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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 SEPTEMBER 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) 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 October 30, 1998, there were 72,513,424 shares of Gulfstream
Aerospace Corporation Common Stock outstanding.
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997.......... 3
Consolidated Statements of Income
Three and nine months ended September 30, 1998
and 1997.......................................... 4
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998.............. 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and
1997.............................................. 6
Notes to Consolidated Financial Statements......... 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................... 16
ITEM 2. CHANGES IN
SECURITIES......................................... 16
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES......................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 16
ITEM 5. OTHER INFORMATION..................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K................................................16-17
SIGNATURE............................................. 18
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS
Cash and cash equivalents $ 10,552 $ 306,451
Accounts receivable (less allowance
for doubtful accounts:
$2,596 and $1,144) 227,809 177,228
Inventories 771,610 629,876
Deferred income taxe 28,983 33,795
Prepaids and other assets 7,360 11,318
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Total current assets 1,046,314 1,158,668
Property and equipment, net 161,145 134,611
Tooling, net of accumulated amortization:
$13,140 and $7,680 38,378 43,471
Goodwill, net of accumulated amortization:
$9,878 and $8,433 215,267 38,957
Other intangible assets, net 47,235 50,485
Deferred income taxes 28,800 32,950
Other assets and deferred charges 14,680 14,525
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Total Assets $ 1,551,819 $ 1,473,667
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 75,000 $ 75,000
Accounts payable 195,494 147,618
Accrued liabilities 145,958 93,798
Customer deposits -- current portion 499,331 546,441
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Total current liabilities 915,783 862,857
Long-term debt 298,750 305,000
Accrued postretirement benefit cost 127,076 115,405
Customer deposits -- long-term 77,825 88,075
Other long-term liabilities 7,102 9,573
Commitments and contingencies
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; 89,797,155 shares issued
in 1998 and 86,522,089 shares issued in 1997 898 865
Additional paid-in capital 437,488 370,258
Accumulated deficit (65,181) (225,960)
Minimum pension liability (762) (762)
Unamortized stock plan expense (248) (1,155)
Less: Treasury stock: 17,283,731 shares in
1998 and 11,978,439 shares in 1997 (246,912) (50,489)
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Total stockholders' equity 125,283 92,757
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Total Liabilities and Stockholders' Equity $ 1,551,819 $ 1,473,667
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
---------- ---------- ---------- ----------
Net revenues $ 626,177 $ 464,036 $1,686,626 $1,362,568
Cost and expenses
Cost of sales 487,361 372,983 1,322,655 1,125,031
Selling and administrative 29,882 23,920 85,399 69,517
Stock option compensation expense 84 329 907 1,314
Research and development 2,746 4,305 6,950 8,079
Amortization of intangibles and
deferred charges 2,428 1,831 6,186 5,477
---------- ---------- ---------- ----------
Total costs and expenses $ 522,501 $ 403,368 $1,422,097 $1,209,418
---------- ---------- ---------- ----------
Income from operations 103,676 60,668 264,529 153,150
Interest income 2,033 2,839 7,087 8,201
Interest expense (6,965) (7,495) (20,399) (23,305)
---------- ---------- ---------- ----------
Income before income taxes 98,744 56,012 251,217 138,046
Income tax expense (benefit) 34,023 (63,076) 90,438 (60,576)
---------- ---------- ---------- ----------
Net income $ 64,721 $ 119,088 $ 160,779 $ 198,622
========== ========== ========== ==========
Earnings per share:
Net income per share - basic $ .88 $ 1.61 $ 2.19 $ 2.68
========== ========== ========== ==========
Net income per share - diluted $ .86 $ 1.54 $ 2.13 $ 2.54
========== ========== ========== ==========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
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 DECEMBER 31, 1997 $ 865 $ 370,258 $ (225,960) $ (762) $ (1,155) $ (50,489) $ 92,757
Net income 160,779 160,779
Amortization of stock plan
expense 907 907
Exercise of common stock
options with the Offering,
net of expenses 26 25,051 2,044 27,121
