GULFSTREAM [Registered Trademark]
Breaking Records
Delivering Results
[GRAPHIC OMITTED]
[IMAGE OF GULFSTREAM V]
1998 Annual Report
BREAKING RECORDS, DELIVERING RESULTS
1998 was a year of outstanding performance for Gulfstream Aerospace
Corporation. The Company achieved a record 90 new aircraft orders plus 18
options, closed the year with a backlog* comprised of 135 Gulfstream IV-SP
and Gulfstream V aircraft valued at approximately $4.3 billion, including
options, grew earnings per share nearly 80 percent to $3.00 and received
aviation's most prestigious award, the Robert J. Collier Trophy for
aeronautical excellence. Through the focused execution of our business plan
and by adeptly responding to a dynamic competitive environment, Gulfstream
solidified its leadership in business aviation and firmly positioned the
Company for future growth. Looking ahead, Gulfstream is poised to continue
to deliver exceptional shareholder value well into the future.
* Reported financial contract backlog is comprised of 106 aircraft valued
at $3.3 billion. This excludes 18 options and 11 aircraft under contract
but not yet delivered into the Middle East Shares fractional ownership
program. Reported new orders, excluding undelivered aircraft intended
for the Middle East Shares program, totaled 79.
FINANCIAL HIGHLIGHTS
Year ended December 31,
==============================================================================
1998 1997 1996
==============================================================================
(Dollars in millions, except per
share amounts and units)
AIRCRAFT DELIVERIES 61 51 27
NET REVENUES $ 2,428.0 $ 1,903.5 $ 1,063.7
PRO FORMA FULLY TAXED EPS* $ 3.00 $ 1.68 $ 0.37
FINANCIAL CONTRACT BACKLOG** $ 3,301.9 $ 2,782.1 $ 3,104.0
CLOSING STOCK PRICE $ 53.25 $ 29.25 $ 24.13
* Diluted EPS, see Notes to the Consolidated Financial Statements.
** Excludes 18 options and 11 Middle East Shares aircraft valued at
approximately $1.0 billion.
[CHART OMITTED]
[BAR GRAPH]
AIRCRAFT DELIVERIES CLOSING STOCK PRICE
1996 27 1996 $24.13
1997 51 1997 $29.25
1998 61 1998 $53.25
NET REVENUES PRO FORMA FULLY TAXED EARNINGS PER SHARE
1996 $1,063.7 1996 $0.37
1997 $1,903.5 1997 $1.68
1998 $2,428.0 1998 $3.00
On the Front Cover
In 1998, the Gulfstream V continued to break aeronautical records and the
Company continued to achieve record-setting operating and financial
performance. Gulfstream has now contracted for 136 Gulfstream V aircraft,
well before the competing aircraft is in service.
TABLE OF CONTENTS
Letter to Shareholders 2
Delivering Results, Defining the Future 5
Building a Diversified Product Portfolio to Meet Market Needs 6
Technological Leadership Through Quality, Performance and Reliability 9
Delivering Value-Added Services to Customers Worldwide 12
Sound Strategies, Expert Execution 16
Board of Directors 18
Financial Review 19
DEAR SHAREHOLDERS
1998 was another record year for Gulfstream. We exceeded all of our key
operating and financial goals and reported the largest number of new
aircraft orders in our history, leaving us with a year-end backlog,
including options, of 135 aircraft valued at $4.3 billion. Our successful
production expansion and strategic acquisition of K-C Aviation positions
Gulfstream for increased revenues and earnings into the new millennium. We
have never been more confident of our ability to sustain profitable growth
and create ongoing shareholder value.
As the Gulfstream V continued to break aeronautical records, we were
achieving record-setting operational and financial performance. Revenues
increased 28 percent to $2.4 billion while fully taxed earnings per share
increased nearly 80 percent to $3.00. We produced and delivered 61
production aircraft, outfitted 54 aircraft and grew our service business by
40 percent.
We used our substantial cash flow to make strategic, value-creating
investments and moved decisively to expand our product portfolio. The
acquisition of the leading independent large cabin completions and service
provider, K-C Aviation, added three facilities and a talented workforce to
support the Company's growth in interior outfitting and significantly
expand our aircraft services business. This acquisition is accretive to
1999 earnings by approximately $0.10 per share. Early in the year, the
Company also announced a $200 million stock repurchase program and
proceeded throughout the year to repurchase 5.5 million shares at an
average price of $35.81.
Demand for our products was stronger than ever as we successfully continued
to expand our markets. The Gulfstream V's exceptional performance led to 40
firm aircraft orders, plus 15 options -- exceeding the number recorded in
any year since the aircraft's introduction. Executive Jet ordered 22
Gulfstream Vs (including 12 options) for introduction into the North
American Shares program with delivery of aircraft beginning in the year
2000. In addition, this fine product continued to make significant inroads
in capturing the government and special mission market. With significant
first-to-market advantage, we have now contracted for 136 Gulfstream Vs
before the competition has delivered its first aircraft into service.
The Gulfstream IV-SP continues to be the most popular large cabin business
jet ever. We took orders for 50 aircraft, plus three options, including a
successful expansion of the Gulfstream Shares[Registered Trademark] program
into the Middle East with a 12 aircraft contract. Along with the Gulfstream
Vs, Executive Jet ordered 14 Gulfstream IV-SPs for the rapidly expanding
North American Shares program, resulting in the largest aircraft order in
the history of business aviation.
In 1998, we created another market expansion opportunity with the
introduction of Gulfstream LeaseSM through a venture with GATX Capital.
Once again, Gulfstream is first-to-market with a short-term operating lease
product for both the Gulfstream IV-SP and the Gulfstream V. The initial
program order was for six aircraft -- five Gulfstream Vs and one Gulfstream
IV-SP -- and includes options for three more of each.
The Company also made significant progress toward our goal to penetrate the
U.S. and international government special mission market with the
Gulfstream V. The United States Air Force took delivery of the first two
completed Gulfstream Vs under the VC-X program and ordered two additional
Gulfstream Vs. The U.S. Air Force Contract
[GRAPHIC OMITTED]
[IMAGE OF GULFSTREAM OFFICERS]
GULFSTREAM'S OFFICE OF THE CHIEF EXECUTIVE INCLUDES CHRIS A. DAVIS,
THEODORE J. FORSTMANN AND W. W. BOISTURE, JR. (LEFT TO RIGHT)
includes options for up to three more Gulfstream Vs. The government of
Kuwait also ordered three Gulfstream Vs. We continue to expect to see more
opportunities in government and special mission applications for this great
aircraft.
Our two fine aircraft brought in 90 new orders, plus 18 options, in 1998
leaving Gulfstream with 135 aircraft under contract valued at $4.3 billion.
Sixty percent of these orders, including options, will deliver from 2000
through 2007. Seventy-six percent of the backlog is in North America,
predominantly with Fortune 500 companies and the Gulfstream Shares Program.
The remaining 24 percent is international and, with the exception of the
Middle East Shares Program, is spread throughout the world with no
significant portion in any single economic region.
Gulfstream continued to profitably execute its plan to increase production
to meet strong customer demand. In 1998, deliveries of new aircraft
increased 20 percent to 61 aircraft and we delivered 54 outfitted aircraft
into service. Gross margins improved to 23.6 percent versus 20.0 percent in
the prior year as we implemented strategies to improve processes and reduce
cycle time.
1998 also saw significant growth in Aircraft Services with the strategic
addition of facilities in Dallas, Texas, Appleton, Wisconsin and Westfield,
Massachusetts. Revenues for this part of our business increased 40 percent
and we now have the capability to service non-Gulfstream mid-size and large
cabin aircraft. In addition, this business also includes engine and
auxiliary power unit repair and overhaul. This provides us with future
growth opportunities, as well as the ability to provide full-service
maintenance to customers with multi-aircraft fleets.
In December 1998, we restructured our management team to better meet the
needs of Gulfstream's next phase of growth. The newly created Office of the
Chief Executive and Ted Forstmann's assumption of the role of Chief
Executive Officer reinforces our personal commitments to Gulfstream and
positions us to take full advantage of Gulfstream's still enormous growth
opportunities. Over the past five years, we have built a strong and deep
management team, which has nearly tripled the size of our business. The
realignment of the organization and the promotions of several of these key
leaders, who have the talent and drive to further expand our market in the
years ahead, supports our goal of continuing double-digit earnings growth
going forward.
As we enter 1999, the outlook remains excellent with an expected increase
in earnings per share of 25 percent. We plan to deliver 65 new aircraft and
complete the ramp-up of completions to match the level of production in the
future. The Company ended 1998 at the required production rate and level of
quality to meet this delivery schedule. We are confident that the progress
we have made on production efficiencies will continue and that we have the
right team in place to drive those same kind of efficiencies into the
completions process.
Including our three new service locations, service revenues are expected to
grow at least 20 percent in 1999. The Company now commands approximately 75
percent market share in Gulfstream maintenance services and has the
opportunity to grow share in the non-Gulfstream product lines.
Profitability in this part of our business is forecasted to improve as the
new locations realize the cost advantage of volume purchases from suppliers
and the full benefit of the integration is achieved.
Looking ahead, the Company expects at least 15 percent earnings growth in
2000. Much of this earnings growth will be driven by continuing
manufacturing improvements in both completions and production, as well as
favorable prices on aircraft currently in the backlog.
We will continue to invest for future growth and creation of shareholder
value. On March 1, 1999, the Company announced an additional $200 million
share repurchase program. This new program reflects our continued strong
confidence in Gulfstream's current performance and future growth prospects.
In addition, the Company has plans to invest $30 million in capital
equipment and business systems and $15 million in research and development
in 1999 to support the revenue and earnings projections at our eight
locations and to keep our products at the forefront of technology.
1998 was an exceptional year for Gulfstream, one in which we exceeded our
goals in every area of our business and produced significant shareholder
return. We are proud of our accomplishments and our 7,700 employees who
contributed to Gulfstream's success. The outlook for Gulfstream remains
strong and we are confident of our ability to successfully execute our
plans for growth.
We are committed to continuing to set the standard for business aviation
through excellence in products, service and financial return.
/s/ Theodore J. Forstmann
THEODORE J. FORSTMANN
Chairman of the Board and Chief Executive Officer
Chairman, Office of the Chief Executive
/s/ W.W. Boisture, Jr.
W.W. BOISTURE, JR.
President and Chief Operating Officer
Member of the Office of the Chief Executive
/s/ Chris A. Davis
CHRIS A. DAVIS
Executive Vice President and
Chief Financial and Administrative Officer
Member of the Office of the Chief Executive
[GRAPHIC OMITTED]
[IMAGE OF AIRCRAFT PRODUCTION)
In 1998, Gulfstream produced 61 aircraft, up 20 percent over 1997.
DELIVERING RESULTS, DEFINING THE FUTURE
Gulfstream again delivered more than it promised in 1998. Just as
importantly, we took steps to define our future and generate exceptional
earnings growth for 1999 and beyond. We achieved record sales and earnings,
aggressively expanded distribution channels for our products, significantly
expanded our production capacity and service market share through the
acquisition of K-C Aviation, realigned our resources to more effectively
capitalize on our strengths and expanded our portfolio of services to meet
our customers' needs and broaden our sources of revenue. Gulfstream
continues to set the standard for business aviation and is well positioned
to continue our leadership position well into the future.
BUILDING A DIVERSIFIED PRODUCT PORTFOLIO TO MEET MARKET NEEDS
From Sydney to St. Louis, Gulfstream is known for setting the standard in
business aviation. We sustain our reputation for excellence by offering the
highest quality, most reliable business aircraft to the most discerning
customers -- national and multinational corporations, governments and
private individuals. More than 900 Gulfstream aircraft are in service today
- -- connecting cities and people and making commerce prosper in 50 countries
on six continents. Our growing and diverse customer base spans the spectrum
of industry -- from household names to emerging enterprises. Two-thirds of
all U.S. Fortune 500 companies operating large cabin business jets --
including all of the top ten -- and 34 governments operate Gulfstream
aircraft. In addition, more than half of all Gulfstream buyers are repeat
customers -- a distinct advantage in today's competitive market. Overall,
Gulfstream leads the large cabin category of business jets with
approximately 60 percent market share.
A number of factors fueled the strong demand for the Gulfstream IV-SP and
the ultra-long range Gulfstream V. Foremost is the fact that Gulfstream
aircraft are proven to be the world's most technologically advanced,
reliable and safe business aircraft. Customers look to our aircraft to
provide a level of safety, security and convenience unavailable on
commercial airlines. And they view our products as an indispensable
business tool that offers an opportunity to gain an advantage in a highly
competitive worldwide market. Independent surveys taken in 1997 found that,
among corporations operating business aircraft, 100 percent of senior
management, more than 60 percent of middle managers and over 40 percent of
sales professionals use these products in the normal course of business. In
fact, corporate jets are considered a significantly more productive work
environment than commercial airlines.
In 1998, we aggressively took steps to capitalize on our leadership
position, leverage the Gulfstream brand, expand access to our markets and
meet our customers' changing needs. By being first to market with product,
service and financing innovations, we now offer more customers than ever
the opportunity to experience the value of the Gulfstream brand with
transportation solutions provided by Gulfstream products.
