==========================================================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 19971998
----------------------
COMMISSION FILE NO.Commission File No. 1-8461
----------------------
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 November 3, 1997,July 15, 1998, there were 74,135,68073,852,224 shares of Gulfstream
Aerospace Corporation Common Stock outstanding.
==========================================================================================================================================================
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NO.Page No.
--------
ITEMItem 1. CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Financial Statements:
Consolidated Balance Sheets
SeptemberJune 30, 19971998 and December 31,
1996................31997....................................................3
Consolidated Statements of Income
Three and ninesix months ended SeptemberJune 30,
19971998 and 1996................................................41997...........................................4
Consolidated Statement of Stockholders'
Equity NineSix months ended SeptemberJune 30, 1997....................51998...................5
Consolidated Statements of Cash Flows
NineSix months ended SeptemberJune 30, 19971998 and 1996...........61997.................6
Notes to Consolidated Financial Statements.............7-9
ITEMStatements..............7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................10-13Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................10-13
PART II. OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGS........................................14
ITEMLegal Proceedings........................................14
Item 2. CHANGES IN SECURITIES....................................14
ITEMChanges in Securities....................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES..........................14
ITEMDefaults upon Senior Securities..........................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...............................................14
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
(In thousands, except share data)
(Unaudited)
SEPTEMBER DECEMBER
30, 31,
1997 1996
------------ -----------
ASSETS
Cash and cash equivalents $ 242,141 $233,172
Accounts receivable (less allowance for doubtful
accounts: $1,136 and $3,243) 129,349 137,342
Inventories 654,186 655,237
Deferred income taxes 54,250 -
Prepaids and other assets 6,876 7,915
------------ -----------
Total current assets 1,086,802 1,033,666
Property and equipment, net 122,454 126,503
Tooling 45,020 47,677
Goodwill, net of accumulated amortization: $8,130 39,259 35,799
and $7,322
Other intangible assets, net 51,753 55,556
Deferred income taxes 35,050 -
Other assets and deferred charges 16,827 14,014
------------ -----------
Total Assets $1,397,165 $1,313,215
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
June 30, December 31,
1998 1997
------------ ------------
Assets
Cash and cash equivalents $ 255,515 $ 306,451
Accounts receivable (less allowance for doubtful accounts:
$1,191 and $1,144) 165,064 177,228
Inventories 747,128 629,876
Deferred income taxes 47,306 33,795
Prepaids and other assets 7,552 11,318
------------ ------------
Total current assets 1,222,565 1,158,668
Property and equipment, net 135,764 134,611
Tooling, net of accumulated amortization: $11,320 and $7,680 40,177 43,471
Goodwill, net of accumulated amortization: $9,037 and $8,433 38,353 38,957
Other intangible assets, net 47,949 50,485
Deferred income taxes 30,400 32,950
Other assets and deferred charges 13,705 14,525
------------ ------------
Total Assets 1,528,913 1,473,667
============ ============
Liabilities and Stockholders' Equity
Current portion of long-term debt 75,000 75,000
Accounts payable 195,454 147,618
Accrued liabilities 120,913 93,798
Customer deposits -- current portion 535,303 546,441
------------ ------------
Total current liabilities 926,670 862,857
Long-term debt 267,500 305,000
Accrued postretirement benefit cost 118,513 115,405
Customer deposits -- long-term 97,745 88,075
Other long-term liabilities 8,680 9,573
Commitments and contingencies
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; 89,789,671 shares issued in 1998
and 86,522,089 shares issued in 1997 898 865
Additional paid-in capital 437,153 370,258
Accumulated deficit (129,902) (225,960)
