<PAGE> 1 [HARD COPY PG.1]
10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission file number 1-3685
----------------------------------------------
MCDONNELL DOUGLAS CORPORATION
- - -----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 43-0400674
- - ---------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Post Office Box 516, St. Louis, MO 63166
- - -----------------------------------------------------------------------
(Address and zip code of principal executive offices)
314-232-0232
- - -----------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 each 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 .
------ ------
========================================================================
Common shares outstanding at April 30, 1994 - 39,506,895 shares
<PAGE> 2 [HARD COPY PG. 2]
TABLE OF CONTENTS
- - -----------------
Hard Copy
PART I FINANCIAL INFORMATION Page No.
--------------------- -------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS 3
CONSOLIDATED BALANCE SHEET 4
CONSOLIDATED STATEMENT OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-25
PART II OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
<PAGE> 3 [HARD COPY PG.3]
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of dollars, except share data)
THREE MONTHS ENDED MARCH 31 1994 1993
-------- --------
(unaudited)
Revenues $ 2,953 $ 3,617
Costs and expenses:
Cost of products, services and rentals 2,420 3,115
General and administrative expenses 169 186
Research and development 80 72
Interest expense:
Aerospace segments 42 11
Financial services and other segment 32 33
-------- --------
Total Costs and Expenses 2,743 3,417
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 210 200
Income taxes 76 21
-------- --------
EARNINGS FROM CONTINUING OPERATIONS 134 179
Discontinued operations, net of income taxes - 37
-------- --------
NET EARNINGS $ 134 $ 216
======== ========
EARNINGS PER SHARE:
Continuing operations $ 3.41 $ 4.58
Discontinued operations - .93
-------- --------
$ 3.41 $ 5.51
======== ========
DIVIDENDS DECLARED PER SHARE $ .35 $ .35
======== ========
- - --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4 [HARD COPY PG. 4]
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED BALANCE SHEET
(Millions of dollars and shares)
MAR 31 DEC 31
1994 1993
-------- --------
(unaudited)
ASSETS
Cash and cash equivalents $ 252 $ 86
Accounts receivable 548 555
Finance receivables and property on lease 2,265 2,357
Contracts in process and inventories 5,940 5,774
Property, plant and equipment 1,715 1,750
Other assets 1,477 1,504
--------- ---------
Total Assets $ 12,197 $ 12,026
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 2,297 $ 2,190
Accrued retiree benefits 1,368 1,388
Income taxes 637 574
Advances and billings in excess of
related costs 1,374 1,251
Notes payable and long-term debt:
Aerospace segments 1,404 1,625
Financial services and other segment 1,503 1,513
--------- ---------
8,583 8,541
Minority Interest 73 72
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1994, 39.4 shares; 1993, 39.3 shares 39 39
Additional capital 342 335
Retained earnings 3,164 3,043
Translation of foreign currency statements (4) (4)
--------- ---------
3,541 3,413
--------- ---------
Total Liabilities and Shareholders' Equity $ 12,197 $ 12,026
========= =========
- - --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5 [HARD COPY PG. 5]
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
THREE MONTHS ENDED MARCH 31 1994 1993
-------- --------
(unaudited)
OPERATING ACTIVITIES
Earnings from continuing operations $ 134 $ 179
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 71 70
Gain on sale of assets (20) (4)
Pension income (33) (35)
Non-cash retiree health care costs 4 9
Change in operating assets and liabilities 170 (91)
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 326 128
INVESTING ACTIVITIES
Property, plant and equipment acquired (31) (20)
Finance receivables and property on lease 55 17
Proceeds from sale of discontinued business - 181
Proceeds from sale of assets 23 32
Other 35 (25)
------- -------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 82 185
<PAGE> 6
THREE MONTHS ENDED MARCH 31 1994 1993
(Continued) -------- --------
(unaudited)
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) (7) 79
Debt having maturities more than 90 days:
New borrowings 126 -
Repayments (350) (368)
Payments from ESOP - net - 16
Proceeds of stock options exercised 2 1
Dividends paid (13) (13)
------- -------
NET CASH USED BY FINANCING
ACTIVITIES (242) (285)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 166 28
Cash and cash equivalents at beginning of year 86 82
------- -------
Cash and cash equivalents at end of period $ 252 $ 110
======= =======
- - -------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7 [HARD COPY PG. 6]
MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(Millions of dollars)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect all
adjustments (which comprise only normal recurring accruals) necessary, in the
opinion of management, for a fair presentation of the financial position, the
results of operations and the cash flows for the interim periods presented.
The statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in McDonnell Douglas Corporation's
(MDC) Annual Report to Shareholders for the year ended December 31, 1993.
2. Discontinued Operations
In March 1993 MDC sold its McDonnell Douglas Information Systems International
(MDISI) business. The sale of MDISI resulted in a gain of $37 million, net of
income taxes of $25 million.
3. Accounts Receivable
In August 1990, MDC entered into a three-year agreement with a financial
institution to sell a participation interest in a designated pool of government
and commercial receivables, with limited recourse, in amounts up to $300
million. A one-year replacement agreement with another financial institution
for up to $300 million was completed during February 1994. Under the
agreements, participation interests in new receivables have been and will
continue to be sold as previously sold amounts are collected. The
participation interests are sold at a discount which is included in general and
administrative expenses in the consolidated statement of earnings. Under both
agreements, MDC has and will continue to act as an agent for the purchaser by
performing record keeping and collection functions.
During the negotiation of the replacement agreement, MDC continued to sell, and
the original financial institution continued to purchase, participation
interests. At March 31, 1994 and December 31, 1993, accounts receivable are
net of $79 million and $100 million, respectively, representing receivable
interests sold.
<PAGE> 8 [HARD COPY PG. 7]
4. Contracts in Process and Inventories
Contracts in Process and Inventories consist of the following:
March 31 December 31
1994 1993
----------- -----------
Government contracts in process $ 6,563 $ 6,347
Commercial products in process 4,188 4,005
Material and spare parts 864 873
Progress payments to subcontractors 1,321 1,362
Progress payments received (6,996) (6,813)
-------- --------
$ 5,940 $ 5,774
======== ========
Substantially all government contracts in process (less applicable progress
payments received) represent unbilled revenue and revenue which is currently
not billable.
The Navy on January 7, 1991, notified MDC and General Dynamics Corporation (the
Team) that it was terminating for default the Team's contract for development
and initial production of the A-12 aircraft. On June 7, 1991, the Team filed a
legal action to contest the Navy's default termination, assert its rights to
convert the termination to one for "the convenience of the Government," and
obtain payment for work done and costs incurred on the A-12 contract, but not
paid to date. The Navy has agreed to continue to defer repayment of $1.335
billion alleged to be due with interest from January 7, 1991, from the Team as
a result of the termination for default of the A-12 program. The agreement
provides that it will remain in force until the dispute as to the type of
termination is resolved by the pending litigation in the United States Court of
Federal Claims or negotiated settlement, subject to review by the U.S.
