1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1994
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _________________
MCDONNELL DOUGLAS FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2564584 0-10795
(State or other (I.R.S. Employer (Commission File No.)
jurisdiction of Identification No.)
Incorporation or
Organization)
4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
(Address of principal executive offices)
(310) 627-3225
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No ______
Common shares outstanding at May 13, 1994: 50,000 shares
Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
2
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Analysis of Results of Operations . . . . . 8
Part II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
* Omitted pursuant to General Instruction H (1)(a) and (b) to Form 10-Q.
3
Part I
Item 1. Financial Statements
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
March 31, December 31,
(Dollars in millions, except stated 1994 1993
value and par value amounts) -----------------------
(Unaudited)
ASSETS
Financing receivables:
Investment in finance leases $1,116.4 $1,125.3
Notes receivable 379.4 350.0
----------------------
1,495.8 1,475.3
Allowance for losses on financing
receivables (36.3) (35.6)
----------------------
1,459.5 1,439.7
Financing receivables, net
Cash and cash equivalents 20.9 65.5
Equipment under operating leases, net 441.5 358.2
Equipment held for sale or re-lease 13.2 32.0
Accounts with MDC and MDFS 39.1 70.4
Other assets 102.0 89.7
----------------------
$2,076.2 $2,055.5
======================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 292.5 $ 202.6
Accounts payable and accrued expenses 24.9 51.5
Other liabilities 70.5 74.5
Deferred income taxes 303.1 298.9
Long-term debt:
Senior 1,036.3 1,080.8
Subordinated 77.8 77.8
----------------------
1,805.1 1,786.1
----------------------
Commitments and contingencies - Note 3
Shareholder's equity:
Preferred stock - no par value;
authorized 100,000 shares:
Series A; $5,000 stated value;
authorized, issued and outstand-
ing 10,000 shares 50.0 50.0
4
Common stock - $100 par value;
authorized 100,000 shares; issued
and outstanding 50,000 shares 5.0 5.0
Capital in excess of par value 89.5 89.5
Income retained for growth 131.4 129.6
Cumulative foreign currency
translation adjustment (4.8) (4.7)
----------------------
271.1 269.4
----------------------
$2,076.2 $2,055.5
======================
See notes to consolidated financial statements.
5
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
(Unaudited)
Three months ended
March 31,
(Dollars in millions) 1994 1993
--------------------
OPERATING INCOME
Finance lease income $ 28.2 $ 23.2
Interest on notes receivable 5.6 10.2
Operating lease income, net of
depreciation expense 8.9 8.1
Net gain on disposal or re-lease of
assets 2.5 2.2
Other 2.8 3.6
--------------------
48.0 47.3
====================
EXPENSES
Interest expense 28.2 29.9
Provision for losses 1.8 3.2
Operating expenses 4.4 5.8
Other 0.4 1.4
-------------------
34.8 40.3
-------------------
Income before taxes on income 13.2 7.0
Taxes on income 5.0 2.5
--------------------
Net income 8.2 4.5
-------------------
Income retained for growth at beginning
of period 129.6 116.4
Dividends (6.4) (0.9)
---------------------
Income retained for growth at end of
period $ 131.4 $ 120.0
======================
See notes to consolidated financial
statements.
