<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 March 31, 1996
------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------------------------
Commission file number 1-3685
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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
- -----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for each shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- ------
Common shares outstanding at April 30, 1996 - 109,184,523 shares
<PAGE> 2
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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 15-21
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
<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 1996 1995
-------- --------
(unaudited)
Revenues $ 3,171 $ 3,333
Costs and expenses:
Cost of products, services and rentals 2,537 2,794
General and administrative expenses 169 156
Research and development 88 68
Interest expense:
Aerospace segments 31 37
Financial services and other segment 30 27
-------- --------
Total Costs and Expenses 2,855 3,082
-------- --------
EARNINGS BEFORE INCOME TAXES 316 251
Income taxes 118 92
-------- --------
NET EARNINGS $ 198 $ 159
======== ========
EARNINGS PER SHARE $ 1.78 $ 1.38
======== ========
DIVIDENDS DECLARED PER SHARE $ .24 $ .20
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
-----------------------------
March 31 December 31
1996 1995
--------- --------
(unaudited)
Assets
Cash and cash equivalents $ 563 $ 797
Accounts receivable 882 821
Finance receivables and property on lease 2,626 2,347
Contracts in process and inventories 3,579 3,421
Prepaid income taxes - -
Property, plant and equipment 1,468 1,471
Investment in Financial Services - -
Other assets 1,599 1,609
-------- -------
Total Assets $10,717 $10,466
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 2,171 $ 2,284
Accrued retiree benefits 1,182 1,205
Income taxes 103 3
Advances and billings in excess of related
costs 1,164 1,147
Notes payable and long-term debt:
Aerospace segments 1,234 1,251
Financial services and other segment 1,755 1,469
-------- --------
7,609 7,359
Minority Interest 67 66
Shareholders' Equity:
Preferred Stock - none issued
Common Stock - issued and outstanding:
1996, 110.1 shares; 1995, 111.8 shares 110 112
Additional capital - -
Retained earnings 2,967 2,947
Unearned compensation (36) (18)
-------- --------
3,041 3,041
-------- --------
Total Liabilities and Shareholders' Equity $10,717 $10,466
======== ========
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
MDC Aerospace Financial Services
- ----------------------- -----------------------
March 31 December 31 March 31 December 31
1996 1995 1996 1995
-------- --------- -------- --------
(unaudited) (unaudited)
$ 548 $ 784 $ 15 $ 13
954 934 2 2
147 165 2,479 2,182
3,579 3,421 - -
217 315 - -
1,404 1,358 64 113
344 331 - -
1,520 1,527 79 82
-------- -------- -------- --------
$ 8,713 $ 8,835 $ 2,639 $ 2,392
======== ======== ======== ========
$ 2,083 $ 2,183 $ 162 $ 216
1,182 1,205 - -
- - 320 318
1,128 1,111 36 36
1,212 1,229 22 22
- - 1,755 1,469
-------- -------- -------- --------
5,605 5,728 2,295 2,061
67 66 - -
110 112 - -
- - 238 238
2,967 2,947 106 93
(36) (18) - -
-------- -------- -------- --------
3,041 3,041 344 331
-------- -------- -------- --------
$ 8,713 $ 8,835 $ 2,639 $ 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> 6
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
THREE MONTHS ENDED MARCH 31 1996 1995
------- ------
(unaudited)
OPERATING ACTIVITIES
Net earnings $ 198 $ 159
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 63 65
Pension income (32) (50)
Change in operating assets and liabilities (217) 427
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12 601
INVESTING ACTIVITIES
Property, plant and equipment acquired (51) (42)
Finance receivables and property on lease (295) (95)
Proceeds from sale of assets - 25
Other 26 9
------- -------
NET CASH USED BY INVESTING ACTIVITIES (320) (103)
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) 89 68
Debt having maturities more than 90 days:
New borrowings 262 137
Repayments (82) (88)
Minority Interest 1 1
Common shares purchased (174) (119)
Dividends paid (22) (22)
------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 74 (23)
------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (234) 475
Cash and cash equivalents at beginning of year 797 421
------- -------
Cash and cash equivalents at end of period $ 563 $ 896
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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> 8
Stock Split
On April 26, 1996, the shareholders of McDonnell Douglas Corporation
approved an increase in the Company's authorized common stock from 200
million shares to 400 million shares. By resolution dated January 26,
1996, the McDonnell Douglas Board of Directors authorized and declared,
subject to the foregoing shareholder approval, a 2-for-1 stock split to be
effected by the payment on May 31, 1996 of a stock dividend of one share of
common stock on each share outstanding at the close of business on May 10,
1996. References to number of shares and per share amounts as of March 31,
1996, do not reflect these changes.
