<PAGE>
<PAGE> 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 June 30, 1994
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3685
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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
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(Address and zip code of principal executive offices)
314-232-0232
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(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 .
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========================================================================
Common shares outstanding at July 31, 1994 - 39,516,269 shares
<PAGE> 2
TABLE OF CONTENTS
- -----------------
PART I FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS 3-4
CONSOLIDATED BALANCE SHEET 5
CONSOLIDATED STATEMENT OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-27
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of dollars, except share data)
<S> <C> <C>
THREE MONTHS ENDED JUNE 30 1994 1993
---- ----
(Unaudited)
Revenues $ 3,250 $ 3,810
Costs and expenses:
Cost of products, services and rentals 2,712 3,283
General and administrative expenses 171 163
Research and development 80 102
Postretirement benefit curtailment - (70)
Interest expense:
Aerospace segments 37 35
Financial services and other segment 30 32
-------- --------
Total Costs and Expenses 3,030 3,545
-------- --------
EARNINGS BEFORE INCOME TAXES 220 265
Income taxes 82 95
-------- --------
NET EARNINGS $ 138 $ 170
======== ========
EARNINGS PER SHARE $ 3.50 $ 4.33
======== ========
DIVIDENDS DECLARED PER SHARE $ .35 $ .35
======== ========
</TABLE>
- --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
<CAPTION>
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of dollars, except share data)
<S> <C> <C>
SIX MONTHS ENDED JUNE 30 1994 1993
-------- --------
(Unaudited)
Revenues $ 6,203 $ 7,427
Costs and expenses:
Cost of products, services and rentals 5,132 6,398
General and administrative expenses 340 349
Research and development 160 174
Postretirement benefit curtailment - (70)
Interest expense:
Aerospace segments 79 46
Financial services and other segment 62 65
-------- --------
Total Costs and Expenses 5,773 6,962
-------- --------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 430 465
Income taxes 158 116
-------- --------
EARNINGS FROM CONTINUING OPERATIONS 272 349
Discontinued operations, net of income taxes - 37
-------- --------
NET EARNINGS $ 272 $ 386
======== ========
EARNINGS PER SHARE:
Continuing operations $ 6.91 $ 8.91
Discontinued operations - .93
-------- --------
$ 6.91 $ 9.84
======== ========
DIVIDENDS DECLARED PER SHARE $ .70 $ .70
======== ========
</TABLE>
- --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
<TABLE>
<CAPTION>
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED BALANCE SHEET
(Millions of dollars and shares)
<S> <C> <C>
JUN 30 DEC 31
1994 1993
--------- --------
(Unaudited)
ASSETS
Cash and cash equivalents $ 321 $ 86
Accounts receivable 596 555
Finance receivables and property on lease 2,168 2,357
Contracts in process and inventories 5,850 5,774
Property, plant and equipment 1,678 1,750
Other assets 1,541 1,504
--------- ---------
Total Assets $ 12,154 $ 12,026
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 2,470 $ 2,190
Accrued retiree benefits 1,346 1,388
Income taxes 716 574
Advances and billings in excess of
related costs 1,159 1,251
Notes payable and long-term debt:
Aerospace segments 1,302 1,625
Financial services and other segment 1,420 1,513
--------- ---------
8,413 8,541
Minority Interest 72 72
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1994, 39.5 shares; 1993, 39.3 shares 40 39
Additional capital 355 335
Retained earnings 3,288 3,043
Translation of foreign currency statements (4) (4)
Unearned compensation (10) -
--------- ---------
3,669 3,413
--------- ---------
Total Liabilities and Shareholders' Equity $ 12,154 $ 12,026
========= =========
</TABLE>
- --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
<TABLE>
<CAPTION>
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
<S> <C> <C>
SIX MONTHS ENDED JUNE 30 1994 1993
------- -------
(Unaudited)
OPERATING ACTIVITIES
Earnings from continuing operations $ 272 $ 349
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 142 144
Gain on sale of assets (20) (4)
Pension income (66) (69)
Non-cash retiree health care costs 5 18
Postretirement benefit curtailment - (70)
Change in operating assets and liabilities 332 (208)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 665 160
INVESTING ACTIVITIES
Property, plant and equipment acquired (59) (25)
Finance receivables and property on lease 65 120
Proceeds from sale of discontinued business - 181
Proceeds from sale of assets 23 32
Other (18) (45)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 11 263
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) 28 (58)
Debt having maturities more than 90 days:
New borrowings 280 17
Repayments (724) (496)
Minority Interest - 74
Payments from ESOP - net - 28
Proceeds of stock options exercised 2 2
Dividends paid (27) (27)
------- -------
NET CASH USED BY FINANCING ACTIVITIES (441) (460)
------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 235 (37)
Cash and cash equivalents at beginning of year 86 82
------- -------
Cash and cash equivalents at end of period $ 321 $ 45
======= =======
</TABLE>
- --------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1994 and December 31, 1993, accounts receivable are net
of $79 million and $100 million, respectively, representing receivable interests
sold.
