<PAGE>
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, 1997
-----------------------------------------
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
=========================================================================
Common shares outstanding at April 30, 1997 - 209,977,846 shares
<PAGE>
TABLE OF CONTENTS
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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 7-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-23
PART II OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
<PAGE>
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 1997 1996
------- -------
(unaudited)
Revenues $ 3,230 $ 3,171
Costs and expenses:
Cost of products, services and rentals 2,607 2,537
General and administrative expenses 171 169
Research and development 94 88
Interest expense:
Aerospace segments 35 31
Financial services and other segment 35 30
-------- --------
Total Costs and Expenses 2,942 2,855
-------- --------
EARNINGS BEFORE INCOME TAXES 288 316
Income taxes 107 118
-------- --------
NET EARNINGS $ 181 $ 198
======== ========
EARNINGS PER SHARE $ .86 $ .89
======== ========
DIVIDENDS DECLARED PER SHARE $ .12 $ .12
======== =========
- ----------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
-----------------------------
March 31 December 31
1997 1996
-------- -----------
(unaudited)
Assets
Cash and cash equivalents $ 706 $ 1,094
Accounts receivable 1,064 882
Finance receivables and property on lease 3,129 3,090
Contracts in process and inventories 3,573 3,486
Prepaid income taxes - -
Property, plant, and equipment 1,468 1,453
Investment in Financial Services - -
Other assets 1,666 1,626
-------- --------
Total Assets $11,606 $11,631
======== ========
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 2,292 $ 2,595
Accrued retiree benefits 1,111 1,109
Income taxes 175 83
Advances and billings in excess of related
costs 1,387 1,310
Notes payable and long-term debt
Aerospace segments 1,417 1,438
Financial services and other segment 1,956 1,995
-------- --------
8,338 8,530
Minority interest 64 63
Shareholders' equity
Preferred Stock - none issued
Common Stock - issued and outstanding:
1997, 210.0 shares; 1996, 209.6 shares 210 210
Additional capital 32 -
Retained earnings 3,007 2,850
Unearned compensation (45) (22)
-------- --------
3,204 3,038
-------- --------
Total Liabilities and Shareholders' Equity $11,606 $11,631
======== ========
- ---------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
MDC Aerospace Financial Services
- ------------------------ -----------------------
March 31 December 31 March 31 December 31
1997 1996 1997 1996
------- --------- --------- ---------
(unaudited) (unaudited)
$ 694 $ 1,077 $ 12 $ 17
1,141 964 - -
340 254 2,789 2,836
3,573 3,486 - -
191 278 - -
1,408 1,391 60 62
398 383 - -
1,588 1,535 78 91
-------- -------- -------- --------
$ 9,333 $ 9,368 $ 2,939 $ 3,006
======== ======== ======== ========
$ 2,216 $ 2,470 $ 153 $ 207
1,111 1,109 - -
- - 366 361
1,336 1,265 51 45
1,402 1,423 15 15
- - 1,956 1,995
-------- -------- -------- --------
6,065 6,267 2,541 2,623
64 63 - -
210 210 - -
32 - 238 238
3,007 2,850 160 145
(45) (22) - -
-------- -------- -------- --------
3,204 3,038 398 383
-------- -------- -------- --------
$ 9,333 $ 9,368 $ 2,939 $ 3,006
======== ======== ======== ========
As used on this page, "MDC Aerospace" means the basis of consolidation as
described in Note 1 to the consolidated 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>
MCDONNELL DOUGLAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
THREE MONTHS ENDED MARCH 31 1997 1996
-------- --------
(unaudited)
OPERATING ACTIVITIES
Net earnings $ 181 $ 198
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization 64 63
Pension income (40) (32)
Change in operating assets and liabilities (416) (217)
------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (211) 12
INVESTING ACTIVITIES
Property, plant and equipment acquired (58) (51)
Finance receivables and property on lease (55) (295)
Other 21 27
------- -------
NET CASH USED BY INVESTING ACTIVITIES (92) (319)
FINANCING ACTIVITIES
Net change in borrowings (maturities 90 days
or less) (19) 89
Debt having maturities more than 90 days:
New borrowings 64 262
Repayments (105) (82)
Common shares purchased - (174)
Dividends paid (25) (22)
------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (85) 73
------- -------
DECREASE IN CASH AND CASH
EQUIVALENTS (388) (234)
Cash and cash equivalents at beginning of year 1,094 797
------- -------
Cash and cash equivalents at end of period $ 706 $ 563
======= =======
- -----------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MCDONNELL DOUGLAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, 1996.
