Document/Exhibit Description Pages Size
1: 10-K Annual Report 27 106K
2: EX-2 Agreement and Plan of Merger 75 214K
3: EX-4.I Form of 6-7/8% Notes Due November 1, 2006 4 23K
4: EX-10.F Mdc Senior Executive Financial/Legal Services Plan 4 13K
5: EX-10.G Deferred Comp. Plan for Nonemployee Directors 7 29K
6: EX-10.L Employment Agreement 12 46K
7: EX-10.M Restricted Stock Award Agreement 3 18K
8: EX-10.N Form of Termination Benefits Agreement 21 95K
9: EX-10.O Settlement Agreement 9 39K
10: EX-10.P Settlement Agreement 10 40K
11: EX-10.S Form of 1997 Pars Agreement-Service Based 4 20K
12: EX-10.T Form of 1997 Pars Agreement - Performance Based 5 23K
13: EX-11 Computation of Earnings Per Share 1 7K
14: EX-12 Computation of Ratio of Earnings to Fixed Charges 1 9K
15: EX-13 Annual Report to Shareholders 69 254K
16: EX-21 Subsidiaries 1 8K
17: EX-23 Consents of Independent Auditors 2 13K
18: EX-27 Financial Data Schedule 1 9K
[Company Pull-Out Section]
MILITARY AIRCRAFT; MISSILES, SPACE, AND ELECTRONIC SYSTEMS
McDonnell Douglas Aerospace and Military Transport Aircraft are the
defense-related operating units of McDonnell Douglas Corp.
MCDONNELL DOUGLAS AEROSPACE (Primary locations)
-----------------------------------------------
TACTICAL AIRCRAFT AND MISSILE SYSTEMS
-------------------------------------
ST. LOUIS, MISSOURI
EMPLOYEES: 23,700 worldwide (including 20,000 in St. Louis)
HISTORY: Founded as the McDonnell Aircraft Co. in 1939 by James S. McDonnell.
MARKETS SERVED: U.S. and other national and international armed forces.
PRODUCTS/SERVICES: F-15 Eagle dual-role fighter; multimission F/A-18 Hornet and
Super Hornet (in development) strike fighters; AV-8B Harrier II Plus
vertical/short takeoff and landing tactical aircraft; T-45 Training System;
Harpoon anti-ship missile; Standoff Land Attack Missile (SLAM) and SLAM Expanded
Response (in development); Joint Direct Attack Munition (in development); Joint
Air-to-Surface Standoff Missile (in development); T-38 avionics upgrade (in
development); ACES II ejection seat; training systems, technical support;
research and development in aerospace structures, avionics, and systems.
HELICOPTER SYSTEMS
------------------
MESA, ARIZONA
EMPLOYEES: 3,200
HISTORY: In 1984, McDonnell Douglas purchased Hughes Helicopters, which was
founded in 1934 by Howard R. Hughes Jr.
MARKETS SERVED: U.S. and other national and international armed forces;
commercial light-helicopter operators; police forces and public-service
providers, including air ambulance services.
PRODUCTS/SERVICES: AH-64D Apache Longbow multirole combat helicopters; MD 500
and MD 600 series of light helicopters, most of which feature the NOTAR [TM](or
no-tail-rotor) system for anti-torque and directional control; MD Explorer
twin-turbine helicopter with the NOTAR system; and ordnance.
SPACE AND DEFENSE SYSTEMS
-------------------------
HUNTINGTON BEACH, CALIFORNIA
EMPLOYEES: 10,500 worldwide (including 6,800 in Huntington Beach)
HISTORY: Space and Defense Systems was formed from portions of the McDonnell and
Douglas aircraft companies, which were pioneers in U.S. space exploration.
MARKETS SERVED: U.S. National Aeronautics and Space Administration (NASA); U.S.
military services; other national governments and space agencies; U.S. and other
national and international commercial-satellite manufacturers.
PRODUCTS/SERVICES: Delta II medium-class launch vehicle; Delta III
intermediate-class rocket (in development); Delta IV family of small, medium,
and heavy launch vehicles (in development); International Space Station truss
structure and major systems; payload integration; Mast Mounted Sight, Thermal
Imaging Sensor System, and other electronic systems.
[Company Pull-Out Section]
MILITARY TRANSPORT AIRCRAFT (Primary location)
----------------------------------------------
LONG BEACH, CALIFORNIA
EMPLOYEES: 9,400 (including 8,300 in Long Beach)
HISTORY: Established in a 1996 reorganization, the Military Transport Aircraft
division manages several transport and tanker aircraft programs. Primarily, it
builds the C-17 Globemaster III transport airlifter, which began as a Douglas
Aircraft Co. program. Associated facilities operate in Macon, Georgia;
Charleston, South Carolina; and Tulsa, Oklahoma.
MARKETS SERVED: U.S. armed forces; other national and international armed
forces; and the commercial heavy-cargo transport industry.
PRODUCTS/SERVICES: C-17 Globemaster III; KC-10/KDC-10 tankers; MD-17 commercial
heavy freighter (in development); YC-15 technology demonstrator; C-9D Skytrain
III; and the Advanced Transport Aircraft Systems research unit.
C-17 GLOBEMASTER III [PICTURE OMITTED]
--------------------
The most versatile airlifter in aviation history, the C-17 can fly long
distances; land on short, unimproved runways close to the front lines; and
deliver heavy cargo. In 1996, the C-17 received Flight International's Aerospace
Industry Award for the manner in which the airlifter was introduced into
service. In its first two years of operational service (1995 and 1996), the
Globemaster III quickly established itself as the U.S. Air Force's primary
airlifter. It supported U.S. peacekeeping and humanitarian relief efforts in
Bosnia (pictured), Liberia, Kuwait, Saudi Arabia, Rwanda, and other countries.
In Bosnia, a squadron of C-17s flew 25 percent of the missions, carrying 60
percent of the cargo to small airfields. In 1996, the U.S. government signed a
seven-year $14.2 billion contract with McDonnell Douglas for 80 C-17s beyond the
40 for which it had previously committed. Meanwhile, the C-17 passed fatigue
testing equivalent to three design lifetimes (90,000 hours). McDonnell Douglas
began efforts to certify and market a commercial version--the MD-17-- which will
serve a niche market for the delivery of outsize cargo, such as large pieces of
oil exploration equipment, construction equipment, or aerospace components. The
company delivered six new C-17s in 1996 and refurbished three of the test
aircraft, raising the number of Globemaster IIIs in USAF service to 28. A number
of potential customers abroad have expressed interest in the aircraft.
PROPULSION: Four Pratt & Whitney F117-PW-100 series turbofans, each producing
40,440 lb. of thrust and equipped with directed-flow thrust reversers that
enable the C-17 to land on short runways and to back up while fully loaded.
DIMENSIONS: Length 174 ft. (53 m.); height 55 ft. (16.8 m.);
wingspan 170 ft. (51.8 m.).
MAXIMUM PAYLOAD: 169,000 lb. (76,658 kg.).
CREW MEMBERS: Two pilots, one loadmaster.
[Company Pull-Out Section]
F/A-18 HORNET [PICTURE OMITTED]
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The F/A-18 is a multimission aircraft known as a strike fighter. It is flown by
the U.S. Navy and Marine Corps and by the air forces of Canada, Australia,
Spain, Kuwait, Finland, and Switzerland. It is the first tactical aircraft
designed from its inception to carry out both air-to-air and air-to-ground
missions, to operate reliably, and to be easy to maintain even during long
periods when it is based on aircraft carriers in the corrosive environment at
sea. Production began in 1977. The upgraded Night Strike F/A-18C/D, introduced
in 1989, enables crews to fly at night and in adverse weather, with improved
survivability and the ability to use a greater range of precision-guided
weapons. In 1996, McDonnell Douglas delivered 26 F/A-18C/Ds, including the first
two of Switzerland's 34 Hornets. The company also delivered 18 F/A-18 kits to
Finland and Switzerland, which are conducting final assembly of most of their 64
and 34 Hornets, respectively. By the end of the year, Finland had taken delivery
of 11 Hornets. Delivery of Malaysia's eight Hornets will begin in March 1997.
Thailand's eight Hornets are to be delivered in 1999.
PROPULSION: In the F/A-18C/D, two General Electric F404-GE-402 engines,
delivering 35,400 lb. of combined thrust (17,700 lb. each).
MAXIMUM PAYLOAD: Up to 14,900 lb. (6,757 kg.) externally.
DIMENSIONS: Length 56 ft. (17.1 m.); height 15.3 ft. (4.7 m.);
wingspan 40.4 ft. (12.3 m.).
CREW MEMBERS: One in F/A-18A and C; two in F/A-18B and D.
F/A-18E/F SUPER HORNET [PICTURE OMITTED]
----------------------
The F/A-18E/F Super Hornet will be the centerpiece of U.S. naval aviation as the
21st century unfolds. Now in development and testing, it is scheduled to enter
operational service with the U.S. Navy in 2001. The Super Hornet adds greater
range and payload-carrying ability, improves the Hornet's benchmark reliability
and maintainability, and allows for the extensive integration of new systems and
technologies. It also incorporates stealth and other features to improve crew
survivability significantly. The first flight was in November 1995. By late
1996, the Navy and McDonnell Douglas were flight-testing five developmental
aircraft. During its initial sea trials in January 1997, the Super Hornet made
its first arrested landings and catapulted launches aboard an aircraft carrier.
The Department of the Navy has indicated a potential purchase of 1,000 aircraft
-- at an estimated program cost of $80 billion -- through 2015. McDonnell
Douglas is the prime contractor and Northrop Grumman the principal subcontractor
for all versions of the F/A-18.
PROPULSION: Two General Electric F414 turbofan engines, producing 44,000 lb. of
combined thrust (22,000 lb. each).
MAXIMUM PAYLOAD: Up to 17,750 lb. (8,051 kg.) externally.
DIMENSIONS: Length 60.3 ft. (18.4 m.); height 16 ft. (4.9 m.);
wingspan 44.9 ft. (13.7 m.).
CREW MEMBERS: One in F/A-18E; two in F/A-18F.
[Company Pull-Out Section]
F-15 EAGLE [PICTURE OMITTED]
----------
The F-15 (A, B, C, and D versions) was originally designed for the U.S. Air
Force as the world's premier air-superiority fighter. The latest version, the
F-15E Strike Eagle, adds the capability for long-range, precision air-to-surface
interdiction, making the Eagle the USAF's most able fighter-bomber. The
versatile, dual-role aircraft carries a variety of air-to-air and air-to-ground
weapons. It can operate around the clock and in any weather. F-15 production has
been extended into 1999 by orders for 72 F-15S aircraft for Saudi Arabia and 25
F-15I aircraft for Israel. In 1996, ten F-15S Eagles were delivered, and
assembly began on the first F-15I. The U.S. Air Force procured six attrition
F-15Es in fiscal year 1996, and funding has been approved for six more aircraft
in fiscal year 1997.
PROPULSION: Two Pratt & Whitney F100-PW-100/220s (25,000 lb. thrust each) in
F-15C/D; two F100-PW-220/229s (29,000 lb. thrust each) in F-15E. The General
Electric F110-GE-129 (29,000 lb. thrust each) is also an option.
MAXIMUM PAYLOAD: Up to 23,000 lb. (10,433 kg.) in F-15C/D; up to 19,000 lb.
(8,618 kg.) in F-15E (with conformal fuel tanks).
DIMENSIONS: Length 63.8 ft. (19.5 m.); height 18.6 ft. (5.6 m.);
wingspan 42.8 ft. (13 m.).
CREW MEMBERS: One in F-15A and C; one or two in F-15B and D trainers;
two in tactical F-15E.
AV-8B HARRIER II PLUS [PICTURE OMITTED]
---------------------
With its capability for vertical and short takeoffs and landings, the AV-8B
Harrier II can operate where other fixed-wing aircraft cannot. McDonnell Douglas
and British Aerospace jointly developed the Harrier II in the early 1980s for
the U.S. Marine Corps and the British Royal Air Force. It is designed to provide
fast and effective interdiction and support to forces on the ground. The new
radar-equipped configuration--called the Harrier II Plus (pictured)-- makes the
aircraft even more accurate and versatile. Assembly of the Harrier II Pluses by
Spain and Italy -- partners with the United States in the development of this
upgraded aircraft -- will continue through the decade. Through the Marines
Corps' remanufacturing program, 72 day-attack Harriers IIs now in the fleet are
being converted to Harrier II Plus aircraft. Remanufactured Harriers gain a new
service life at two-thirds the cost of all-new aircraft. Four remanufactured
Harrier II Pluses were delivered to the U.S. Marines in 1996.
PROPULSION: One Rolls-Royce F402-RR-408 turbofan engine, delivering 23,800 lb.
of thrust.
MAXIMUM PAYLOAD: 11,795 lb. (5,350 kg.) externally.
DIMENSIONS: Length 47.8 ft. (14.6 m.); height 11.6 ft. (3.5 m.);
wingspan 30.3 ft. (9.2 m.).
CREW MEMBERS: One (two in TAV-8B trainer).
[Company Pull-Out Section]
T-45 TRAINING SYSTEM (T45TS) [PICTURE OMITTED]
---------------------------
The T45TS is the first totally integrated training system developed for and used
by the U.S. Navy. It includes the T-45A Goshawk aircraft, advanced flight
simulators, academics, computer-assisted instructional programs, a computerized
training-integration system, and a contractor logistics support package.
McDonnell Douglas and British Aerospace share production of the T-45A, and
Hughes Training Inc. is the principal subcontractor for the simulators. Plans
call for a total of 187 T-45A Goshawks to be delivered to the Navy. Nine were
delivered in 1996. Fourteen more are scheduled for 1997. Training with the T45TS
began in January 1994. T-45 flying hours surpassed 100,000 in February 1997.
PROPULSION: One Rolls-Royce F405-RR-401 Adour turbofan engine, producing 5,845
lb. of thrust.
DIMENSIONS: Length 39.3 ft. (12 m.); height 13.5 ft. (4.1 m.);
wingspan 30.8 ft. (9.4 m.).
CREW MEMBERS: Two -- one instructor and one student pilot.
