<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, 1996
------------------------------------
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
- -----------------------------------------------------------------------
(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, 1996 - 215,285,216 shares
<PAGE> 2
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS 3-4
BALANCE SHEET 5-6
CONSOLIDATED STATEMENT OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16-24
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
<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 JUNE 30 1996 1995
-------- --------
(unaudited)
Revenues $ 3,264 $ 3,922
Costs and expenses:
Cost of products, services and rentals 2,640 3,336
General and administrative expenses 177 183
Research and development 91 72
Interest expense:
Aerospace segments 31 35
Financial services and other segment 32 28
-------- --------
Total Costs and Expenses 2,971 3,654
-------- --------
EARNINGS BEFORE INCOME TAXES 293 268
Income taxes 105 99
-------- --------
NET EARNINGS $ 188 $ 169
======== ========
EARNINGS PER SHARE $ .87 $ .74
======== ========
DIVIDENDS DECLARED PER SHARE $ .12 $ .10
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 4
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of dollars, except share data)
SIX MONTHS ENDED JUNE 30 1996 1995
-------- --------
(unaudited)
Revenues $ 6,435 $ 7,255
Costs and expenses:
Cost of products, services and rentals 5,177 6,130
General and administrative expenses 346 339
Research and development 179 140
Interest expense:
Aerospace segments 62 72
Financial services and other segment 62 55
-------- --------
Total Costs and Expenses 5,826 6,736
-------- --------
EARNINGS BEFORE INCOME TAXES 609 519
Income taxes 223 191
-------- --------
NET EARNINGS $ 386 $ 328
======== ========
EARNINGS PER SHARE $ 1.76 $ 1.43
======== ========
DIVIDENDS DECLARED PER SHARE $ .24 $ .20
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 5
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
-----------------------------
June 30 December 31
1996 1995
-------- --------
(unaudited)
Assets
Cash and cash equivalents $ 402 $ 797
Accounts receivable 843 821
Finance receivables and property on lease 2,649 2,347
Contracts in process and inventories 3,669 3,421
Prepaid income taxes - -
Property, plant and equipment 1,442 1,471
Investment in Financial Services - -
Other assets 1,634 1,609
-------- --------
Total Assets $10,639 $10,466
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 2,236 $ 2,284
Accrued retiree benefits 1,156 1,205
Income taxes 21 3
Advances and billings in excess of related
costs 1,178 1,147
Notes payable and long-term debt:
Aerospace segments 1,233 1,251
Financial services and other segment 1,730 1,469
-------- --------
7,554 7,359
Minority Interest 66 66
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1996, 216.3 shares; 1995, 223.6 shares 216 224
Additional capital - -
Retained earnings 2,835 2,835
Unearned compensation (32) (18)
-------- --------
3,019 3,041
-------- --------
Total Liabilities and Shareholders' Equity $10,639 $10,466
======== ========
The accompanying notes are an integral part of the financial
statements.
<PAGE> 6
MDC Aerospace Financial Services
--------------- -------------------
June 30 December 31 June 30 December 31
1996 1995 1996 1995
======= ======== ======== ========
(unaudited) (unaudited)
$ 386 $ 784 $ 16 $ 13
934 934 2 2
149 165 2,500 2,182
3,669 3,421 - -
312 315 - -
1,378 1,358 64 113
354 331 - -
1,547 1,527 87 82
-------- -------- -------- --------
$ 8,729 $ 8,835 $ 2,669 $ 2,392
======== ======== ======== ========
$ 2,135 $ 2,183 $ 194 $ 216
1,156 1,205 - -
- - 333 318
1,140 1,111 38 36
1,213 1,229 20 22
- - 1,730 1,469
-------- -------- -------- --------
5,644 5,728 2,315 2,061
66 66 - -
216 224 - -
- - 238 238
2,835 2,835 116 93
(32) (18) - -
-------- -------- -------- --------
3,019 3,041 354 331
-------- -------- -------- --------
$ 8,729 $ 8,835 $ 2,669 $ 2,392
======== ======== ======== ========
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.
<PAGE> 7
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
SIX MONTHS ENDED JUNE 30 1996 1995
------- -------
(unaudited)
OPERATING ACTIVITIES
Net earnings $ 386 $ 328
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 130 127
Pension income (65) (93)
Change in operating assets and liabilities (252) 421
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 199 783
INVESTING ACTIVITIES
Property, plant and equipment acquired (87) (68)
Finance receivables and property on lease (318) (62)
Proceeds from sale of assets - 25
Other (6) (21)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (411) (126)
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) 33 28
Debt having maturities more than 90 days:
New borrowings 366 235
Repayments (156) (183)
Minority Interest 1
Common shares purchased (377) (242)
Dividends paid (49) (46)
------- -------
NET CASH USED BY FINANCING ACTIVITIES (183) (207)
------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (395) 450
Cash and cash equivalents at beginning of year 797 421
------- -------
Cash and cash equivalents at end of period $ 402 $ 871
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 8
MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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 Annual Report to
Shareholders for the year ended December 31, 1995.