Government annually on December 1, to determine if there has been a substantial
change in the financial condition of either Team member such that deferment is
no longer in the best interest of the Government. The Government, which
extended the December 1, 1993 review beyond the time to which MDC and GD
agreed, has not advised the contractors of the results of that review. On
February 15, 1994, however, the U.S. Court of Federal Claims entered an Order,
deferring rulings on the merits of the legal action to July 21, 1994, to enable
the parties to pursue settlement negotiations, among other things, conditioned
on an undertaking made by the Government that it would not seek to terminate
the deferment agreement in the interim. MDC firmly believes it is entitled to
continuation of the deferment agreement in accordance with its terms.
<PAGE> 9
At March 31, 1994, Contracts in Process and Inventories include approximately
$516 million of recorded costs on the A-12 contract, against which MDC has
established a loss provision of $350 million. The amount of the provision,
which was established in 1990, is based on MDC's belief that the termination
for default will be converted to a termination for convenience, that the Team
will recover a minimum of $250 million in claims, that there is a range of
reasonably possible results on termination for convenience and that it is
prudent to provide for what MDC believes is the upper range of possible loss on
[HARD COPY PG. 8]
termination for convenience, namely $350 million. In MDC's opinion, this loss
provision continues to provide adequately for the reasonably possible reduction
in value of A-12 net contracts in process and nonreimbursed supplier
termination payments as of March 31, 1994, as a result of termination of the
contract for the convenience of the Government. MDC has been provided with an
opinion of outside counsel that the Government's termination of the contract
for default is contrary to law and fact, that the default is excusable, that
the rights and obligations of MDC are the same as if the termination had been
issued for the convenience of the Government and that, subject to prevailing
that the termination is properly one for the convenience of the Government, the
probable recovery on the claims is not less than $250 million.
If, contrary to MDC's belief, the termination is not deemed to be for the
convenience of the Government, it is estimated that an additional loss would be
incurred which could amount to approximately $1.2 billion.
In 1984, MDC entered into a full scale development letter contract, containing
a not-to-exceed price, for the conversion of the land-based British Hawk
aircraft with minimal change into a carrier-capable Navy aircraft, designated
the T-45A, and to provide training systems. The final negotiated firm fixed
price contract was agreed to in 1986. As a result of flight testing in late
1988, the Navy indicated that changes to the T-45 aircraft were necessary to
meet its operational desires. MDC advised the Navy that incorporation of the
requested improvements into the aircraft configuration would entitle it to
additional compensation. MDC proceeded with the improvements, and their cost
has increased the cost at completion for the development and low rate initial
production contracts to a point where it exceeds the fixed price of such
contracts. At March 31, 1994, Contracts in Process and Inventories include
costs for the related contracts of $160 million. Realization of this amount is
dependent in part on (i) costs to complete these contracts not exceeding
present estimates and (ii) realization of expected amounts of recovery on
claims filed with respect to these contracts. MDC believes it is entitled to
<PAGE> 10
an equitable adjustment in contract price and schedule and other appropriate
relief for such improvements and submitted claims to the Navy during 1990 for
such relief. During 1993 the Navy denied these claims. MDC has appealed the
Navy's decision to the Armed Services Board of Contract Appeals. The estimated
revenue of the contracts at completion includes $225 million from expected
recovery on such claims filed with the Navy. MDC's belief as to expected
claims recovery is supported by an opinion of outside counsel provided to MDC
that there are reasonable factual and legal bases for the current claims
against the Navy and that, based on MDC's labor and cost accounting records and
computations, it is probable that MDC will recover in excess of $225 million on
the claims. Additionally, if MDC were not to recover a portion of the claims
amount related to work for which a subcontractor is responsible, MDC, supported
by the opinion of outside counsel, believes the subcontractor would be legally
liable for such costs. If revenue from such claims is not realized, a loss
provision of approximately $152 million would be required on the related
development and low rate initial production contracts.
[HARD COPY PG. 9]
Resolution of claims on the A-12 and T-45 contracts will involve negotiation
with the Government or litigation, and the ultimate realization and receipt of
future revenue may vary from current estimates.
In May 1993, a Defense Acquisition Board (DAB) initiated by the Under Secretary
of Defense for Acquisitions began a review of the C-17 program in an effort to
resolve outstanding issues and to make recommendations regarding the C-17's
future. In connection with the review, MDC provided data and participated in
numerous discussions. The Department of Defense (DoD), in conjunction with the
DAB, submitted a proposal to MDC in December 1993 for a business settlement of
a variety of issues concerning the C-17 program. In January 1994, MDC and the
DoD agreed to such a settlement. MDC and the Air Force are developing plans
and contractual modifications and agreements to implement the business
settlement; MDC has begun to implement certain aspects of the settlement
pending congressional authorization and appropriations expected to be completed
during 1994.
The settlement covered many issues open as of the date of the settlement,
including the allocation of sustaining engineering costs to the development and
production contracts, the sharing of flight test costs over a previous level,
and the resolution of claims and of performance/specification issues. Terms of
the settlement also stipulated that MDC will expend funds in an effort to
achieve product and systems improvements.
<PAGE> 11
During the fourth quarter of 1993, MDC recorded a $450 million pre-tax charge
associated with the business settlement arranged with the DoD and with cost
growth on the development and initial production lots. Based upon further
definition and pricing of issues in the settlement, in the first quarter of
1994, MDC reduced cost estimates associated with the settlement. At the same
time, MDC recognized additional cost growth for work yet to be completed in the
development and initial production lots. The $450 million provision recognized
at the end of 1993 was increased by $5 million during 1994 to cover net cost
growth.
At March 31, 1994, Contracts in Process and Inventories include incurred costs
totaling $696 million for the fixed price type contracts for development and
first ten initial production C-17 military transport aircraft for the Air
Force. The estimated value of these contracts at completion includes $208
million of claim revenues expected to be collected as part of the settlement.
MDC's loss provision of $455 million is an offset to the Contracts in Process
and Inventories balance, resulting in a $241 million net balance at March 31,
1994 associated with these contracts.