AH-64D APACHE LONGBOW [PICTURE OMITTED]
---------------------
The AH-64D Apache Longbow is the modernized, more capable version of the
battle-proven AH-64A Apache. The AH-64D is the most lethal, survivable,
deployable, and maintainable multimission combat helicopter in the world. It is
available with or without the distinctive fire-control radar dome. The Apache
Longbow has a unique ability to let pilots see and share information on the
digital battlefield. That gives battlefield commanders the information they need
to make critical decisions rapidly. In 1996, McDonnell Douglas delivered 38
AH-64A Apaches. The U.S. Army plans to remanufacture more than 750 AH-64s into
Apache Longbow. Production of the AH-64Ds began in 1996; first delivery will be
in March 1997. Also awaiting delivery of AH-64Ds are the Netherlands, which has
ordered 30, and the United Kingdom, which has ordered 67.
PROPULSION: Two General Electric T700-GE-701C turbine engines.
MAXIMUM PAYLOAD: 10,570 lb. (4,795 kg.).
DIMENSIONS: Length 58.2 ft. (17.7 m.); 16.25 ft. (5 m.); main rotor diameter 48
ft. (14.6 m.).
CREW MEMBERS: One pilot and one co-pilot.
MD 500 [PICTURE OMITTED]
------
MD 500 series helicopters--including the MD 500E, the MD 530F and the MD
520N--are among the fastest, lightest, and most advanced rotorcraft in service.
They are descended from the U.S. Army's OH-6A Cayuse. Although they are now
considered primarily civil helicopters, they are also available in military
configurations. The five-place MD 520N (pictured) features the revolutionary
NOTAR[TM] anti-torque system for increased safety and quiet performance.
Helicopters equipped with the NOTAR system have no tail rotors. McDonnell
Douglas delivered 14 MD 500 series helicopters in 1996.
[Company Pull-Out Section]
PROPULSION: One Allison Model 250-C20R gas turbine engine.*
DIMENSIONS: Length 32.1 ft. (9.8 m.); height 9.7 ft. (2.9 m.);
main rotor diameter 27.4 ft. (8.3 m.).*
USEFUL LOAD: 1,513 lb. (686 kg.).*
*All specifications are for the MD 520N. Engines, dimensions, and useful load
vary from model to model.
MD 600N [PICTURE OMITTED]
-------
This soon-to-be certified eight-place helicopter is a spacious, versatile
performer, well suited for a variety of uses. It features outstanding speed and
hovering ability. It also has the agility and exceptional handling for which the
MD 500 series, from which it is descended, is known. With its advanced NOTAR
[TM] anti-torque system, the MD 600N is a member of an exclusive class of the
safest, quietest helicopters in the world. Other features include a six-bladed
main rotor and a powerful engine and drive system for performance on demand.
Deliveries will begin 1997.
PROPULSION: One Allison Model 250-C47M gas turbine engine.
USEFUL LOAD: 2,120 lb. (962 kg.).
DIMENSIONS: Length 36.9 ft. (11.2 m.); height 9.7 ft. (2.9 m.);
main rotor diameter 27.5 ft. (8.4 m.).
MD EXPLORER [PICTURE OMITTED]
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The latest version of the eight-place, twin engine MD Explorer features
better-performing engines for increased speed, range, and payload capabilities.
This aircraft, which secured the European Joint Aviation Authorities' Type
Certification for 27 countries in 1996, is expected to earn Category A
certification in 1997. Category A approval will permit greater flexibility,
especially in areas with stringent single-engine operating rules. The aircraft
also features a variety of advanced technologies, including an all-composite
bearingless main rotor, flexbeam, and blade system. It is equipped with the
NOTAR[TM] anti-torque system for enhanced safety and quiet performance. Fifteen
MD Explorers were delivered in 1996 to customers in diverse worldwide markets.
The MD Explorer is especially popular with medical evacuation services.
PROPULSION: Two Pratt & Whitney 206E gas turboshaft engines.
USEFUL LOAD: 2,975 lb. (1,349 kg.).
DIMENSIONS: Length 38.8 ft. (11.8 m.); height 12 ft. (3.7 m.); main rotor
diameter 33.8 ft. (10.3 m.).
C4I SYSTEMS [PICTURE OMITTED]
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McDonnell Douglas's command, control, communications, computers, and
intelligence (C4I) work encompasses information warfare, airborne surveillance
and detection, and maritime warfare systems. McDonnell Douglas's multisensored
Thermal Imaging Sensor System (TISS, pictured) provides U.S. Navy surface ships
with the capability to detect floating mines, speedboats, and swimmers in
near-zero visibility. The unit's Mast Mounted Sight, the precursor to TISS, is
in operation on nearly 500 helicopters and ships worldwide.
[Company Pull-Out Section]
BUSHMASTER III [PICTURE OMITTED]
--------------
The 35 mm. Bushmaster III (pictured on a Bradley fighting vehicle) is a member
of the Chain Gun[TM] family of reliable automatic cannons. It incorporates all
the features of the 25 mm. M242 Bushmaster, which is in service on land and sea
vehicles around the world. The Bushmaster III, which fires NATO standard 35 mm.
ammunition, is a compact, cost-effective answer to future military threats.
McDonnell Douglas has delivered more than 10,000 M242 Bushmasters. It also
builds the 30 mm. M230 cannon for the apache attack helicopter and the 30 mm.
Bushmaster II for Norway. Several Chain Gun cannon variants are now in
production at McDonnell Douglas and elsewhere under license.
DELTA II [PICTURE OMITTED]
--------
The Delta II medium-class rocket is the world's most reliable expendable launch
vehicle. An updated version of the Delta rockets McDonnell Douglas has built and
launched since 1960, the Delta II serves a mix of military, commercial, and
civil customers. McDonnell Douglas has booked a full manifest for the rocket
through the year 2002, launching satellites from both Cape Canaveral, Florida,
and Vandenberg Air Force Base, California. The Delta II launched 10 payloads in
1996.
DIMENSIONS: Height 125 ft. (38.1 m.); diameter 8 ft. (2.4 m.).
PAYLOAD CAPACITY: 4,100 lb. (1,860 kg.) to geosynchronous transfer orbit.
DELTA III [PICTURE OMITTED]
---------
The Delta III intermediate-class rocket, whose development was announced in
1995, is building on the successful Delta II heritage. Delta III will deliver
more than twice the lifting power of Delta II. Development of Delta III
continued in 1996. Hughes Space and Communications International Inc., the
initial customer, has scheduled its first launch, of the Galaxy X cable
television satellite, for 1998.
DIMENSIONS: Height 128.2 ft. (39.1 m.); upper-stage diameter 13.1 ft.
(4 m.); lower-stage diameter 7.8 ft. (2.4 m.).
PAYLOAD CAPACITY: 8,400 lb. (3,810 kg.) to geosynchronous transfer orbit.
DELTA IV/EELV [PICTURE OMITTED]
-------------
In December 1996, the U.S. Department of Defense selected McDonnell Douglas as
one of the two contractors to compete for development of the U.S. Air Force's
Evolved Expendable Launch Vehicle (EELV). Final selection is expected in 1998,
with the first flight in 2001. The value of the contract to the winner, over the
life of the development program, could reach $1.4 billion. The EELV program is
conceived as a family of rockets in the small, medium, and heavy launch
categories. McDonnell Douglas's design, the Delta IV, is an extension of the
highly reliable Delta II and the new Delta III launch systems.
[Company Pull-Out Section]
DIMENSIONS: Small-height 182.3 ft. (55.6 m.); gross liftoff wt. 509,000 lb.
(230,882 kg.); payload to geosynchronous transfer orbit 4,800 lb. (2,177.3 kg.).
Medium-height 197.6 ft. (60.2 m.); gross liftoff wt. 533,000 lb. (241,769 kg.);
payload to geosynchronous transfer orbit 10,000 lb. (4536 kg.). Heavy-height
225.4 ft. (68.7 m.); gross liftoff wt. 1,538,000 lb. (697,637 kg.); payload to
geosynchronous transfer orbit 33,000 lb. (14,968.8 kg.).
INTERNATIONAL SPACE STATION [PICTURE OMITTED]
---------------------------
As the major subcontractor on the International Space Station, McDonnell Douglas
is developing and building five integrated truss segments, along with major
subsystems. McDonnell Douglas also will provide other hardware and software
elements, including the mobile transporter used to support assembly and
operations on orbit, pressurized mating adapters used to dock the space shuttle
to the station, and outfitting for pressurized nodes that connect laboratory and
habitation modules. Space agencies in the United States (NASA), Europe, Canada,
Japan, and Russia are participating in the program. The first two launches of
hardware are planned for late 1997.
DIMENSIONS: Length 355.6 ft. (108.4m.); width 243.1 ft. (74.1m.); height 121.4
ft. (37m.).
TOTAL MASS AT COMPLETION: 900,000 LB. (408,240 KG.).
CREW MEMBERS: Six astronauts full-time.
HARPOON [PICTURE OMITTED]
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More than 25 years after its development began, the AGM 84A/C/D Harpoon is still
deployed as the U.S. Navy's primary anti-ship missile. It has been ordered by 24
customers around the world. It can be launched from aircraft, surface ships,
submarines, and land-based installations.
JOINT AIR-TO-SURFACE STANDOFF MISSILE (JASSM) [PICTURE OMITTED]
---------------------------------------------
In June 1996, McDonnell Douglas was named one of two contractors to compete for
development of the Joint Air-to-Surface Standoff Missile. The JASSM is intended
to be launched from a variety of U.S. Air Force and U.S. Navy bombers and
fighter aircraft. It will allow them to attack high-priority targets from beyond
the range of enemy air defenses. The $130 million contract is for program
definition and risk reduction. In 1998, a single contractor will be selected to
complete the development program. Production of 2,400 missiles is expected to
start in the year 2000. The total program is valued at $3 billion.
JOINT DIRECT ATTACK MUNITION (JDAM) [PICTURE OMITTED]
-----------------------------------
In October 1995, McDonnell Douglas won a $63 million U.S. Department of Defense
competition to develop the Joint Direct Attack Munition. The DOD's fiscal year
1997 budget funds the purchase of 936 units. Orders could total about $4 billion
over the next two decades. JDAM is a guidance kit that allows purchasers to
convert existing 1,000-pound and 2,000-pound unguided, free-falling bombs into
precision-guided "smart" munitions that can autonomously strike targets in any
weather conditions. JDAM also minimizes collateral damage while leaving strike
aircraft crews less exposed to hostile fire. Its first free-flight tests
occurred in late 1996. JDAM is currently in flight testing on the F/A-18, the
B-52H, the B-1B, the B-2A, and the F-16.
[Company Pull-Out Section]
STANDOFF LAND ATTACK MISSILES (SLAM AND SLAM ER) [PICTURE OMITTED]
------------------------------------------------
A derivative of the Harpoon, the AGM 84E Standoff Land Attack Missile is the
U.S. Navy's only air-launched, precision-guided standoff missile system. In
March 1995, the Navy awarded McDonnell Douglas a $91.6 million contract to
develop the SLAM Expanded Response (SLAM ER, pictured). This retrofit kit lets
users upgrade existing SLAMs to achieve longer range, greater effectiveness,
more resistance to jamming, and easier mission planning. In December 1996, the
first operational test SLAM ER was delivered to the U.S. Navy. Low-rate initial
production of 60 missiles will begin in April 1997.
COMMERCIAL AIRCRAFT
-------------------
Douglas Aircraft Co. is the commercial aircraft component of the McDonnell
Douglas Corp.
DOUGLAS AIRCRAFT COMPANY (Primary location)
LONG BEACH, CALIFORNIA
EMPLOYEES: 14,200 worldwide (including 10,800 in Long Beach)
HISTORY: Since its founding in 1920 by Donald W. Douglas, the company has
delivered more than 46,000 commercial and military airplanes, including a long
line of Douglas Commercial (DC) and McDonnell Douglas (MD) models.
In 1996, Douglas Aircraft continued to serve the world's airlines by delivering
extended-range models of the MD-11 trijet and introducing an Advanced Common
Flightdeck for the MD-95. Douglas also launched a major modification program to
convert DC-10 trijets into MD-10s. The MD-10 conversion provides performance
upgrades and a new two-person cockpit that combines features of the MD-11 and
the Advanced Common Flightdeck.
Late in the year, Boeing and McDonnell Douglas announced a strategic agreement
to work together on Boeing's future wide-body commercial airplane programs.
MARKETS SERVED: Passenger airlines and freight-shipping services.
PRODUCTS/SERVICES: MD-11 wide-cabin trijet; MD-80 midsize twin jet; MD-90
advanced technology, midsize twin jet; MD-95 advanced technology twin jet (in
development); spare parts; modifications, including conversion of the DC-10
trijet into the advanced technology MD-10; and collaboration on future Boeing
wide-body commercial aircraft.
MD-80 [PICTURE OMITTED]
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Almost 1,150 MD-80 twin jets have been delivered since the airliner entered
service in 1980. The MD-80 features commercial aviation's first digital
flight-guidance system. It is available in five models -- the MD-81, the MD-82,
the MD-83, the MD-88, and the smaller MD-87.
[Company Pull-Out Section]
PROPULSION: Two Pratt & Whitney JT8D-200 engines at 18,500 to 21,000 lb. of
thrust each.
DIMENSIONS: Length 147.8 ft. (45 m.); height 29.6 ft. (9 m.); wingspan 107.8 ft.
(32.9 m.). MD-87 length 130.4 ft. (39.7 m.).
CAPACITY: 155 (nominal). MD-87 capacity 130 (nominal--varies depending on
configuration).
RANGE: 1,800 to 2,880 statute mi. (2,897 to 4,635 km.), depending on model and
configuration.
MD-90 [PICTURE OMITTED]
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The MD-90 twin jet is an advanced midsize airliner that entered revenue service
in 1995. The MD-90 is the quietest large commercial jetliner in the skies. Its
engines are designed for fuel efficiency and reduced exhaust emissions.
PROPULSION: Two International Aero Engines V2500s, delivering 25,000 lb. of
thrust each.
DIMENSIONS: Length 152.6 ft. (46.5 m.); height 30.6 ft. (9.3 m.);
wingspan 107.8 ft. (32.9 m.).
CAPACITY: 153 (nominal--varies depending on configuration).
RANGE: 2,400 to 3,205 statute mi. (3,862 to 5,157 km.), depending on model and
configuration.
MD-95 [PICTURE OMITTED]
-----
The MD-95 twin jet airliner was launched in 1995 to serve the market for
aircraft that carry about 100 passengers. ValuJet Airlines is the launch
customer. Its first delivery is scheduled for 1999. The MD-95 is designed to
operate economically on high-frequency, short- to medium-range routes such as
those now flown by hundreds of DC-9s and similar aircraft. Like all McDonnell
Douglas twin jets, the MD-95 features popular five-across coach-class seating
and an all-new interior, with illuminated handrails and larger overhead baggage
racks. The two-person cockpit introduces the new McDonnell Douglas Advanced
Common Flightdeck, featuring the latest technology: liquid-crystal displays for
flight instruments and highly automated systems controllers that can reduce the
pilot's workload in all phases of operation. The MD-95 also continues the
environmental tradition of the MD-90 with reduced fuel consumption, reduced
exhaust emissions, and significantly lower sound levels compared to similar-size
aircraft now in service.
