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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
---------------1998
----------------------
Commission File No. 1-8461
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GULFSTREAM AEROSPACE CORPORATION
P. O. Box 2206
500 Gulfstream Road
Savannah, Georgia 31402-2206
Telephone: (912) 965-3000
State of incorporation: Delaware
IRS identification number: 13-3554834
---------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d)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 August 2, 1997,July 15, 1998, there were 74,127,74273,852,224 shares of Gulfstream
Aerospace Corporation Common Stock outstanding.
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
ITEMItem 1. CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 19971998 and December 31,
1996 31997....................................................3
Consolidated Statements of Income
Three and six months ended June 30,
19971998 and 1996 41997...........................................4
Consolidated Statement of Stockholders'
Equity Six months ended June 30, 1997 51998...................5
Consolidated Statements of Cash Flows
Six months ended June 30, 19971998 and 1996 61997.................6
Notes to Consolidated Financial Statements 7-8
ITEMStatements..............7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9-12Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................10-13
PART II. OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGS 13
ITEMLegal Proceedings........................................14
Item 2. CHANGES IN SECURITIES 13
ITEMChanges in Securities....................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEMDefaults upon Senior Securities..........................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 13
ITEMSubmission of Matters to a Vote of Security Holders......14
Item 5. OTHER INFORMATION 14
ITEMOther Information........................................15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signature 15Exhibits and Reports on Form 8-K.........................15
Signature................................................16
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
June 30, December 31,
1998 1997
1996
----------- ----------------------- ------------
ASSETSAssets
Cash and cash equivalents $ 249,310255,515 $ 233,172306,451
Accounts receivable (less allowance for doubtful accounts:
$1,153$1,191 and $3,243) 105,479 137,342$1,144) 165,064 177,228
Inventories 609,835 655,237747,128 629,876
Deferred income taxes 47,306 33,795
Prepaids and other assets 9,185 7,915
----------- -----------7,552 11,318
------------ ------------
Total current assets 973,809 1,033,6661,222,565 1,158,668
Property and equipment, net 122,331 126,503135,764 134,611
Tooling, 45,705 47,677net of accumulated amortization: $11,320 and $7,680 40,177 43,471
Goodwill, net of accumulated amortization: $7,861$9,037 and $7,322 35,260 35,799$8,433 38,353 38,957
Other intangible assets, net 53,021 55,55647,949 50,485
Deferred income taxes 30,400 32,950
Other assets and deferred charges 16,077 14,014
----------- -----------13,705 14,525
------------ ------------
Total Assets $1,246,203 $1,313,215
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY1,528,913 1,473,667
============ ============
Liabilities and Stockholders' Equity
Current portion of long-term debt $ 50,833 $ 20,00075,000 75,000
Accounts payable 150,197 129,410195,454 147,618
Accrued liabilities 92,495 111,243120,913 93,798
Customer deposits --- current portion 464,834 634,922
----------- -----------535,303 546,441
------------ ------------
Total current liabilities 758,359 895,575926,670 862,857
Long-term debt 342,500 380,000267,500 305,000
Accrued postretirement benefit cost 112,113 108,705118,513 115,405
Customer deposits --- long-term 132,768 109,03797,745 88,075
Other long-term liabilities 8,106 8,7098,680 9,573
Commitments and contingencies
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; 86,053,67989,789,671 shares issued in 1998
and 86,522,089 shares issued in 1997 and
85,890,212 shares issued in 1996 860 859898 865
Additional paid-in capital 334,334 333,686437,153 370,258
Accumulated deficit (389,437) (468,971)(129,902) (225,960)
Minimum pension liability (1,464) (1,464)(762) (762)
Unamortized stock plan expense (1,447) (2,432)(332) (1,155)
Less: Treasury stock: 15,944,831 shares in 1998 and
11,978,439 shares in 1997 and 1996(197,250) (50,489)
(50,489)
----------- ----------------------- ------------
Total stockholders' equity (107,643) (188,811)
----------- -----------109,805 92,757
------------ ------------
Total Liabilities and Stockholders' Equity $1,246,203 $1,313,215
=========== ===========
1,528,913 1,473,667
============ ============
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- --------------------------------------------------------- -----------------------------
1998 1997 19961998 1997
1996
----------- ----------- ----------- ----------------------- ------------ ------------ ------------
Net revenues $522,906 $243,609 $898,532 $458,672$ 557,042 $ 522,906 $ 1,060,449 $ 898,532
Cost and expenses
Cost of sales 431,225 446,896 186,569835,294 752,048 354,841
Selling and administrative 29,575 22,982 22,74655,517 45,597 45,190
Stock option compensation expense 494 463 5,078823 985 5,200
Research and development 2,259 5,294 18,7204,204 3,774 34,746
Amortization of intangibles and deferred charges 1,882 1,826 1,8813,758 3,646
3,763
----------- ----------- ----------- ----------------------- ------------ ------------ ------------
Total costs and expenses $477,461 $234,994 $806,050 $443,740
----------- ----------- ----------- -----------$ 465,435 $ 477,461 $ 899,596 $ 806,050
------------ ------------ ------------ ------------
Income from operations 91,607 45,445 8,615160,853 92,482 14,932
Interest income 2,532 2,239 4,1185,054 5,362 7,593
Interest expense (6,435) (7,680) (3,451)(13,434) (15,810)
