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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 1998
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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
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d)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 May 1,July 15, 1998, there were 72,680,91973,852,224 shares of Gulfstream
Aerospace Corporation Common Stock outstanding.
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
-----------------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31,June 30, 1998 and December 31,
1997............................................ 31997....................................................3
Consolidated Statements of Income
Three and six months ended March 31,June 30,
1998 and 1997............................................ 41997...........................................4
Consolidated Statement of Stockholders'
Equity ThreeSix months ended March 31,
1998............................................ 5June 30, 1998...................5
Consolidated Statements of Cash Flows
ThreeSix months ended March 31,June 30, 1998 and 1997............................................ 61997.................6
Notes to Consolidated Financial Statements..................................... 7-9Statements..............7-9
Item 2. Management's Discussion and Analysis of
Financial 10-12
Condition and Results of
OperationsOperations..........................................10-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 13Proceedings........................................14
Item 2. Changes in Securities................................ 13Securities....................................14
Item 3. Defaults upon Senior Securities....................... 13Securities..........................14
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13Holders......14
Item 5. Other Information...................................... 13Information........................................15
Item 6. Exhibits and Reports on Form 8-K....................... 14
Signature.............................................. 148-K.........................15
Signature................................................16
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, December 31,
1998 1997
----------- -----------
Assets
Cash and cash equivalents $ 183,214 $ 306,451
Accounts receivable (less allowance
for doubtful accounts:
$1,109 and $1,144) 141,445 177,228
Inventories 708,545 629,876
Deferred income taxes 19,372 33,795
Prepaids and other assets 7,466 11,318
---------- ----------
Total current assets 1,060,042 1,158,668
Property and equipment, net 133,744 134,611
Tooling, net of accumulated
amortization: $9,500 and $7,680 41,759 43,471
Goodwill, net of accumulated
amortization: $8,735 and $8,433 38,655 38,957
Other intangible assets, net 49,217 50,485
Deferred income taxes 31,700 32,950
Other assets and deferred charges 14,528 14,525
---------- ----------
Total Assets $1,369,645 $1,473,667
========== ==========
Liabilities and Stockholders' Equity
Current portion of long-term debt $ 75,000 $ 75,000
Accounts payable 164,854 147,618
Accrued liabilities 91,450 93,798
Customer deposits--current portion 471,538 546,441
------------- -------------
Total current liabilities 802,842 862,857
Long-term debt 286,250 305,000
Accrued postretirement benefit cost 116,885 115,405
Customer deposits--long-term 85,869 88,075
Other long-term liabilities 8,826 9,573
Commitments and contingencies
Stockholders' equity
Common stock; $.01 par value;
300,000,000 shares authorized;
87,133,546 shares issued
in 1998 and 86,522,089 share
issued in 1997 871 865
Additional paid-in capital 380,237 370,258
Accumulated deficit (185,479) (225,960)
Minimum pension liability (762) (762)
Unamortized stock plan expense (826) (1,155)
Less: Treasury stock:
14,463,439 shares in 1998 and
11,978,439 shares in 1997 (125,068) (50,489)
------------- -------------
Total stockholders' equity 68,973 92,757
------------- -------------
Total Liabilities and Stockholders'
Equity $ 1,369,645 $ 1,473,667
============= =============
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
============ ============
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended
March 31,
----------------------
1998 1997
---------- ----------
Net revenues $ 503,407 $ 375,626
Cost and expenses
Cost of sales 404,069 305,152
Selling and administrative 25,942 22,615
Stock option compensation expense 329 522
Research and development 1,945 (1,520)
Amortization of intangibles
and deferred charges 1,876 1,820
--------- ---------
Total costs and expenses $ 434,161 $ 328,589
--------- ---------
Income from operations 69,246 47,037
Interest income 2,522 3,123
Interest expense (6,999) (8,130)
--------- ---------