PROPULSION: Two BMW/Rolls-Royce BR715 engines, delivering 18,500 to 21,000 lb.
of thrust each.
DIMENSIONS: Length 124 ft. (37.8 m.); height 29.3 ft. (8.9 m.);
wingspan 93.3 ft. (28.4 m.).
CAPACITY: 106 (nominal--varies depending on configuration).
RANGE: 1,781 statute mi. (2,866 km.); 2,304 statute mi. (3,707 km.) for
extended-range model with optional auxiliary fuel tanks.
[Company Pull-Out Section]
MD-11 [PICTURE OMITTED]
-----
More than 160 MD-11 wide-cabin trijets have been delivered to customers around
the world. Delivery began in 1990. The MD-11 is the only aircraft of its type
available in four models -- passenger, all freighter, convertible freighter
(which can be quickly reconfigured to carry passengers or freight), and "combi"
(which carries passengers and freight on the main deck and additional freight
below). Although outwardly similar to the DC-10, the MD-11 is larger and
features advanced aerodynamics, propulsion, aircraft systems, cockpit systems,
operating economy. Delivery of an extended-range version -- the MD-11ER for
routes up to 8,300 statute miles (13,355 km.) -- began in 1996.
PROPULSION: Three engines, with three available options -- General Electric
CF6-80C2 at 61,500 lb. thrust each; Pratt & Whitney 4460 at 60,000 lb. thrust
each; or Pratt & Whitney 4462 at 62,000 lb. thrust each.
DIMENSIONS: Length 200.8 ft. (61.2 m.); height 57.8 ft. (17.6 m.);
wingspan 169.5 ft. (51.7 m.).
CAPACITY: Passenger version -- 233 to 410, depending on seating
configuration (300 nominal); freighter version -- 20,886 cubic feet of cargo.
RANGE: 4,550 to 8,300 statute miles (7,160 to 13,355 km.), depending on model
and total gross takeoff weight.
[Annual Report Page 26]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto beginning on page 35, which are
incorporated herein by this reference.
Forward-Looking Information Is Subject to Risk and Uncertainty
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 reported record earnings in 1996 of $788 million, led by
the military aircraft operations. Earnings in this segment were at a record
level for 1996, surpassing the previous record year, 1995, by more than 9
percent. The C-17 and Apache Longbow programs led the earnings improvement in
the military aircraft segment. Operating earnings in each of the segments in
1996 exceeded 1995 results, except for the missiles, space, and electronics
systems segment, where operating earnings were down $4 million. Excluding the
effect of an accounting charge related to the MD-11 trijet, McDonnell Douglas
had 1995 earnings of $707 million, an 18 percent improvement over the 1994
earnings of $598 million. Military aircraft operating earnings in 1995 were 28
percent higher than in 1994.
Revenues for 1996 were $13.834 billion, a 3 percent decline compared with
$14.332 billion in 1995. Revenues in 1995 were 9 percent greater than 1994
revenues of $13.176 billion. The revenue fluctuation over the three-year period
was largely attributed to the number and mix of aircraft deliveries in the
commercial aircraft segment, where revenue was down $574 million in 1996 after
increasing $736 million in 1995. Military aircraft segment revenues were also
higher in 1995 as compared with 1996 and 1994.
McDonnell Douglas and The Boeing Company (Boeing) entered into a definitive
agreement on December 14, 1996, 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, McDonnell Douglas shareholders will receive 0.65
share 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; and it is expected to close as early as mid-1997.
Approval of shareholders is expected to be considered at separate meetings of
both companies' shareholders in July 1997. The following discussions do not
consider the effects the merger will have on future products or operating
results since the exact timing of the consummation is uncertain and the future
effects of the merger have not been quantified.
Military Aircraft
Operating revenues in the military aircraft segment in 1996 were 3 percent
lower than in 1995, following a 5 percent increase in 1995 compared with 1994.
Revenue in the F/A-18E/F program, which is transitioning from development to
low-rate initial production, decreased in 1996 as compared with 1995. A 99-day
strike at the St. Louis, Missouri, facilities, which ended in mid-September
1996, also reduced revenue in 1996. Higher volume in the F/A-18C/D program from
production-rate increases and more activity on the F-15 program contributed to
revenue growth in 1995.
[Annual Report Page 27]
The military aircraft segment reported record operating earnings of $990
million in 1996, compared with $905 million in 1995 and $708 million in 1994.
Operating margins in the segment exceeded 12 percent in 1996, compared with
margins in excess of 11 percent in 1995 and 9 percent in 1994. Increased volume
and improved margins on the C-17 and Apache Longbow programs led the improvement
in 1996. Award fees on the F/A-18E/F program, partially offset by a charge
associated with the settlement of claims on the T-45 program, also contributed
to the 1996 increase. Improved earnings in the C-17 and F-15 programs led the
increase in 1995 over 1994. Almost all of the C-17 activity in 1995 was
associated with ongoing production lots, as relatively minor activity remained
on the development and initial-production lots. Award fees on the C-17 and
F/A-18 programs also contributed to the 1995 improvement. The F-15 earnings
improvement was principally a result of volume increases. The 1994 C-17
operating earnings were lower than in 1995 and included cost growth in the
development and initial-production lots, reduced cost estimates associated with
a 1993 omnibus settlement, and comparatively lower earnings on ongoing
production lots.
Commercial Aircraft
Operating revenues in the commercial aircraft segment decreased 15 percent in
1996, after a 23 percent increase in 1995. Fewer deliveries of MD-11 trijets,
along with the inclusion of two trijet and three twin jet deliveries recorded as
operating leases with minimal revenue recorded at the time of delivery,
accounted for the majority of the decrease. McDonnell Douglas delivered 24 MD-90
and 12 MD-80 twin jets (including three under lease arrangements) in 1996,
compared with 14 MD-90 and 18 MD-80 twin jets in 1995 and 22 MD-80 twin jets in
1994. McDonnell Douglas delivered 15 trijets (including two under lease
arrangements)in 1996, compared with 18 in 1995 and 17 in 1994. Current
commercial aircraft production plans for 1997 anticipate MD-80/90 twin jet
deliveries to be slightly higher than 1996 deliveries, with approximately twice
as many deliveries of MD-90s as MD-80s. MD-11 trijet deliveries in 1997 are
expected to be slightly lower than in 1996.
The commercial aircraft segment had operating earnings of $101 million in
1996. Excluding the effect of a 1995 charge related to the MD-11 trijet,
operating earnings were $39 million in 1995 and were $47 million in 1994.
Earnings from the sale of spare parts and related services continued their
significant contribution to segment earnings in each of the three years.
Operating earnings on aircraft production programs, although improved in 1996 as
compared with 1995 and 1994, were near break-even. Development costs, largely
related to the MD-95 program, increased in 1996 over the 1995 and 1994 levels.
Insurance recoveries recorded in 1996 partially offset the higher development
costs. Development costs in 1996 on the MD-95 were also reduced by participation
payments received from MD-95 subcontractors. Loss provisions on several MD-90
twin jets and a write-off of MD-80 inventory amounts contributed to lower 1995
earnings.
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 (1)
the number of units to be produced and sold in the program, (2) the rate at
which the units were expected to be produced and sold, and thus the period of
time to accomplish that, and (3) selling prices, production costs, and the gross
profit margin for the total program. The gross profit margin for the MD-11 was
unchanged from 1993 through September 30, 1995. After deducting period costs,
the MD-11 program operated at a loss during this period.
Effective October 1, 1995, McDonnell Douglas changed its accounting for cost
of sales on the MD-11 aircraft program from the program-average cost basis to
the specific-unit cost basis. At the same time, McDonnell Douglas revalued MD-11
program support costs previously valued in inventories consistent with the
program-average cost concept. MD-11 program support costs are now allocated to
current production. This change to the specific-unit costing method for the
MD-11 program was made in recognition of production rates, existing order base,
and length of time required to achieve program deliveries, and thus, the
resultant increased difficulty - which became apparent in the fourth quarter of
1995 - in making the estimates necessary under the program-average method of
accounting. Because the effect of this change in accounting principle was
inseparable from the effect of the change in accounting estimate, the change was
accounted for as a change in estimate. As a result, McDonnell Douglas recorded a
noncash charge to operations of $1.838 billion in the fourth quarter of 1995.
[Annual Report Page 28]
Missiles, Space, and Electronic Systems
Operating revenues in the missiles, space, and electronic systems segment
were $2.178 billion in 1996, $1.917 billion in 1995, and $1.877 billion in 1994.
Higher revenue in the Delta II and Space Station programs, partially offset by
lower revenue in the missiles programs, contributed to the increases in 1996 and
1995.
Operating earnings in the missiles, space, and electronic systems segment
were $194 million in 1996, slightly lower than $198 million in 1995, and down
from $262 million in 1994. Earnings increases in 1996 as compared with 1995 in
the Delta II program were largely offset by increased research and development
expenditures on the Delta III, a launch vehicle under development. Increased
spending on the Delta III and increased costs related to the closing of a
Florida missile facility contributed to lower earnings for 1995 as compared with
1994.
Financial Services and Other
Operating revenues in the financial services and other segment increased to
$367 million in 1996, compared with $334 million in 1995 and $326 million in
1994. Operating earnings of this segment were $74 million in 1996, compared with
$61 million in 1995 and $50 million in 1994. The 1996 operating earnings were at
their highest level since 1990. Operating earnings in this segment have grown in
each of the last three years as a result of increased volume in selective
markets. Operating earnings of the financial services and other segment are
reduced by interest expense, an operating expense of that segment.
Interest Expense
Interest expense related to aerospace segments was $121 million in 1996, $139
million in 1995, and $141 million in 1994, after excluding from 1995 and 1994
the reversal of interest associated with the resolution of tax issues. The
interest expense decline in 1996 reflects lower interest on income tax
obligations and reduced aerospace debt for most of the year. Interest expense
was reduced by $23 million in 1995 and $10 million in 1994, associated with
resolving tax issues. See Note 9, "Income Taxes," page 45.
Interest expense in the financial services and other segment was $127 million
in 1996, up from $109 million in 1995. An increase in debt, associated with a
growth in the asset portfolio, caused the 1996 increase. Interest expense in
1995 was $9 million lower than in 1994 as a result of the refinancing of high
coupon debt to lower rates.
The Company settled certain state tax issues in 1995, resulting in net
earnings of $35 million, of which $14 million ($23 million pretax) related to
reductions in accrued interest. The Company settled certain accounting method
and tax credit issues with the Internal Revenue Service (IRS) in 1994 in
connection with the an IRS audit of the years 1986 through 1989. Issues resolved
in 1994 resulted in net earnings of $21 million, of which $6 million ($10
million pretax) related to reductions in accrued interest. See Note 9, "Income
Taxes," page 45.
Liquidity
DEBT AND CREDIT ARRANGEMENTS. MDC Aerospace, which represents the
consolidation of McDonnell Douglas Corporation and all of its subsidiaries other
than McDonnell Douglas Financial Services Corporation (MDFS) and McDonnell
Douglas Realty Company (MDRC), has in place a number of credit facilities with
banks and other institutions. MDC Aerospace debt at December 31, 1996, was $1.4
billion, up from $1.2 billion at December 31, 1995. The increase in debt relates
largely to the issuance of $250 million of 10-year notes in late 1996 for
general corporate purposes; the notes may be used to fund $250 million of
securities maturing in April 1997. Financial Services debt at December 31, 1996,
was $2.0 billion, up from approximately $1.5 billion at December 31, 1995. The
increase in debt is consistent with the increased portfolio of McDonnell Douglas
Finance Corporation (MDFC), a subsidiary of MDFS.
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 under the RCA to increase that limit
by 20 percent. There were no amounts outstanding under the RCA at December 31,
1996.
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 December 31, 1996, 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
December 31, 1996, no receivable interests were sold. See Note 3, "Accounts
Receivable," page 42.
[Annual Report Page 29]
During 1996, MDFS and MDFC amended their joint RCA to provide, among other
things, for increased borrowing capacity and to extend the maturity date to
August 2001. Under the amended 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
December 31, 1996. At December 31, 1996, $96 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 $500 million medium-term note program under this registration
statement, and as of December 31, 1996, had issued $490 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 December 31, 1996, 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.
During 1996, rating agencies raised their ratings of MDC Aerospace and MDFC
debt. Moody's Investors Service Inc. raised its ratings of MDC Aerospace senior
debt to Baa1 from Baa2. Standard & Poor's raised its ratings of MDC Aerospace
and MDFC senior debt to A- from BBB. The rating agency also upgraded its rating
on MDFC subordinated debt to BBB+ from BBB-. Duff & Phelps Credit Rating Company
raised its rating of MDC Aerospace and MDFC senior debt to A- from BBB+. MDFC's
subordinated debt was also raised to BBB+ from BBB.
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 42 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.
Shareholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying, from additional capital
or retained earnings to common stock, the par value of the additional shares
arising from the split. In addition, all references to number of shares, per
share amounts, and market prices of common stock have been restated to reflect
the stock split.
AEROSPACE CASH AND CASH EQUIVALENTS. MDC Aerospace cash and cash
equivalentswere $1.1 billion at December 31, 1996. Included in this amount
are proceeds received from the 1996 fourth-quarter issuance of $250 million of
10-year notes. These notes were issued for general corporate purposes and
may be used to fund $250 million of securities that mature in April 1997. Cash
provided by aerospace operations was $824 million for 1996, prior to reductions
of $718 million used by McDonnell Douglas to purchase its common stock.
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.
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.
[Annual Report Page 30]
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 16, "Commitments and Contingencies," page 51, the
Company also has outstanding guarantees of $868 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 $97 million 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), the Company's largest
aircraft-leasing customer, 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 also 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 16,
"Commitments and Contingencies," page 51, for a further discussion of VARIG and
TWA.
The Company, including MDFC, has also made offers totaling $2.087 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 16, "Commitments and Contingencies," page 51.
CAPITAL EXPENDITURES. The Company's capital expenditures were $209 million in
1996, $143 million in 1995, and $112 million in 1994. The 1996 level of capital
expenditures reflects a planned increase in such activity, after a few years of
reduced expenditures. At December 31, 1996, the Company was not committed to the
purchase of a significant amount of property, plant, and equipment. Capital
expenditures are expected to approximate $300 million in 1997.