During 1991, MDC combined the C-17 contracts for the development and first ten
initial production aircraft for financial accounting purposes. The estimated
costs at completion of the combined C-17 contracts, excluding general and
administrative costs and other period costs, exceed the estimated revenue of
the combined contracts. During 1992, MDC recorded loss provisions in the
[HARD COPY PG. 10]
amounts by which estimated costs on the combined contracts, excluding general
and administrative costs and other period costs, exceeded estimated revenues
from the remaining work on the contracts.
The Air Force continues to reduce payments to MDC under the C-17 contracts,
largely due to the DoD projecting production costs at completion in excess of
MDC's estimate at completion. In addition, during 1992 the Air Force
questioned MDC's segregation of certain C-17 engineering costs between full
scale engineering development (FSED) and production lots. Pending resolution
of the segregation question, for progress payment purposes the Air Force has
reclassified to FSED a substantial portion of sustaining engineering costs
applied by MDC to production lots. As of March 31, 1994, the Air Force had
withheld approximately $282 million from MDC's payment requests on the C-17
contracts principally as a result of higher cost estimates and the sustaining
engineering reclassification. The portion of this amount associated with the
sustaining engineering reclassification is $52 million, and is provided for in
the C-17 business settlement.
<PAGE> 12
MD-11 production and tooling costs are charged to cost of sales based upon the
estimated average unit cost for the program. The estimated average unit costs
are based upon cost estimates of a 301 aircraft program. The costs incurred in
excess of the estimated average unit cost are deferred to be recovered by
production and sale of lower-than-average cost units. Commercial products in
process for the MD-11 program at March 31, 1994, includes net deferred
production costs of $1.341 billion and unamortized tooling of $259 million.
These amounts are to be applied to the remainder of the 301 aircraft pool.
Under the current costing percentage, an estimated $1.1 billion of current and
future deferred costs will be recovered from firm orders received after March
31, 1994.
As of March 31, 1994, MDC had delivered 115 MD-11 aircraft and has 57 aircraft
on firm order. In addition, MDC has 101 options and reserves representing
potential future orders for the MD-11. Estimated proceeds from the undelivered
aircraft in the pool exceed the production and tooling costs in inventory at
March 31, 1994, plus the estimated additional production and tooling costs to
be incurred. However, if fewer than 301 MD-11 aircraft are sold, if the
proceeds from future sales of MD-11 aircraft are less than currently estimated,
or if the costs to complete the program exceed current estimates, substantial
amounts of unrecoverable costs may be charged to expense in subsequent fiscal
periods. MDC believes that the slowdown in MD-11 orders is temporary and that
it will sell in excess of 301 MD-11 aircraft over the life of the program.
5. Income Taxes
In November 1991, MDC settled tax years 1977-1985 with the Internal Revenue
Service (IRS). The settlement resulted in net earnings of $32 million in 1991
and a substantial future obligation payable upon completion of the 1986-1989
IRS audit. During 1993, this obligation was reduced by the resolution with the
IRS of certain accounting method and tax credit issues. The resolution of
these issues for the 1986-1989 tax period resulted in net earnings of $158
[HARD COPY PG. 11]
million in 1993, of which $85 million was recognized in the first quarter of
1993. Excluding the after-tax benefit of the related reduction in accrued
interest, the resolution of such issues resulted in a $75 million federal tax
benefit for the year 1993, of which $53 million was recognized in the first
quarter of 1993. Payment of the tax and interest for the 1986-1989 tax period
obligation approximates $250 million and is expected to be made during mid
1994. Taxes and interest related to this payment have been provided.
<PAGE> 13
6. Debt & Credit Arrangements
Aerospace Credit Agreements
At March 31, 1994, MDC has two revolving credit agreements under which MDC may
borrow up to $1.4 billion through April 1995. Under the credit agreements, the
interest rate, at the option of MDC, is a floating rate generally based on a
defined prime rate, a fixed rate related to either the London interbank offered
rate (LIBOR) or a certificate of deposit rate, or as quoted under a competitive
bid or a negotiated rate. A fee is charged on the amount of the commitments.
The agreements contain restrictive covenants relating to net worth (as
defined), liquidity (as defined), indebtedness, customer financing, fixed asset
dispositions and subsidiary indebtedness. There are no amounts outstanding
under the credit agreements at March 31, 1994.
In August 1992, MDC commenced an offering of up to $550 million of its medium-
term notes due from and exceeding nine months from the date of issue. The
interest rate applicable to each note and certain other variable terms are
established at the date of issue. As of March 31, 1994, MDC has issued $132
million of medium-term notes at rates ranging from 5.3% to 7.4% due in 1994
through 1996. During 1993, MDC issued $200 million of 8.25% senior debt
securities due on July 1, 2000. As of March 31, 1994, $218 million of
securities registered under the shelf registration remain unissued.
Financial Services Credit Agreements
At March 31, 1994, McDonnell Douglas Finance Corporation (MDFC) has a revolving
credit agreement under which it can borrow a maximum of $100 million through
January 31, 1995. The maximum amount available to MDFC is reduced quarterly by
$25 million through January 1995. The interest rate, at the option of MDFC, is
either a floating rate generally based on a defined prime rate, a fixed rate
related to either LIBOR or a certificate of deposit rate, or as quoted under a
competitive bid. There are no amounts outstanding under the revolving credit
agreement at March 31, 1994.
At March 31, 1994, McDonnell Douglas Financial Services Corporation (MDFS),
parent company of MDFC, and MDFC have a revolving credit agreement under which
MDFC may borrow a maximum of $45 million, reduced by MDFS borrowings under this
same agreement. Under this agreement, MDFS can borrow a maximum of $6 million.
The interest rate, at the option of MDFC, is either a floating rate generally
based on a defined prime rate or fixed rate related to LIBOR. There are no
outstanding borrowings under this agreement at March 31, 1994.
<PAGE> 14 [HARD COPY PG. 12]
The provisions of various credit and debt agreements require MDFC to maintain a
minimum net worth, restrict indebtedness, and limit MDFC's cash dividends and
other distributions.
In June 1993, MDFC commenced an offering of up to $250 million of its general
term notes and in November 1993 an offering of up to $250 million of its medium-
term notes. The interest rate applicable to each note and certain other
variable terms are established at the date of issue. As of March 31, 1994,
MDFC has issued $87 million of general term notes at rates ranging from 5.3% to
8.4% due in 1995 through 2008, and $140 million of medium-term notes at rates
ranging from 4.6% to 6.8% due in 1995 through 1998.
7. Commitments and Contingencies
The marketing of commercial aircraft at times will result in agreements to
provide or guarantee long-term financing of some portion of the delivery price
of aircraft, to lease aircraft, or to guarantee customer lease payments, tax
benefit transfers or aircraft values. At March 31, 1994, $263 million in
guarantees are outstanding, and commitments of $171 million are outstanding to
lease aircraft, accept notes in payment for aircraft, or guarantee financing
for customers for ordered but undelivered aircraft. In addition, MDFS has
commitments to provide leasing and other financing in the aggregate amount of
$57 million at March 31, 1994.