Gulfstream Shares is the industry's most successful large cabin fractional
ownership program with 80 aircraft now under contract. In 1998, we expanded
the program to include the Gulfstream V aircraft and introduced Gulfstream
IV-SP fractional ownership into the Middle East. More than 100 new
customers have joined the Gulfstream family as part of the Shares program
since its launch in 1995.
Introduced in 1998, Gulfstream Lease is the first short-term operating
lease program available in business aviation. By requiring no capital
investment and offering lease terms ranging from two to five years at
competitive rates, Gulfstream Lease offers a flexible new approach to
aircraft operation.
Gulfstream Financial Services Corporation (GFSC) offers flexible financing
solutions tailored to individual customer needs. Through private label
relationships with financing providers, GFSC has financed over $400 million
since 1996.
To provide service for Gulfstream operators, the Company operates a network
of service centers, authorized warranty providers and parts depots in eight
countries, as well as worldwide field service representatives. To assist
customers in fulfilling their charter needs, Gulfstream introduced
Gulfstream Charter ServicesSM in 1998. Gulfstream also now offers
Gulfstream Management ServicesSM which provides comprehensive flight crew,
hangar and aircraft maintenance management for customers.
As our products, services and fleet of Gulfstream aircraft have grown, we
have made strategic investments to support this growth. We used our strong
cash flow to acquire K-C Aviation, the industry's leading independent
provider of aircraft completions services, with facilities in Appleton,
Wisconsin, Dallas, Texas and Westfield, Massachusetts. This $250 million
acquisition gives Gulfstream two critical competitive advantages. First, it
offers the opportunity to increase the number of aircraft interiors we
complete to match production levels and meet customer demand. Second, it
expands our service and maintenance capacity and positions the Company to
grow our service revenues for both Gulfstream and other mid-size and large
cabin aircraft.
[GRAPHIC OMITTED]
[IMAGE OF RUNWAY]
[GRAPHICS OMITTED]
[IMAGES OF GULFSTREAM IV-SP AND V]
Gulfstream now offers multiple opportunities for customers to fly in the
Gulfstream IV-SP, the world's best-selling, large cabin business jet, and
the Gulfstream V, the world's first ultra-long range business aircraft.
Customers can now benefit from these fine aircraft through the Gulfstream
Shares fractional ownership program, Gulfstream Lease short-term operating
leases or direct purchase of an entire aircraft.
[GRAPHIC OMITTED]
[IMAGE OF TEST FACILITY AND TEST FACILITY EMPLOYEE]
Gulfstream's Integrated Test Facility ensures high quality aircraft systems
integration in the manufacturing process.
TECHNOLOGICAL LEADERSHIP THROUGH QUALITY, PERFORMANCE AND RELIABILITY
THE GULFSTREAM V
The Gulfstream V, the world's first ultra-long range business aircraft,
continued to exceed expectations in 1998. Orders for this revolutionary
aircraft totaled 55 in 1998, including 15 options. By year-end, we had sold
136 Gulfstream Vs, a very powerful start for a new aircraft certified by
the Federal Aviation Administration less than two years ago. Early in the
year, the Gulfstream V was recognized with American aviation's greatest
honor -- the Robert J. Collier Trophy. Also in 1998, the record flight of
the Gulfstream V from Washington, D.C. to Dubai, United Arab Emirates was
recognized among the "Ten Most Memorable Flights in 1997".
Like all preceding Gulfstream aircraft, the Gulfstream V represents the
standard of performance, reliability, safety and comfort against which
other aircraft are measured. Cruising effortlessly at speeds up to Mach
0.885 or nearly 600 miles per hour, the Gulfstream V can fly 6,500 nautical
miles at 51,000 feet -- high above weather and commercial aircraft traffic.
While renowned for its ultra-long range capabilities, the Gulfstream V is
equally well suited to short-range missions -- New York to Chicago, Paris to
Milan, Hong Kong to Bejing. With a proven ability to take off and land at
more airports than any aircraft in its class, the Gulfstream V offers its
owners unsurpassed flexibility. In every aspect, this record-setting
aircraft continues to exceed customer expectations and outperform the
competition.
The Gulfstream V also offers unparalleled versatility in interior
furnishings and equipment, as well as expanded baggage capacity. It is the
only aircraft in its class to provide 100 percent fresh air in the cabin
and maintain a constant 6,000 foot cabin pressure -- effectively minimizing
the wear and tear effects common in long distance commercial airline
travel.
The Gulfstream V's flexible operating capability, altitude, high speed, and
ultra-long range has led to its rapid acceptance as a special mission
aircraft for government and military use. To date, the United States
Government has ordered four Gulfstream V aircraft and holds options for up
to three additional aircraft.
In late 1998, two Gulfstream V aircraft entered service with the United
States Air Force (USAF) 89th Airlift Wing, also known as the Presidential
Wing. Designated VC-X or C-37A, these specially outfitted Gulfstream Vs
provide worldwide transportation for senior government officials and
dignitaries. Also in 1998, the U.S. Army's Priority Air Transport Squadron
ordered a Gulfstream V for outfitted delivery in the fourth quarter of
1999. In early 1999, the USAF ordered an additional aircraft for use by the
Commanders In Chief of the Unified Commands. Gulfstream will provide
technical and logistic support, spare parts and overhaul services to the
Department of Defense in support of these aircraft.
Outside the United States, the Gulfstream V is also recognized as an
exceptional special mission aircraft. In 1998, the Government of Kuwait
purchased three Gulfstream V aircraft to provide worldwide airlift and
unprecedented ultra-long range medical evacuation capabilities.
[GRAPHIC OMITTED]
[IMAGE OF AIRCRAFT FUSELAGE IN MANUFACTURING]
THE GULFSTREAM IV-SP
In 1998, the Gulfstream IV-SP further solidified its leadership position in
the large cabin, long range business aircraft market segment. Fifty-three
aircraft were ordered in 1998, including three options, bringing the total
number of Gulfstream IV/IV-SP aircraft sold to 423. This remarkable
aircraft continues to outsell its nearest competitor by a two-to-one
margin.
The continued strong demand for the Gulfstream IV-SP attests to its
extraordinary ability to perform on demand, at unmatched levels of safety
and comfort. Its 4,220 nautical mile range is enough to connect Chicago and
Madrid, London and Dubai, Hong Kong and Perth, and Buenos Aires and Cape
Town. Like the Gulfstream V, the Gulfstream IV-SP flies high above
commercial air traffic at 45,000 feet and offers a 100 percent fresh air
environmental control system with a constant cabin pressure of 6,500 feet,
well below the 8,000 foot cabin pressure of commercial airliners travelling
at 35,000 feet.
Its record of performance, reliability and flexibility also makes the
Gulfstream IV-SP a preferred platform for special purpose missions ranging
from medical evacuation, scientific and weather research and military
surveillance to V.I.P. transport. Nearly 50 Gulfstream IV/IV-SP aircraft
support government and military needs in 21 countries around the world.
Looking ahead, we expect the Gulfstream IV-SP to remain the leader in large
cabin, long range business aviation. The aircraft's digital design will
readily incorporate new advances in avionics, electronics and
telecommunications while its airframe and engine combination offers
unparalleled performance.
CUSTOMIZED INTERIORS
Gulfstream aircraft appeal to a wide spectrum of customers because they
combine exceptional technical performance with flexible, high quality
interior designs. Today, Gulfstream has achieved its goal of providing
interiors for every aircraft it produces. Gulfstream aircraft can be
outfitted as a virtual office just as readily as an airborne hospital
emergency room with state-of-the-art life support equipment.
Characteristics like these provide a significant advantage for Gulfstream
customers.
To increase completions capacity consistent with the Company's accelerated
production plan, Gulfstream acquired K-C Aviation, the industry's leading
independent provider of aircraft completions and service, from the
Kimberly-Clark Corporation in August, 1998 for approximately $250 million.
This strategic acquisition gave Gulfstream additional facilities and
equipment for interior completions, as well as an experienced and talented
team of 1,200 employees. Gulfstream now completes aircraft interiors at
five locations -- Appleton, Wisconsin, Brunswick, Georgia, Dallas, Texas,
Long Beach, California and Savannah, Georgia.
To help drive cost efficiencies while continuing to provide the industry's
highest quality completions, Gulfstream is aggressively integrating the
best practices across all locations into the overall interior design and
production process.
In 1998, Gulfstream also opened a new $8.5 million, 60,000 square foot,
state-of-the-art paint facility at its Long Beach, California location.
Combined with paint facilities at Appleton, Dallas and Savannah, Gulfstream
is positioned to increase the number of aircraft completed per year and
attract large maintenance and interior refurbishment jobs.
GULFSTREAM'S TEAM OF TALENTED AND DEDICATED CRAFTSPEOPLE PRODUCE THE
INDUSTRY'S HIGHEST QUALITY CUSTOM INTERIORS.
[GRAPHIC OMITTED]
[IMAGES OF AIRCRAFT INTERIORS AND COMPLETION EMPLOYEES]
DELIVERING VALUE-ADDED SERVICES TO CUSTOMERS WORLDWIDE
Gulfstream has taken significant steps to meet the changing needs of its
customers and expand the market for its products. The result is a broad
portfolio of products and services that leverage the brand and
strategically position the Company to be the first choice provider of
transportation solutions for customers worldwide.
SUCCESSFULLY EXPANDING PRODUCT OFFERINGS
Gulfstream has expanded the market for the Gulfstream IV-SP and Gulfstream
V aircraft by creating new distribution channels. Innovative programs such
as Gulfstream Shares and Gulfstream Lease offer customers an opportunity to
gain the advantage of a Gulfstream without the investment required for full
aircraft purchase.
Gulfstream Shares, a program offering fractional ownership interests in
Gulfstream aircraft, is a key contributor to Gulfstream's growth.
Introduced in 1995 in conjunction with Executive Jet (EJ), Gulfstream
Shares offers the opportunity to own one-eighth, one-quarter and one-half
shares in Gulfstream aircraft. To date, more than 100 owners -- including
many first-time aircraft operators -- have joined the Gulfstream family
through this program. Nearly half of Gulfstream Shares customers did not
previously own an aircraft and over 85 percent have never owned a
Gulfstream. Eighteen Gulfstream IV-SPs are currently in service in the
Shares program.
The Gulfstream Shares program grew substantially in 1998. In October, EJ
placed the largest order in business aviation's history for 14 Gulfstream
IV-SP and 10 Gulfstream V aircraft plus options for 12 additional
Gulfstream Vs. Valued at approximately $1.3 billion including a maintenance
services arrangement, this agreement expanded the Gulfstream IV-SP program
and added the ultra-long range Gulfstream V in North America. Now customers
that require the extended range and high-performance capabilities of the
Gulfstream V for only a portion of their transportation needs can
cost-effectively acquire a share of this asset.
At the end of 1998, 68 aircraft valued at $2 billion, including the
options, were under contract with EJ for the Gulfstream Shares program in
North America. Deliveries of these aircraft extend through 2007.
1998 marked further success for the Gulfstream Shares concept as we
introduced a fractional ownership program into the Middle East with the
sale of 12 Gulfstream IV-SP aircraft valued at $335 million to a group of
Middle East investors. The first aircraft will go into operational service
late in the second quarter of 1999. Gulfstream will provide technical,
sales and marketing support while the operation of the fleet will be
managed by EJ. We continue to see future expansion opportunities for the
Gulfstream Shares program in other regions around the world.
In September 1998, we introduced Gulfstream Lease, the industry's first
short-term operating lease program. Created in conjunction with GATX
Capital, a diversified international financial services corporation,
Gulfstream Lease provides greater flexibility and ease of entry to
customers by eliminating the up-front capital investment and offering lease
terms from two to five years at competitive rates. Emerging growth
companies, enterprises with short-term projects such as manufacturing
expansion or the integration of an acquisition, companies with off-balance
sheet financing requirements or companies awaiting delivery of a new
Gulfstream aircraft may find this a valuable alternative to aircraft
ownership.
The newly formed Gulfstream GATX Leasing Company is owned 85 percent by
GATX Capital and 15 percent by Gulfstream. Gulfstream will provide sales,
marketing and aircraft maintenance services and GATX will provide account
management services for the program.
[GRAPHIC OMITTED]
[IMAGE OF AIRCRAFT]
[GRAPHIC OMITTED]
[IMAGE OF AIRCRAFT, HANGAR AND MEETING]
In 1998, Gulfstream successfully expanded the Gulfstream Shares program to
include the Gulfstream V aircraft and the Middle East region.
[GRAPHIC OMITTED]
[IMAGE OF AIRCRAFT ENGINE AND MECHANIC]
Gulfstream now offers service for Gulfstream aircraft at six North American
locations. The Company also services Hawker, Falcon and Challenger aircraft
at three locations: Appleton, Wisconsin, Dallas, Texas and Westfield,
Massachusetts.
[GRAPHIC OMITTED]
[IMAGE OF PEOPLE]
To launch Gulfstream Lease, the venture signed contracts valued at more
than $400 million for five Gulfstream V, one Gulfstream IV-SP and options
for three Gulfstream V and three Gulfstream IV-SP aircraft. The first
aircraft will be delivered into service at the end of 1999.