The consolidated financial statements comprise the accounts of
McDonnell Douglas Corporation and its subsidiaries, including McDonnell
Douglas Financial Services Corporation (MDFS), which is the parent
company of McDonnell Douglas Finance Corporation (MDFC). In
consolidation, all significant intercompany balances and transactions
are eliminated.
The consolidating balance sheet represents the sum of all affiliates -
companies that McDonnell Douglas Corporation directly or indirectly
controls 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 all of its subsidiaries other than MDFS and
McDonnell Douglas Realty Company (MDRC). Those two 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
McDonnell Douglas.
McDonnell Douglas Corporation and Consolidated Subsidiaries. This
represents the consolidation of McDonnell Douglas Corporation and
all its subsidiaries (the Company).
Reclassification
In 1996, McDonnell Douglas reclassified cash flow related to certain
finance receivables and property on lease from operating activities to
investing activities. The prior year has been restated to conform with
the 1996 presentation.
<PAGE> 9
Stock Split
In January 1996, the McDonnell Douglas Board of Directors authorized a
two-for-one stock split to be implemented by a stock dividend of one
share for each share outstanding to shareholders of record on May 10,
1996, payable on May 31, 1996. Shareholders' equity has been restated
to give retroactive recognition to the stock split for all periods
presented by reclassifying from retained earnings to common stock the
par value of the additional shares arising from the split. In
addition, all references to number of shares, per share amounts, and
market prices of common stock have been restated to reflect the stock
split.
2. Contracts in Process and Inventories
Contracts in process and inventories consisted of the following:
June 30 December 31
1996 1995
----------- ----------
Government contracts in process $ 5,011 $ 5,451
Commercial products in process 2,272 1,936
Material and spare parts 683 634
Progress payments to subcontractors 1,046 1,185
Progress payments received (5,343) (5,785)
-------- --------
$ 3,669 $ 3,421
======== ========
Substantially all government contracts in process (less applicable
progress payments received) represent unbilled revenue and revenue that
is currently not billable.
The U.S. Navy on January 7, 1991, notified McDonnell Douglas 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. The Team has filed a legal action to contest the
Navy's default termination, to assert its rights to convert the
termination to one for "the convenience of the Government," and to
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 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 Team member such that
deferment is no longer in the best interest of the Government. On
December 19, 1995, the U.S. Court of Federal Claims ordered the
Government's termination of the A-12 contract for default be converted
to a termination for convenience of the Government. On June 12, 1996,
the U.S. Court of Federal Claims ordered that it would not consider
<PAGE> 10
either a loss adjustment or entitlement to profit, so that only
incurred costs remain to be determined to decide the Team's termination
for convenience recovery, and that a trial, if necessary, is scheduled
to begin no later than September 16, 1996.
At June 30, 1996, Contracts in Process and Inventories included
approximately $574 million of recorded costs on the A-12 contract,
against which the Company has established a loss provision of $350
million. The amount of the provision, which was established in 1990,
was based on the Company's belief, supported by an opinion of outside
counsel, that the termination for default would be converted to a
termination for convenience, that the Team would establish a minimum of
$250 million in claims adjustments, that there was a range of
reasonably possible results on termination for convenience, and that it
was prudent to provide for what the Company believed was the upper
range of possible loss on termination for convenience, namely $350
million. In the Company's opinion, this loss provision continues to
provide adequately for the reasonably possible reduction in value of
A12 net contracts in process and nonreimbursed supplier termination
payments as of June 30, 1996, as a result of a termination of the
contract for the convenience of the Government.
Resolution of claims on the A-12 contract will involve negotiation with
the Government or litigation, and the ultimate realization and receipt
of future revenue may vary from current estimates.
In 1984, the Company entered into a full-scale development letter
contract, containing a not-to-exceed price for the T-45 Training System
that included the conversion of the land-based British Hawk aircraft
with minimal change into a carrier-capable U.S. 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. The Company advised the Navy that
incorporation of the requested improvements into the aircraft
configuration would entitle it to additional compensation. The Company
proceeded with the improvements, and its 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, 1996, Contracts in Process and Inventories
included costs for the related contracts of $164 million. The Company
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. The Company 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. In August 1996, the Company and the Navy
agreed to settle the T-45 claims and appeal pending in the Armed
Services Board of Contract Appeal. Under the agreement, subject to
Congressional notification, the Navy will pay McDonnell Douglas $209
million by September 30, 1996, or the agreement will expire. The
agreement also provides for the resolution of several contract issues
and the conclusion of certain current business arrangements. Based on
<PAGE> 11
current understandings, McDonnell Douglas expects to record a charge to
pre-tax earnings of approximately $14 million in the third quarter of
1996 in connection with the settlement and the resolution of such
contract issues. After supplier payments, the agreement is expected to
result in favorable cash impacts aggregating approximately $169 million
in the third quarter.
Prior to October 1, 1995, MD-11 production and tooling costs were
charged to cost of sales based on the estimated average unit cost for
the program. The estimated average unit costs were based on cost
estimates of a 301-aircraft program. The costs incurred per unit in
excess of the estimated average unit cost were deferred, to be
recovered by production and sale of lower-than-average cost units. In
applying the program-average method, the Company estimated (a) the
number of units to be produced and sold in the program, (b) the rate at
which the units were expected to be produced and sold, and thus the
period of time to accomplish that, and (c) selling prices, production
costs, and the gross profit margin for the total program.
