=========================================================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
-------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998MARCH 31, 1999
----------------------
COMMISSION FILE NO.Commission File No. 1-8461
----------------------
GULFSTREAM AEROSPACE CORPORATION
P. O. Box 2206
500 Gulfstream Road
Savannah, Georgia 31402-2206
Telephone: (912) 965-3000
State of incorporation: Delaware
IRS identification number: 13-3554834
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) 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
[ ]Yes[X] No[_]
As of OctoberApril 30, 1998,1999, there were 72,513,42471,607,043 shares of Gulfstream Aerospace
Corporation Common Stock outstanding.
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GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
ITEMPage No.
----------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997.......... 3Financial Statements:
Consolidated Statements of Income
Three and nine months ended September 30, 1998March 31, 1999 and
1997.......................................... 41998...............................................3
Consolidated Balance Sheets
March 31, 1999 and December 31,
1998...............................................4
Consolidated Statement of Stockholders' Equity
NineThree months ended September 30, 1998.............. 5March 31,
1999...............................................5
Consolidated Statements of Cash Flows
NineThree months ended September 30, 1998March 31, 1999 and
1997.............................................. 61998...............................................6
Notes to Consolidated Financial
Statements.........Statements...................................... 7-10
ITEMItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSManagement's Discussion and Analysis of Financial 11-15
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGS..................................... 16
ITEMLegal Proceedings.....................................16
Item 2. CHANGES IN
SECURITIES......................................... 16
ITEMChanges in Securities.................................16
Item 3. DEFAULTS UPON SENIOR
SECURITIES......................................... 16
ITEMDefaults upon Senior Securities.......................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 16
ITEMSubmission of Matters to a Vote of Security
Holders............................................16
Item 5. OTHER INFORMATION..................................... 16
ITEMOther Information.....................................16
Item 6. EXHIBITS AND REPORTS ON FORM
8-K................................................16-17
SIGNATURE............................................. 18Exhibits and Reports on Form 8-K......................16
Signature.............................................17
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSConsolidated 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)
SEPTEMBER 30, DECEMBERMarch 31, December
1999 31,
1998
1997
------------- -------------------------
ASSETS
Cash and cash equivalents $ 10,55275,159 $ 306,45138,149
Accounts receivable (less allowance for
doubtful accounts: $2,596$2,426 and $1,144) 227,809 177,228$2,525) 330,358 263,959
Inventories 771,610 629,876752,907 729,874
Deferred income taxe 28,983 33,795taxes 4,582 17,132
Prepaids and other assets 7,360 11,318
------------- -------------8,104 6,494
---------------------------
Total current assets 1,046,314 1,158,6681,171,110 1,055,608
Property and equipment, net 161,145 134,611165,706 166,777
Tooling, net of accumulated amortization:
$13,140$17,040 and $7,680 38,378 43,471$15,220 34,601 36,415
Goodwill, net of accumulated amortization:
$9,878$12,670 and $8,433 215,267 38,957$11,268 211,658 213,906
Other intangible assets, net 47,235 50,48544,146 45,414
Deferred income taxes 28,800 32,95021,236 22,011
Other assets and deferred charges 14,680 14,525
------------- -------------74,406 74,003
---------------------------
Total Assets $ 1,551,8191,722,863 $ 1,473,667
============= =============1,614,134
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt 76,047 $ 75,000 $ 75,00075,262
Accounts payable 195,494 147,618209,978 182,040
Accrued liabilities 145,958 93,798177,294 170,681
Customer deposits -- current portion 499,331 546,441
------------- -------------565,881 488,218
---------------------------
Total current liabilities 915,783 862,8571,029,200 916,201
Long-term debt 298,750 305,000266,203 285,738
Accrued postretirement benefit cost 127,076 115,405117,778 115,154
Customer deposits -- long-term 77,825 88,07587,815 94,445
Other long-term liabilities 7,102 9,573
Commitments and contingencies6,661 6,916
Stockholders' equity
Common stock; $.01 par value; 300,000,000
shares authorized; 89,797,155 shares issued
in 1998issued:
89,819,274 and 86,522,089 shares issued in 199789,818,774 900 898 865
Additional paid-in capital 437,488 370,258449,607 444,301
Retained earnings (deficit) 57,827 (672)
Accumulated deficit (65,181) (225,960)
Minimum pension liability (762) (762)other comprehensive income (2,441) (2,441)
Unamortized stock plan expense (248) (1,155)- (52)
Less: Treasury stock: 17,283,73118,012,856 (290,687) (246,354)
and 17,244,581 shares in
1998 and 11,978,439 shares in 1997 (246,912) (50,489)
------------- ----------------------------------------
Total stockholders' equity 125,283 92,757
------------- -------------215,206 195,680
---------------------------
Total Liabilities and Stockholders' Equity $ 1,551,8191,722,863 $ 1,473,667
============= =============1,614,134
===========================
