1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
_X_ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 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) 627-3000
(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 November 14, 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 10
Part II Other Information
Item 1. . . . . . . . . . . . . . . . . . Legal Proceedings 11
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 11
Item 6. . . . . . . . . . . Exhibits and Reports on Form 8-K 16
* 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
September December
(Dollars in millions, except stated 30, 31,
value and par value amounts) 1994 1993
(Unaudited)
ASSETS
Financing receivables:
Investment in finance leases $1,072.1 $1,092.6
Notes receivable 299.8 350.0
-----------------------
1,371.9 1,442.6
Allowance for losses on financing (35.6) (35.6)
receivables
_______________________
Financing receivables, net 1,336.3 1,407.0
Cash and cash equivalents 22.4 65.5
Equipment under operating leases, net 384.5 390.9
Equipment held for sale or re-lease 10.8 32.0
Accounts with MDC and MDFS 47.2 70.4
_______________________
Other assets 85.2 89.7
-----------------------
$1,886.4 $2,055.5
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term notes payable $ - $ 202.6
Accounts payable and accrued expenses 19.4 51.5
Other liabilities 85.2 74.5
Deferred income taxes 300.7 298.9
Long-term debt:
Senior 1,108.8 1,080.8
Subordinated 97.7 77.8
_______________________
1,611.8 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 outstanding 50.0 50.0
10,000 shares
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 133.5 129.6
4
Cumulative foreign currency (3.4) (4.7)
translation adjustment ________________________
274.6 269.4
________________________
$1,886.4 $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 Nine months
ended ended
September 30, September 30,
(Dollars in millions) 1994 1993 1994 1993
OPERATING INCOME
Finance lease income $25.3 $21.9 $75.5 $67.1
Interest income on notes 7.0 9.9 22.4 30.0
receivable
Operating lease income, net 10.2 8.7 30.1 25.9
of depreciation expense
Net gain on disposal or re- 2.5 3.6 8.6 8.1
lease of assets
Other 1.5 2.5 6.2 7.6
__________________________________
46.5 46.6 142.8 138.7
__________________________________
EXPENSES
Interest expense 26.4 28.3 83.2 87.3
Provision for losses 2.1 2.0 5.9 6.9
Operating expenses 3.7 4.3 11.5 15.0
_________________________________
Other 3.0 8.7 6.1 10.9
_________________________________
35.2 43.3 106.7 120.1
_________________________________
Income before taxes on income 11.3 3.3 36.1 18.6
Provision for income taxes 4.2 9.9 13.6 15.4
_________________________________
Net income (loss) 7.1 (6.6) 22.5 3.2
_________________________________
Income retained for growth at 132.3 124.4 129.6 116.4
beginning of period
Dividends (5.9) (0.9) (18.6) (2.7)
_________________________________
Income retained for growth at $133.5 $116.9 $133.5 $116.9
end of period _________________________________
6
See notes to consolidated financial statements.
7
McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
Nine months
ended September 30,
(Dollars in millions) 1994 1993
OPERATING ACTIVITIES
Net income $22.5 $3.2
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation expense - equipment under 30.2 28.1
operating leases
Net gain on disposal or re-lease of assets (8.6) (8.1)
Provision for losses 5.9 6.9
Change in assets and liabilities:
Accounts with MDC and MDFS 23.2 (32.9)
Other assets 4.5 47.2
Accounts payable (32.1) (19.5)
Other liabilities
Deferred income taxes 1.8 2.2
Other, net 2.5 6.9
_________________
60.6 35.8
_________________
INVESTING ACTIVITIES
Net change in short-term notes and lease (25.8) (47.1)
receivables
Purchase of equipment for operating leases (34.2) (37.0)
Proceeds from disposition of equipment, notes 60.4 83.6
and leases receivable
Collection of notes and leases receivable 169.1 138.4
Acquisition of notes and leases receivable (97.5) (86.9)
_________________
72.0 51.0
_________________
FINANCING ACTIVITIES
Net change in short-term borrowings (202.6) (30.5)
Debt having maturities more than 90 days:
Proceeds 229.9 68.3
8
Repayments (185.2) (126.7)
Payment of cash dividends (17.8) (1.8)
__________________
(175.7) (90.7)
__________________
Decrease in cash and cash equivalents (43.1) (3.9)
Cash and cash equivalents at beginning of year 65.5 11.6
__________________
Cash and cash equivalents at end of period $22.4 $7.7
__________________
See notes to consolidated financial statements.