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.
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process critical financial and operational information
incorrectly. McDonnell Douglas, like many other companies, is expected to incur
expenditures over the next few years to address this issue.
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 and
1998. 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.
[Annual Report Page 31]
Military Aerospace Business
The Company's most significant customer in the military aircraft and in the
missiles, space, and electronic systems segments is the U.S. Government. Certain
foreign governments also purchase a significant share of the Company's aerospace
products directly or through contracts for foreign military sales with U.S.
Government agencies. Companies engaged in supplying military and space equipment
to the U.S. Government are subject to risks in addition to those found in
commercial business. These additional risks include dependence on Congressional
appropriations and annual administrative allotment of funds, general reductions
in the U.S. and worldwide defense budgets, and changes in Government policies,
including weapons export policies. In addition, at times McDonnell Douglas
invests in competitive programs still in the predevelopment stage, some of
which may never result in production. Moreover, the costs of maintaining
adequate research and development as well as manufacturing capabilities are
substantial.
The U.S. Government may terminate its contracts (1) for its convenience
whenever it believes that such termination would be in the best interest of the
Government or (2) for default. Under contracts terminated for the convenience of
the Government, a contractor is generally entitled to receive payments for its
contract cost and the proportionate share of its fee or earnings for the work
done, subject to the availability of funding. The U.S. Government may terminate
a contract for default if the contractor materially breaches the contract.
U.S. Government defense spending, which has declined in recent years, is
expected to remain at about the same level in 1997 as it was in 1996, based upon
the fiscal year 1997 defense budget. In an era of shrinking or static defense
budgets, military customers are more constrained in their ability to support new
development programs. Declines in new development programs can have a negative
impact on defense contractors. Additionally, the loss of a major program or a
major reduction or stretch-out in one or more programs could have a material
adverse impact on the Company's future revenues, earnings, and cash flow.
However, any such impact could be mitigated by foreign sales and by programs to
upgrade existing products. Certain foreign sales may require some portion of the
production to be performed or completed in the purchasing country. In late 1996,
the Company was eliminated in the downselect for the Joint Strike Fighter (JSF)
competition, a significant new DOD development program. In early 1997, the
Company agreed to work with Boeing on its JSF program. While the JSF is not
expected to have a major impact on revenues or earnings for at least a decade,
its impact on the longer-term future is potentially great. The Company does,
however, believe it is well positioned in this defense era; the DOD has
indicated its commitment to several of the Company's relatively new programs
and/or to pursuing significant modifications that will extend the duration of
existing production lines. Because McDonnell Douglas is the largest producer of
military aircraft, the extension of existing programs could have favorable
competitive results. In light of the uncertainty regarding the changes in
defense spending, reported financial information may not be indicative of the
Company's future operating results. Production contracts awarded under the
fiscal year 1997 budget will generally continue through 1999.
In January 1997, a Delta II rocket carrying a Global Positioning System
satellite exploded shortly after launch. An investigation to determine the cause
of the mishap is underway. As is standard in the industry, other 1997 Delta II
launches have been delayed pending determination of the cause of the explosion.
The extent or the impact of the mishap and of such delays cannot be determined
at this time.
Commercial Aircraft Business
McDonnell Douglas is producing the MD-80 and MD-90 twin jets and MD-11 trijet
commercial aircraft, developing the MD-95 twin jet commercial aircraft, and
supporting commercial aircraft, spare parts, and related services. The
commercial aircraft business requires large investments to develop new aircraft
or derivatives of existing aircraft.
During 1996, McDonnell Douglas received orders for 17 MD-80 twin jets, 12
MD-90 twin jets, and 9 MD-11 trijets. This amounted to 4 percent of the total
narrow-body and wide-body orders received in the commercial aircraft industry.
Three of the nine trijet orders received were for the freighter configuration.
Not included in these orders are five MD-11 freighters requested by Lufthansa
Cargo; this contract was finalized early in 1997. McDonnell Douglas expected to
receive a higher level of orders in 1996. As the year progressed, it became
apparent that the Company's share of commercial aircraft orders would be
minimal. Airline customer orders in which the Company expected to participate
were instead recorded by its competitors. In addition, a few significant
customers previously supportive of
[Annual Report Page 32]
McDonnell Douglas have either expressed
reduced confidence in the Company's existing product line or have made decisions
to convert to aircraft of a competitor. During this same period, McDonnell
Douglas studied the feasibility of developing a new high-capacity long-range
three-engine jetliner, designated the MD-XX. In October 1996, subsequent to a
disappointing first nine months of new orders, McDonnell Douglas decided not to
proceed with this proposed aircraft. Several factors influenced the decision.
Key among those were a high level of risk, marketplace price expectations, and
the amount of product and internal infrastructure investment (estimated at $15
billion) required to bring the Company to the level of the other major players
in the commercial aerospace industry.
In early December, McDonnell Douglas and Boeing agreed on a plan to
collaborate on future jetliner design and production. In connection with this
agreement, finalized in January 1997, several hundred engineers of the Company
began work on jetliner design and production for Boeing.
McDonnell Douglas's presence in the commercial aerospace industry will be
focused on its existing product line of MD-80 and MD-90 twin jets and MD-11
trijet commercial aircraft, its MD-95 twin jet in development, and its
commercial aircraft modification, support, spare parts, and related services.
The impact of the decision not to proceed with the MD-XX on existing orders and
options and on future orders of its existing product line is uncertain. However,
as mentioned above, reduced confidence expressed by a few significant existing
customers and customer movement is likely to have negative ramifications. The
Company has emphasized cost-reduction efforts during recent years, and those
efforts will continue. Significant price competition also currently exists in
the marketplace, and the Company's competitors offer broader product lines.
These factors continue to cause downward pressure on profit margins.
Estimated costs for development and initial production of new aircraft, such
as the MD-95, include assumptions, analyses, and forecasts that are subject to
continuous reassessment during the development and initial production period.
Technological risks, as well as risks with suppliers and customers, are inherent
in development programs.
Estimated development and initial production costs on new aircraft and
production costs on existing aircraft may fluctuate from current estimates.
Fluctuations on development programs generally diminish as the project
approaches initial deliveries.
See also "Backlog," page 33, for a discussion of certain risks related to
commercial aircraft customers and "Commercial Aircraft," page 27, for a
discussion of the status of commercial aircraft orders.
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 the Company's 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 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.
In March 1991, the SEC issued a Formal Order of Private Investigation (the
1991 SEC Investigation) looking into whether the Company violated the Securities
Act of 1933 and the Securities Exchange Act of 1934 in connection with
disclosures about and accounting for the A-12 program. In February 1993, the SEC
issued subpoenas requesting additional information, and broadened its inquiry to
include the C-17 program. In June 1996, McDonnell Douglas resolved the
investigation commenced in 1993 relating to the Company's disclosure about and
accounting for the C-17 program. Without admitting or denying any of the
allegations in the complaint for purposes of this SEC proceeding only, and
solely for the purposes of settlement of the SEC's complaint, the Company
simultaneously agreed to the entry of an injunction enjoining it from violating
Section 13(a) of the Securities Exchange Act of 1934, and Rules 13a-1 and 12b-20
thereunder, in the future, and to the payment of a civil penalty of $500,000.
This settlement concluded the investigation. Further, the 1991 SEC Investigation
was concluded without any action.
In 1991, McDonnell Douglas and General Dynamics Corporation filed a legal
action to contest the U.S. Navy's termination for default on the A-12 contract.
See Note 5, "Contracts in Process and Inventories," page 43 for a discussion of
the status of this action.
In 1984, the Company entered into a full-scale development letter contract
for the T-45 Training System. The final negotiated firm fixed-price contract was
agreed to in 1986. As a result of flight testing in late 1988, the Navy required
that changes be made to the T-45 aircraft. See Note 5, "Contracts in Process and
Inventories," page 43, for a discussion of the resolution of this matter.
[Annual Report Page 33]
Environmental Expenditures
The Company believes that expenditures that may be required to comply with
federal, state, and local provisions regulating the discharge of materials into
the environment or otherwise relating to the environment will not be material in
relation to its earnings, cash flow, or financial position. Compliance with such
regulations has not had a material effect on the Company's earnings, cash flow,
or financial position.
McDonnell Douglas 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,
McDonnell Douglas believes that it has de minimis liability at 23 sites,
including 14 sites at which it believes that it has no future liability. At five
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 nine 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.
McDonnell Douglas estimates include reasonably possible costs of
approximately $63 million for study and remediation expenditures at Superfund
sites and for the Company's current and former operating sites, of which $44
million was accrued at December 31, 1996. Because of uncertainty inherent in the
estimation process, it is possible that actual costs will differ from estimates.
Ongoing operating and maintenance costs at current operating sites and
remediation expenditures on property held for sale are not included in the
amounts. Claims for recovery are recorded as receivables and therefore have not
been netted against the environmental liabilities. A receivable has been
recorded from one insurance carrier for agreed reimbursement of environmental
costs and totals $8 million at December 31, 1996. 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.
Backlog
The Company's commercial backlog decreased during 1996, while backlog for its
two major competitors increased substantially. The Company's ability to generate
additional orders is subject to its ability to operate successfully as a niche
player. See "Business and Market Considerations - Commercial Aircraft Business,"
page 31, for a further discussion of this risk. Approximately 39 percent of the
firm backlog for commercial aircraft is scheduled for delivery during 1997 and
an additional 20 percent during 1998. As an additional risk, if difficulties
recur in the commercial airline industry, airlines may decline deliveries of
aircraft, request changes in delivery schedules, or default on contracts for
firm orders. Purchase options and announced orders for which definitive
contracts have not been executed are excluded from firm backlog. See also the
"Firm Backlog" column in the table on page 34.
Inflation
The effects of inflation have not been significant to McDonnell Douglas
because inflation rates have been relatively low. Contracts for both government
and commercial products generally either include estimates of inflation or
adjust for inflation's effect.
[Annual Report Page 34]
SELECTED FINANCIAL DATA BY INDUSTRY SEGMENT
The Company has three aerospace segments: military aircraft; commercial
aircraft; and missiles, space, and electronic systems. The military aircraft
segment produces attack and fighter aircraft, military and commercial
helicopters, military transport aircraft, training systems, and spare parts. It
also provides related services. The attack and fighter aircraft are capable of a
full spectrum of missions (air superiority, all-weather and day/night attack,
close air support, reconnaissance, etc.). This segment offers land-based,
aircraft carrier-based, and vertical/short takeoff and landing aircraft. The
commercial aircraft segment produces commercial aircraft and spare parts, and it
provides related services. The missiles, space, and electronic systems segment
produces tactical missiles, satellite launching vehicles, and defense electronic
components and systems. It also works on space station design and development
and provides space shuttle payload integration.
The financial services and other segment is engaged in a wide range of
financial services including the financing of commercial and private aircraft,
commercial equipment, and real estate. The segment also acquires and develops
properties for other McDonnell Douglas segments and commercial customers. The
financial services and other segment includes McDonnell Douglas Financial
Services Corporation and McDonnell Douglas Realty Company. Operating earnings of
the segment have been reduced by interest expense, an operating expense of that
segment. The financial services and other segment includes interest earned on
advances or loans to other industry segments in its operating revenues and
earnings. Other intersegment revenues and earnings were immaterial and have been
eliminated. Assets of individual segments have been stated net of applicable
progress payments.
(Millions of dollars) Revenues
December 31 or Years Then Ended 1996 1995 1994
--------- --------- ---------
Military aircraft $ 7,952 $ 8,158 $ 7,804
Commercial aircraft 3,317 3,891 3,155
Missiles, space, and electronic
systems 2,178 1,917 1,877
Financial services and other 367 334 326
--------- --------- ---------
Operating revenues 13,814 14,300 13,162
Nonoperating - net 20 32 14
--------- --------- ---------
$13,834 $14,332 $13,176
========= ========= =========
(Millions of dollars) Earnings (Loss)
December 31 or Years Then Ended 1996 1995 1994
--------- --------- ---------
Military aircraft $ 990 $ 905 $ 708
Commercial aircraft 101 (1,799) 47
Missiles, space, and electronic
systems 194 198 262
Financial services and other 74 61 50
--------- --------- ---------
Operating earnings (loss) 1,359 (635) 1,067
Nonoperating - net 16 19 (3)
General corporate expenses (31) (18) (13)
Interest expense (121) (116) (131)
Income tax benefit (expense) (435) 334 (322)
--------- --------- ---------
$ 788 $ (416) $ 598
========= ========= =========
(Millions of dollars) Firm Backlog (Unaudited)*
December 31 or Years Then Ended 1996 1995 1994
--------- --------- ---------
Military aircraft $12,934 $10,121 $ 8,340
Commercial aircraft 7,000 7,175 7,544
Missiles, space, and electronic
systems 3,745 2,344 1,619
--------- --------- ---------
$23,679 $19,640 $17,503
========= ========= =========
* Amounts as of December 31
(Millions of dollars) Assets*
December 31 or Years Then Ended 1996 1995 1994
--------- --------- ---------
Military aircraft $ 3,657 $ 3,678 $ 3,860
Commercial aircraft 2,643 2,480 4,559
Missiles, space, and electronic
systems 1,169 1,081 1,175
Financial services and other 3,025 2,358 2,160
--------- --------- ---------
10,494 9,597 11,754
Corporate 1,137 869 462
-------- -------- --------
$11,631 $10,466 $12,216
========= ========= =========
*Amounts as of December 31
Property, Plant, and
(Millions of dollars) Equipment Acquired
December 31 or Years Then Ended 1996 1995 1994
--------- --------- ---------
Military aircraft $ 122 $ 76 $ 88
Commercial aircraft 16 16 17
Missiles, space, and electronic
systems 47 40 4
Financial services and other 1 1 2
--------- --------- ---------
186 133 111
Corporate 23 10 1
--------- --------- ---------
$ 209 $ 143 $ 112
========= ========= =========
(Millions of dollars) Depreciation and Amortization
December 31 or Years Then Ended 1996 1995 1994
------- ------- --------
Military aircraft $ 120 $ 120 $ 123
Commercial aircraft 47 46 53
Missiles, space, and electronic
systems 35 43 43
Financial services and other 68 59 55
--------- --------- ---------
270 268 274
Corporate 5 5 5
--------- --------- ---------
$ 275 $ 273 $ 279
========= ========= =========
[Annual Report Page 35]
CONSOLIDATED STATEMENT OF OPERATIONS
(Millions of dollars, except share data)
Years Ended December 31 1996 1995 1994
-------- -------- --------
Revenues $13,834 $14,332 $13,176
Costs and expenses
Cost of products, services, and rentals 11,282 12,027 11,026
MD-11 accounting charge 1,838
General and administrative expenses 726 681 684
Research and development 355 311 297
Interest expense
Aerospace segments 121 116 131
Financial services and other segment 127 109 118
-------- -------- --------
Total costs and expenses 12,611 15,082 12,256
-------- -------- --------
Earnings (Loss) before Income Taxes 1,223 (750) 920
Income taxes (benefit) 435 (334) 322
-------- -------- --------
Net Earnings (Loss) $ 788 $ (416) $ 598
======== ======== ========
Earnings (Loss) per Share $ 3.64 $ (1.83) $ 2.53
======== ======== ========
Dividends Declared per Share $ .48 $ .40 $ .28
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
[Annual Report Page 36]
BALANCE SHEET
(Millions of dollars and shares)
McDonnell Douglas Corporation
and Consolidated Subsidiaries
----------------------------
December 31 1996 1995
--------- ---------
Assets
Cash and cash equivalents $ 1,094 $ 797
Accounts receivable 882 821
Finance receivables and property on lease 3,090 2,347
Contracts in process and inventories 3,486 3,421
Prepaid income taxes
Property, plant, and equipment 1,453 1,471
Investment in Financial Services
Other assets 1,626 1,609
--------- ---------
Total Assets $ 11,631 $ 10,466
========= =========
Liabilities And Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 2,595 $ 2,284
Accrued retiree benefits 1,109 1,205
Income taxes 83 3
Advances and billings in excess of related
costs 1,310 1,147
Notes payable and long-term debt
Aerospace segments 1,438 1,251
Financial services and other segment 1,995 1,469
--------- ---------
8,530 7,359
Minority interest 63 66
Shareholders' equity
Preferred stock - none issued
Common stock - issued and outstanding
1996, 209.6 shares; 1995, 223.6 shares 210 224
Additional capital
Retained earnings 2,850 2,835
Unearned compensation (22) (18)
--------- ---------
3,038 3,041
--------- ---------
Total Liabilities and Shareholders' Equity $ 11,631 $ 10,466
========= =========
The accompanying notes are an integral part of the financial statements.