6
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Three months ended
March 31,
(Dollars in millions) 1994 1993
-------------------
OPERATING ACTIVITIES
Net income $ 8.2 $ 4.5
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation expense equipment
under operating leases 9.2 9.3
Net gain on disposal or re-lease of
assets (2.5) (2.2)
Provision for losses 1.8 3.2
Change in assets and liabilities:
Accounts with MDC and MDFS 31.3 29.0
Other assets (12.3) 11.3
Accounts payable (26.6) (20.1)
Other liabilities (4.0) (0.7)
Deferred income taxes 4.2 (0.3)
Other, net 3.0 1.1
--------------------
12.3 35.1
--------------------
INVESTING ACTIVITIES
Net change in short-term notes and (143.2) 25.0
lease receivables
Purchase of equipment for operating (7.0) (30.6)
leases
Proceeds from disposition of
equipment, notes and
leases receivable 19.5 33.6
Collection of notes and leases
receivable 87.3 41.4
Acquisition of notes and leases
receivable (50.1) (55.2)
-------------------
(93.5) 14.2
-------------------
FINANCING ACTIVITIES
Net change in short-term borrowings 89.9 54.4
Debt having maturities more than 90
days:
Proceeds 56.2 -
7
Repayments (104.0) (59.1)
Payment of cash dividends (5.5) -
---------------------
36.6 (4.7)
---------------------
Increase (decrease) in cash and cash
equivalents (44.6) 44.6
Cash and cash equivalents at beginning
of year 65.5 14.7
---------------------
Cash and cash equivalents at end of
period $ 20.9 $ 59.3
=====================
See notes to consolidated financial statements.
8
McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation
McDonnell Douglas Finance Corporation (the "Company") is a wholly-owned
subsidiary of McDonnell Douglas Financial Services Corporation ("MDFS"), a
wholly-owned subsidiary of McDonnell Douglas Corporation ("MDC"). In the
opinion of management, the accompanying consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are
necessary to present fairly the consolidated financial position, the
consolidated results of operations and cash flows for the interim periods
presented. The statements should be read in conjunction with the notes to the
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 1993.
Certain 1993 amounts have been reclassified to conform to the 1994
presentation.
Note 2 Credit Agreements and Long-Term Debt
The provisions of various credit and debt agreements require the Company to
maintain a minimum net worth, restrict indebtedness, and limit cash dividends
and other distributions. Under the most restrictive provision, $40.0 million
of the Company's income retained for growth was available for dividends at
March 31, 1994.
Note 3 Commitments and Contingencies
At March 31, 1994 and December 31, 1993, the Company had unused credit lines
available to customers totaling $5.8 million and $6.6 million; and commitments
to provide leasing and other financing totaling $51.0 million and $43.6
million.
In conjunction with prior asset dispositions, the Company is subject to a
maximum recourse of $41.2 million. Based on trends to date, the Company's
exposure to such loss is not expected to be significant.
The Company has guaranteed the repayment of $9.7 million in capital lease
obligations associated with a 50% partner.
Item 2. Management's Analysis of Results of Operations
Finance lease income for the three months ended March 31, 1994 was $5.0
million (21.6%) higher than the comparable three-month period in 1993,
primarily as a result of additional aircraft purchased from MDC and financed
under finance leases.
Interest on notes receivable was $4.6 million (45.1%) lower than the first
quarter of 1993, primarily due to a lower average outstanding balance of
bridge financings in the aircraft portfolio.
9
The provision for losses decreased $1.4 million (43.8%) from the first quarter
of 1993, which is primarily attributable to the improved credit quality of the
total Company portfolio and reduced writeoffs in the aircraft portfolio.
Operating expenses decreased $1.4 million (24.1%) compared to the first
quarter of 1993, primarily due to reductions in the Company's work force.
Other expenses decreased $1.0 million (71.4%) compared to the first quarter of
1993, primarily due to decreased expenses associated with the Company's real
estate owned portfolio. On September 28, 1993, the Company sold a substantial
portion of its real estate owned portfolio.
Part II
Item 1. Legal Proceedings
As discussed in the Company's 10-K for the year ended December 31, 1993, MDFC
Equipment Leasing Corporation, a wholly-owned subsidiary of the Company,
reached an agreement in principle to settle the suit brought against it by
Wilmington Trust Company, CoreStates Bank, N.A., Midlantic National Bank and
Continental Bank. Court approval of the settlement for a de minimus amount is
still pending.
Item 5. Other Information
As of April 25, 1994, the Company moved its principal executive offices from
340 Golden Shore, Long Beach, California 90802 to 4060 Lakewood Boulevard, 6th
Floor, Long Beach, California 90808-1700. Concurrently, the Registrant's
telephone number changed from (310) 491-3225 to (310) 627-3225.
