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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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Commission File No. 1-8461
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GULFSTREAM AEROSPACE CORPORATION
P. O. Box 2206
500 Gulfstream Road
Savannah, Georgia 31402-2206
Telephone: (912) 965-3000
State of incorporation: Delaware
IRS identification number: 13-3554834
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes[X] No[_]
As of April 30, 1999, there 71,607,043 shares of Gulfstream Aerospace
Corporation Common Stock outstanding.
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
----------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income
Three months ended March 31, 1999 and
1998...............................................3
Consolidated Balance Sheets
March 31, 1999 and December 31,
1998...............................................4
Consolidated Statement of Stockholders' Equity
Three months ended March 31,
1999...............................................5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and
1998...............................................6
Notes to Consolidated Financial
Statements...................................... 7-10
Item 2. Management's Discussion and Analysis of Financial 11-15
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................16
Item 2. Changes in Securities.................................16
Item 3. Defaults upon Senior Securities.......................16
Item 4. Submission of Matters to a Vote of Security
Holders............................................16
Item 5. Other Information.....................................16
Item 6. Exhibits and Reports on Form 8-K......................16
Signature.............................................17
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three months ended
March 31,
-------------------------
1999 1998
---------- -----------
Net revenues $ 625,072 $ 503,407
Cost and expenses
Cost of sales 490,406 404,069
Selling and administrative 30,915 25,942
Stock option compensation expense 52 329
Research and development 3,268 1,945
Amortization of intangibles and deferred
charges 3,147 1,876
------------------------
Total costs and expenses 527,788 434,161
------------------------
Income from operations 97,284 69,246
Interest income 823 2,522
Interest expense (5,982) (6,999)
------------------------
Income before income taxes 92,125 64,769
Income tax expense 33,626 24,288
-------------------------
Net income $ 58,499 $ 40,481
=========================
Earnings per share:
Basic $ .81 $ .56
Diluted $ .79 $ .54
=========================
See Notes to Consolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, December
1999 31,
1998
------------- ------------
ASSETS
Cash and cash equivalents $ 75,159 $ 38,149
Accounts receivable (less allowance for
doubtful accounts: $2,426 and $2,525) 330,358 263,959
Inventories 752,907 729,874
Deferred income taxes 4,582 17,132
Prepaids and other assets 8,104 6,494
---------------------------
Total current assets 1,171,110 1,055,608
Property and equipment, net 165,706 166,777
Tooling, net of accumulated amortization:
$17,040 and $15,220 34,601 36,415
Goodwill, net of accumulated amortization:
$12,670 and $11,268 211,658 213,906
Other intangible assets, net 44,146 45,414
Deferred income taxes 21,236 22,011
Other assets and deferred charges 74,406 74,003
---------------------------
Total Assets $ 1,722,863 $ 1,614,134
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt 76,047 $ 75,262
Accounts payable 209,978 182,040
Accrued liabilities 177,294 170,681
Customer deposits 565,881 488,218
---------------------------
Total current liabilities 1,029,200 916,201
Long-term debt 266,203 285,738
Accrued postretirement benefit cost 117,778 115,154
Customer deposits -- long-term 87,815 94,445
Other long-term liabilities 6,661 6,916
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; shares issued:
89,819,274 and 89,818,774 900 898
Additional paid-in capital 449,607 444,301
Retained earnings (deficit) 57,827 (672)
Accumulated other comprehensive income (2,441) (2,441)
Unamortized stock plan expense - (52)
Less: Treasury stock: 18,012,856 (290,687) (246,354)
and 17,244,581 shares ---------------------------
Total stockholders' equity 215,206 195,680
---------------------------
Total Liabilities and Stockholders' Equity $ 1,722,863 $ 1,614,134
===========================
See Notes to Consolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(In thousands)
(Unaudited)
Accumulated
Additional Retained Other Unamortized Total
Common Paid-In Earnings Comprehensive Stock Plan Treasury Stockholders'
Stock Capital (Deficit) Income Expense Stock Equity
--------------------------------------------------------------------------------------
Balance as of January 1, 1999 $ 898 $ 444,301 $ (672) $ (2,441) $ (52) $ (246,354) $ 195,680
Net income 58,499 58,499
Other comprehensive income adjustment -
------------
Total comprehensive income 58,499
------------
Amortization of stock plan expense 52 52
Exercise of common stock options 2 5,306 583 5,891
Purchase of treasury stock (44,916) (44,916)
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$ 900 $ 449,607 $ 57,827 $ (2,441) $ - $ (290,687) $ 215,206
Balance as of March 31, 1999 ======================================================================================