4. Contracts in Process and Inventories
Contracts in Process and Inventories consist of the following:
June 30 December 31
1994 1993
------------ ------------
Government contracts in process $ 6,027 $ 6,347
Commercial products in process 4,151 4,005
Material and spare parts 849 873
Progress payments to subcontractors 1,317 1,362
Progress payments received (6,494) (6,813)
-------- --------
$ 5,850 $ 5,774
======== ========
<PAGE> 8
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, 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. The Order expired on July 21, 1994. MDC firmly believes it is
entitled to continuation of the deferment agreement in accordance with its
terms.
At June 30, 1994, Contracts in Process and Inventories include approximately
$517 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 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 June 30, 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.
<PAGE> 9
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
June 30, 1994, Contracts in Process and Inventories include costs for the
related contracts of $164 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 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 $151 million would be required on the related development and low
rate initial production contracts.
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> 10
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. During the 1994 second quarter, MDC
recognized losses in the development and initial production lots. These losses,
however, were offset by increased earnings in the current production lots.
At June 30, 1994, Contracts in Process and Inventories include costs of $236
million for the fixed price type contracts for development and first ten initial
production C-17 military transport aircraft for the Air Force. This balance
reflects reductions for loss provisions recorded by MDC. The estimated value of
these contracts at completion includes $208 million of claim revenues expected
to be collected as part of the settlement.
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 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 June 30, 1994, the Air Force had
withheld approximately $303 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 $59 million, and is included in the
provision for the C-17 business settlement.
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 June 30, 1994, includes net deferred production
costs of $1.324 billion and unamortized tooling of $257 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 June 30, 1994.
<PAGE> 11
As of June 30, 1994, MDC had delivered 119 MD-11 aircraft and has 53 aircraft on
firm order. In addition, MDC has 92 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 June 30,
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 million in
1993, of which $99 million was recognized in the first six months 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 six months of
1993. Payment of the tax and interest obligation for the 1986-1989 tax period
approximates $200 million and is expected to be made during the third quarter of
1994. Taxes and interest related to this payment have been provided.
6. Debt & Credit Arrangements
Aerospace Credit Agreements
At June 30, 1994, MDC had two revolving credit agreements (RCAs) under which MDC
could borrow up to $1.4 billion through April 1995. There were no amounts
outstanding under the credit agreements at June 30, 1994. As of July 15, 1994
these RCAs were replaced with a new agreement under which MDC may borrow up to
$1.25 billion through July 1998. Under the new credit agreement, the interest
rate, at the option of MDC, is a floating rate generally based on a defined
prime rate, a fixed rate related to the London interbank offered rate (LIBOR),
or as quoted under a competitive bid. A fee is charged on the amount of the
commitments. The new agreement contains restrictive covenants including but not
limited to net worth (as defined), indebtedness, subsidiary indebtedness,
customer financing, interest coverage and liens.
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 June 30, 1994, MDC has issued $132
million of medium-term notes at rates ranging from 5.3% to 7.4% due in 1994
through 1996, of which $126 million is currently outstanding. During 1993, MDC
issued $200 million of 8.25% senior debt securities due on July 1, 2000. As of
June 30, 1994, $218 million of securities registered under the shelf
registration remain unissued.