(7,166)
----------- ----------- ----------- ----------------------- ------------ ------------ ------------
Income before income taxes 87,704 40,004 9,282152,473 82,034
15,359
Provision forIncome tax expense 32,127 500 56,415 2,500
------------ ------------ ------------ ------------
Net income taxes 500 - 2,500 -
----------- ----------- ----------- -----------
Net Income$ 55,577 $ 39,504 $ 9,28296,058 $ 79,534
$ 15,359
=========== =========== =========== ======================= ============ ============ ============
Earnings Per Share:per share:
Net income per share - basic $ .75 $ .53 $ 1.31 $ 1.07
============ ============ ============ ============
Net income per share - diluted $ .73 $ .50 $ .121.27 $ 1.01
$ .20
=========== =========== =========== ===========
Weighted average common and common equivalent shares
outstanding 78,719 78,535 78,638 78,535
=========== =========== =========== ===========
============ ============ ============ ============
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Consolidated Statement of Stockholders' Equity
(In thousands)
(Unaudited)
Additional Minimum Unamortized Total
Common Paid-In Accumulated Pension Stock Plan Treasury Stockholders'
Stock Capital Deficit Liability Expense Stock Equity
---------------------------------------------------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of
DecemberBALANCE AS OF DECEMBER 31, 1996 $859 $333,686 $(468,971) $(1,464) $(2,432)1997 $865 $370,258 $(225,960) $(762) $(1,155) $(50,489) $(188,811)$92,757
Net income 79,534 79,53496,058 96,058
Amortization of stock plan expense 985 985823 823
Exercise of common stock options 1 648 649
-----------------------------------------------------------------------------------
Balance aswith
the Offering, net of Juneexpenses 26 24,751 2,044 26,821
Tax benefit of exercised common stock
options 40,033 40,033
Exercise of common stock options 7 2,111 2,118
Purchase of treasury stock (148,805) (148,805)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF JUNE 30, 1997 $860 $334,334 $(389,437) $(1,464) $(1,447) $(50,489) $(107,643)
===================================================================================1998 $898 $437,153 $(129,902) $(762) $(332) $(197,250) $ 109,805
=========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWSConsolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended June 30,
--------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 79,534 $ 15,359
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,901 12,242
Postretirement benefit cost 3,408 3,320
Provision for loss on pre-owned aircraft 800
Non-cash stock option compensation expense 985 5,200
Other, net (1,659) 201
Change in assets and liabilities:
Accounts receivable 33,522 (16,784)
Inventories 45,402 (175,381)
Prepaids, other assets, and deferred charges (3,904) (844)
Accounts payable and accrued liabilities 2,039 11,845
Customer deposits (146,357) 285,269
Other long-term liabilities (603) (1,347)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,268 139,880
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (4,734) (7,518)
Dispositions of property and equipment 22
Expenditures for tooling (1,378) (899)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (6,112) (8,395)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options 649 78
Principal payments on long-term debt (6,667) (26,533)
Repurchase of preferred stock (18,938)
Dividends paid on preferred stock (96,136)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (6,018) (141,529)
Increase (decrease) in cash and cash equivalents 16,138 (10,044)
Cash and cash equivalents, beginning of period 233,172 223,312
---------- ----------
Cash and cash equivalents, end of period $ 249,310 $ 213,268
========== ==========
Six months ended
June 30,
---------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities
Net income $ 96,058 $ 79,534
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,354 15,901
Postretirement benefit cost 3,108 3,408
Non-cash stock option compensation expense 823 985
Deferred income tax benefit 29,072
Other, net 46 21
Change in assets and liabilities:
Accounts receivable 11,993 31,842
Inventories (117,887) 45,402
Prepaids, other assets, and deferred charges 3,968 (3,904)
Accounts payable and accrued liabilities 74,951 2,039
Customer deposits (1,468) (146,357)
Other long-term liabilities (893) (603)
----------- -----------
Net Cash Provided by Operating Activities 116,125 28,268
Cash Flows from Investing Activities
Expenditures for property and equipment (10,184) (4,734)
Expenditures for tooling (346) (1,378)
Proceeds from sales of assets 835
----------- -----------
Net Cash Used in Investing Activities (9,695) (6,112)
Cash Flows from Financing Activities
Proceeds from exercise of common stock options 28,939 649
Principal payment of long-term debt (37,500) (6,667)
Purchase of treasury stock (148,805)
----------- -----------
Net Cash Used in Financing Activities (157,366) (6,018)
----------- -----------
Decrease in cash and cash equivalents (50,936) 16,138
Cash and cash equivalents, beginning of period 306,451 233,172
=========== ===========
Cash and cash equivalents, end of period $ 255,515 $ 249,310
=========== ===========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of financial position, results of operations and cash
flows. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules.
The operating results for the three and six months ended June 30, 19971998 are
not necessarily indicative of the results to be expected for the full year.entire
year ended December 31, 1998. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 19961997 included in the Company's 19961997 Annual
Report to Stockholders.
NOTE 2. NET INCOME PER SHARE
Net incomeEarnings per Share
Basic earnings per share is based onwere computed by dividing net income divided by the
weighted average numbercommon shares outstanding during the periods presented.