24 HOURS-A-DAY CONVENIENCE FOR OUR CUSTOMERS
The purchase of a Gulfstream aircraft is the first step in building a
long-term relationship with our customer. The Company has service centers
in Appleton, Wisconsin, Brunswick, Georgia, Dallas, Texas, Long Beach,
California, Savannah, Georgia and Westfield, Massachusetts, as well as a
network of worldwide Gulfstream-authorized service warranty centers and
parts depots available to service aircraft maintenance needs. By focusing
on the customer and improving turn times, we have increased our market
share in service successfully over the past three years. Today, we service
three out of every four Gulfstream aircraft in operation. Revenues for
Gulfstream's Aircraft Services business increased 40 percent in 1998 to
$281.8 million, including the impact of the acquisition of the Appleton,
Dallas and Westfield facilities.
As the worldwide Gulfstream fleet continues to increase, Aircraft Services
provides important growth opportunities for the Company. The acquisition of
the Appleton, Dallas and Westfield facilities supports the expansion of
this strategic business and allows Gulfstream to offer convenient
coast-to-coast service in the United States. Gulfstream also will now
service Hawker, Falcon and Challenger business jets at the new locations,
an advantage for customers whose aircraft fleets include a variety of
aircraft models. The acquisition also strongly establishes the Gulfstream
name in the engine and auxiliary power unit service market. Over the longer
term, Gulfstream expects to use its expanded capacity to provide paint and
refurbishment services to mid-size and large cabin aircraft operators, an
important differentiating feature in attracting large maintenance
contracts.
To help customers manage maintenance costs, Gulfstream offers a
comprehensive, nose-to-tail maintenance program with guaranteed hourly
costs. Gulfstream ServiceCareSM covers virtually every part, component,
assembly and system on the aircraft for a ten-year period.
In 1998, Gulfstream introduced Gulfstream Charter Services to assist our
customers in chartering Gulfstream aircraft. Gulfstream Charter Services
monitors availability of Gulfstream aircraft for charter, ensuring that the
charter aircraft adhere to strict standards, are operated by a qualified
crew and reflect, as much as possible, personal preferences in comfort and
in-flight service.
Gulfstream Management Services simplifies aircraft ownership by offering
flight operations and maintenance services for Gulfstream customers.
Offered through an alliance with Chrysler Pentastar Aviation, a world
leader in aviation service and support, Gulfstream Management Services
provides crew, hangar facilities, dispatch scheduling and maintenance
management. It is the ideal solution for customers who want the benefits of
owning a Gulfstream without the accompanying complexities of fleet
management. It is also expected to appeal to customers leasing an aircraft
on a short-term basis through Gulfstream Lease.
SOUND STRATEGIES, EXPERT EXECUTION
Five years ago, Gulfstream established a vision to "Set the Standard for
Business Aviation through Excellence in Products, Services and Financial
Return." Our strategy was clear -- to bring the Gulfstream V to market well
ahead of the competition, to capitalize on the success of the Gulfstream
IV-SP and to offer new products and services to meet our customers'
changing needs.
We have successfully executed our strategy and significantly grown
revenues and earnings while expanding our sources of revenue to provide
for future growth. By focusing on our core competencies, maintaining
technical leadership in our products and driving process improvements
across all business areas, we realized a nearly 80 percent increase in
earnings in 1998 to $3.00 per share and expect to grow earnings an
additional 25 percent in 1999 to $3.75 per share.
Gulfstream increased production from 27 aircraft in 1996 to 61 aircraft in
1998 and we expect to deliver 65 new aircraft in 1999. This production
increase was accomplished with a capital investment of approximately $35
million. In addition to our revenue growth, the increase in earnings has
been realized through cost productivity on Gulfstream IV-SP and Gulfstream
V coproduction. In 1998, the manufacturing hours to build the Gulfstream
IV-SP and the Gulfstream V were reduced by 14 percent and 27 percent,
respectively. We will continue to focus on driving cost efficiencies and
quality through process improvements developed by cross-functional teams
working together to meet our goals. We expect to see margin expansion going
forward as we apply this same approach to our completions and service
businesses.
We plan to invest $15 million annually in research and development over the
next several years to ensure that our products remain at the forefront of
technological advancement. These investments will be primarily focused on
the integration of useful technology into the Gulfstream IV-SP and the
Gulfstream V while seeking ways to continuously improve the reliability and
the cost of operations for these outstanding products.
We are also focused on sustaining a culture based on teamwork and
entrepreneurial spirit. We will continue to lead our employees in an
environment supported by these values:
o We take personal and professional pride in the integrity, quality
and safety of products and services we sell and provide to our
customers.
o We expect to treat each other and our customers with the greatest
respect.
o We work diligently, supportively and safely as "One Team."
o We are committed to achieving excellent business performance for
our shareowners.
o We are committed to sustaining an action-oriented environment of
continuous improvement, risk taking and personal integrity.
As we look forward, Gulfstream is well positioned for continued growth with
a broader set of product offerings -- the Gulfstream IV-SP, the Gulfstream
V, Gulfstream Shares, Gulfstream Lease, Gulfstream Worldwide Service,
Gulfstream Financial Services, Gulfstream Pre-Owned Aircraft, Gulfstream
Charter Services and Gulfstream Management Services -- which will provide
transportation solutions to customers worldwide. We have never been more
confident in our ability to sustain profitable growth and create ongoing
shareholder value.
OVER THE PAST FIVE YEARS, GULFSTREAM HAS BUILT A STRONG MANAGEMENT TEAM
WHICH HAS NEARLY TRIPLED THE SIZE OF THE BUSINESS AND HAS THE TALENT AND
DRIVE TO EXPAND OUR MARKETS IN THE YEARS AHEAD.
[GRAPHIC OMITTED]
[IMAGE OF GULFSTREAM LEADERSHIP TEAM]
GULFSTREAM NOW OFFERS A BROAD RANGE OF TRANSPORTATION
PRODUCTS AND SERVICES
GULFSTREAM LEASE GULFSTREAM SHARES
GULFSTREAM WORLDWIDE [GRAPHIC OMITTED] GULFSTREAM PRE-OWNED
SERVICE [IMAGES OF GULFSTREAM V AIRCRAFT
& GULFSTREAM IV-SP]
GULFSTREAM CHARTER SERVICES
GULFSTREAM FINANCIAL GULFSTREAM MANAGEMENT
SERVICES SERVICES
GULFSTREAM CHARTER SERVICES
BOARD OF DIRECTORS
[GRAPHIC OMITTED]
[IMAGE OF R. ANDERSON]
Robert Anderson
Chairman Emeritus
Rockwell International Corporation
[GRAPHIC OMITTED]
[IMAGE OF C. L. BEERS]
Charlotte L. Beers
Chairman
J. Walter Thompson
[GRAPHIC OMITTED]
[IMAGE OF T. D. BELL, JR.]
Thomas D. Bell, Jr.
Chairman & Chief Executive Officer
Young & Rubicam Advertising
[GRAPHIC OMITTED]
[IMAGE OF W. W. BOISTURE, JR.]
W. W. Boisture, Jr.
President & Chief Operating Officer
Gulfstream Aerospace Corporation
[GRAPHIC OMITTED]
[IMAGE OF C. A. DAVIS]
Chris A. Davis
Executive Vice President &
Chief Financial & Administrative Officer
Gulfstream Aerospace Corporation
[GRAPHIC OMITTED]
[IMAGE OF L. FORESTER]
Lynn Forester
Co-Chief Executive Officer
FirstMark Communications
International L.L.C.
[GRAPHIC OMITTED]
[IMAGE OF N. C. FORSTMANN]
Nicholas C. Forstmann
Founding General Partner
Forstmann Little & Co.
[GRAPHIC OMITTED]
[IMAGE OF T. J. FORSTMANN]
Theodore J. Forstmann
Chairman & Chief Executive Officer
Gulfstream Aerospace Corporation
Founding General Partner
Forstmann Little & Co.
[GRAPHIC OMITTED]
[IMAGE OF S. J. HORBACH]
Sandra J. Horbach
General Partner
Forstmann Little & Co.
[GRAPHIC OMITTED]
[IMAGE OF J. T. JOHNSON]
James T. Johnson
Former President & Chief Operating Officer
Gulfstream Aerospace Corporation
[GRAPHIC OMITTED]
[IMAGE OF H. A. KISSINGER]
Henry A. Kissinger
Chairman
Kissinger Associates, Inc.
Former U.S. Secretary of State
[GRAPHIC OMITTED]
[IMAGE OF D. LEWIS]
Drew Lewis
Former Chairman & Chief Executive Officer
Union Pacific Corporation
[GRAPHIC OMITTED]
[IMAGE OF M. H. MCCORMACK]
Mark H. McCormack
Chairman, President & Chief Executive Officer
International Management Group
[GRAPHIC OMITTED]
[IMAGE OF B. T. MOSS]
Bryan T. Moss
Vice Chairman
Gulfstream Aerospace Corporation
[GRAPHIC OMITTED]
[IMAGE OF M. S. OVITZ]
Michael S. Ovitz
CKE Investments
Artists Management Group
[GRAPHIC OMITTED]
[IMAGE OF A. E. PAULSON]
Allen E. Paulson
Chairman Emeritus
Gulfstream Aerospace Corporation
[GRAPHIC OMITTED]
[IMAGE OF R. S. PENSKE]
Roger S. Penske
Chairman
Penske Corporation
[GRAPHIC OMITTED]
[IMAGE OF C. L. POWELL]
Colin L. Powell
Chairman, America's Promise --
The Alliance for Youth
Former Chairman, U.S. Joint Chiefs of Staff
[GRAPHIC OMITTED]
[IMAGE OF G. R. ROCHE]
Gerard R. Roche
Chairman
Heidrick & Struggles, Inc.
[GRAPHIC OMITTED]
[IMAGE OF D. H. RUMSFELD]
Donald H. Rumsfeld
Chairman
Gilead Sciences, Inc.
Former U.S. Secretary of Defense
[GRAPHIC OMITTED]
[IMAGE OF G. P. SHULTZ]
George P. Shultz
Former U.S. Secretary of State
[GRAPHIC OMITTED]
[IMAGE OF R. S. STRAUSS]
Robert S. Strauss
Founder & Partner
Akin, Gump, Strauss, Hauer & Feld
Former U.S. Ambassador to Russia
FINANCIAL TABLE OF CONTENTS
==============================================================================
Management's Discussion & Analysis 20
Consolidated Statements of Income 26
Consolidated Balance Sheets 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Independent Auditors' Report 39
Report of Management's Responsibility 39
Quarterly Financial Results 40
Quarterly Common Stock Price Range 40
Selected Financial Data 41
Corporate Information 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
Gulfstream is recognized worldwide as a leading designer, developer,
manufacturer and marketer of intercontinental business aircraft. The
Company operates principally in three segments: New Aircraft, Aircraft
Services and Pre-Owned Aircraft. Within New Aircraft, the Company's current
product offerings are the Gulfstream IV-SP, the Gulfstream V, Gulfstream
Shares (fractional ownership interest in Gulfstream IV-SPs and Gulfstream
Vs), and Gulfstream Lease. Also, the Company's financial services
subsidiary, Gulfstream Financial Services Corporation, through private
label relationships with third-party aircraft financing providers, offers
customized products to finance the worldwide sale of Gulfstream aircraft.
Within its Aircraft Services segment, the Company offers aftermarket
maintenance services, spare parts, and engine and auxiliary power unit
service and overhaul for both Gulfstream and other business aircraft. The
Company's Pre-Owned Aircraft segment markets and sells pre-owned Gulfstream
aircraft and other business aircraft, acquired in trade, to a worldwide
market.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto beginning on page 26,
which are included herein.
ACQUISITION OF K-C AVIATION
On August 19, 1998, the Company completed the acquisition of K-C Aviation,
Inc. for approximately $250 million, including acquisition costs. The
acquisition is a key part of Gulfstream's growth strategy and has allowed
the Company to obtain a skilled workforce, as well as add capacity to
accelerate its aircraft completions business, diversify and grow its
aircraft maintenance and parts business, and strongly establish the
Gulfstream name in the aircraft engine service market.
K-C Aviation was 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 was the
second largest independent aircraft engine service center in the United
States and also offers maintenance services, spare parts, auxiliary power
unit service, avionics retrofit, non-destructive testing and component
overhaul.
The purchase of K-C Aviation 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 the purchase price exceeded the fair value of net assets
acquired by approximately $178 million. The discussion and analysis that
follows reflects the combined results from the date of the acquisition.
RESULTS OF OPERATIONS
The following sets forth certain statistical data concerning the Company's
deliveries, orders and financial contract backlog for new aircraft.
1998 1997 1996
============================================================
Units delivered
during period:
Gulfstream IV-SP 32 22 24
Gulfstream V 29 29 3
============================================================
Total green deliveries 61 51 27
Units ordered during period:
Gulfstream IV-SP 39 39 44
Gulfstream V 40 7 21
============================================================
Total orders 79 46 65
Units in backlog at end
of period:
Gulfstream IV-SP (1) 50 43 27
Gulfstream V (2) 56 45 67
============================================================
Total backlog
(in units) (3) 106 88 94
Estimated backlog
(in billions) (3) $ 3.3 $ 2.8 $ 3.1
- ----------------------
(1) Net of one cancellation in 1997, which relates to an order placed in
that year.
