<PAGE>
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FORM 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, 1995
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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
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(Exact name of registrant as specified in its charter)
Maryland 43-0400674
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(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 April 30, 1995 - 114,113,045 shares
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TABLE OF CONTENTS
10Q
PART I FINANCIAL INFORMATION Page No.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS 3
BALANCE SHEET 4-5
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 15-23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
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<PAGE> 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 1995 1994
-------- --------
(unaudited)
Revenues $ 3,333 $ 2,953
Costs and expenses:
Cost of products, services and rentals 2,794 2,420
General and administrative expenses 156 169
Research and development 68 80
Interest expense:
Aerospace segments 37 42
Financial services and other segment 27 32
-------- --------
Total Costs and Expenses 3,082 2,743
-------- --------
EARNINGS BEFORE INCOME TAXES 251 210
Income taxes 92 76
-------- -------
NET EARNINGS $ 159 $ 134
======== =======
EARNINGS PER SHARE $ 1.38 $ 1.13
======== =======
DIVIDENDS DECLARED PER SHARE $ .20 $ .12
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 4
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
-----------------------------
March 31 December 31
1995 1994
--------- ----------
(unaudited)
Assets
Cash and cash equivalents $ 896 $ 421
Accounts receivable 641 772
Finance receivables and property on lease 2,182 2,087
Contracts in process and inventories 5,356 5,806
Property, plant and equipment 1,543 1,597
Investment in Financial Services - -
Other assets 1,556 1,533
-------- --------
Total Assets $12,174 $12,216
======== ========
Liabilities And Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 2,246 $ 2,485
Accrued retiree benefits 1,275 1,298
Income taxes 790 723
Advances and billings in excess of related
costs 1,222 1,200
Notes payable and long-term debt:
Aerospace segments 1,292 1,272
Financial services and other segment 1,394 1,297
-------- --------
8,219 8,275
Minority Interest 70 69
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1995, 114.6 shares; 1994, 116.7 shares 115 117
Additional capital 80 191
Retained earnings 3,713 3,576
Unearned compensation (23) (12)
-------- --------
3,885 3,872
-------- --------
Total Liabilities and Shareholders' Equity $12,174 $12,216
======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE> 5
MDC Aerospace Financial Services
---------------------- ------------------------
March 31 December 31 March 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(unaudited) (unaudited)
$ 872 $ 408 $ 24 $ 13
766 916 - 1
161 152 2,021 1,935
5,356 5,806 - -
1,427 1,441 116 156
314 313 - -
1,433 1,420 123 113
-------- -------- -------- --------
$10,329 $10,456 $ 2,284 $ 2,218
$ 2,171 $ 2,382 $ 200 $ 248
1,275 1,298 - -
473 424 317 299
1,186 1,162 36 38
1,269 1,249 23 23
- - 1,394 1,297
-------- -------- -------- --------
6,374 6,515 1,970 1,905
70 69 - -
115 117 - -
80 191 238 238
3,713 3,576 76 75
(23) (12) - -
-------- -------- -------- --------
3,885 3,872 314 313
-------- --------- -------- -------
$10,329 $10,456 $ 2,284 $ 2,218
======== ======== ======== ========
As used on this page, "MDC Aerospace" means the basis of consolidation as
described in Note 1 to the financial statements; "Financial Services" means
McDonnell Douglas Financial Services Corporation and all of its affiliates
and associated companies and McDonnell Douglas Realty Company.
Transactions between MDC Aerospace and Financial Services have been
eliminated from the "McDonnell Douglas Corporation and Consolidated
Subsidiaries" columns.
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MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
THREE MONTHS ENDED MARCH 31 1995 1994
-------- --------
(unaudited)
OPERATING ACTIVITIES
Net earnings $ 159 $ 134
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 65 71
Gain on sale of assets - (20)
Pension income (50) (33)
Non-cash retiree health care costs 1 4
Change in operating assets and liabilities 395 170
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 570 326
INVESTING ACTIVITIES
Property, plant and equipment acquired (42) (31)
Finance receivables and property on lease (64) 55
Proceeds from sale of assets 25 23
Other 9 35
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NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (72) 82
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) 68 (7)
Debt having maturities more than 90 days:
New borrowings 137 126
Repayments (88) (350)
Minority interest 1 -
Proceeds of stock options exercised - 2
Common shares purchased (119) -
Dividends paid (22) (13)
------- -------
NET CASH USED BY FINANCING
ACTIVITIES (23) (242)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 475 166
Cash and cash equivalents at beginning of year 421 86
------- -------
Cash and cash equivalents at end of period $ 896 $ 252
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(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, 1994.