Diluted earnings per share were computed by dividing net income by the
weighted average common shares and potential common shares outstanding. The
Company adopted Financial Accounting Standards Board SFAS No. 128, Earnings
per Share, effective December 15, 1997. As a result, all earnings per share
information for prior periods have been restated to conform to the
requirements of SFAS No. 128.
The following table sets forth the reconciliation of per share data as
of:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net Income $ 55,577 $ 39,504 $ 96,058 $ 79,534
========= ========= ========= =========
Basic EPS
Weighted average common
shares outstanding 73,821 74,068 73,177 73,994
--------- --------- --------- ---------
Diluted EPS
Incremental shares from stock
options 2,106 4,651 2,462 4,644
--------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding during the period. Common equivalent shares consist
of the Company's stock issuable upon exercise of common stock
options determined using the treasury stock method. For the 1996
periods, net75,927 78,719 75,639 78,638
========= ========= ========= =========
Earnings Per Share:
Net income per share is calculated based on historical
net-
basic $ .75 $ .53 $ 1.31 $ 1.07
========= ========= ========= =========
Net income andper share -
diluted $ .73 $ .50 $ 1.27 $ 1.01
========= ========= ========= =========
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On a pro forma basis, assuming an effective tax rate of 37.5% for the
1997 periods, the Company's initial public offeringbasic and related transactions that occurred during October 1996 and the
issuance of stock options in 1996 had occurreddiluted earnings per share is as
of the
beginning of the respective reporting period.follows:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Pro forma Earnings Per Share:
Net income per share -
basic $ .75 $ .34 $ 1.31 $ .69
========= ========= ========= =========
Net income per share -
diluted $ .73 $ .32 $ 1.27 $ .65
========= ========= ========= =========
NOTE 3. INVENTORIESInventories
Inventories consisted of the following at:
June 30, December 31,
1997 1996
----------- -----------
(In thousands)
Work in process $348,955 $355,198
Raw materials 111,454 108,041
Vendor progress payments 76,954 104,318
Pre-owned aircraft 72,472 87,680
-------- --------
$609,835 $655,237
======== ========
June 30, December 31,
1998 1997
--------------- ---------------
(In thousands)
Work in process $ 376,712 $ 330,155
Raw materials 154,140 134,973
Vendor progress payments 74,949 60,606
Pre-owned aircraft 141,327 104,142
--------------- ---------------
$ 747,128 $ 629,876
=============== ===============
NOTE 4. COMMITMENTS AND CONTINGENCIESIncome Taxes
In the quarter and six month period ended June 30, 1998, the Company
recorded income tax provisions of $32.1 million and $56.4 million,
respectively, based on an estimated annual effective tax rate of 37.0% and,
in the quarter and six month period ended June 30, 1997, recorded a
provision for alternative minimum taxes of approximately $0.5 million and
$2.5 million, respectively. Prior to September 30, 1997, the Company
recorded no provision for income taxes, other than alternative minimum
taxes, principally as a result of utilization of net operating loss
carryforwards.
NOTE 5. Commitments and Contingencies
In the normal course of business, lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company relating to
various matters, including products liability. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims or
proceedings may be disposed of unfavorably to the Company, management has
made provision for all known probable losses related to lawsuits and claims
and believes that the disposition of all matters which are pending or
asserted will not have a material adverse effect on the financial
statements of the Company.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in a tax auditaudits by the Internal Revenue Service
covering the years ended December 31, 1991 and
1990.1990 through 1994. The revenue agent's report includesreports include
several proposed adjustments involving the deductibility of certain
compensation expense, items relating to the initial capitalization of the
Company, the allocation of the original purchase price for the acquisition
by the Company of the Gulfstream business, including the treatment of
advance payments with respect to and the cost of aircraft that were in
backlog at the time of the acquisition, and the amortization of amounts
allocated to intangible assets. The Company believes that the ultimate
resolution of these issues will not have a material adverse effect on its
financial statements because the financial statements already reflect what
the Company currently believes is the expected loss of benefit arising from
the resolution of these issues.
The Company is currently engaged in the monitoring and cleanup of
certain ground water at its Savannah facility under the oversight of the
Georgia Department of Natural Resources. Expenses incurred for cleanup have
not been significant. The
Company received in 1992, at its Long Beach facility, two
inquiries fromLiabilities are recorded when environmental
assessments and/or remedial efforts are probable and the U.S. Environmental Protection Agency and, in
1991, at its Oklahoma facility, a soil contamination inquiry.costs can be
reasonably estimated. The Company believes other aspectsthe remainder of the Savannah
facility, as well as other Gulfstream properties, are being carefully
monitored and are in substantial compliance with current federal, state and
local environmental regulations. The Company believes the liabilities, if
any, that will result from the above environmental matters will not have a
material adverse effect on its financial statements.
NOTE 5. NEW ACCOUNTING STANDARD6. Common Stock Repurchases
During January 1998, the Company announced a program to repurchase up
to $200 million of its common stock. The repurchase has, and will continue
to be funded from the Company's available cash. As of June 30, 1998, the
Company had repurchased approximately 4.2 million shares, at an average
price of $35.41 per share, for an aggregate amount of approximately $150
million.