Effective October 1, 1995, McDonnell Douglas changed its accounting for
cost of sales on the MD-11 aircraft program from the program-average
cost basis to the specific-unit cost basis. At the same time,
McDonnell Douglas revalued MD-11 program support costs previously
valued in inventories consistent with the program-average cost concept.
MD-11 program support costs are now allocated to current production.
This change to the specific-unit costing method for the MD-11 program
was made in recognition of production rates, existing order base, and
length of time required to achieve program deliveries, and thus, the
resultant increased difficulty - which became apparent in the fourth
quarter of 1995 - in making the estimates necessary under the program-
average method of accounting. Because the effect of this change in
accounting principle was inseparable from the effect of the change in
accounting estimate, the change was accounted for as a change in
estimate. As a result, McDonnell Douglas recorded a noncash charge to
operations of $1.838 billion in the fourth quarter of 1995.
<PAGE> 12
3. Debt & Credit Arrangements
MDC Aerospace Credit Agreements
At June 30, 1996, MDC Aerospace has a revolving credit agreement (RCA)
under which MDC Aerospace may borrow up to $1.75 billion through June
2000. 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
June 30, 1996.
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, pursuant to a shelf registration filed with the Securities
and Exchange Commission (SEC). The interest rate applicable to each
note and certain other variable terms are established at the date of
issue. As of June 30, 1996, MDC Aerospace had issued $152 million of
medium-term notes, of which $59 million is currently outstanding.
During 1993, MDC Aerospace issued $200 million of 8.25% senior debt
securities due on July 1, 2000. As of June 30, 1996, $198 million of
securities registered under the shelf registration remain unissued.
Senior debt securities totaling $1.146 billion, including the $200
million mentioned above, were outstanding at June 30, 1996. The notes
were issued in 1992 and 1993 with interest rates of 8.25% to 9.75% and
maturities from 1997 to 2012. Aerospace long-term debt also includes
aerospace-related obligations of McDonnell Douglas Realty Company in
the amount of $20 million at June 30, 1996.
Financial Services Credit Agreements
At June 30, 1996, 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 August 1999, 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, 1996. Commercial paper of $33 million outstanding at June 30,
1996, 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.
<PAGE> 13
During 1995, MDFC filed a shelf registration statement with the SEC
relating to up to $750 million aggregate principal amount of debt
securities. MDFC established a $500 million medium-term note program
under this registration statement, and as of June 30, 1996, had issued
$220 million of such notes.
During July 1995, MDFS initiated a medium-term note program under a
private placement of up to $100 million principal amount. This program
was increased to $200 million in April 1996. As of June 30, 1996, MDFS
had issued $135 million of securities under this program.
MDFC's senior debt at June 30, 1996, included $63 million secured by
equipment that had a carrying value of $87 million. MDRC's debt of $31
million at June 30, 1996, was secured by indentures of mortgage and
deeds of trust on MDRC's interest in real estate developments that had
a carrying value of $64 million.
4. Financial Instruments
McDonnell Douglas uses derivative financial instruments to manage well-
defined foreign exchange subcontract price risks and foreign currency
denominated debt risks, and on a selective basis to reduce the impact
of interest-rate fluctuations on certain debt instruments. McDonnell
Douglas does not trade in derivatives for speculative purposes.
At June 30, 1996, the notional amount of forward exchange contracts
denominated in currencies of major industrial countries was $241
million. The term of currency derivatives varies, but the longest is
three years.
At June 30, 1996, MDFC had interest rate swap agreements outstanding as
follows:
Contract Notional Receive Pay
Maturity Amount Rate Rate
--------- -------- ------- -----
Senior debt securities 2006 - 2008 $221 Floating 7.2% - 7.5%
Capital lease obligations 2007 $168 Floating 6.7% - 6.9%
Medium term notes 1997 $ 20 Floating 6.7%
Medium term notes 2000 - 2001 $ 50 5.7%-6.0% Floating
The floating rates are based on LIBOR or Federal Funds.
5. 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,
1996, the Company had made offers of this nature to customers totaling
$2.032 billion related to aircraft on order or under option scheduled
for delivery through the year 2009 and had made guarantees and other
commitments totaling $737 million on delivered aircraft. MDFS also had
commitments to provide leasing and other financing in the aggregate
<PAGE> 14
amount of $199 million at June 30, 1996. The Company does not expect
these offers or commitments to have a material adverse effect on its
earnings, cash flow, or financial position.
The Company's outstanding guarantees include amounts related to MD-11s
operated by Viacao Aerea Rio-Grandense S.A. (VARIG). During 1994,
VARIG notified its aircraft lenders and lessors that it was temporarily
suspending payments pending a restructuring of its financial
obligations. In connection with that restructuring, the Company made
lease, loan, and interest payments totaling $65 million on behalf of
VARIG in 1994 and 1995. During January 1996, VARIG requested deferral
of additional obligations covering the January 1996 through January
1998 period. VARIG and the Company agreed to defer certain
payments owed to the Company, with repayment by VARIG to begin in 1998.