The consolidated financial statements include the accounts of McDonnell
Douglas Corporation and its subsidiaries including McDonnell Douglas
Financial Services Corporation (MDFS), parent company of McDonnell Douglas
Finance Corporation (MDFC). In consolidation, all significant intercompany
balances and transactions are eliminated.
The consolidating balance sheet represents the adding together of all
affiliates - companies that McDonnell Douglas Corporation directly or
indirectly controls, either through majority ownership or otherwise.
Financial data and related measurements are presented in the following
categories:
MDC Aerospace. This represents the consolidation of McDonnell Douglas
Corporation and its subsidiaries other than MDFS and McDonnell Douglas
Realty Company (MDRC), which are presented on a one-line basis as
Investment in Financial Services.
Financial Services. This represents the consolidation of MDFS (and its
subsidiaries) and MDRC, both wholly-owned subsidiaries of MDC.
McDonnell Douglas Corporation and Consolidated Subsidiaries. This
represents the consolidation of McDonnell Douglas Corporation and
all its subsidiaries (MDC).
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<PAGE> 8
2. Contracts in Process and Inventories
Contracts in Process and Inventories consist of the following:
March 31 December 31
1995 1994
----------- -----------
Government contracts in process $ 5,535 $ 5,548
Commercial products in process 4,074 4,127
Material and spare parts 687 710
Progress payments to subcontractors 1,339 1,438
Progress payments received (6,279) (6,017)
-------- --------
$ 5,356 $ 5,806
======== ========
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 $1.334 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 remains 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. On December 9, 1994, the U.S. Court of
Federal Claims ordered the January 7, 1991 decision terminating the
contract for default vacated because that decision was not properly made.
A trial of certain of the remaining issues related to the termination is
scheduled to commence in late 1995.
At March 31, 1995, Contracts in Process and Inventories include
approximately $563 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, was based on MDC's belief that the
termination for default would be converted to a termination for convenience,
that the Team will establish a minimum of $250 million in claims
adjustments, 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,
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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, 1995, as a result of a termination of
the contract for the convenience of the Government. MDC has been provided
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with an opinion of outside counsel that the Government's termination of the
contract for default was contrary to law and fact, 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 sustaining that the
termination is properly one for the convenience of the Government, the
probable claims adjustments are not less than $250 million.
In 1984, MDC entered into a full scale development letter contract,
containing a not-to-exceed price, for the T-45 Training System which
included the conversion of the land-based British Hawk aircraft with
minimal change into a carrier-capable Navy aircraft, designated the T- 45A.
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,
1995, Contracts in Process and Inventories include costs for the related
contracts of $168 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 the improvements. 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. 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.
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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 January 1994, MDC and the Department of Defense (DoD) agreed to a
settlement which covered a range of issues related to the C-17 military
aircraft program. MDC and the Air Force executed contract modifications to
implement the settlement in February 1995. As a result, claims and other
costs previously included in Contracts in Process and Inventories and
covered by the settlement were eliminated during the first quarter of 1995
as payments were received.
<PAGE> 10
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 these combined C-17 contracts, excluding
general and administrative costs and other period costs, exceed the
estimated revenue of the combined 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 estimates at
completion and due to work remaining on delivered aircraft. As of March
31, 1995, the Air Force had withheld approximately $74 million from MDC's
progress payment requests on these C-17 contracts, along with additional
withholds of approximately $59 million on the price of delivered C-17
aircraft.
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. Since
inception and based upon current projections, MDC believes use of 301
aircraft in the program is appropriate. 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, 1995, includes net deferred production
costs of $1.121 billion and unamortized tooling of $247 million. These
amounts are to be applied to the remainder of the 301 aircraft pool.