See notesNotes to consolidated financial statementsConsolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net revenues $ 626,177 $ 464,036 $1,686,626 $1,362,568
Cost and expenses
CostConsolidated Statement of sales 487,361 372,983 1,322,655 1,125,031
Selling and administrative 29,882 23,920 85,399 69,517
Stock option compensation expense 84 329 907 1,314
Research and development 2,746 4,305 6,950 8,079
Amortization of intangibles and
deferred charges 2,428 1,831 6,186 5,477
---------- ---------- ---------- ----------
Total costs and expenses $ 522,501 $ 403,368 $1,422,097 $1,209,418
---------- ---------- ---------- ----------
Income from operations 103,676 60,668 264,529 153,150
Interest income 2,033 2,839 7,087 8,201
Interest expense (6,965) (7,495) (20,399) (23,305)
---------- ---------- ---------- ----------
Income before income taxes 98,744 56,012 251,217 138,046
Income tax expense (benefit) 34,023 (63,076) 90,438 (60,576)
---------- ---------- ---------- ----------
Net income $ 64,721 $ 119,088 $ 160,779 $ 198,622
========== ========== ========== ==========
Earnings per share:
Net income per share - basic $ .88 $ 1.61 $ 2.19 $ 2.68
========== ========== ========== ==========
Net income per share - diluted $ .86 $ 1.54 $ 2.13 $ 2.54
========== ========== ========== ==========
See notes to consolidated financial statements
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYStockholders' Equity
(In thousands)
(Unaudited)
Accumulated
Additional MinimumRetained Other Unamortized Total
Common Paid-In Accumulated PensionEarnings Comprehensive Stock Plan Treasury Stockholders'
Stock Capital Deficit Liability(Deficit) Income Expense Stock Equity
---------- ---------- ---------- ---------- ---------- ---------- ------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1997Balance as of January 1, 1999 $ 865898 $ 370,258444,301 $ (225,960)(672) $ (762)(2,441) $ (1,155)(52) $ (50,489)(246,354) $ 92,757195,680
Net income 160,779 160,77958,499 58,499
Other comprehensive income adjustment -
------------
Total comprehensive income 58,499
------------
Amortization of stock plan expense 907 90752 52
Exercise of common stock options with the Offering,
net of expenses 26 25,051 2,044 27,121
Tax benefit of exercised
common stock options 40,033 40,033
Exercise of common stock options 7 2,146 2,1532 5,306 583 5,891
Purchase of treasury stock (198,467) (198,467)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AS OF SEPTEMBER 30, 1998(44,916) (44,916)
--------------------------------------------------------------------------------------
$ 898900 $ 437,488449,607 $ (65,181)57,827 $ (762)(2,441) $ (248)- $ (246,912)(290,687) $ 125,283
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements215,206
Balance as of March 31, 1999 ======================================================================================
See Notes to Consolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Cash Flows
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------Three months ended
March 31,
-----------------------
1999 1998
1997
------------- ----------------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 160,77958,499 $ 198,62240,481
Adjustments to reconcile net income to net
cash provided by operating activities:
Acquisition related non-cash items 415 -
Depreciation and amortization 25,176 24,3429,657 8,292
Postretirement benefit cost 5,060 5,140
Provision for loss on pre-owned aircraft (1,100)2,624 1,480
Non-cash stock option compensation expense 907 1,314
Other acquisition related non-cash items 3,88052 329
Deferred income taxes 48,995 (64,801)13,325 23,662
Other, net 677 71275 86
Change in assets and liabilities, excluding
effect of acquisition:liabilities:
Accounts receivable (10,985) 7,986(66,474) 35,697
Inventories (93,791) 2,151(23,448) (78,669)
Prepaids, other assets, and deferred charges 4,822 (2,640)(1,742) 3,543
Accounts payable and accrued liabilities 83,021 (3,942)34,551 14,888
Customer deposits (78,448) (134,753)71,033 (77,109)
Other long-term liabilities (2,471) 615
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 147,622 33,646(255) (747)
----------------------
Net Cash Provided by (Used in) Operating Activities 98,312 (28,067)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for business acquired (251,087)
Investment in unconsolidated affiliate (1,260)(750) -
Expenditures for property and equipment (16,089) (9,619)(3,618) (3,729)
Expenditures for tooling (477) (2,613)
Proceeds from sales of assets 835
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (268,078) (12,232)(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 29,274 888
Net borrowings under revolving credit loans 50,0005,891 1,996
Principal payments on long-term debt (56,250) (13,333)(18,750) (18,750)
Purchase of treasury stock (198,467)
------------- -------------
NET(44,916) (74,579)
----------------------
Net Cash Used in Financing Activities (57,775) (91,333)
CASH USED IN FINANCING ACTIVITIES (175,443) (12,445)
------------- -------------
(Decrease)AND CASH EQUIVALENTS
----------------------
Net increase in cash and cash equivalents (295,899) 8,969(decrease) during the period 37,010 (123,237)
Cash and cash equivalents, beginning of period 38,149 306,451
233,172
============= ===================================
Cash and cash equivalents, endCash Equivalents, End of periodPeriod $ 10,552 $ 242,141
============= =============75,159 $183,214
======================
See notesNotes to consolidated financial statementsConsolidated Financial Statements.
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of financial position, results of operations and cash
flows. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules.