Minimum pension liability (762) (762)
Unamortized stock plan expense (332) (1,155)
Less: Treasury stock: 15,944,831 shares in 1998 and
11,978,439 shares in 1997 (197,250) (50,489)
------------ ------------
Total stockholders' equity 109,805 92,757
------------ ------------
Total Liabilities and Stockholders' Equity 1,528,913 1,473,667
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 62,917 $ 20,000
Accounts payable 140,093 129,410
Accrued liabilities 96,618 111,243
Customer deposits -- current portion 498,030 634,922
------------ -----------
Total current liabilities 797,658 895,575
Long-term debt 323,750 380,000
Accrued postretirement benefit cost 113,845 108,705
Customer deposits -- long-term 111,176 109,037
Other long-term liabilities 9,324 8,709
Commitments and contingencies
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; 86,114,119 shares issued in 1997
and 85,890,212 shares issued in 1996 861 859
Additional paid-in capital 363,971 333,686
Accumulated deficit (270,349) (468,971)
Minimum pension liability (1,464) (1,464)
Unamortized stock plan expense (1,118) (2,432)
Less: Treasury stock: 11,978,439 shares in 1997 (50,489) (50,489)
and 1996
------------ -----------
Total stockholders' equity 41,412 (188,811)
------------ -----------
Total Liabilities and Stockholders' Equity $1,397,165 $1,313,215
============ ===========
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 NINE MONTHS ENDED
SEPTEMBERThree months ended Six months ended
June 30, SEPTEMBERJune 30,
--------------------- -------------------------------------------------- -----------------------------
1998 1997 19961998 1997
1996
--------- --------- ---------- --------------------- ------------ ------------ ------------
Net revenues $464,036 $283,834 $1,362,568 $742,506$ 557,042 $ 522,906 $ 1,060,449 $ 898,532
Cost and expenses
Cost of sales 372,983 222,495 1,125,031 577,336431,225 446,896 835,294 752,048
Selling and administrative 23,920 24,819 69,517 70,00929,575 22,982 55,517 45,597
Stock option compensation expense 329 1,463 1,314 6,663494 463 823 985
Research and development 4,305 16,356 8,079 51,1022,259 5,294 4,204 3,774
Amortization of intangibles and deferred charges 1,831 1,882 5,477 5,645
-------- -------- ---------- --------1,826 3,758 3,646
------------ ------------ ------------ ------------
Total costs and expenses $403,368 $267,015 $1,209,418 $710,755
-------- -------- ---------- --------$ 465,435 $ 477,461 $ 899,596 $ 806,050
------------ ------------ ------------ ------------
Income from operations 60,668 16,819 153,150 31,75191,607 45,445 160,853 92,482
Interest income 2,839 3,613 8,201 11,2062,532 2,239 5,054 5,362
Interest expense (7,495) (3,185) (23,305) (10,351)
--------- --------- ---------- ---------(6,435) (7,680) (13,434) (15,810)
------------ ------------ ------------ ------------
Income before income taxes 56,012 17,247 138,046 32,60687,704 40,004 152,473 82,034
Income tax benefit (63,076) - (60,576) -
--------- --------- ---------- ---------expense 32,127 500 56,415 2,500
------------ ------------ ------------ ------------
Net Income $119,088income $ 17,24755,577 $ 198,62239,504 $ 32,606
========= ========= ========== =========96,058 $ 79,534
============ ============ ============ ============
Earnings Per Share:per share:
Net income per share - basic $ 1.54.75 $ .22.53 $ 2.541.31 $ .42
========= ========= ========== =========
Weighted average common and common
equivalent shares outstanding 77,105 78,535 78,127 78,535
========= ========= ========== =========
1.07
============ ============ ============ ============
Net income per share - diluted $ .73 $ .50 $ 1.27 $ 1.01
============ ============ ============ ============
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 198,622 198,62296,058 96,058
Amortization of stock 1,314 1,314
plan expense 823 823
Exercise of common 2 886 888
stock options with
the Offering, net of expenses 26 24,751 2,044 26,821
Tax benefit of exercised common 29,399 29,399 stock
options ------------------------------------------------------------------------
Balance as40,033 40,033
Exercise of September $861 $363,971 $(270,349) $(1,464) $(1,118) $(50,489) $41,412common stock options 7 2,111 2,118
Purchase of treasury stock (148,805) (148,805)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF JUNE 30, 1997
========================================================================1998 $898 $437,153 $(129,902) $(762) $(332) $(197,250) $ 109,805