Commercial products in process for the MD-11 programs at December 31, 1994
and March 31, 1994, included net deferred production costs of $1.202
billion and $1.341 billion, respectively, and unamortized tooling of $247
million and $259 million, respectively. Under the current costing
percentage, an estimated $1.0 billion of current and future deferred costs
will be recovered from firm orders received after March 31, 1995. This
amount is relatively unchanged during the past three years.
MDC delivered 4 trijets during the first quarter of 1995 compared with 3
during the first quarter of 1994. As of March 31, 1995, MDC had delivered
133 MD-11 aircraft and has 40 aircraft on firm order. In addition, MDC had
84 options and reserves representing potential
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future orders for the MD-11. Total orders, representing deliveries plus
undelivered firm orders, have been static during the last three years. MDC
periodically, and at least annually, reviews its assumptions as to the size
of the pool, the estimated period over which the units will be delivered and
the estimated future costs and revenues associated with the program. The
percent used to charge cost of sales has remained constant since 1992, as
cost increases related to extending the estimated delivery period were offset
by operational efficiencies. Estimated proceeds from the undelivered aircraft
in the pool exceed the production and tooling costs in inventory at March 31,
1995, 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.
<PAGE> 11
3. Debt & Credit Arrangements
MDC Aerospace Credit Agreements
At March 31, 1995, MDC Aerospace has a revolving credit agreement (RCA)
under which MDC Aerospace may borrow up to $1.25 billion through July 1998.
Under the credit agreement, the interest rate, at the option of MDC
Aerospace, 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
commitment. The agreement contains restrictive covenants including but not
limited to net worth (as defined), indebtedness, subsidiary indebtedness,
customer financing, interest coverage and liens. There are no amounts
outstanding under the credit agreement at March 31, 1995.
In 1992, MDC Aerospace 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, 1995,
MDC Aerospace has issued $152 million of medium-term notes, of which $121
million is currently outstanding. During 1993, MDC Aerospace issued $200
million of 8.25% senior debt securities due on July 1, 2000. As of March
31, 1995, $198 million of securities registered under the shelf
registration remain unissued.
Senior debt securities totaling $1,145 million, including the $200 million
above issued in 1993, were outstanding at March 31, 1995. The notes were
issued in 1992 and 1993 with interest rates of 8.3% to 9.8% and maturities
from 1997 to 2012. Aerospace long-term debt also includes an aerospace-
related obligation of McDonnell Douglas Realty Company in the amount of $23
million at March 31, 1995.
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Financial Services Credit Agreements
At March 31, 1995, MDFS and MDFC have a joint revolving credit agreement
under which MDFC may borrow a maximum of $220 million, reduced by MDFS
borrowings under this same agreement. By terms of this agreement, which
expires in September 1998, 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 are no outstanding borrowings under this agreement at March 31, 1995.
Commercial paper of $129 million outstanding at March 31, 1995 is fully
supported by unused commitments under this agreement.
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.
Since June 1993, MDFC has issued $518 million of debt securities registered
with the Securities and Exchange Commission under shelf registrations. The
interest rate applicable to each note and certain other variable terms are
established at the date of issue. As of March 31, 1995, $131 million of
securities registered under the shelf registration remain unissued.
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4. 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, 1995,
$389 million in guarantees are outstanding on delivered aircraft. At March
31, 1995, MDC had made offers totaling $649 million to lease aircraft
scheduled to be delivered during 1995 to 1998 and had made offers totaling
$121 million to 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 $168 million at March 31, 1995.
MDC's outstanding guarantees include approximately $125 million related to
MD-11s operated by Viacao Aerea Rio-Grandense, S.A. (Varig). During March
1994, Varig notified its aircraft lenders and lessors that it was
temporarily suspending payments pending a restructuring of its financial
obligations. MDC has made and will continue through the first half of 1995
to make lease payments on behalf of Varig. These payments have not and are
not expected to have a significant adverse effect on MDC's cash flow or
financial position. MDC and Varig have tentatively negotiated a repayment
schedule calling for payments to begin later in 1995.
-12-
During October 1994, Trans World Airlines, Inc. (TWA), MDC's largest
aircraft leasing customer, proposed a restructuring plan relating to its
indebtedness and leasehold obligations to its creditors. As part of its
overall plan, TWA requested and MDC agreed to defer six months of lease and
other payments. Under the agreement, deferred amounts will be repaid to
MDC over a 28 month period which commenced in April 1995. While the
ultimate outcome of the proposed restructuring plan is dependent upon
factors beyond the control of MDC, it is not expected to be materially
adverse to MDC.