<PAGE> 12
Financial Services Credit Agreements
At June 30, 1994, McDonnell Douglas Finance Corporation (MDFC) has a revolving
credit agreement under which it can borrow a maximum of $75 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 were no amounts outstanding under the revolving credit
agreement at June 30, 1994.
At June 30, 1994, McDonnell Douglas Financial Services Corporation (MDFS),
parent company of MDFC, and MDFC have a joint revolving credit agreement under
which MDFC may borrow a maximum of $100 million, reduced by MDFS borrowings
under this same agreement. The maximum borrowings under this agreement, which
expires December 19, 1994, was increased from $45 million to the current level
during the second quarter of 1994. By the terms of this agreement, MDFS can
borrow no more than $16 million. The interest rate, at the option of MDFC or
MDFS, is either a floating rate generally based on a defined prime rate or fixed
rate related to LIBOR. There were no outstanding borrowings under this
agreement at June 30, 1994.
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 subsequently commenced offerings of up to an aggregate of $350
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 June
30, 1994, MDFC has issued pursuant to such offerings $91 million of general term
notes at rates ranging from 5.0% to 8.4% due in 1995 through 2011, $140 million
of medium-term notes at fixed rates ranging from 4.6% to 6.8% due in 1995
through 1998, and an additional $150 million of medium-term notes due in 1995
through 1999 at floating rates based on LIBOR and reset quarterly.
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 June 30, 1994, $258 million in
guarantees are outstanding, and commitments of $166 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
$88 million at June 30, 1994.
<PAGE> 13
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 June 30, 1994, the accrued liability for
environmental cleanup matters at Superfund sites and on MDC's current and former
operating sites is $29 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
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.
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.
Six Months Ended June 30 1994 1993
-------- --------
Earned income $ 98 $ 94
Costs and expenses 76 82
Net earnings 14 8
Dividends 11 -
9. Supplementary Payment Information
Six Months Ended June 30 1994 1993
-------- --------
Interest paid $ 124 $ 179
Income taxes paid 6 8
10. Earnings Per Share
Earnings per share computations are based upon the weighted average common
shares outstanding during the six month period which were 39,418,835 in 1994 and
39,218,501 in 1993.
<PAGE> 14
11. Unearned Compensation
In April 1994, MDC initiated a Performance and Equity Incentive Plan (Plan).
Under the Plan, 1,900,000 shares were authorized for issuance in connection with
stock options, stock appreciation rights, restricted stock, performance shares,
cash awards, and other stock-based awards. As of June 30, 1994, 103,600
restricted shares of MDC common stock had been granted. Compensation is being
amortized to expense over periods of three to five years, depending on the
award. Unearned compensation is reflected as a component of shareholders'
equity.
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 7, 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 June 30, 1994 and
December 31, 1993 between its aerospace segments (including aerospace-related
obligations of MDRC in the amount of $32 million as of June 30, 1994 and $107
million as of 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.
<PAGE> 15
Financial
Services
Aerospace and Other
June 30, 1994 Segments Segment Total
- ------------- ---------- --------- -------
(Dollar amounts in millions)
Debt $ 1,302 $ 1,420 $ 2,722
Equity 3,364 305 3,669
------- ------- -------
$ 4,666 $ 1,725 $ 6,391
======= ======= =======
Debt-to-equity ratio .39 4.66
======= =======
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
======= =======
The aerospace segments' debt-to-equity ratio decreased during 1994 as a result
of a $323 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 six months of 1994. Cash and cash
equivalents of aerospace segments increased by $290 million during the first six
months to $305 million at June 30, 1994.
Cash provided by operations on a consolidated basis during the first six months
of 1994 and 1993 was $665 million and $160 million, respectively. Cash provided
by aerospace operations of over $600 million in the first half of 1994 exceeded
the 1993 amount of approximately $200 million.
Commercial Aircraft. MDC delivered 12 MD-80 twin jets and 7 MD-11 trijets in
the first half of 1994 as compared to 24 MD-80 twin jets (including 4 under
lease arrangements) and 19 MD-11 trijets in the first six months of 1993. The
weakness in the commercial aircraft market, evidenced by the reduction in
deliveries, is expected to continue at least 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 12,088 at June 30, 1994
reflecting cost reduction efforts and scheduled production rate declines.