[Annual Report Page 37]
MDC Aerospace Financial Services
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
$ 1,077 $ 784 $ 17 $ 13
964 934 2
254 165 2,836 2,182
3,486 3,421
278 315
1,391 1,358 62 113
383 331
1,535 1,527 91 82
--------- --------- --------- ---------
$ 9,368 $ 8,835 $ 3,006 $ 2,392
========= ========= ========= =========
$ 2,470 $ 2,183 $ 207 $ 216
1,109 1,205
361 318
1,265 1,111 45 36
1,423 1,229 15 22
1,995 1,469
--------- --------- --------- ---------
6,267 5,728 2,623 2,061
63 66
210 224
238 238
2,850 2,835 145 93
(22) (18)
--------- --------- --------- ---------
3,038 3,041 383 331
--------- --------- --------- ---------
$ 9,368 $ 8,835 $ 3,006 $ 2,392
========= ========= ========= =========
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.
[Annual Report Page 38]
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Millions of dollars)
Years Ended December 31 1996 1995 1994
-------- -------- --------
Common Stock
Beginning balance $ 224 $ 234 $ 236
Shares purchased (15) (10) (4)
Employee stock awards and options 1 2
-------- -------- --------
210 224 234
Additional Capital
Beginning balance 74 137
Shares purchased (28) (92) (88)
Employee stock awards and options 28 18 25
-------- -------- --------
74
Retained Earnings
Beginning balance 2,835 3,576 3,043
Net earnings (loss) 788 (416) 598
Shares purchased (669) (235)
Dividends declared (104) (90) (65)
-------- -------- --------
2,850 2,835 3,576
Unearned Compensation
Beginning balance (18) (12)
Unamortized restricted stock compensation (20) (17) (17)
Compensation amortized 16 11 5
-------- -------- --------
(22) (18) (12)
-------- -------- --------
Shareholders' Equity $ 3,038 $ 3,041 $ 3,872
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
[Annual Report Page 39]
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
Years Ended December 31 1996 1995 1994
-------- -------- -------
Operating Activities
Net earnings (loss) $ 788 $ (416) $ 598
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities
Depreciation of property, plant, and
equipment 190 196 213
Depreciation of rental equipment 67 58 51
Amortization of intangible and other
assets 18 19 15
Gain on sale of assets (26)
Pension income (130) (165) (132)
Change in operating assets and
liabilities
Accounts receivable (61) (49) (217)
Contracts in process and inventories (65) 547 (32)
MD-11 accounting charge 1,838
Accounts payable and accrued expenses 338 (186) 285
Income taxes 80 (720) 149
Advances and billings in excess of
related costs 163 (53) (51)
------- ------- -------
Net Cash Provided by
Operating Activities 1,388 1,069 853
Investing Activities
Property, plant, and equipment acquired (209) (143) (112)
Finance receivables and property on lease (792) (304) 217
Other 15 31 83
------- ------- -------
Net Cash Provided (Used) by
Investing Activities (986) (416) 188
Years Ended December 31 1996 1995 1994
(Continued) -------- -------- --------
Financing Activities
Net change in borrowings (maturities
90 days or less) 131 (103) 50
Debt having maturities more than 90 days
New borrowings 920 695 450
Repayments (338) (441) (1,069)
Proceeds of stock options exercised 1 1 3
Common shares purchased (718) (337) (85)
Dividends paid (101) (92) (55)
-------- -------- --------
Net Cash Used by Financing
Activities (105) (277) (706)
-------- -------- --------
Increase in Cash and
Cash Equivalents 297 376 335
Cash and cash equivalents at
beginning of year 797 421 86
-------- -------- --------
Cash and cash equivalents at end
of year $ 1,094 $ 797 $ 421
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
[Annual Report Page 40]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except share data)
1. Accounting Policies
Basis of Presentation
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. Shareholders' equity
has been restated to give retroactive recognition to the stock split for all
periods presented by reclassifying, from additional capital or retained earnings
to common stock, the par value of the additional shares arising from the split.
In addition, all references to number of shares, per share amounts, stock option
data, and market prices of common stock have been restated to reflect the stock
split.
Nature of Operations
McDonnell Douglas is one of the largest defense contractors and NASA prime
contractors. It has a wide range of programs in production and development, and
it is the world's leading producer of military aircraft. McDonnell Douglas is
also a manufacturer of large commercial transport aircraft. The programs and
products that account for most of McDonnell Douglas's business volume are of a
highly technical nature, comparatively few in number, and high in unit cost;
they have traditionally had relatively long production lives.
McDonnell Douglas's aerospace segments compete in an industry composed of a few
major competitors and a limited number of customers. The most significant
customer of the Company's military aircraft segment and of its missiles, space,
and electronic systems segment is the U.S. Government. Certain foreign
governments also purchase a significant share of the Company's aerospace
products either directly or through contracts for foreign military sales with
U.S. Government agencies. The commercial aircraft business is market-sensitive,
which causes disruptions in production and procurement and attendant costs. It
also requires large investments to develop new aircraft or derivatives of
existing aircraft.
Through MDFS, McDonnell Douglas is engaged in aircraft financing and commercial
equipment leasing. MDRC is a full-service developer and property manager. It
serves the commercial real estate market as well as McDonnell Douglas's
aerospace business.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Revenue Recognition
Revenues and earnings on cost-reimbursement and fixed-price government contracts
are generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis) in accordance with Statement of Position
81-1, "Accounting for Performance of Construction Type and Certain Production
Type Contracts" (SOP 81-1). Revenues include costs incurred plus a portion of
estimated fees or profits based on the relationship of costs incurred to total
estimated costs. Some contracts contain incentive provisions that provide
increased or decreased earnings based upon performance in relation to
established targets. Incentives based upon cost performance are generally
recorded currently, and other incentives are recorded when such amounts can
reasonably be determined. Revenues relating to contracts or contract changes
that have not been completely priced, negotiated, documented, or funded are not
recognized unless realization is considered probable.
Major contracts for complex military systems are performed over extended periods
and are subject to changes in scope of work and delivery schedules. Pricing
[Annual Report Page 41]
negotiations on changes and settlement of claims often extend over prolonged
periods. Any anticipated losses on contracts (estimated final contract costs,
excluding period costs, in excess of estimated final contract revenues) are
charged to current operations as soon as they are evident. Estimates of final
contract revenues on certain fixed-price development contracts include future
revenue from expected recovery on claims. Such revenues are generally included
when it is probable that the claim will result in additional contract revenue
and when the amount can be reasonably estimated.
Revenues from commercial aircraft programs are based on sales prices and are
recognized as aircraft are delivered. Cost of sales of the MD-80, MD-90, and
MD-11 aircraft programs are determined on a specific-unit cost method. As
described in Note 5, "Contracts in Process and Inventories," effective October
1, 1995, McDonnell Douglas changed its accounting for the MD-11 aircraft program
to the specific-unit cost method. Prior to October 1, 1995, cost of sales of the
MD-11 aircraft program was determined on a program-average cost method, and it
was computed as a percentage of the sales price of the aircraft. Under the
program-average cost method, the percentage was calculated as the total of
estimated production and tooling costs for the entire program divided by the
estimated sales prices of all aircraft in the program. A constant gross margin
was achieved by deferring or accelerating a portion of the average unit cost on
each unit delivered.
Revenues, costs, and earnings on government contracts and commercial aircraft
programs are based, in part, on estimates and as a result, actual earnings may
differ from estimates. Under the prior MD-11 program-average cost method of
accounting, such adjustments were made prospectively. Such adjustments on
government contracts are made on a cumulative basis; the effect of such changes
is recognized currently. Losses anticipated on government contracts or
commercial programs, excluding period costs, are charged to operations as soon
as they are evident.
Revenues and costs from the manufacturing aspects of sales-type leases are
generally recognized at the inception of such leases. Revenues from the
financing aspects of sales-type and direct-financing leases are recognized by
the interest method. The interest method results in a constant rate of return on
the unrecovered investment.
Contracts in Process and Inventories
Government contracts in process represent incurred costs plus estimated earnings
(unbilled revenues), less amounts billed to customers when items are completed
and delivered. Incurred costs include production costs and related overhead.
Commercial products in process are stated at the lower of cost (principally
specific unit) or market. Material and spare parts are stated at the lower of
cost (principally moving average) or market.
General and administrative expenses and research and development expenses are
considered period costs and, accordingly, are charged to operations on a current
basis.
The U.S. Government has title to, or a security interest in, certain inventories
by reason of progress payments.
Cash and Cash Equivalents
Cash equivalents consist of short-term highly liquid investments purchased with
a maturity of three months or less. Cash equivalents are stated at cost that
approximates market.
Finance Receivables and Property on Lease
Rental equipment subject to operating leases is stated at cost; it is generally
depreciated by the straight-line method.
Property, Plant, and Equipment
Property, plant, and equipment is carried at cost and depreciated over the
useful lives of the various classes of properties, primarily by accelerated
methods.
During 1996 McDonnell Douglas adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The adoption thereof had no
material effect on the Company's financial position or operating results.
Intangible Assets
Intangible assets consist principally of computer software, deferred debt
expense, and deferred leasing costs. Intangibles are being amortized over 3 to
10 years.
Income Taxes
U.S. and foreign income taxes are computed at current tax rates, less tax
credits. Taxes are adjusted both for items that do not have tax consequences and
for the cumulative effect of any changes in tax rates from those previously used
to determine deferred tax assets or liabilities. Tax provisions include amounts
that are currently payable, plus changes in deferred tax assets and liabilities
that arise because of temporary differences between the time when items of
income and expense are recognized for financial reporting and income tax
purposes.
The undistributed earnings of foreign subsidiaries are considered permanently
invested for continuing operations; accordingly, no provisions are made for
taxes that would become payable upon the distribution of such earnings as a
dividend to the Company. The Company files a consolidated return for federal and
certain state
[Annual Report Page 42]
income taxes, and dividends from domestic subsidiaries included
therein are not subject to federal or to most state income taxes.
Minority Interest
Minority interest represents the limited partner's equity interest in a real
estate venture. McDonnell Douglas is the general partner in its real estate
partnership. It contributed land, buildings, and improvements to the
partnership. At December 31, 1996, McDonnell Douglas's participation in the
partnership was approximately 50 percent.
Research and Development
Research and development costs include the costs of independent research and
development, bid and proposal efforts, and costs incurred in excess of amounts
estimated to be recoverable under cost-sharing research and development
agreements. All such costs are expensed as incurred.
Research and development expense was reduced by $29 million in 1996, $5 million
in 1995, and $32 million in 1994 for risk-sharing funds received from vendors
and subcontractors participating in the development of commercial aircraft. Some
amounts may be repayable under certain circumstances.
Environmental
Environmental expenditures that relate to current operations are expensed or
capitalized, as appropriate. Expenditures that extend the life, increase the
capacity, or mitigate or prevent environmental contamination are capitalized.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the costs can be reasonably estimated. Estimated liabilities
are not discounted to present value. See also Note 16, "Commitments and
Contingencies."
Earnings per Share
Earnings per share computations are based upon the weighted average of common
shares outstanding during the year. Common stock equivalents (options) are not
material.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. McDonnell Douglas has chosen to continue to
account for stock-based compensation plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. The Company has adopted the disclosure-only option
under SFAS No. 123 as of December 31, 1996. See also Note 13.
Reclassification
In 1996, McDonnell Douglas reclassified cash flows related to certain finance
receivables and property on lease from operating activities to investing
activities. The prior years have been restated to conform with the 1996
presentation.
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, McDonnell Douglas shareholders will receive 0.65
share 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 mid-1997.
3. Accounts Receivable
Accounts receivable consisted of the following:
December 31 1996 1995
------ ------
MDC Aerospace
U.S. Government - primarily from
long-term contracts
Billed $ 361 $ 361
Unbilled 283 322
------ ------
644 683
Commercial and other governments 238 136
Financial Services 2
------ ------
$ 882 $ 821
====== ======
MDC Aerospace also had net receivables from Financial Services of $82 million
and $115 million at December 31, 1996 and 1995, respectively.
Unbilled receivables at December 31, 1996, include unbillable amounts of $131
million. Unbillable amounts include the estimated sales value of items delivered
or other work performed that lacks contractual documentation to permit billing.