Tax benefit of exercised
common stock options 40,033 40,033
Exercise of common stock options 7 2,146 2,153
Purchase of treasury stock (198,467) (198,467)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AS OF SEPTEMBER 30, 1998 $ 898 $ 437,488 $ (65,181) $ (762) $ (248) $ (246,912) $ 125,283
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 160,779 $ 198,622
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,176 24,342
Postretirement benefit cost 5,060 5,140
Provision for loss on pre-owned aircraft (1,100)
Non-cash stock option compensation expense 907 1,314
Other acquisition related non-cash items 3,880
Deferred income taxes 48,995 (64,801)
Other, net 677 712
Change in assets and liabilities, excluding
effect of acquisition:
Accounts receivable (10,985) 7,986
Inventories (93,791) 2,151
Prepaids, other assets, and deferred charges 4,822 (2,640)
Accounts payable and accrued liabilities 83,021 (3,942)
Customer deposits (78,448) (134,753)
Other long-term liabilities (2,471) 615
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NET CASH PROVIDED BY OPERATING ACTIVITIES 147,622 33,646
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquired (251,087)
Investment in unconsolidated affiliate (1,260)
Expenditures for property and equipment (16,089) (9,619)
Expenditures for tooling (477) (2,613)
Proceeds from sales of assets 835
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NET CASH USED IN INVESTING ACTIVITIES (268,078) (12,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options 29,274 888
Net borrowings under revolving credit loans 50,000
Principal payments on long-term debt (56,250) (13,333)
Purchase of treasury stock (198,467)
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NET CASH USED IN FINANCING ACTIVITIES (175,443) (12,445)
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(Decrease) increase in cash and cash equivalents (295,899) 8,969
Cash and cash equivalents, beginning of period 306,451 233,172
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Cash and cash equivalents, end of period $ 10,552 $ 242,141
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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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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Net Income $ 64,721 $ 119,088 $ 160,779 $ 198,622
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BASIC EPS
Weighted average common shares
shares outstanding 73,454 74,119 73,269 74,036
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DILUTED EPS
Incremental shares from stock
options 1,392 2,986 2,106 4,091
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Weighted average common and
common equivalent shares
outstanding 74,846 77,105 75,375 78,127
========== ========== ========== ==========
EARNINGS PER SHARE:
Net income per share - basic $ .88 $ 1.61 $ 2.19 $ 2.68
========== ========== ========== ==========
Net income per share - diluted $ .86 $ 1.54 $ 2.13 $ 2.54
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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PRO FORMA EARNINGS PER SHARE:
Net income per share - basic $ .88 $ .47 $ 2.19 $ 1.17
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Net income per share - diluted $ .86 $ .45 $ 2.13 $ 1.10
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NOTE 3. INVENTORIES
Inventories consisted of the following at:
SEPTEMBER 30, DECEMBER 31,
1998 1997
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(In thousands)
Work in process $ 415,584 $ 330,155
Raw materials 177,807 134,973
Vendor progress payments 76,747 60,606
Pre-owned aircraft 101,472 104,142
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$ 771,610 $ 629,876
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NOTE 4. INCOME TAXES
In the quarter and nine month period ended September 30, 1998, the
Company recorded income tax provisions of $ 34.0 million and $90.4 million,
respectively, based on an estimated annual effective tax rate of 36.0%. In
the comparable periods of 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. As a result of numerous
factors, including, but not limited to the Company's recent earnings trends
and the size of its contractual backlog, the Company determined that its
net deferred tax asset was more likely than not to be realized, and, in the
quarter ending September 30, 1997, released its deferred tax valuation
allowance, totaling $94.2 million. Of this amount, $29.4 million related to
the exercise of stock options and was credited to additional paid-in
capital and $64.8 million was recorded as a one-time, non-cash income tax
benefit.
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.
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 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.