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 29 sites. Of these, MDC believes
that it has de minimis liability at 19 sites, including 14 sites at which
it believes that it has no future liability. At eight of the 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. At the two remaining sites, MDC lacks sufficient
information to determine its probable share or amount of liability. 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.
<PAGE> 13
At March 31, 1995, the accrued liability for environmental cleanup matters
at Superfund sites and for MDC's current and former operating sites was $26
million. Claims for recovery have not been netted against the disclosed
environmental liabilities. While ongoing litigation may eventually result
in recovery of costs expended at certain of the waste sites, any gain is
contingent upon a successful outcome and has not been accrued. MDC
believes any amounts paid in excess of the accrued liability will not have
a material effect on its financial position, results of operations,
liquidity or cash flow.
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,
results of operations, liquidity or cash flow.
See Note 2, Contracts in Process and Inventories, for a discussion of
certain risks on fixed price development contracts.
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5. Operations of MDFS
The condensed financial data presented below have been summarized from the
consolidated financial statements of MDFS.
Three Months Ended March 31 1995 1994
------- --------
Earned income $ 47 $ 49
Costs and expenses 34 37
Net earnings 9 7
Dividends 9 6
6. Supplementary Payment Information
Three Months Ended March 31 1995 1994
-------- --------
Interest paid $ 100 $ 63
Income taxes paid 25 3
7. Earnings Per Share
Earnings per share computations are based upon the weighted average common
shares outstanding during the three-month period which were 115,818,563 in
1995 and 118,058,925 in 1994.
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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 beginning on 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 1994 Annual Report
to Shareholders.
Results of Operations
MDC revenue increased to $3.333 billion in the first quarter of 1995,
compared to $2.953 billion in the first quarter of 1994. Most of this
increase was associated with the commercial aircraft segment, where 1995
first quarter deliveries of both twin jets and trijets exceeded the 1994
level. Revenue decreases in the missiles, space and electronic systems
segment and the financial services and other segment were more than offset
by revenue increase in the military aircraft segment.
Net earnings for the first quarter of 1995 were $159 million, a 19%
increase over the first quarter 1994 net earnings of $134 million. The
earnings improvement was led by the F-15 and C-17 programs in the military
aircraft segment. This same segment showed continued improvement in profit
margin and also had higher revenues -- accounting for almost 58% of total
revenues.
The military aircraft segment had record operating earnings in the first
quarter of 1995 due to improved earnings on the F-15 and C-17 programs.
Operating earnings in the commercial aircraft segment for the first quarter
of 1995 were higher than the comparable quarter in 1994 due in part to
increased earnings from the sale of spare parts and related services. The
missiles, space and electronic systems segment earnings in the first
quarter of 1995 were flat as compared to the same quarter in 1994. First
quarter 1995 operating earnings in the financial services and other segment
decreased from the first quarter of 1994. Most of the prior year's higher
earnings in this segment were attributed to a gain on the sale of property
by McDonnell Douglas Realty Company (MDRC).
Interest expense for the aerospace segments in the first quarter of 1994
was $37 million, down from $42 million in 1994's first quarter. The lower
interest reflects reduced aerospace debt.
Pension income totaled $50 million in the 1995 first quarter, up from $33
million in 1994's first quarter. The increased pension income reflects a
higher actuarial interest assumption for the discount rate and a greater
amount of earnings on an increased asset base. MDC did not change the rate
of return assumption, however, plan assets have increased over the prior
year.
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<PAGE> 15
Three Months Ended
March 31
1995 1994
-------- --------
(Millions of dollars)
Revenues
Military aircraft $ 1,929 $ 1,822
Commercial aircraft 917 589
Missiles, space and electronic
systems 407 445
Financial services and other 77 93
-------- --------
Operating revenues 3,330 2,949
Non-operating income 3 4
-------- --------
Total Revenues $ 3,333 $ 2,953
-------- --------
Earnings
Military aircraft $ 210 $ 166
Commercial aircraft 12 3
Missiles, space and electronic
systems 59 60
Financial services and other 12 30
-------- --------
Operating earnings 293 259
Corporate and other (5) (7)
Interest expense (37) (42)
Income taxes (92) (76)
------- --------
Net Earnings $ 159 $ 134
======== ========
Military Aircraft
Revenues in the military aircraft segment increased 6% in the first quarter
of 1995 to $1.9 billion from $1.8 billion in the first quarter of 1994.