=========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Cash Flows
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBERSix months ended
June 30,
-----------------------------------------------
1998 1997
1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES----------- -----------
Cash Flows from Operating Activities
Net income $198,622 $ 32,60696,058 $ 79,534
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,342 18,27316,354 15,901
Postretirement benefit cost 5,140 5,051
Provision for loss on pre-owned aircraft (1,100) 1,0003,108 3,408
Non-cash stock option compensation expense 1,314 6,663823 985
Deferred income tax benefit (64,801)29,072
Other, net 712 32246 21
Change in assets and liabilities:
Accounts receivable 7,986 (66,048)11,993 31,842
Inventories 2,151 (205,997)(117,887) 45,402
Prepaids, other assets, and deferred charges (2,640) (2,784)3,968 (3,904)
Accounts payable and accrued liabilities (3,942) 17,79474,951 2,039
Customer deposits (134,753) 410,314(1,468) (146,357)
Other long-term liabilities 615 (2,641)
--------- ---------(893) (603)
----------- -----------
Net Cash Provided by Operating Activities 33,646 214,553
CASH FLOWS FROM INVESTING ACTIVITIES116,125 28,268
Cash Flows from Investing Activities
Expenditures for property and equipment (9,619) (9,518)
Dispositions of property and equipment 24(10,184) (4,734)
Expenditures for tooling (2,613) (1,593)
--------- ---------(346) (1,378)
Proceeds from sales of assets 835
----------- -----------
Net Cash Used in Investing Activities (12,232) (11,087)
CASH FLOWS FROM FINANCING ACTIVITIES(9,695) (6,112)
Cash Flows from Financing Activities
Proceeds from exercise of common stock options 888 7828,939 649
Principal payments onpayment of long-term debt (13,333) (39,799)
Repurchase(37,500) (6,667)
Purchase of preferredtreasury stock (18,938)
Dividends paid on preferred stock (104,010)
--------- ---------(148,805)
----------- -----------
Net Cash Used in Financing Activities (12,445) (162,669)
Increase(157,366) (6,018)
----------- -----------
Decrease in cash and cash equivalents 8,969 40,797(50,936) 16,138
Cash and cash equivalents, beginning of period 306,451 233,172
223,312
========= ==================== ===========
Cash and cash equivalents, end of period $242,141 $ 264,109
========= =========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 ninesix months ended SeptemberJune 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:
SeptemberJune 30, December 30, 31,
1998 1997
1996
------------ --------------------------- ---------------
(In thousands)
Work in process $334,760 $355,198$ 376,712 $ 330,155
Raw materials 140,270 108,041
Pre-owned aircraft 116,122 87,680154,140 134,973
Vendor progress payments 63,034 104,318
------------ ------------
$654,186 $655,237
============ ============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. INCOME TAXES
The6. Common Stock Repurchases
During January 1998, the Company recordedannounced a net income tax benefit of $63.1program to repurchase up
to $200 million
and $60.6 million for the quarter and nine month period ended
September 30, 1997, respectively. No provision for income taxes for
the quarter and nine month period ended September 30, 1996 was
recorded, principally as a result of utilization of net operating loss
carryforwards. The Company, in estimating the realizability of its net
deferred tax assets, considers both positivecommon stock. The repurchase has, and negative evidence and
gives greater weightwill continue
to evidence that is objectively verifiable.be funded from the Company's available cash. As a
result of numerous factors, including, but not limited to recent
earnings trends,June 30, 1998, the
Company currently believes its net deferred tax
asset is more likely than not to be realized, and released in the
quarter ended September 30, 1997 its deferred tax valuation allowance,
totallinghad repurchased approximately $944.2 million shares, at an average
price of which $29 million of such
benefits related to the exercise of stock options and was credited to
additional paid-in capital and the remainder, $65 million was recorded
as a one-time, non-cash tax benefit. The Company had available at
September 30, 1997 net operating loss carryforwards$35.41 per share, for regular
federal income tax purposesan aggregate amount of approximately $115.0 million which will
begin expiring$150
million.
NOTE 7. Change in 2006.