NOTE 6. COMMON STOCK REPURCHASES
During January 1998, the Company announced a program to repurchase up
to $200 million of its common stock. As of September 30, 1998, the Company
had repurchased approximately 5.5 million shares, at an average price of
$35.81 per share, for an aggregate amount of approximately $198.5 million.
The repurchase was funded from the Company's available cash.
NOTE 7. BUSINESS ACQUISITION
On August 19, 1998, the Company acquired K-C Aviation, Inc. for
approximately $250 million, including acquisition costs. K-C Aviation is a
leading provider of business aviation services and the largest independent
completion center for business aircraft in North America. In addition to
custom aircraft interiors, K-C Aviation is the second largest engine
service center in the United States and also offers maintenance services,
spares, auxiliary power unit service, avionics retrofit, non-destructive
testing and component overhaul.
The purchase of K-C Aviation, Inc. was funded primarily from existing
cash balances, and due to the timing of the closing of the transaction,
also from the revolving credit facility.
The acquisition has been accounted for as a purchase, and accordingly,
the operating results of K-C Aviation have been included in the Company's
consolidated financial statements since the date of acquisition. The
purchase price exceeded the fair value of net assets acquired by
approximately $178 million, which is being amortized on a straight-line
basis over 40 years. Allocations of the purchase price have been determined
based upon preliminary estimates of value, and therefore, are subject to
change as asset appraisals are finalized. As refinements are made, goodwill
and any other appropriate accounts will be adjusted accordingly.
The following unaudited pro forma summary presents the combined
results of operations of the Company and K-C Aviation, as if the
acquisition had occurred at the beginning of fiscal 1998 and 1997. The pro
forma amounts give effect to certain adjustments, including the
amortization of goodwill, reduced interest income from cash utilized to
complete the acquisition and the related income tax effects. The pro forma
consolidated results do not purport to be indicative of results that would
have occurred had the acquisitions been in effect for the period presented,
nor do they purport to be indicative of the results that will be obtained
in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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Pro forma Net Revenues $ 650.3 $ 516.2 $ 1,809.8 $ 1,504.9
========== ========== ========== ==========
Pro forma Income Before Income
Taxes 99.5 56.3 251.1 129.9
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Pro forma Net Income 66.3 120.6 163.1 193.4
========== ========== ========== ==========
Pro forma Earnings Per Share -
Basic .90 1.63 2.23 2.61
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Pro forma Earnings Per Share -
Diluted $ .88 $ 1.56 $ 2.17 $ 2.47
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NOTE 8. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This
Statement requires disclosure of total nonowner changes in stockholders'
equity, which is defined as net income plus certain direct adjustments to
stockholders' equity such as pension liability adjustments. For the three
and nine month periods of 1998 and 1997, the Company had no such
adjustments.
NOTE 9. 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.
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 AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
Net Revenues. Total net revenues increased by $162.2 million, or
35.0%, to $626.2 million in the third quarter of 1998 from $464.0 million
in the third quarter of 1997. The third quarter 1998 results of operations
include net revenues of K-C Aviation, Inc. from the date of acquisition,
which were $35.2 million, resulting principally from the delivery of five
non-Gulfstream completions. Excluding the net revenues of K-C Aviation, the
Company's net revenues were up $127.0 million, or 27.4%. The increase
resulted from several factors; an increase in revenues from green aircraft
of $44.5 million as the Company delivered 16 aircraft, seven Gulfstream Vs
and nine Gulfstream IV-SPs, as compared with 14 aircraft, eight Gulfstream
Vs and six Gulfstream IV-SPs, in the third quarter of 1997; and an increase
in Gulfstream completion revenues of $30.7 million reflecting 11 Gulfstream
completions delivered during the third quarter compared with only five
Gulfstream completions delivered in the comparable 1997 period. In
addition, revenues associated with the sale of pre-owned aircraft increased
$29.2 million to $45.0 million in the third quarter of 1998 as compared to
$15.8 million in the same period in 1997.
