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TO ALL SHAREHOLDERS [Photograph
AND TEAMMATES Office of the Chairman:
Left to right: Kenneth A. Francis
Gerald A. Johnston, John F.
McDonnell, John P. Capellupo,
and Herbert J. Lanese]
To grow stronger in hard times is the acid test of
competitiveness. McDonnell Douglas has met that challenge, as
our 1993 results demonstrate.
Along with other aerospace companies, MDC faced a deepening
downturn in military and commercial markets in 1993. U.S.
military aircraft expenditures declined 17% in real terms in
1993, and have fallen 36% since 1989. Since 1991, there has also
been a drought in new orders for commercial aircraft.
Despite the harsh environment, MDC had an extremely good
year. We had multiple successes in securing new business
essential to future growth. Productivity and quality continued
to rise -- more than compensating for lower rates of production.
We achieved a strong increase in earnings and a dramatic
reduction in aerospace debt.
Shareholders benefited from MDC's performance. From the
beginning of the year to the end, the price per share of our
stock grew from $48 1/4 to $107 -- a 122% increase. By
comparison, the S&P aerospace index rose by 27% in 1993.
The twin problems of excess capacity and lower levels of
demand have led to a period of consolidation within the aerospace
industry. Leading aerospace companies have pursued a variety of
strategies. Lockheed, Martin Marietta, and Loral have made
acquisitions to bolster their positions in key markets. General
Dynamics -- our principal rival in fighter aircraft for many
years -- has liquidated much of its defense business and returned
cash to shareholders. Grumman has announced withdrawal from the
fighter airframe business.
MDC has tackled the problem of excess capacity head-on -- by
directly reducing capacity and instituting a number of measures
aimed at making the corporation better able to survive and
flourish on a leaner diet. In the past two years, for example,
we have decided to close four major fabrication plants in the
U.S. By consolidating work in our remaining plants, we expect to
make a substantial improvement in average plant utilization.
While reducing costs, we have tightened the focus of our
objectives and strategies. We have no intention of diversifying
into new and unfamiliar businesses. In fact, over the past three
years, we have shed peripheral businesses in information systems
and financial services. Ours is a here-we-stand strategy. It is
based on a unique set of strengths as an aerospace company.
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The first of those strengths is our position in combat
aircraft. We are the world leader in that business. MDC is
producing a total of four combat aircraft, plus the T-45 trainer.
No other company is producing more than two combat aircraft.
We also have the dominant military transport aircraft of the
future in the C-17 Globemaster III, which entered service with an
operational unit of the U.S. Air Force in 1993. The only other
military transport in production is the short-range, propeller-
driven C-130 Hercules, which is less than half the size of the C-
17 and has been produced for more than 30 years. The C-17 is the
key to the concept of rapid deployment of U.S. and allied forces
in a world of multiple regional instabilities. Unlike any other
aircraft (or combination of aircraft), the C-17 can deliver heavy
firepower (such as main battle tanks, Apache helicopters, and
Patriot missile batteries) direct to small, austere airfields
anywhere in the world.
MDC and the Department of Defense have reached a settlement
on a wide range of issues related to the C-17 fixed price
development program. The settlement -- which is subject to
Congressional approval -- was the principal cause of a $450
million pre-tax write-off against our 1993 earnings. We were
willing to accept that very large write-off because the
settlement gives us until the end of 1995 to prove to our
customer that we can deliver high quality airplanes on schedule,
on specification, and at affordable costs. If we do, I am
convinced we will produce C-17s for a long time to come (see more
detailed discussion on p. 9).
Outside of military aircraft, MDC is the largest producer of
stand-off strike missiles. Our Tomahawk and Harpoon/SLAM
missiles won praise for precision strikes against military
targets in Desert Storm.
And we make the world's most reliable satellite launch
vehicle. Entering 1994, our Delta rocket has had a record string
of 46 consecutive successful launches since 1986. Going back to
1977, the Delta has been successful in 89 of 90 launches. That
compares with an industry average of one failure in every ten
launches.
Our growing financial success received close and welcome
attention in 1993. Less well known is our surging technological
leadership, and our progress in total quality measures. We won
almost $400 million in government-funded R&D contracts in 1993, a
23% increase over 1992. That includes winning 31 out of the 33
important competitions involving MDC. Our "Phantom Works" in
St. Louis is doing pioneering work which combines advanced
product technologies with advanced production methods.
[TEXT IN THE RIGHT MARGIN: "Ours is a here-we-stand strategy.