9
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
At September 30, 1994, the Company and MDFS have a joint revolving credit
agreement under which the Company may borrow a maximum of $220 million,
reduced by MDFS borrowings under this same agreement. This agreement, which
became effective September 29, 1994, expires September 28, 1998. By the terms
of this agreement, MDFS can borrow no more than $16 million. The interest
rate, at the option of the Company or MDFS, is either a floating rate
generally based on a defined prime rate or fixed rate related to LIBOR. There
were no amounts outstanding under this agreement at September 30, 1994.
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, $54.5 million
of the Company's income retained for growth was available for dividends at
September 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 approximately $399 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 September 30, 1994, MDFC has issued
pursuant to such offerings $91 million of General Term Notes(R) at rates
ranging from 5.00% to 8.38% due in 1995 through 2011, $140 million of senior
medium-term notes at fixed rates ranging from 4.63% to 6.78% due in 1995
through 1998, $150 million of senior medium-term notes due in 1995 through
1999 at floating rates based on LIBOR and reset quarterly, and $20 million of
subordinated medium-term notes issued during the third quarter of 1994 at a
fixed rate of 8.31% due in 2004.
Note 3 Commitments and Contingencies
At September 30, 1994 and December 31, 1993, the Company had unused credit
lines available to customers totaling $2.9 million and $6.6 million; and
10
commitments to provide leasing and other financing totaling $75.9 million and
$43.6 million.
In conjunction with prior asset dispositions, the Company is subject to a
maximum recourse of $38.2 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.
Company financings to Trans World Airlines, Inc. ("TWA"), the Company's
largest aircraft financing customer, accounted for $281.8 million (16.1% of
total Company portfolio) at September 30, 1994 and as of such date, the
Company had commitments to provide a nominal amount of additional financing
relating to aircraft previously delivered to TWA. TWA has recently proposed a
restructuring plan relating to its indebtedness and leasehold obligations to
its creditors. As part of an overall plan, TWA has requested the Company to
defer six months of lease and other payments and to convert 50% of the
deferral to equity. The Company is currently evaluating the proposal and is
engaged in discussions with TWA. While the outcome of the proposed
restructuring plan is dependent upon factors beyond the control of the
Company, management believes that it is not expected to be materially adverse
to the Company due to the collateral value of the aircraft and guaranties
provided by MDC.
Payments from a few of the Company's commercial aircraft customers are
delinquent and, as a result, the Company may be required to repossess aircraft
from such customers. Losses from repossession of aircraft from these
delinquent customers in the currently depressed aircraft market could have a
material adverse affect on earnings. However, based on its current assessment
of probable credit losses, management believes its loss reserves are adequate
and does not believe that these matters would have a material adverse affect
on the Company.
One group of creditors of Greyhound Lines Inc. ("Greyhound"), the Company's
largest commercial equipment leasing customer, recently filed an involuntary
bankruptcy petition against Greyhound in Federal Bankruptcy Court. Greyhound
accounted for $18.9 million (1.1% of total Company portfolio) at September 30,
1994 and is current on its lease payments to the Company.Certain obligations
of Greyhound to the Company are supported by letters of credit in the
aggregate amount of $3.8 million. Based on its current assessment, management
believes the loss reserves are adequate and does not believe that this matter
will have a material adverse affect on the earnings of the Company.
Item 2. Management's Analysis of Results of Operations
Finance lease income for the nine months ended September 30, 1994 was $8.4
million (12.5%) higher than the comparable nine-month period in 1993,
primarily as a result of additional aircraft purchased from MDC and financed
under finance leases.
Interest on notes receivable was $7.6 million (25.3%) lower than the 1993
nine-month period, primarily due to a lower average outstanding balance of
bridge financings in the aircraft portfolio.
11
Operating lease income, net of depreciation expense, increased $4.2 million
(16.2%) compared to the 1993 nine-month period, resulting primarily from an
aircraft purchased from MDC and financed under an operating lease and aircraft
previously leased under finance leases re-leased under operating leases.