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 including 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).
Stock Split
In January 1996 the McDonnell Douglas Board of Directors authorized a
two-for-one split of the common stock. The stock split was completed in May 1996
after receipt of shareholder approval in April 1996 of an increase in the
Company's authorized common stock to 400 million shares. References to number of
shares and per share amounts of common stock have been restated to reflect the
stock split.
<PAGE>
Earnings Per Share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," issued in February 1997, specifies the computation, presentation, and
disclosure requirements for earnings per share. The objective of SFAS No. 128,
which is effective for financial statements issued for periods ending after
December 15, 1997, is to simplify the standards for computing earnings per share
and make them comparable to international earnings per share standards. The
Company does not believe that adoption of this standard will have a material
impact on its earnings per share calculations.
2. Proposed Merger with The Boeing Company
On December 14, 1996, McDonnell Douglas and The Boeing Company (Boeing) entered
into a definitive agreement whereby a wholly owned subsidiary of Boeing will
merge into McDonnell Douglas in a stock-for-stock transaction, as a result of
which McDonnell Douglas will become a wholly owned subsidiary of Boeing. Under
the terms of the transaction and as a result of a two-for-one stock split
arising from a share issuance approved by Boeing's shareholders on April 28,
1997, McDonnell Douglas shareholders will receive 1.3 shares of Boeing common
stock for each share of McDonnell Douglas common stock. The transaction is
subject to approval by the shareholders of both companies and certain regulatory
agencies; it is expected to close as early as August 1997.
3. Contracts in Process and Inventories
Contracts in process and inventories consisted of the following:
March 31 December 31
1997 1996
--------- -----------
Government contracts in process $ 5,081 $ 5,177
Commercial products in process 2,575 2,211
Material and spare parts 713 713
Progress payments to subcontractors 775 843
Progress payments received (5,571) (5,458)
-------- --------
$ 3,573 $ 3,486
======== ========
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, and
demanded repayment of the amounts paid to the Team under such contracts. The
Team 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.
<PAGE>
At March 31, 1997, 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 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 then
believed was the upper range of possible loss on termination for convenience,
namely $350 million.
On December 19, 1995, the U.S. Court of Federal Claims ordered that the
Government's termination of the A-12 contract for default be converted to a
termination for convenience of the Government. On December 13, 1996, the Court
issued an opinion confirming its prior no-loss adjustment and no-profit recovery
order. Subsequent to an early 1997 stipulation based on the prior orders and
findings of the Court in which the parties agreed that plaintiffs were entitled
to recover $1.071 billion, the Court has preliminarily determined that the
Government is liable for certain adjustments that increase plaintiffs' possible
recovery. A June 1997 trial has been set to determine plaintiffs' recovery if
the parties are unable to reach an agreement adjusting the stipulation. On
January 22, 1997, the Court issued an opinion in which it ruled that plaintiffs
are entitled to recover interest on that recovery.
Although the Government is expected to appeal the resulting judgment, McDonnell
Douglas believes that it will be sustained. Final resolution of the A-12
litigation will depend on such appeals and possible further litigation, or
negotiations, with the Government. If sustained, however, the expected damages
judgment, including interest, ultimately could result in pretax income ranging
up to an amount that could more than offset the loss provision established in
1990.
4. Debt & Credit Arrangements
MDC Aerospace Credit Agreements
MDC Aerospace has a revolving credit agreement (RCA), amended and restated in
January 1997, under which MDC Aerospace may borrow up to $1.75 billion through
January 2002. MDC Aerospace has the option to increase that limit by 20 percent.
Under the RCA, the interest rate, at the option of MDC Aerospace, is a floating
rate generally based on (1) a defined prime rate, (2) a fixed rate related to
the London interbank offered rate (LIBOR), or (3) as quoted under a competitive
bid. A fee is charged on the amount of the commitment. The RCA contains
restrictive covenants including, but not limited to, indebtedness, subsidiary
indebtedness, customer financing, and liens. There were no RCA amounts
outstanding at March 31, 1997.
During 1996, MDC Aerospace filed a shelf registration statement with the
Securities and Exchange Commission (SEC) relating to debt securities. The filing
increased a prior offering, commenced in 1992, by an aggregate principal amount
of $1 billion. In the fourth quarter of 1996, the
<PAGE>
Company issued $250 million of 6.9% notes due in 2006 under this shelf
registration. As of March 31, 1997, MDC Aerospace had $948 million of unissued
debt securities registered with the SEC. The interest rate applicable to each
note and certain other variable terms are established at the date of issue.