Income before income taxes 64,769 42,030
Income tax expense 24,288 2,000
Net income $ 40,481 $ 40,030
========= =========
Earnings per share:
Net income per share-basic $ .56 $ .54
========= =========
Net income per share-diluted $ .54 $ .51
========= =========
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net revenues $ 557,042 $ 522,906 $ 1,060,449 $ 898,532
Cost and expenses
Cost of sales 431,225 446,896 835,294 752,048
Selling and administrative 29,575 22,982 55,517 45,597
Stock option compensation expense 494 463 823 985
Research and development 2,259 5,294 4,204 3,774
Amortization of intangibles and deferred charges 1,882 1,826 3,758 3,646
------------ ------------ ------------ ------------
Total costs and expenses $ 465,435 $ 477,461 $ 899,596 $ 806,050
------------ ------------ ------------ ------------
Income from operations 91,607 45,445 160,853 92,482
Interest income 2,532 2,239 5,054 5,362
Interest expense (6,435) (7,680) (13,434) (15,810)
------------ ------------ ------------ ------------
Income before income taxes 87,704 40,004 152,473 82,034
Income tax expense 32,127 500 56,415 2,500
------------ ------------ ------------ ------------
Net income $ 55,577 $ 39,504 $ 96,058 $ 79,534
============ ============ ============ ============
Earnings per share:
Net income per share - basic $ .75 $ .53 $ 1.31 $ 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
(In thousands)
(Unaudited)
Unamortized
Additional Minimum StockUnamortized Total
Common Paid-In Accumulated Pension Stock Plan Treasury Stockholders'
Stock Capital Deficit Liability Expense Stock Equity
--------------------------------------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF DECEMBER 31, 1997 $865 $370,258 $(225,960) $(762) $(1,155) $(50,489) $92,757
Net income 40,481 40,48196,058 96,058
Amortization of stock plan expense 329 329823 823
Exercise of common stock options with
the Offering, net of expenses 26 24,751 2,044 26,821
Tax benefit of exercised common stock
options 7,989 7,98940,033 40,033
Exercise of common stock options 6 1,990 1,9967 2,111 2,118
Purchase of treasury stock (74,579) (74,579)
--------------------------------------------------------------------------(148,805) (148,805)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AS OF MARCH 31,JUNE 30, 1998 $871 $380,237 $(185,479)$898 $437,153 $(129,902) $(762) $(332) $(197,250) $ (826) $(125,068) $68,973
==== ======== ========= ===== ====== ========= =======109,805
=========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
ThreeSix months ended
March 31,
-----------------------June 30,
---------------------------
1998 1997
----------- ---------------------
Cash Flows from Operating Activities
Net income $ 40,48196,058 $ 40,03079,534
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,292 7,83216,354 15,901
Postretirement benefit cost 1,480 1,7993,108 3,408
Non-cash stock option compensation expense 329 522823 985
Deferred income tax benefit 23,66229,072
Other, net 86 (1,595)46 21
Change in assets and liabilities:
Accounts receivable 35,697 13,90311,993 31,842
Inventories (78,669) 25,732(117,887) 45,402
Prepaids, other assets, and deferred charges 3,543 (1,343)3,968 (3,904)
Accounts payable and accrued liabilities 14,888 (22,217)74,951 2,039
Customer deposits (77,109) (95,248)(1,468) (146,357)
Other long-term liabilities (747) (157)
-------- --------(893) (603)
----------- -----------
Net Cash Used inProvided by Operating Activities (28,067) (30,742)116,125 28,268
Cash Flows from Investing Activities
Expenditures for property and equipment (3,729) (2,267)(10,184) (4,734)
Expenditures for tooling (108) (160)
-------- --------(346) (1,378)
Proceeds from sales of assets 835
----------- -----------
Net Cash Used in Investing Activities (3,837) (2,427)(9,695) (6,112)
Cash Flows from Financing Activities
Proceeds from exercise of common stock options 1,996 50728,939 649
Principal payment of long-term debt (18,750)(37,500) (6,667)
Purchase of treasury stock (74,579)
-------- --------(148,805)
----------- -----------
Net Cash Provided by (Used in)Used in Financing Activities (91,333) 507
-------- --------(157,366) (6,018)
----------- -----------
Decrease in cash and cash equivalents (123,237) (32,662)(50,936) 16,138
Cash and cash equivalents, beginning of period 306,451 233,172
------- -------=========== ===========
Cash and cash equivalents, end of period $183,214 $200,510
======= =======$ 255,515 $ 249,310
=========== ===========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis 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 March 31,June 30, 1998 are
not necessarily indicative of the results to be expected for the 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, 1997 included in the Company's 1997 Annual
Report to Stockholders.