The operating results for the three and nine months ended September 30,
1998March 31, 1999 are not
necessarily indicative of the results to be expected for the entire year
ended December 31, 1998.1999. These financial statements should be read in
conjunction with the consolidated financial statementsConsolidated Financial Statements and notesNotes thereto
for the year ended December 31, 19971998 included in the Company's 19971998 Annual
Report to Stockholders.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share were("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 duringplus the periods presented.
Diluted earningsincremental shares that would have been outstanding
under stock option plans.
The following table sets forth the reconciliation of per share were computed by dividing net income by the
weighteddata as
of:
Three months ended March
31,
---------------------------
1999 1998
------------- ------------
(In thousands)
Net Income $ 58,499 $ 40,481
============ ============
BASIC EPS
Weighted average common shares outstanding 72,450 72,533
------------ ------------
DILUTED EPS
Incremental shares from stock options 1,464 2,818
------------ ------------
Weighted average common and potential common
equivalent shares outstanding. The
Company adopted Financial Accounting Standards Board SFAS No. 128, Earnings
per Share, effective December 15, 1997. As a result, all earnings per share
information for prior periods have been restated to conform to the
requirements of SFAS No. 128.
The following table sets forth the reconciliation of per share data as
of:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Income $ 64,721 $ 119,088 $ 160,779 $ 198,622
========== ========== ========== ==========
BASIC EPS
Weighted average common shares
shares outstanding 73,454 74,119 73,269 74,036
---------- ---------- ---------- ----------
DILUTED EPS
Incremental shares from stock
options 1,392 2,986 2,106 4,091
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares
outstanding 74,846 77,105 75,375 78,127
========== ========== ========== ==========
EARNINGS PER SHARE:
Net income per share - basic $ .88 $ 1.61 $ 2.19 $ 2.68
========== ========== ========== ==========
Net income per share - diluted $ .86 $ 1.54 $ 2.13 $ 2.54
========== ========== ========== ==========
outstanding 73,914 75,351
============ ============
EARNINGS PER SHARE:
Basic $ .81 $ .56
============ ============
Diluted $ .79 $ .54
============ ============
GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On a pro forma basis, assuming an effective tax rate of 37.5% for the
1997 periods, the Company's basic and diluted earnings per share is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
PRO FORMA EARNINGS PER SHARE:
Net income per share - basic $ .88 $ .47 $ 2.19 $ 1.17
========== ========== ========== ==========
Net income per share - diluted $ .86 $ .45 $ 2.13 $ 1.10
========== ========== ========== ==========
NOTE 3. INVENTORIES
Inventories consisted of the following at:
SEPTEMBER 30, DECEMBERMarch 31, December
1999 31,
1998
1997
------------- ------------------------- -----------
(In thousands)
Work in process $ 415,584387,391 $ 330,155359,212
Raw materials 177,807 134,973204,679 190,890
Vendor progress payments 76,747 60,60682,070 85,605
Pre-owned aircraft 101,472 104,142
------------- -------------78,767 94,167
------------ ----------
$ 771,610752,907 $ 629,876
============= =============729,874
============ ==========
NOTE 4. INCOME TAXES
In the quarter and nine month period ended September 30, 1998, the
Company recorded income tax provisions of $ 34.0 million and $90.4 million,
respectively, based on an estimated annual effective tax rate of 36.0%. In
the comparable periods of 1997, the Company recorded no provision for
income taxes, other than alternative minimum taxes, principally as a result
of utilization of net operating loss carryforwards. As a result of numerous
factors, including, but not limited to the Company's recent earnings trends
and the size of its contractual backlog, the Company determined that its
net deferred tax asset was more likely than not to be realized, and, in the
quarter ending September 30, 1997, released its deferred tax valuation
allowance, totaling $94.2 million. Of this amount, $29.4 million related to
the exercise of stock options and was credited to additional paid-in
capital and $64.8 million was recorded as a one-time, non-cash income tax
benefit.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In the normal course of business, lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company relating to
various matters, including products liability. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims or
proceedings may be disposed of unfavorably to the Company, management has
made provision for all known probable losses related to lawsuits and claims
and believes that the disposition of all matters which are pending or
asserted will not have a material adverse effect on the financial
statements of the Company.
The Company is involved in tax audits by the Internal Revenue Service
covering the years 1990 through 1994. The revenue agent's reports include
several proposed adjustments involving the deductibility of certain
compensation expense, items relating to the initial capitalization of the
Company, the allocation of the original purchase price for the acquisition
by the Company of the Gulfstream business, including the treatment of
advance payments with respect to the cost of aircraft that were in backlog
at the time of the acquisition, and the amortization of amounts allocated
to intangible assets. The Company believes that the ultimate resolution of
these issues will not have a material adverse effect on its financial
statements because the financial statements already reflect what the
Company currently believes is the expected loss of benefit arising from the
resolution of these issues.
The Company is currently engaged in the monitoring and cleanup of
certain ground watergroundwater at its Savannah facility under the oversight of the
Georgia Department of Natural Resources. Expenses incurred for cleanup have
not been significant. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated. The Company believes the remainder of the Savannah
facility, as well as other Gulfstream properties, are being carefully
monitored and are in substantial compliance with current federal, state and
local environmental regulations. The Company believes the liabilities, if
any, that will result from the above environmental matters will not have a
material adverse effect on its financial statements.