These restructurings and payments have not had and, assuming
restructuring steps are successful, are not expected to have a material
adverse effect on the Company's earnings, cash flow, or financial
position.
The Company 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. The Company
has been identified as a potentially responsible party (PRP) at 33
sites. Of these, the Company believes that it has de minimis liability
at 21 sites, including 13 sites at which it believes that it has no
future liability. At four of the sites where the Company's liability is
not considered to be de minimis, the Company lacks sufficient
information to determine its probable share or amount of liability. At
the remaining eight sites at which the Company'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, the Company 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, 1996, the accrued liability for study and remediation
expenditures at Superfund sites and for the Company's current and
former operating sites was $44 million. Because of uncertainty
inherent in the estimation process, it is at least reasonably possible
that actual costs will differ from estimates. Ongoing operating and
maintenance costs on current operating sites and remediation
expenditures on property held for sale are not included in this amount.
The Company believes any amounts paid in excess of the accrued
liability will not have a material effect on its earnings, cash flow,
or financial position. Claims for recovery have not been netted
against the environmental liabilities. Receivables have been recorded
from one insurance carrier with which environmental coverage has been
agreed. Such receivables totaled $8 million at June 30, 1996.
A number of legal proceedings and claims are pending or have been
asserted against the Company, including legal proceedings and claims
relating to alleged injuries to persons associated with the disposal of
hazardous substances. A substantial portion of such legal proceedings
and claims is covered by insurance. The Company believes that the
final outcome of such proceedings and claims will not have a material
adverse effect on its earnings, cash flow, or financial position.
<PAGE> 15
The Company has union contracts that have expired or will expire in
1996, covering eleven bargaining units and approximately 7,300 people.
The largest of those unions is District Lodge 837, International
Association of Machinists and Aerospace Workers (IAMAW). The IAMAW
contract expired May 19, 1996. On June 5, 1996, the IAMAW, which
represents approximately 6,700 St. Louis, Missouri employees, initiated
a labor strike. Although management cannot predict when a labor
settlement will be reached, the IAMAW strike is expected to result in
some delay in military aircraft deliveries in the 1996 third and fourth
quarters and consequently some shifting of cash receipts to later
quarters. Revenues and earnings are not expected to be materially
impacted, although the extent will be dependent upon the length of the
strike and the productivity of temporary replacement workers.
McDonnell Douglas is striving to negotiate an agreement that balances
fair compensation and security for employees with the positioning of
the corporation for continued competitiveness in the future.
6. Operations of MDFS
The condensed financial data presented below have been summarized from
the consolidated financial statements of MDFS:
Six Months Ended June 30 1996 1995
-------- ---------
Earned income $ 112 $ 96
Costs and expenses 77 66
Net earnings 23 19
Dividends - 18
7. Supplementary Payment Information
Six Months Ended June 30 1996 1995
-------- ---------
Interest paid $ 108 $ 110
Income taxes paid 207 195
8. Earnings Per Share
Earnings per share computations are based upon the weighted average
common shares outstanding during the six-month period which were 220.1
million in 1996 and 229.6 million in 1995.
<PAGE> 16
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
8, and with Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A), Audited Consolidated Financial
Statements and Notes to Consolidated Financial Statements appearing in
the Company's 1995 Annual Report to Shareholders (the 1995 Annual
Report).
Forward-Looking Information
Statements and financial discussion and analysis by management
contained herein and in the MD&A of the 1995 Annual Report which are
not historical facts are forward-looking statements. Such forward-
looking statements in this document are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve a number of risks and
uncertainties. For a discussion of certain risks and uncertainties
which may affect the actual results of any forward-looking information
contained herein, refer to the Form 8-K filed by the Company with the
Securities and Exchange Commission (SEC) on April 17, 1996.
Results of Operations
McDonnell Douglas revenues were $3.264 billion in the second quarter of
1996, compared to $3.922 billion in the second quarter of 1995.
Revenue for the first six months of 1996 were $6.435 billion, down from
$7.255 billion in the first six months of 1995. A decrease in revenue
in the commercial aircraft segment was only partially offset by
increased six month revenues in each of the other segments.
Net earnings for the second quarter of 1996 were $188 million, or $.87
per share, compared with $169 million, or $.74 per share, in the second
quarter of 1995. The 1996 second quarter earnings per share were 18
percent higher than the 1995 second quarter.
Net earnings for the first six months of 1996 were $386 million, or
$1.76 per share, compared with $328 million, or $1.43 per share, in the
first six months of 1995. The 1996 earnings per share were 23 percent
higher than the 1995 first six months.
Operating earnings were $328 million for the second quarter of 1996,
and $675 million for the first six months of 1996. That compares with
$300 million and $593 million, respectively, for the same periods in
1995. All of the operating earnings improvement in the second quarter
and most of the improvement for the six months were in the military
aircraft segment.
Pension income totaled $33 million in the second quarter and $65
million in the 1996 first six months, compared with $43 million and $93
million, respectively, in the same periods of 1995. Increases
announced in the second quarter of 1995 in pension benefits and a
change in the actuarial interest assumption for the discount rate
contributed to the 1996 reduction.