It is based on a unique set of strengths as an aerospace
company."]
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MDC made history in 1993 when the DC-X Delta Clipper
Experimental rocket rose from the New Mexico desert, hovered,
moved laterally, and landed safely under its own power. The
development of the new E/F model of the F/A-18 Hornet continued
on-cost, on-schedule, and on-performance. Furthermore, the
Clinton Administration's "Bottom Up Review" of U.S. defense
requirements for the post-Cold War world reaffirmed the F/A-18
E/F as the primary Navy combat aircraft for the foreseeable
future.
We continued on-cost, on-schedule, and on-performance with
the development of the MD-90 jetliner. The MD-90 and our new
super-quiet MD Explorer helicopter are moving toward FAA
certification at the end of 1994.
We also made great strides in 1993 in our total quality
efforts. Across MDC, high-performance teams are reducing cycle
times, improving processes, cutting costs, and raising quality.
Every major unit of the corporation has achieved significantly
higher scores in annual Baldrige assessments.
1993 FINANCIAL PERFORMANCE
At the outset of 1993, MDC could be fairly described as a
highly leveraged company. By the end of the year, our debt was
down to a normal level for a company in our business.
In 1993 we reduced aerospace debt by 41%, or $1.1 billion.
The debt-to-equity ratio for our aerospace segments stood at 0.52
at year end -- down from 1.01 at the end of 1992. That is the
lowest the debt ratio has been since 1987.
MDC did not have to sell the family silver, as it were, to
pay the mortgage. The great preponderance of the cash used to
reduce debt -- about $900 million -- was generated from aerospace
operations -- rather than divestitures. That included a first-
time, large positive cash flow from our new MD-11 commercial
jetliner program.
LEAN AND SMART
Our strong financial results in 1993 reflect comprehensive
cost control measures initiated in 1990 -- at a time when we were
experiencing cash flow difficulties as a result of concurrent
problems in four development programs. In retrospect, the crisis
in 1990 was a blessing in disguise in terms of timing. Ahead of
other aerospace companies, we commenced a series of strong
actions to reduce cost structures and make better and more
creative use of all of our resources.
Since mid-1990, we have reduced our workforce by
approximately 65,000 people, or 48%; vacated or begun to vacate
facilities in California, Ohio, and Oklahoma; and restructured
our businesses.
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Across the corporation, we have reduced inventory, overhead,
and rework. In addition to rigorous cost controls, we have
achieved better results by break-through thinking at many levels.
Take the development of the new E/F model of the F/A-18
Hornet. According to an old joke in the aerospace industry, an
advanced aircraft is "500,000 parts flying in close formation."
Aerospace engineers sometimes boast of the hundreds of thousands
of parts and the miles and miles of wiring that go into an
aircraft. They take pride in the complexity of the product. But
multi-disciplinary teams responsible for carrying out the work on
every major assembly and subassembly in the F/A-18 E/F program
have a different mindset. One of their objectives is to reduce
the parts count. And to develop an aircraft that is less
complicated and less costly to manufacture.
While the F/A-18 E/F will be substantially larger and much
more capable than earlier models of the Hornet, it will have
about 30% fewer structural parts. Fewer parts means less
tooling, less inventory, fewer suppliers, less paperwork, and
less time in manufacture and assembly. From the customer's point
of view, fewer parts mean an aircraft that weighs less, is easier
to maintain, easier to upgrade, more durable -- and lower priced.
A critical element in an effective war on costs is good
communications and constant sharing of information -- within the
company, and between the company and its customers and suppliers.
And this is another area in which we are breaking through old
ways of thinking. Since 1992, we have established fourteen
senior-level teams that directly involve DoD customer
representatives in documenting and improving our processes.
Similarly, we have made our suppliers a more integral part
of our business through active sharing of computerized
information systems and much earlier involvement in product
design. Through our supplier certification program, we have
forged close working partnerships with over 300 high-performing
suppliers -- and entrusted an increasing share of the workload to
them.
THE ROAD AHEAD
I am often asked: Why hasn't MDC tried to diversify -- or to
"convert" from what it does now into whole new lines of non-
defense business? There are two answers to that question.
First, I regard diversification as an inherently weak
strategy. We became the nation's largest defense contractor by
becoming a highly optimized organization. For a big company to
convert to a different business may be compared to a world
champion golfer switching to competitive tennis. The golfer may
become a very good tennis player, but it is doubtful that he or
she will be able to make a living by competing at the highest
levels of professional tennis.