<PAGE> 16
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
engineering development and first ten initial production aircraft. A 1993
charge of $450 million 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. In the 1994 first quarter,
additional cost growth for work yet to be completed in the development and
initial production lots was largely offset by reduced cost estimates associated
with the C-17 settlement. During the 1994 second quarter, MDC recognized losses
in the development and initial production lots. These losses, however, were
offset by increased earnings in the current production lots. Although
completion of the full scale engineering and development portion of the C-17
program is approaching, MDC continues to bear additional costs in the
development and initial production contracts. MDC is incurring costs, among
other things, to improve the aircraft in preparation for the Operational
Readiness Evaluation demonstration scheduled for 1995. In part, this evaluation
will be used to gather data to determine compliance with logistical support
requirements of the contracts including warranted reliability, maintainability
and availability. The evaluation will also be used by the Under Secretary of
Defense in his previously announced end of 1995 review of the program for future
procurement of the C-17. See Note 4, Contracts in Process and Inventories, page
7, and Results of Operations, below.
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 results of that
review. On February 15, 1994, 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. The Order expired on July 21, 1994. 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
Net earnings for the second quarter of 1994 were $138 million compared with the
second quarter of 1993 net earnings of $113 million after excluding from 1993
unusual gains of $57 million. The unusual gains included a $43 million
postretirement benefits curtailment gain and a $14 million gain from the
resolution of tax issues.
<PAGE> 17
Net earnings for the first six months of 1994 were $272 million. Net earnings
for the first six months of 1993 were $207 million, after excluding unusual
gains totaling $179 million related to resolution of tax issues, sale of
McDonnell Douglas Information Systems International (MDISI), and the
postretirement benefits curtailment gain.
Revenues decreased 15 percent in the second quarter and 16 percent for the first
six months in 1994 as compared to 1993. The decrease in revenues in both
periods of 1994 resulted principally from reduced deliveries in the commercial
aircraft segment and MDC's reduced role in the downsized Space Station program.
Revenues from the military aircraft segment were 11 percent higher for both
periods in 1994.
The military aircraft segment had record operating earnings for both the second
quarter and first six months of 1994. The missiles, space and electronic
systems segment reported strong second quarter and first half operating
earnings, although lower than the record levels achieved in 1993. The 1993
first quarter operating earnings for this segment included a $20 million
incentive award from the U.S. Air Force for the successful completion of a
series of launches of global positioning satellites. Despite decreased
revenues, the commercial aircraft segment had increased operating earnings for
both the second quarter and first six months of 1994 as compared with the same
periods in 1993.
Aerospace interest expense in the second quarter of 1994 was $37 million, down
from $57 million in the same period for 1993 after excluding from 1993 the
reversal of $22 million in interest associated with the resolution of tax issues
with the IRS. Aerospace interest expense for the first six months was $79
million, down from $120 million in 1993's first six months after excluding from
1993 the reversal of $74 million in interest associated with the previously
mentioned tax issues. The lower interest expense reflects reduced aerospace
debt.
Income taxes were $158 million in the first half of 1994, an effective tax rate
of 37 percent. Excluding discontinued operations, taxes in 1993's first six
months were $116 million, an effective tax rate of 25 percent. The 1993 tax
provision included the reversal of $53 million in the first quarter associated
with the resolution of tax issues with the IRS.
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> 18
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
------ ------ ------ ------
Revenues
Military aircraft $ 1,916 $ 1,721 $ 3,738 $ 3,379
Commercial aircraft 810 1,353 1,399 2,601
Missiles, space and
electronic systems 447 666 892 1,309
Financial services and other 74 67 167 133
-------- -------- -------- --------
Operating revenues 3,247 3,807 6,196 7,422
Non-operating income 3 3 7 5
-------- -------- -------- --------
Total Revenues $ 3,250 $ 3,810 $ 6,203 $ 7,427
======== ======== ======== ========
Earnings
Military aircraft $ 153 $ 118 $ 319 $ 217
Commercial aircraft 24 12 27 24
Missiles, space and
electronic systems 80 99 140 197
Financial services and other 2 5 32 11
-------- -------- -------- --------
Operating earnings from
continuing operations 259 234 518 449
Discontinued operations,
net of income taxes - - - 37
Corporate and other (2) (4) (9) (8)
Postretirement benefit
curtailment - 70 - 70
Interest expense (37) (35) (79) (46)
Income taxes (82) (95) (158) (116)
-------- -------- -------- --------
Net Earnings $ 138 $ 170 $ 272 $ 386
======== ======== ======== ========
Military Aircraft
Operating revenues increased 11% for both the second quarter and first six
months of 1994 compared to the same periods in 1993. Increased revenues are
primarily the result of increased activity in the F/A-18 and C-17 production
contracts. Revenues were also higher in the AV-8B production program. These
increases were partially offset by decreased revenues for the F-15, T-45 and
AH-64 Apache programs.