NOTE 7. Change in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This
Statement requires disclosure of total nonowner changes in stockholders'
equity, which is defined as net income plus certain direct adjustments to
stockholders' equity such as pension liability adjustments. For the three
and six month periods of 1998 and 1997, the Company had no such
adjustments.
NOTE 8. New Accounting Standard
In FebruaryJune 1997, the Financial Accounting Standards Board issued StatementSFAS No.
131, Disclosures about Segments of Financial Accounting Standards (SFAS) No.
128, EARNINGS PER SHARE,an Enterprise and Related Information,
which will beis effective no later than for the Company's 1997 annual1998 fiscal year-end.
Management believes that the adoption of this statement will not have a
material effect on the Company's consolidated financial statements.
SFAS No. 128
simplifiesNOTE 9. Subsequent Event
On July 23, 1998, the standardsCompany entered into a definitive agreement to
acquire K-C Aviation, Inc., a leading provider of business aviation
services, from Kimberly-Clark Corporation for computing earnings per share (EPS)
informationa purchase price of $250
million in cash. The acquisition is subject to regulatory approvals and makesis
expected to be completed in the computation comparable to international
EPS standards. SFAS No. 128 replaces the presentationthird quarter of "primary" (and when required "fully diluted") EPS with a
presentation of "basic" and "diluted" EPS. Pro forma amounts
under the provisions of SFAS No. 128 are set forth below:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
Basic EPS $0.53 $0.13 $1.07 $0.21
Diluted EPS $0.50 $0.12 $1.01 $0.20
NOTE 6. INCOME TAXES1998. The Company recorded a provision for income taxes
(principally alternative minimum tax) of $0.5 million and $2.5
millionplans to
finance the transaction with available cash on hand. The bank group for the
quarter and six months ended June 30, 1997,
respectively, and no provision for income taxes forCompany's credit facility has approved an amendment that permits the
quarter
and six months ended June 30, 1996, principally as a result ofCompany to consummate the utilization of net operating loss carryforwards. The Company
had available at June 30, 1997 net operating loss carryforwards
for regular federal income tax purposes of approximately $160
million which will begin expiring in 2006.acquisition.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Notes
to Consolidated Financial Statements beginning on page 7 and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and the audited Consolidated Financial Statementsconsolidated financial statements and
Notesnotes to Consolidated
Financial Statementsconsolidated financial statements appearing in the Company's 19961997
Annual Report to Stockholders.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER
AND SIX MONTHS ENDED JUNEComparison of Results of Operations for the Quarter and Six Months Ended
June 30, 1998 and 1997
AND 1996
NET REVENUES. Net Revenues. Total net revenues increased by $279.3$34.1 million, or 115%6.5%,
to $557.0 million in the second quarter of 1998 from $522.9 million in the
second quarter of 1997 from $243.6
million in the second quarter of 1996.1997. The significant increase resulted primarily from an increase in
revenues from green aircraft of $79.3 million as the delivery of 12 newCompany delivered 15
aircraft, five
Gulfstream IV-SPs and seven Gulfstream Vs and eight Gulfstream IV-SPs, as compared with
six12 aircraft, allseven Gulfstream Vs and five Gulfstream IV-SPs, in the second
quarter of 1996.
Another contributing factor to higher1997. In addition, completion revenues increased by $21.1
million reflecting nine completions delivered during the second quarter
compared with only five delivered in the comparable 1997 period. Partially
offsetting this increase was an increasea decrease in revenues associated with the
sale of
$87.8 million in pre-owned aircraft revenues to $123.6of $69.9 million as five fewer units were
delivered in the second quarter of 1997 from $35.8 million1998 as compared to the same period in
the second
quarter of 1996.1997. During the six months ended June 30, 1997,1998, total net revenues
increased by $439.8$161.9 million, or 96%18.0%, to $898.5$1,060.4 million from $458.7$898.5
million for the six months ended June 30, 1996.1997. For the six months ended
June 30, 1997,1998, Gulfstream delivered 28 new aircraft, 14 Gulfstream Vs and
14 Gulfstream IV-SPs, up from 23 new aircraft, ten Gulfstream IV-SPs and 13 Gulfstream Vs up from 11and ten
Gulfstream IV-SPs in the same period of 1996.1997. Also contributing to the
revenue increase in revenues was the salean increase in completion revenues of ten pre-
owned aircraft for the$35.0
million, resulting from six months as compared to sevenadditional completion deliveries in the
corresponding period in 1996.
COST OF SALES.1998.
Cost of Sales. Total cost of sales increased $260.3decreased to $431.2 million toin the
second quarter of 1998 from $446.9 million in the second quarter of 1997,
from $186.6
million in the second quarter of 1996, and increased $397.2$83.2 million to $835.3 million for the six months ended June
30, 1998 from $752.0 million for the six months ended June 30, 1997
from $354.8 million for the six months ended June 30, 1996.
These increases were a result of the higher number of new
aircraft and pre-owned aircraft deliveries discussed above.1997.