NOTE 6.5. COMMON STOCK REPURCHASES
During January 1998,March 1999, the Company announcedestablished a program to repurchase up
to an additional $200 million of its common stock. As of September 30, 1998,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 approximately 5.5 million960,000 shares, at an average price of $35.81$46.79 per share,
for an aggregate amount of approximately $198.5$44.9 million.
NOTE 6. BUSINESS SEGMENTS AND RELATED INFORMATION
The repurchase was funded fromCompany 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
available cash.
NOTE 7. BUSINESS ACQUISITION
On August 19, 1998 theAnnual Report to Stockholders. Intersegment sales and transfers are
not significant. The Company acquired K-C Aviation, Inc. for
approximately $250 million, including acquisition costs. K-C Aviation is a
leading providerhas no significant assets domiciled outside of business aviation services and the largest independent
completion center for business aircraft in North America. In addition to
custom aircraft interiors, K-C Aviation is the second largest engine
service center in
the United States and also offers maintenance services,
spares, auxiliary power unit service, avionics retrofit, non-destructive
testing and component overhaul.
The purchaseassets are not allocated to reportable segments.
Gulfstream evaluates each segment's performance based on gross profit
margins (net revenues less cost of K-C Aviation, Inc. was funded primarily from existing
cash balances, and duesales) 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 timingreportable 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
----------- ----------
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 closingfollowing 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 transaction,
also fromterm loan facility for the revolving credit facility.first year. 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,Company may choose either
an Adjusted Base Rate interest option, which is being amortizedbased on a straight-line
basis over 40 years. Allocationsthe greater of the
purchase price have been determined
based upon preliminary estimates of value, and therefore,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 asset appraisals are finalized. As refinements are made, goodwillthe 1996 Credit Agreement and any other appropriate accounts will be adjusted accordingly.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 following unaudited pro forma summary presents the combined
results of operations ofagreement provides
for a business combination between the Company and K-C Aviation,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 had occurred at the beginning of fiscal 1998 and 1997. The pro
forma amounts give effect to certain adjustments, including the
amortization of goodwill, reduced interest income from cash utilized to
complete the acquisition and the related income tax effects. The pro forma
consolidated results do not purportis
expected to be indicative of results that would
have occurred had the acquisitions been in effect for the period presented,
nor do they purport to be indicative of the results that will be obtainedcompleted in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Pro forma Net Revenues $ 650.3 $ 516.2 $ 1,809.8 $ 1,504.9
========== ========== ========== ==========
Pro forma Income Before Income
Taxes 99.5 56.3 251.1 129.9
========== ========== ========== ==========
Pro forma Net Income 66.3 120.6 163.1 193.4
========== ========== ========== ==========
Pro forma Earnings Per Share -
Basic .90 1.63 2.23 2.61
========== ========== ========== ==========
Pro forma Earnings Per Share -
Diluted $ .88 $ 1.56 $ 2.17 $ 2.47
========== ========== ========== ==========
NOTE 8. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statementthird quarter of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This
Statement requires disclosure of total nonowner changes in stockholders'
equity, which is defined as net income plus certain direct adjustments to
stockholders' equity such as pension liability adjustments. For the three
and nine month periods of 1998 and 1997, the Company had no such
adjustments.
NOTE 9. NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which is effective no later than for the Company's 1998 fiscal year-end.
Management believes that the adoption of this statement will not have a
material effect on the Company's consolidated financial statements.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 statementsConsolidated Financial Statements and
notesNotes to consolidated financial statementsConsolidated Financial Statements appearing in the Company's 19971998
Annual Report to Stockholders.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERTOTAL COMPANY REVENUES AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
Net Revenues.GROSS MARGIN
Total net revenues increased by $162.2$121.7 million, or 35.0%24.2%, to $626.2$625.1
million in the thirdfirst quarter of 19981999 from $464.0$503.4 million in the thirdfirst
quarter of 1997.1998. The third quarter 1998 results of operations
include net revenues of K-C Aviation, Inc. from the date of acquisition,
which were $35.2 million, resulting principally from the delivery of five
non-Gulfstream completions. Excluding the net revenues of K-C Aviation, the
Company's net revenues were up $127.0 million, or 27.4%. The increase
resulted from several factors; an increase in revenues from green aircraft
of $44.5 million as the Company delivered 16 aircraft, seven Gulfstream Vs
and nine Gulfstream IV-SPs, as compared with 14 aircraft, eight Gulfstream
Vs and six Gulfstream IV-SPs, in the third quarter of 1997; and an increase
in Gulfstream completion revenues of $30.7 million reflecting 11 Gulfstream
completions delivered during the third quarter compared with only five
Gulfstream completions delivered in the comparable 1997 period. In
addition, revenues associated with the sale of pre-owned aircraft increased
$29.2 million to $45.0 million in the third quarter of 1998 as compared to
$15.8 million in the same period in 1997.