<PAGE> 19
The military aircraft segment had second quarter operating earnings of $153
million, compared with $118 million in 1993's second quarter. The F/A-18
program reported stronger earnings due to increased activity on the C/D models
and excellent performance on the E/F development program. The C-17 program had
a slight profit for the second quarters of 1994 and 1993. The 1994 second
quarter amount was lower than the earnings achieved in the 1994 first quarter as
second quarter increased earnings in the current production contracts were
offset by losses in the development and initial production contracts. Although
completion of the full scale engineering and development portion of the C-17
program is approaching, McDonnell Douglas continues to bear additional costs in
the development and initial production contracts. McDonnell Douglas is
incurring costs, among other things, to improve the aircraft in preparation for
the Operational Readiness Evaluation demonstration scheduled for 1995. In part,
this evaluation will be used to gather data to determine compliance with
logistical support requirements of the contracts including warranted
reliability, maintainability and availability.
Operating earnings for the segment in the first six months of 1994 were $319
million, compared with $217 million in the first six months of 1993. Increased
earnings came predominantly from the F/A-18 program and to a lesser extent from
the C-17 program.
Commercial Aircraft
The commercial aircraft segment had second quarter operating earnings of $24
million, compared with $12 million in 1993's second quarter. Earnings for the
first six months of 1994 were $27 million, compared with $24 million in the same
period of 1993. These improved earnings were achieved despite a 40% reduction
in revenues during the second quarter and a 46% reduction for the first six
months of 1994, compared with the 1993 similar periods, reflecting reduced
aircraft deliveries and the overall softness in the commercial aircraft market.
Improved earnings were achieved through continued overhead reductions and
improvements in productivity.
MDC delivered eight MD-80 twin jets in the second quarter and 12 in the first
six months of 1994, as compared to 13 in the second quarter and 24 in the first
six months of 1993. Included in the 1993 deliveries were four aircraft leased
to customers, of which two occurred in each of the first two quarters. MDC
delivered four MD-11 trijets in the second quarter and seven in the first six
months of 1994, as compared to 10 in the second quarter and 19 in the first six
months of 1993.
Missiles, Space and Electronic Systems
Operating revenues totaled $447 million in the second quarter of 1994, down from
$666 million in the same period of 1993. Operating revenues were $892 million
for the first six months of 1994, down from $1.309 billion in the first six
months of 1993. Decreased revenues are primarily due to lower volume on the
downsized Space Station program and the winding down of the Advanced Cruise
Missile program. Revenues also decreased on several electronic systems,
missiles, and space transportation programs.
<PAGE> 20
The missiles, space and electronic systems segment had second quarter operating
earnings of $80 million compared with $99 million in 1993's second quarter.
Earnings in the first six months of 1994 were $140 million, down from $197
million in the first six months of 1993. Last year's 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 in the financial services and other segment were $2 million
for the 1994 second quarter, a $3 million decrease over the same period in 1993.
These lower earnings were largely the result of a $4 million charge in 1994's
second quarter related to the early retirement of long-term debt. Earnings for
the first six months of 1994 totaled $32 million, compared with $11 million in
the first six months of 1993. The 1994 first quarter included a $20 million
pre-tax gain from 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 first quarter gain related to the
sale of MDISI.
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 16, 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 June 30, 1994, MDC had two revolving
credit agreements aggregating $1.4 billion, which were scheduled to terminate
April 30, 1995. At June 30, 1994, there were no amounts outstanding under the
credit agreements. As of July 15, 1994, these RCAs were replaced with a new
agreement under which MDC may borrow up to $1.25 billion through July 1998.