The F-15 program was the main contributor to this increase, as a result of
production of F-15s for Saudi Arabia and Israel.
This segment had a record quarter with operating earnings of $210 million
compared with $166 million in the same period in 1994. Improved earnings
in the F-15 program, where volume doubled over the 1994 first quarter, and
the C-17 program, where earnings included a performance award fee,
contributed to the improved results.
MDC received payment in the first quarter of 1995 related to the C-17
omnibus settlement. See also "Liquidity", page 17.
<PAGE> 16
Commercial Aircraft
Revenues increased 56% to $917 million in the 1995 first quarter, compared
with $589 million in the 1994 same quarter. The increase in revenues
resulted from increased commercial aircraft deliveries. MDC delivered nine
twin jets, including the first three MD-90 twin jets, and four trijets in
1995's first quarter. Four twin jets and three trijets were delivered in
the 1994 first quarter.
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Operating earnings in the 1995 first quarter were $12 million, compared
with $3 million in the first quarter of 1994. Increased earnings from the
sale of spare parts and related services contributed to this improvement.
Missiles, Space and Electronic Systems
Revenues decreased to $407 million in the first quarter of 1995, from $445
million in the same period in 1994. Revenues in the Tomahawk program were
lower than in the prior years, as MDC's work on this program winds down.
Operating earnings in the first quarter of 1995 were $59 million, compared
with earnings of $60 million in the first quarter of 1994. Increased
earnings in the space station were offset by lower earnings in the Tomahawk
missiles program.
Financial Services
Operating earnings in the financial services and other segments were $12
million in the 1995 first quarter, compared with $30 million in the 1994
same period. The 1994 first quarter earnings included a $20 million pre-
tax gain on the sale of commercial real estate by MDRC.
Liquidity
As detailed in this section, MDC believes that it has sufficient sources of
capital to meet anticipated needs.
Debt and Credit Arrangements. MDC has in place a number of credit
facilities with banks and other institutions. At March 31, 1995, MDC had a
revolving credit agreement under which MDC could borrow up to $1.25 billion
through July 1998. There were no amounts outstanding under the credit
agreement at March 31, 1995.
In 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 Securities and Exchange Commission (SEC). As of March 31,
1995, $198 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.
MDC has an 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. No receivable
interests were sold as of March 31, 1995.
<PAGE> 17
Aerospace Cash & Cash Equivalents. Although aerospace debt remained steady
at just under $1.3 billion, aerospace cash and cash equivalents at March 31,
1995, more than doubled the December 31, 1994 level. Aerospace cash and cash
equivalents were $872 million at March 31, 1995, compared with $408 million at
December 31, 1994. This cash level includes C-17 program first quarter
receipts related to the omnibus settlement, and includes reduction of
-17-
$119 million used to repurchase 2.2 million shares of common
stock during the quarter. The stock purchase is part of MDC's previously
announced shareholder value initiative.
Shareholder Initiatives. On October 28, 1994, MDC's Board of Directors
authorized a stock repurchase plan which authorizes MDC to purchase up to
18 million shares, or about 15 percent of MDC's common stock. Although
funds are available under existing credit agreements, MDC intends to use
excess cash flow to finance the stock repurchase program and does not
expect the program to affect negatively MDC's ability to fund capital
spending, research and development, or acquisitions. As of March 31, 1995,
MDC had repurchased 4.0 million shares at a cost of $204 million.
C-17 Settlement. In January 1994, MDC and the Department of Defense (DoD)
agreed to a settlement which covered a range of issues related to the C-17
military aircraft program. MDC and the Air Force executed contract
modifications to implement the settlement in February 1995. As indicated
above, payment relating to the settlement was received in the first quarter
of 1995.