(2) Net of one cancellation in 1996, which relates to an order placed in a
prior year.
(3) Backlog and orders exclude 11 Middle East Shares contracts. See
discussion of Financial Contract Backlog on page 24.
The Company recognizes revenue for the sale of a new "green" aircraft
(i.e., before exterior painting and installation of customer-selected
interiors and optional avionics) when that aircraft is delivered to the
customer. Revenues from completion services are recorded when the outfitted
aircraft is delivered to the customer. Revenues on all other products and
services, including pre-owned aircraft, are recognized when such products
are delivered or such services are performed. Generally, aircraft
deliveries remain relatively smooth throughout a year. However, aircraft
deliveries can vary significantly depending upon the timing of contract
execution and final customer acceptance. Accordingly, the Company's
revenues can vary significantly from quarter to quarter.
TOTAL COMPANY REVENUES AND GROSS MARGIN
In 1998, total Company revenues increased by $524.5 million to $2,428.0
million from $1,903.5 million in 1997. In 1997, total Company revenues
increased $839.8 million from $1,063.7 million in 1996. The increase in
revenues is principally attributable to the increase in new aircraft
deliveries to 61 in 1998 from 51 in 1997 and 27 in 1996. The Company's 1998
results of operations include revenues of K-C Aviation from the date of
acquisition, totaling $84.9 million, a portion of which resulted from the
delivery of eight non-Gulfstream completions. Cost of sales of the acquired
business includes a non-cash acquisition-related charge of $7.2 million for
the fair value step-up related to the sale of inventories. Excluding
pre-owned aircraft, which generally are sold at or near break-even levels,
and the non-cash inventory step-up, the Company's gross margin percentage
for 1998 was 23.6% compared to 20.0% for 1997 and 24.8% in 1996.
NET REVENUES
[GRAPHIC OMITTED]
[BAR GRAPH]
1996 $1,063.7
1997 $1,903.5
1998 $2,428.0
The following table displays net revenues and segment gross margin for the
Gulfstream Aerospace Corporation reportable segments for each of the three
years in the period ended December 31, 1998, which correspond to the
segment information presented in Note 15 to the consolidated financial
statements.
NET REVENUES 1998 1997 1996
===============================================================
(Dollars in millions)
New Aircraft $ 1,909.0 $ 1,492.0 $ 740.5
Aircraft Services 281.8 201.1 169.9
Pre-Owned Aircraft 237.2 210.4 153.3
--------------------------------------
Total Net Revenues $ 2,428.0 $ 1,903.5 $ 1,063.7
======================================
SEGMENT GROSS MARGIN 1998 1997 1996
===============================================================
(Dollars in millions)
New Aircraft $ 464.3 $ 297.5 $ 193.9
Aircraft Services 53.7 45.0 36.5
Pre-Owned Aircraft 11.4 8.2 (1.7)
--------------------------------------
Segment Gross Margin $ 529.4 $ 350.7 $ 228.7
======================================
NEW AIRCRAFT
New Aircraft segment revenues have continued to grow over the last three
years, reaching $1,909.0 million in 1998, after increasing to $1,492.0
million in 1997 from $740.5 in 1996. This represents a 27.9% increase in
1998 over 1997 and a twofold increase in 1997 compared with 1996. The
overall growth in New Aircraft revenues is primarily due to the increasing
level of production to meet expanded product demand. See also "Financial
Contract Backlog". In 1998, the New Aircraft segment delivered a total of
61 green aircraft, including both Gulfstream IV-SPs and Gulfstream Vs,
compared to 51 in 1997 and 27 in 1996. The increase in 1998 over 1997 is
driven by delivery of 10 additional Gulfstream IV-SP aircraft. The increase
in 1997 over 1996 is driven by delivery of 26 additional Gulfstream V
aircraft, which commenced delivery in December 1996.
The gross margins for New Aircraft were $464.3 million, $297.5 million, and
$193.9 million for 1998, 1997 and 1996, respectively. Gross margin
percentage increased to 24.3% in 1998 from 19.9% in 1997 but declined from
26.2% in 1996. The increase in gross margin percentage in 1998 is primarily
attributable to reductions in new aircraft production costs. The decline in
gross margin percentage in 1997 is primarily attributable to the
introduction of the Gulfstream V aircraft into production and the higher
costs experienced in 1997 associated with the early stages of Gulfstream V
production and completions.
AIRCRAFT SERVICES
Revenues for Aircraft Services increased 40.1% to $281.8 million in 1998
from $201.1 million in 1997. In 1997 Aircraft Services revenues increased
18.4% over 1996. Contributing to the revenue increase in 1998 was $57.4
million of revenues resulting from the acquisition of K-C Aviation. The
continuing growth in Aircraft Services revenue from 1996 to 1998 is
directly related to the Company's success in significantly increasing
market share.
Gross margin percentages for Aircraft Services were 19.1% in 1998, a
decrease from 22.4% in 1997, after increasing from 21.5% in 1996. The
decrease in gross margins in 1998 from 1997 resulted principally from lower
levels of gross margins realized on revenues from the acquired K-C Aviation
business. The increase in 1997 compared with 1996 is primarily attributable
to improved operating performance.
PRE-OWNED AIRCRAFT
Pre-Owned Aircraft revenues were $237.2 million in 1998, $210.4 million in
1997 and $153.3 million in 1996. These increases represent 12.7% growth in
1998 over 1997 compared to a 37.2% increase from 1996 to 1997. This
increase in revenue year over year is a function of the volume of units
delivered and the mix of aircraft sold (i.e., Gulfstream IIs, IIIs, and
IVs, etc.).
Gross margins for the Pre-Owned Aircraft segment can vary from year to year
depending on the mix of aircraft sold and current market conditions.
Generally, gross margins on pre-owned aircraft sales have been at or near
break-even, with 1998 gross margins reflecting favorable market conditions.
Selling and Administrative Expense
% of Net Revenues
[GRAPHICS OMITTED]
[BAR GRAPH]
1996 9.3%
1997 5.1%
1998 5.0%
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense
increased by $23.8 million, or 24.4%, to $121.3 million in 1998 from $97.5
million in 1997. Selling and administrative expense decreased $2.0 million
in 1997 from $99.5 million in 1996. As a percentage of net revenues,
selling and administrative expenses decreased slightly to 5.0% in 1998 from
5.1% in 1997 and 9.3% in 1996. Expenses were higher in 1998 due principally
to increased levels of sales and marketing expenses and administrative
costs associated with the acquisition of K-C Aviation. Expenses were higher
in 1996 due principally to the level of advertising and marketing expense
associated with the certification and initial customer deliveries of the
Gulfstream V.
STOCK OPTION COMPENSATION EXPENSE. Non-cash compensation charges related to
stock options were $6.9 million in 1998, $1.6 million in 1997 and $7.2
million in 1996. The 1998 expense includes $5.8 million related to
modification of certain prior grants in connection with the retirement of
a senior executive during the fourth quarter.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
$10.0 million in 1998, relatively unchanged from the $10.8 million incurred
in 1997, and significantly below the $58.1 million incurred in 1996.
Research and development expense decreased during 1998 and 1997 from 1996
principally as a result of the substantial completion of the Gulfstream V
development program. Research and development expense for 1997 and 1996 are
net of credits of $10.0 million and $8.0 million, respectively, for launch
assistance funds received from suppliers participating in the development
of the Gulfstream V. Research and development expenditures in 1999 and the
near-term future are expected to stem principally from product improvements
and enhancements, rather than new aircraft development.
AMORTIZATION OF INTANGIBLES AND DEFERRED CHARGES. This non-cash expense
includes amortization of goodwill and other intangible assets consisting of
aftermarket service and aftermarket product support, as well as deferred
financing charges related to the Company's pre-existing and new bank credit
facilities. Amortization of intangibles and deferred charges were $9.3
million for 1998, $7.3 million in 1997 and $9.4 million in 1996. The
increase in 1998 was a result of additional goodwill amortization directly
attributable to the acquisition of K-C Aviation. The decrease in 1997 from
1996 was a result of the accelerated amortization in 1996 of financing
charges associated with the Company's prior bank credit facilities, which
were repaid in October 1996. Amortization will increase in 1999 as a result
of a full year of amortization attributable to the acquisition.
INTEREST INCOME AND EXPENSE. Interest income decreased by $4.2 million to
$7.3 million in 1998 from $11.5 million in 1997. Interest income decreased
$3.1 million in 1997 from $14.6 million in 1996. The decrease in both
periods was a result of lower average cash balances the Company had
invested compared to the previous year. For 1998, this was principally as a
result of cash used for the Company's 1998 share repurchase program and the
acquisition of K-C Aviation. Interest expense consists almost entirely of
interest paid on long-term borrowings under the Company's bank credit
facilities. Interest expense decreased to $28.0 million for 1998 from $31.2
million in 1997. Interest expense increased $13.3 million from $17.9
million in 1996. This decrease in 1998 was due to a decrease in average
borrowings, as well as lower average borrowing costs of 7.3% in 1998 versus
7.7% in 1997. The increase in 1997 from 1996 was due principally to an
increase in average borrowings. See "Liquidity and Capital Resources".
INCOME TAXES. The Company recorded income tax expense of $126.7 million for
1998, based on an annual effective tax rate of 36.0% as compared to an
income tax benefit of $33.9 million in 1997. No provision for income taxes
was recorded in 1996, principally due to the utilization of net operating
loss carryforwards. The Company, in estimating its ability to realize the
benefit of its net deferred tax assets, considers both positive and
negative evidence and gives greater weight to evidence that is objectively
verifiable. As a result of numerous factors including, but not limited to,
recent earnings trends and the size of its financial contract backlog, the
Company currently believes that its net deferred tax asset is more likely
than not to be realized. In the third quarter of 1997, the Company 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. During the fourth quarter of 1997,
the Company recorded a provision for income taxes based on its overall
estimated effective tax rate of 37.5%. The Company's net operating loss
carryforward for regular federal income tax purposes at December 31, 1997
was approximately $65.0 million, which was fully utilized during 1998.
EARNINGS PER SHARE. The Company reported diluted earnings per share of
$3.00 for 1998 compared to diluted earnings per share of $3.12 for 1997 and
diluted earnings per share of $0.60 in 1996. On a pro forma basis, assuming
an effective tax rate of 37.5%, the Company's diluted earnings per share
would have been $1.68 and $0.37 for 1997 and 1996, respectively.
Pro Forma (Fully Taxed)
Earnings per Share
[GRAPHICS OMITTED]
[BAR GRAPH]
1996 $0.37
1997 $1.68
1998 $3.00
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise principally from working capital
requirements, capital expenditures, principal and interest payments on
long-term debt (including the revolving credit facility), and the Company's
share repurchase program described below. During 1998, the Company also
acquired K-C Aviation. During 1998 and 1997, the Company relied on its
available cash balances and, in 1998, its revolving credit facility to fund
these needs.
The Company had cash and cash equivalents totaling $38.1 million at
December 31, 1998, down from $306.5 million at December 31, 1997. This
decrease is attributable to the acquisition of K-C Aviation during the
third quarter of 1998 and the Company's share repurchase program.
In January 1998, the Company established a program to repurchase up to $200
million of its common stock. As of December 31, 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.
On March 1, 1999, the Company established a program to repurchase up to an
additional $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.
Net cash generated by operating activities was $194.7 million, $120.4
million and $243.4 million in 1998, 1997, and 1996, respectively. The
increase in 1998 from 1997 was primarily due to the increase in income
before income taxes. The reduction in 1997 from 1996 was primarily due to
the decrease in customer progress payments associated with new aircraft in
backlog.
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 year ended December 31, 1998, additions to property and
equipment amounted to $27.0 million. Additions to property and equipment
were $26.7 million in 1997 and $16.2 million in 1996. Additions in 1998
include approximately $2.0 million of property and equipment acquired to
upgrade existing equipment at the newly acquired locations. As a result of
both continued production level increases and the acquisition of K-C
Aviation, the Company plans to spend approximately $30.0 million for
property and equipment in 1999. The increased level of spending of $10.5
million in 1997 over 1996 primarily related to the Company's strategic
initiative to increase its annual production rate to 65 aircraft by 1999, a
twofold increase over its 1996 annual production rate. At December 31,
1998, the Company was not committed to the purchase of any significant
amount of property and equipment. 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 stockholders of the Company completed the sale of 18
million shares of common stock in a secondary offering (the "Secondary").
The Company did not receive any of the proceeds from the sale of shares in
the Secondary. In connection with the Secondary, 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 $27.4 million, after deducting issuance costs. The Company
used the proceeds from these exercises for working capital purposes.