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 June 30, 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.
On June 17, 1994, Standard and Poor's raised its rating on the commercial paper
of MDC and MDFC to A-2 from A-3. At the same time Standard and Poor's affirmed
MDC's and MDFC's senior long-term debt credit rating at BBB. It also affirmed
MDFC's subordinated debt credit rating at BBB- and medium-term notes credit
rating at BBB.
<PAGE> 21
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 and
on subordinated debt to Ba-2 from Ba-3.
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.
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 obligation
for the 1986-1989 tax period approximates $200 million and is expected to be
made during the third quarter of 1994. Taxes and interest related to the
payment for the 1986-1989 tax period have been provided. See Note 5, Income
Taxes, page 11.
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.
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 $258 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 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.
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. Restructuring
discussions were initiated with the carrier during the second quarter.
<PAGE> 22
Financial Services. The financial services and other segment debt on June 30,
1994 was $1.420 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 general term notes, its first
public debt offering since 1990, and subsequently commenced offerings of up to
an aggregate of $350 million of its medium-term notes. As of June 30, 1994,
approximately $91 million associated with the June 1993 offering and $290
million associated with the medium-term notes offerings had been sold.
MDFC has also used, and in the future anticipates using, cash provided by
operations, borrowings under bank credit lines and the normal run-off of its
portfolio as its primary sources of funding. MDFC anticipates using proceeds
from the issuance of additional public debt to fund future growth.
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 was the second largest defense contractor in 1993, as indicated in
a report published by "Defense News" based on 1993 defense revenues. MDC is one
of the three principal manufacturers of large commercial transport aircraft
outside the former Soviet Union.
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 Visual Simulation Systems
(VSS) business 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 enhance its commercial aircraft business.
Employment levels were reduced 5% in the first six months of 1994 to 66,346 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.
<PAGE> 23
Discussions under the captions "Military Aerospace Business," "Commercial
Aircraft Business" and "Government Business Audits, Reviews and Investigations"
reflect developments during the second 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 and in MDC's
quarterly report on Form 10-Q for the quarterly period ended March 31, 1994.
Military Aerospace Business
C-17 Globemaster III. 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 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
the durability testing a C-17 airframe is subjected to simulated flight loads
and conditions expected to be encountered in two lifetimes of service with
the U.S. Air Force.
The eleventh, twelfth and thirteenth production aircraft, P-11, P-12 and P-13,
were delivered to the Air Force in April, May and June 1994, respectively. With
delivery of these aircraft, three of the four C-17s in the Lot IV procurement
have been delivered. To date, the Air Force has taken delivery of fourteen C-
17s with eight aircraft in operational service. The next two production
aircraft, P-14 and P-15, are over 90% complete and are scheduled for delivery in
the third quarter. On June 3, 1994, MDC and the Air Force finalized the pricing
and terms of sale for the C-17 Lot VI FY94 contract, which calls for the Air
Force to purchase six production aircraft.
For additional information regarding Government claims and inquiries on the C-17
program, see also "Government Business Audits, Reviews and Investigations,"
page 26.
F-15 Eagle. On April 11, 1994, President Clinton notified Congress of his
approval for the sale of 25 F-15s to Israel. On May 12, 1994, the governments
of the United States and Israel signed a letter of offer and acceptance,
authorizing MDC to produce 21 F-15 Eagles for the Israeli Air Force with an
option for an additional four. Delivery of the F-15s will begin in 1997.
F-18 Hornet. During June 1994, the F/A-18E/F Hornet successfully passed its
critical design review, enabling the Navy's advanced strike fighter upgrade to
proceed on schedule toward its first flight in December 1995. Government
evaluators participating in the review determined that the F/A-18E/F's design
meets or exceeds all of its technical, reliability, and maintainability
requirements and that the strike fighter's development is on schedule and within
budget. Evaluators rated the aircraft's development low risk.