See Notes to Consolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three months ended
March 31,
-----------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58,499 $ 40,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Acquisition related non-cash items 415 -
Depreciation and amortization 9,657 8,292
Postretirement benefit cost 2,624 1,480
Non-cash stock option compensation expense 52 329
Deferred income taxes 13,325 23,662
Other, net 75 86
Change in assets and liabilities:
Accounts receivable (66,474) 35,697
Inventories (23,448) (78,669)
Prepaids, other assets, and deferred charges (1,742) 3,543
Accounts payable and accrued liabilities 34,551 14,888
Customer deposits 71,033 (77,109)
Other long-term liabilities (255) (747)
----------------------
Net Cash Provided by (Used in) Operating Activities 98,312 (28,067)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated affiliate (750) -
Expenditures for property and equipment (3,618) (3,729)
Expenditures for tooling (6) (108)
Other investing activities 847 -
----------------------
Net Cash Used in Investing Activities (3,527) (3,837)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options 5,891 1,996
Principal payments on long-term debt (18,750) (18,750)
Purchase of treasury stock (44,916) (74,579)
----------------------
Net Cash Used in Financing Activities (57,775) (91,333)
CASH AND CASH EQUIVALENTS
----------------------
Net increase (decrease) during the period 37,010 (123,237)
Cash and cash equivalents, beginning of period 38,149 306,451
======================
Cash and Cash Equivalents, End of Period $ 75,159 $183,214
======================
See Notes to Consolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of financial position, results of operations and cash
flows. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules.
The operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire year
ended December 31, 1999. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
for the year ended December 31, 1998 included in the Company's 1998 Annual
Report to Stockholders.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share ("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.
The following table sets forth the reconciliation of per share data as
of:
Three months ended March
31,
---------------------------
1999 1998
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(In thousands)
Net Income $ 58,499 $ 40,481
============ ============
BASIC EPS
Weighted average common shares outstanding 72,450 72,533
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DILUTED EPS
Incremental shares from stock options 1,464 2,818
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Weighted average common and common
equivalent shares outstanding 73,914 75,351
============ ============
EARNINGS PER SHARE:
Basic $ .81 $ .56
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Diluted $ .79 $ .54
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVENTORIES
Inventories consisted of the following at:
March 31, December
1999 31,
1998
------------ -----------
(In thousands)
Work in process $ 387,391 $ 359,212
Raw materials 204,679 190,890
Vendor progress payments 82,070 85,605
Pre-owned aircraft 78,767 94,167
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$ 752,907 $ 729,874
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NOTE 4. COMMITMENTS AND CONTINGENCIES
In the normal course of business, lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company relating to
various matters, including products liability. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims or
proceedings may be disposed of unfavorably to the Company, management has
made provision for all known probable losses related to lawsuits and claims
and believes that the disposition of all matters which are pending or
asserted will not have a material adverse effect on the financial
statements of the Company.
The Company is involved in tax audits by the Internal Revenue Service
covering the years 1990 through 1994. The revenue agent's reports include
several proposed adjustments involving the deductibility of certain
compensation expense, items relating to the initial capitalization of the
Company, the allocation of the original purchase price for the acquisition
by the Company of the Gulfstream business, including the treatment of
advance payments with respect to the cost of aircraft that were in backlog
at the time of the acquisition, and the amortization of amounts allocated
to intangible assets. The Company believes that the ultimate resolution of
these issues will not have a material adverse effect on its financial
statements because the financial statements already reflect what the
Company currently believes is the expected loss of benefit arising from the
resolution of these issues.
The Company is currently engaged in the monitoring and cleanup of
certain 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.
NOTE 5. COMMON STOCK REPURCHASES
During March 1999, the Company established a program to repurchase up
to an additional $200 million of its common stock. The purchases have been,
and will be made from time to time in the open market or through negotiated
transactions as market conditions warrant. At March 31, 1999, the Company
had repurchased 960,000 shares, at an average price of $46.79 per share,
for an aggregate amount of $44.9 million.