NOTE 6. NEW ACCOUNTING STANDARDS
In February 1997,Accounting Principles
Effective January 1, 1998, the Financial Accounting Standards Board issuedCompany adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings
per Share,130, Reporting Comprehensive Income. This
Statement requires disclosure of total nonowner changes in stockholders'
equity, which will be effective foris defined as net income plus certain direct adjustments to
stockholders' equity such as pension liability adjustments. For the Company'sthree
and six month periods of 1998 and 1997, annual
financial statements. SFAS No. 128 simplifies the standards for
computing earnings per share (EPS) information and makes the
computation comparable to international EPS standards. SFAS No. 128
replaces the presentation 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 Nine months ended
September 30, September 30,
--------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
Basic EPS $1.61 $0.23 $2.68 $0.44
Diluted EPS $1.54 $0.22 $2.54 $0.42Company had no such
adjustments.
NOTE 8. New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, Reporting Comprehensive Income, and SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which are bothis effective no later than for the Company's 1998 fiscal year. These two new statements may affectyear-end.
Management believes that the adoption of this statement will not have a
material effect on the Company's consolidated financial statement disclosures.statements.
NOTE 9. Subsequent Event
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 is evaluating how and whenplans to
implement these new disclosure statements.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.
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 NINE MONTHS ENDED
SEPTEMBERComparison of Results of Operations for the Quarter and Six Months Ended
June 30, 1998 and 1997 AND 1996
Net Revenues. NetTotal net revenues increased by $180.2$34.1 million, or 63%6.5%,
to $464.0$557.0 million in the thirdsecond quarter of 19971998 from $283.8$522.9 million in the
thirdsecond 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 14 newCompany delivered 15
aircraft, sixseven Gulfstream IV-SPsVs and eight Gulfstream Vs,IV-SPs, as compared with
nine12 aircraft, allseven Gulfstream Vs and five Gulfstream IV-SPs, in the thirdsecond
quarter of 1996.1997. 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 a decrease in revenues associated with the
sale of pre-owned aircraft of $69.9 million as five fewer units were
delivered in the second quarter of 1998 as compared to the same period in
1997. During the ninesix months ended SeptemberJune 30, 1997,1998, total net revenues
increased by $620.1$161.9 million, or 84%18.0%, to $1,362.6$1,060.4 million from $742.5$898.5
million for the ninesix months ended SeptemberJune 30, 1996.1997. For the ninesix months ended
SeptemberJune 30, 1997,1998, Gulfstream delivered 3728 new aircraft, 1614 Gulfstream Vs and
14 Gulfstream IV-SPs, and 21up from 23 new aircraft, 13 Gulfstream Vs up from 20and ten
Gulfstream IV-SPs and no Gulfstream Vs in the same period of 1996.1997. Also contributing to the
increase werein revenues was an increase in completion revenues of $158.4$35.0
million, resulting from the sale of 12 pre-owned aircraft for
the nine months as compared to revenues of $100.3 million from the
sale of 10 aircraftsix additional completion deliveries in the corresponding period in 1996.1998.
Cost of Sales. Total cost of sales increased $150.5 milliondecreased to $373.0$431.2 million in the
thirdsecond quarter of 1998 from $446.9 million in the second quarter of 1997,
from $222.5 million in the
third quarter of 1996, and increased $547.7$83.2 million to $1,125.0$835.3 million for the ninesix months ended SeptemberJune
30, 19971998 from $577.3$752.0 million for the ninesix months ended SeptemberJune 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-even
levels, the gross profit percentage for the thirdsecond quarter of 1998 was
24.0% compared to 18.2% for the second quarter of 1997, was 19.3% compared to 24.7%
for the third quarter of 1996, and for the ninesix
months ended SeptemberJune 30, 1997,1998, the gross profit percentage was 19.1%23.1% compared
to 26.0%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 and the higher costs associated with the
early stages of the Gulfstream V production program. The Company
expects the margin percentage of revenue on the Gulfstream V to
approach that of the Gulfstream IV-SP over the next 12-18 months.costs.