Senior debt securities totaling $1.394 billion were outstanding at March 31,
1997. The notes were issued in 1992, 1993 and 1996 with interest rates of 6.9%
to 9.8% and maturities from 1997 to 2012. Outstanding notes of $250 million,
bearing interest at 8.6%, were due and retired in April 1997. Aerospace
long-term debt also includes aerospace-related obligations of McDonnell Douglas
Realty Company in the amount of $15 million at March 31, 1997.
Financial Services Credit Agreements
MDFS and MDFC have a joint RCA which expires in August 2001. Under the
agreement, MDFC may borrow a maximum of $240 million, reduced by MDFS borrowings
under this same agreement, which are limited to $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, 1997. Commercial paper issued by
MDFC in the amount of $97 million was outstanding at March 31, 1997. The joint
RCA could therefore be used to support the full amount of commercial paper
outstanding.
Various credit and debt agreements require MDFC to maintain a minimum net worth,
to restrict indebtedness, and to limit MDFC's cash dividends and other
distributions.
During the second quarter of 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 $750 million medium-term note program under this
shelf registration statement and, as of March 31, 1997, had issued $550 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 note program was
increased to $200 million in April 1996. As of March 31, 1997, MDFS had issued
$135 million of securities under this program.
MDFC's senior debt at March 31, 1997, included $53 million secured by equipment
that had a carrying value of $70 million. MDRC's debt of $39 million at
March 31, 1997, was secured by indentures of mortgage and deeds of trust on its
interest in real estate developments that had a carrying value of $52 million.
5. 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.
<PAGE>
At March 31, 1997, the notional amount of forward exchange contracts denominated
in currencies of major industrial countries was $322 million. The terms of the
currency derivatives vary, but the longest is three years. At March 31, 1997,
unrealized gains, net of losses, on forward exchange contracts were $10 million.
At March 31, 1997, MDFC had interest rate swap agreements outstanding listed
below. The Company believes it has no market rate risk as the interest rate
swaps are matched with specific debt.
Contract Notional Receive Pay
Maturity Amount Rate Rate
-------- -------- ------- ----
Capital lease
obligations 2006 - 2008 $393 Floating 6.7% - 7.6%
Medium-term notes 1997 $ 20 Floating 6.7%
Medium-term notes 2000 - 2001 $ 50 6.8% - 8.6% Floating
The floating rates are based on LIBOR or on Federal Funds.
Because of the off-balance-sheet nature of derivative instruments, counterparty
failure would result in recognition of unrealized gains and losses. The Company
does not anticipate nonperformance by any of its counterparties.
6. Commitments and Contingencies
A number of legal proceedings and claims are pending or have been asserted
against the Company. A substantial number of such legal proceedings and claims
are covered by insurance or settlements with insurance companies. 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 marketing of commercial aircraft sometimes results in agreements to provide
or to guarantee long-term financing of some portion of the delivery price of
aircraft, to lease aircraft, or to guarantee customer lease payments or aircraft
values. At March 31, 1997, the Company had made offers of this nature totaling
$1.970 billion related to aircraft on order or under option. The Company had
made guarantees and other commitments totaling $843 million on delivered
aircraft. At March 31, 1997, MDFS also had commitments to provide leasing and
other financing in the aggregate amount of $104 million. 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 the restructuring of its financial obligations. In connection with that
restructuring, the Company made lease, loan, and interest payments totaling $70
million on behalf of VARIG in 1994
<PAGE>
and 1995. At March 31, 1997, VARIG had made repayments totaling $24 million to
the Company. During January 1996, VARIG requested deferral of additional
obligations covering the January 1996 through January 1998 period. VARIG and the
Company agreed to defer up to $60 million in certain payments owed to the
Company, with repayment by VARIG to begin in 1998. At March 31, 1997, the
Company had made payments related to this additional deferral in the amount of
$34 million on behalf of VARIG. These restructurings and payments have not had
and, if the restructuring steps are successful, are not expected to have a
material adverse effect on the Company's earnings, cash flow, or financial
position.