NOTE 2. Earnings per Share
Basic earnings per share were computed by dividing net income by the
weighted average common 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 March 31,
---------------------Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 ----------1998 1997
--------- --------- --------- ---------
Net Income $40,481 $40,030
======= =======$ 55,577 $ 39,504 $ 96,058 $ 79,534
========= ========= ========= =========
Basic EPS
Weighted average common
shares outstanding 72,533 73,920
------- -------73,821 74,068 73,177 73,994
--------- --------- --------- ---------
Diluted EPS
Incremental shares from stock
options 2,818 4,637
------- -------2,106 4,651 2,462 4,644
--------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding 75,351 78,557
======= =======75,927 78,719 75,639 78,638
========= ========= ========= =========
Earnings Per Share:
Net income per share -
basic $ .56.75 $ .54
======= =======.53 $ 1.31 $ 1.07
========= ========= ========= =========
Net income per share -
diluted $ .54.73 $ .51
======= =======.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 basic and diluted earnings per share is as
follows:
Three months ended March 31,
----------------------Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 ---------- -----------1998 1997
--------- --------- --------- ---------
Pro forma Earnings Per Share:
Net income per share -
basic $.56 $ .36
==== =======.75 $ .34 $ 1.31 $ .69
========= ========= ========= =========
Net income per share -
diluted $.54 $ .33
==== =======
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.73 $ .32 $ 1.27 $ .65
========= ========= ========= =========
NOTE 3. Inventories
Inventories consisted of the following at:
March 31,June 30, December 31,
1998 1997
----------- --------------------------- ---------------
(In thousands)
Work in process $352,626 $330,155$ 376,712 $ 330,155
Raw materials 142,581154,140 134,973
Vendor progress payments 74,87674,949 60,606
Pre-owned aircraft 138,462141,327 104,142
$708,545 $629,876
======== ========--------------- ---------------
$ 747,128 $ 629,876
=============== ===============
NOTE 4. Income Taxes
TheIn the quarter and six month period ended June 30, 1998, the Company
recorded an income tax provisionprovisions of $24.3$32.1 million in
the first quarter of 1998and $56.4 million,
respectively, based on an estimated annual effective tax rate of 37.5%
compared with37.0% and,
in the quarter and six month period ended June 30, 1997, recorded a
provision of income taxes of $2.0 million, representingfor alternative minimum taxes in the first quarter 1997.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. The Company had available at March 31, 1998 a
net operating loss carryforward for regular federal income tax purposes of
approximately $11.7 million, which will begin expiring in 2006.
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 tax audits by the Internal Revenue Service
covering the years 1990 through 1994. The revenue agent's reports 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. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated. The Company believes the 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.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. Common Stock Repurchases
During January 1998, the Company began theannounced a program to repurchase of 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 March 31,June 30, 1998, the
Company had repurchased approximately 2.54.2 million shares, at an average
price of $30.01$35.41 per share, for an aggregate amount of $74.6approximately $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 first quarterthree
and six month periods of 1998 and 1997, the Company had no such
adjustments.
NOTE 8. New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which is effective no later than for the Company's 1998 fiscal year-end.
Management believes that the adoption of this statement will not have a
material effect on the Company's consolidated financial statements.
NOTE 9. Subsequent Event
On April 21,July 23, 1998, the Company filedentered into a registration statement on
Form S-3 with the Securities and Exchange Commissiondefinitive agreement to
acquire K-C Aviation, Inc., a leading provider of business aviation
services, from Kimberly-Clark Corporation for the sale of
18,000,000 shares of common stock in a secondary offering (the "Offering").
The Company will 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 are expected to
exercise 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 $28.7 million; all of such shares are$250
million in cash. The acquisition is subject to regulatory approvals and is
expected to be soldcompleted in the Offering.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.