<PAGE> 17
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
------ ------ ------ ------
(Millions of Dollars)
Revenues
Military aircraft $ 1,923 $ 1,969 $ 3,962 $ 3,898
Commercial aircraft 722 1,385 1,150 2,302
Missiles, space and
electronic systems 529 471 1,137 878
Financial services and other 87 84 174 161
------- ------- ------- -------
Operating revenues 3,261 3,909 6,423 7,239
Non-operating income 3 13 12 16
------- ------- ------- -------
Total Revenues $ 3,264 $ 3,922 $ 6,435 $ 7,255
======= ======= ======= =======
Earnings
Military aircraft $ 243 $ 205 $ 493 $ 415
Commercial aircraft 18 21 37 33
Missiles, space and
electronic systems 53 57 111 116
Financial services and other 14 17 34 29
------- ------- ------- -------
Operating earnings 328 300 675 593
Corporate and other (4) 3 (4) (2)
Interest expense (31) (35) (62) (72)
Income taxes (105) (99) (223) (191)
------- ------- ------- -------
Net Earnings $ 188 $ 169 $ 386 $ 328
======= ======= ======= =======
Military Aircraft
Revenues for the military aircraft segment were $1.9 billion for the
second quarter and $4.0 billion for the first six months of 1996. That
compares with $2.0 billion and $3.9 billion, respectively, for the same
periods in 1995.
Operating earnings in the segment in the 1996 second quarter were $243
million, compared with $205 million in the second quarter of 1995.
Operating earnings in this segment for the first six months of 1996
were $493 million, compared with $415 million in the 1995 same period.
These amounts reflect a 19 percent improvement in the 1996 second
quarter and first six months operating earnings. Improved earnings in
the F/A-18 program, which included an award fee in the development
portion of the program, accounted for most of the 1996 second quarter
improvement. In addition, the 1995 second quarter results included an
$18 million write-off on a modified KC-10 Dutch tanker contract
involving a new product design. Increased earnings in the C-17 and
Apache programs also contributed to the year over year increase for the
six month period. Profit margins in the segment were about 2 percent
higher in 1996 as compared to the three and six month periods of 1995.
<PAGE> 18
Commercial Aircraft
Revenues in the commercial aircraft segment were $722 million for the
second quarter and $1.2 billion for the first six months of 1996, down
from $1.4 billion in the second quarter and $2.3 billion in the first
six months of 1995. McDonnell Douglas delivered three MD-80 and one MD-
90 twin jets and four MD-11 trijets in 1996's second quarter. This
compared with five MD-80 and three MD-90 twin jets and seven MD-11
trijets in 1995's second quarter. For the first six months of 1996,
twin jet deliveries totaled eleven (seven MD-80s and four MD-90s) and
trijet deliveries totaled seven, a decrease of six twin jets and four
trijets from the same period in 1995. In addition, two twin jet and
two trijet 1996 first quarter deliveries were accounted for as
operating leases with minimal revenue recorded on such transactions at
the time of delivery.
Operating earnings in the commercial aircraft segment in the 1996
second quarter and first six months were $18 million and $37 million,
respectively, compared with $21 million and $33 million in the 1995
same periods. Earnings in the 1996 second quarter included recoveries
from an insurance carrier of charges previously expensed related to a
1987 airline accident, and in the first quarter included recoveries
associated with environmental insurance coverage. Development costs
associated with the MD-95, which were higher in the 1996 second quarter
and first six months compared with the 1995 same periods, have more
than offset these insurance recoveries.
Effective October 1, 1995, McDonnell Douglas began recording cost of
sales on MD-11 trijet sales on the specific-unit cost basis. Prior to
October 1, 1995, MD-11 trijet production and tooling costs were charged
to cost of sales using the program-average cost basis. See Note 2,
"Contracts in Process and Inventories," page 9, for a further
discussion of this change.
McDonnell Douglas received net orders for eight MD-90 twin jets and two
MD-11 passenger trijets in the second quarter of 1996. Three of the MD-
90 twin jets and both MD-11 trijets are scheduled for delivery in 1996,
with the remaining MD-90 twin jet deliveries scheduled in 1997 and
1998. On June 30, 1996, McDonnell Douglas had firm orders for 17 MD-80
twin jets, 125 MD-90 twin jets, 50 MD-95 twin jets, and 19 MD-11
trijets.
Missiles, Space and Electronic Systems
Revenues for the missiles, space and electronic systems segment were
$529 million for the second quarter and $1.1 billion for the first six
months of 1996. That compares with $471 million and $878 million for
the same periods in 1995. Higher revenue in the Delta II and Space
Station programs, partially offset by lower revenue in the missiles
programs, contributed to the increase in the 1996 periods.