NOTE 6. BUSINESS SEGMENTS AND RELATED INFORMATION
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 to the Consolidated Financial
Statements for the year ended December 31, 1998 included in the Company's
1998 Annual Report to Stockholders. 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.
Gulfstream evaluates each segment's performance based on gross profit
margins (net revenues less cost of sales) excluding inventory step-charges.
Summarized financial information concerning the Company's reportable
segments are shown in the following tables. Unallocated expenses represent
expenses not directly related to the reportable segments.
Three months ended
March 31,
------------------------
1999 1998
------------------------
(In millions)
NET REVENUES
New Aircraft $ 489.4 $ 386.8
Aircraft Services 83.1 49.9
Pre-Owned Aircraft 52.6 66.7
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Total Net Revenues $ 625.1 $ 503.4
=========== ==========
Three months ended
March 31,
------------------------
1999 1998
------------------------
(In millions)
SEGMENT GROSS MARGIN
New Aircraft $ 120.8 $ 87.4
Aircraft Services 15.8 9.9
Pre-Owned Aircraft (1.6) 2.7
------------ ----------
Total Segment Gross Margin 135.0 100.0
Unallocated expenses (37.7) (30.8)
------------ ----------
Income from operations 97.3 69.2
Interest income .8 2.6
Interest expense (6.0) (7.0)
------------ ----------
Income before income taxes $ 92.1 $ 64.8
============ ==========
NOTE 7. SUBSEQUENT EVENTS
On April 15, 1999, the Company entered into a new $200 million term
loan facility (the "1999 Term Loan"). The 1999 Term Loan may be drawn upon
at any time during the first year, and is repayable in consecutive
quarterly installments with a final maturity on March 31, 2003, in
aggregate amounts for each of the following years as follows, assuming the
entire $200 million is drawn: 2000 - $25 million; 2001 - $70.9 million;
2002 - $83.3 million; 2003 - $20.8 million. Amounts are reduced ratably if
less than the full amount is drawn. The Company is required to pay
commitment fees of .35% per annum on the average daily unutilized portion
of the term loan facility for the first year. The Company may choose either
an Adjusted Base Rate 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. Interest rates are subject to change based on the Company's
performance with respect to certain financial covenants set forth in the
term loan agreement.
The 1999 Term Loan contains the same financial and operating covenants
as the 1996 Credit Agreement and shares ratably in the pledge of stock of
subsidiaries under the 1996 Credit Agreement.
On May 16, 1999, the Company entered into a definitive merger
agreement with General Dynamics Corporation ("GD"). The agreement provides
for a business combination between the Company and GD in which the Company
will become a subsidiary of GD. Under the terms of the agreement, the
holders of the Company's common stock will be issued one share of GD common
stock in exchange for each share of the Company's common stock, in a
transaction intended to qualify as a pooling of interests for accounting
purposes and as a tax-free reorganization for federal income tax purposes.
On May 14, 1999, the last trading day prior to the public announcement of
the merger, the closing price on the New York Stock Exchange Composite Tape
of a share of GD's common stock was $71.44. The proposed acquisition is
subject to approval by both companies' shareholders, as well as regulatory
approval and customary closing conditions. The agreement also provides that
either party may terminate the agreement if the average trading price of a
share of GD common stock for the fifteen trading days ending on the fifth
trading day prior to the meeting of the Company's stockholders to vote on
the agreement is less than $63 per share. The proposed acquisition is
expected to be completed in the third quarter of 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENT
On May 16, 1999, the Company entered into a definitive merger
agreement with General Dynamics Corporation ("GD"). The agreement provides
for a business combination between the Company and GD in which the Company
will become a subsidiary of GD. Under the terms of the agreement, the
holders of the Company's common stock will be issued one share of GD common
stock in exchange for each share of the Company's common stock, in a
transaction intended to qualify as a pooling of interests for accounting
purposes and as a tax-free reorganization for federal income tax purposes.
On May 14, 1999, the last trading day prior to the public announcement of
the merger, the closing price on the New York Stock Exchange Composite Tape
of a share of GD's common stock was $71.44. The proposed acquisition is
subject to approval by both companies' shareholders, as well as regulatory
approval and customary closing conditions. The agreement also provides that
either party may terminate the agreement if the average trading price of a
share of GD common stock for the fifteen trading days ending on the fifth
trading day prior to the meeting of the Company's stockholders to vote on
the agreement is less than $63 per share. The proposed acquisition is
expected to be completed in the third quarter of 1999.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Notes
to Consolidated Financial Statements beginning on page 7 and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and the audited Consolidated Financial Statements and
Notes to Consolidated Financial Statements appearing in the Company's 1998
Annual Report to Stockholders.