Other income for the nine months ended September 30, 1994 was $1.4 million
(18.4%) lower than the comparable nine-month period in 1993, primarily
resulting from reduced lease underwriting residuals generated from the
recently ceased operations of McDonnell Douglas Capital Corporation ("MDCC").
The provision for losses for the nine months ended September 30, 1994 was $1.0
million (14.5%) lower than the comparable nine-month period in 1993, primarily
attributable to the improved credit quality of the total Company portfolio and
reduced writeoffs in the real estate portfolio.
Operating expenses were $3.5 million (23.3%) lower than the 1993 nine-month
period, primarily due to the sales of the portfolios of McDonnell Douglas Bank
Limited and MDCC.
Other expenses decreased $4.8 million (44.0%) compared to the 1993 nine-month
period, primarily due to a $5.7 million loss recorded in the third quarter of
1993 in conjunction with the transfer of real estate owned properties to an
affiliate.
Part II
Item 1. Legal Proceedings
None to report.
Item 5. Other Information
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; commercial equipment leasing; and information regarding MDC are
summarized below.
12
Portfolio Balances
Portfolio balances for the Company's various business segments is summarized
as follows:
September 30, December 31,
(Dollars in millions) 1994 1993 1992
MDC aircraft financing:
Finance leases $ 739.9 $ 732.3 $ 506.2
Operating leases 199.5 176.9 93.7
Notes receivable 120.5 125.9 169.4
---------------------------------
1,059.9 1,035.1 769.3
---------------------------------
Other commercial aircraft financing:
Finance leases 119.8 123.0 149.9
Operating leases 43.8 55.9 57.6
Notes receivable 24.8 23.5 24.3
---------------------------------
188.4 202.4 231.8
---------------------------------
Commercial equipment leasing:
Finance leases 210.5 235.2 325.9
Operating leases 141.1 157.5 179.9
Notes receivable 17.8 28.8 50.7
Preferred and preference stock 0.8 0.8 0.9
---------------------------------
370.2 422.3 557.4
---------------------------------
Non-core businesses:
Finance leases 1.9 2.2 11.8
Operating leases - 0.6 1.7
Notes receivable 136.0 170.9 214.4
---------------------------------
137.9 173.7 227.9
---------------------------------
$ 1,756.4 $1,833.5 $1,786.4
=================================
New Business Volume
New business volume for the Company's various business segments are summarized
as follows:
Nine months Years ended
ended December 31,
September 30,
(Dollars in millions) 1994 1993 1992
MDC aircraft financing $ 62.9 $ 410.2 $ 153.2
Other commercial aircraft 0.4 1.2 -
financing
Commercial equipment leasing 46.5 41.5 50.7
Non-core businesses - 0.1 2.6
---------------------------------
$ 109.8 $ 453.0 $ 206.5
=================================
13
Analysis of Allowance for Losses on Financing Receivables and Credit Loss
Experience
September December 31,
30,
(Dollars in millions) 1994 1993 1992
Allowance for losses on financing re-
ceivables at $ 35.6 $37.4 $ 46.7
beginning of year
Provision for losses 5.9 8.6 19.1
Write-offs, net of recoveries (5.9) (10.4) (27.4)
Other - - (1.0)
-------------------------
Allowance for losses on financing re-
ceivables at end of period $ 35.6 $35.6 $ 37.4
=========================
Allowance as percent of total portfo- 2.0% 1.9% 2.1%
lio
Net write-offs as percent of average 0.4% 0.6% 1.4%
portfolio
More than 90 days delinquent:
Amount of delinquent installments $ 2.0 $ 3.7 $ 4.6
Total receivables due from delin- $ 17.2 $108.4 $ 10.5
quent obligors
Total receivables due from delin-
quent obligors 1.0% 5.9% 0.6%
as a percentage of total portfolio
14
Receivable Write-offs, Net of Recoveries by Business Unit
The following table summarizes the loss experience of each of the business
units:
Nine months Years ended
ended December 31,
September 30,
(Dollars in millions) 1994 1993 1992
Commercial aircraft financing $ (1.5) $ (1.5) $ 6.6
Commercial equipment leasing 3.6 3.9 5.3
--------------------------------
2.1 2.4 11.9
--------------------------------
Non-Core Businesses
Real estate financing 2.5 6.4 7.7
Receivable inventory financing 0.1 - 3.2
Marketable debt securities 1.5 0.8 1.2
McDonnell Douglas Bank Limited (0.4) 0.3 2.8
McDonnell Douglas Truck Ser- - - 0.5
vices Inc.