During the nine months ended September 30, 1998, total net revenues
increased by $324.0 million (including the effects of the acquisition), or
23.8%, to $1,686.6 million from $1,362.6 million for the nine months ended
September 30, 1997. For the nine months ended September 30, 1998,
Gulfstream delivered 44 new aircraft; 21 Gulfstream Vs and 23 Gulfstream
IV-SPs, up from 37 new aircraft; 21 Gulfstream Vs and 16 Gulfstream IV-SPs
in the same period of 1997. Also contributing to the increase in revenues
was an increase in completion revenues of $82.5 million, resulting from 12
additional Gulfstream completion deliveries and five non-Gulfstream
completion deliveries in 1998.
Cost of Sales. Total cost of sales increased to $487.4 million in the
third quarter of 1998 from $373.0 million in the third quarter of 1997, and
increased $197.7 million to $1,322.7 million for the nine months ended
September 30, 1998 from $1,125.0 million for the nine months ended
September 30, 1997. Cost of sales of the acquired business includes a
non-cash acquisition related charge of $3.9 million for the fair value
step-up related to the sale of inventories. Excluding pre-owned aircraft,
which generally are sold at break-even levels, and the non-cash inventory
step-up of $3.9 million, the gross profit percentage for the third quarter
of 1998 was 24.1% compared to 19.3% for the third quarter of 1997, and for
the nine months ended September 30, 1998, the gross profit percentage was
23.5% compared to 19.1% 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 $6.0 million, or 25.1%, to $29.9 million in the third quarter
of 1998 from $23.9 million in the third quarter of 1997, but as a
percentage of net revenues, decreased to 4.8% in the third quarter of 1998
from 5.2% in the third quarter of 1997. For the nine months ended September
30, 1998, selling and administrative expense was $85.4 million as compared
to $69.5 million for the nine months ended September 30, 1997. The
principal drivers for the increase for both the quarter and the nine months
are additional sales and marketing expenses associated with the increased
sales activity, the acquisition of K-C Aviation, 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
$2.7 million in the third quarter of 1998, as compared to $4.3 million in
the third quarter of 1997. For the nine month period ended September 30,
1998, research and development expense was $7.0 million compared to $8.1
million for the corresponding period in 1997. Research and development
expense for the nine months ended September 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 decreased by $0.8 million
to $2.0 million in the third quarter of 1998 from $2.8 million in the third
quarter of 1997 as a result of lower average cash balances the Company had
invested during 1998 compared to the same period of 1997. Interest expense
decreased by $0.5 million to $7.0 million for the third quarter of 1998 and
by $2.9 million to $20.4 million for the nine months ended September 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. In the quarter and nine month period ended September 30,
1998, the Company recorded income tax provisions of $34.0 million and $90.4
million, respectively, based on an estimated effective tax rate of 36.0%.
In the comparable periods of 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. As a result of numerous
factors, including, but not limited to the Company's recent earnings trends
and the size of its contractual backlog, the Company determined that its
net deferred tax asset was more likely than not to be realized, and, in the
quarter ending September 30, 1997, released its deferred tax valuation
allowance, totaling $94.2 million. Of this amount, $29.4 million related to
the exercise of stock options and was credited to additional paid-in
capital and $64.8 million was recorded as a one-time, non-cash income tax
benefit. The Company's net operating loss carryforward for regular federal
income tax purposes was fully utilized during the second quarter 1998.
Earnings Per Share. The Company reported diluted earnings per share of
$0.86 for the third quarter 1998 as compared to the third quarter of 1997
of $1.54 (or $0.70 per share, excluding the one-time tax benefit discussed
above). For the nine months ended September 30, 1998, earnings per share
was $2.13, compared to $2.54 (or $1.71 per share excluding the one-time tax
benefit discussed above) for the corresponding period in 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
$.45 for the third quarter and $1.10 for the nine month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise principally from working capital
requirements, capital expenditures, and principal and interest payments on
long-term debt (including the revolving credit facility). During 1998, the
Company also implemented a share repurchase program and acquired K-C
Aviation. During the nine months ended September 30, 1998, the Company
relied on both cash balances and its revolving credit facility to fund
these needs.