2. Contracts in Process and Inventories
Contracts in process and inventories consisted of the following:
March 31 December 31
1996 1995
-------- --------
Government contracts in process $ 5,478 $ 5,451
Commercial products in process 2,082 1,936
Material and spare parts 671 634
Progress payments to subcontractors 1,135 1,185
Progress payments received (5,787) (5,785)
-------- --------
$ 3,579 $ 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. A trial of remaining issues, including damages due to the
Team, is scheduled to commence in November 1996.
<PAGE> 9
At March 31, 1996, Contracts in Process and Inventories included
approximately $573 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 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 A-12 net contracts in process and
nonreimbursed supplier termination payments as of March 31, 1996, as a
result of a termination of the contract for the convenience of the
Government. The Company has been provided 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 the Company
are the same as if the termination had been issued for the convenience of
the Government, and that, subject to prevailing that the termination is
properly one for the convenience of the Government, the probable claims
adjustments are not less than $250 million.
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 March 31, 1996, Contracts in Process and Inventories included costs for
the related contracts of $166 million. Realization of the majority of this
amount is dependent on the Company's recovery on claims filed with respect
to the improvements. 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 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. The Company's belief
as to expected claims recovery is supported by an opinion of outside
counsel provided to the Company that there are reasonable factual and legal
bases for the current claims against the Navy and that, based on the
Company's labor and cost accounting records and computations, it is
probable that McDonnell Douglas will recover in excess of $225 million on
the claims. Additionally, if the Company were not to recover a portion of
the claims amount related to work for which a subcontractor is responsible,
the Company, 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 $156 million
would be required on the related development and low-rate initial-
production contracts.
<PAGE> 10
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.
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 million in the fourth
quarter of 1995.
<PAGE> 11
3. Debt & Credit Arrangements
MDC Aerospace Credit Agreements
At March 31, 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 March 31, 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
March 31, 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 March 31, 1996, $198 million of securities registered under the shelf
registration remain unissued.
Senior debt securities totaling $1,145 million, including the
$200 million mentioned above, were outstanding at March 31, 1996. The
notes were issued in 1992 and 1993 with interest rates of 8.25% to 9.8% and
maturities from 1997 to 2012. Aerospace long-term debt also includes
aerospace-related obligations of McDonnell Douglas Realty Company in the
amount of $22 million at March 31, 1996.
Financial Services Credit Agreements
At March 31, 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 March 31,
1996. Commercial paper of $89 million outstanding at March 31, 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> 12
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 March 31, 1996, had issued $170
million of securities.
During July 1995, MDFS initiated a medium-term note program under a private
placement of up to $100 million aggregate principal amount. As of
March 31, 1996, MDFC had issued $85 million of securities under the
program.
MDFC's senior debt at March 31, 1996 included $69 million secured by
equipment that had a carrying value of $95 million. MDRC's debt of $28
million at March 31, 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 $60 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 March 31, 1996, the notional amount of forward exchange contracts
denominated in currencies of major industrial countries was $99 million.
The term of currency derivatives varies, but the longest is three years.
At March 31, 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 $166 Floating 6.7% - 6.9%
Medium term notes 1997 $ 20 Floating 6.7%
Medium term notes 2000 $ 20 8.6% 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 March 31, 1996,
MDC Aerospace had made offers of this nature to customers totaling $1,301
million related to aircraft on order or under option scheduled for delivery
through the year 2002 and had made guarantees and other commitments
totaling $591 million on delivered aircraft. MDFS also had commitments to
provide leasing and other financing in the aggregate amount of $180 million
at March 31, 1996. The Company does not expect these offers or commitments
to have a material adverse effect on its earnings, cash flow, or financial
position.
<PAGE> 13
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 tentatively 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 not
unsuccessful, 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 12 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 seven of 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 March 31, 1996, the accrued liability for study and remediation
expenditures at Superfund sites and for the Company's current and former
operating sites was $45 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 March 31, 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.