<PAGE> 19
Operating earnings in the missiles, space and electronic systems
segment in the 1996 second quarter and first six months were $53
million and $111 million, respectively, compared to $57 million and
$116 million in the 1995 same periods. Profit margins in this segment
were down 2 percent in the second quarter and 3.5 percent for the first
six months of 1996, as compared to 1995. Expenditures on the Delta
III, a launch vehicle currently under development, were largely offset
by improved earnings in the Delta II program during the first two
quarters of 1996. Both quarters in 1995 were affected by increased
costs related to the closure of a Florida missile facility.
Financial Services
Operating earnings in the financial services and other segment were $14
million for the second quarter and $34 million in the 1996 first six
months, compared with $17 million and $29 million, respectively, in the
1995 same periods. Revenues in this segment were up slightly during
the quarter to $87 million and were $174 million for the first six
months of 1996, $13 million higher than in the first six months of
1995.
Liquidity
As detailed in this section, McDonnell Douglas believes that it has
sufficient sources of capital to meet anticipated needs.
Debt and Credit Arrangements. MDC Aerospace, which represents the
consolidation of McDonnell Douglas Corporation and all of its
subsidiaries other than McDonnell Douglas Financial Services
Corporation (MDFS) and McDonnell Douglas Realty Company (MDRC), has in
place a number of credit facilities with banks and other institutions.
At June 30, 1996, MDC Aerospace had a revolving credit agreement (RCA)
under which it can borrow up to $1.75 billion through June 2000. There
were no amounts outstanding under the RCA at June 30, 1996.
In 1992, MDC Aerospace 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, 1996, $198 million of
securities registered under the shelf registration remain unissued. No
securities have been issued under this shelf registration since the
first quarter of 1995.
Amounts available under the RCA and medium-term note program may be
accessed to meet cash requirements.
McDonnell Douglas has an agreement with a financial institution to sell
a participation interest in a designated pool of government and
commercial receivables in amounts up to $300 million. As of June 30,
1996, no current receivable interests have been sold.
<PAGE> 20
Shareholder Initiatives. On October 28, 1994, the Company's Board of
Directors authorized a stock repurchase plan that authorizes McDonnell
Douglas to purchase up to 36 million shares, or about 15 percent of its
then-outstanding common stock. Although funds are available under
existing debt agreements, the Company intends to continue to use excess
cash flow to fund the stock repurchase program and does not expect the
program to affect negatively the Company's ability to fund capital
spending, research and development, or acquisitions. Through June 30,
1996, the Company had acquired 22.4 million shares, or about 62 percent
of the authorized repurchase amount, at a cost of $799 million.
In January 1996, the MDC Board of Directors authorized a two-for-one
stock split to be implemented by a stock dividend of one share for each
share outstanding to shareholders of record on May 10, 1996, payable on
May 31, 1996.
Aerospace Cash & Cash Equivalents. Aerospace cash and cash equivalents
were $386 million at June 30, 1996, compared with $784 million at
December 31, 1995. Aerospace debt decreased by $18 million during the
same period. Cash used by aerospace operations was $4 million for the
first six months of 1996, prior to reductions of $377 million for
common stock repurchases. An increase in inventory, largely in
commercial aircraft scheduled for second half 1996 deliveries,
contributed to the use of cash in the first six months of 1996.
As the result of an agreement reached in August 1996 by the Company and
the Navy regarding the settlement of T-45 claims and resolution of
certain contract issues, the Company expects favorable cash impacts,
after supplier payments, aggregating approximately $169 million for
this item in the third quarter of 1996. See Note 2 "Contracts in
Process and Inventories," page 9, for a further discussion of the
agreement.
Development Programs. In October 1995, McDonnell Douglas launched the
MD-95, a 100-seat medium-range airliner. Initial deliveries of the
MD-95 are scheduled in 1999. In addition, in May 1995 McDonnell Douglas
announced the development of the Delta III, its newest expendable launch
vehicle. The MD-95 twin jet and the Delta III launch vehicle will require
investments in development, inventory, and tooling during the next several
years, which the Company intends to fund with excess cash flow or from
resources available under its existing credit agreements.
Commercial Aircraft Financing. Airlines may decline deliveries of
aircraft, request changes in delivery schedules, or default on
contracts for firm orders. Aircraft delivery delays or defaults by
commercial aircraft customers not anticipated by the Company 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 5, "Commitments and Contingencies," page 13, the
Company also has outstanding guarantees of $737 million related to the
marketing of commercial aircraft. The Company does not believe that
the existence of such guarantees, after considering residual values, or
delays or defaults by commercial aircraft customers, will have a
material adverse effect upon its earnings, cash flow, or financial
position.
<PAGE> 21
McDonnell Douglas has made lease, loan principal, and interest payments
totaling $65 million and has agreed to make certain additional loan principal
payments through January 1998 on behalf of Viacao Aerea Rio-Grandense S.A.
(VARIG). Payments on behalf of VARIG are not expected to have a material
adverse effect on earnings, cash flow, or financial position of the Company.
See Note 5, "Commitments and Contingencies," page 13, for a further
discussion of VARIG.
The Company, including MDFC, has also made offers totaling $2.032
billion to arrange or provide financing for ordered but undelivered
aircraft. The Company does not anticipate that the existence of such
financing offers will have a material adverse effect on its earnings,
cash flow, or financial position. See Note 5, "Commitments and
Contingencies," page 13.