Excluding pre-owned aircraft, which generally are sold at break-
evenbreak-even
levels, the gross profit percentage for the second quarter of 19971998 was
18.2%24.0% compared to 28.0%18.2% for the second quarter of 1996,1997, and for the six
months ended June 30, 1997,1998, the gross profit percentage was 19.0%23.1% compared
to 26.9%19.0% for the comparable period in 1996. The decline1997. This increase in gross profit
percentagepercentages is primarily attributable to the introduction of thereductions in Gulfstream V
aircraft into production costs.
Selling and the higher costs associated with the
early stages of the Gulfstream V production program. The Company
expects the margin on the Gulfstream V to approach those of the
Gulfstream IV-SP over the next 18-24 months.
SELLING AND ADMINISTRATIVE EXPENSE.Administrative Expense. Selling and administrative expense
increased by $6.6 million, or 28.7% to $29.6 million in the second quarter
of 1998 from $23.0 million in the second quarter of 1997, was relatively unchanged comparedand as a
percentage of net revenues, increased to $22.7 million for5.3% in the second quarter of 1996.1998
from 4.4% in the second quarter of 1997. For the six months ended June 30,
1997,1998, selling and administrative expense was $45.6$55.5 million as compared to
$45.2$45.6 million for the six months ended June 30, 1996. As a
percentage of net revenues, selling1997. The principal drivers
for the increase for both the quarter and administrativethe six months is additional
sales and marketing expenses associated with the increased sales activity
and the business systems which are being implemented in 1998 and 1999 to
support the production increases described elsewhere herein.
Research and Development Expense. Research and development expense decreased to 4.4% during the second quarter of 1997 compared to
9.3%was
$2.3 million in the second quarter of 1996, and decreased1998, as compared to 5.1% during
the six months ended June 30, 1997 versus 9.9%$5.3 million in the comparable
period of 1996, both as a result of higher revenues in 1997.
STOCK OPTION COMPENSATION EXPENSE. The issuance of options
to purchase common stock of the Company resulted in a non-cash
compensation charge of $0.5 million and $1.0 million during
the second quarter of 1997 and the six months ended June 30, 1997,
respectively, compared to $5.1 million and $5.2 million for the
comparable periods in 1996.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development
expense decreased by $13.4 million to $5.3 million for the second
quarter of 1997 from $18.7 million for the second quarter of
1996, principally as a result of the substantial completion of
the Gulfstream V development program.1997. For the six month period ended June 30, 1997,1998,
research and development expense decreased
by $30.9was $4.2 million compared to $3.8 million from $34.7 million
for the corresponding period in 1996.1997. Research and development expense for
the six months ended June 30, 1997 is net of a $10.0 million credit for
launch assistance funds received from a vendorvendors participating in the
development of the Gulfstream V. INTEREST INCOME AND EXPENSE.Research and development expenditures in
1998 and the near-term future are expected to stem principally from product
improvements and enhancements, rather than new aircraft development.
Interest Income and Expense. Interest income decreasedincreased by $1.9$0.3 million
to $2.5 million in the second quarter of 1998 from $2.2 million in the
second quarter of 1997 and
decreased by $2.2 million to $5.4 million in the six months ended
June 30, 1997. In each case, the decrease wasas a result of lowerhigher average cash balances the
Company had invested during 1998 compared to the 1997 periods.same period of 1997.
Interest expense increaseddecreased by $4.2$1.2 million to $7.7$6.4 million for the second
quarter of 19971998 and by $8.6$2.4 million to $15.8$13.4 million for the six months
ended June 30, 1997,1998, respectively, over the comparable periods in 1996.1997.
This increase was principally duedecrease is attributable to the
increaseboth a decrease in average long-term borrowings resulting from the
Company's new credit facilities.
PROVISION FOR INCOME TAXES.and
lower weighted average interest rates.
Income Taxes. The Company recorded an income tax provision of $32.1
million in the second quarter of 1998 based on an estimated annual
effective tax rate of 37.0% compared with a provision of income taxes of
$0.5 million, representing alternative minimum taxes, in the second quarter
1997. Prior to September 30, 1997, the Company recorded no provision for
income taxes, principallyother than alternative minimum tax,
of approximately $0.5 million for the second quarter of 1997, and
$2.5 million for the six months ended June 30, 1997. No
provision for income taxes, was made for the second quarter or six
months ended June 30, 1996, principally as a result
of the utilization of net operating loss carryforwards. In compliance with SFAS No. 109, ACCOUNTING FOR INCOME
TAXES,The Company's net
operating loss carryforward for regular federal income tax purposes was
fully utilized during the second quarter 1998.
Earnings Per Share. The Company reported diluted earnings per share of
$0.73 for the second quarter of 1998, up from $0.50 for the second quarter
of 1997. On a pro forma fully - taxed basis, and assuming operating trends continue, the Company is
anticipating the releasean effective tax
rate of its deferred tax valuation allowance
in the third quarter 1997. This would result in a one-time, non-
cash benefit of approximately $65.0 million in reported earnings37.5% for the third1997 periods, comparable diluted earnings per share
would have been $0.32 for the second quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
The Company's liquidity needs arise from working capital requirements,
capital expenditures, and principal and interest payments on long-term debt.debt and
the Company's share repurchase program described herein. During the six
months ended June 30, 1997,1998, the Company relied on its available cash
balances to fund these needs.