<PAGE> 24
AV-8B Harrier. During the second quarter of 1994, the U.S. Navy and MDC signed
a contract for the remanufacture of four Harrier II Plus aircraft for fiscal
1994. These four aircraft mark the beginning of a planned program to
remanufacture 73 aircraft. Under this program, day-attack Harriers will receive
new fuselages, APG-65 multi-mode radars, night attack systems, and higher thrust
engines. The result is expected to yield a significantly more effective
aircraft at significant cost savings over the production of an all-new aircraft.
In June 1994, MDC delivered the first three radar-equipped Harrier II Plus
aircraft to the Italian navy. Sixteen Harrier II Plus aircraft, produced in
cooperation with the U.S., will be delivered to the Italian navy between 1994
and 1997. Final assembly of the remaining thirteen aircraft will be conducted
in Italy by Alenia.
T45TS. Upon the recent successful completion of a comprehensive operational
evaluation (OPEVAL), the Navy has recommended that the T45TS be approved for
fleet introduction. The two phase OPEVAL, which began in October 1993,
consisted of a series of flight tests and technical evaluations to determine the
operational effectiveness and operational suitability of the T45TS, and its
readiness for fleet introduction.
AH-64 Apache. In June 1994, the United Arab Emirates (U.A.E.) signed a letter
of offer and acceptance with the U.S. Army for ten additional AH-64A Apache
combat helicopters. The U.A.E. had previously ordered 20 Apaches of which six
have been delivered. The ten U.A.E. helicopter follow-on request will be
produced along with a U.S. Army order for ten Apaches funded in the DoD's FY94
appropriation. The 20 aircraft for the Army and U.A.E. will extend production
deliveries into late 1996.
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.
Tomahawk. MDC and Hughes Missiles Systems Company (Hughes) have 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 selection of MDC or Hughes as the exclusive contractor is expected during
the third quarter.
<PAGE> 25
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.
Delta Clipper. In May 1994, MDC received a $3.5 million contract from the
Ballistic Missile Defense Organization (BMDO) for continuation of the flight
test program. The flight test program resumed on June 20, 1994 with the
completion of the fourth flight of the DC-X. During the fifth flight test on
June 27, 1994, an explosion at takeoff caused damage to the vehicle. The DC-X,
however, continued through its flight sequence and landed safely. MDC and BMDO
are currently discussing the repair of the vehicle and continuation of the
flight test program. Recently, MDC and NASA signed a cost-sharing agreement to
jointly fund a $25 million program to modify the DC-X for testing of advanced
lightweight materials and propulsion systems.
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.
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 half of 1994; however, in July
1994, Martinair Holland announced one new order and two options for the
freighter version of the MD-11.
On April 19, 1994 Alaska Airlines announced that it was replacing firm orders
for 10 MD-90 twin jets with orders for 4 MD-80 twin jets to be delivered during
1995 and 1996. The MD-90s had been scheduled for delivery in 1996 and 1997. In
addition, the airline announced that it would not exercise 20 options for the
MD-90.
On June 30, 1994, MDC and GD agreed to terminate their contract for the
production of fuselage sections for the MD-11 jetliner. The agreement transfers
responsibility for the MD-11 fuselage production to MDC over the next 18 months.
Under the agreement, GD will increase production of MD-11 fuselage sections to
build additional inventory and assist in the transfer process. MDC plans to
move the work to a new location, with a decision on the location to be made
later this year.
<PAGE> 26
During the second quarter the MD-90 jetliner completed U.S. Federal Aviation
Administration (FAA) noise certification testing and demonstrated that the twin-
engine aircraft is substantially quieter than any other in its class. The MD-90
is currently on schedule to obtain type certification from the FAA in November.
Delivery of the first of the intermediate-range twin jets is scheduled for
February 1995.
In July 1994, MDC began to solicit airline orders for a new 100-seat, medium
range twin-jet, called the MD-95, proposed to serve airline needs on routes with
relatively light traffic or where demand for frequent departures limits the
number of passengers on each flight. Formal launch of the MD-95 is subject to
meeting certain launch criteria.
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
believes that it has properly reported and disclosed information and accounted
for its programs in accordance with generally accepted accounting principles.
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 IG.
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.
<PAGE> 27
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 expected to be completed during 1994.
The settlement covered 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. 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.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of MDC's shareholders was held on Friday,
April 22, 1994.