During the nine months ended September 30, 1998, total net revenues
increased by $324.0 million (including the effects of the acquisition), or
23.8%, to $1,686.6 million from $1,362.6 million for the nine months ended
September 30, 1997. For the nine months ended September 30, 1998,
Gulfstream delivered 44 new aircraft; 21 Gulfstream Vs and 23 Gulfstream
IV-SPs, up from 37 new aircraft; 21 Gulfstream Vs and 16 Gulfstream IV-SPs
in the same period of 1997. Also contributingis 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 an increase23.9%, versus 22.1% in completionthe first quarter
of March 31, 1998.
The following table displays net revenues of $82.5and 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, resulting from 12
additional Gulfstream completion deliveries and five non-Gulfstream
completion deliveries in 1998.
Cost of Sales. Total cost of sales increasedor 26.5% to $487.4$489.4 million in the thirdfirst quarter of 19981999 from
$373.0$386.8 million in the thirdfirst quarter of 1997, and
increased $197.71998. 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 to $1,322.7 million forin the nine months ended
September 30, 1998 from $1,125.0 million for the nine months ended
September 30, 1997. Cost of sales of the acquired business includes a
non-cash acquisition related charge of $3.9 million for the fair value
step-up related to the sale of inventories. Excluding pre-owned aircraft,
which generally are sold at break-even levels, and the non-cash inventory
step-up of $3.9 million, the gross profit percentage for the thirdfirst
quarter of 1998 was 24.1% compared to 19.3% for1999 versus $87.4 million in the thirdfirst quarter of 1997, and for
the nine months ended September 30, 1998, the gross profit percentage was
23.5% compared to 19.1% for the comparable period in 1997. This1998. The
increase in gross profitmargin percentages to 24.7% in the 1999 quarter from
22.6% in the 1998 quarter is primarily attributable to continued reductions
in Gulfstream Vnew aircraft production costs.
SellingAIRCRAFT 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 Administrative Expense.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 $6.0$5.0 million, or 25.1%19.2%, to $29.9$30.9 million in the thirdfirst quarter
of 19981999 from $23.9$25.9 million in the thirdfirst quarter of 1997,1998, but as a
percentage of net revenues decreased to 4.8%4.9% in the thirdfirst quarter of 19981999
from 5.2% in the thirdfirst quarter of 1997. For the nine months ended September
30, 1998, selling and administrative expense was $85.4 million as compared
to $69.5 million for the nine months ended September 30, 1997.1998. The principal drivers for the
increase for both the quarter and the nine months are additional sales and marketing expenses associated with the
increased sales activity, the acquisition of K-C Aviation, and the business
systems which are being implemented in 1998 and 1999 to support the production
increases described elsewhere herein.
Research and Development Expense.RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
$2.7$3.3 million in the thirdfirst quarter of 1998,1999, as compared to $4.3$1.9 million in
the thirdfirst quarter of 1997. For the nine month period ended September 30,
1998, research and development expense was $7.0 million compared to $8.1
million for the corresponding period in 1997. Research and development
expense for the nine months ended September 30, 1997 is net of a $10.0
million credit for launch assistance funds received from vendors
participating in the development of the Gulfstream V.1998. Research and development expenditures in 19981999
and the near-term future are expected to stem principally from product
improvements and enhancements, rather than new aircraft development.
Interest IncomeAMORTIZATION OF INTANGIBLES AND DEFERRED CHARGES. This non-cash
expense includes amortization of goodwill and Expense.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 $0.8$1.7 million
to $2.0$0.8 million in the thirdfirst quarter of 19981999 from $2.8$2.5 million in the thirdfirst
quarter of 19971998 as a result of lower average cash balances the Company had
invested during 1998the first quarter of 1999 compared to the same period of
1997.1998. Interest expense decreased by $0.5$1.0 million to $7.0$6.0 million for the
thirdfirst quarter of 1998 and
by $2.9 million to $20.4 million for the nine months ended September 30,
1998, respectively,1999 over the comparable periodsperiod in 1997.1998. This decrease is
attributable to both a decrease in average borrowings and lower weighted
average interest rates.
Income Taxes.INCOME TAXES. In the quarter and nine month period ended September 30,
1998,March 31,1999, the Company recorded
an income tax provisionsprovision of $34.0$33.6 million and $90.4
million, respectively, based on an estimated effective
tax rate of 36.0%.
In the comparable periods36.5% compared with an income tax provision of 1997, the Company recorded no provision for
income taxes, other than alternative minimum taxes, principally as a result$24.3 million
based on an estimated effective tax rate of utilization of net operating loss carryforwards. As a result of numerous
factors, including, but not limited to the Company's recent earnings trends
and the size of its contractual backlog, the Company determined that its
net deferred tax asset was more likely than not to be realized, and,37.5% in the quarter ending September 30, 1997, released its deferred tax valuation
allowance, totaling $94.2 million. Of this amount, $29.4 million related to
the exercise of stock options and was credited to additional paid-in
capital and $64.8 million was recorded as a one-time, non-cash income tax
benefit. The Company's net operating loss carryforward for regular federal
income tax purposes was fully utilized during the second quarterended
March 31, 1998.