Trans World Airlines Inc. (TWA), one of the Company's largest aircraft-leasing
customers, continues to operate under a reorganization plan, confirmed by the
U.S. Bankruptcy Court in 1995, that restructured its indebtedness and leasehold
obligations to its creditors. TWA continues to face financial and operational
challenges due in part to an airliner crash in July 1996 and turnover of key
management, which occurred during 1996. The reorganization plan and TWA's
current financial condition have not had, and are not expected to have, a
material adverse effect on the Company's earnings, cash flow, or financial
position. However, TWA's independent auditors included an explanatory paragraph
in their "Independent Auditors' Report" for TWA's December 31, 1996 financial
statements expressing "substantial doubt" about TWA's ability to continue as a
going concern. The Company anticipates deliveries of additional aircraft to TWA
during 1997. The Company will continue to evaluate the impact of TWA's financial
condition on existing and potential future financial commitments and guarantees
to TWA.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation, and Liability Act, commonly
known as Superfund, and under similar state statutes. The Company has been
identified as a potentially responsible party (PRP) at 37 sites. Of these, the
Company believes that it has de minimis liability at 23 sites, including 17
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 ten 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 that the parties will bear. In addition, the
Company is remediating, or has begun environmental engineering studies to
determine cleanup requirements for, certain of its current operating sites or
former sites of industrial activity.
At March 31, 1997, the accrued liability for study and remediation expenditures
at Superfund sites and at the Company's current and former operating sites was
$44 million. Because of the inherent uncertainty of the estimation process,
actual costs could differ from estimates. Ongoing operating and maintenance
costs at current operating sites and remediation expenditures on property held
for sale are not included in this amount. The Company believes that 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 are recorded as
receivables and therefore they have not been netted against the environmental
liabilities. At March 31, 1997, a receivable had been recorded from one
insurance carrier for agreed reimbursement of environmental costs for $7
million.
<PAGE>
7. Operations of MDFS
The condensed financial data presented below have been summarized from the
unaudited consolidated financial statements of MDFS:
Three Months Ended March 31 1997 1996
-------- --------
Earned income $ 63 $ 57
Costs and expenses 43 36
Net earnings 13 13
Cash flow provided (used) by:
Operating activities $ 2 $ 9
Investing activities 37 (292)
Financing activities (44) 286
8. Supplementary Payment Information
Three Months Ended March 31 1997 1996
-------- --------
Interest paid $ 62 $ 57
Income taxes paid 6 18
9. Earnings Per Share
Earnings per share computations are based upon the weighted average common
shares outstanding during the three-month period which were 209.9 million in
1997 and 222.2 million in 1996.
<PAGE>
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 1996 Annual Report
to Shareholders (the 1996 Annual Report).
Forward-Looking Information
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995) that involves
risk and uncertainty, including projections for the timing of the consummation
of the proposed Boeing merger, future sales, earnings, production levels and
costs, aircraft deliveries, research and development, environmental and other
expenditures, and various business environment trends. Actual results and trends
in the future may differ materially depending on a variety of factors including,
but not limited to, changing priorities or reductions in the U.S. and worldwide
defense and space budgets; global trade policies; worldwide political stability
and economic growth; termination of government contracts due to unilateral
government action or the Company's failure to perform; governmental export and
import policies; the Company's successful execution of internal operating plans;
performance issues with key suppliers and subcontractors; factors that result in
significant and prolonged disruption to air travel worldwide; aircraft delivery
delays or defaults by customers; collective bargaining labor disputes; other
regulatory uncertainties; and legal proceedings. For further discussion of
certain risks and uncertainties that 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 $3.2 billion in the first quarter of 1997,
slightly above the 1996 revenues for the same period. An increase in revenue in
the commercial aircraft segment was largely offset by lower revenues in the
military aircraft and missiles, space and electronic systems segments.
Net earnings for the first quarter of 1997 were $181 million, a decrease from
the first quarter 1996 net earnings of $198 million. Operating earnings for the
first quarter of 1997 were $321 million, compared to $347 million in the first
quarter of 1996. The decrease was largely due to lower earnings in the missiles,
space and electronic systems segment.
Interest expense totaled $35 million in the first quarter of 1997, up from $31
million in the first quarter of 1996. The increase relates to a higher
<PAGE>
level of aerospace debt, brought about by the issuance of $250 million of
10-year notes in late 1996.
Pension income totaled $40 million in the 1997 first quarter, up from $32
million in the first quarter of 1996. The increase is associated with a higher
level of plan assets.
Three Months Ended
March 31
1997 1996
-------- --------
(Millions of dollars)
Revenues
Military aircraft $ 1,946 $ 2,039
Commercial aircraft 624 428
Missiles, space and electronic
systems 553 608
Financial services and other 101 87
-------- --------
Operating revenues 3,224 3,162
Non-operating income 6 9
-------- --------
Total Revenues $ 3,230 $ 3,171
======== ========
Earnings
Military aircraft $ 259 $ 250
Commercial aircraft 4 19
Missiles, space and electronic
systems 36 58
Financial services and other 22 20
-------- --------
Operating earnings 321 347
Corporate and other 2
Interest expense (35) (31)
Income taxes (107) (118)
-------- --------
Net Earnings $ 181 $ 198
======== ========
Military Aircraft
Revenues in the military aircraft segment decreased to $1.9 billion in the first
quarter of 1997, compared with $2.0 billion in the first quarter of 1996.