The Company had cash and cash equivalents totaling $10.6 million at
September 30, 1998 down from $306.5 million at December 31, 1997. This
decrease is primarily attributable to the acquisition of K-C Aviation
during the third quarter 1998 and the Company's share repurchase program.
On August 19, 1998, the Company acquired K-C Aviation, Inc. for
approximately $250 million, including acquisition costs. K-C Aviation is a
leading provider of business aviation services and the largest independent
completion center for business aircraft in North America. In addition to
custom aircraft interiors, K-C Aviation is the second largest engine
service center in the United States and also offers maintenance services,
spares, auxiliary power unit service, avionics retrofit, non-destructive
testing and component overhaul. The acquisition allows the Company to
obtain a skilled workforce as well as the additional capacity to accelerate
the completions ramp-up, while at the same time grow service revenues
through three new strategic locations.
In January 1998, the Company established a program to repurchase up to
$200 million of its common stock. As of September 30, 1998, approximately
5.5 million shares, at an average price of $35.81 per share, had been
repurchased under this plan for an aggregate amount of approximately $198.5
million.
During the nine months ended September 30, 1998, net cash provided by
operating activities was $147.6 million compared with the nine months ended
September 30, 1997 when the Company generated $33.6 million in cash from
operations. This increase is primarily attributable to an increase in
pre-tax earnings.
During the third quarter of 1998, the Company together with GATX
Capital Corporation, a diversified international financial services
company, formed Gulfstream GATX Leasing Company to provide an operating
lease program to customers in the large cabin, long range business aircraft
market. Gulfstream GATX Leasing Company is owned 85% by GATX Capital and
15% by Gulfstream.
During the nine months ended September 30, 1998, additions to property
and equipment amounted to $16.1 million. At September 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 65 aircraft by 1999, the
Company's planned 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. 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, certain shareholders of 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 $27.1 million, after deducting issuance costs. The Company
used the proceeds from these exercises for working capital purposes.
At September 30, 1998, borrowings under the Company's revolving credit
facilities were $50 million, with available borrowings of $134.7 million.
Scheduled repayments remaining under the term facility are $18.8 million in
1998 and $75.0 million in each of the years 1999 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 September 30, 1998, the Company
was in compliance with the covenants of its 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 and
other available financing sources will be adequate to fund operations,
capital expenditures, and debt service 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 September 30, 1998, in connection with orders for 21 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 $281.9 million as of September 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 $18.8 million for the nine months ended September 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 September 30, 1998, Gulfstream had a firm contract backlog of
approximately $2.9 billion of revenues, representing a total of 91
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 third quarter of 1998, Gulfstream GATX Leasing Company
executed agreements to purchase five Gulfstream Vs and one Gulfstream
IV-SP, valued at approximately $210 million, with deliveries from 1999
through 2001. It also executed options to purchase three Gulfstream Vs and
three Gulfstream IV-SPs, valued at approximately $200 million, with
potential deliveries from 2001 through 2004.
During the quarter ended March 31, 1998, the Company signed a $335
million contract for 12 Gulfstream IV-SPs to expand its highly successful
Gulfstream Shares fractional ownership program to the Middle East region.
The first green aircraft delivery for the Middle East Shares Program
occurred during the third quarter of 1998. The remaining 11 undelivered
aircraft are 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 11 undelivered aircraft in
the Middle East contract, the Company had a total of 102 aircraft, valued
at approximately $3.2 billion of potential future revenues, under contract
at September 30, 1998.
As part of the Company's ongoing Gulfstream Shares program, on October
16, 1998, the Company signed agreements in principle with Executive Jet
International (EJI) which significantly expands the successful relationship
between the two companies. The agreements include plans for a Gulfstream V
Shares fractional ownership program, with the purchase of 10 Gulfstream V
aircraft and options for an additional 12 Gulfstream V aircraft, the
purchase of 14 Gulfstream IV-SP aircraft to supplement the current
Gulfstream Shares program and a long-term maintenance agreement for
Executive Jet's fleet of Falcons and Hawkers in addition to the Gulfstream
jets. The value of the purchase and service agreements is estimated to be
nearly $1.3 billion and is excluded from the Company's September 30, 1998
contractual backlog.