MDC is a party to a number of proceedings brought under the Comprehensive
Environmental Response, Compensation and Liability Act, commonly known as
Superfund, or similar state statutes. MDC has been identified as a potentially
responsible party (PRP) at 28 sites. Of these, MDC believes that it has de
minimis liability at 19 sites, including nine sites at which it believes that
it has no future liability. At the nine sites at which MDC's liability is not
considered to be de minimis, either final or interim cost sharing agreements
have been effected between the cooperating PRPs, although such agreements do
not fix the amount of cleanup costs which the parties will bear. In addition,
MDC is remediating, or has begun environmental engineering studies to determine
cleanup requirements, at certain of its current operating sites or former sites
of industrial activity. At March 31, 1994, the accrued liability for
environmental cleanup matters at Superfund sites and on MDC's current and
former operating sites is $28 million.
A number of legal proceedings and claims are pending or have been asserted
against MDC including legal proceedings and claims relating to alleged injuries
to persons associated with the disposal of hazardous waste. A substantial
portion of such legal proceedings and claims is covered by insurance. MDC
<PAGE> 15
believes that the final outcome of such proceedings and claims will not have a
material adverse effect on MDC's financial position.
See Note 4, Contracts in Process and Inventories, for a discussion of certain
risks on fixed price development contracts including the termination on January
7, 1991, by the Navy of a contract with MDC and General Dynamics Corporation
for the development and initial production of the A-12 aircraft.
[HARD COPY PG. 13]
8. Investment in Financial Services Subsidiary
The condensed financial data presented below have been summarized from the
consolidated financial statements of MDFS. Prior year amounts have been
reclassified to conform to the current year presentation.
Three Months Ended March 31 1994 1993
-------- --------
Earned income $ 49 $ 48
Costs and expenses 37 43
Net earnings 7 3
Dividends 6 -
9. Supplementary Payment Information
Three Months Ended March 31 1994 1993
-------- --------
Interest paid $ 63 $ 99
Income taxes paid (refunded) 3 (45)
10. Earnings Per Share
Earnings per share computations are based upon the weighted average common
shares outstanding during the three-month period which were 39,352,975 in 1994
and 39,204,117 in 1993.
<PAGE> 16 [HARD COPY PG. 14]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Notes to Consolidated Financial Statements, page 6, and with Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Audited Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing in MDC's 1993 Annual Report to Shareholders.
Financial Condition
General. MDC's financial statements include McDonnell Douglas Financial
Services Corporation (MDFS) and McDonnell Douglas Realty Company (MDRC) on a
fully consolidated basis. MDFS is the parent company of McDonnell Douglas
Finance Corporation (MDFC), a diversified financial services company that has a
capital structure significantly different from MDC's other business segments.
The following table allocates MDC's capital structure at March 31, 1994 and
December 31, 1993 between its aerospace segments (including aerospace-related
obligations of MDRC in the amount of $107 million as of both March 31, 1994 and
December 31, 1993) and its financial services and other segment, which is
comprised principally of MDFS, MDFC and MDRC. The debt of MDFS, MDFC and MDRC
is non-recourse to MDC. See also Note 6, Debt and Credit Arrangements, page
11.
Financial
Services
Aerospace and Other
March 31, 1994 Segments Segment Total
- - -------------- --------- --------- -------
(Dollar amounts in millions)
Debt $ 1,404 $ 1,503 $ 2,907
Equity 3,237 304 3,541
------- ------- -------
$ 4,641 $ 1,807 $ 6,448
======= ======= =======
Debt-to-equity ratio .43 4.94
======= =======
<PAGE> 17
Financial
Services
Aerospace and Other
December 31, 1993 Segments Segment Total
- - -------------- --------- --------- -------
(Dollar amounts in millions)
Debt $ 1,625 $ 1,513 $ 3,138
Equity 3,123 290 3,413
------- ------- -------
$ 4,748 $ 1,803 $ 6,551
======= ======= =======
Debt-to-equity ratio .52 5.22
======= =======
[HARD COPY PG. 15]
The aerospace segments' debt-to-equity ratio decreased during 1994 as a result
of a $221 million reduction in aerospace debt and improved earnings. MDC
generated positive cash flow from operations, a portion of which was used to
reduce aerospace debt during the first three months of 1994. Cash and cash
equivalents from aerospace operations increased by $215 million during the
first quarter to $230 million at March 31, 1994.
Cash provided by operations on a consolidated basis during the first three
months of 1994 and 1993 was $326 million and $128 million, respectively. Cash
provided by aerospace operations of over $430 million in the first quarter of
1994 exceeded the 1993 first quarter amount of $147 million.
Commercial Aircraft. MDC delivered 4 MD-80 twin jets and 3 MD-11 trijets in
the first quarter of 1994 as compared to 11 MD-80 twin jets (including two
under lease arrangements) and 9 MD-11 trijets in the first quarter of 1993.
The weakness in the commercial aircraft market evidenced by the reduction in
deliveries is expected to continue during the remainder of 1994. Current
commercial aircraft production plans anticipate MD-80 deliveries in the low
20's and MD-11 deliveries around 20 in 1994. Aircraft delivery delays or
contract defaults by commercial aircraft customers not anticipated by MDC could
have a negative short-term impact on cash flow. Aggressive cost reduction
actions have been undertaken in the commercial aircraft segment in an effort to
match costs with the production rate. Employment in the commercial aircraft
segment decreased from 35,418 at December 31, 1991 to 12,307 at March 31, 1994
reflecting cost reduction efforts and scheduled production rate declines.
C-17 Globemaster III. During the past several years, MDC increased its cost
estimate at completion for the C-17 Globemaster III contracts for the full scale
<PAGE> 18
engineering development and first ten initial production aircraft. The 1993
charge reflected the estimated impact of the C-17 settlement with the DoD and
other increases in the estimated remaining cost on the development and initial
production contracts. The 1994 first quarter net charge of $5 million included
reduced cost estimates associated with the C-17 settlement and additional cost
growth for work yet to be completed in the development and initial production
lots. See Note 4, Contracts in Process and Inventories, page 7, and Results of
Operations, page 16.