Information on the Company's portfolio balances; new business volume; analysis
of allowance for losses on financing receivables and credit loss experience;
receivable writeoffs, net of recoveries by business unit; commercial aircraft
financing; and information regarding MDC are summarized below.
10
Portfolio Balances
Portfolio balances for the Company's various business segments is summarized
as follows:
March 31, December 31,
(Dollars in millions) 1994 1993 1992
-----------------------------------
MDC aircraft financing:
Finance leases $ 774.0 $ 765.0 $ 506.2
Operating leases 238.6 144.2 93.7
Notes receivable 170.7 125.9 169.4
-----------------------------------
1,183.3 1,035.1 769.3
------------------------------------
Other commercial aircraft financing:
Finance leases 122.2 123.0 149.9
Operating leases 54.9 55.9 57.6
Notes receivable 24.1 23.5 24.3
-----------------------------------
201.2 202.4 231.8
-----------------------------------
Commercial equipment leasing:
Finance leases 218.2 235.2 325.9
Operating leases 147.7 157.5 179.9
Notes receivable 23.2 28.8 50.7
Preferred and preference stock 0.8 0.8 0.9
-------------------------------
389.9 422.3 557.4
--------------------------------
Non-core businesses:
Finance leases 2.0 2.2 11.8
Operating leases 0.3 0.6 1.7
Notes receivable 160.6 170.9 214.4
--------------------------------
162.9 173.7 227.9
--------------------------------
$1,937.3 $1,833.5 $1,786.4
================================
11
New Business Volume
New business volume for the Company's various business segments are summarized
as follows:
Three months Years ended
ended March 31, December 31,
(Dollars in millions) 1994 1993 1992
------------------------------------
MDC aircraft financing $ 41.4 $ 410.2 $ 153.2
Other commercial aircraft
financing - 1.2 -
Commercial equipment
leasing 5.1 41.5 50.7
Non-core businesses - 0.1 2.6
--------------------------------------
$ 46.5 $ 453.0 $ 206.5
======================================
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
March 31, December 31,
(Dollars in millions) 1994 1993 1992
-----------------------------
Allowance for losses on financing
receivables at beginning of year $ 35.6 $ 37.4 $ 46.7
Provision for losses 1.8 8.6 19.1
Write-offs, net of recoveries (1.1) (10.4) (27.4)
Other - - (1.0)
------------------------------
Allowance for losses on financing
receivables at end of period $ 36.3 $ 35.6 $ 37.4
==============================
Allowance as percent of total 1.9% 1.9% 2.1%
portfolio
Net write-offs as percent of average 0.2% 0.6% 1.4%
portfolio
More than 90 days delinquent:
Amount of delinquent installments $ 6.4 $ 3.7 $ 4.6
Total receivables due from
delinquent obligors $ 33.7 $108.4 $ 10.5
Total receivables due from
delinquent obligors as a
percentage of total portfolio 1.7% 5.9% 0.6%
12
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the business
units:
Three months Years ended
ended March 31, December 31,
(Dollars in millions) 1994 1993 1992
----------------------------------
Commercial aircraft financing $ - $ (1.5) $ 6.6
Commercial equipment leasing (0.1) 3.9 5.3
----------------------------------
(0.1) 2.4 11.9
-----------------------------------
Non-Core Businesses
Real estate financing 0.2 6.4 7.7
Receivable inventory financing - - 3.2
Marketable debt securities 1.3 0.8 1.2
McDonnell Douglas Bank Limited (0.2) 0.3 2.8
McDonnell Douglas Truck
Services Inc. - - 0.5
McDonnell Douglas Capital
Corporation - 0.1 0.1
Business credit group - 0.4 -
-------------------------------
1.3 8.0 15.5
-------------------------------
$ 1.2 $ 10.4 $ 27.4
===============================
Commercial Aircraft Financing
P. T. Garuda Indonesia, which recently became the Company's single largest
commercial aircraft financing customer, accounted for $275.1 million (14.2% of
total Company portfolio) and $181.0 million (9.9% of total Company portfolio)
at March 31, 1994 and December 31, 1993. The five largest commercial aircraft
financing customers accounted for $817.6 million (42.2% of total Company
portfolio) and $718.5 million (39.2% of Company total portfolio) at March 31,
1994 and December 31, 1993.