Commercial Aircraft Financing. Difficulties in the commercial airline
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 4,
Commitments and Contingencies, page 12, MDC also has outstanding guarantees
of $389 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 earnings, cash flow or financial position.
MDC has also made offers totaling $649 million to lease aircraft scheduled
for delivery during 1995 to 1998. Although earnings, cash flows, and
financial position could be adversely impacted, MDC does not anticipate
that the existence of such lease offers will have a material adverse effect
on earnings, cash flow or financial position. See also Note 4, Commitments
and Contingencies, page 12.
MDC's outstanding guarantees include approximately $125 million related to
MD-11s operated by Viacao Aerea Rio-Grandense, S.A. (Varig). In addition,
Trans World Airlines, Inc. (TWA), MDC's largest aircraft leasing customer,
during October 1994 proposed a restructuring plan relating to its
indebtedness and leasehold obligations to its creditors. Neither delays in
payments from Varig nor the effects of the TWA restructuring are expected
to have a material adverse effect on earnings, cash flow or financial
position of MDC. See Note 4, Commitments and Contingencies, page 12, for a
further discussion of Varig and TWA.
-18-
<PAGE> 18
Financial Services. Financial Services debt on March 31, 1995, was
approximately $1.4 billion, up from approximately $1.3 billion at December
31, 1994. McDonnell Douglas Financial Services Corporation (MDFS), through
its McDonnell Douglas Finance Corporation (MDFC) subsidiary, has
traditionally obtained cash from operating activities, placements of debt,
issuances of commercial paper and the normal run-off of its portfolio to
fund its operations. Since June 1993, MDFC has issued $518 million of debt
securities registered with the SEC under shelf registrations.
MDFC has also used, and in the future anticipates using, cash provided by
operations, commercial paper borrowings, borrowings under bank credit lines
and unsecured term borrowings 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. MDC
is one of the largest U.S. defense contractors and 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.
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 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.
In March 1995, MDC announced that in late 1995 it will close two
facilities, one in Titusville, Florida and another in St. Charles,
Missouri, as part of its continuing consolidation of facilities due to
excess capacity throughout MDC. The plant in Titusville will close after
production of Tomahawk cruise missiles for the U.S. Navy and other
operations come to an end there in August 1995. Operations at the St.
Charles facility, which included production of electrical wire bundles and
ground support equipment for aircraft and missile systems, will be
reassigned to other MDC locations.
Discussions under the captions "Military Aerospace Business," "Commercial
Aircraft Business" and "Government Business Audits, Reviews and
Investigations" reflect developments during the first quarter of 1995 and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations in MDC's 1994 Annual Report
to Shareholders.
-19-
<PAGE> 19
Military Aerospace Business
C-17 Globemaster III. In January 1995, the first squadron of 12
C-17s was declared operationally ready for worldwide service and began
readiness exercises for the Reliability, Maintainability and Availability
(RM&A) evaluations in July 1995. During the RM&A, the C-17 fleet well be
tested under peacetime and simulated wartime emergency conditions. The DoD
is expected to make a decision in late 1995 on whether to extend the total
buy of C-17s beyond the 40 aircraft to which it is now committed.
The eighteenth and nineteenth C-17 production aircraft, P-18 and
P-19, were delivered to the Air Force in February and April 1995
respectively. P-19 is the seventh C-17 in a row delivered ahead of
schedule. To date, the Air Force has taken delivery of twenty C-17s. The
next production aircraft is over 95% complete and is scheduled for delivery
during the second quarter.
For additional information regarding Government inquires on the C-17
program, see also "Government Business Audits, Reviews and Investigations",
page 22.
F-18 Hornet. In early January, MDC received six separate contract awards
totaling approximately $1 billion. The two largest contract awards
represented modifications to orders by Switzerland and Finland for F/A-
18C/D aircraft.
On January 12, 1995, the structural assembly of the forward fuselage for
the F/A-18E/F advanced tactical strike fighter was completed, moving a step
closer to the scheduled first flight in December 1995. The F/A-18E/F
program is more than 40 percent through development from a cost standpoint.
Development of the F/A-18E/F is on schedule.
T45TS. The T45 Training System, composed of the T45A Goshawk and other
training system elements, was authorized for full-rate production of 12
aircraft per year, following a successful DoD Milestone III review January
17, 1995. Current Navy procurement plans for the T45TS call for 174
Goshawk aircraft to be produced through 2003.