The Company has union contracts that 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), whose contract ends May 19, 1996. Contract
negotiations with the IAMAW officially began March 25, 1996.
<PAGE> 14
6. Operations of MDFS
The condensed financial data presented below have been summarized from the
consolidated financial statements of MDFS:
Three Months Ended March 31 1996 1995
------ ------
Earned income $ 57 $ 47
Costs and expenses 36 34
Net earnings 13 9
Dividends - 9
7. Supplementary Payment Information
Three Months Ended March 31 1996 1995
------ ------
Interest paid $ 57 $ 100
Income taxes paid 18 25
8. Earnings Per Share
Earnings per share computations are based upon the weighted average common
shares outstanding during the three-month period which were 111,115,990 in
1996 and 115,818,563 in 1995.
<PAGE> 15
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 (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 $3.171 billion in the first quarter of
1996, compared to $3.333 billion in the first quarter of 1995. A decrease
in revenue in the commercial aircraft segment was largely offset by
increases in each of the other segments.
Net earnings for the first quarter of 1996 were $198 million, an increase
of 25 percent over the first quarter 1995 net earnings of $159 million.
The earnings improvement was led by the military aircraft segment.
Operating earnings for the first quarter of 1996 were $347 million,
compared to $293 million in the first quarter of 1995. Operating earnings
were higher in the military aircraft, commercial aircraft, and financial
services and other segments. The missiles, space and electronic systems
segment operating earnings were flat compared to 1995's first quarter.
Pension income totaled $32 million in the 1996 first quarter, down from $50
million in the first quarter of 1995. Increases in pension benefits
announced in the second quarter of 1995 and a change in the actuarial
interest assumption for the discount rate contributed to the 1996
reduction.
<PAGE> 16
Three Months Ended
March 31
1996 1995
------- -------
(Millions of dollars)
Revenues
Military aircraft $ 2,039 $ 1,929
Commercial aircraft 428 917
Missiles, space and electronic
systems 608 407
Financial services and other 87 77
-------- --------
Operating revenues 3,162 3,330
Non-operating income 9 3
-------- --------
Total Revenues $ 3,171 $ 3,333
======== ========
Earnings
Military aircraft $ 250 $ 210
Commercial aircraft 19 12
Missiles, space and electronic
systems 58 59
Financial services and other 20 12
-------- --------
Operating earnings 347 293
Corporate and other (5)
Interest expense (31) (37)
Income taxes (118) (92)
-------- --------
Net Earnings $ 198 $ 159
======== ========
Military Aircraft
Revenues in the military aircraft segment increased 6 percent in the first
quarter of 1996 to $2.0 billion from $1.9 billion in the first quarter of
1995. Several programs contributed to the increase, most notably the F/A-
18 and C-17 programs and the remanufacturing phase associated with the
Apache Longbow program.
The military aircraft segment had record operating earnings of $250 million
in the first quarter of 1996, compared with $210 million in the same period
in 1995. Improved earnings in the F/A-18 and C-17 programs led the way. C-
17 earnings included award fees in the first quarter of 1996 and 1995.
Profit margins in this segment exceeded 12 percent in the 1996 period,
compared with just under 11 percent in the 1995 first quarter.
MDC received payment in the first quarter of 1995 related to the C-17
omnibus settlement. See also "Liquidity," page 18.
<PAGE> 17
Commercial Aircraft
Revenues in the commercial aircraft segment decreased to $428 million in
the 1996 first quarter, compared with $917 million in the 1995 same
quarter. McDonnell Douglas delivered four MD-80 and three MD-90 twin jets
and three MD-11 trijets in the 1996 first quarter, compared with six MD-80
and three MD-90 twin jets and four MD-11 trijets in the 1995 same period.
Two of the MD-90 twin jet and two of the MD-11 trijet 1996 deliveries were
accounted for as operating leases with minimal revenue recorded on such
transactions at the time of delivery. The decreased revenues in the first
quarter of 1996 were attributable mainly to the types of transactions
(operating leases rather than sales) and, to a lesser extent, to lower
number of aircraft deliveries.
Operating earnings in the commercial aircraft segment in the 1996 first
quarter were $19 million, up from $12 million in the first quarter of 1995.