Earnings Per Share.EARNINGS PER SHARE. The Company reported diluted earnings per share of
$0.86$0.79 for the third quarter 1998 as compared to the thirdfirst quarter of 19971999, a 46.3% increase over the first
quarter of $1.54 (or $0.70 per share, excluding the one-time tax benefit discussed
above). For the nine months ended September 30, 1998 earnings per share
was $2.13, compared to $2.54 (or $1.71 per share excluding the one-time tax
benefit discussed above) for the corresponding period in 1997. On a pro
forma fully-taxed basis, and assuming an effective tax rate of 37.5% for
the 1997 periods, comparable diluted earnings per share would have been
$.45 for the third quarter and $1.10 for the nine month period.of $0.54.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise principally from working capital
requirements, capital expenditures, and principal and interest payments on
long-term debt (including the revolving credit facility). During 1998,, and the Company also implemented aCompany's
share repurchase program and acquired K-C
Aviation.described below. During the nine months ended September 30, 1998,first quarter of 1999,
the Company relied on bothits available cash balances and its revolving credit
facility to fund these needs.
The Company had cash and cash equivalents totaling $10.6 million at
September 30, 1998 down from $306.5 million at December 31, 1997. This
decrease is primarily attributable to the acquisition of K-C Aviation
during the third quarter 1998 and the Company's share repurchase program.
On August 19, 1998, the Company acquired K-C Aviation, Inc. for
approximately $250 million, including acquisition costs. K-C Aviation is a
leading provider of business aviation services and the largest independent
completion center for business aircraft in North America. In addition to
custom aircraft interiors, K-C Aviation is the second largest engine
service center in the United States and also offers maintenance services,
spares, auxiliary power unit service, avionics retrofit, non-destructive
testing and component overhaul. The acquisition allows the Company to
obtain a skilled workforce as well as the additional capacity to accelerate
the completions ramp-up, while at the same time grow service revenues
through three new strategic locations.
In January 1998,During March 1999, the Company established a program to repurchase up
to an additional $200 million of its common stock. As of September 30, 1998, approximately
5.5 millionThe 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 $35.81$46.79 per share, had been
repurchased under this plan
for an aggregate amount of approximately $198.5$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 ninethree
months ended September 30, 1998,March 31, 1999, net cash provided by operating activities was
$147.6$98.3 million compared with the ninethree months ended September 30, 1997March 31, 1998 when the
Company generated $33.6used $28.1 million in cash from operations. This increase is primarily attributable to anThe increase in pre-tax earnings.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 third quarter of 1998, the Company together with GATX
Capital Corporation, a diversified international financial services
company, formed Gulfstream GATX Leasing Company to provide an operating
lease program to customers in the large cabin, long range business aircraft
market. Gulfstream GATX Leasing Company is owned 85% by GATX Capital and
15% by Gulfstream.
During the nine months ended September 30, 1998,March 31, 1999, additions to property and
equipment amounted to $16.1$3.6 million. At September 30, 1998,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
Company's strategic initiativeacquisition of K-C Aviation, the Company plans to increase
its annual production rate tospend approximately 65 aircraft by 1999, the
Company's planned capital expenditures increased $15$30.0
million for property and equipment in 1997, and
in 1998, are expected to increase by approximately another $20 million
above previously planned annual levels of approximately $15 million.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.
In May 1998, certain shareholders of the Company completed the sale of
18,000,000 shares of common stock in a secondary offering (the "Offering").
The Company did not receive any of the proceeds from the sale of shares in
the Offering. In connection with the Offering, certain current and former
directors and employees of, and advisors to, the Company exercised stock
options to purchase, in the aggregate, approximately 2.9 million shares of
common stock from the Company for an aggregate exercise price of
approximately $27.1 million, after deducting issuance costs. The Company
used the proceeds from these exercises for working capital purposes.
At September 30, 1998,March 31, 1999, borrowings under the Company's revolving credit
facilities1996 Credit Agreement were
$50 million, with available borrowings of $134.7$286.3 million. Scheduled repayments remaining under the term facility are $18.8$56.3 million in 19981999
and $75.0 million in each of the years 19992000 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 September 30, 1998,March 31, 1999, the Company was
in compliance with the covenants of its creditCredit 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 byfrom operations, including customer
progress payments and deposits on new aircraft orders. Occasionally,
however,However, the Company
may borrow against the credit agreement1996 Credit Agreement, the 1999 Term Loan, or
through other available borrowing vehicles to supplement cash flow from
operations. The Company believes, that based upon its analysis of its
consolidated financial position, its cash flow during the past 12 months
and theits expected results of operations in the future, that operating cash
flow and available borrowings under the credit agreement1996 Credit Agreement, the 1999
Term Loan and other available financing sourcesborrowing vehicles will be adequate to fund
operations, capital expenditures, and 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 specificindustry-specific
developments or general economic trends will not adversely affect the
Company's operations or its ability to meet its cash requirements.