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 statements and
notes to consolidated financial statements appearing in the Company's 1997
Annual Report to Stockholders.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31,Comparison of Results of Operations for the Quarter and Six Months Ended
June 30, 1998 ANDand 1997
Net Revenues. Total net revenues increased by $127.8$34.1 million, or 34.0%6.5%,
to $503.4$557.0 million in the firstsecond quarter of 1998 from $375.6$522.9 million in the
firstsecond quarter of 1997. The significant increase resulted primarily from an increase in
revenues from green aircraft of $62.8$79.3 million as the Company delivered 1315
aircraft, seven Gulfstream Vs and sixeight Gulfstream IV-SPs, as compared with
1112 aircraft, sixseven Gulfstream Vs and five Gulfstream IV-SPs, in the firstsecond
quarter of 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 increased by $47.6of $69.9 million as two additionalfive fewer units were
delivered in 1998.the second quarter of 1998 as compared to the same period in
1997. During the six months ended June 30, 1998, total net revenues
increased by $161.9 million, or 18.0%, to $1,060.4 million from $898.5
million for the six months ended June 30, 1997. For the six months ended
June 30, 1998, Gulfstream delivered 28 new aircraft, 14 Gulfstream Vs and
14 Gulfstream IV-SPs, up from 23 new aircraft, 13 Gulfstream Vs and ten
Gulfstream IV-SPs in the same period of 1997. Also contributing to the
increase in revenues was an increase in completion revenues of $13.9$35.0
million, resulting from Gulfstream Vsix additional completion deliveries.deliveries in 1998.
Cost of Sales. Total cost of sales increaseddecreased to $404.1$431.2 million in the
firstsecond quarter of 1998 from $305.2$446.9 million in the firstsecond quarter of 1997.
The increase was a result of1997,
and increased $83.2 million to $835.3 million for the higher number of green, pre-owned and
completion aircraft deliveries discussed above.six months ended June
30, 1998 from $752.0 million for the six months ended June 30, 1997.
Excluding pre-owned aircraft, which generally are sold at break-even
levels, the gross profit percentage for the firstsecond quarter of 1998 was
22.1%24.0% compared to 20.0%18.2% for the firstsecond quarter of 1997, and for the six
months ended June 30, 1998, the gross profit percentage was 23.1% compared
to 19.0% for the comparable period in 1997. This increase in gross profit
percentages is primarily attributable to reductions in Gulfstream V
aircraft production costs.
Selling and Administrative Expense. Selling and administrative expense
increased by $3.3$6.6 million, or 14.7%28.7% to $25.9$29.6 million in the firstsecond quarter
of 1998 from $22.6$23.0 million in the firstsecond quarter of 1997, and as a
percentage of net revenues, decreasedincreased to 5.2%5.3% in the firstsecond quarter of 1998
from 6.0%4.4% in the firstsecond quarter of 1997 due1997. For the six months ended June 30,
1998, selling and administrative expense was $55.5 million as compared to
$45.6 million for the higher level of revenues.six months ended June 30, 1997. The principal drivers
for the increase for both the quarter and the 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 was
$1.9$2.3 million in the firstsecond quarter of 1998, as compared to $(1.5)$5.3 million in
the firstsecond quarter of 1997. For the six month period ended June 30, 1998,
research and development expense was $4.2 million compared to $3.8 million
for the corresponding period in 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 vendors 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 $0.6$0.3 million
to $2.5 million in the firstsecond quarter of 1998 from $3.1$2.2 million in the
firstsecond quarter of 1997 as a result of lowerhigher average cash balances the
Company had invested during 1998 compared to the same period of 1997.
Interest expense decreased by $1.1$1.2 million to $7.0$6.4 million for the firstsecond
quarter of 1998.1998 and by $2.4 million to $13.4 million for the six months
ended June 30, 1998, respectively, over the comparable periods in 1997.
This decrease is attributable to both a decrease in average borrowings and
lower weighted average interest rates.
Income Taxes. The Company recorded an income tax provision of $24.3$32.1
million in the firstsecond quarter of 1998 based on an estimated annual
effective tax rate of 37.5%37.0% compared with a provision of income taxes of
$2.0$0.5 million, representing alternative minimum taxes, in the firstsecond quarter
1997. 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. The Company had
available at March 31, 1998 aCompany's net
operating loss carryforward for regular federal income tax purposes of approximately $11.7 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
$0.54$0.73 for the firstsecond quarter of 1998, up from $0.51$0.50 for the firstsecond quarter
of 1997. On a pro forma fully - taxed basis, and assuming an effective tax
rate of 37.5%, for the 1997 periods, comparable diluted earnings per share
would have been $0.33$0.32 for the firstsecond quarter of 1997.