Financial Services. Financial Services debt at June 30, 1996, was
approximately $1.7 billion, up from approximately $1.5 billion at
December 31, 1995. The increase in debt is consistent with the
increased finance receivables and property on lease portfolio of MDFC.
During 1995, MDFC filed a shelf registration statement with the SEC
providing for up to $750 million aggregate principal amount of debt
securities. MDFC established a $500 million medium-term note program
under this registration statement, and as of June 30, 1996, had issued
$220 million of debt securities under this program.
During 1995, MDFS also initiated a medium-term note program under a
private placement of up to $100 million aggregate principal amount.
This program was increased to $200 million in April 1996. As of June
30, 1996, MDFS had issued $135 million of securities under this
program.
MDFC's senior debt at June 30, 1996, included $63 million secured by
equipment that had a carrying value of $87 million. MDRC's debt of $31
million at June 30, 1996, was secured by indentures of mortgage and
deeds of trust on MDRC's interest in real estate developments that had
a carrying value of $64 million.
MDFC has also used, and in the future anticipates using, cash provided
by operations, commercial paper borrowings, borrowings under bank
credit lines, and term borrowings as its primary sources of funding.
MDFC also anticipates using proceeds from the issuance of additional
public and private debt to fund future growth.
<PAGE> 22
Business and Market Considerations
General
McDonnell Douglas Corporation is a major participant in both the
defense and commercial aerospace industries. McDonnell Douglas has a
wide range of programs in production and development, and is the
world's leading producer of military aircraft. McDonnell Douglas is
one of the largest U.S. defense contractors and NASA prime contractors
based on prime contracts awarded and is one of the principal
manufacturers of large commercial transport aircraft.
Discussion under the captions "Military Aerospace Business", and
"Government Business Audits, Reviews and Investigations" reflect
developments during the second quarter of 1996 and should be read in
conjunction with the "Business and Market Considerations" discussion in
Management's Discussion and Analysis of Financial Condition and Results
of Operations in McDonnell Douglas Corporation's 1995 Annual Report to
Shareholders and in its quarterly report on Form 10-Q for the quarterly
period ended March 31, 1996.
Military Aerospace Business
F/A-18 Hornet. In May 1996, the F/A-18E/F Super Hornet program
received authority to proceed for low rate initial production of 12
aircraft. The contract has an estimated value of $1.8 billion.
The U.S. Navy signed a contract with an estimated value of $530 million
in April 1996 to purchase 18 F/A-18C/D Hornet aircraft. Also in April,
the government of Finland signed an agreement with the U.S. Navy to
purchase 17 McDonnell Douglas F/A-18C/D aircraft with an estimated
value of $466 million.
International Space Station. In May 1996, a subcontract agreement
covering the Company's work on the International Space Station was
ratified by NASA. The agreement covers remaining work in excess of $1
billion.
Joint Air-To-Surface Missile (JASSM). On June 17, 1996, McDonnell
Douglas was selected by the U.S. Air Force and Navy as one of two
contractors to develop an affordable new-generation missile system
called the Joint Air-to-Surface Standoff Missile, or JASSM. Valued at
approximately $130 million, the contract is for the program definition
and risk reduction phase of the JASSM program. The contract will run
through 1998, when a single source is expected to be selected for the
engineering, manufacturing and development phase, followed by
production contracts starting in 2000 for 2,400 missiles.
C-17 GLOBEMASTER III. On May 31, 1996, the Secretary of the Air Force
signed a letter of transmittal to McDonnell Douglas to produce the next
80 C-17 Globemaster III military transport planes under a seven-year
$14.2 billion contract.
Under the contract, McDonnell Douglas will build the next 80 aircraft,
starting in 1997 and ending in 2004, ramping up to a maximum of 15
aircraft a year. There is an option for a six-year contract, with the
five aircraft scheduled for 2004 moved to earlier in the program.
<PAGE> 23
T-38 Avionics Upgrade Program. In July 1996, McDonnell Douglas was
chosen to provide the U.S. Air Force with the first phase of the T-38
Avionics Upgrade Program. Under the contract, valued at $45.6 million,
the Company will develop upgrades to the avionics system and deliver
two T-38 aircraft with the upgrades incorporated. In addition, the
Company will design and develop upgrades for the T-38 Operational
Flight Trainer, Unit Training Device and Training System Support
Center, as well as deliver one of each. First flight of an upgraded
T-38 is scheduled for June 1998, with production modifications
beginning in 1999. The entire program has a potential value of more
than $400 million, including production and support options.
Government Business Audits, Reviews, and Investigations
McDonnell Douglas, 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 on presently known facts, the Company
believes that it has not engaged in any criminal misconduct with
respect to any of these matters currently known to be under
investigation and that the ultimate resolution of these investigations
will not have a material adverse effect on the Company's earnings, cash
flow, or financial position.
In March 1991, the SEC issued a Formal Order of Private Investigation
(the 1991 SEC Investigation) looking into whether the Company violated
the Securities Act of 1933 and the Securities Exchange Act of 1934 in
connection with disclosures about and accounting for the A-12 program.