Earnings in the 1996 first quarter include recoveries from an insurance
carrier related to environmental coverage at several sites. Before period
costs, operating margins in the commercial aircraft programs in the first
quarter of 1996 were minimal. Earnings from the sale of spare parts and
other commercial aircraft support services offset the commercial aircraft
research and development and general and administrative expenses.
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 8, for a further discussion of this change.
During the 1996 first quarter, McDonnell Douglas received net orders for
four MD-90 twin jets and new orders for three passenger configuration MD-11
trijets. Two of the MD-90's are scheduled for delivery in 1996. Two of
the MD-11 orders represent 1996 deliveries, and the third a 1997 first
quarter scheduled delivery. On March 31, 1996, McDonnell Douglas had firm
orders for 20 MD-80 twin jets, 118 MD-90 twin jets, 50 MD-95 twin jets, and
21 MD-11 trijets.
Missiles, Space and Electronic Systems
Revenues in the missiles, space and electronic systems segment increased to
$608 million in the first quarter of 1996, from $407 million in the same
period in 1995. Higher revenue in the Delta II program, bolstered by four
launches in the 1996 first quarter, accounted for the increase.
Operating earnings in the missiles, space and electronic systems segment in
the first quarter of 1996 were $58 million, compared with $59 million in
the first quarter of 1995. Profit margins in this segment were 9.5 percent
in the first quarter of 1996, compared with 14.5 percent in the same period
of 1995. Development expenditures on the Delta III, a launch vehicle
currently under development, and lower earnings on the Space Station
program contributed to the reduced margins in 1996. The Delta II program
recorded increased earnings in 1996 over the 1995 first quarter.
<PAGE> 18
Financial Services
Operating earnings in the financial services and other segment were $20
million in the first quarter of 1996, compared with $12 million in the same
quarter in 1995. Revenues in this segment were $87 million in the first
quarter of 1996, an increase of $10 million over the same period in 1995.
The earnings improvement and revenues increase reflect the corporation's
continued focus on growing this segment of its business.
Liquidity
As detailed in this section, MDC believes that it has sufficient sources of
capital to meet anticipated needs.
Debt and Credit Arrangements. McDonnell Douglas has in place a number of
credit facilities with banks and other institutions. At March 31, 1996,
the Company 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 March 31, 1996.
In 1992, McDonnell Douglas commenced an offering of up to $550 million
aggregate principal amount of its medium-term notes pursuant to a shelf
registration filed with the SEC. As of March 31, 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.
The Company also 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 March 31, 1996, no
current receivable interests have been sold.
In March 1996, Standard & Poor's raised its ratings of McDonnell Douglas
and McDonnell Douglas Finance Corporation senior debt to A-minus from BBB.
The rating agency also upgraded its rating on MDFC subordinated debt to BBB-
plus from BBB-minus.
In March 1996, Duff & Phelps Credit Rating Co. raised its ratings of
McDonnell Douglas and MDFC senior debt to A-minus from BBB-plus. The
rating agency also upgraded its rating on MDFC subordinated debt to BBB-
plus from BBB-minus.
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 18 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 March 31, 1996, the Company had
acquired 9.2 million shares, or about 8 percent of its common stock, at a
cost of $611 million. These amounts include .2 million shares with a cost
of $15 million settled subsequent to March 31, 1996.
<PAGE> 19
On January 26, 1996, the Company's Board of Directors authorized a 20
percent increase in the quarterly dividend and a two-for-one split of the
common stock. The quarterly dividend was increased from 20 cents per share
to 24 cents per share, payable on April 1, 1996, to shareholders of record
on March 1, 1996. The stock split had been subject to shareholder approval
of an increase in authorized common stock. An increase in the Company's
authorized common stock from 200 million to 400 million shares was approved
at the annual meeting of shareholders on April 26, 1996. To effectuate the
stock split, shareholders of record at the close of business on May 10,
1996, are entitled to receive on May 31, 1996, an additional stock
certificate representing one additional common share for each share of
common stock held.
Aerospace Cash & Cash Equivalents. Aerospace cash and cash equivalents
were $548 million at March 31, 1996, compared with $784 million at December
31, 1995. Cash used by aerospace operations was just under $50 million for
the 1996 first quarter, prior to reductions of $174 million used by
McDonnell Douglas to repurchase 1.9 million shares of its common stock. An
increase in contracts in process and inventories contributed to the use of
cash in the 1996 first quarter. Receipts related to the C-17 omnibus
settlement contributed to the increase in cash in the 1995 first quarter.