MD 600N. On January 30, 1995, the new stretch version of the MD 500N
series commercial helicopter was publicly unveiled, and the first year's
production was sold out on the first day advance purchase orders were
offered. Formal approval for production was given in March. Full
development and certification is expected to be completed in 1996 with
first deliveries following immediately.
SLAM ER. The Navy awarded a $91.6 million contract for the Engineering and
Manufacturing Development phase of the Standoff Land Attack Missile-
Expanded Response (SLAM ER) retrofit program. SLAM ER conversion kits will
be used to upgrade the Navy's inventory of SLAMs into the SLAM ER
configuration.
-20-
<PAGE> 20
Delta III. MDC announced its intent to develop the Delta III, a launch
vehicle with payload capacity of 8,400 pounds, more than twice that of the
Delta II. The first launch of this intermediate-class rocket is planned
for 1998. MDC and Hughes Space and Communications International Inc. have
signed a contract for 10 firm launches, plus options for additional
launches through 2005. The total value of the contract could be up to $1.5
billion.
Commercial Aircraft Business
The commercial aircraft business continues to be highly market sensitive,
and therefore competition and pricing are 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.
On March 31, 1995, the MD-80/90 program included 1,120 deliveries, 113
aircraft on firm order, and 118 options and reserves. On the same date,
the MD-11 program included 133 deliveries, 40 aircraft on firm order, and
84 options and reserves representing potential firm orders. MDC had a
decrease of one MD-11 trijet in the first quarter, related to a customer
default.
The MD-11 program continues to operate at a loss after deducting period
costs. MDC is accounting for the MD-11 program on a delivery basis using
the program-average cost method. Under this method, certain production
costs incurred during assembly of early MD-11 aircraft as well as tooling
costs are being deferred and will be recognized on delivery of aircraft in
future years based on a planned number of aircraft in the program.
Production costs, combined with an allocation of tooling costs, on most of
the aircraft delivered since 1993 were less than program-average costs.
MDC periodically, and at least annually, reviews its assumptions as to the
size of the MD-11 pool, the estimated period over which the units will be
delivered and the estimated future costs and revenues associated with the
program. As part of this analysis during 1994, the estimated total costs
to complete the 301 aircraft in the pool reflected decreases related to
subcontractor costs, such as the cost of the MD-11 fuselage currently being
produced by a subcontractor but scheduled to be produced by MDC beginning
in early 1996, and production and assembly costs, where MDC continues to
improve efficiency in the production process from procurement through
assembly and delivery. These decreases, however, were offset by a similar
amount of increased costs related to extending the period over which the
301 aircraft in the pool are expected to be delivered. In the aggregate,
these changes had an offsetting impact and as a result, there was no change
in the costing percentage used by MDC on the MD-11 program.
-21-
<PAGE> 21
Based on current orders and scheduled delivery dates, MD-11 deliveries in
1996 and 1997 are expected to be lower than deliveries in the high teens
planned for 1995. As a result, during the first quarter of 1995, MDC made
a tentative decision to schedule production at the lower rate for the next
two years. MDC is currently evaluating the impact of this production rate
change on the MD-11 pool.
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 departure
lowers the number of passengers on each flight. A team of companies would
produce the proposed plane, and thus share the risks, with MDC acting as
the program manager responsible for systems integration, configuration,
sales and product support. Although subject to certain future events, MDC
is also expected to perform the final assembly work on the MD-95. Formal
launch of the MD-95 is subject to meeting certain launch criteria,
including receipt of sufficient orders from airline and leasing company
customers.
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 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
-22-
<PAGE> 22
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. See also Note 2,
Contracts in Process and Inventories, page 8.
MDC and General Dynamics Corporation (GD) have filed a legal action to
contest the Navy's termination for default on the A-12 contract. The Navy
has agreed to continue to defer repayment of $1.334 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 remains 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. On December 9, 1994, the U.S. Court
of Federal Claims ordered the January 7, 1991 decision terminating the
contract for default vacated because that decision was not properly made.
A trial of certain of the remaining issues related to the termination is
scheduled to commence in late 1995. See also Note 2, Contracts in Process
and Inventories, page 8.