A-12. MDC and General Dynamics Corporation (GD) have filed a legal action to
contest the Navy's termination for default on the A-12 program. The Navy has
agreed to continue to defer repayment of $1.335 billion alleged to be due, with
interest from January 7, 1991, from MDC and GD as a result of the termination
for default of the A-12 program. The agreement provides that it will remain in
force until the dispute as to the type of termination is resolved by the
pending litigation in the U.S. Court of Federal Claims or negotiated
settlement, subject to review by the U.S. Government annually on December 1, to
determine if there has been a substantial change in the financial condition of
either MDC or GD such that deferment is no longer in the best interest of the
Government. The Government, which extended the December 1, 1993 review beyond
the time to which MDC and GD agreed, has not advised the contractors of the
[HARD COPY PG. 16]
results of that review. On February 15, 1994, however, the U.S. Court of
Federal Claims entered an Order, deferring rulings on the merits of the legal
action to July 21, 1994, to enable the parties to pursue settlement
negotiations, among other things, conditioned on an undertaking made by the
Government that it would not seek to terminate the deferment agreement in the
interim. MDC firmly believes it is entitled to continuation of the deferment
agreement in accordance with its terms. However, if the agreement is not
continued, MDC intends to contest collection efforts. If payments of the
deferred amount were required, such payments would have a material adverse
effect on MDC's cash flows. See Note 4, Contracts in Process and Inventories,
page 7.
Results of Operations
MDC revenues decreased 18% in the first quarter of 1994 to $2.953 billion, from
$3.617 billion in the first quarter of 1993. Revenues in the military aircraft
segment increased by 10%, while revenues in the commercial aircraft segment
decreased by 53% due to reduced commercial aircraft deliveries in 1994.
Revenues were also lower in the missiles, space and electronic systems segment
as a result of MDC's reduced role in the downsized Space Station program.
<PAGE> 19
Net earnings for the 1994 first quarter were $134 million compared with first
quarter 1993 earnings of $94 million, after excluding from 1993 a $37 million
after-tax gain on the sale of McDonnell Douglas Information Systems
International and an $85 million earnings increase resulting from the
resolution of income tax issues.
Operating earnings in the first quarter of 1994 in the military aircraft
segment were considerably higher than the comparable quarter in 1993 due to
improved earnings on the F/A-18 and C-17 programs. Despite substantially
reduced revenues, the commercial aircraft segment was marginally profitable in
this first quarter as a result of continuing reductions in overhead and
improvements in productivity. The missiles, space and electronic systems
segment had strong operating earnings during the quarter, although lower than
the record level achieved in 1993's first quarter. Increased 1994 first
quarter operating earnings in the financial services and other segment were
primarily due to a gain on the sale of property by MDRC.
Aerospace interest expense in the first quarter of 1994 was $42 million, down
from $63 million in 1993's first quarter after excluding from 1993 the reversal
of $52 million in interest associated with the resolution of tax issues with
the Internal Revenue Service. The lower interest expense reflects reduced
aerospace debt.
Income taxes were $76 million in the 1994 first quarter, an effective tax rate
of 36 percent. Taxes in 1993's first quarter were $21 million, or about 10
percent of pre-tax earnings from continuing operations. The 1993 tax provision
included the reversal of $53 million associated with the resolution of tax
issues with the Internal Revenue Service.
[HARD COPY PG. 17]
In light of declining defense spending and the continuing depressed condition
of the commercial aircraft business, reported financial information by segment
may not be indicative of MDC's future operating results.
<PAGE> 20
Three Months Ended
March 31
1994 1993
-------- --------
Revenues
Military aircraft $ 1,822 $ 1,658
Commercial aircraft 589 1,248
Missiles, space and electronic
systems 445 643
Financial services and other 93 66
-------- --------
Operating revenues 2,949 3,615
Non-operating income 4 2
-------- --------
Total Revenues $ 2,953 $ 3,617
======== ========
Earnings
Military aircraft $ 166 $ 99
Commercial aircraft 3 12
Missiles, space and electronic
systems 60 98
Financial services and other 30 6
-------- --------
Operating earnings from
continuing operations 259 215
Discontinued operations - 37
Corporate and other (7) (4)
Interest expense (42) (11)
Income taxes (76) (21)
-------- --------
Net Earnings $ 134 $ 216
======== ========
Military Aircraft
Operating revenues increased 10% in the first quarter of 1994 to $1.822 billion
from $1.658 billion in the first quarter of 1993, primarily due to increased
activity in the F/A-18 and C-17 programs. Revenues were also higher in the
AV-8B production program. These increases were partially offset by decreased
revenues for the F-15 and AH-64 Apache programs.
<PAGE> 21
Operating earnings of $166 million and $99 million were recorded in the first
quarter of 1994 and 1993, respectively. The increased earnings were primarily
from improved results in the F/A-18 and C-17 programs. The C-17 program was
profitable in 1994's first quarter as a result of work on current production
lots. The C-17 program was breakeven for the first quarter in 1993. The AV-8B
and T-45 also had increased earnings in the first quarter of 1994.
During the fourth quarter of 1993, MDC recorded a $450 million pre-tax charge
associated with the business settlement arranged with the DoD and with cost
growth on the development and initial production lots. Based upon discussion
[HARD COPY PG. 18]
with the Government to further define work scopes under the settlement, in the
first quarter of 1994 MDC reduced cost estimates associated with the
settlement. At the same time, MDC recognized additional cost growth for work
yet to be completed in the development and initial production lots. The $450
million provision recognized at the end of 1993 was increased by $5 million
during 1994 to cover net cost growth.
Commercial Aircraft
Operating revenues decreased 53% in the quarter to $589 million from $1.248
billion in the first quarter of 1993. The decrease in revenues reflects fewer
commercial aircraft deliveries and the overall softness in the commercial
aircraft market. MDC delivered 4 MD-80 twin jets in the first quarter of 1994
compared with 11 in the first quarter of 1993 (including two under lease
arrangements). MDC delivered 3 MD-11 trijets in the first quarter of 1994
compared with 9 in the first quarter of 1993.
As a result of continuing reductions in overhead and improvements in
productivity, the commercial aircraft segment was marginally profitable despite
the large decline in revenues. Operating earnings were $3 million in the first
quarter of 1994 compared to $12 million during the same period for 1993. In
addition to reduced revenues, the 1994 quarter also reflected increased
development expense over the 1993 period. In the prior year, development
expense was reduced by $24 million from funds received from risk-sharing
subcontractors.
<PAGE> 22
Missiles, Space and Electronic Systems
Operating revenues decreased to $445 million in the first quarter of 1994, from
$643 million in the same period in 1993. The 31% decrease was primarily due to
lower revenues on the Space Station program, but also included decreased
revenues on several electronic systems, missiles, and space transportation
programs.