On October 16, 1996, Gulfstream Delaware Corporation, a wholly owned
subsidiary of the Company, entered into a $650 million credit facility (the
"Credit Agreement"). The Credit Agreement consists of a $400 million term
loan facility and a $250 million revolving credit facility. A portion of
the revolving credit facility, in an amount not to exceed $150 million, may
be used (to the extent available) for standby and commercial letters of
credit, and up to $200 million of the revolving credit facility will be
available to the Company for borrowings. In addition, up to $20 million of
the revolving credit facility may be used for swing line loans. The
revolving credit facility expires September 30, 2002 with any amounts
outstanding due on that date. While the Company utilized the revolving
credit facility during 1998, there were no amounts outstanding under the
revolving credit facility on December 31, 1998. 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 December 31, 1998, the Company was in compliance with the
covenants contained in the Credit Agreement, but was prohibited from paying
dividends. Payments under the term loan facility were $75.0 million in
1998, and scheduled repayments are $75.0 million in each of the years 1999
through 2001 and $80.0 million in 2002.
On November 30, 1998, the Company issued notes totaling $56 million secured
by three pre-owned aircraft used as core fleet in the Gulfstream Shares
Program. The notes underlying the agreement have substantially identical
terms and are repayable in consecutive monthly installments of principal
commencing December 31, 1999, with a final maturity on November 30, 2008;
aggregate principal payments for each of the following years are as
follows: 1999 -- $0.3 million; 2000 through 2007 -- $3.1 million; 2008 --
$30.6 million.
The Company's principal source of liquidity both on a short- and long-term
basis is cash flow provided from operations, including customer progress
payments and deposits on new aircraft orders. However, the Company may
borrow against the Credit Agreement or through other available borrowing
vehicles to supplement cash flow from operations. The Company believes,
based upon its analysis of its consolidated financial position, its cash
flow during the past 12 months and its expected results of operations in
the future, that operating cash flow and available borrowings under the
Credit Agreement and other available borrowing vehicles will be adequate to
fund operations, capital expenditures, debt service, and the Company's
share repurchase program 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 December 31, 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, at December 31, 1998, the Company has
agreed to accept pre-owned aircraft totaling $209.9 million. Management
believes that the fair market value of all such aircraft exceeds the
specified trade-in value.
The Company is party to an agreement with the Pension Benefit Guaranty
Corporation (the "PBGC") concerning funding of the Company's defined
benefit pension plans. Pursuant to this agreement, the Company contributed
$25.0 million during 1998 and has agreed to contribute a total of $25.0
million annually (to be paid quarterly in equal installments) for 1999 and
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.
The Company is currently engaged in the monitoring and cleanup of certain
groundwater 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.
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.
FINANCIAL CONTRACT BACKLOG
At December 31, 1998, the Company had a financial contract backlog of
approximately $3.3 billion, representing a total of 50 contracts for
Gulfstream IV-SPs, and 56 contracts for Gulfstream Vs, compared with $2.8
billion at the end of 1997, representing a total of 43 contracts for
Gulfstream IV-SPs and 45 contracts for Gulfstream Vs. Including the 11
undelivered aircraft in the Middle East Shares contract, which have been
excluded from the Company's financial contract backlog, the Company had a
total of 117 aircraft, valued at approximately $3.6 billion of potential
future revenues, under contract at December 31, 1998. This excludes 18
options valued at $0.7 billion. The increase in backlog from 1997 is driven
by the high demand for the Company's products.
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 first quarter of 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 financial contract 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 into backlog when the aircraft are delivered.
As of December 31, 1998, the Company had contracted to deliver to Executive
Jet 44 Gulfstream IV-SPs and 12 Gulfstream Vs in connection with North
American Gulfstream Shares program plus options for additional 12
Gulfstream Vs. Of these, 18 Gulfstream IV-SPs are in service, with the
remaining 50 Gulfstream IV-SPs and Gulfstream Vs to be delivered through
2007.
The Company includes an order in financial contract 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. In total, approximately 50% of the Company's
contractual backlog is scheduled for delivery beyond 1999.
Financial Contract Backlog
[GRAPHICS OMITTED]
[BAR GRAPH]
1996 $3,104.0
1997 $2,782.1
1998 $3,301.9
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 expected delivery date, there may be increased uncertainty as
to changes in business and economic conditions which may affect customer
cancellations.
FOREIGN EXCHANGE
The Company does not have any significant assets located outside the United
States. All the Company's sales and contracts have historically been and
currently are denominated in U.S. dollars and, as a result, are not subject
to changes in exchange rates. In addition, substantially all of the
Company's material purchases are currently denominated in U.S. dollars.
INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the
past few years, the rate of inflation has been low and has not had a
significant impact on the results of the Company's operations.
A portion of the Company's Gulfstream V contracts contain an adjustment in
the purchase price to account for inflation. Such adjustments are generally
capped at an aggregate of 3% per year. These adjustments are intended to
minimize the Company's cost risk associated with the small portion of
material contracts which are not under long-term agreements.
YEAR 2000 READINESS
As part of the Company's initiatives, begun in 1996, to increase production
rates and coproduce 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 require minor component modifications. This information
has been made available to Gulfstream operators. 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. Gulfstream has completed approximately 85% of its Year 2000
program plan for products and infrastructure. Confirmation of Year 2000
plans for all significant suppliers has also been completed. 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 suppliers or
governmental agencies 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.
OUTLOOK
Based on its strong backlog and continued product demand, Gulfstream plans
to increase production to 65 new aircraft in 1999. With this increased
production and continuing margin improvements, the Company expects 1999
diluted earnings per share of $3.75, a 25% increase over 1998. The Company
also expects diluted EPS in 2000 to increase by at least 15%.
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
Annual Report to Stockholders, 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 to the Company's Securities and
Exchange Commission filings.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
---------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net revenues $ 2,427,958 $ 1,903,494 $ 1,063,713
Cost and expenses
Cost of sales 1,907,749 1,557,520 839,254
Selling and administrative 121,294 97,499 99,452
Stock option compensation expense 6,908 1,640 7,186
Research and development 10,030 10,792 58,118
Amortization of intangibles and
deferred charges 9,285 7,347 9,434
---------------------------------------
Total costs and expenses 2,055,266 1,674,798 1,013,444
---------------------------------------
Income from operations 372,692 228,696 50,269
Interest income 7,280 11,532 14,605
Interest expense (27,959) (31,159) (17,909)
---------------------------------------
Income before income taxes 352,013 209,069 46,965
Income tax expense (benefit) 126,725 (33,942) ---
---------------------------------------
Net income $ 225,288 $ 243,011 $ 46,965
=======================================
Earnings per share:
Basic $ 3.08 $ 3.28 $ .64
Diluted $ 3.00 $ 3.12 $ .60
=======================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1998 1997
- -------------------------------------------------------------------------------
(In thousands, except for share amounts)
ASSETS
Cash and cash equivalents $ 38,149 $ 306,451
Accounts receivable (less allowance for
doubtful accounts: $2,525 and $1,144) 263,959 177,228
Inventories 729,874 629,876
Deferred income taxes 17,132 33,795
Prepaids and other assets 6,494 11,318
-------------------------
Total current assets 1,055,608 1,158,668
Property and equipment, net 166,777 134,611
Tooling, net of accumulated
amortization: $15,220 and $7,680 36,415 43,471
Goodwill, net of accumulated
amortization: $11,268 and $8,433 213,906 38,957
Other intangible assets, net 45,414 50,485
Deferred income taxes 22,011 32,950
Other assets and deferred charges 74,003 14,525
-------------------------
Total Assets $1,614,134 $1,473,667
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 75,262 $ 75,000
Accounts payable 182,040 147,618
Accrued liabilities 170,681 93,798
Customer deposits 488,218 546,441
-------------------------
Total current liabilities 916,201 862,857
Long-term debt 285,738 305,000
Accrued postretirement benefit cost 115,154 115,405
Customer deposits -- long-term 94,445 88,075
Other long-term liabilities 6,916 9,573
Stockholders' equity
Common stock, $.01 par value;
300,000,000 shares authorized;
shares issued: 89,818,774 and 86,522,089 898 865
Additional paid-in capital 444,301 370,258
Accumulated deficit (672) (225,960)
Accumulated other comprehensive income (2,441) (762)
Unamortized stock plan expense (52) (1,155)
Less: Treasury stock: 17,244,581 and
11,978,439 shares (246,354) (50,489)
-------------------------
Total stockholders' equity 195,680 92,757
-------------------------
Total Liabilities and Stockholders' Equity $1,614,134 $1,473,667
=========================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Unamortized Total
Additional Compre- Stock Stock-
Preferred Common Paid-In Accumulated hensive Plan Treasury holders'
Stock Stock Capital Deficit Income Expense Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
BALANCE AS OF JANUARY 1, 1996 $468,938 $523 $210,631 $(410,613) $(1,450) $--- $(50,489) $217,540
Net income for fiscal 1996 46,965 46,965
Minimum pension liability adjustment (14) (14)
---------
Total comprehensive income 46,951
---------
Repurchase of preferred stock (468,938) (468,938)
Dividends paid on preferred stock (105,323) (105,323)
Issuance of compensatory
common stock options 9,618 (9,618) ---
Amortization of stock plan expense 7,186 7,186
Conversion of common stock (8) 8 ---
Stock Split of 1.5 for 1 258 (258) ---
Common stock offering, net of expenses 46 99,557 99,603
Exercise of common stock options 40 14,130 14,170
--------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1996 --- 859 333,686 (468,971) (1,464) (2,432) (50,489) (188,811)
Net income for fiscal 1997 243,011 243,011
Minimum pension liability adjustment 702 702
---------
Total comprehensive income 243,713
---------
Issuance of compensatory
common stock options 363 (363) ---
Amortization of stock plan expense 1,640 1,640
Tax benefit of exercised
common stock options 33,682 33,682
Exercise of common stock options 6 2,527 2,533
--------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1997 --- 865 370,258 (225,960) (762) (1,155) (50,489) 92,757
Net income for fiscal 1998 225,288 225,288
Minimum pension liability
adjustment, net of tax of $1,464 (1,679) (1,679)
---------
Total comprehensive income 223,609
---------
Modification of common stock options 5,805 5,805
Amortization of stock plan expense 1,103 1,103
Exercise of common stock options
with the offering, net of expenses 26 25,331 2,044 27,401
Tax benefit of exercised
common stock options 39,551 39,551
Exercise of common stock options 7 3,356 558 3,921
Purchase of treasury stock (198,467) (198,467)
--------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 $ --- $898 $444,301 $ (672) $(2,441) $ (52) $(246,354) $195,680
======================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 225,288 $ 243,011 $ 46,965
Adjustments to reconcile net income
to net cash provided by operating
activities:
Acquisition related non-cash items 7,195 --- ---
Depreciation and amortization 34,851 33,022 26,910
Postretirement benefit cost 7,438 6,700 6,684
Non-cash stock option
compensation expense 6,908 1,640 7,186
Provision for loss (recovery)
on pre-owned aircraft --- (1,600) 1,000
Deferred income taxes 62,803 (37,867) ---
Other, net (243) 1,428 417
Change in assets and liabilities,
net of acquired assets
and liabilities:
Accounts receivable (47,210) (39,978) (55,029)
Inventories (55,370) 26,961 (263,112)
Prepaids, other assets and
deferred charges (53,498) (5,080) (5,578)
Accounts payable and
accrued liabilities 96,439 763 102,551
Customer deposits (72,940) (109,443) 432,365
Other long-term liabilities (16,957) 864 (56,956)
----------------------------------
Net Cash Provided by Operating Activities 194,704 120,421 243,403
==================================
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquired (248,887) --- ---
Investment in unconsolidated affiliate (1,260) --- ---
Expenditures for property and equipment (26,955) (26,692) (16,167)
Expenditures for tooling (594) (2,984) (2,085)
Proceeds from sales of assets 835 1 28
----------------------------------
Net Cash Used in Investing Activities (276,861) (29,675) (18,224)
==================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock --- --- 99,603
Proceeds from exercise of common
stock options 31,322 2,533 14,170
Repurchase of preferred stock --- --- (468,938)
Dividends paid on preferred stock --- --- (105,323)
Proceeds from issuance of
long-term debt 56,000 --- 400,000
Principal payments on long-term debt (75,000) (20,000) (146,331)
Payment of financing costs --- --- (8,500)
Purchase of treasury stock (198,467) --- ---
----------------------------------
Net Cash Used in Financing Activities (186,145) (17,467) (215,319)
----------------------------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) during the year (268,302) 73,279 9,860
Cash and cash equivalents, beginning of year 306,451 233,172 223,312
----------------------------------
Cash and Cash Equivalents, End of Year $ 38,149 $ 306,451 $ 233,172
==================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Gulfstream is primarily engaged in the design, development, production and
sale of large business jet aircraft. The Company is also engaged in a
number of related businesses, including: product support and services for
customer-owned aircraft, which include maintenance services and replacement
parts for both Gulfstream and non-Gulfstream aircraft; engine and auxiliary
power unit service and overhaul; and the sale of pre-owned aircraft. The
majority of the Company's aircraft are sold to domestic and multinational
corporations and domestic and foreign governments.
BASIS OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Company
and majority-owned subsidiaries, all of which are wholly owned. Material
intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
assumptions and estimates that directly affect the amounts reported in the
consolidated financial statements. Significant estimates for which changes
in the near term are considered reasonably possible and that may have a
material effect on the financial statements are addressed in these notes to
the consolidated financial statements.