(b) [Need not be answered because (1) proxies for the meeting were
solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, (2) there was no solicitation in
opposition to management's nominees as listed in the proxy
statement, and (3) all such nominees were elected.]
(c) The following is a brief description of matters voted upon at
the meeting:
Five Directors were elected at the annual meeting.
Beverly B. Byron: 31,939,245 shares were voted for election
and 2,238,951 shares were withheld. William H. Danforth,
M.D.: 33,095,454 shares were voted for election and
1,082,742 shares were withheld. Kenneth M. Duberstein:
33,117,980 shares were voted for election and 1,060,216
shares were withheld. John F. McDonnell: 32,879,332 shares
were voted for election and 1,298,864 shares were withheld.
Ronald L. Thompson: 33,099,585 shares were voted for
election and 1,078,611 shares were withheld.
The shareholders considered a proposal to approve the McDonnell
Douglas Corporation 1994 Performance and Equity Incentive Plan.
This proposal was approved; 25,481,157 shares were voted for
the proposal, 8,338,901 shares were voted against it, 356,784
shares were abstained, and 4,403 shares were not voted.
<PAGE> 28
The shareholders considered a proposed amendment and
restatement of MDC's Charter to increase the number of
authorized shares of common stock from 100,000,000 to
200,000,000 shares. This proposal was approved; 28,795,826
shares were voted for the proposal, 5,130,335 shares were voted
against it, 254,131 shares were abstained, and 953 shares were
not voted.
A proposal to reapprove the continuation of the Employee
Savings Plan of McDonnell Douglas Corporation--Salaried Plan
was presented to the shareholders. This proposal was approved;
33,321,477 shares were voted for the proposal, 710,676 shares
were voted against it, 148,331 shares were abstained, and 761
shares were not voted.
The Board of Directors selected Ernst & Young as independent
auditors to audit the financial statements of MDC and its
subsidiaries for 1994, subject to ratification by the
shareholders. The selection was approved: 33,217,333 shares
were voted for the proposal, 643,253 shares were voted against
it, 319,576 shares were abstained, and 1,083 shares were not
voted.
A shareholder proposal asked that the Board of Directors,
within one year of the 1994 Annual Meeting, provide all
shareholders with a report of any efforts taken toward
conversion of its military-oriented businesses to commercial
endeavors. This proposal was defeated; 1,696,354 shares were
voted for the proposal, 28,805,436 shares were voted against
it, 794,734 shares were abstained, and 2,884,721 shares were
not voted.
A shareholder proposal requested that MDC establish a
Nominating Committee to recommend candidates to stand for
election to MDC's Board of Directors and that the Committee be
comprised solely of independent directors as defined in the
proposal. This proposal was defeated; 8,562,957 shares were
voted for the proposal, 21,692,015 shares were voted against
it, 1,041,249 shares were abstained, and 2,885,024 shares were
not voted.
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
None.
<PAGE> 29
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: August 12, 1994 /s/ R. L. Brand
-------------------- -------------------------------
R. L. Brand
Vice President and Controller
and Registrant's Authorized
Officer
/TEXT
<PAGE>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>2
<DESCRIPTION>EARNINGS TO FIXED CHARGES
<PAGE> 30
Exhibit 99
McDonnell Douglas Corporation
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended June 30, 1994
(Dollars in Millions)
Earnings
Earnings from continuing operations
before income taxes $ 430
Add: Interest expense 141
Interest factor in rents 7
Amortization of capitalized interest 1
-----
$ 579
=====
Fixed Charges
Interest expense $ 141
Interest factor in rents 7
-----
$ 148
=====
Ratio of earnings to fixed charges 3.9X
=====
/TEXT
<PAGE>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<DESCRIPTION>COVER LETTER
<PAGE> 31
August 12, 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 Quarter - 1994
Ladies and Gentlemen:
On behalf of McDonnell Douglas Corporation, I enclose (via EDGAR
transmission) MDC's Report on Form 10-Q for June 30, 1994.
If you have any questions or comments, please call me at (314) 232-5958.
Thank you for your assistance.
Very truly yours,
/s/ Robert L. Brand
Robert L. Brand
Vice President and Controller