Operating earnings decreased to $60 million in the first quarter of 1994 from
$98 million in the first quarter of 1993. The 1993 first quarter earnings
included a $20 million incentive award for achieving 100% launch success on a
Delta Global Positioning Satellite contract for the U.S. Air Force.
Financial Services
Operating earnings of the financial services and other segment increased to $30
million in the first quarter of 1994, from $6 million in the first quarter of
1993. The increase was primarily the result of a $20 million pre-tax gain on
the sale of commercial real estate by MDRC. The 1994 operating earnings were
also higher due to lower interest and debt expense, an operating expense of the
segment.
Discontinued Operations
The 1993 discontinued operations include the gain related to the sale of
McDonnell Douglas Information Systems International (MDISI).
[HARD COPY PG. 19]
Liquidity
As detailed in the following discussion, MDC believes that it has sufficient
sources of capital to meet anticipated needs. In addition to the discussion in
this section which follows, see also A-12, page 15, for a discussion of the A-
12 deferment status.
Debt and Credit Arrangements. MDC has in place a number of credit facilities
with banks and other institutions. At March 31, 1994, MDC had two revolving
credit agreements aggregating $1.4 billion, which are in effect until April 30,
1995. At March 31, 1994, there were no amounts outstanding under the current
agreements.
<PAGE> 23
In August 1992, MDC commenced an offering of up to $550 million aggregate
principal amount of its medium-term notes pursuant to a shelf registration
filed with the SEC. As of March 31, 1994, $218 million of securities
registered under the shelf registration remain unissued.
Amounts available under the revolving credit agreement and medium-term note
program may be accessed to meet cash requirements. Increased borrowings under
the revolving credit agreements may not be available in the event of a material
adverse change in the operations, financial condition, business or prospects of
MDC and its consolidated subsidiaries, taken as a whole.
On December 22, 1993, MDC notified holders of its 7.875% notes due January 15,
1997 that the $150 million issue would be redeemed on January 21, 1994. The
notes were redeemed at 100% of their principal amount plus accrued interest to
the redemption date.
In February 1994, MDC entered into a one-year agreement with a financial
institution to sell a participation interest in a designated pool of government
and commercial receivables, with limited recourse, in amounts up to $300
million. At March 31, 1994, accounts receivable are net of $79 million,
representing receivable interests sold pursuant to the agreement. The new
agreement replaced a similar agreement which had expired during 1993. See Note
3, Accounts Receivable, page 6.
On March 31, 1994, Moody's Investors Service Inc. raised its ratings of MDC and
MDFC debt. MDC's senior debt rating was raised to Baa-3 from Ba-2, while the
short-term debt rating for commercial paper was upgraded to Prime-3 from Not
Prime. Ratings on the senior debt of MDFC were increased to Baa-3 from Ba-1,
on subordinated debt to Ba-2 from Ba-3, and on its shelf registration to (P)
Baa-3 and (P) Ba-2 from (P) Ba-1 and (P) Ba-3, respectively.
During 1993, MDC received an initial investment grade rating from Duff & Phelps
Credit Rating Co. of BBB- to MDC's senior unsecured debt while MDFC received
ratings of BBB and BBB- to its senior unsecured debt and subordinated debt,
respectively. In March 1994, Duff & Phelps placed MDC on the Ratings Watch-Up
list for a possible upgrade of its debt ratings.
[HARD COPY PG. 20]
In September 1992, Standard and Poor's affirmed MDC's senior long-term debt
credit rating at BBB and short-term debt rating for commercial paper at A-3 and
removed MDC's ratings from CreditWatch.
<PAGE> 24
Taxes. MDC is currently under audit by the IRS for tax years 1986-1989.
Issues resolved in the IRS settlement of the tax years 1977-1985 will impact
results of the current IRS audit. During 1993, MDC resolved several issues
with the IRS related to prior years' taxes. The resolution of these issues
resulted in net earnings of $158 million in 1993. Excluding the after-tax
benefit of the related reduction in accrued interest, the resolution of such
issues resulted in a $75 million federal tax benefit. Payment of the tax and
interest for the 1986-1989 tax period obligation approximates $250 million and
is expected to be made during mid 1994. Taxes and interest related to the
payment for the 1986-1989 tax period have been provided. See Note 5, Income
Taxes, page 10.
C-17 Settlement. As previously discussed, during January 1994 MDC reached a
settlement with the DoD which covered a range of issues related to the C-17
military aircraft program. The settlement is subject to congressional
authorization and appropriations. The settlement is not expected to have any
significant adverse cash impact.
Foreign Military Product Purchases. The government of Saudi Arabia, MDC, the
U.S. Government, and other major U.S. defense contractors reached an agreement
in the first quarter of 1994 to restructure work and payments due in 1994 for
military product purchases by Saudi Arabia. Based on the agreement, delivery
of 72 F-15s has been rescheduled; MDC will now deliver one aircraft per month
for the first two years instead of two as originally planned. MDC does not
anticipate any significant adverse cash impact in 1994 as a result of this
restructuring plan.
Commercial Aircraft Financing. Difficulties in the commercial aircraft
industry may continue to result in airlines not taking deliveries of aircraft,
requesting changes in delivery schedules, or defaulting on contracts for firm
orders. Aircraft delivery delays or defaults by commercial aircraft customers
not anticipated by MDC could have a negative short-term impact on cash flow.
During recent years, several airlines filed for protection under the Federal
Bankruptcy Code or became delinquent on their obligations for commercial
aircraft. As indicated in Note 7, Commitments and Contingencies, page 12, MDC
also has outstanding guarantees of $263 million related to the marketing of
commercial aircraft. MDC does not anticipate that the existence of such
guarantees will have a material adverse effect upon its financial condition.
In addition, some existing commercial aircraft contracts contain provisions
requiring MDC to repurchase used aircraft at the option of the commercial
customers. In view of the current market conditions for used aircraft, MDC's
earnings and cash flows could be adversely impacted by the exercise of such
<PAGE> 25
options. However, it is not anticipated that the existence of such repurchase
obligations will have a material adverse effect on cash flow or financial
position.
[HARD COPY PG. 21]
MDC's outstanding guarantees include approximately $125 million related to MD-
11s operated by a foreign carrier. During March 1994, this carrier notified
its aircraft lenders and lessors that it was temporarily suspending payments
pending a restructuring of its financial obligations, and requested a
"standstill" agreement to protect itself from default remedies for sixty days.
MDC is currently participating in restructuring discussions with this airline
and the creditor group.