REVENUE RECOGNITION
Contracts for new aircraft are segmented between the manufacture of the
"green" aircraft (i.e., before exterior painting and installation of
customer-selected interiors and optional avionics) and its completion.
Sales of new Gulfstream green aircraft are recorded as deliveries are made
to the customer prior to the aircraft entering the completion process. With
respect to completed aircraft, any costs related to parts to be installed
and services to be performed under the contract, after the delivery of the
aircraft, which are not significant, are included as cost of sales at the
time of the sale of the new aircraft. Sales of all other products and
services, including pre-owned aircraft, are recognized when delivered or
the service is performed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid financial instruments
which have maturities of less than three months. The Company places its
temporary cash investments with high credit quality financial institutions.
INVENTORIES
Inventories of work in process and finished goods for aircraft are stated
at the lower of cost (based on estimated average unit costs of the number
of units in a production lot) or market. Raw materials, material components
of other work in process and substantially all purchased parts inventories
are stated at the lower of cost (first-in, first-out method) or market.
Pre-owned aircraft acquired in connection with the sale of new aircraft are
recorded at the lower of the trade-in value or estimated net realizable
value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated by the
straight-line method over their estimated useful lives ranging from 15 to
40 years for buildings and improvements and four to 20 years for all other
property and equipment. The cost of maintenance and repairs is charged to
operations as incurred; significant renewals and betterments are
capitalized.
TOOLING
Tooling is stated at cost and represents primarily production tooling
relating to the Gulfstream V aircraft program. Tooling associated with the
Gulfstream V is amortized to cost of sales on a unit basis over the first
200 units of the Gulfstream V program.
INTANGIBLES AND OTHER ASSETS
Goodwill, including goodwill arising from the 1998 acquisition of K-C
Aviation, is being amortized using the straight-line method over 40 years.
Other intangible assets consisting of aftermarket service and product
support (i.e., customer lists) are being amortized on a straight-line basis
over the expected useful lives which range from 10 to 21 years. The costs
of obtaining bank financing have been included in other assets and deferred
charges and are being amortized over the lives of the related bank
borrowings.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged directly to operations as
incurred.
PRODUCT WARRANTIES
Product warranty expense is recorded as aircraft are delivered based upon
the estimated aggregate future warranty costs relating to the aircraft.
CUSTOMER DEPOSITS
Substantially all customer deposits represent advance payments for new
aircraft purchases. The deposits on aircraft that are expected to be
delivered in the following year are classified as current in the
accompanying consolidated balance sheets.
CONCENTRATIONS OF CREDIT
Financial instruments which may potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade and contract receivables. Approximately 14.0% and
32.0%, respectively, of accounts receivable outstanding at December 31,
1998 and 1997 are represented by a contract receivable associated with the
sale of multiple aircraft to one customer. Generally, contract receivables
are satisfied prior to delivery of the outfitted aircraft. In the normal
course of business the Company performs ongoing credit evaluations of its
customers' financial position, and for trade receivables, generally
requires no collateral from its customers. Overall, credit risks with
respect to trade receivables are limited due to the Company's large number
of customers and their dispersion across many industries and geographic
regions.
INCOME TAXES
Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for tax purposes as well as tax credit
carryforwards and loss carryforwards. These deferred income taxes are
measured by applying enacted tax rates in the years in which the
differences are expected to reverse. A valuation allowance reduces deferred
tax assets when it is "more likely than not" that some portion or all of
the deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities reflected in the financial
statements approximates fair value because of the short-term nature of
these instruments. Based on the borrowing rates currently available to the
Company for bank loans with similar terms and maturities, the Company
estimates that the carrying value of its long-term debt approximates fair
value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of assets based on its
expectations of future profitability and undiscounted cash flow of the
related operations and, when circumstances dictate, adjusts the carrying
value of the asset. These factors, along with management's plans with
respect to the operations, are considered in assessing the recoverability
of goodwill, other purchased intangibles, and property and equipment.
NOTE 2 BUSINESS ACQUISITION
On August 19, 1998, the Company completed the acquisition of K-C Aviation,
Inc. for approximately $250 million, including acquisition costs. K-C
Aviation was 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 was the
second largest independent aircraft engine service center in the United
States and offered maintenance services, spare parts, auxiliary power unit
service, avionics retrofit, non-destructive testing and component overhaul.
The purchase of K-C Aviation 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. In connection with the acquisition, the Company
assumed $51.2 million in liabilities.
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
and inventory step-up, reduced interest income from cash utilized to
complete the acquisition and the related income tax effects.
The pro forma consolidated results are not indicative of results that would
have occurred had the acquisition been in effect for the periods presented,
nor are they indicative of the results that are expected in the future.
Year ended December 31, 1998 1997
- ---------------------------------------------------------------------------
(In millions, except per share amounts)
Pro forma net revenues $ 2,551.2 $ 2,090.6
Pro forma income before income taxes 346.2 198.5
Pro forma net income 221.6 236.4
Pro forma earnings per share:
Basic $ 3.03 $ 3.19
Diluted 2.95 3.03
NOTE 3 INVENTORIES
Inventories consisted of the following at:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Work in process $ 359,212 $ 330,155
Raw materials 190,890 134,973
Vendor progress payments 85,605 60,606
Pre-owned aircraft 94,167 104,142
------------------------
$ 729,874 $ 629,876
========================
NOTE 4 PROPERTY AND EQUIPMENT
The major categories of property and equipment consisted of the following
at:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Land $ 4,409 $ 4,109
Buildings and improvements 126,580 101,836
Machinery and equipment 150,797 130,491
Construction in progress 8,385 9,074
------------------------
Total 290,171 245,510
Less accumulated depreciation (123,394) (110,899)
------------------------
$ 166,777 $ 134,611
========================
NOTE 5 OTHER INTANGIBLE ASSETS
Other intangible assets are comprised of the following at:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Aftermarket - Service Center $ 15,000 $ 15,000
Aftermarket - Product Support 75,000 75,000
------------------------
Total 90,000 90,000
Less accumulated amortization (44,586) (39,515)
------------------------
$ 45,414 $ 50,485
========================
NOTE 6 INCOME TAXES
The components of income tax expense (benefit) consisted of the following:
Year ended December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Current $ 63,922 $ 3,925
Deferred 62,803 26,934
Decrease in valuation allowance --- (64,801)
------------------------
Income tax expense (benefit) $ 126,725 $ (33,942)
========================
Although the Company recorded net income during 1996, no provision for
income taxes was recorded, principally as a result of utilization of net
operating loss carryforwards. The Company made income tax payments of $4.4
million, $4.8 million and $0.3 million for 1998, 1997 and 1996,
respectively. The Company's provision for income taxes differed from the
amount computed by applying the U.S. federal income tax rate as follows:
Year ended December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Statutory federal tax rate $ 123,205 $ 73,174
Foreign Sales Corporation tax benefit (5,614) (1,888)
State income tax provision 9,056 1,605
Decrease in valuation allowance --- (64,801)
Net operating loss carryforwards --- (43,613)
Other provision adjustments 78 1,581
------------------------
Income tax expense (benefit) $ 126,725 $ (33,942)
========================
The tax effects of significant components of the Company's deferred tax
assets and liabilities are as follows:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
DEFERRED TAX ASSETS RELATED TO:
Postretirement benefits $ 43,183 $ 43,386
Tax credit carryforwards 16,049 7,037
Warranty reserves 12,569 9,199
Net operating loss carryforwards --- 24,500
Intangible assets --- 7,031
Other 7,567 9,114
------------------------
79,368 100,267
========================
DEFERRED TAX LIABILITIES RELATED TO:
Property and equipment,
principally due to basis difference (14,826) (17,392)
Inventory (11,295) (9,147)
Pension and other employee benefits (7,648) (6,236)
Intangible assets (2,053) ---
Other (4,403) (747)
------------------------
(40,225) (33,522)
------------------------
Net deferred tax assets $ 39,143 $ 66,745
========================
At December 31, 1998, the Company had available tax credit carryforwards
for regular federal income tax purposes of approximately $6.3 million which
will expire beginning in 2009.
During the third quarter ended September 30, 1997, as a result of numerous
factors, including, but not limited to the Company's earnings trends and
the size of its financial contract backlog, the Company determined that its
net deferred tax asset is more likely than not to be realized, and released
its deferred tax valuation allowance, totaling $94.2 million. Of this
amount, $29.4 million related to the exercise of stock options was credited
to additional paid-in capital and the remainder, $64.8 million, was
recorded as a one-time, non-cash income tax benefit.
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.
NOTE 7 ACCRUED LIABILITIES
Accrued liabilities are comprised of the following at:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Income taxes $ 51,615 $ ---
Employee compensation and benefits 36,954 33,245
Accrued warranty 32,017 23,844
Uncompleted work on delivered aircraft 20,798 11,098
Other 29,297 25,611
------------------------
$ 170,681 $ 93,798
========================
NOTE 8 LONG-TERM DEBT
Long-term debt consisted of the following at:
December 31, 1998 1997
- ---------------------------------------------------------------------------
(In thousands)
Notes payable $ 56,000 $ ---
Term loans 305,000 380,000
------------------------
361,000 380,000
Less current portion (75,262) (75,000)
------------------------
$ 285,738 $ 305,000
========================
On November 30, 1998, the Company issued notes totaling $56 million secured
by three pre-owned aircraft used as core fleet in the Gulfstream Shares
Program. The notes underlying the agreement have substantially
identical terms and are repayable in consecutive monthly installments of
principal commencing December 31, 1999 with a final maturity on November
30, 2008; aggregate principal payments for each of the following years are
as follows: 1999 -- $0.3 million; 2000 through 2007 -- $3.1 million; 2008
- -- $30.6 million. Interest is payable monthly from November 30, 1998, and
is based on LIBOR plus 1.4%.
On October 16, 1996, the Company entered into a long-term credit agreement
under which the lenders who are parties to the credit agreement made
available to the Company a $400 million term loan facility and a $250
million revolving credit facility. A portion of the revolving credit
facility, in an amount not to exceed $150 million, may be used (to the
extent available) for standby and commercial letters of credit, and up to
$200 million of the revolving credit facility will be available to the
Company for borrowings. Concurrent with entering into the credit agreement,
the Company repaid all amounts outstanding under its pre-existing credit
agreements totaling $107.7 million, and terminated such agreements.
The term loan is repayable in consecutive quarterly installments with a
final maturity on September 30, 2002, in aggregate amounts for each of the
following years as follows: 1999 through 2001 -- $75.0 million; 2002 --
$80.0 million. The revolving credit facility expires September 30, 2002,
with any outstanding amounts due on that date. The Company is required to
pay commitment fees on the average daily unutilized portion of the term
loan facility and the revolving credit facility, which fees were initially
set at 0.375% per annum. The credit agreement permits the Company to choose
either the Adjusted Base Rate (the "ABR") interest option which is based on
the greater of the prime rate or the federal funds rate, or LIBOR, in each
case, plus an applied margin. The interest rates and commitment fees are
subject to change based on the Company's performance with respect to
certain financial ratios set forth in the credit agreement.
The credit agreement includes restrictions as to, amongst other things, the
amount of additional indebtedness, contingent obligations, liens, capital
expenditures, and dividends, and requires the maintenance of certain
financial ratios. At December 31, 1998, the credit agreement prohibited the
payment of dividends. In addition, under the credit agreement, certain
changes in control of the Company would cause an event of default and the
banks could declare all outstanding borrowings under the credit agreement
immediately due and payable. None of the restrictions contained in the
credit agreement are expected to have a significant effect on the ability
of the Company to operate. As of December 31, 1998, the Company was in
compliance with all financial and operating covenants under the credit
agreement.
The Company has pledged the common stock of certain of its subsidiaries as
well as certain intercompany notes as collateral under the credit
agreement, and the Company and certain of its subsidiaries have guaranteed
repayment of amounts borrowed under the credit agreement.
The available revolving credit commitment was $213.6 million and $203.6
million at December 31, 1998 and 1997, respectively. At December 31, 1998
and December 31, 1997, the Company had outstanding letters of credit
totaling $56.9 million and $46.4 million, respectively.
The effective interest rate on the Company's long-term debt at December 31,
1998 and 1997 was 6.2 % and 6.9%, respectively. The Company paid interest
of $29.2 million, $32.3 million, and $12.9 million during the years 1998,
1997 and 1996, respectively.
NOTE 9 LEASES
The Company has various operating leases for both real and personal
property including Company aircraft. Rental expense for 1998, 1997 and 1996
was $15.5 million, $10.9 million and $13.4 million, respectively. Future
minimum lease payments for all noncancelable operating leases having a
remaining term in excess of one year at December 31, 1998, aggregated
approximately $40.0 million, and payments during the next five years are:
1999, $13.0 million; 2000, $9.6 million; 2001, $7.0 million; 2002, $2.1
million; 2003, $1.4 million. The Company also receives sublease rental
income under an operating lease which ends November 1999; the approximate
future minimum sublease rental income is $2.3 million.