TOTAL COMPANY REVENUES AND GROSS MARGIN
Total net revenues increased by $121.7 million, or 24.2%, to $625.1
million in the first quarter of 1999 from $503.4 million in the first
quarter of 1998. The increase in revenues is principally attributable to
the increase in new aircraft deliveries. The Company delivered 17 new
aircraft in the 1999 first quarter, versus 13 new aircraft in the first
quarter of 1998. As a percentage of revenues, first quarter gross margin,
excluding pre-owned aircraft, was 23.9%, versus 22.1% in the first quarter
of March 31, 1998.
The following table displays net revenues and segment gross margin for
the Company's reportable segments, for the quarter ended March 31, 1999 and
1998, respectively.
Three months ended March
31,
--------------------------
1999 1998
-------------------------
(In millions)
NET REVENUES
New Aircraft $ 489.4 $ 386.8
Aircraft Services 83.1 49.9
Pre-Owned Aircraft 52.6 66.7
============ ===========
Total Net Revenues $ 625.1 $ 503.4
============ ===========
Three months ended March
31,
--------------------------
1999 1998
-------------------------
(In millions)
SEGMENT GROSS MARGIN
New Aircraft $ 120.8 $ 87.4
Aircraft Services 15.8 9.9
Pre-Owned Aircraft (1.6) 2.7
------------ -----------
Total Segment Gross Margin $ 135.0 $ 100.0
============ ===========
NEW AIRCRAFT
The Company's New Aircraft segment increased its revenues $102.6
million, or 26.5% to $489.4 million in the first quarter of 1999 from
$386.8 million in the first quarter of 1998. As described above, this
increase is attributable to new aircraft deliveries resulting from the
Company's increasing level of production to meet expanded product demand.
See also "Financial Contract Backlog."
The gross margins for New Aircraft were $120.8 million in the first
quarter of 1999 versus $87.4 million in the first quarter of 1998. The
increase in gross margin percentages to 24.7% in the 1999 quarter from
22.6% in the 1998 quarter is primarily attributable to continued reductions
in new aircraft production costs.
AIRCRAFT SERVICES
Revenues for Aircraft Services increased 66.5% to $83.1 million in the
first quarter of 1999 from $49.9 million in the first quarter of 1998. The
increase in revenues is attributable to the August 1998 acquisition of K-C
Aviation, as well as the Company's success in increasing market share.
Gross margin percentages for Aircraft Services were 19.0% for the
first quarter of 1999, relatively unchanged from 19.8% in the first quarter
of 1998. The decrease in gross margin percentage results principally from
lower levels of gross margins realized on revenues from the acquired K-C
Aviation business.
PRE-OWNED AIRCRAFT
The Company's Pre-Owned Aircraft segment had revenues of $52.6 million
in the first quarter of 1999 compared with revenues of $66.7 million for
the first quarter of 1998. The decrease in revenue 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 period
to period 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.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense
increased by $5.0 million, or 19.2%, to $30.9 million in the first quarter
of 1999 from $25.9 million in the first quarter of 1998, but as a
percentage of net revenues decreased to 4.9% in the first quarter of 1999
from 5.2% in the first quarter of 1998. The principal drivers for the
increase are additional sales and marketing expenses associated with the
increased sales activity, the acquisition of K-C Aviation, and the business
systems which are being implemented in 1999 to support the production
increases described elsewhere herein.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
$3.3 million in the first quarter of 1999, as compared to $1.9 million in
the first quarter of 1998. 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 $3.1 million for the first quarter of 1999 versus $1.9 million for the
first quarter of 1998. The increase in 1999 was a result of additional
goodwill amortization directly attributable to the acquisition of K-C
Aviation.
INTEREST INCOME AND EXPENSE. Interest income decreased by $1.7 million
to $0.8 million in the first quarter of 1999 from $2.5 million in the first
quarter of 1998 as a result of lower average cash balances the Company had
invested during the first quarter of 1999 compared to the same period of
1998. Interest expense decreased by $1.0 million to $6.0 million for the
first quarter of 1999 over the comparable period in 1998. This decrease is
attributable to both a decrease in average borrowings and lower weighted
average interest rates.