Liquidity and Capital Resources
The Company's liquidity needs arise from working capital requirements,
capital expenditures, principal and interest payments on long-term debt and
the Company's share repurchase program described below.herein. During the first quarter ofsix
months ended June 30, 1998, the Company relied on its available cash
balances to fund these needs.
The Company had cash and cash equivalents totaling $183.2$255.5 million at
March 31,June 30, 1998 down from $306.4$306.5 million at December 31, 1997. During the
first quarter of 1998, net cash used in operating activities was $28.1
million compared with the first quarter of 1997 when the Company used $30.7
million in cash from operations.
During the first quarter of 1998, additions to property and
equipment amounted to $3.7 million. At March 31, 1998, the Company was not
committed to the purchase of any significant amount of property and
equipment. As a result of the Company's strategic initiative to increase
its annual production rate to approximately 60 aircraft by 1999, the
Company's capital expenditures increased $15 million in 1997, and in 1998
are expected to increase by approximately another $20 million above
previously planned annual levels of approximately $15 million. During the
first quarter of 1998, the Company completed a new $8.5 million paint
facility located at its Long Beach, California facility. This facility is
part of the Company's 60 aircraft plan and will allow the Company to double
its present volume of painting new, pre-owned and customer aircraft. 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 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 expects to continue to fund the stock purchases from cash
on hand. As of March 31,June 30, 1998, approximately 2.54.2 million shares, at an
average price of $30.01$35.41 per share, had been repurchased under this plan for
an aggregate amount of $74.6approximately $150 million.
During the six months ended June 30, 1998, net cash provided by
operating activities was $116.1 million compared with the six months ended
June 30, 1997 when the Company generated $28.3 million in cash from
operations. This increase is attributable to the higher inflows of deposits
and progress payments associated with aircraft in the backlog during the
1998 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 March 31,June 30, 1998, the Company was not committed
to the purchase of any significant amount of property and equipment. As a
result of the Company's strategic initiative to increase its annual
production rate to approximately 64 aircraft by 1999, in 1997, the
Company's planned capital expenditures increased $15 million, and in 1998,
are expected to increase by approximately another $20 million above
previously planned annual levels of approximately $15 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, 1998, borrowings under the Company's credit facilities
were $361.3$342.5 million, with available borrowings of $172.6$173.3 million under a
revolving credit facility. Scheduled repayments remaining under the term
facility are $37.5 million in 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. As of March 31,June 30,
1998, the Company was in compliance with the covenants of its existing
credit agreement.
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.
As of March 31,June 30, 1998, in connection with orders for 2423 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 $203.7$202.0 million as of March 31,June 30, 1998.
Of this amount, $47.1$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 $25.0$12.5 million in 1997,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 19981999 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 March 31,June 30, 1998, Gulfstream had a firm contract backlog of
approximately $2.8$2.9 billion of revenues, representing a total of 8890
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
100102 aircraft, valued at approximately $3.1$3.2 billion of potential future
revenues, under contract.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. Completions1999, and completions are expected to nearly double in 1998.1998
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 the Company'sthis Form 10-K for the
year ended December 31, 1997, incorporated herein by reference.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
NoThe Company held its Annual Meeting of Stockholders on May 14,
1998. The following matters were submittedvoted upon:
Proposal 1: Election of Directors. The following nominees were
elected to security holders duringserve as Class II Directors of the quarter
ended March 31, 1998.Company, 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
Company for 1998 was ratified by the following vote:
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-K10-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 contained in the forward-looking
statements is contained in Exhibit 99,99.1, Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995 to the
Company's previously filed Form 10-K for the year ended December 31,
1997.1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.312.1 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 February 26,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 8-K
On February 10,April 16, 1998 the Company filed a report on Form 8-K,
reporting 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 February 10,April 16, 1998 pertaining to the Company's
fiscal 1997first quarter 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: May 8,July 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
Exhibits
Exhibit 10.312.1 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 February 26,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.