings Thereon 14,535 12,923
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Total Earned Revenue on Uncompleted Contracts 56,129 58,642
Less Billings Applicable thereto 54,270 54,185
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$ 1,859 $ 4,457
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Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 4,944 $ 6,423
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,085 1,966
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$ 1,859 $ 4,457
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NOTE C - CONTINGENCIES AND COMMITMENTS
Guarantees of approximately $5,148,340 were outstanding on March 31,
2002 to various customers as bid bonds or in exchange for down payments
or warranty performance bonds.
Page 8
AERO SYSTEMS ENGINEERING, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Financial Condition
First quarter 2002 (All dollar amounts are in thousands.)
Worldwide revenue for first quarter 2002 totaled $8,927, which was a 56%
increase from $5,739 in first quarter of last year. Net income for first quarter
was $193 as compared to the first quarter loss of $283 last year.
Backlog of orders as of March 31, 2002 was $30,826 as compared with $29,483 and
$26,215 as of December 31, 2001 and March 31, 2001, respectively. This 18%
increase from first quarter 2001 is mostly the result of the receipt of several
orders during the last six months. The total orders received during the first
quarter was $10.3 million.
The revenue increase was mostly attributable to the increase in the orders in
process and the resumption of normal activities on the Singapore wind tunnel
project since the receipt of the export license. The first quarter of last year
experienced lower than normal levels on the Singapore project as the U.S.
government approval of the export license application was still pending during
the quarter. The improvement in net income in the first quarter 2002 as compared
to the prior year was due to the increased level of orders during the last six
months and due to lower interest expense resulting from both lower interest
rates and lower debt levels.
Cost of earned revenue for first quarter of 2002, which includes manufacturing
and engineering costs, was 80% of revenue as compared to 77% during the same
period of last year. This increase is mostly the result of work shifting to
slightly lower margin projects in the wind tunnel portion of the business during
the first quarter 2002.
The Company recognizes revenue and profit as work on long-term contracts
progresses using the percentage-of-completion method of accounting, which relies
on estimates of total expected contract revenues and costs. The Company follows
this method since reasonably dependable estimates of the revenue and costs
applicable to various stages of a contract can be made. Because the financial
reporting of these contracts depends on estimates, which are assessed
continually during the term of the contract, recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are reflected in the period in which the facts that give rise
to the revision become known. Accordingly, favorable changes in estimates result
in additional profit recognition, and unfavorable changes in estimates result in
the reversal of previously recognized revenue and profits. When estimates
indicate a loss under a contract, cost of revenue is charged with a provision
for such loss. As work progresses under a loss contract, revenue continues to be
recognized, and a portion of the contract costs incurred in each period is
charged to the contract loss reserve.
Selling, general and administrative expenses of $1,346 were 15% of revenues
during first quarter 2002 as compared to $1,296 and 23% during the same period
of last year. This increase of $50 is the result of additional marketing staff
added since the first quarter 2001.
Research and development expenses were $78 during first quarter of 2002 as
compared to $107 in the same period in 2001. This decrease of $29 or 27% is
mostly related to the focus of certain resources in first quarter 2002 on
project work rather than on R&D activities. During 2002, additional R & D will
be incurred for continued enhancements to the ASE2000, aero-acoustic analysis
and new product initiatives.
Page 9
AERO SYSTEMS ENGINEERING, INC.
Interest expense of $91 was incurred during the first quarter 2002 as compared
to $227 from the same period in the prior year. The average rate of interest on
short-term borrowings was lower partially as a result of the interest rate
reductions experienced during latter portion of 2001 and partially due to the
new bank agreements. Also, the average amount of borrowings outstanding has
decreased in the first quarter 2002 as compared to the first quarter of last
year mostly due to ability to resume normal invoicing activities on the
Singapore wind tunnel project after the receipt of the export license.
Income tax expense was $100 for the first quarter 2002 as compared to $0 for the
first quarter of 2001. Income taxes are provided on an interim basis based upon
management's estimate of the annual effective tax rate. The income tax rate in
2001 is not comparable to the current year rate due to the termination of the
intercompany tax sharing agreement in September 2001. Through September 25,
2001, Aero Systems was included in the consolidated federal income tax return of
Celsius Inc. The Company's income tax provision was calculated and presented on
a separate return basis. As a result of the acquisition of 51% of Aero Systems'
stock by Minnesota ASE, LLC, Celsius Inc. owns less than 80% of Aero Systems
and, accordingly, is no longer able to include Aero Systems in its consolidated
federal income tax return.
Capital expenditures during the first quarter 2002 were $43 as compared to $116
for the same period of last year. This decrease of $73 is the result of the
timing of the major capital acquisitions during 2002. Additional capital
expenditures will be used to acquire additional equipment for research and
development projects, facility improvements and desktop upgrades. We expect the
total capital expenditures in 2002 to be comparable to 2001.
Accounts receivable at the end of first quarter 2002 was $8,625 as compared with
the year end balance of $4,730. This increase of $3,895 was due mainly to the
timing of project billing milestones resulting in several large invoices
outstanding at the end of the first quarter of 2002.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of first quarter 2002 was $4,944, which is an increase of $67 or 1% as
compared with the year-end 2001 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 balances totaled $2,175 as compared to the year-end 2001 balance
of $2,000, which is an increase of $175 or 9%. This increase 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 2002 increased
$2,037 or 37% as compared to the year-end 2001 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 2002 increased $1,394 to $3,085 compared to the
year-end 2001 balance of $1,691. The increase 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.
Page 10
AERO SYSTEMS ENGINEERING, INC.
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 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.
The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. During the third
quarter 2001, Celsius Inc. sold 51% of the total outstanding shares of common
stock of ASE to Minnesota ASE, LLC. Related to this transaction, the Company has
secured new bank financing agreements for operating funds and future letter of
credit needs. These new agreements are asset based collateral agreements, with
the funds available under these agreements determined by the available securable
assets at any point in time, up to a maximum of $6,000 of operating funds, and
$3,000 of letter of credit funds. Also related to the transaction, Celsius Inc.
has agreed to continue to hold certain existing bank guarantees until maturity
that were previously provided to a few of the Company's customers, and Celsius
Inc. has provided a three year $1,500 loan to the Company at 8% per year, which
is subordinated debt under the new bank agreement. The Company has provided an
indemnification agreement to Celsius Inc. to secure Celsius Inc.'s interest in
the above items. The average funds available and amounts outstanding on the
operating line and letter of credit during the first quarter 2002 were
$1,600 outstanding on $3,500 available and $1,400 outstanding on
$3,000 available, respectively.
At the end of the first quarter 2002, the Company had notes payable balances of
$2,175 current and $1,500 long term. The current notes payable balance of $2,175
consisted of $1,875 of borrowings under the new bank agreement, and $300 of
interim loans provided by Minnesota ASE, LLC. The $300 note to Minnesota ASE,
LLC is at 8% per year and does not have a stated maturity date. 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 2002, the amount of business in
backlog and the number of proposals outstanding should provide a solid base for
the remainder of the year.
Page 11
AERO SYSTEMS ENGINEERING, 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, 2002. During the period from March 31, 2002 to the date
of filing of this quarterly report on Form 10-Q, one Form 8-K
filing occurred on May 1, 2002 to file a press release announcing
an exclusive services agreement with Honeywell.
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 6, 2002
/s/ Charles Loux
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Charles H. Loux, President and CEO
/s/ Steven R. Hedberg
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Steven R. Hedberg, Chief Financial Officer