INCOME TAXES. In the quarter ended March 31,1999, the Company recorded
an income tax provision of $33.6 million based on an estimated effective
tax rate of 36.5% compared with an income tax provision of $24.3 million
based on an estimated effective tax rate of 37.5% in the quarter ended
March 31, 1998.
EARNINGS PER SHARE. The Company reported diluted earnings per share of
$0.79 for the first quarter of 1999, a 46.3% increase over the first
quarter of 1998 diluted earnings per share of $0.54.
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 the first quarter of 1999,
the Company relied on its available cash balances and its revolving credit
facility to fund these needs.
During March 1999, the Company established a program to repurchase up
to an additional $200 million of its common stock. The purchases have been,
and will be made from time to time in the open market or through negotiated
transactions as market conditions warrant. At March 31, 1999, the Company
had repurchased 960,000 shares, at an average price of $46.79 per share,
for an aggregate amount of $44.9 million.
The Company had cash and cash equivalents totaling $75.2 million at
March 31, 1999 up from $38.1 million at December 31, 1998. During the three
months ended March 31, 1999, net cash provided by operating activities was
$98.3 million compared with the three months ended March 31, 1998 when the
Company used $28.1 million in cash from operations. The increase in cash
flow from operations between periods is principally a result of the
increased level of initial deposits and progress payments received during
the first quarter of 1999 for new aircraft orders.
During the quarter ended March 31, 1999, additions to property and
equipment amounted to $3.6 million. At March 31, 1999, the Company was not
committed to the purchase of any significant amount of property and
equipment. 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 Company continually
monitors its capital spending in relation to current and anticipated
business needs. As circumstances dictate, facilities are added,
consolidated or modernized.
At March 31, 1999, borrowings under the 1996 Credit Agreement were
$286.3 million. Scheduled repayments remaining are $56.3 million in 1999
and $75.0 million in each of the years 2000 through 2001, and $80.0 million
in 2002. The 1996 Credit Agreement contains customary affirmative and
negative covenants including restrictions on the ability of the Company and
its subsidiaries to pay cash dividends, as well as financial covenants
under which the Company must operate. As of March 31, 1999, the Company was
in compliance with the covenants of its Credit Agreement.
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.
On April 15, 1999, the Company entered into a new $200 million term
loan facility (the "1999 Term Loan"). The 1999 Term Loan may be drawn upon
at any time during the first year, and is repayable in consecutive
quarterly installments with a final maturity on March 31, 2003, in
aggregate amounts for each of the following years as follows, assuming the
entire $200 million is drawn: 2000 - $25 million; 2001 - $70.9 million;
2002 - $83.3 million; 2003 - $20.8 million. Amounts are reduced ratably if
less than the full amount is drawn. The Company is required to pay
commitment fees of .35% per annum on the average daily unutilized portion
of the term loan facility for the first year. The Company may choose either
an Adjusted Base Rate 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. Interest rates are subject to change based on the Company's
performance with respect to certain financial covenants set forth in the
term loan agreement.
The 1999 Term Loan contains the same financial and operating covenants
as the 1996 Credit Agreement and shares ratably in the pledge of stock of
subsidiaries under the 1996 Credit Agreement.
The Company's principal source of liquidity both on a short-term 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 1996 Credit Agreement, the 1999 Term Loan, 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 1996 Credit Agreement, the 1999
Term Loan 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 March 31, 1999, in connection with orders for 17 Gulfstream V
aircraft in the backlog, the Company has offered customers trade-in options
(which may or may not be exercised by the customer) under which the Company
will accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a
guaranteed minimum trade-in price. Additionally, in connection with
recorded sales of new aircraft, the Company has agreed to accept pre-owned
aircraft totaling $282.4 million as of March 31, 1999. 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
$6.25 million in the first quarter 1999, 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.
FINANCIAL CONTRACT BACKLOG
At March 31, 1999, the Company had a financial contract backlog of
approximately $3.2 billion, representing a total of 47 contracts for
Gulfstream IV-SPs, and 54 contracts for Gulfstream Vs. Including the 10
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 111 aircraft, valued at approximately $3.4 billion of potential
future revenues, under contract at March 31, 1999. This excludes 18 options
valued at $0.7 billion.
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.
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. The
first green aircraft delivery for this Program occurred during the third
quarter of 1998 and the second delivery occurred in the first quarter of
1999. The remaining 10 undelivered aircraft are not included in the
Company's financial contract backlog.