The Company had cash and cash equivalents totaling $249.3$255.5 million at
June 30, 19971998 down from $306.5 million at December 31, 1997. In January
1998, the Company established a program to repurchase up to $200 million of
its common stock. The purchases will be made from time to time in the open
market or through negotiated transactions as market conditions warrant. The
Company has, and available borrowingsexpects to continue to fund the stock purchases from cash
on hand. As of $200.0June 30, 1998, approximately 4.2 million shares, at an
average price of $35.41 per share, had been repurchased under a revolving credit facility.
Netthis plan for
an aggregate amount of approximately $150 million.
During the six months ended June 30, 1998, net cash generatedprovided by
operating activities duringwas $116.1 million compared with the six months ended
June 30, 1997 and 1996, waswhen the Company generated $28.3 million and $139.9
million, respectively. The reduction in 1997cash from
operations. This increase is primarily attributable to the timinghigher inflows of deposits
and progress payments onassociated with aircraft in backlog for the comparable periods. A partially offsetting
factor was the decline in inventories in 1997 as a result of
Gulfstream V deliveries, versus the temporary build up in
Gulfstream V related inventorybacklog during the
same1998 period, in 1996.
Capital expenditures for propertyoffset somewhat by increased inventory levels associated with
the Company's ongoing plans to increase its new aircraft production and
equipment and tooling
were $4.7 million and $1.4 million, respectively, duringcompletion levels.
During the six months ended 1998, additions to property and equipment
amounted to $10.5 million. At June 30, 1997.1998, the Company was not committed
to the purchase of any significant amount of property and equipment. As a
result of continued strong
demand for its products, and the Company's objective to make
deliveries sooner to its new aircraft customers, Gulfstream
announced, during the fourth quarter of 1996, plansstrategic initiative to increase its annual
production rate to approximately 6064 aircraft by 1999, a twofold increase over its 1996 annual production rate. As a
result, in 1997, and 1998, the
Company's planned capital expenditures increased $15 million, and in 1998,
are expected to increase by a total of $25 to $35approximately another $20 million above
previously planned annual levels of approximately $15 million to
meet the requirements of the increased production capacity.million. The Company
continually monitors its capital spending in relation to current and
anticipated business needs. As circumstances dictate, facilities are added,
consolidated or modernized.
In May 1998, the Company completed the sale of 18,000,000 shares of
common stock in a secondary offering (the "Offering"). The Company did not
receive any of the proceeds from the sale of shares in the Offering. In
connection with the Offering, certain current and former directors and
employees of, and advisors to, the Company exercised stock options to
purchase, in the aggregate, approximately 2.9 million shares of common
stock from the Company for an aggregate exercise price of approximately
$26.8 million, after deducting issuance costs. The Company used the
proceeds from these exercises for working capital purposes.
At June 30, 1997,1998, borrowings under the Company's credit facilities
were $393.3 million. The Company made scheduled
payments on its long-term debt$342.5 million, with available borrowings of $6.7$173.3 million during the six
months ended June 30, 1997, and scheduledunder a
revolving credit facility. Scheduled repayments remaining under the term
facility are $13.3$37.5 million in 1997,1998 and $75.0 million in each of the years
19981999 through 2001, and $80.0 million in 2002. The Credit Agreement contains
customary affirmative and negative covenants including restrictions on the
ability of the Company and its subsidiaries to pay cash dividends, as well
as financial covenants under which the Company must operate. AtAs of June 30,
19971998, the Company was in compliance with the covenants of its existing
credit agreement.
In connection with orders for 27 Gulfstream V aircraft in
the backlog, the Company has offered customers trade-in options
(which may or may not be exercised) under which the Company will
accept trade-in aircraft, primarily Gulfstream IVs and Gulfstream
IV-SPs, at a guaranteed minimum trade-in price. In light of the
current market for pre-owned Gulfstream aircraft, management
believes that the fair market value of such aircraft exceeds the
specified trade-in values. As such, Gulfstream does not believe
the existence of such commitments will have a material adverse
effect on its results of operations, cash flow or financial
position.
On October 10, 1996, the Company reached an agreement in
principle with the Pension Benefit Guaranty Corporation (the
"PBGC") concerning funding of the Company's defined benefit
pension plans. Pursuant to this agreement, the Company
contributed an additional $20 million in 1996, and $12.5 million
during the six months ended June 30, 1997. Further, the Company
has agreed to contribute $12.5 million for the remainder of 1997
and a total of $25 million annually from 1998 through 2000 to its
pension plans, which payments are expected to result in such
plans being fully funded. The payments to be made under this
agreement were already part of the Company's overall financial
planning, and therefore, are not expected to have a material
effect on the Company's financial statements.
The Company's principal source of liquidity both on a short-
termshort-term and
long-term basis is cash flow provided by operations, including customer
progress payments and deposits on new aircraft orders. Occasionally,
however, the Company may borrow against the credit agreement to supplement
cash flow from operations. The Company believes that based upon its
analysis of its consolidated financial position, its cash flow during the
past 12 months and the expected results of operations in the future,
operating cash flow and available borrowings under the credit agreement
will be adequate to fund operations, capital expenditures, and debt service and
the transaction described below under Recent Developments for at least the
next 12 months. The Company intends to repay its remaining indebtedness
primarily with cash flow from operations. There can be no assurance,
however, that future industry specific developments or general economic
trends will not adversely affect the Company's operations or its ability to
meet its cash requirements.