Increased volume on the F-15 program, where McDonnell Douglas is increasing
production rate, was offset by planned lower activity on the F/A-18C/D program.
Operating earnings in this segment were $259 million in the first quarter of
1997, compared with $250 million in the same period in 1996. Operating earnings
in this segment were favorably impacted by increased earnings in the F/A-18E/F
program, which were nearly offset by reduced earnings in the F-15 and F/A-18C/D
production programs.
<PAGE>
Several positive developments occurred in the F/A-18E/F program during the 1997
first quarter. The F/A-18E/F program successfully completed all test objectives
of initial sea trials, delivered the last aircraft of the development phase, and
received approval from the Department of Defense to begin low-rate initial
production of the first 12 aircraft. In connection with the achievement of these
significant milestones, McDonnell Douglas increased the overall earnings rate on
this program to include an estimate of a portion of remaining award fees. Most
of the remaining potential award fees will be determined at the completion of
technical and operational evaluations scheduled for 1999.
Production cost increases, primarily on the F/A-18C/D and F-15 programs,
negatively impacted 1997 first quarter operating results. The phase-in of work
subsequent to a 99-day strike at the St. Louis operations, which ended in
September 1996, along with increased retirements of experienced personnel late
in the year, impacted productivity levels. A build-up of the production rate on
the F-15 program, and with it the use of personnel less experienced on the F-15
program, added to the increased production costs.
Commercial Aircraft
Revenues in the commercial aircraft segment increased to $624 million in the
1997 first quarter, compared with $428 million in the 1996 same quarter.
McDonnell Douglas delivered seven MD-90 twin jets and two MD-11 trijets in the
1997 first quarter,compared with four MD-80 and three MD-90 twin jets and three
MD-11 trijets in the 1996 same period. Two of the MD-90 twin jet deliveries in
each year 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.
Operating earnings in this segment in the 1997 first quarter were $4 million,
down from $19 million in the first quarter of 1996. Increased losses on the
MD-95 program, currently in development, were in part offset by some improvement
in cost estimates related to prior deliveries of trijet and twin jet aircraft.
Additionally, earnings in the 1996 first quarter included recoveries from an
insurance carrier related to environmental coverage at several sites. As with
the last several quarters, earnings from the sale of spare parts and services,
while largely offset by development costs, have allowed the commercial segment
to remain profitable. At the same time, profits from the production and sale of
commercial aircraft remain at or near break-even levels.
During the 1997 first quarter, McDonnell Douglas received orders for two MD-90
twin jets and completed lease arrangements with Lufthansa Cargo for five MD-11
freighters. One of the MD-90 orders is scheduled for delivery in 1997, and the
other in 1998. The five MD-11 orders represent 1998 deliveries. On March 31,
1997, McDonnell Douglas had firm orders for 29 MD-80 twin jets, 100 MD-90 twin
jets, 50 MD-95 twin jets, and 18 MD-11 trijets.
<PAGE>
Missiles, Space and Electronic Systems
Revenues in the missiles, space and electronic systems segment were $553 million
in the first quarter of 1997, compared with $608 million in the same period in
1996. Lower revenue in the Delta II program, due to a reduction in launches from
four in the 1996 first quarter to only one in the first quarter of 1997, was
partially offset by increased Space Station program and classified program
activities.
Operating earnings in this segment were $36 million in the first quarter of
1997, compared with $58 million in the first quarter of 1996. Expenditures on
the Delta III, a launch vehicle currently under development, and lower earnings
on the Delta II program caused the decrease. The Delta II program was impacted
by accident-related costs and fewer launches resulting from the failure of a
January 1997 launch.
Financial Services
Operating earnings in the financial services and other segment were $22 million
in the first quarter of 1997, compared with $20 million in the same quarter in
1996. Revenues in this segment were $101 million in the first quarter of 1997,
an increase of $14 million over the same period in 1996. The revenue increase
resulted from the corporation's continued focus on growing this segment of its
business.
Liquidity
Debt and Credit Arrangements. MDC Aerospace debt at March 31, 1997 and
December 31, 1996, was $1.4 billion. MDC Aerospace had $250 million of senior
debt which matured in early April 1997.