In February 1993, the SEC issued subpoenas requesting additional
information, and it broadened its inquiry to include the C-17 program
and possibly other programs. In June 1996, McDonnell Douglas resolved
the investigation commenced in 1993 relating to the Company's
disclosure about and accounting for the C-17 program. Without
admitting or denying any of the allegations in the complaint for
purposes of this SEC proceeding only, and solely for the purposes of
settlement of the SEC's complaint, the Company simultaneously agreed to
the entry of an injunction enjoining it from violating Section 13(a) of
the Securities Exchange Act of 1934, and Rules 13a-1 and 12b-20
thereunder in the future, and to the payment of a civil penalty of
$500,000. This settlement concluded the investigation. Further, the
SEC investigation commenced in 1991 with regard to the A-12 program was
concluded without any action.
Backlog
McDonnell Douglas had firm backlog of $22.629 billion on June 30, 1996,
compared with $19.640 billion on December 31, 1995. Total backlog was
$45.562 billion on June 30, 1996, compared with $28.353 billion on
December 31, 1995. The increase in firm backlog related to the Apache
program and to finalizing terms for the next 8 C-17 aircraft. The 61
percent increase in total backlog related largely to a multi-year
contract on the C-17 program, and to a lesser extent increases in the
Space Station, F/A-18 and helicopter programs.
<PAGE> 24
Union Negotiations
The Company has union contracts that have expired or will expire in
1996, covering eleven bargaining units and approximately 7,300 people.
The largest of those unions is District Lodge 837, International
Association of Machinists and Aerospace Workers (IAMAW). The IAMAW
contract expired May 19, 1996. On June 5, 1996, the IAMAW, which
represents approximately 6,700 St. Louis, Missouri employees, initiated
a labor strike. Although management cannot predict when a labor
settlement will be reached, the IAMAW strike is expected to result in
some delay in military aircraft deliveries in the 1996 third and fourth
quarters and consequently some shifting of cash receipts to later
quarters. Revenues and earnings are not expected to be materially
impacted, although the extent will be dependent upon the length of the
strike and the productivity of temporary replacement workers.
McDonnell Douglas is striving to negotiate an agreement that balances
fair compensation and security for employees with the positioning of
the corporation for continued competitiveness in the future.
<PAGE> 25
PART II OTHER INFORMATION
ITEM 4. SUMBISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of McDonnell Douglas Corporation's
shareholders was held on Friday, April 26, 1996.
(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 (share totals do not reflect the two-for-one stock split
which occurred in May 1996):
Four Directors were elected at the annual meeting.
B.A. (Dolph) Bridgewater, Jr.: 97,786,964 shares were voted for
election, 1,823,696 shares were withheld, and 1,692 shares were broker
non-votes. William E. Cornelius: 97,892,519 shares were voted for
election, 1,718,141 shares were withheld, and 1,692 shares were broker
non-votes. William S. Kanaga: 97,637,671 shares were voted for
election, 1,972,990 shares were withheld, and 1,691 shares were broker
non-votes. George A. Schaefer: 97,699,600 shares were voted for
election, 1,911,060 shares were withheld, and 1,692 shares were broker
non-votes.
The shareholders considered a proposed amendment and restatement of
McDonnell Douglas' Charter to increase the number of authorized shares
of common stock from 200 million to 400 million shares. This proposal
was approved; 98,289,690 shares were voted for the proposal, 1,022,917
shares were voted against it, 298,271 shares were abstained, and 1,474
shares were broker non-votes.
A shareholder proposal requested that the Board of Directors provide a
comprehensive report on the Company's foreign military sales. This
proposal was defeated; 4,069,093 shares voted for the proposal,
86,148,372 shares voted against it, 3,494,342 shares were abstained,
and 5,900,545 shares were broker non-votes.
A shareholder proposal requested that McDonnell Douglas establish a
Nominating Committee to recommend candidates to stand for election to
the Company's Board of Directors and that the Committee be comprised
solely of independent directors as defined in the proposal. This
proposal was defeated; 19,501,925 shares were voted for the proposal,
71,974,581 shares were voted against it, 2,235,083 shares were
abstained, and 5,900,763 shares were non-votes.
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on April 17, 1996, in response to Item 5.
Form 8-K filed on June 3, 1996, in response to Item 5 and
Item 7.
Form 8-K filed on June 5, 1996, in response to Item 5.
Form 8-K filed on July 8, 1996, in response to Item 5.
Form 8-K filed on August 2, 1996, in response to Item 5.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, its principal accounting officer, thereunto
duly authorized.
MCDONNELL DOUGLAS CORPORATION
(Registrant)
Date: August 13, 1996 /s/ R. L. Brand
R. L. Brand
Vice President and Controller
and Registrant's Authorized
Officer
<PAGE> 27
Exhibit 12
McDonnell Douglas Corporation
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended June 30, 1996
(Dollars in Millions)
Earnings
Earnings before income taxes $609
Add: Interest expense 124
Interest factor in rents 23
----
$756
====
Fixed Charges
Interest expense $124
Interest factor in rents 23
----
$147
====
Ratio of earnings to fixed charges 5.1X
====
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