CONTRACTUAL BACKLOGAs of June 30, 1998, in connection with orders for 23 Gulfstream V
aircraft in the backlog, the Company has offered customers trade-in options
(which may or may not be exercised by the customer) under which the Company
will accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a
guaranteed minimum trade-in price. Additionally, in connection with
recorded sales of new aircraft, the Company has agreed to accept pre-owned
aircraft with trade-in values totaling $202.0 million as of June 30, 1998.
Of this amount, $8.6 million is under contract for resale to pre-owned
aircraft customers. Management believes that the fair market value of all
such aircraft exceeds the specified trade-in value.
On December 24, 1997, the Company executed final documents with the
Pension Benefit Guaranty Corporation (the "PBGC") concerning funding of the
Company's defined benefit pension plans. The terms were essentially the
same as those set out in the agreement in principle reached between the
PBGC and the Company during October 1996. Pursuant to this agreement, the
Company contributed $12.5 million for the six months ended June 30, 1998,
and has agreed to contribute a total of $25.0 million annually (to be paid
quarterly in equal installments) from 1999 through 2000 to its pension
plans which payments are expected to result in such plans being fully
funded. The payments to be made under this agreement were already part of
the Company's overall financial planning, and therefore, are not expected
to have a material adverse effect on the Company's financial statements.
The funding required under this agreement will not result in any increase
in the Company's annual pension expense.
Contractual Backlog
At June 30, 1997,1998, Gulfstream had a firm contract backlog of
approximately $3.1$2.9 billion of revenues, representing a total of 9890
aircraft. The Company includes an order in backlog only if the Company has
entered into a purchase contract (with no contingencies) with the customer
and has received a significant (generally non-refundable) deposit from the
customer.
During the quarter ended March 31, 1998, the Company also signed a
contract for 12 Gulfstream IV-SPs to expand its highly successful
Gulfstream Shares fractional ownership program to the Middle East region.
This contract is valued at approximately $335 million and is not included
in the Company's backlog. In 1993, the Company established very stringent
deposit requirements for recording aircraft into its backlog. The contract
for the Middle East Shares expansion includes modestly different deposit
requirements early in the program. The Company has decided for the initial
phase of the program to record these orders when the aircraft are
delivered. Including the Middle East contract, the Company has a total of
102 aircraft, valued at approximately $3.2 billion of potential future
revenues, under contract at June 30, 1998.
The Company continually monitors the condition of its backlog and
believes, based on the nature of its customers and its historical
experience, that there will not be a significant number of cancellations.
However, to the extent that there is a lengthy period of time between a
customer's aircraft order and its delivery date, there may be increased
uncertainty as to changes in business and economic conditions which may
affect customer cancellations.
Outlook
The Company plans to deliver 58 green aircraft in fiscal 1998 and 64
in fiscal 1999, and completions are expected to nearly double in 1998
compared to 1997. The gross margins are expected to improve from 20% in
1997 to the mid-20s by the end of 1998. Based on projections of increasing
aircraft production and improving margins, Gulfstream expects 1998 diluted
earnings per share of approximately $2.85. The Company also expects diluted
earnings per share to increase 15% per year in 1999 and 2000.
Recent Development
On July 23, 1998, the Company entered into a definitive agreement to
acquire K-C Aviation, Inc., a leading provider of business aviation
services, from Kimberly-Clark Corporation for a purchase price of $250
million in cash. The acquisition is subject to regulatory approvals and is
expected to be completed in the third quarter of 1998. The Company plans to
finance the transaction with available cash on hand. The bank group for the
Company's credit facility has approved an amendment that permits the
Company to consummate the acquisition.
Forward-Looking Information Is Subject to Risk and Uncertainty
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations", including the
statements under the heading "Outlook", as well as other statements
elsewhere in this Form 10-Q, contain forward-looking information. These
forward-looking statements are subject to risks and uncertainties. Actual
results might differ materially from those projected in the forward-looking
statements. Additional information concerning factors that could cause
actual results to materially differ from those in the forward-looking
statements is contained in Exhibit 99.1 to this Form 10-Q.
PART II. OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGSLegal Proceedings
Not Applicable.
ITEMItem 2. CHANGES IN SECURITIESChanges in Securities
Not Applicable.
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIESDefaults Upon Senior Securities
Not Applicable.
ITEMItem 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 14,
1997.1998. The following matters were voted upon:
Proposal 1: Election of Directors. The following nominees were
elected to serve as Class III Directors of the Company, to serve
until the annual meeting of stockholders in 20002001 and until their
successors are elected and qualified, by the following vote:
NOMINEE VOTES FOR VOTES WITHHELD
--------------------- ----------Nominee Votes For Votes Withheld
------- --------- --------------
W. W. Boisture, Jr. 65,420,007 1,359,432
Sandra J. Horbach 66,295,630 483,809
Henry A. Kissinger 66,070,566 708,873
Michael S. Ovitz 66,391,854 387,585
Allen E. Paulson 66,281,912 497,527
Colin L. Powell 66,293,800 485,639
George P. Shultz 58,646,876 8,132,563
The following directors have terms that extend beyond the 1998
Annual Meeting of Stockholders:
Terms Expiring 1999: Terms Expiring 2000:
-------------------- --------------------
Robert Anderson Charlotte L. Beers
65,234,002 114,565Lynn Forester Thomas D. Bell, Jr.