Union Negotiations
During April 1995, MDC and the United Aerospace Workers in Long Beach,
California and various other locations ratified a new five year contract
which will expire in the year 2000.
MDC also has union contracts with the International Association of
Machinist and Aerospace Workers in California and various other unions
which expire in the fourth quarter of 1995.
-23-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 24, 1995, the Superior Court of Los Angeles County (Long Beach
Division) entered a consent decree and a stipulated judgment with respect
to two jet fuel spills at MDC's Douglas Aircraft Company facility in Long
Beach, California. Douglas Aircraft Company is an unincorporated operating
division of MDC. The consent decree resolves a complaint filed by the Long
Beach City prosecutor against MDC in the Long Beach Municipal Court,
arising out of a spill of jet fuel in March 1994 to the storm sewer system
at the Douglas Aircraft facility. The complaint alleged violations of
state law for: disposal of hazardous waste without a permit; discharge of a
water pollutant without providing the proper report; discharging oil to
<PAGE> 23
marine waters; failure to immediately report the spill; permitting
petroleum to pass into waters of the state; and discharging a substance
deleterious to wildlife. The complaint sought statutory penalties. Under
the consent decree MDC must pay approximately $515,000 for reimbursement of
agency costs, natural resource damages, and supplemental environmental
projects. Douglas Aircraft also agreed to conduct an audit of spill risks
at its Long Beach facility, to take reasonable action in response to the
audit findings, and to complete installation of a spill containment system
at the facility. Douglas Aircraft also agreed to meet state marine
facilities requirements at its Long Beach facility.
The stipulated judgment resolves potential liability with respect to a
December 24, 1994 spill of jet fuel at the Douglas Aircraft-Long Beach
facility. This judgment requires MDC to pay $962,300, which includes
$200,000 as civil penalties and the remainder for reimbursement of agency
costs, natural resource damages, and supplemental environmental projects.
Douglas Aircraft also must remove the underground tank that contained the
fuel which spilled on December 24 and remediate any soil contamination
associated with the tank as required by law. Douglas Aircraft is
prohibited during the next three years from intentionally or negligently
discharging oil into marine waters from its Long Beach facility, and from
failing to immediately report and begin cleanup action after discovery of
any discharge of oil to marine waters from its Long Beach facility; it also
must construct sampling sites to enable the Long Beach Health Department to
sample stormwater at the facility during the same period. The South Coast
Air Quality Management District has issued a notice of violation alleging a
nuisance and failure to obtain a permit for an oil/water separator involved
in the spill. No penalty has been proposed.
-24-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(99) Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, its principal accounting officer, thereunto duly authorized.
MCDONNELL DOUGLAS CORPORATION
(Registrant)
Date: May 10, 1995 /s/ R. L. Brand
------------ ---------------
R. L. Brand
Vice President and Controller
and Registrant's Authorized Officer
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000063917
<NAME> MCDONNELL DOUGLAS
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 896
<SECURITIES> 0
<RECEIVABLES> 641
<ALLOWANCES> 0
<INVENTORY> 5,356
<CURRENT-ASSETS> 0
<PP&E> 4,119<F1>
<DEPRECIATION> 2,576<F2>
<TOTAL-ASSETS> 12,174
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 115
0
0
<OTHER-SE> 3,770
<TOTAL-LIABILITY-AND-EQUITY> 12,174
<SALES> 3,264
<TOTAL-REVENUES> 3,333
<CGS> 2,821
<TOTAL-COSTS> 3,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 251
<INCOME-TAX> 92
<INCOME-CONTINUING> 159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 0
<FN>
<F1>PP&E includes MDC Aerospace of $3,974 and Financial Services of $145.
<F2>Depreciation includes MDC Aerospace of $2,547 and Financial Services of $29.
</FN>
</TABLE>
<PAGE>
Exhibit 99
McDonnell Douglas Corporation
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended March 31, 1995
(Dollars in Millions)
Earnings
Earnings before income taxes $251
Add: Interest expense 64
Interest factor in rents 8
----
$323
====
Fixed Charges
Interest expense $ 64
Interest factor in rents 8
----
$ 72
====
Ratio of earnings to fixed charges 4.5X
====