Information Regarding McDonnell Douglas Corporation
One of MDC's largest programs for the U.S. Government is the C-17 Globemaster
III. MDC has incurred significant C-17 related losses as a result of its cost
estimate at completion exceeding the fixed-price ceiling set for development
and initial production. In addition, as of March 31, 1994, the U.S.Air Force
had withheld approximately $282 million from MDC's progress payment requests
principally as a result of the higher cost estimates and the reclassification
of certain costs. In May 1993, a Defense Acquisition Board initiated by the
Under Secretary of Defense for Acquisition began a review of the C-17 program
13
in an effort to resolve outstanding issues and to make recommendations
regarding the C-17's future. In connection with the review, MDC provided data
and participated in numerous discussions. In January 1994, MDC and the
Department of Defense agreed to a business settlement of a variety of issues
concerning the C-17. MDC and the U.S. Air Force will be developing plans and
contractual modifications and agreements to implement the business settlement.
MDC has begun to implement certain aspects of the settlement pending
Congressional authorization and appropriations expected to be completed during
1994. The settlement covered many issues open as of the date of the
settlement, including the allocation of sustaining engineering costs to the
development and production contracts, the sharing of flight test costs over a
previous level, and the resolution of claims and of performance/specification
issues. The settlement also stipulated that MDC will expend funds in an
effort to achieve product and systems improvements. During the fourth quarter
of 1993, MDC recorded a $450 million pretax charge associated with the
business settlement arranged with the Department of Defense and with cost
growth on the development and initial production lots. Based upon further
definition and pricing of issues in the settlement, in the first quarter of
1994, MDC reduced cost estimates associated with the settlement. At the same
time, MDC recognized additional cost growth for work yet to be completed in
the development and initial production lots. The $450 million provision
recognized at the end of 1993 has been increased by $5 million during 1994 to
cover net cost growth.
MDC revenues decreased 18% in the first quarter of 1994 to $2.953 billion,
from $3.617 billion in the first quarter of 1993. Revenues in the military
aircraft segment increased by 10%, while revenues in the commercial aircraft
segment decreased by 53% due to reduced commercial aircraft deliveries in
1994. Revenues were also lower in the missiles, space and electronic systems
segment as a result of MDC's reduced role in the downsized Space Station
program.
Net earnings for the 1994 first quarter were $135 million compared with first
quarter 1993 earnings of $94 million, after excluding from 1993 a $37 million
after-tax gain on the sale of McDonnell Douglas Information Systems
International and an $85 million earnings increase resulting from the
resolution of income tax issues.
14
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit
Exhibit 12.1 Computation of ratio of income to fixed charges.
B. Reports on Form 8-K
On February 3, 1994, the Company filed a current report on Form 8-K, which
included the Company's Consolidated Balance Sheet at December 31, 1993 and
1992 and Consolidated Statement of Income and Income Retained for Growth
for each of the years ended December 31, 1993, 1992 and 1991.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal accounting officer, thereunto duly authorized.
McDonnell Douglas Finance Corporation
May 13, 1994 /s/ Douglas E. Scudamore
Douglas E. Scudamore
Vice President Controller (Chief
Accounting Officer) and
Registrant's Authorized Officer
15
McDonnell Douglas Finance Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
(Unaudited)
Three months ended March 31,
(Dollars in millions) 1994 1993
---------------------------
Income:
Income before taxes on income $ 13.2 $ 7.0
Fixed charges 29.1 30.8
---------------------------
Income before taxes on income and
fixed charges $ 42.3 $ 37.8
===========================
Fixed charges:
Interest expense $ 28.2 $ 29.9
Preferred stock cash dividends 0.9 0.9
--------------------------
$ 29.1 $ 30.8
==========================
Ratio of income before taxes on income and
fixed charges to fixed charges 1.45 1.23
Exhibit 99