MDC Aerospace has in place a number of credit facilities with banks and other
institutions. At March 31, 1997, MDC Aerospace had a revolving credit agreement
(RCA), amended and restated in January 1997, under which it can borrow up to
$1.75 billion through June 2002. There were no amounts outstanding under the RCA
at March 31, 1997.
During 1996, MDC Aerospace filed a shelf registration statement with the SEC
relating to debt securities. The filing increased a prior offering, commenced in
1992 for up to $550 million of notes, by an aggregate principal amount of $1
billion. As of March 31, 1997, MDC Aerospace had $948 million of unissued debt
securities registered with the SEC.
The Company also has an agreement with a financial institution to sell a
participation interest in a designated pool of government and commercial
receivables, with limited recourse, in amounts up to $300 million. As of
March 31, 1997, no receivable interests were sold.
Financial Services debt at March 31, 1997 and December 31, 1996 was $2.0
billion.
<PAGE>
MDFS and MDFC have a joint RCA which expires in August 2001. Under the
agreement, MDFC may borrow a maximum of $240 million, reduced by MDFS borrowings
under this same agreement, which are limited to $16 million. There were no
outstanding borrowings under this agreement at March 31, 1997. At March 31,
1997, $97 million of commercial paper issued by MDFC was outstanding. The joint
RCA could therefore be used to support the full amount of commercial paper
outstanding.
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 $750 million medium-term note program under this registration
statement and as of March 31, 1997, had issued $550 million of such notes.
During 1995, MDFS initiated a medium-term note program under a private placement
of up to $100 million principal amount. This note program was increased to $200
million in April 1996. As of March 31, 1997, MDFS had issued $135 million of
securities under this program.
Amounts available under the RCAs, note programs, and the receivables program
discussed above may be used to meet cash requirements. McDonnell Douglas
believes that it has sufficient sources of capital to meet anticipated needs.
Shareholder Initiatives. On October 28, 1994, the Company's Board of Directors
approved a stock repurchase plan that authorized McDonnell Douglas to purchase
up to 36 million shares, or about 15 percent of its then-outstanding common
stock. Through mid-December 1996, the Company had acquired 29 million shares, or
about 81 percent of its authorized repurchase amount, at a cost of $1.1 billion.
The Company suspended common stock acquisitions associated with the repurchase
program as a result of the proposed merger with Boeing. See Note 2 on page 8 for
a further discussion of the proposed merger.
In January 1996, the McDonnell Douglas Board of Directors authorized a
two-for-one split of the common stock and a 20 percent increase in the quarterly
dividend. In April 1996, McDonnell Douglas shareholders approved an amendment to
the Company's charter increasing the number of the Company's authorized shares;
the stock split was effected in the form of a stock dividend in May 1996.
References to number of shares and per share amounts have been restated to
reflect the stock split.
Aerospace Cash & Cash Equivalents. Aerospace cash and cash equivalents were $694
million at March 31, 1997, compared with $1,077 million at December 31, 1996.
Cash used by aerospace operations was a little more than $350 million for the
1997 first quarter. Most of the cash was used in the commercial aircraft
segment. Higher commercial deliveries are expected in the second half of this
year.
<PAGE>
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. (ValuJet), the launch customer for the MD-95, are scheduled for
1999. ValuJet's operations were suspended for more than three months following
an airliner crash in May 1996. The carrier resumed scaled-back operations in
September 1996 and affirmed its order for 50 MD-95s in December 1996. No
additional orders for the MD-95 from other customers were received during 1996
or in the first quarter of 1997.
McDonnell Douglas is currently developing the Delta III, an expendable launch
vehicle. Launch of the first Delta III is scheduled for 1998.
The MD-95 twin jet and the Delta III launch vehicle will require cash
expenditures in development, inventory, and tooling during the next several
years, which the Company intends to fund from its 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 6, "Commitments and Contingencies," page 11, the
Company also has outstanding guarantees of $843 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 on its
earnings, cash flow, or financial position.
McDonnell Douglas has made lease, loan principal, and interest payments and has
agreed to make certain additional loan principal payments through January 1998
on behalf of Viacao Aerea Rio-Grandense S.A. (VARIG). In addition, Trans World
Airlines Inc. (TWA), one of the Company's largest aircraft-leasing customers,
continues to operate under a reorganization plan, confirmed by the U.S.