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 approximately 60 green aircraft in fiscal
1998 and 65 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
diluted earnings per share of approximately $2.95 in 1998 and $3.75 in
1999. The Company is also targeting diluted earnings per share in 2000 to
increase 15% over 1999.
YEAR 2000 READINESS
As part of the Company's initiatives, begun in 1996, to increase
production rates and co-produce the Gulfstream IV-SP and Gulfstream V, the
Company has, and continues to, upgrade and replace business systems and
facility infrastructure. These initiatives help to reduce the potential
impact of the Year 2000 issue on the Company's operations.
In addition, the Company has implemented a Year 2000 Compliance Plan
designed to ensure that all other hardware, software, systems, and products
with microprocessors relevant to the Company's business are not adversely
affected by the Year 2000 issue. The Company has established a formal
program office under the leadership of a senior level executive, to manage
the assessment and implementation of the Plan objectives. The program is
reviewed regularly with executive management.
Gulfstream has reviewed all current production components and systems
installed in the Gulfstream IV-SP and Gulfstream V aircraft and has found
no issues. Older aircraft which are no longer under warranty have also been
reviewed and some required minor component modifications have been
identified and communicated to the relevant customers. Gulfstream intends
to substantially complete Year 2000 compliance remediation and testing by
the first quarter 1999, with some activities continuing through the
remainder of 1999. Confirmations of Year 2000 plans for all high and medium
risk suppliers has also been completed and low risk suppliers are
approximately 90% complete. Supplier Year 2000 compliance monitoring will
continue through year-end 1999 and into the Year 2000.
The Company currently estimates the total costs of these efforts
incurred during the years 1997 through 1999 to be approximately $3.5
million. In addition, some non-compliant systems will be eliminated as the
Company installs Year 2000 compliant software in connection with its
ongoing integrated resource planning project. The cost of this effort has
been included in the Company's capital projections discussed above under
the caption "Liquidity and Capital Resources".
The Company does not believe that the implementation of this Year 2000
Compliance Plan will have a material effect on the Company's business
operations, financial condition, liquidity or capital resources. Management
of the Company believes it has an effective program in place to address the
Year 2000 issue in a timely manner. As a component of the Year 2000
Compliance Plan, the Company is developing contingency plans to mitigate
the effects of potential problems experienced by it or its key vendors or
suppliers in the timely implementation of its Year 2000 Compliance Plan.
Nevertheless, since it is not possible to anticipate all future outcomes,
especially when third parties are involved, there could be circumstances in
which the Company's operations would be adversely affected.
The statements in this section constitute a "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure Act to
the extent provided therein.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations", including the
statements under the heading "Outlook", as well as other statements
elsewhere in this Form 10-Q, contain forward-looking information. These
forward-looking statements are subject to risks and uncertainties. Actual
results might differ materially from those projected in the forward-looking
statements. Additional information concerning factors that could cause
actual results to materially differ from those in the forward-looking
statements is contained in Exhibit 99.1 to this Form 10-Q.
PART II. OTHER INFORMATION
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
Not Applicable.
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 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, 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 10.33 Amendment dated October 6, 1998 to Credit
Agreement among Gulfstream Delaware
Corporation, The Chase Manhattan Bank, and
the banks and other financial institutions
parties thereto.
Exhibit 10.34 Lease Agreement, dated January 1, 1998, by
and between Immuebles El Vigia, S.A., and
Interiores Aeroes, S.A. De C.V.
Exhibit 10.35 Amendment No. 3 to Sublease Agreement, dated
February 23, 1998, by and between the
Brunswick and Glynn County Development
Authority and Gulfstream Aerospace
Corporation.