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As a matter of fact, airframe companies have made numerous
highly publicized attempts to diversify in the past. With almost
no exceptions, the results (including our own attempts at
diversification) have been dismal.
Second, there are ample opportunities for us within the
aerospace industry. We have not come to the end of the road --
not by a long shot. Though we now face major downturns in
defense and airliners, neither market will remain down forever.
It is impossible to conceive of a growing world economy that does
not (over time) include a vibrant and growing aerospace industry.
Nor is it conceivable that the world will soon be magically
transformed into a safe place not requiring a strong U.S. defense
capability.
Furthermore, MDC expects to win a growing share of the still
large and critically important U.S. defense market. In a
shrinking market, we have the advantage of having programs
already in production and readily upgradable. In addition, our
combat aircraft sales to allied nations, which have averaged $1
billion per year over the past three years, should be growing in
the next few years as a result of a string of recent successes in
international competitions.
In summary, MDC is strongly positioned as one of the handful
of clear winners in the continuing shake-out within the defense
industry.
In MDC's commercial airliner business, there will be further
reductions in deliveries and revenues in 1994. But we have
learned to operate efficiently at extremely low rates of
production. And our reputation with airline customers is
steadily improving as a result of a sustained period of on-time
deliveries of high-quality products. We expect another strong
cyclical upturn in the airliner market with increased deliveries
beginning in 1996 or 1997 -- and lasting into the early 21st
century. As of the end of 1993 we still had firm orders assuring
adequate production rates through 1995. We will need to land new
orders for MD-11s in 1994 to bolster our deliveries in 1996 and
beyond.
While MDC competes in only two of the five principal
segments of the large commercial aircraft market served by Boeing
and Airbus, we are strong competitors in those two segments. Our
MD-80 twinjets are in service with almost 60 airlines and our MD-
11 long-range trijet is in service with 17 airlines around the
world.
[TEXT IN THE RIGHT MARGIN: "MDC is strongly positioned as one of
the handful of clear winners in the continuing shake-out within
the defense industry."]
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We intend to build upon our franchise with the world's
airlines by continuing to expand and grow within the segments of
the market we now serve (see p.15 for some of our product
expansion plans).
During 1993 we continued to explore the feasibility of
converting Douglas Aircraft into an international alliance owned
by several companies around the world with MDC as the majority
owner. If achieved, the new company would have the financial
resources, low cost structure, and worldwide presence to compete
across the board with Boeing and Airbus.
In the recent past, our low stock price, low earnings, and
heavy debt load dictated defensive strategies aimed at limiting
risk and maximizing cash flow. Our greatly improved financial
condition now permits us to take a more aggressive approach. As
we enter 1994, we are in position to consider additional
investments, including acquisitions, to further strengthen our
core businesses. With our strong positive cash flow, we are
committed in the coming years to maximizing value for our
shareholders -- through careful reinvestment in our core
businesses, stock repurchases, or increasing direct returns to
shareholders.
We have entered a new period that will be characterized by
financial and program strength, better employment stability, and
sustained future success. That is a tribute to the hard,
effective work of my many thousands of teammates - and their
willingness to embrace change.
Two things are certain: Our future is aerospace, and the
future is bright.
/s/ John F. McDonnell
Chairman and Chief Executive Officer
February 17, 1994
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LAW DEPARTMENT
STEVEN N. FRANK
Vice President
Associate General Counsel &
Assistant Secretary
(314) 234-8091
March 18, 1994
Securities and Exchange Commission
Operations Center
Stop 0-7
6432 General Green Way
Alexandria, VA 22312
Re: Letter from McDonnell Douglas Corporation's (the
Company) Chairman and Chief Executive Officer
Ladies and Gentlemen:
Enclosed (via EDGAR transmission) please find the letter to
all shareholders and teammates (i.e., employees) from the
Company's Chairman and Chief Executive Officer that is included
in the Company's 1993 Annual Report (the "Letter"). While we do
not believe that the Letter constitutes proxy solicitation
material we are nevertheless filing it pursuant to Rule 16a-6(b).
Such filing, however, shall not be deemed an admission that the
Letter constitutes solicitation materials. If you have any
questions regarding the enclosed material, please call me at
(314) 234-8091 or Eric R. Fencl at (314) 232-2158.
Very truly yours,
/s/ Steven N. Frank
Steven N. Frank
cc: New York Stock Exchange (5 copies of enclosure)
Pacific Stock Exchange (4 copies of enclosure)