Selling and Administrative Expense. Selling and administrative expense
of $23.9increased by $6.6 million, or 28.7% to $29.6 million in the thirdsecond 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 $24.8 million for5.3% in the thirdsecond quarter of 1996.1998
from 4.4% in the second quarter of 1997. For the ninesix months ended SeptemberJune 30,
1997,1998, selling and administrative expense was $69.5$55.5 million as compared to
$70.0$45.6 million for the ninesix months ended SeptemberJune 30, 1996. As a percentage of net revenues,
selling and administrative expense decreased to 5.2% during1997. The principal drivers
for the thirdincrease for both the quarter of 1997 compared to 8.7% in the third quarter of 1996, and
decreased to 5.1% during the nine months ended September 30, 1997
versus 9.4% 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 $0.3 million and $1.3 million during the third
quarter of 1997 and the ninesix months ended September 30, 1997,
respectively, comparedis additional
sales and marketing expenses associated with the increased sales activity
and the business systems which are being implemented in 1998 and 1999 to
$1.5 million and $6.7 million forsupport the comparable periods in 1996.production increases described elsewhere herein.
Research and Development Expense. Research and development expense decreased by $12.1was
$2.3 million to $4.3 million forin the thirdsecond quarter of 1997 from $16.41998, as compared to $5.3 million forin
the thirdsecond quarter of 1996,
principally as a result of the substantial completion of the
Gulfstream V development program.1997. For the ninesix month period ended SeptemberJune 30, 1997,1998,
research and development expense decreased by
$43.0was $4.2 million compared to $8.1 million from $51.1$3.8 million
for the corresponding period in 1996.1997. Research and development expense for
the ninesix months ended SeptemberJune 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. 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 $0.8$0.3 million
to $2.8$2.5 million in the thirdsecond quarter of 1998 from $2.2 million in the
second quarter of 1997 and decreased by
$3.0 million to $8.2 million in the nine months ended September 30,
1997 from the comparable 1996 periods. 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 $4.3$1.2 million to $7.5$6.4 million for the thirdsecond
quarter of 19971998 and by $13.0$2.4 million to $23.3$13.4 million for the ninesix months
ended SeptemberJune 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 (Benefit) forand
lower weighted average interest rates.
Income Taxes. The Company recorded a netan income tax benefitprovision of $63.1$32.1
million and $60.6in 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, forrepresenting alternative minimum taxes, in the second quarter
and nine month period ended1997. Prior to September 30, 1997, respectively. Nothe Company recorded no provision for
income taxes, for the quarter and nine month period ended
September 30, 1996 was recorded,other than alternative minimum taxes, principally as a result
of utilization of net operating loss carryforwards. The Company, in
estimating the realizability of its net deferred tax assets, considers
both positive and negative evidence and gives greater weight to
evidence that is objectively verifiable. As a result of numerous
factors, including, but not limited to recent earnings trends, the
Company currently believes its net deferred tax asset is more likely
than not to be realized, and released in the quarter ended September
30, 1997 its deferred tax valuation allowance, totalling approximately
$94 million, of which $29 million of such benefits related to the
exercise of stock options and was credited to additional paid-in
capital and the remainder, $65 million was recorded as a one-time
non-cash tax benefit. The Company had available at September 30, 1997Company's net
operating loss carryforwardscarryforward for regular federal income tax purposes of approximately $115.0 million which will begin expiring in
2006.was
fully utilized during the second quarter 1998.
Earnings Per Share. The Company reported diluted earnings per share of
$1.54$0.73 for the thirdsecond quarter 1997 (or $0.70 per share, excluding the
one time tax benefit discussed above)of 1998, up from the third quarter 1996
of $0.22. For the nine months ended September 30, 1997, earnings per
share increased to $2.54 (or $1.71 per share, excluding the one time
tax benefit discussed above) from $0.42$0.50 for the corresponding period
in 1996.second quarter
of 1997. On a pro forma fully - taxed basis, and assuming an effective tax
rate of 37.5%, for the Company's1997 periods, comparable diluted earnings per share
would have been $0.45 and
$0.14$0.32 for the quarters ended September 30, 1997second quarter of 1997.