Exhibit 10.36 Amendment No. 4 to Sublease Agreement, dated
March 23, 1998, by and between the Brunswick
and Glynn County Development Authority and
Gulfstream Aerospace Corporation
Exhibit 10.37 Lease Agreement, dated January 25, 1968, by
and between Outagamie County, Wisconsin and
K-C Aviation Incorporated which was assigned
to K-C Aviation on October 9, 1980; as
amended by Addendum No. 1, dated December 24,
1980, Addendum No. 2, dated February 9, 1988,
Addendum No. 3 dated January 26, 1989,
Addendum No. 4 dated October 22, 1996, and
Addendum No. 5 to Lease Agreement, dated
March 11, 1997.
Exhibit 10.38 Lease Agreement, dated February 1, 1978, by
and between City of Dallas and K-C Aviation,
Incorporated for lease of land and facility
at Dallas Love Field; as amended by Agreement
Amending Lease dated October 28, 1981, Second
Amendment dated June 1, 1989, and that
certain letter from the City of Dallas to K-C
Aviation dated December 9, 1997.
Exhibit 10.39 Sublease Agreement, dated January 17, 1989,
by and between Dalfort Aviation Services, a
division of Dalfort Corporation and K-C
Aviation, Incorporated, as amended by that
certain First Additional Agreement effective
January 17, 1989.
Exhibit 10.40 Sublease Agreement, dated December 1, 1996,
by and between Dallas Airmotive, Incorporated
and K-C Aviation, Incorporated.
Exhibit 10.41 Lease Agreement, dated May 1, 1997, by and
between Carpenter Freeway Properties and K-C
Aviation, Incorporated.
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.
(b) Report on Form 8-K
On August 27, 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 August 19, 1998 pertaining to the Company's
acquisition of K-C Aviation.
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 12, 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 10.33 Amendment dated October 6, 1998 to Credit
Agreement among Gulfstream Delaware
Corporation, The Chase Manhattan Bank, and
the banks and other financial institutions
parties thereto.
Exhibit 10.34 Lease Agreement, dated January 1, 1998, by
and between Immuebles El Vigia, S.A., and
Interiores Aeroes, S.A. De C.V.
Exhibit 10.35 Amendment No. 3 to Sublease Agreement, dated
February 23, 1998, by and between the
Brunswick and Glynn County Development
Authority and Gulfstream Aerospace
Corporation.
Exhibit 10.36 Amendment No. 4 to Sublease Agreement, dated
March 23, 1998, by and between the Brunswick
and Glynn County Development Authority and
Gulfstream Aerospace Corporation
Exhibit 10.37 Lease Agreement, dated January 25, 1968, by
and between Outagamie County, Wisconsin and
K-C Aviation Incorporated which was assigned
to K-C Aviation on October 9, 1980; as
amended by Addendum No. 1, dated December 24,
1980, Addendum No. 2, dated February 9, 1988,
Addendum No. 3 dated January 26, 1989,
Addendum No. 4 dated October 22, 1996, and
Addendum No. 5 to Lease Agreement, dated
March 11, 1997.
Exhibit 10.38 Lease Agreement, dated February 1, 1978, by
and between City of Dallas and K-C Aviation,
Incorporated for lease of land and facility
at Dallas Love Field; as amended by Agreement
Amending Lease dated October 28, 1981, Second
Amendment dated June 1, 1989, and that
certain letter from the City of Dallas to K-C
Aviation dated December 9, 1997.
Exhibit 10.39 Sublease Agreement, dated January 17, 1989,
by and between Dalfort Aviation Services, a
division of Dalfort Corporation and K-C
Aviation, Incorporated, as amended by that
certain First Additional Agreement effective
January 17, 1989.
Exhibit 10.40 Sublease Agreement, dated December 1, 1996,
by and between Dallas Airmotive, Incorporated
and K-C Aviation, Incorporated.
Exhibit 10.41 Lease Agreement, dated May 1, 1997, by and
between Carpenter Freeway Properties and K-C
Aviation, Incorporated.
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.