Approximately $52 million of the 1996 unbilled amount is not expected to be
collected within one year.
[Annual Report Page 43]
McDonnell Douglas 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. Under the
agreement, participation interests in new receivables are sold as previously
sold amounts are collected. The participation interests are sold at a discount,
which is included in general and administrative expenses in the consolidated
statement of operations. The Company acts as an agent for the purchaser by
performing record-keeping and collection functions. No receivable interests were
sold as of December 31, 1996 and 1995.
4. Finance Receivables and Property on Lease
Finance and lease receivables and property on lease consisted of the following:
December 31 1996 1995
-------- --------
Financial Services
Investment in finance leases
Minimum lease payments $ 2,354 $ 1,800
Residual values 437 322
Unearned income (1,092) (801)
-------- --------
1,699 1,321
Notes receivable 322 271
Allowances for doubtful receivables (50) (42)
Investment in operating leases, net of
accumulated depreciation of $185 in
1996, $172 in 1995 819 568
Property held for sale or lease 46 64
-------- --------
2,836 2,182
MDC Aerospace 254 165
-------- --------
$ 3,090 $ 2,347
======== ========
The aggregate amount of the scheduled principal payments and installments to be
received on notes and lease receivables and the minimum rentals to be received
under noncancelable operating leases for Financial Services consisted of the
following at December 31, 1996:
Principal Payments
and Installments Minimum Rentals
------------------ ---------------
1997 $ 590 $124
1998 254 105
1999 281 90
2000 227 69
2001 220 61
After 2001 1,104 395
Concentration of Credit Risk
Financial Services' financing and leasing portfolio (excluding $150 million at
December 31, 1996, and $135 million at December 31, 1995, of MDRC) consisted of
the following:
December 31 1996 1995
--------------- ---------------
Commercial aircraft financing
McDonnell Douglas aircraft
financing $1,659 61.8% $1,286 62.8%
Other commercial aircraft
financing 207 7.7% 194 9.5%
------ ------ ------ ------
1,866 69.5% 1,480 72.3%
Commercial equipment leasing 820 30.5% 567 27.7%
------ ------ ------ ------
Total portfolio $2,686 100.0% $2,047 100.0%
====== ====== ====== ======
The single largest commercial aircraft financing customer accounted for $375
million (14.0 percent of total portfolio) in 1996 and $282 million (13.8 percent
of total portfolio) in 1995. The five largest accounted for $1.231 billion (45.8
percent) and $921 million (45.0 percent) in 1996 and 1995, respectively.
There were no significant concentrations by customer in Financial Services'
portfolio for commercial equipment leasing.
Financial Services generally holds title to all leased equipment. It generally
has a perfected security interest in the assets financed through note and loan
arrangements.
5. Contracts in Process and Inventories
Contracts in process and inventories consisted of the following:
December 31 1996 1995
-------- --------
Government contracts in process $ 5,177 $ 5,451
Commercial products in process 2,211 1,936
Material and spare parts 713 634
Progress payments to subcontractors 843 1,185
Progress payments received (5,458) (5,785)
-------- --------
$ 3,486 $ 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, 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
[Annual Report Page 44]
not paid to date. At December 31, 1996, Contracts in Process and
Inventories included approximately $574 million of recorded costs on the A-12
contract, against which the Company has established a loss provision of $350
million. The amount of the provision, which was established in 1990, was based
on the Company's belief 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. In an early 1997 stipulation, the parties agreed that, based on the prior
orders and findings of the court, plaintiffs were entitled to recover $1.071
billion. Furthermore, on January 22, 1997, the court issued an opinion in that
it ruled that plaintiffs are entitled to recover interest on that amount. A
judgment is expected to be issued in the near future.
Although the Government is expected to appeal the 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 which
could more than offset the loss provision established in 1990.
In 1984, the Company entered into a full-scale development letter contract for
the T-45 Training System. The final negotiated firm fixed-price contract was
agreed to in 1986. As a result of flight testing in late 1988, the Navy required
that changes be made to the T-45 aircraft. The Company made the improvements;
and the cost of these changes increased the cost at completion for the
development and low-rate initial-production contracts beyond the fixed price of
such contracts.
The Company submitted to the Navy claims for an equitable adjustment in contract
price, and schedule and other appropriate relief for such improvements; the
Company recorded an expected $225 million recovery on such claims.
In August 1996, the Company and the Navy agreed to settle the T-45 claims; and
in September 1996, the Navy paid McDonnell Douglas $209 million. The agreement
also provided for the resolution of several contract issues and the conclusion
of certain business arrangements. McDonnell Douglas recorded a $14 million
charge to pretax earnings in the third quarter of 1996 in connection with the
settlement and the resolution of such contract issues.
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 (1)
the number of units to be produced and sold in the program, (2) the rate at
which the units were expected to be produced and sold, and thus the period of
time to accomplish that, and (3) selling prices, production costs, and the gross
profit margin for the total program.
Effective October 1, 1995, McDonnell Douglas changed its accounting for cost of
sales on the MD-11 aircraft program from the program-average cost basis to the
specific-unit cost basis. At the same time, McDonnell Douglas revalued MD-11
program support costs previously valued in inventories consistent with the
program-average cost concept. MD-11 program support costs are now allocated to
current production. This change to the specific-unit costing method for the
MD-11 program was made in recognition of production rates, existing order base,
and length of time required to achieve program deliveries, and thus, the
resultant increased difficulty - which became apparent in the fourth quarter of
1995 - in making the estimates necessary under the program-average method of
accounting. Because the effect of this change in accounting principle was
inseparable from the effect of the change in accounting estimate, the change was
accounted for as a change in estimate. As a result, McDonnell Douglas recorded a
noncash charge to operations of $1.838 billion in the fourth quarter of 1995.
The effect of the charge was to decrease 1995 net earnings by $1.123 billion, or
$4.95 per share.
6. Property, Plant, and Equipment
The major categories of properties consisted of the following:
December 31 1996 1995
-------- --------
MDC Aerospace
Land $ 98 $ 91
Buildings and fixtures 1,690 1,647
Machinery and equipment 2,201 2,161
Accumulated depreciation (2,598) (2,541)
-------- --------
1,391 1,358
Financial Services - net 62 113
-------- --------
$ 1,453 $ 1,471
======== ========
[Annual Report Page 45]
7. Other Assets
Other assets consisted of the following:
December 31 1996 1995
-------- --------
MDC Aerospace
Prepaid pension asset $ 1,306 $ 1,267
Prepaid expenses 71 69
Intangible assets 63 55
Other 95 136
-------- --------
1,535 1,527
Financial Services 91 82
-------- --------
$ 1,626 $ 1,609
======== ========
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
December 31 1996 1995
-------- --------
MDC Aerospace
Accounts and drafts payable $ 1,233 $ 1,065
Accrued expenses 834 783
Employee compensation 403 335
-------- --------
2,470 2,183
Financial Services 125 101
-------- --------
$ 2,595 $ 2,284
======== ========
Financial Services also had net accounts payable to MDC Aerospace of $82 million
and $115 million as of December 31, 1996 and 1995, respectively.
9. Income Taxes
Income taxes consisted of the following:
December 31 1996 1995
------ ------
Financial Services
Current tax assets $ (23) $ (6)
Deferred tax liabilities 384 324
------ ------
Net tax liability 361 318
MDC Aerospace
Current tax liabilities 148 62
Deferred tax assets (426) (377)
------ ------
Net tax asset (278) (315)
------- ------
$ 83 $ 3
======= ======
Tax effects of temporary differences that gave rise to the deferred tax
liability (asset) consisted of the following:
December 31 1996 1995
------ ------
Financial Services
Deferred tax assets
Bad debts $ (18) $ (42)
Other (6) (14)
Deferred tax liabilities
Leased assets 403 371
Other 5 9
------- -------
Net deferred tax liabilities 384 324
MDC Aerospace
Deferred tax assets
Retiree medical (420) (453)
Long-term contracts and related
liabilities (369) (422)
Other (263) (147)
Deferred tax liabilities
Pension plan 486 478
Other 140 167
------- -------
Net deferred tax assets (426) (377)
------- -------
Net deferred tax asset $ (42) $ (53)
======= =======
The Company's income tax provision (benefit) consisted of the following:
Years Ended December 31 1996 1995 1994
------ ------ ------
U.S. federal
Current $ 350 $ 289 $ 115
Deferred 26 (546) 151
------ ------ -------
376 (257) 266
State
Current 61 33 20
Deferred (6) (112) 33
------ ------ -------
55 (79) 53
Foreign 4 2 3
------ ------ ------
Income tax provision (benefit) $ 435 $(334) $ 322
====== ====== =======
The following is a reconciliation of the pro forma income tax provision
(benefit) computed by applying the U.S. federal statutory rate of 35 percent to
the recorded income tax provision:
Years Ended December 31 1996 1995 1994
------ ------ ------
Pro forma income tax provision (benefit)
computed at the statutory U.S.
federal income tax rate $ 428 $(262) $ 322
State income tax provision (benefit)
net of effect on pro forma
U.S. federal tax 35 (31) 34
Increase (decrease) in taxes
resulting from:
Export tax-exempt income (20) (10) (8)
Executive life insurance (7) (16) (12)
Settlement of tax issues (21) (15)
Other - net (1) 6 1
------ ------ ------
Income tax provision (benefit) $ 435 $(334) $ 322
====== ====== ======
Pretax earnings from foreign subsidiaries included in continuing operations, but
excluding the operations of McDonnell Douglas Foreign Sales Corporation, were
$10 million in 1996, $4 million in 1995, and $2 million
[Annual Report Page 46]
in 1994. Provisions for foreign income taxes are computed at applicable foreign
rates. Undistributed earnings of foreign subsidiaries are considered to be
permanently invested. Accordingly, no provision has been made for U.S. federal
income taxes on $128 million of undistributed earnings of foreign subsidiaries.
The Company settled certain state tax issues in 1995, which resulted in net
earnings of $35 million, of which $14 million was related to reductions in
accrued interest and $21 million was related to tax reductions. In 1994, the
Company settled certain accounting method and tax credit issues with the
Internal Revenue Service (IRS) in connection with an IRS audit of the years 1986
through 1989. The resolution of these issues resulted in net earnings of $21
million, of which $6 million was related to reductions in accrued interest.
McDonnell Douglas has filed with the IRS refund claims dating back to 1986. The
Company is seeking to recover additional research and development tax credits it
believes it is due in relation to several of its government fixed-price
development programs. McDonnell Douglas has not recorded these credits as the
claims are under review by the IRS. Should the Company prevail, the credits
earned will increase income.
10. Debt and Credit Arrangements
Consolidated debt consisted of the following classifications:
Current
December 31 Interest Rate 1996 1995
------------- -------- --------
Short-term debt
Financial Services 5.9% - 6.8% $ 141 $ 10
Long-term debt
MDC Aerospace
Senior debt securities,
due through 2012 6.9% - 9.8% 1,395 1,145
Senior medium-term notes,
due in 1997 6.0% - 8.1% 20 75
Other debt, due through 2005 5.8% - 11.5% 8 9
-------- --------
Total MDC Aerospace long-term debt 1,423 1,229
Financial Services
Senior debt securities,
due through 2008 3.9% - 9.4% 159 217
Senior medium-term notes,
due through 2017 5.5% - 13.6% 1,104 867
Subordinated medium-term notes,
due through 2004 5.5% - 8.3% 95 120
Other notes, due through 2017 6.5% - 10.4% 20 7
Other debt, due through 2003 8.7% 15 22
Capital lease obligations,
due through 2008 476 248
-------- --------
Total Financial Services long-term debt 1,869 1,481
-------- --------
Total long-term debt 3,292 2,710
-------- --------
Total debt $ 3,433 $ 2,720
======== ========
The aggregate amount of long-term debt at December 31, 1996, maturing by
calendar year for 1997 to 2001, was as follows:
MDC Aerospace Financial Services
------------- ------------------
1997 $ 271 $ 212
1998 1 286
1999 1 288
2000 201 222
2001 1 189
The weighted average interest rates on short-term borrowings outstanding at
December 31, 1996 and 1995, were 6.3 percent and 6.1 percent, respectively.
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 December 31, 1996.
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 for up to $550 million of notes,
by an aggregate principal amount of $1 billion. In the fourth quarter of 1996,
the Company issued $250 million of 6 7/8 percent notes due in 2006 under this
shelf registration. As of December 31, 1996, 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.
Financial Services Credit Agreements
During 1996, MDFS and MDFC amended their joint RCA to provide, among other
things, for increased borrowing capacity and to extend the maturity date to
August 2001. Under the amended 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 December 31,
1996. Commercial
[Annual Report Page 47]
paper issued by MDFC in the amount of $96 million was outstanding at December
31, 1996. 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 $500 million medium-term note program under this
registration statement. As of December 31, 1996, MDFC had issued $490 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 December 31, 1996, MDFS had
issued $135 million of securities under this program.
MDFC's senior debt at December 31, 1996, included $55 million secured by
equipment that had a carrying value of $72 million. MDRC's debt of $35 million
at December 31, 1996, was secured by indentures of mortgage and deeds of trust
on its interest in real estate developments that had a carrying value of $50
million.
11. 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 December 31, 1996, the notional amount of forward exchange contracts
denominated in currencies of major industrial countries was $333 million. The
terms of the currency derivatives vary, but the longest is three years. At
December 31, 1996, unrealized gains, net of losses, on foreign exchange
contracts were $23 million.
At December 31, 1996, MDFC had interest rate swap
agreements outstanding as follows:
Contract Notional Receive Pay
Maturity Amount Rate Rate
Capital lease
obligations 2006 - 2008 $400 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.
The following methods and assumptions were used in estimating the fair value
disclosure amounts of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
NOTES RECEIVABLE: Fair values for variable rate notes that reprice
frequently with no significant change in credit risk are based on
carrying values. The fair values of fixed rate notes are estimated in
discounted cash flow analyses, with the use of interest rates currently
offered on loans with similar terms to borrowers of similar credit
quality.
SHORT- AND LONG-TERM DEBT: Carrying amounts of borrowings under the
short-term revolving credit agreements approximate their fair value. The
fair values of long-term debt, excluding capital lease obligations, are
estimated according to public quotations or discounted cash flow
analyses, which are based on current incremental borrowing rates for
similar types of borrowing arrangements.
