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 June 30, 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 August 15, 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.
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Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . 3
Item 2. Management's Analysis of Results of Operations . . 9
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.
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Part I
Item 1. Financial Statements
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet
June 30, December 31,
(Dollars in millions, except stated 1994 1993
value and par value amounts) ___________________________________
(Unaudited)
ASSETS
Financing receivables:
Investment in finance leases $ 1,109.3 $ 1,125.3
Notes receivable 311.1 350.0
_____________________________________
1,420.4 1,475.3
Allowance for losses on financing (35.6) (35.6)
receivables
_____________________________________
Financing receivables, net 1,384.8 1,439.7
Cash and cash equivalents 15.7 65.5
Equipment under operating leases, net 437.9 358.2
Equipment held for sale or re-lease 2.1 32.0
Accounts with MDC and MDFS 53.8 70.4
Other assets 107.0 89.7
_____________________________________
$ 2,001.3 $ 2,055.5
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ 86.3 $ 202.6
Accounts payable and accrued expenses 33.3 51.5
Other liabilities 88.4 74.5
Deferred income taxes 300.9 298.9
Long-term debt:
Senior 1,141.8 1,080.8
Subordinated 77.8 77.8
_____________________________________
1,728.5 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- 50.0 50.0
ing 10,000 shares
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Common stock $100 par value;
authorized 100,000 shares; issued 5.0 5.0
and outstanding 50,000 shares
Capital in excess of par value 89.5 89.5
Income retained for growth 132.3 129.6
Cumulative foreign currency (4.0) (4.7)
translation adjustment
272.8 269.4
_____________________________________
$ 2,001.3 $ 2,055.5
=====================================
See notes to consolidated financial statements.
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McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
(Unaudited)
Three months ended Six months ended
June 30, June 30,
(Dollars in millions) 1994 1993 1994 1993
__________________________________________
OPERATING INCOME
Finance lease income $ 23.8 $ 22.0 $ 52.0 $ 45.2
Interest income on notes 9.8 9.9 15.4 20.1
receivable
Operating lease income, net 9.2 9.1 18.1 17.2
of depreciation expense
Net gain on disposal or re- 3.6 2.3 6.1 4.5
lease of assets
Other 1.9 1.5 4.7 5.1
__________________________________________
48.3 44.8 96.3 92.1
__________________________________________
EXPENSES
Interest expense 28.6 29.1 56.8 59.0
Provision for losses 2.0 1.7 3.8 4.9
Operating expenses 3.4 4.9 7.8 10.7
Other 2.7 0.8 3.1 2.2
36.7 36.5 71.5 76.8
__________________________________________
Income before taxes on 11.6 8.3 24.8 15.3
income
Provision for income taxes 4.4 3.0 9.4 5.5
Net income 7.2 5.3 15.4 9.8
__________________________________________
Income retained for growth 131.4 120.0 129.6 116.4
at beginning of period
Dividends (6.3) (0.9) (12.7) (1.8)
__________________________________________
Income retained for growth $ 132.3 $ 124.4 $ 132.3 $ 124.4
at end of period
==========================================
See notes to consolidated financial statements.
6
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended June 30,
(Dollars in millions) 1994 1993
______________________________
OPERATING ACTIVITIES
Net income $ 15.4 $ 9.8
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation expense 19.1 18.8
equipment under operating
leases
Net gain on disposal or re- (6.1) (4.5)
lease of assets
Provision for losses 3.8 4.9
Change in assets and
liabilities:
Accounts with MDC and MDFS 16.6 15.1
Other assets (17.3) 14.5
Accounts payable (18.2) (5.4)
Other liabilities 13.9 0.5
Deferred income taxes 2.0 (0.7)
Other, net (13.9) 2.6
15.3 55.6
______________________________
INVESTING ACTIVITIES
Net change in short-term notes and (113.2) 27.6
lease receivables
Purchase of equipment for operating (12.7) (34.9)
leases
Proceeds from disposition of
equipment, notes and 48.0 66.6
leases receivable
Collection of notes and leases 139.5 96.5
receivable
Acquisition of notes and leases (72.5) (79.2)
receivable
______________________________
(10.9) 76.6
______________________________
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FINANCING ACTIVITIES
Net change in short-term borrowings (116.3) (60.9)
Debt having maturities more than 90
days:
Proceeds 209.9 17.0
Repayments (135.1) (72.2)
Payment of cash dividends (12.7) (1.8)
______________________________
(54.2) (117.9)
______________________________
Increase (decrease) in cash and cash (49.8) 14.3
equivalents
Cash and cash equivalents at 65.5 11.6
beginning of year
______________________________
Cash and cash equivalents at end of $ 15.7 $ 25.9
period
==============================
See notes to consolidated financial statements.