Financial Services. The financial services and other segment debt on March 31,
1994 was $1.503 billion, down from $1.513 billion at December 31, 1993. MDFS,
through its MDFC subsidiary, has traditionally obtained cash from operating
activities, placement of term debt, issuances of commercial paper, and the
normal run-off of its portfolio to fund its operations. In June 1993, MDFC
commenced an offering of up to $250 million of its unsecured senior debt
securities, its first debt offering since 1990, and in November 1993 commenced
accepting inquiries for the sale of its medium-term notes. As of March 31,
1994, approximately $87 million associated with the June offering and $140
million associated with the medium-term notes had been sold.
MDFC has also used asset sales and secured borrowings as sources of funding.
MDFC anticipates using asset sales and the normal run-off of its lease
portfolio as additional sources of liquidity in the future.
Business and Market Considerations
General
MDC is a major participant in both the defense and commercial aerospace
industries. MDC has a wide range of programs in production and development,
and is the world's leading producer of military aircraft. Since 1987, MDC has
been the largest U.S. defense contractor, based on the DoD's list of prime
contract awards and one of the larger NASA prime contractors based on prime
contracts awarded. MDC is one of the three principal manufacturers of large
commercial transport aircraft outside the former Soviet Union.
<PAGE> 26
Downsizing has had and continues to have a negative impact on the utilization
of MDC's facilities and capacity, and on labor costs due to inefficiencies
caused by the reassignment of workers as a result of layoffs. During 1992, MDC
consolidated its six government aerospace companies into one division and since
then has closed or announced plans to close several of its manufacturing
facilities to streamline operations and create greater efficiencies. MDC also
communicated its strategy to concentrate on its principal aerospace businesses,
and as a result sold non-core business assets to implement this strategy. As a
result of this strategy, MDC completed the sale of its VSS business unit in
January 1993, and in March 1993 sold its remaining information technology
business, MDISI, to a group of investors in the United Kingdom. MDC continues
to pursue a possible strategic alliance with organizations throughout the world
in order to support the commercial aircraft segment.
[HARD COPY PG. 22]
Employment levels were reduced 3% in the first three months of 1994 to 67,751
as a result of further streamlining of MDC's government aerospace companies and
reduced production on several major programs. MDC has continued its aggressive
asset management plan of reducing accounts receivable, inventory and work in
process levels, as well as reducing facilities commensurate with the levels of
ongoing business.
Discussions under the captions "Military Aerospace Business," "Commercial
Aircraft Business" and "Government Business Audits, Reviews and Investigations"
reflect developments during the first quarter of 1994 and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations in MDC's 1993 Annual Report to Shareholders.
Military Aerospace Business
C-17 Globemaster III. On February 8, 1994, the C-17 tenth production aircraft,
P-10, was delivered to the U.S. Air Force. P-10 was the fifth C-17 to enter
operational service with the Air Force. This aircraft represents the last of
the development and first ten initial production aircraft. The 11th production
aircraft (P-11) was delivered to the Air Force on April 8, 1994. P-11 is the
first of four C-17s in the Lot IV procurement buy authorized in the fiscal year
1992 defense budget. The next two C-17 production aircraft, P-12 and P-13, are
more than 90% complete and are scheduled for delivery in mid 1994.
In April 1994, the C-17 program successfully completed ground static
qualification testing. The static testing program subjected critical portions
of the airframe to forces greater than would ever be expected in actual
service. Completion of static testing on April 1, 1994 represents a major
<PAGE> 27
program achievement. On April 6, 1994, a C-17 transport successfully completed
its first design service lifetime or 30,000 hours of durability testing. The
one lifetime reached is the halfway point in a contract calling for durability
testing to two design service lifetimes or 60,000 hours. During durability
testing a C-17 airframe is subjected to simulated flight load and conditions
expected to be encountered in a lifetime of service with the U.S. Air Force.
For additional information regarding Government claims and inquiries on the C-
17 program, see also "Government Business Audits, Reviews and Investigations,"
page 24.
F-15 Eagle. In January 1994, Israel announced its intention to purchase 20 F-
15 Eagles, with an option for five more, to meet its future defense needs. On
April 11, 1994, President Clinton notified Congress of his approval for the
sale of 25 F-15s to Israel. The two governments are currently negotiating
contract specifications.
AV-8B Harrier. The U.S. Navy and MDC are currently negotiating a contract to
remanufacture existing Harrier's with new fuselages, APG-65 radar, night attack
avionics, higher thrust engines, and various other new systems. Upgrades for
four AV-8Bs have been funded in the fiscal year 1994 budget. The Navy plans to
[HARD COPY PG. 23]
refurbish 73 existing aircraft in coming years; however orders are subject to
approval each year.
EH 101. In the first quarter of 1994, MDC announced the formation of a
partnership with EH Industries to define a variant of the EH 101 helicopter to
meet U.S. military medium lift requirements. The U.S. version would be
manufactured in Mesa, Arizona with development starting in 1996 and production
in 1999.
Joint Direct Attack Munition (JDAM) Program. In April 1994 MDC received one of
two contracts the U.S. Air Force awarded to further develop designs for the
JDAM program. The $35 million contract awarded MDC is for Phase 1 of
engineering and manufacturing development of JDAM, a guidance unit that would
be attached to unguided bombs, turning them into precision-guided munitions.
In late 1995, the Air Force is scheduled to choose between MDC and its
competitor, Martin Marietta, for the Phase 2 engineering and manufacturing
development contract. The Department of Defense plans to buy approximately
74,000 JDAMs under a production program expected to continue well into the next
century with an estimated value of up to $6 billion.
<PAGE> 28
Tomahawk. In April 1994 MDC and Hughes Missiles Systems Company (Hughes)
submitted proposals to the Navy to become the exclusive contractor for the
Tomahawk Cruise Missile. The Government plans to select either MDC or Hughes
for FY94-98 missile production, depot maintenance and preflight/post flight
operations in addition to a requirement for the development of the Block IV
Tomahawk missile. The anticipated revenue from the production contract
covering a five year period is approximately $1.4 billion. A second contract
with an estimated value of $400 million will cover the development of the Block
IV All-Up-Round Tomahawk missile.
Delta. In April 1994, MDC signed a contract with Motorola's Satellite
Communications Division to launch the majority of the satellites needed to form
the global wireless IRIDIUMTM/SM Telecommunications network. Under the
contract, valued in excess of $400 million, MDC will launch eight Delta II
launch vehicles to place 40 communications satellites in low-Earth orbit. The
first launch is scheduled for 1996.
On March 9, 1994, the Delta II rocket launched its 48th consecutive successful
flight. Over the past 16 years and 92 launches, Delta rockets have maintained
a 98.9% success rate.