The carrying amounts and fair values of financial instruments were as follows:
MDC Aerospace Financial Services
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
December 31, 1996
-----------------
Cash and cash
equivalents $1,077 $1,077 $ 17 $ 17
Notes receivable 101 100 315 324
Short-term notes
payable 141 141
Long-term debt 1,423 1,562 1,393 1,432
December 31, 1995
-----------------
Cash and cash
equivalents $ 784 $ 784 $ 13 $ 13
Notes receivable 67 67 265 273
Short-term notes
payable 10 10
Long-term debt 1,229 1,404 1,233 1,302
[Annual Report Page 48]
12. Common and Preferred Shares
The authorized common stock of McDonnell Douglas is 400 million shares, each of
$1.00 par value. The following table summarizes changes in shares outstanding
for the periods presented:
Common Shares
Outstanding
-------------
Balance January 1, 1995 233,472,582
Shares repurchased (10,430,200)
Employee stock awards and options 605,096
-------------
Balance December 31, 1995 223,647,478
Shares repurchased (14,657,071)
Employee stock awards and options 604,198
-------------
Balance December 31, 1996 209,594,605
=============
In January 1996, the McDonnell Douglas Board of Directors authorized a
two-for-one split of the common stock. Shareholders' equity has been restated to
give retroactive recognition to the stock split for all periods presented by
reclassifying, from additional capital or retained earnings to common stock, the
par value of the additional shares arising from the split. In addition, all
references to number of shares, per share amounts, and market prices of common
stock have been restated to reflect the stock split.
In October 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. Repurchased common shares
are treated as authorized but unissued shares, and they remain available for use
to meet the Company's current and future common stock requirements for its
benefit plans and for other corporate purposes. Through mid-December 1996, the
Company had acquired 29 million shares, or about 81 percent of the 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 for a further discussion of the proposed merger.
At December 31, 1996, a total of 11.9 million shares of authorized and unissued
common stock was reserved for issuance of stock awards and options granted or
authorized to be granted. Also, 23.8 million shares were reserved for
contributions to the Company's savings plans. At December 31, 1996, there were
10 million shares, $1.00 par value, preferred stock authorized for issuance;
however, none had been issued.
During 1990, the Board of Directors declared a dividend distribution of one
preferred stock purchase right (Right) for each outstanding share of common
stock. Among other provisions, each Right may be exercised to purchase from the
Company one one-hundredth of a share of a new series of preferred stock. The
Rights are exercisable only after (1) a person or group has acquired or obtained
the right to acquire 20 percent or more of the Company's common stock or (2) the
commencement of a tender offer or exchange offer, for 20 percent or more of the
voting power of the Company. In conjunction with the 1996 stock split, the Board
of Directors authorized the adjustment of the exercise price to $125. The Rights
expire December 31, 2004. They may be redeemed by the Company at a price of 1
cent per Right at any time until 10 business days after the acquisition of 20
percent of the Company's common stock. The Board of Directors of the Company
retains the authority to amend or supplement the Rights.
If any person or group acquires 20 percent of the Company's common stock, each
holder of a Right will have the right to receive upon exercise the number of
shares of common stock having a market value equal to two times the exercise
price of the Right. If the Company is acquired, each Right may be exercised to
purchase the number of shares of common stock of the surviving or purchasing
company that at the time of such transaction would have a market value equal to
two times the purchase price.
In December 1996, the Board of Directors approved the proposed merger, with
Boeing becoming the owner of 20 percent or more of the voting power of the
Company. The Board also resolved that Boeing would not be considered an
acquiring person or group as such term is defined in the Rights Agreement.
13. Stock-Option and Incentive Plans
In April 1994, the Company's shareholders approved the 1994 Performance and
Equity Incentive Plan (PEIP). Under the PEIP, 11.4 million shares were
authorized for issuance or sale in connection with stock options, stock
appreciation rights, restricted stock, performance shares, and other stock-based
awards. Options may be granted to officers and employees at an exercise price of
no less than the fair market value of the shares on the date of grant. As of
December 31, 1996, a total of 1.7 million restricted shares of McDonnell Douglas
common stock had been granted. Compensation related to these restricted shares
is being amortized to expense over periods of three to five years, depending on
the award. Unearned compensation is reflected as a component of shareholders'
equity.
Certain awards granted prior to approval of the PEIP remain outstanding. These
include awards made under the Incentive Award Plan (IA Plan), approved by
shareholders in 1986, in the form of stock, nonqualified stock options, and
incentive stock options.
[Annual Report Page 49]
Options to purchase the McDonnell Douglas common stock have been granted under
the Company's compensation plans. In 1996, the Company adopted the
disclosure-only alternative under SFAS No. 123, "Accounting for Stock-Based
Compensation." If the accounting provisions of the new statement had been
adopted as of the beginning of 1996, the effect on 1996 net earnings would have
been immaterial.
The following is a summary of options for McDonnell Douglas common stock:
Years Ended December 31 1996 1995
-------- --------
Granted under the PEIP
Number of shares 40,000
Price per share $24
Exercised under the IA Plan
Number of shares 84,100 136,610
Price per share $6-$10 $6-$10
December 31 1996 1995
-------- --------
Outstanding
Number of shares 1,030,686 1,114,786
Price per share $9-$24 $6-$24
Exercisable
Number of shares 290,686 184,786
Price per share $9-$24 $6-$24
The following table summarizes additional information about stock options
outstanding at December 31, 1996:
Weighted
Exercise Outstanding Average Exercisable
Price Shares Life* Shares
----------- ----------- ------- ---------
$10 43,457 0.3 43,457
$ 9 47,229 1.3 47,229
$24 40,000 8.1 20,000
$18 900,000 11.8 180,000
---------- --------
Total 1,030,686 10.6 290,686
========== ========
*Weighted average contractual life remaining, in years.
At December 31, 1996, the weighted average exercise price of options outstanding
and exercisable was $18 and $16, respectively.
Under the terms of certain of these, and other cash award plans, consummation of
the proposed merger with Boeing would result in accelerating the payment of
certain benefits that would otherwise have been payable over time, early vesting
of certain benefits, and the use of modified formulas for calculating the
amounts of such benefits. The effect of the above has not been included in the
1996 McDonnell Douglas financial statements, but is expected to be included in
the estimated costs and expenses to be incurred in connection with consummating
the proposed merger. In addition, upon consummation, the proposed merger would
result in outstanding stock option, stock appreciation right, restricted stock,
performance shares, and other stock-based awards' being converted into similar
instruments of Boeing.
14. Retirement Plans
Most employees of the Company are participants in defined benefit pension plans,
including several multiemployer and foreign plans. In addition, the Company has
a supplementary unfunded pension plan to provide those benefits that are
otherwise due employees under the defined benefit pension plans' benefit
formulas, but that are in excess of the benefits the Internal Revenue Code
permits companies to offer under the defined benefit pension plans. Benefits for
salaried plans are based primarily on salary and years of service, whereas
benefits for hourly plans are generally based on a fixed dollar amount per year
of service.
The Company measures pension cost and makes contributions to its pension plans
according to independent actuarial valuations. It uses the projected unit credit
actuarial cost method to determine pension cost for financial accounting
purposes and, beginning in 1996, to determine funding levels and pension cost
allocable to government contracts consistent with the provisions of SFAS No. 87,
"Employers' Accounting for Pensions." Funding levels and pension cost
allocable to government contracts were determined by the entry-age normal
actuarial cost method prior to 1996.
The assets of the plans consist principally of marketable fixed income and
equity securities. At December 31, 1996, the plans held $35 million of the
Company's senior debt securities with varying interest rates and maturity dates,
as well as 144,000 shares of McDonnell Douglas common stock.
The following assumptions were used to determine net periodic pension expense
(income) and the actuarial present value of benefit obligations for the
significant domestic plans:
Years Ended December 31 1996 1995 1994
-------- -------- --------
Discount rate
January 1 7.5% 8.25% 7.5%
December 31 7.75% 7.5% 8.25%
Average rates of increase in
compensation based upon age -
salaried plans
January 1 4.5% 5.0% 5.0%
December 31 5.0% 4.5% 5.0%
Expected return on plan assets 9.3% 9.3% 9.3%
[Annual Report Page 50]
Periodic pension expense (income) for the significant domestic pension plans
included the following components:
Years Ended December 31 1996 1995 1994
-------- ------ ------
Service cost for the year $ 110 $ 91 $ 119
Interest cost on pension
benefit obligations 339 305 278
Return on plan assets
Actual (1,058) (1,285) (64)
Deferred gain (loss) 520 791 (403)
Net amortization (41) (67) (62)
-------- ------- ------
Domestic plans $ (130) $ (165) $(132)
======== ======= ======
Foreign and other plans $ 3 $ 4 $ 6
======== ======= ======
An analysis of the funded status of the significant pension plans follows:
December 31 1996 1995
-------- --------
Actuarial present value of accumulated
benefit obligations
Vested $ 4,401 $ 4,002
Nonvested 282 276
-------- --------
Accumulated benefit obligation 4,683 4,278
Additional amounts related to projected
future salary increases 406 355
-------- --------
Projected benefit obligation 5,089 4,633
Plan assets, at fair value 6,976 6,140
-------- --------
Excess of plan assets 1,887 1,507
Items not yet recognized in earnings
Unrecognized net transition asset (345) (418)
Unrecognized prior service cost 718 657
Deferred net gain (970) (490)
-------- --------
Domestic plans 1,290 1,256
Foreign plans 16 11
-------- --------
Prepaid pension asset $ 1,306 $ 1,267
======== ========
During 1995, the Company amended its significant domestic pension plans to
increase pension benefits for current and future nonunion retirees. The
increases became effective December 1, 1996.
Effective January 1, 1993, the Company amended its significant domestic pension
plans to provide a supplemental pension benefit to nonunion retirees who elect
to participate in the new health care plan funded entirely by participant
contributions. The effect of this amendment was to increase unrecognized prior
service cost as of December 31, 1992, by $385 million. The Company recorded this
liability in connection with the adoption of and subsequent accounting for SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," during 1992.
The Company has no intention of terminating any of its pension plans. However,
if a qualified defined benefit pension plan is terminated and all accrued
liabilities to employees and their beneficiaries are satisfied, all remaining
assets in the plan's trust revert to the employer (except in certain limited
circumstances where a change in control has occurred within the five-year period
preceding the termination). In such a case, the following consequences would
ensue: First, a nondeductible 20 percent to 50 percent excise tax on the gross
amount of the reversion would be imposed. Second, under a regulation issued by
the U.S. Department of Defense and other Government contracting agencies, the
Government could assert a claim to an equitable share (to the extent that the
Government participated in pension costs through its contracts with the
Company). Third, any amount that the employer then retained would be treated as
taxable income.
In addition to the defined benefit pension plans, the Company gives eligible
employees the opportunity to participate in savings plans that permit both
pretax and after-tax contributions. Most domestic employees with at least 30
days of continuous service are eligible to participate in a plan. Under these
plans, the employee may contribute to various savings alternatives, including
the Company's common stock. In most cases, the Company matches a portion of the
employee's contribution with contributions to the McDonnell Douglas Common Stock
Fund in the plans. Generally, the Company's contributions are vested after the
employee completes five years of service. The Company's contributions to the
savings plans during 1996, 1995, and 1994 totaled $94 million, $78 million, and
$73 million, respectively.
In addition to the above plans, the Company and certain of its domestic
subsidiaries provide health care benefits for retirees who are covered by
collective bargaining agreements. Generally, such employees become eligible for
retiree health care upon retirement from active service at or after age 55 with
10 or more years of service. Qualifying dependents are also eligible for medical
coverage. The Company's policy is to fund the cost of medical benefits as the
claims are received. The retiree health care plan has provisions for participant
contributions, deductibles, co-insurance percentages, out-of-pocket limits,
schedules of reasonable fees, maintenance of benefits with other plans, the
Medicare carve-out, and a maximum lifetime benefit per covered individual.
An analysis of the accrued retiree benefits follows:
December 31 1996 1995
-------- --------
Accumulated postretirement benefit
obligation
Retirees $ 608 $ 753
Active participants fully eligible
to retire 123 126
Other active participants 89 122
-------- --------
Accumulated postretirement benefit
obligation 820 1,001
Items not yet recognized in earnings
Unrecognized prior service gain 226 200
Deferred net gain (loss) 63 (92)
-------- --------
Accrued retiree health care liability 1,109 1,109
Liability for pension supplement 96
-------- --------
Accrued retiree benefits $ 1,109 $ 1,205
======== ========
[Annual Report Page 51]
Periodic postretirement benefit expense included the following components:
Years Ended December 31 1996 1995 1994
------ ------ ------
Service cost for the year $ 8 $ 7 $ 9
Interest cost on accumulated
postretirement benefit obligations 67 78 77
Net amortization (20) (17) (10)
------ ------ ------
$ 55 $ 68 $ 76
====== ====== ======
The following assumptions were used to determine periodic postretirement benefit
costs and the actuarial present value of benefit obligations:
Years Ended December 31 1996 1995 1994
------ ------ ------
Discount rate
January 1 7.5% 8.25% 7.5%
December 31 7.75% 7.5% 8.25%
Health care cost trend rate
Preferred provider non-Medicare* 8.8% 10.3% 10.2%
Point of service non-Medicare* 6.8% 8.0%
Medicare* 7.7% 8.9% 8.5%
HMO premiums 5.0% 5.0% 6.0%
* Decreasing to 5.0% - 5.4% after 2003
Increasing the health care cost trend rates by one percentage point would result
in a 9 percent increase in the sum of the service and interest cost components
of periodic postretirement benefit cost and an 8.3 percent increase in the
accumulated postretirement benefit obligation at December 31, 1996.
15. Leased Properties
Rental expense for leased properties was $73 million in 1996, $61 million in
1995, and $79 million in 1994. These expenses, substantially all minimum
rentals, are net of sublease income. The Company has negotiated noncancelable
sublease agreements on certain of its facilities and equipment totaling $40
million during the next several years. Minimum rental payments under operating
leases with initial or remaining terms of one year or more aggregated $291
million at December 31, 1996. Payments, net of sublease amounts, due during the
next several years are as follows: 1997, $42 million; 1998, $34 million; 1999,
$27 million; 2000, $26 million; and 2001, $27 million.
In 1996, the Company purchased $378 million in data processing services from an
unaffiliated company pursuant to an outsourcing of its information-technology
operations in 1992. During the remaining six-year term of the outsourcing
agreement, data processing service payments are expected to aggregate
approximately $2 billion.