As of September 30, 1998,March 31, 1999, in connection with orders for 2117 Gulfstream V
aircraft in the backlog, the Company has offered customers trade-in options
(which may or may not be exercised by the customer) under which the Company
will accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a
guaranteed minimum trade-in price. Additionally, in connection with
recorded sales of new aircraft, the Company has agreed to accept pre-owned
aircraft with trade-in values totaling $281.9$282.4 million as of September 30,
1998. Of this amount, $8.6 million is under contract for resale to
pre-owned aircraft customers.March 31, 1999. Management believes
that the fair market value of all such aircraft exceeds the specified
trade-in value.
On December 24, 1997, theThe Company executed final documentsis party to an agreement with the Pension Benefit Guaranty
Corporation (the "PBGC") concerning funding of the Company's defined
benefit pension plans. The terms were essentially the
same as those set out in the agreement in principle reached between the
PBGC and the Company during October 1996. Pursuant to this agreement, the Company contributed
$18.8$6.25 million forin the nine months ended September 30,
1998,first quarter 1999, and has agreed to contribute a
total of $25.0 million annually (to be paid quarterly in equal
installments) fromfor 1999 throughand 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.
CONTRACTUALFINANCIAL CONTRACT BACKLOG
At September 30, 1998, GulfstreamMarch 31, 1999, the Company had a firmfinancial contract backlog of
approximately $2.9$3.2 billion, of revenues, representing a total of 91
aircraft. The Company includes an order47 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, only if the Company has
entered intohad a
purchase contract (with no contingencies) with the customer
and has received a significant (generally non-refundable) deposit from the
customer.
During the third quartertotal of 1998, Gulfstream GATX Leasing Company
executed agreements to purchase five Gulfstream Vs and one Gulfstream
IV-SP,111 aircraft, valued at approximately $210 million, with deliveries from 1999
through 2001. It also executed$3.4 billion of potential
future revenues, under contract at March 31, 1999. This excludes 18 options to purchase three Gulfstream Vs and
three Gulfstream IV-SPs,
valued at approximately $200 million, with
potential deliveries from 2001 through 2004.$0.7 billion.
During the first quarter ended March 31,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 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. IncludingThe
first green aircraft delivery for this Program occurred during the 11third
quarter of 1998 and the second delivery occurred in the first quarter of
1999. The remaining 10 undelivered aircraft are not included in the
Middle EastCompany's financial contract backlog.
As of March 31, 1999, the Company had a total of 102 aircraft, valued
at approximately $3.2 billion of potential future revenues, under contract
at September 30, 1998.
As part ofcontracted to deliver to
Executive Jet 44 Gulfstream IV-SPs and 12 Gulfstream Vs in connection with
the Company's ongoingNorth American Gulfstream Shares program on October
16, 1998, the Company signed agreements in principle with Executive Jet
International (EJI) which significantly expands the successful relationship
between the two companies. The agreements include plans for a Gulfstream V
Shares fractional ownership program, with the purchase of 10 Gulfstream V
aircraft andplus options for an additional 12
Gulfstream V aircraft,Vs. Of these, 19 Gulfstream IV-SPs are in service, with the
purchase of 14remaining 49 Gulfstream IV-SP aircraft to supplement the currentIV-SPs and Gulfstream Shares program and a long-term maintenance agreement for
Executive Jet's fleet of Falcons and Hawkers in addition to the Gulfstream
jets. The value of the purchase and service agreements is estimatedVs to be nearly $1.3 billiondelivered 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 is excludedhas received a significant (generally non-refundable)
deposit from the Company's September 30, 1998
contractual backlog.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
TheBased on its strong backlog and continued product demand, the Company
planshas increased production to deliver approximately 60 green65 new aircraft in fiscal
1998 and 65 in fiscal 1999, and completions are expected to nearly double
in 1998 compared to 1997. The gross margins are expected to improve from
20% in 1997 to the mid-20s by the end of 1998. Based on projections of
increasing aircraft1999. With this increased
production and improving margins, Gulfstreamcontinuing margin improvements, the Company expects at least
25% growth in 1999 diluted earnings per share of approximately $2.95 in 1998 and $3.75 in
1999.to $3.75. The Company is also
targetingexpects diluted earnings per shareEPS 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 requiredrequire minor component modifications havemodifications. This information
has been identified and communicatedmade available to the relevant customers. Gulfstream intends
to substantially completeoperators. Gulfstream has completed
approximately 90% of its Year 2000 compliance remediationprogram plan for products and
testing by
the first quarter 1999, with some activities continuing through the
remainder of 1999. Confirmationsinfrastructure. Confirmation of Year 2000 plans for all high and medium
risksignificant
suppliers has also been completed and low risk suppliers are
approximately 90% complete.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 vendorssuppliers or
suppliersgovernmental 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",Operations," including the
statements under the heading "Outlook","Outlook," as well as other statements
elsewhere in this Form 10-Q, contain forward-looking information. These
forward-looking statements are subject to risks and uncertainties. Actual
results might differ materially from those projected in the forward-looking
statements. Additional information concerning factors that could cause
actual results to materially differ from those in the forward-looking
statements is contained in Exhibit 99.1 to this Form 10-Q.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 10.332.2 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, 1998 to Credit
Agreement1996
among Gulfstream Delaware Corporation,
The Chase Manhattan Bank, and the banks
and other financial institutions parties
thereto.