Liquidity and 1996, respectively
and $1.10 and $0.26 for the nine months ended September 30, 1997 and
1996, respectively.
LIQUIDITY AND CAPITAL RESOURCESCapital 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 ninesix
months ended SeptemberJune 30, 1997,1998, the Company relied on its available cash
balances to fund these needs.
The Company had cash and cash equivalents totaling $242.1$255.5 million at
SeptemberJune 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 but undrawn 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 ninesix months ended
SeptemberJune 30, 1997 and 1996, was $33.6when the Company generated $28.3 million and $214.6
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 the backlog forduring the
comparable periods.
Capital expenditures for1998 period, offset somewhat by increased inventory levels associated with
the Company's ongoing plans to increase its new aircraft production and
completion levels.
During the six months ended 1998, additions to property and equipment
amounted to $10.5 million. At June 30, 1998, the Company was not committed
to the purchase of any significant amount of property and tooling were
$12.2 million and $11.1 million, respectively, during the nine months
ended September 30, 1997.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 over the two year period
by approximately $35another $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 SeptemberJune 30, 1997,1998, borrowings under the Company's credit facilities
were $386.7 million. The Company made scheduled payments on
its long-term debt$342.5 million, with available borrowings of $13.3$173.3 million during the nine months ended
September 30, 1997, and scheduledunder a
revolving credit facility. Scheduled repayments remaining under the term
facility are $6.7$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. At
SeptemberAs of June 30,
19971998, the Company was in compliance with the covenants of its existing
credit agreement.
In connection with orders for 25 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 $18.8 million during the nine months ended
September 30, 1997. Further, the Company has agreed to contribute $6.2
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-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 SeptemberJune 30, 1997,1998, Gulfstream had a firm contract backlog of
approximately $2.8$2.9 billion of revenues, representing a total of 8990
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.
PART II. OTHER INFORMATION
ITEM LEGAL PROCEEDINGS
1.
Not Applicable.
ITEM CHANGES IN SECURITIES
2.
Not Applicable.
ITEM DEFAULTS UPON SENIOR SECURITIES
3.
Not Applicable.
ITEM SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
4.
Not Applicable.
ITEM OTHER INFORMATION
5.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 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 dependingfrom 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
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on a varietyMay 14,
1998. The following matters were voted upon:
Proposal 1: Election of factors. For discussion of these factors, see
Exhibit 99, Cautionary Statement for PurposesDirectors. The following nominees were
elected to serve as Class II Directors of the "Safe
Harbor" ProvisionsCompany, to serve
until the annual meeting of stockholders in 2001 and until their
successors are elected and qualified, by the following vote:
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
Lynn Forester Thomas D. Bell, Jr.
Theodore J. Forstmann Chris A. Davis
James T. Johnson Nicholas C. Forstmann
Drew Lewis Bryan T. Moss
Mark H. McCarmack Roger S. Penske
Gerard R. Roche Donald H. Rumsfeld
Robert S. Strauss
Proposal 2: Ratification of Appointment of Auditors. The
appointment of Deloitte & Touche LLP to serve as auditors of the
Private Securities Litigation
Reform Act of 1995.
ITEM EXHIBITS AND REPORTS ON FORM 8-K
6.
(a) Exhibits
TheCompany for 1998 was ratified by the following exhibitsvote:
Votes For Votes Against Abstentions
--------- ------------- -----------
66,760,683 6,757 11,999
Item 5. Other Information
Certain statements contained in or incorporated by reference in
this Form 10-Q contain forward-looking information. These
forward-looking statements are filed as part of this report:
Exhibit 11.1 Computation of Earnings per Common Share.
Exhibit 27.1 Financial Data Schedule.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 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 Form No reports8-K
On April 16, 1998 the Company filed a report on Form 8-K,
were filed duringreporting under Items 5 and 7, disclosing the 8-KCompany'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 September 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: November 11, 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 11.1 Computation2.1 Agreement of Earnings per Common Share.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 theThe
Private Securities Litigation Reform
Act of 1995.
Exhibit 99.2 Press Release dated July 24, 1998.