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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, $52.1 million
of the Company's income retained for growth was available for dividends at
June 30, 1994.
In June 1993, the Company commenced an offering of up to $250 million of its
General Term Notes(R) and subsequently commenced offerings of up to an
aggregate of $350 million of its medium-term notes. The interest rate
applicable to each note and certain other variable terms are established at
the date of issue. As of June 30, 1994, MDFC has issued pursuant to such
offerings $91 million of General Term Notes(R) at rates ranging from 5.0% to
8.4% due in 1995 through 2011, $140 million of medium-term notes at fixed
rates ranging from 4.6% to 6.8% due in 1995 through 1998, and an additional
$150 million of medium-term notes issued during the second quarter of 1994 due
in 1995 through 1999 at floating rates based on LIBOR and reset quarterly.
Note 3 Commitments and Contingencies
At June 30, 1994 and December 31, 1993, the Company had unused credit lines
available to customers totaling $6.5 million and $6.6 million; and commitments
to provide leasing and other financing totaling $81.5 million and $43.6
million.
In conjunction with prior asset dispositions, the Company is subject to a
maximum recourse of $40.0 million. Based on trends to date, the Company's
actual losses from such exposure are not expected to be significant.
The Company has guaranteed the repayment of $9.2 million in capital lease
obligations associated with a 50% partner.
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Item 2. Management's Analysis of Results of Operations
Finance lease income for the six months ended June 30, 1994 was $6.8 million
(15.0%) higher than the comparable six-month period in 1993, primarily as a
result of additional aircraft purchased and financed under finance leases.
Interest on notes receivable was $4.7 million (23.4%) lower than the 1993
six-month period, primarily due to a lower average outstanding balance of
bridge financings in the aircraft portfolio.
Net gain on disposal or re-lease of assets increased $1.6 million (35.6%) from
the first half of 1993, resulting primarily from equipment in the Company's
commercial equipment leasing portfolio being sold at a gain at the end of the
lease term.
The provision for losses for the six months ended June 30, 1994 was $1.1
million (22.5%) lower than the comparable six month period in 1993, primarily
attributable to the improved credit quality of the total Company portfolio and
reduced writeoffs in the aircraft portfolio.
Operating expenses were $2.9 million (27.1%) lower than the 1993 six month
period, primarily due to the sales of the portfolios of McDonnell Douglas Bank
Limited and McDonnell Douglas Capital Corporation, both of which were, in
effect, wholly-owned subsidiaries of the Company.
Other expenses increased $0.9 million (40.9%) compared to the first half of
1993, primarily due to increased expenses associated with the Company's 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 for an immaterial amount. During the second quarter of 1994
the settlement was consummated and the suit was dismissed with prejudice.
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.
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Portfolio Balances
Portfolio balances for the Company's various business segments is summarized
as follows:
June 30, December 31,
(Dollars in millions) 1994 1993 1992
MDC aircraft financing:
Finance leases $ 782.2 $ 765.0 $ 506.2
Operating leases 248.9 144.2 93.7
Notes receivable 123.6 125.9 169.4
_____________________________________
1,154.7 1,035.1 769.3
_____________________________________
Other commercial aircraft financing:
Finance leases 120.7 123.0 149.9
Operating leases 53.9 55.9 57.6
Notes receivable 25.9 23.5 24.3
_____________________________________
200.5 202.4 231.8
_____________________________________
Commercial equipment leasing:
Finance leases 204.9 235.2 325.9
Operating leases 135.0 157.5 179.9
Notes receivable 19.3 28.8 50.7
Preferred and preference stock 0.8 0.8 0.9
_____________________________________
360.0 422.3 557.4
_____________________________________
Non-core businesses:
Finance leases 1.5 2.2 11.8
Operating leases 0.2 0.6 1.7
Notes receivable 141.4 170.9 214.4
_____________________________________
143.1 173.7 227.9
_____________________________________
$ 1,858.3 $ 1,833.5 $ 1,786.4
=====================================
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New Business Volume
New business volume for the Company's various business segments are summarized
as follows:
Six months ended Years ended
June 30, December 31,
_____________________________________________
(Dollars in millions) 1994 1993 1992
MDC aircraft financing $ 54.1 $ 410.2 $ 153.2
Other commercial aircraft 0.4 1.2 -
financing
Commercial equipment leasing 7.6 41.5 50.7
Non-core businesses - 0.1 2.6
_____________________________________________
$ 62.1 $ 453.0 $ 206.5
=============================================
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
June 30, December 31,
____________________________________
(Dollars in millions) 1994 1993 1992
Allowance for losses on financing