65,234,002 114,565Theodore J. Forstmann Chris A. Davis
65,234,000 114,567James T. Johnson Nicholas C. Forstmann
65,234,002 114,565Drew Lewis Bryan T. Moss
65,234,002 114,565Mark H. McCarmack Roger S. Penske
61,355,161 3,993,406Gerard R. Roche Donald H. Rumsfeld
64,963,102 385,465Robert S. Strauss
Proposal 2: Amended and Restated 1990 Stock Option
Plan. The Amended and Restated 1990 Stock Option Plan
was approved by the following vote:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------ ----------- ----------------
51,439,558 13,853,744 33,765 21,500
Proposal 3: Ratification of Appointment of Auditors. The
appointment of Deloitte & Touche LLP to serve as auditors of the
Company for 19971998 was ratified by the following vote:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
----------Votes For Votes Against Abstentions
--------- ------------- -----------
----------------
60,000,862 5,325,025 13,480 9,200
ITEM66,760,683 6,757 11,999
Item 5. OTHER INFORMATIONOther Information
Certain statements contained in or incorporated by reference in
this Form 10-Q contain "forward-looking" information that involves riskforward-looking information. These
forward-looking statements are subject to risks and
uncertainty, including, but not limited to, statements
regarding planned future deliveries and expenditures.uncertainties. Actual future results and trends maymight differ materially depending on a variety of factors. For discussion of
thesefrom those
projected in the forward-looking statements. Additional
information concerning factors see Exhibit 99, CAUTIONARY STATEMENT FOR
PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this
report:
Exhibit 10.24 Outfitted Gulfstream V Sales
Agreement dated June 13, 1997
between Gulfstream Aerospace
Corporation and Allen E. Paulson.
Exhibit 10.25 Marketing Services Agreement dated
June 13, 1997 between Gulfstream
Aerospace Corporation and Allen E.
Paulson.
Exhibit 10.26 Gulfstream IV Aircraft Purchase
Agreement and Amendmentthat could cause actual results to
Outfitted Gulfstream V Sales
Agreement dated August 1, 1997
between Gulfstream Aerospace
Corporation and Allen E. Paulson.
Exhibit 10.27 Amended and Restated Gulfstream
Aerospace Corporation 1990 Stock
Option Plan, as further amended
through July 30, 1997.
Exhibit 11.1 Computation of Earnings per Common
Share.
Exhibit 27.1 Financial Data Schedule.materially differ from those contained in the forward-looking
statements is contained in Exhibit 99.1, Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2.1 Agreement of Purchase and Sale, dated as of
July 23, 1998 by and between Kimberly-Clark
Corporation and Gulfstream Aerospace
Corporation.
Exhibit 10.32 Amendment dated July 15, 1998 to Credit
Agreement among Gulfstream Delaware
Corporation, The Chase Manhattan Bank, and the
banks and other financial institutions parties
thereto.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Cautionary Statement for Purposes of
the "Safe Harbor" Provisions of The
Private Securities Litigation Reform
Act of 1995.
Exhibit 99.2 Press Release dated July 24, 1998.
(b) Report on No reportsForm 8-K
On April 16, 1998 the Company filed a report on Form 8-K,
were filed
Form 8-K duringreporting under Items 5 and 7, disclosing the Company's
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995, and the
Press Release issued April 16, 1998 pertaining to the Company's
first quarter ended June 30,
1997.1998 financial results.
SIGNATURE
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.
Dated: August 12, 1997July 24, 1998
GULFSTREAM AEROSPACE CORPORATION
/s/ Chris A. Davis
----------------------------------------------------------------------
Chris A. Davis
Executive Vice President,
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
EXHIBITSExhibits
Exhibit 10.24 Outfitted Gulfstream V Sales2.1 Agreement of Purchase and Sale, dated June 13, 1997as
of July 23, 1998 by and between
Kimberly-Clark Corporation and Gulfstream
Aerospace Corporation.
Exhibit 10.32 Amendment dated July 15, 1998 to Credit
Agreement among Gulfstream Delaware
Corporation, The Chase Manhattan Bank, and
Allen E. Paulson.
Exhibit 10.25 Marketing Services Agreement dated
June 13, 1997 between Gulfstream
Aerospace Corporationthe banks and Allen E.
Paulson.
Exhibit 10.26 Gulfstream IV Aircraft Purchase
Agreement and Amendment to
Outfitted Gulfstream V Sales
Agreement dated August 1, 1997
between Gulfstream Aerospace
Corporation and Allen E. Paulson.
Exhibit 10.27 Amended and Restated Gulfstream
Aerospace Corporation 1990 Stock
Option Plan, as further amended
through July 30, 1997.
Exhibit 11.1 Computation of Earnings per Common
Share.other financial institutions
parties thereto.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Cautionary Statement for Purposes of
the "Safe Harbor" Provisions of theThe
Private Securities Litigation Reform
Act of 1995.
Exhibit 99.2 Press Release dated July 24, 1998.