Delta Clipper. On January 31, 1994, NASA notified MDC that it would provide
almost one million dollars for the continuation of the Delta Clipper
Experimental (DC-X) program. These funds were used to maintain the DC-X
vehicle and ground systems in a readiness state for future flight testing. In
May 1994, MDC received a $3.5 million contract from the Ballistic Missile
Defense Organization for continuation of the flight test program. Preliminary
plans call for three to five additional test flights of the DC-X vehicle.
[HARD COPY PG. 24]
Commercial Aircraft Business
The commercial aircraft business continues to be highly market sensitive, and
therefore competition and pricing are very aggressive. Difficulties in the
commercial aircraft industry have resulted and may continue to result in
airlines not taking deliveries of aircraft, requesting changes in delivery
schedules, defaulting on contracts for firm orders or not exercising options or
reserves. MDC has refrained from obtaining new business through drastic price
reductions, instead focusing on cost control measures. As cost controls are
put in place and the commercial aircraft market rebounds, MDC believes it will
be in position to capture profitable new orders.
<PAGE> 29
On February 16, 1994, Saudi Arabian Airlines announced its intention of
purchasing a total of 50 commercial airliners from MDC and Boeing.
Negotiations with Saudia are in process; however, the number and types of
aircraft have not yet been finally determined. No firm orders were received
from Saudia or other airlines or leasing customers during the first quarter of
1994.
On April 19, 1994 Alaska Airlines announced that it was replacing firm orders
for 10 MD-90s with orders for 4 MD-80s. The MD-90s were scheduled for delivery
in 1996 and 1997. In addition, the airline announced that it would not
exercise 20 options for the MD-90.
On February 23, 1994, MDC introduced a new derivative of the MD-11 jetliner,
the MD-11ER (Extended Range). The MD-11 trijet is currently the longest-range
300-seat aircraft in operation. The ER version has the capability to fly an
additional 480 nautical miles over the current MD-11. The MD-11ER will become
available in 1996.
Government Business Audits, Reviews and Investigations
MDC, as a large defense contractor, is subject to many audits, reviews and
investigations by the U.S. Government of its negotiation and performance of,
accounting for, and general practices relating to Government contracts. An
indictment of a contractor may result in suspension from eligibility for award
of any new government contract, and a guilty plea or conviction may result in
debarment from eligibility for awards. The Government may, in certain cases,
also terminate existing contracts, recover damages, and impose other sanctions
and penalties. Based upon presently known facts, MDC believes that it has not
engaged in any criminal misconduct with respect to any of the matters currently
known to be under investigation and that the ultimate resolution of these
investigations will not have a material adverse effect on MDC's financial
position.
In March 1991, the Securities and Exchange Commission (SEC) issued a Formal
Order of Private Investigation (the "1991 SEC Investigation") looking into
whether MDC violated the Securities Act of 1933 and the Securities Exchange Act
of 1934 in connection with disclosures about and accounting for the A-12. In
February 1993, the SEC issued subpoenas requesting additional information and
broadened its inquiry to include the C-17 and possibly other programs. MDC
[HARD COPY PG. 25]
believes that it has properly reported and disclosed information and accounted
for its programs in accordance with generally accepted accounting principles.
<PAGE> 30
In January 1993, the DoD Inspector General (IG) completed an inquiry into an
allegation of favoritism and advantageous treatment accorded MDC by the DoD in
connection with the C-17 Globemaster III program. The IG's report questioned
contracting actions and payments by the U.S. Air Force and related information
provided by the U.S. Air Force and MDC personnel. MDC believes that it
properly reported and disclosed information relative to the C-17 contract and
that it properly submitted bills to and was paid by the U.S. Air Force in
accordance with DoD rules then in effect for work performed. In April 1993,
the Air Force issued an extensive report responding to the allegations made by
the DoD. Although the Air Force report reflected the difference between the
parties concerning the segregation and payment of certain C-17 engineering
costs, the report concluded that there was no illegal or improper plan or
actions taken to provide payments to MDC and that the integrity of the
acquisition system had not been compromised. In a November 1993 reply, the IG
reasserted his conclusion that there had been an Air Force plan to assist MDC
that exceeded the limits of what was permissible.
In May 1993, a Defense Acquisition Board (DAB) initiated by the Under Secretary
of Defense for Acquisitions began a review of the C-17 program in an effort to
resolve outstanding issues and to make recommendations regarding the C-17's
future. In connection with the review, MDC provided data and participated in
numerous discussions. The DoD, in conjunction with the DAB, submitted a
proposal to MDC in December 1993 for a business settlement of a variety of
issues concerning the C-17 program. In January 1994, MDC and the DoD agreed to
such a settlement. MDC and the Air Force are developing plans and contractual
modifications and agreements to implement the business settlement; MDC has
begun to implement certain aspects of the settlement pending congressional
authorization and appropriations. This process is expected to be completed
during 1994.
The settlement covered issues open as of the date of the settlement, including
the process of allocating sustaining engineering costs to the development and
production contracts, the sharing of flight test costs over a previous level,
and the resolution of claims and of performance/specification issues. The
settlement also stipulated that MDC will expend additional funds in an effort
to achieve product and systems improvements. See also Note 4, Contracts in
Process and Inventories, page 7.
<PAGE> 31 [HARD COPY PG. 26]
PART II OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
(99) Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
-------------------
Form 8-K filed on February 9, 1994 in response to Item 5.
Form 8-K filed on February 15, 1994 in response to Item 5.
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, its principal accounting officer, thereunto duly authorized.
MCDONNELL DOUGLAS CORPORATION
(Registrant)
Date: May 13, 1994 /s/ R. L. Brand
------------------ ------------------------------
R. L. Brand
Vice President and Controller
and Registrant's Authorized
Officer
<PAGE> 1 Exhibit 99
MCDONNELL DOUGLAS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED MARCH 31, 1994
(Dollars in Millions)
EARNINGS
Earnings from continuing operations
before income taxes $210
Add: Interest expense 74
Interest factor in rents 4
------
$288
======
FIXED CHARGES
Interest expense $74
Interest factor in rents 4
------
$78
======
Ratio of earnings to fixed charges 3.7X
======
<PAGE> 1
13 May 1994
Securities and Exchange Commission
Operations Center
Stop 0-7
6432 General Green Way
Alexandria, VA 22312
Re: McDonnell Douglas Corporation
Form 10-Q, 2nd Qtr - 1994
Ladies and Gentlemen:
On behalf of McDonnell Douglas Corporation, I enclose (via EDGAR
transmission) MDC's Report on Form 10-Q for March 31, 1994.
If you have any questions or comments, please call me at (314) 232-5958.
Thank you for your assistance
Very truly yours,
/s/ R. L. Brand
Robert L. Brand
Vice President and Controller