NOTE 10 EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company maintains four defined benefit pension plans covering
substantially all employees. Benefits paid to retirees are based primarily
on age at retirement, years of credited service and compensation earned
during employment. The Company's funding policy complies with the
requirements of Federal law and regulations. The Company's total pension
fund contributions were $25.0 million, $25.0 million, and $34.4 million in
1998, 1997 and 1996, respectively. Effective August 19, 1998 and as part of
the acquisition described in Note 2, the Company adopted a new pension
plan, covering all employees of the acquired company and all non-vested
employees of the Company except for those covered under a collective
bargaining agreement.
OTHER BENEFIT PLANS
In addition to pension benefits, the Company provides certain health care
insurance benefits to retired Company employees and their dependents. The
Company currently funds these plans on a pay-as-you-go basis. Substantially
all of the Company's salaried employees and certain hourly employees become
eligible for such benefits when they attain certain age and service
requirements while employed by the Company. In December 1998, a Voluntary
Employees' Beneficiary Association Trust was established and funded with
$14.3 million of Company funds for the purpose of paying retiree claims.
The Company will periodically obtain reimbursement from the Trust for
retiree claims.
The Company has supplemental benefit plans covering certain key executives.
These plans provide for benefits which supplement those provided by the
Company's other retirement plans.
The following table is based on an actuarial valuation date as of September
30, and amounts recognized in the Company's consolidated financial
statements as of December 31. The following provides a reconciliation of
benefit obligations, plan assets and funded status of the plans:
Pension Benefits Other Benefits
-------------------------- ------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 255,074 $ 213,080 $ 96,788 $ 87,231
Service cost 17,599 12,466 5,616 4,283
Interest cost 18,842 16,743 7,277 6,820
Amendments --- --- (2,742) (879)
Actuarial (gain) loss 41,451 20,470 (34) 1,983
Benefits paid (7,995) (7,685) (3,900) (2,650)
----------------------------------------------------
Benefit obligation at end of year $ 324,971 $ 255,074 $ 103,005 $ 96,788
----------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 239,001 $ 163,598 $ --- $ ---
Actual return on plan assets 9,164 49,892 --- ---
Company contributions 25,000 33,196 3,900 2,650
Benefits paid (7,995) (7,685) (3,900) (2,650)
----------------------------------------------------
Fair value of plan assets at end of year $ 265,170 $ 239,001 $ --- $ ---
----------------------------------------------------
Funded status of the plans $ (59,801) $ (16,073) $ (103,005) $ (96,788)
Unrecognized actuarial (gain) loss 48,718 (3,900) (15,472) (15,839)
Unrecognized prior service cost (benefit) 5,393 5,860 (16,079) (7,599)
Contributions paid in fourth quarter 6,250 6,250 15,168 809
----------------------------------------------------
Prepaid (accrued) benefit cost $ 560 $ (7,863) $ (119,388) $ (119,417)
====================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 190 $ 2,543 $ --- $ ---
Accrued benefit liability (5,125) (10,316) (120,341) (120,343)
Intangible asset 2,334 --- 209 164
Accumulated other comprehensive income 3,161 --- 744 762
----------------------------------------------------
Net amount recognized $ 560 $ (7,863) $ (119,388) $ (119,417)
====================================================
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $20.9 million, $20.9 million, and
$19.8 million, respectively, as of December 31, 1998, and $17.0 million,
$17.0 million, and $17.8 million, respectively, as of December 31, 1997.
Accumulated other comprehensive income represents minimum pension liability
adjustments.
Net periodic pension and other benefit costs include the following
components:
Pension Benefits Other Benefits
---------------------------------------- --------------------------------------
Year ended December 31, 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 17,599 $ 12,466 $ 11,258 $ 5,616 $ 4,283 $ 4,162
Interest cost 18,842 16,743 14,966 7,277 6,820 6,581
Expected return on plan assets (20,442) (16,385) (12,950) --- --- ---
Amortization of prior service cost 467 467 313 (873) (489) (430)
Recognized actuarial (gain) loss 111 --- --- (400) (648) (377)
--------------------------------------------------------------------------------
Net periodic benefit cost $ 16,577 $ 13,291 $ 13,587 $ 11,620 $ 9,966 $ 9,936
================================================================================
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 6.75% 7.50% 8.00% 6.75% 7.50% 8.00%
Expected return on plan assets 9.50% 9.50% 9.50% --- --- ---
Rate of compensation increase 4.75% 4.75% 4.75% --- --- ---
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- ---------------------------------------------------------------------------
(In thousands)
Effect on total of service and
interest cost components $ 2,071 $ (1,685)
Effect on the postretirement
benefit obligation 14,417 (11,989)
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of medicare ineligible employees' covered health care benefits was
assumed for 1998. The rate was assumed to decrease annually by 0.75% to
5.0% and remain at that level thereafter. For medicare eligible employees,
a 5.25% annual rate of increase in the per capita cost of health care
benefits was assumed for 1998. The rate was assumed to decrease annually by
0.75% to 4.5% and remain at that level thereafter.
INVESTMENT AND OTHER PLANS
The Company sponsors two voluntary 401(k) investment plans which cover all
eligible employees and are designed to enhance existing retirement plans.
The Company matches either 37.5% or 50.0% of the employee's contribution up
to a maximum of four percent of the employee's eligible compensation. Total
expense for the plans were $3.1 million, $2.6 million and $2.2 million for
1998, 1997 and 1996, respectively.
The Company has an Incentive Compensation Plan administered by the
Compensation Committee of the Board of Directors which provides for payment
of cash awards to officers and key employees based upon achievement of
specific goals by the Company and the participating employees. For the
years ended 1998, 1997 and 1996, provisions of approximately $6.3 million,
$5.8 million and $5.5 million, respectively, were charged against income
related to the plan. Payouts are based entirely on achievement of financial
and business objectives.
NOTE 11 STOCKHOLDERS' EQUITY
On October 16, 1996, the Company issued 4,559,100 shares of common stock,
and selling stockholders sold 37,940,900 shares of common stock, in an
initial public offering pursuant to the Securities Act of 1933 (the
"Offering"). In connection and simultaneously with the closing of the
Offering, the Company (a) effected a recapitalization plan (the
"Recapitalization") which included (i) the repurchase of all of its
outstanding 7% Series A Cumulative Preferred Stock for a purchase price of
$450 million plus approximately $1.3 million of unpaid dividends, (ii) the
exchange of all outstanding shares of Class A, Series A-2 and Class B
common stock for Class A, Series A-1 common stock, (iii) the redesignation
of all Class A, Series A-1 common stock into common stock, (iv) a 1.5-for-1
stock split of the common stock, and (v) the restatement of the Company's
certificate of incorporation to provide that the authorized capital stock
of the Company consists of 300,000,000 shares of common stock, par value of
$.01 per share, and 20,000,000 shares of Preferred Stock, par value of $.01
per share, and (b) issued 3,949,346 shares of common stock to certain
option holders pursuant to existing option agreements, who subsequently
sold those shares in the Offering.
In May 1998, the Company completed a secondary offering (the "Secondary")
in which 18 million shares of stock were sold by certain stockholders. The
Company did not receive any of the proceeds from the sale of shares in the
Secondary. In connection with the Secondary, 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 $27.4 million, after deducting issuance costs. The Company
used the proceeds from these exercises for working capital purposes.
TREASURY STOCK
During January 1998, the Company announced a program to repurchase up to
$200 million of its common stock. As of December 31, 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 program was funded from the Company's available cash.
STOCK OPTIONS
Under the Amended and Restated 1990 Stock Option Plan approved by its
stockholders effective March 28, 1997, as further amended, the Company has
granted options to purchase its common stock to certain Company employees,
directors and advisors. Generally, options granted prior to July 1, 1994,
vest 25.0% on date of issuance, 25.0% on the first anniversary of the date
of issuance and 25.0% annually thereafter. Generally, options granted on or
after July 1, 1994, vest 33.3% on the first anniversary of the date of
issuance, 33.3% on the second anniversary of the date of issuance and the
last 33.3% on the third anniversary of the date of issuance. In addition,
the Company has granted options to purchase its common stock to certain of
its executive officers, directors and advisors outside the Stock Option
Plan with vesting periods ranging from immediately up to three years.
Generally, such options expire 10 years from date of grant.
The Company recorded compensation expense of $6.9 million, $1.6 million and
$7.2 million in 1998, 1997 and 1996, respectively, related to stock option
grants and modification of certain existing grants in connection with the
retirement of a senior executive. At December 31, 1998, approximately 5.3
million shares of common stock were reserved for issuance under the Stock
Option Plan and non-plan options.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, defines a fair value based method of accounting
for an employee stock option or similar equity instrument. This statement
gives entities a choice of recognizing related compensation expense by
adopting the fair value method or to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB) Opinion
No. 25. The Company has elected to continue using the measurement method
prescribed by APB Opinion No. 25, by adopting the disclosure-only
provisions of SFAS No. 123. Had compensation cost for the Company's stock
options granted been determined based on the fair value at the grant dates
for awards under those plans consistent with a method prescribed in SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income --
As reported $ 225,288 $ 243,011 $ 46,965
Pro forma 218,708 240,769 46,480
Basic earnings per share--
As reported $ 3.08 $ 3.28 $ .64
Pro forma 2.99 3.25 .63
Diluted earnings per share--
As reported $ 3.00 $ 3.12 $ .60
Pro forma 2.91 3.09 .59
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: expected
volatility of 46.13%, 32.01% and 36.02%, respectively; risk-free interest
rate of 4.75%, 5.96% and 6.27%, respectively; expected lives of three years
for all years; and no dividend yield.
A summary of the status of the Company's stock option plans as of December
31, 1998, 1997 and 1996, and changes during the years ending on those dates
is presented below:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 6,494,978 $ 9.40 5,729,279 $ 3.91 8,691,573 $ 3.88
Granted 2,334,674 47.53 1,566,000 26.72 1,020,000 4.10
Exercised (3,572,160) 9.02 (631,877) 4.01 (3,949,346) 3.88
Forfeited (318,195) 26.57 (168,424) 3.90 (32,948) 4.10
-----------------------------------------------------------------------------------------------
Outstanding at end of year 4,939,297 $ 26.59 6,494,978 $ 9.40 5,729,279 $ 3.91
===============================================================================================
Options exercisable at year-end 2,794,729 $ 13.22 4,112,728 $ 3.86 3,817,582 $ 3.80
Weighted average fair value of
options granted during the year $ 17.07 $ 6.97 $ 10.13
Information with respect to stock options outstanding and exercisable at
December 31, 1998, is as follows:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------
$ 3.11-$ 4.10 2,129,342 5.2 $ 3.99 2,024,004 $ 3.98
$ 21.50-$ 29.75 534,731 8.7 26.70 263,675 26.94
$ 36.88-$ 42.06 152,174 9.6 39.21 - -
$ 43.00-$ 50.06 2,123,050 9.8 48.33 507,050 43.00
--------------------------------------------------------------------------------------
4,939,297 7.7 $ 26.59 2,794,729 $ 13.22
======================================================================================
NOTE 12 RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, certain partnerships formed by Forstmann
Little & Co. ("Forstmann Little") owned approximately 22.8% and 42.1%,
respectively, of the Company's common stock.
During 1998, the Company sold to a director of the Company a Gulfstream V
previously utilized by the Company as a flight test aircraft, for a
purchase price equal to the estimated fair market value of the aircraft. In
1997, the Company purchased a pre-owned aircraft for $21.0 million from the
same director.
Under a usage agreement which ended in August 1996, the Company paid an
affiliate of Forstmann Little for the use of a Gulfstream IV which was
utilized as a demonstrator aircraft by the Company. Total expenses
associated with this agreement were $1.6 million in 1996 and $2.3 million
in 1995. Beginning in August 1996, the Company engaged an affiliate of
Forstmann Little to manage the operations of the Gulfstream IV aircraft
discussed below. Total payments were $2.0 million, $2.1 million and $0.7
million in 1998, 1997 and 1996, respectively. Management believes all these
transactions with related parties are on terms similar to those of other
customers and suppliers.
In August 1996, the Company entered into agreements with the Company's
Chairman pursuant to which the Company will provide the Chairman with the
use of a Gulfstream V for a period of ten years. Until the Gulfstream V
becomes available, the Company has made available to the Chairman a
Gulfstream IV, which the Company received through an assumption of a lease
from an affiliate of Forstmann Little. During January 1997, the Company
exercised its early buyout option under the lease and purchased the
aircraft from the lessor, an international financial institution. The
Chairman paid $0.8 million in both 1998 and 1997 and has agreed to pay the
Company up to $1.0 million annually for non-company use of the aircraft. If
the Chairman is no longer serving as a director or official of the Company,
he has agreed to reimburse the Company $1,800 per hour for all use of the
aircraft, or other such rate required so as not to exceed FAA regulatory
requirements.
NOTE 13 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 product 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 currently engaged in the monitoring and cleanup of certain
groundwater 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.