receivables at $ 35.6 $ 37.4 $ 46.7
beginning of year
Provision for losses 3.8 8.6 19.1
Write-offs, net of recoveries (3.8) (10.4) (27.4)
Other - - (1.0)
Allowance for losses on financing ___________________________________
receivables at end of period $ 35.6 $ 35.6 $ 37.4
===================================
Allowance as percent of total portfolio 1.9% 1.9% 2.1%
Net write-offs as percent of average 0.4% 0.6% 1.4%
portfolio
More than 90 days delinquent:
Amount of delinquent installments $ 2.6 $ 3.7 $ 4.6
Total receivables due from delinquent $ 14.9 $ 108.4 $ 10.5
obligors
Total receivables due from delinquent
obligors 0.8% 5.9% 0.6%
as a percentage of total portfolio
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Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the business
units:
Six months ended Years ended
June 30, December 31,
________________________________________
(Dollars in millions) 1994 1993 1992
Commercial aircraft financing $ (0.9) $ (1.5) $ 6.6
Commercial equipment leasing 0.9 3.9 5.3
________________________________________
- 2.4 11.9
________________________________________
Non-Core Businesses
Real estate financing 2.5 6.4 7.7
Receivable inventory financing - - 3.2
Marketable debt securities 1.5 0.8 1.2
McDonnell Douglas Bank Limited (0.3) 0.3 2.8
McDonnell Douglas Truck - - 0.5
Services Inc.
McDonnell Douglas Capital - 0.1 0.1
Corporation
Business credit group 0.1 0.4 -
________________________________________
3.8 8.0 15.5
________________________________________
Total net write-offs $ 3.8 $ 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 $276.9 million (14.9% of
total Company portfolio) and $181.0 million (9.9% of total Company portfolio)
at June 30, 1994 and December 31, 1993. The five largest commercial aircraft
financing customers accounted for $827.3 million (44.5% of total Company
portfolio) and $718.5 million (39.2% of Company total portfolio) at June 30,
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
estimates at completion exceeding the fixed-price ceiling set for development
and initial production. In addition, as of June 30, 1994, the U.S.Air Force
had withheld approximately $303 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
in an effort to resolve outstanding issues and to make recommendations
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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 many 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. During the second quarter, MDC
recognized losses in the development and initial production lots. These
losses, however, were offset by increased earnings in the current production
lots. Although completion of the full scale engineering and development
portion of the C-17 program is approaching, MDC continues to bear additional
costs in the development and initial production contracts.
MDC revenues decreased 16% in the first six months in 1994 to $6.20 billion,
from $7.43 billion in the first six months in 1993. The decrease in revenues
resulted principally from reduced deliveries in the commercial aircraft
segment and MDC's reduced role in the downsized Space Station program.
Revenues from the military aircraft segment were 11% higher for the first six
months in 1994 as compared with the same period in 1993. Revenues from the
commercial aircraft segment decreased 46% in the first six months of 1994
compared to the first six months of 1993 reflecting reduced aircraft
deliveries and the overall softness in the commercial aircraft market. MDC
expects the weakness of the commercial aircraft market to continue at least
during the remainder of 1994.
Net earnings for the first six months of 1994 were $272 million compared with
the first six months of 1993 earnings of $207 million, after excluding from
1993 unusual gains totaling $179 million related to the sale of McDonnell
Douglas Information Systems International, the resolution of income tax
issues, and a postretirement benefits curtailment gain.
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibit
Exhibit 99 Computation of ratio of income to fixed charges.
B. Reports on Form 8-K
On July 7, 1994, the Company filed a report on Form 8-K dated July 7, 1994,
concerning the appointment of a new President and a Chief Financial Officer
for the Company.
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
August 15, 1994 /s/ Douglas E. Scudamore
_______________________________
Douglas E. Scudamore
Vice President Controller (Chief
Accounting Officer) and
Registrant's Authorized Officer
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McDonnell Douglas Finance Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
(Unaudited)
Six months ended June 30,
(Dollars in millions) 1994 1993
_______________________________
Income:
Income before taxes on income $ 24.8 $ 15.3
Fixed charges 58.5 60.7
_______________________________
Income before taxes on $ 83.3 $ 76.0
income and fixed charges
===============================
Fixed charges:
Interest expense $ 56.8 $ 59.0
Preferred stock cash dividends 1.7 1.7
_______________________________
$ 58.5 $ 60.7
===============================
Ratio of income before taxes on income
and fixed charges 1.42 1.25
to fixed charges
===============================
Exhibit 99