Bankruptcy Court in 1995, that restructured its indebtedness and leasehold
obligations to its creditors. TWA continues to face financial and operational
challenges due in part to an airliner crash in July 1996 and turnover of key
management, which occurred during 1996. Neither payments on behalf of VARIG nor
the effects of TWA's reorganization plan and current financial condition are
expected to have a material adverse effect on earnings, cash flow, or financial
position of the Company. See Note 6, "Commitments and Contingencies," page 11,
for a further discussion of VARIG and TWA.
The Company, including MDFC, has also made offers totaling $1.97 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 6, "Commitments and Contingencies," page 11.
<PAGE>
Information Systems. The Company has several information system improvement
initiatives underway that will require increased expenditures during the next
several years. These initiatives, which began in prior years, include the
conversion of certain Company computer systems to be Year 2000 compliant.
McDonnell Douglas has assessed and continues to assess the impact of the Year
2000 issue on its operations, including the development of cost estimates for,
and the extent of programming changes required to address, this issue. Although
final cost estimates have yet to be determined, it is anticipated that these
Year 2000 costs will result in an increase to Company expenses during 1997, 1998
and 1999. The Company expects to complete its Year 2000 cost estimates by
mid-1997.
Business and Market Considerations
General
McDonnell Douglas is one of the largest U.S. defense contractors and NASA prime
contractors. 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 also a manufacturer of large commercial transport aircraft.
Discussion under the captions "Military Aerospace Business," "Commercial
Aircraft Business," and "Government Business Audits, Reviews and Investigations"
reflect developments during the first quarter of 1997 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 1996 Annual Report to
Shareholders.
Military Aerospace Business
F/A-18 Hornet. In January 1997, the F/A-18E/F Super Hornet successfully
completed initial sea trials aboard a U.S. aircraft carrier. The program also
delivered the last aircraft of the development phase and received approval from
the Department of Defense (DoD) to begin low-rate initial production of the
first 12 aircraft. In addition, the DoD authorized the release of long-lead
funding for the next 20 aircraft and a total initial production run of 62
planes. The DoD authorized the Navy to make future production decisions for the
F/A-18E/F program, including the decision to begin full-rate production of 48
aircraft per year in fiscal year 2000.
In March, the first of eight F-18D's was delivered to the Royal Malaysian Air
Force.
F-15. In February 1997, MDC definitized its contract with Israel for 25 aircraft
valued at $1.0 billion. This finalized a previously announced order with Israel.
<PAGE>
AH-64D Apache Longbow. The first remanufactured AH-64D Apache Longbow
multi-mission combat helicopter was delivered to the U.S. Army on March 31,
1997. The Apache Longbow's fire control radar and advanced avionics suite will
provide combat pilots the ability to rapidly detect, classify, prioritize, and
engage stationary or moving enemy targets at standoff ranges. MDC will
remanufacture 232 AH-64D helicopters under a $1.9 billion, five-year, multi-year
contract. Production will gradually increase from one aircraft a month in 1997
to five aircraft a month by 1999.
C-17 Globemaster. The U.S. Air Force's fleet of McDonnell Douglas C-17
Globemaster IIIs surpassed 50,000 total flying hours. McDonnell Douglas
delivered aircraft P-31 on March 25, 1997, one month ahead of schedule, the 19th
consecutive C-17 delivered ahead of schedule.
Delta Program. In January 1997, a Delta II rocket launched by the U.S. Air
Force self-destructed shortly into flight. There were no injuries associated
with the incident. Other scheduled 1997 Delta II launches were delayed pending
determination of the cause of the explosion. On April 3, 1997, the USAF released
a statement indicating the failure was caused by a vertical rupture in the
casing of one of the Delta's nine solid rocket strap-on motors. Launches resumed
in May 1997.
In February 1997, MDC and Space Systems/Loral entered into an agreement for
five Delta III launches between 1999 and 2001. Delta III backlog is now 18
launches through 2002, with the first launch planned for 1998.
Missiles. The Standoff Land Attack Missile Expanded Response (SLAM ER)
successfully completed its first flight in March 1997. The Navy approved
low-rate initial production of SLAM ER in April. SLAM ER is an upgrade program
to the U.S. Navy's inventory of SLAM missiles that will provide significant
improvements in survivability, standoff range, weapon effectiveness and reaction
time. The U.S. Navy plans to retrofit all 700 SLAMs in its inventory to SLAM
ERs.