The Company has entered into sale/leaseback arrangements (as seller/lessee) as
financing methods for certain of its commercial aircraft sales. In a typical
arrangement, the Company sells the aircraft to a financial institution and
immediately agrees to lease such equipment for a specified time. The Company
subleases the aircraft to the aircraft operator. Profit on the transaction is
deferred and amortized to income over the leaseback term on a straight-line
basis. At the end of the leaseback term, the Company must either repurchase the
aircraft at an agreed value or pay a defined amount upon sale of the aircraft by
the financial institution. The following information, at December 31, 1996, is
provided for existing sale/leasebacks.
Minimum Lease Payments Sublease rentals
---------------------- ----------------
1997 $ 42 $ 47
1998 42 46
1999 43 46
2000 44 46
2001 46 29
Remainder 55 168
---- ----
Total $272 $382
==== ====
16. Commitments and Contingencies
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 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 December 31, 1996, the Company had made offers of this nature to
customers totaling $2.087 billion related to aircraft on order or under option
scheduled for delivery through the year 2017. The Company had made guarantees
and other commitments totaling $868 million on delivered aircraft. At December
31, 1996, MDFS also had commitments to provide leasing and other financing in
the aggregate amount of $77 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
restructur-
[Annual Report Page 52]
ing, the Company made lease, loan, and interest payments totaling $70 million on
behalf of VARIG in 1994 and 1995. At December 31, 1996, VARIG had made
repayments totaling $20 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 December 31, 1996, the Company had made payments related to this additional
deferral in the amount of $27 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), the Company's largest aircraft-leasing
customer, 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. In addition, 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, assuming TWA's financial
condition does not further deteriorate, 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, 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 14
sites at which it believes that it has no future liability. At five 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 nine 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 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 December 31, 1996, 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, it is possible that actual costs will 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
December 31, 1996, a receivable had been recorded from one insurance carrier for
agreed reimbursement of environmental costs for $8 million.
17. Operations of MDFS
The condensed financial data presented below have been summarized from the MDFS
audited consolidated financial statements:
Years Ended December 31 1996 1995 1994
------ ------ ------
Earned income $ 229 $ 194 $ 190
Costs and expenses 156 136 154
Net earnings 48 37 25
Dividends 26 25
18. U.S. Government and Export Sales
Consolidated sales to U.S. Government agencies (including sales to foreign
governments through foreign military sales contracts with U.S. Government
agencies) amounted to $9.507 billion in 1996, $9.621 billion in 1995, and $9.229
billion in 1994. No other single customer accounted for 10 percent or more of
consolidated revenues in 1996, 1995, or 1994.
Foreign sales, some of which were made through foreign military sales contracts
with the U.S. Government, are shown by geographical area in the table below:
Years Ended December 31 1996 1995 1994
------- ------- -------
North America $ 42 $ 35 $ 58
Central and South America 347 224 25
Western Europe 1,993 2,186 2,161
Eastern Europe and Asia 1,018 1,531 1,032
Africa and the Middle East 1,289 1,098 703
South Pacific 353 173 256
------- ------- -------
$ 5,042 $ 5,247 $ 4,235
======= ======= =======
19. Supplementary Payment Information
Years Ended December 31 1996 1995 1994
------- ------- -------
Interest paid $ 151 $ 265 $ 313
Income taxes paid 342 354 162
20. Business Segment Reporting
Selected financial data by industry segment is presented on page 34.
[Annual Report Page 53]
REPORT OF MANAGEMENT RESPONSIBITIES
The financial statements of McDonnell Douglas Corporation and its consolidated
subsidiaries have been prepared under the direction of management in conformity
with generally accepted accounting principles and, particularly with respect to
long-term contracts and programs, include amounts based upon estimates and
judgments. The integrity and reliability of the data in these financial
statements are the responsibility of management. In the opinion of management,
the financial statements set forth a fair presentation of the consolidated
financial condition of McDonnell Douglas at December 31, 1996 and 1995, and the
consolidated results of its operations for the years ended December 31, 1996,
1995, and 1994.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of an internal control system can
change with circumstances.
McDonnell Douglas and its consolidated subsidiaries maintain accounting systems
and related internal controls that, in the opinion of management, provide
reasonable assurances that transactions are executed in accordance with
management's authorization, that financial statements are prepared in accordance
with generally accepted accounting principles, and that assets are properly
accounted for and safeguarded.
Ethical decision making is fundamental to the Company's management philosophy.
Management recognizes its responsibility for fostering a strong ethical climate.
Written codes of ethics and standards of business conduct are distributed to
every employee, and each employee has been trained or will be trained in ethical
decision making. The Board of Directors' Corporate Responsibility Committee
oversees standards of business conduct.
The Board of Directors has appointed four of its nonemployee members to an Audit
Committee. This committee meets periodically with management and with the
internal and independent auditors. Both internal and independent auditors have
unrestricted access to the Audit Committee to discuss the results of their
examinations and the adequacy of internal controls. In addition, the Audit
Committee recommends independent auditors to the Board.
/s/ Harry C. Stonecipher
Harry C. Stonecipher
President and Chief Executive Officer
/s/ James F. Palmer
James F. Palmer
Senior Vice President and Chief Financial Officer
January 22, 1997
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
McDonnell Douglas Corporation
We have audited the accompanying balance sheet (including the consolidating data
for MDC Aerospace and Financial Services) of McDonnell Douglas Corporation and
consolidated subsidiaries (MDC) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of MDC's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of McDonnell Douglas Corporation
and consolidated subsidiaries at December 31, 1996 and 1995, and the
consolidated results of MDC's operations and MDC's cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 5 to the consolidated financial statements, in 1995
MDC changed its method of accounting for the MD-11 commercial aircraft program.
/s/ Ernst & Young LLP
Ernst & Young LLP
St. Louis, Missouri
January 22, 1997
[Annual Report Page 54]
Five-Year Consolidated Financial Summary
--------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
--------------------------------------------------------------------------------
December 31 or Years Then Ended 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------
Summary of Operations
Revenues by industry segment
Military aircraft $ 7,952 $ 8,158 $ 7,804 $ 6,852 $ 7,238
Commercial aircraft 3,317 3,891 3,155 4,760 6,595
Missiles, space, and
electronic systems 2,178 1,917 1,877 2,575 3,169
Financial services and other 367 334 326 287 352
--------------------------------------------------
Operating revenues 13,814 14,300 13,162 14,474 17,354
Earnings (loss) from
continuing operations 788 (416)(a) 598 359 698(b)
Per share 3.64 (1.83)(a) 2.53 1.53 3.00(b)
Net earnings (loss) 788 (416)(a) 598 396 (781)(c)
Per share 3.64 (1.83)(a) 2.53 1.68 (3.35)(c)
As a percentage of revenues 5.7% 4.5% 2.7%
As a percentage of beginning
equity 25.9% 17.5% 13.1%
Research and development 355 311 297 341 509
Interest expense
Aerospace segments 121 116 131 89 309
Financial services and
other segment 127 109 118 126 159
Income taxes (benefit) 435 (334) 322 100 388
Cash dividends declared 104 90 65 55 55
Per share .48 .40 .28 .23 .23
--------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
--------------------------------------------------------------------------------
December 31 or Years Then Ended 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------
Balance Sheet Information
Cash and cash equivalents $ 1,094 $ 797 $ 421 $ 86 $ 82
Receivables and property
on lease 3,972 3,168 2,859 2,912 2,866
Contracts in process and
inventories 3,486 3,421 5,806 5,774 7,230
Property, plant, and equipment 1,453 1,471 1,597 1,750 1,991
Total assets 11,631 10,466 12,216 12,026 13,781
Notes payable and
long-term debt
Aerospace segments 1,438 1,251 1,272 1,625 2,767
Financial services and other
segment 1,995 1,469 1,297 1,513 1,474
Shareholders' equity 3,038 3,041 3,872 3,413 3,022
Per share 14.50 13.60 16.58 14.46 12.85
Debt-to-equity ratios
Aerospace segments .54 .46 .36 .52 1.01
Financial services and other
segment 5.21 4.44 4.14 5.22 5.42
--------------------------------------------------------------------------------
General Information
Shares outstanding
(in millions) 209.6 223.6 233.5 236.0 235.1
Shareholders of record 23,565 23,582 24,479 28,513 34,124
Personnel 63,873 63,612 65,760 70,016 87,377
Salaries and wages $ 3,294 $ 3,347 $ 3,238 $ 3,464 $ 4,258
Firm backlog $23,679 19,640 $17,503 $19,379 $24,052
Total backlog $44,361 $28,353 $29,232 $35,698 $41,806
(a Includes a charge of $1.123 billion ($4.95 per share) related to the MD-11
commercial aircraft.
(b)Includes a gain of $676 million ($2.90 per share) from a postretirement
benefit curtailment relating to SFAS No. 106.
(c)Includes a net charge of $860 million ($3.69 per share) related to the
initial adoption and subsequent curtailment gain associated with SFAS No.106.
Total backlog includes firm backlog plus (i) U.S. and other government orders
not yet funded, (ii) U.S. and other government orders being negotiated as
continuations of authorized programs and, (iii) unearned price escalation on
firm commercial aircraft orders. Backlog is that of the aerospace segments only
and includes all but a minor portion of the work to be performed under long-term
contracts. Customer options and products produced for lease are excluded from
backlog.
[Annual Report Page 57]
Supplemental Information
Quarterly Common Stock Prices and Dividends
Cash dividends of $.12 and $.10 a share were declared for each quarter in 1996
and 1995, respectively. The number of holders of McDonnell Douglas Common Stock
at January 31, 1997, was 23,573.
Stock Exchanges
McDonnell Douglas Corporation's Common Stock is listed on the New York and
Pacific stock exchanges (ticker symbol MD) and is traded on these and other
exchanges. It is commonly abbreviated in market reports as "McDnD."
Shareholder Information
Both the McDonnell Douglas Corporation and the McDonnell Douglas Finance
Corporation file Forms 10-K and 10-Q with the Securities and Exchange
Commission. Shareholders may obtain copies of these reports, and of McDonnell
Douglas's Annual Report to Shareholders, on the Internet at www.mdc.com or by
writing or calling:
Shareholder Services
Mail Code S100-1240
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(800) 233-8193
A recorded summary of quarterly financial results is also available through the
toll-free number shortly after release of the results.
Transfer Agent and Registrar
Correspondence and questions concerning shareholder accounts, payment of
dividends, or transfer of stock should be addressed to:
First Chicago Trust Company of New York
Attn: Shareholder Relations Department
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 446-2617
(201) 222-4955 (for the hearing impaired)
World Wide Web: www.fctc.com
Electronic mail: fctc@delphi.com
Investor Relations
Securities analysts should contact:
Investor Relations
Mail Code S100-1320
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(314) 232-6358
Code of Ethics
McDonnell Douglas is committed to maintaining the highest standards of integrity
and ethical behavior in every aspect of its business. The corporation lives by
the credo "Always take the high road" - do what is right rather than what is
expedient. If you have any questions about the corporation's code of ethics or
standards of business conduct, contact:
Harold S. Coyle, Vice President, Corporate Ethics
Mail Code S100-1470
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(314) 232-7257
Corporate Public Relations
Members of the news media should contact:
Corporate Communications
Mail Code S100-1195
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(314) 233-8957
McDonnell Douglas issues its news releases through PR Newswire. Faxed copies of
news releases are available at no charge. To get them, call Company News On-Call
at 1-800-758-5804. This electronic system requests a six-digit code(543287) and
allows callers to choose from a menu of McDonnell Douglas news releases. The
requested release will be faxed within minutes of the inquiry. This service is
available 24 hours a day, 7 days a week. News releases are also posted on the
World Wide Web sites of both McDonnell Douglas (www.mdc.com) and On-Call
(www.prnewswire.com).
Web Address
www.mdc.com
Other Reports
McDonnell Douglas employees, retirees, and family members volunteered thousands
of hours of their personal time to community programs and projects across the
nation during 1996. In addition, the Employees' Community Funds in the United
States and Canada contributed more than $4.7 million to charitable organizations
and programs. The McDonnell Douglas Foundation contributed more than $12 million
to support philanthropic endeavors that included science and math education;
civic and cultural programs; health and social services (including disaster
relief, hunger alleviation, and shelters for the homeless); youth issues; and
the environment.
The 1996 community relations report summarizes the charitable and philanthropic
activities of McDonnell Douglas and its employees. A copy may be requested from:
Community Relations [Picture Omitted]
Mail Code S100-1510
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(314) 233-4123
McDonnell Douglas's 1996 safety, health, and environmental affairs report
summarizes the corporation's progress in pollution prevention, waste recycling,
and employee health and safety protection. To obtain a copy, contact:
Safety, Health, and Environmental Affairs [Picture Omitted]
Mail Code S100-1210
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO 63166-0516
(314) 233-9469
[Annual Report Page 55]
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share data)
--------------------------------------------------------------------------------
For Year Ended December 31,
---------------------------------------------
1996
---------------------------------------------
Quarter 1st 2nd 3rd 4th
----------------------------------------------------------------
Revenues $3,171 $3,264 $3,308 $4,091
Gross Margin 604 592 610 619
Net earnings 198 188 195 207
Earnings
per share (b) .89 .87 .90 .98
Market Price
High $48 5/8 $52 3/8 $53 1/4 $66 1/2
Low 42 1/8 42 1/2 42 1/2 49
For Year Ended December 31,
---------------------------------------------
1995
---------------------------------------------
Quarter 1st 2nd 3rd 4th
----------------------------------------------------------------
Revenues $3,333 $3,922 $3,346 $3,731
Gross Margin 512 558 536 (1,248)
Net earnings
(loss) 159 169 192 (936)
Earnings (loss)
per share (b) .69 .74 .85 (4.18)
Market Price
High $29 $39 3/8 $43 1/8 $46 1/8
Low 23 1/4 27 7/8 37 7/8 38 1/4
(a) Includes MD-11 accounting charge of $1.838 billion ($1.123 billion
after-tax) or $5.02 (b) per share.
(b) 1995 data restated to reflect a two-for-one stock split.
The table above presents unaudited quarterly financial information for the
years ended December 31, 1996 and 1995. Gross margin is net of interest expense
of the financial services and other segment.
The sum of the 1995 quarterly earnings per share does not equal the 1995
annual earnings per share. This is because of a combination of two factors.
First, the number of shares outstanding decreased each quarter, and second, the
MD-11 accounting charge had a significant impact on fourth-quarter earnings.
The range of market prices for a share of McDonnell Douglas Common Stock is
shown above, by quarters for 1996 and 1995. Prices are as reported in the
consolidated transaction reporting system.
Dates Referenced Herein and Documents Incorporated by Reference
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