McDonnell Douglas Capital Cor- - 0.1 0.1
poration
Business credit group 0.1 0.4 -
--------------------------------
3.8 8.0 15.5
--------------------------------
Total net write-offs $ 5.9 $ 10.4 $ 27.4
================================
Commercial Aircraft Financing
Company financings to Trans World Airlines, Inc. ("TWA"), the Company's
largest aircraft financing customer, accounted for $281.8 million (16.1% of
total Company portfolio) at September 30, 1994 and as of such date, the
Company had commitments to provide a nominal amount of additional financing
relating to aircraft previously delivered to TWA. TWA has recently proposed a
restructuring plan relating to its indebtedness and leasehold obligations to
its creditors. As part of an overall plan, TWA has requested the Company to
defer six months of lease and other payments and to convert 50% of the
deferral to equity. The Company is currently evaluating the proposal and is
engaged in discussions with TWA. While the outcome of the proposed restruc-
turing plan is dependent upon factors beyond the control of the Company,
management believes that it is not expected to be materially adverse to the
Company due to the collateral value of the aircraft and guaranties provided by
MDC.
Payments from a few of the Company's commercial aircraft customers are
delinquent and, as a result, the Company may be required to repossess aircraft
from such customers. Losses from repossession of aircraft from these delin-
quent customers in the currently depressed aircraft market could have a
material adverse affect on earnings. However, based on its current assessment
of probable credit losses, management believes its loss reserves are adequate
and does not believe that these matters would have a material adverse affect
on the Company.
15
Commercial Equipment Leasing
One group of creditors of Greyhound Lines Inc. ("Greyhound"), the Company's
largest commercial equipment leasing customer, recently filed an involuntary
bankruptcy petition against Greyhound in Federal Bankruptcy Court. Greyhound
accounted for $18.9 million (1.1% of total Company portfolio) at September 30,
1994 and is current on its lease payments to the Company.Certain obligations
of Greyhound to the Company are supported by letters of credit in the aggre-
gate amount of $3.8 million. Based on its current assessment, management
believes the loss reserves are adequate and does not believe that this matter
will have a material adverse affect on the earnings of the Company.
Information Regarding McDonnell Douglas Corporation
The financial well-being of MDC may impact the Company's ability to enter into
significant amounts of new business in the future. Approximately 20% of the
receivables from the Company's total aircraft portfolio are supported by
guaranties from MDC. In the event a substantial portion of the guaranties
become payable and in the unlikely event that MDC is unable to honor its
obligations under these guaranties, such event could have a material adverse
effect on the financial condition of the Company. In addition, MDC partici-
pates as an intermediary in financings to a small number of the Company's
commercial aircraft customers and largely as a result thereof, MDC is the
fourth largest commercial aircraft financing customer of the Company.
16
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit
Exhibit 27 Financial Data Schedule.
Exhibit 99 Computation of ratio of income to fixed charges.
B. Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, its principal accounting officer, thereunto duly authorized.
McDonnell Douglas Finance Corporation
November 14, 1994 /s/ Thomas J. Lawlor, Jr.
Thomas J. Lawlor, Jr.
Senior Vice President Finance
(Chief Accounting Officer) and
Registrant's Authorized Officer
17
McDonnell Douglas Finance Corporation and Subsidiaries
Computation of Ratio of Income to Fixed Charges
(Unaudited)
Nine months ended
September 30,
(Dollars in millions) 1994 1993
Income:
Income before taxes on income $ 36.1 $ 18.6
Fixed charges 85.8 90.0
________________________
Income before taxes on income and $ 121.9 $ 108.6
fixed charges
========================
Fixed charges:
Interest expense $ 83.2 $ 87.3
Preferred stock cash dividends 2.6 2.7
________________________
$ 85.8 $ 90.0
========================
Ratio of income before taxes on income
and fixed charges to fixed charges 1.42 1.21
=========================
Exhibit 99