As of March 31, 1999, the Company had contracted to deliver to
Executive Jet 44 Gulfstream IV-SPs and 12 Gulfstream Vs in connection with
the North American Gulfstream Shares program plus options for additional 12
Gulfstream Vs. Of these, 19 Gulfstream IV-SPs are in service, with the
remaining 49 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.
The Company continually monitors the condition of its backlog and
believes, based on the nature of its customers and its historical
experience, that there will not be a significant number of cancellations.
However, to the extent that there is a lengthy period of time between a
customer's aircraft order and its delivery date, there may be increased
uncertainty as to changes in business and economic conditions which may
affect customer cancellations.
OUTLOOK
Based on its strong backlog and continued product demand, the Company
has increased production to 65 new aircraft in 1999. With this increased
production and continuing margin improvements, the Company expects at least
25% growth in 1999 diluted earnings per share to $3.75. The Company also
expects diluted EPS in 2000 to increase by at least 15% over 1999.
YEAR 2000 READINESS
As part of the Company's initiatives, begun in 1996, to increase
production rates and co-produce the Gulfstream IV-SP and Gulfstream V, the
Company has, and continues to, upgrade and replace business systems and
facility infrastructure. These initiatives help to reduce the potential
impact of the Year 2000 issue on the Company's operations.
In addition, the Company has implemented a Year 2000 Compliance Plan
designed to ensure that all other hardware, software, systems, and products
with microprocessors relevant to the Company's business are not adversely
affected by the Year 2000 issue. The Company has established a formal
program office under the leadership of a senior level executive to manage
the assessment and implementation of the Plan objectives. The program is
reviewed regularly with executive management.
Gulfstream has reviewed all current production components and systems
installed in the Gulfstream IV-SP and Gulfstream V aircraft and has found
no issues. Older aircraft which are no longer under warranty have also been
reviewed and some require minor component modifications. This information
has been made available to Gulfstream operators. Gulfstream has completed
approximately 90% 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.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including the
statements under the heading "Outlook," as well as other statements
elsewhere in this Form 10-Q, contain forward-looking information. These
forward-looking statements are subject to risks and uncertainties. Actual
results might differ materially from those projected in the forward-looking
statements. Additional information concerning factors that could cause
actual results to materially differ from those in the forward-looking
statements is contained in Exhibit 99.1 to the Company's Securities and
Exchange Commission filings.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Certain statements contained in or incorporated by reference
in this Form 10-Q contain forward-looking information. These
forward-looking statements are subject to risks and
uncertainties. Actual results might differ materially from
those projected in the forward-looking statements. Additional
information concerning factors that could cause actual
results to materially differ from those contained in the
forward-looking statements is contained in Exhibit 99,
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.2 Agreement and Plan of Merger among
General Dynamics Corporation, Tara
Acquisition Corporation and Gulfstream
Aerospace Corporation dated May 16,
1999.
Exhibit 10.51 Term Loan Agreement dated April 15, 1999
among Gulfstream Delaware Corporation,
Certain Lenders, and The Chase Manhattan
Bank, as Administrative Agent.
Exhibit 10.52 Amendment No. 6 dated April 15, 1999 to
Credit Agreement dated October 6, 1996
among Gulfstream Delaware Corporation,
The Chase Manhattan Bank, and the banks
and other financial institutions parties
thereto.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.2 Press Release dated May 17, 1999.
(b) Report on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 1999
GULFSTREAM AEROSPACE CORPORATION
/s/ Chris A. Davis
-------------------------------------------
Chris A. Davis
Executive Vice President &
Chief Financial & Administrative Officer
and Secretary
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
Exhibits
Exhibit 2.2 Agreement and Plan of Merger among
General Dynamics Corporation, Tara
Acquisition Corporation and Gulfstream
Aerospace Corporation dated May 16,
1999.
Exhibit 10.51 Term Loan Agreement dated April 15, 1999
among Gulfstream Delaware Corporation,
Certain Lenders, and The Chase Manhattan
Bank, as Administrative Agent.
Exhibit 10.52 Amendment No. 6 dated April 15, 1999 to
Credit Agreement dated October 6, 1996
among Gulfstream Delaware Corporation,
The Chase Manhattan Bank, and the banks
and other financial institutions parties
thereto.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.2 Press Release dated May 17, 1999.