Exhibit 10.34 Lease Agreement, dated January 1, 1998, by
and between Immuebles El Vigia, S.A., and
Interiores Aeroes, S.A. De C.V.
Exhibit 10.35 Amendment No. 3 to Sublease Agreement, dated
February 23, 1998, by and between the
Brunswick and Glynn County Development
Authority and Gulfstream Aerospace
Corporation.
Exhibit 10.36 Amendment No. 4 to Sublease Agreement, dated
March 23, 1998, by and between the Brunswick
and Glynn County Development Authority and
Gulfstream Aerospace Corporation
Exhibit 10.37 Lease Agreement, dated January 25, 1968, by
and between Outagamie County, Wisconsin and
K-C Aviation Incorporated which was assigned
to K-C Aviation on October 9, 1980; as
amended by Addendum No. 1, dated December 24,
1980, Addendum No. 2, dated February 9, 1988,
Addendum No. 3 dated January 26, 1989,
Addendum No. 4 dated October 22, 1996, and
Addendum No. 5 to Lease Agreement, dated
March 11, 1997.
Exhibit 10.38 Lease Agreement, dated February 1, 1978, by
and between City of Dallas and K-C Aviation,
Incorporated for lease of land and facility
at Dallas Love Field; as amended by Agreement
Amending Lease dated October 28, 1981, Second
Amendment dated June 1, 1989, and that
certain letter from the City of Dallas to K-C
Aviation dated December 9, 1997.
Exhibit 10.39 Sublease Agreement, dated January 17, 1989,
by and between Dalfort Aviation Services, a
division of Dalfort Corporation and K-C
Aviation, Incorporated, as amended by that
certain First Additional Agreement effective
January 17, 1989.
Exhibit 10.40 Sublease Agreement, dated December 1, 1996,
by and between Dallas Airmotive, Incorporated
and K-C Aviation, Incorporated.
Exhibit 10.41 Lease Agreement, dated May 1, 1997, by and
between Carpenter Freeway Properties and K-C
Aviation, Incorporated.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of The Private
Securities Litigation Reform Act of 1995.99.2 Press Release dated May 17, 1999.
(b) Report on Form 8-K
On August 27, 1998 the Company filed a report on Form 8-K,
reporting under Items 5 and 7, disclosing the Company's
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995, and the
Press Release issued August 19, 1998 pertaining to the Company's
acquisition of K-C Aviation.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: November 12, 1998May 17, 1999
GULFSTREAM AEROSPACE CORPORATION
/s/ Chris A. Davis
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Chris A. Davis
Executive Vice President &
Chief Financial & Administrative Officer
and Secretary
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
EXHIBITSExhibits
Exhibit 10.332.2 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, 1998 to Credit
Agreement1996
among Gulfstream Delaware Corporation,
The Chase Manhattan Bank, and the banks
and other financial institutions parties
thereto.
Exhibit 10.34 Lease Agreement, dated January 1, 1998, by
and between Immuebles El Vigia, S.A., and
Interiores Aeroes, S.A. De C.V.
Exhibit 10.35 Amendment No. 3 to Sublease Agreement, dated
February 23, 1998, by and between the
Brunswick and Glynn County Development
Authority and Gulfstream Aerospace
Corporation.
Exhibit 10.36 Amendment No. 4 to Sublease Agreement, dated
March 23, 1998, by and between the Brunswick
and Glynn County Development Authority and
Gulfstream Aerospace Corporation
Exhibit 10.37 Lease Agreement, dated January 25, 1968, by
and between Outagamie County, Wisconsin and
K-C Aviation Incorporated which was assigned
to K-C Aviation on October 9, 1980; as
amended by Addendum No. 1, dated December 24,
1980, Addendum No. 2, dated February 9, 1988,
Addendum No. 3 dated January 26, 1989,
Addendum No. 4 dated October 22, 1996, and
Addendum No. 5 to Lease Agreement, dated
March 11, 1997.
Exhibit 10.38 Lease Agreement, dated February 1, 1978, by
and between City of Dallas and K-C Aviation,
Incorporated for lease of land and facility
at Dallas Love Field; as amended by Agreement
Amending Lease dated October 28, 1981, Second
Amendment dated June 1, 1989, and that
certain letter from the City of Dallas to K-C
Aviation dated December 9, 1997.
Exhibit 10.39 Sublease Agreement, dated January 17, 1989,
by and between Dalfort Aviation Services, a
division of Dalfort Corporation and K-C
Aviation, Incorporated, as amended by that
certain First Additional Agreement effective
January 17, 1989.
Exhibit 10.40 Sublease Agreement, dated December 1, 1996,
by and between Dallas Airmotive, Incorporated
and K-C Aviation, Incorporated.
Exhibit 10.41 Lease Agreement, dated May 1, 1997, by and
between Carpenter Freeway Properties and K-C
Aviation, Incorporated.
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of The Private
Securities Litigation Reform Act of 1995.99.2 Press Release dated May 17, 1999.