Development Programs. In October 1995, McDonnell Douglas launched the MD-
95, a 100-seat medium-range airliner. Initial deliveries of the MD-95 to
ValuJet Airlines Inc. 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 12, the Company also has outstanding
guarantees of $591 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.
McDonnell Douglas has made lease, loan principal, and interest payments
totaling $65 million and has tentatively 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 12, for a further discussion of Varig.
<PAGE> 20
The Company, including MDFC, has also made offers totaling $1,301 million
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 earnings, cash flow, or financial
position. See Note 5, "Commitments and Contingencies," page 12.
Financial Services. Financial Services debt at March 31, 1996, was
approximately $1.8 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. McDonnell Douglas
Financial Services Corporation (MDFS), through its MDFC subsidiary, has
traditionally generated cash from operating activities, placement of debt,
issuances of commercial paper, and the normal runoff of its portfolio to
fund its operations.
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 March 31, 1996, had issued $170
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. As of March
31, 1996, MDFS had issued $85 million of securities under this program.
MDFC's senior debt at March 31, 1996, included $69 million secured by
equipment that had a carrying value of $95 million. MDRC's debt of $28
million at March 31, 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 $60 million.
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.
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.
<PAGE> 21
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. 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. The Company 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 the Company
by the DOD in connection with the C-17 Globmaster III program. The IG's
report questioned contracting actions and payments by the U.S. Air Force
and related information provided by the Air Force and McDonnell Douglas
personnel. The Company 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 Air Force in accordance with DOD rules then in
effect for work performed. In April 1993, the Air Force issued an
extensive report responding to the allegations made by the IG. Although
the Air Force report reflected the difference between the parties
concerning the segregation and payment of certain C-17 engineering costs,
the report concluded that there was no illegal or improper plan or actions
taken to provide payments to McDonnell Douglas 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 the Company that exceeded permissible limits.
Backlog
McDonnell Douglas had firm backlog of $22.534 billion on March 31, 1996,
compared with $19.640 billion on December 31, 1995. Total backlog was
$29.408 billion on March 31, 1996, compared with $28.353 billion on
December 31, 1995. Substantially all of the increase in both firm and
total backlog occurred in the military aircraft segment, led by the C-17
and Apache programs. The C-17 program received an order for eight
aircraft, completing the Air Force 40 aircraft buy authorization. The
Apache helicopter program received contracts for attack helicopters and for
long lead materials and production of the initial lot for the remanufacture
of the Apache helicopter to the Longbow radar configuration.
In late April 1996, President Clinton signed into law the fiscal year 1996
budget accord for the U.S. Government that contains language approving a
multi-year purchase of 80 C-17 aircraft. The aforementioned backlog
amounts exclude these 80 additional C-17 aircraft.
Union Negotiations
The Company has union contracts that 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), whose contract ends May 19, 1996. Contract
negotiations with the IAMAW officially began March 25, 1996.
<PAGE> 22
PART II OTHER INFORMATION
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.
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 14, 1996 /s/ R. L. Brand
R. L. Brand
Vice President and Controller
and Registrant's Authorized
Officer
<PAGE>
Exhibit 12
McDonnell Douglas Corporation
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended March 31, 1996
(Dollars in Millions)
Earnings
Earnings before income taxes $316
Add: Interest expense 61
Interest factor in rents 12
----
$389
====
Fixed Charges
Interest expense $ 61
Interest factor in rents 12
----
$ 73
====
Ratio of earnings to fixed charges 5.3X
====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
McDonnell Douglas Corporation
Financial Data Schedule (FDS)
</LEGEND>
<CIK> 0000063917
<NAME> MCDONNELL DOUGLAS
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 563
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<RECEIVABLES> 882
<ALLOWANCES> 0
<INVENTORY> 3,579
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<PP&E> 4,077
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<BONDS> 2,989<F1>
0
0
<COMMON> 110
<OTHER-SE> 2,931
<TOTAL-LIABILITY-AND-EQUITY> 10,717
<SALES> 3,064
<TOTAL-REVENUES> 3,171
<CGS> 2,567
<TOTAL-COSTS> 2,855
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<F1>(1) Mortgages and similar debt.
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