The Company has agreements with certain of its suppliers to procure major
aircraft components such as engines, wings, and avionics. The agreements
vary in length from three to five years and generally provide for price and
quantity of components to be supplied. In connection with the Gulfstream V
program, the Company has entered into revenue sharing agreements with two
suppliers. The terms of such agreements require the suppliers to design,
manufacture and supply certain aircraft components in exchange for a fixed
percentage of the revenues of each Gulfstream V sold. Progress payments
under the revenue sharing agreements are generally required to be made on a
pro rata basis concurrent with the associated deposits received on
Gulfstream V contracts.
As of December 31, 1998, in connection with orders for 21 Gulfstream V
aircraft in the financial contract 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, at
December 31, 1998, the Company has agreed to accept pre-owned aircraft
totaling $209.9 million. Management believes that the fair market value of
all such aircraft exceeds the specified trade-in value.
NOTE 14 EARNINGS PER SHARE
Basic EPS is computed based on net income divided by the weighted average
common shares outstanding. Diluted EPS is computed by dividing net income
by the weighted average common shares outstanding plus the incremental
shares that would have been outstanding under stock option plans.
EPS information for 1996 is based on historical unadjusted net income
divided by pro forma weighted average number of shares. Shares included for
basic EPS give retroactive effect to the Recapitalization, the shares
issued to option holders upon the exercise of options at the date of the
Offering, and the shares issued pursuant to the Offering (all of which are
described in Note 11) as if such transactions had occurred at the beginning
of the period. Diluted EPS further includes the effects of options granted
in 1996 as if such options had been outstanding for the entire period.
The following table sets forth the reconciliation of per share data:
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
NET INCOME $ 225,288 $ 243,011 $ 46,965
==================================
BASIC EPS
Average shares issued
and outstanding
(after giving effect to
the Recapitalization) 73,089 74,095 67,530
Exercise of certain stock
options with the Offering 2,962
Shares issued pursuant
to the Offering 3,419
----------------------------------
Weighted average common
shares outstanding 73,089 74,095 73,911
DILUTED EPS
Incremental shares from
stock options 1,947 3,800 4,624
----------------------------------
Weighted average common
and common equivalent
shares outstanding 75,036 77,895 78,535
==================================
EARNINGS PER SHARE:
Basic $ 3.08 $ 3.28 $ .64
Diluted $ 3.00 $ 3.12 $ .60
==================================
NOTE 15 BUSINESS SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services,
and geographic areas.
The Company operates in three reportable segments: New Aircraft, Aircraft
Services and Pre-Owned Aircraft. New Aircraft is comprised of the design,
development, production (including customized interiors and optional
avionics) and sale of large business aircraft to customers on a worldwide
basis. Aircraft Services provides aftermarket maintenance services, spare
parts, engine and auxiliary power unit service and overhaul for both
Gulfstream and other business aircraft. The Company's Pre-Owned Aircraft
segment consists of the sale of pre-owned Gulfstream aircraft and other
business aircraft acquired as trade-ins against the sale of new aircraft to
a worldwide market. The accounting policies used to develop segment
information correspond to those described in the summary of significant
accounting policies in Note 1. Intersegment sales and transfers are not
significant. The Company has no significant assets domiciled outside of the
United States and assets are not allocated to reportable segments. The
information for 1997 and 1996 has been restated from the prior year's
presentation in order to conform to the 1998 presentation.
Gulfstream evaluates each segment's performance based on gross profit
margins (net revenues less cost of sales) excluding inventory step-up
charges. Summarized financial information concerning the Company's
reportable segments is shown in the following table. Unallocated expenses
represent expenses not directly related to the reportable segments.
Net Revenues
--------------------------------------
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(In millions)
New Aircraft $ 1,909.0 $ 1,492.0 $ 740.5
Aircraft Services 281.8 201.1 169.9
Pre-owned aircraft 237.2 210.4 153.3
---------------------------------------
Total Net Revenues $ 2,428.0 $ 1,903.5 $ 1,063.7
=======================================
Segment Gross Margin
---------------------------------------
Year ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(In millions)
New Aircraft $ 464.3 $ 297.5 $ 193.9
Aircraft Services 53.7 45.0 36.5
Pre-owned Aircraft 11.4 8.2 (1.7)
---------------------------------------
Segment gross margin 529.4 350.7 228.7
Unallocated expenses (156.7) (122.0) (178.4)
--------------------------------------
Income from operations 372.7 228.7 50.3
Interest income 7.3 11.5 14.6
Interest expense (28.0) (31.1) (17.9)
--------------------------------------
Income before income taxes $ 352.0 $ 209.1 $ 47.0
======================================
The following table presents revenues by geographic area of the location of
the Company's customers:
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In millions)
North America
United States $ 1,833.0 $ 1,403.1 $ 799.4
Canada and Mexico 96.4 67.3 5.2
---------------------------------------
Total North America 1,929.4 1,470.4 784.6
Asia/Pacific 243.5 162.9 85.1
Africa/Middle East 104.9 3.8 71.5
Europe 83.4 185.2 24.6
Latin America/Other 66.8 81.2 97.9
---------------------------------------
Total $ 2,428.0 $ 1,903.5 $ 1,063.7
=======================================
During 1996, revenues from one customer included in the New Aircraft and
Aircraft Services reportable segments represented approximately 11.7% of
the Company's total revenues.
NOTE 16 SUBSEQUENT EVENT
On March 1, 1999, the Company established a program to repurchase up to an
additional $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.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Gulfstream Aerospace Corporation:
We have audited the consolidated balance sheets of Gulfstream Aerospace
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Gulfstream Aerospace
Corporation and subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 1, 1999
(March 1, 1999 as to Note 16)
REPORT OF MANAGEMENT'S RESPONSIBILITY
The management of Gulfstream Aerospace Corporation is responsible for the
preparation and integrity of the consolidated financial statements of the
Company. The financial statements and notes have been prepared by the
Company in accordance with generally accepted accounting principles and, in
the judgment of management, present fairly the Company's financial position
and results of operations. The financial information contained elsewhere in
this annual report is consistent with that in the financial statements. The
financial statements and other financial information in this annual report
include amounts that are based on management's best estimates and judgments
and give due consideration to materiality.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded
properly to permit the preparation of financial statements in accordance
with generally accepted accounting principles.
The Board of Directors discharges its responsibility for the Company's
financial statements primarily through its Audit Committee. The Audit
Committee, comprised solely of outside directors, meets periodically and
privately with the independent auditors and representatives from management
to appraise the adequacy and effectiveness of internal control systems and
quality of our financial accounting and reporting.
The Company's independent auditors, Deloitte & Touche LLP, are recommended
by the Audit Committee of the Board of Directors, selected by the Board of
Directors and ratified by our Company's stockholders. Deloitte & Touche LLP
is engaged to perform an audit of the consolidated financial statements of
Gulfstream Aerospace Corporation and subsidiaries. This audit provides an
objective outside review of management's responsibility to report operating
results and financial condition. They audit and perform tests, as
appropriate, of the data included in the financial statements.
/s/ Chris A. Davis
Chris A. Davis
Executive Vice President and
Chief Financial and Administrative Officer
February 1, 1999
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following tables set forth the unaudited consolidated statements of
operating data for each quarter of 1998 and 1997. The operating results for
any quarter are not indicative of results for any future period.
1998 First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------
(In thousands, except deliveries and per share amounts)
Net revenues $503,407 $557,042 $626,177 $741,332
Gross profit 99,338 125,817 138,816 156,238
Income from operations (1) 69,246 91,607 103,676 108,163
Net income 40,481 55,577 64,721 64,509
Earnings per share:
Basic $ .56 $ .75 $ .88 $ .89
Diluted $ .54 $ .73 $ .86 $ .87
Aircraft deliveries (in units):
Gulfstream IV-SP (green) 6 8 9 9
Gulfstream V (green) 7 7 7 8
Completion -- Gulfstream 7 9 11 19
Completion -- Non-Gulfstream - - 5 3
Pre-owned aircraft 3 4 2 3
-----------------------------------------------
1997 First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------
(In thousands, except deliveries and per share amounts)
Net revenues $375,626 $522,906 $464,036 $540,926
Gross profit 70,474 76,010 91,053 108,437
Income from operations (1) 47,037 45,445 60,668 75,546
Net income 40,030 39,504 119,088(2) 44,389(2)
Earnings per share:
Basic $ .54 $ .53 $ 1.61 $ .60
Diluted $ .51 $ .50 $ 1.54 $ .58
Pro forma (fully taxed)
Earnings per share -- diluted (3) $ .33 $ .32 $ .45 $ .58
Aircraft deliveries (in units):
Gulfstream IV-SP (green) 5 5 6 6
Gulfstream V (green) 6 7 8 8
Completion 5 5 5 11
Pre-owned aircraft 1 9 2 2
-----------------------------------------------
<FN>
(1) Non-cash compensation expense of $0.3 million, $0.5 million, $0.1
million, and $6.0 million was recorded in each of the 1998 quarters,
and $0.5 million, $0.5 million, $0.3 million, and $0.3 million was
recorded in each of the 1997 quarters, respectively, related to the
issuance of options to purchase common stock. See Note 11 to the
consolidated financial statements.
(2) As described under the caption Income Taxes on page 22, the Company
recorded a net income tax benefit of $63.1 million during the third
quarter of 1997. During the fourth quarter of 1997, the Company
recorded an income tax provision of $26.6 million based on an estimated
effective tax rate of 37.5%.
(3) Pro forma (fully taxed) earnings per share -- diluted is presented for
all periods assuming an estimated effective tax rate of 37.5%.
</FN>
QUARTERLY COMMON STOCK PRICE RANGE
1998 First Second Third Fourth
- --------------------------------------------------------------------------------
High $44.44 $46.94 $51.50 $57.44
Low 28.75 41.25 31.13 29.00
-----------------------------------------
1997 First Second Third Fourth
- --------------------------------------------------------------------------------
High $24.13 $32.75 $31.13 $32.06
Low 21.25 21.75 26.00 26.50
-----------------------------------------
Gulfstream Aerospace Corporation's common stock is traded principally on
the New York Stock Exchange under the symbol GAC. At March 1, 1999, there
were approximately 245 holders of record. The Company has never paid cash
dividends on its common stock and does not anticipate paying any cash
dividends in the near future.
SELECTED FINANCIAL DATA
Fiscal Year 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share data)
INCOME STATEMENT DATA
Revenues $2,427,958 $1,903,494 $1,063,713 $1,041,514 $901,638
Income from operations 372,692 228,696 50,269 42,090 43,883
Net income 225,288 243,011 46,965 28,894 23,564
Earnings per share:
Basic (1) 3.08 3.28 .64 .39 N/A
Diluted (1) 3.00 3.12 .60 .37 N/A
------------------------------------------------------------
Pro forma (fully taxed)
Earnings per share--diluted (2) 3.00 1.68 0.37 0.23 N/A
BALANCE SHEET DATA
Working capital $ 139,407 $ 295,811 $ 138,091 $ 356,976 $301,913
Total assets 1,614,134 1,473,667 1,313,215 981,253 745,761
Total debt 361,000 380,000 400,000 146,331 178,145
Total stockholders' equity (deficit)(3) 195,680 92,757 (188,811) 217,540 188,950
------------------------------------------------------------
<FN>
(1) Earnings per share (EPS) information for 1996 and 1995 is based on
historical unadjusted net income divided by pro forma weighted average
number of shares. Shares included for basic EPS give retroactive effect
to the Recapitalization, the shares issued to option holders upon the
exercise of options at the date of the Offering, and the shares issued
pursuant to the Offering (all of which are described in Note 11 to the
consolidated financial statements) as if such transactions had occurred
at the beginning of the period. Diluted EPS further includes the
effects of options granted in 1996 and 1995 as if such options had been
outstanding for all periods presented. See also Note 14 to the
consolidated financial statements for a reconciliation of per share
data.
(2) Pro forma (fully taxed) earnings per share -- diluted is presented for
all periods prior to 1998 assuming an effective tax rate of 37.5%.
(3) Total stockholders' equity and total debt at December 31, 1996 gives
effect to the Recapitalization and Offering which occurred during the
fourth quarter 1996. See "Liquidity and Capital Resources" on page 23.
</FN>
CORPORATE INFORMATION
CORPORATE OFFICES
Gulfstream Aerospace Corporation
500 Gulfstream Road
Savannah, Georgia 31408
912 965-3000
MAILING ADDRESS
P.O. Box 2206
Savannah, Georgia 31402-2206
WEBSITE
www.gulfstreamaircraft.com
STOCK LISTINGS
New York Stock Exchange
Symbol "GAC"
ANNUAL MEETING
May 19, 1999 at 9:30 a.m.
St. Regis Hotel
Two East 55th Street
Iridium Room-Lower Level
New York, New York 10022
TRANSFER AGENT & REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
800 526-0801
www.chasemellon.com
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
191 Peachtree Street
Atlanta, Georgia 30303
FINANCIAL INFORMATION
Copies of Gulfstream's annual report and Form 10-K submitted to the
Securities and Exchange Commision may be obtained by visiting the Company's
website or by written request to:
Gulfstream Investor Relations
P.O. Box 2206, Mail Stop A-01
Savannah, Georgia 31402-2206
Gulfstream(R)
P.O. Box 2206 Savannah, Georgia 31402-2206
912 965-3000 www.gulfstreamaircraft.com