Commercial Aircraft Business
During the first quarter of 1997, McDonnell Douglas received orders for two
MD-90 twin jets and completed lease arrangements with Lufthansa Cargo for five
MD-11 freighters. New orders and production rates for McDonnell Douglas
commercial aircraft products have fallen to low levels. No orders for the MD-95
twin jet have been received since it was launched on the basis of a sale to
ValuJet in October, 1995. The Company's share of worldwide commercial aircraft
orders declined to 4% during 1996.
During the last nine months, American Airlines, Continental Airlines, Delta Air
Lines and US Airways, each long standing major McDonnell Douglas customers, have
chosen Boeing or Airbus Industrie in major competitions for a significant number
of aircraft. Recently, Finnair, another previously staunch supporter of
McDonnell Douglas aircraft, invited only Boeing and Airbus to bid on its planned
replacement of McDonnell Douglas narrow body aircraft. One of these customers,
Delta,
<PAGE>
operates 16 MD-90s, has firm orders for 15 MD-90s and options for many more. As
part of its fleet rationalization strategy, Delta intends in time to replace all
of its current fleet of MD-90s, and is considering its alternatives for the
remaining aircraft on firm order; even though McDonnell Douglas has an
enforceable firm contract, the companies are forming a joint task force to seek
a business resolution to these firm orders. Sales of McDonnell Douglas
commercial aircraft products have been adversely affected by (1) the lack of a
full family of aircraft, (2) customer and marketplace uncertainty as to the
future of Douglas Aircraft Company (DAC), an unincorporated operating division
of the Company through which the Company operates its commercial aircraft
segment, and (3) investment in product development at levels significantly below
competition. Significant price competition for the sale of commercial aircraft
is expected to continue. At the same time, the Company's production costs are
affected by decreased economies of scale and older aircraft designs,
manufacturing technology and production processes as compared to its
competitors. As a result, it is difficult for the Company to sell commercial
aircraft profitably.
At various times during the last several years, McDonnell Douglas has considered
its strategic alternatives for DAC. These have included: strategic alliances
with non-United States partners bringing new markets and investment to DAC;
significant investment to permit DAC to offer a full family of commercial
aircraft; a niche strategy with DAC principally offering a smaller product line
and as a lesser player in commercial aircraft; sale of the commercial aircraft
business; and an exit from the commercial aircraft production business while
retaining its spares business. Earlier efforts over a several year period to
find a strategic partner were not successful. The amount of investment required
to offer a full family of aircraft was estimated at $15 billion and was deemed
too high and risky for the Company to incur without partners. The success of the
Company's niche strategy announced in October 1996 will be determined over time
and, in part, is based on its ability to generate in the near term a sufficient
number of new customer orders and to sustain a reasonable production rate.
Current backlog, other than the ValuJet order for 50 MD-95 twin jets which begin
delivery in mid 1999, will be largely produced and delivered by the end of 1998.
The proposed merger with Boeing provides the best alternative for McDonnell
Douglas to maximize the utilization of its investments and skills in the
commercial aircraft production business. In the event the merger with Boeing is
not consummated, McDonnell Douglas would continue to evaluate its strategic
alternatives.
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
<PAGE>
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 the 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.
Backlog
McDonnell Douglas had firm backlog of $23.4 billion on March 31, 1997, compared
with $23.7 billion on December 31, 1996. Total backlog was $43.1 billion on
March 31, 1997, compared with $44.4 billion on December 31, 1996.
<PAGE>
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
-------------------
None.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal accounting officer, thereunto duly authorized.
MCDONNELL DOUGLAS CORPORATION
-----------------------------
(Registrant)
Date: May 14, 1997 /s/ M. N. Schroeder
--------------------------- -----------------------------
M. N. Schroeder
Vice President and Controller
and Registrant's Authorized
Officer
Exhibit 12
McDonnell Douglas Corporation
Computation of Ratio of Earnings to Fixed Charges
Three Months Ended March 31, 1997
(Dollars in Millions)
Earnings
Earnings before income taxes $288
Add: Interest expense 70
Interest factor in rents 17
-------
$375
=======
Fixed Charges
Interest expense $ 70
Interest factor in rents 17
-------
$ 87
=======
Ratio of earnings to fixed charges 4.3X
======
<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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 706
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<INVENTORY> 3,573
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<PP&E> 4,107
<DEPRECIATION> (2,639)
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<BONDS> 3,373 <F1>
0
0
<COMMON> 210
<OTHER-SE> 2,994
<TOTAL-LIABILITY-AND-EQUITY> 11,606
<SALES> 3,095
<TOTAL-REVENUES> 3,230
<CGS> 2,642
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<FN>
<F1>(1) Mortgages and similar debt.
</FN>
</TABLE>
