McDonnell Reports a $10-Million Loss : Firm Cites $66 Million of Red Ink at Douglas Unit in Quarter
McDonnell Douglas posted a $10-million first-quarter loss Friday, the result of a stunning $66-million loss at its Douglas Aircraft operation in Long Beach.
Douglas took a $31-million charge on the Navy T-45 trainer aircraft program, a development under a fixed-price contract. The project has encountered problems that the company will have to solve at its own expense.
The balance of the losses at Douglas, $35 million, apparently occurred on its commercial aircraft business. The company said it lost money on its long-running MD-80 aircraft line, despite an increase in deliveries to 27 for the quarter from 24 the year before.
In last year’s first quarter, the Douglas subsidiary reported a $26-million profit, which included a $21-million gain resulting from conversion of a short-term lease to long-term.
McDonnell’s first-quarter performance was helped by an accounting change, which resulted in net income of $169 million on sales of $3.34 billion, compared to earnings of $51 million on sales of $3.31 billion the year earlier. But the accounting change added $179 million to the bottom line, meaning that there would have been a $10-million loss without it.
News of the operating loss sent McDonnell shares sharply down. They ended the day on the New York Stock Exchange at $88.125, down $5.625.
Paine Webber aerospace analyst Jack Modzelewski slashed his 1989 earnings estimate for McDonnell Douglas to $7 per share from $9.25 after the first-quarter report was released Friday.
“Everyone knew that they were having trouble on the commercial side and certainly this proved that,” he said.
McDonnell has undertaken a top-to-bottom reorganization of its Douglas Aircraft unit, including the reassignment of almost every top level manager. Douglas President James E. Worsham was replaced by Robert H. Hood Jr., who recently characterized Douglas as having deep problems with antiquated systems and high costs.
Even more disturbing, Modzelewski said, is the poor performance McDonnell reported on its combat aircraft operations, which have historically carried the commercial business. Operating profit on military aircraft dropped to $62 million in the quarter from $73 million the year earlier.
Pentagon budget cutbacks have reduced production of the company’s four major combat aircraft, but the cutbacks have been modest compared to the larger reductions expected in the near future.
“If they are going to have margin problems now, what are they going to do later on?” the analyst said. “It portends for not great things.”
The company’s long-troubled information systems operation posted a loss of $9 million, down from $28 million the year earlier. Interest expense soared to $99 million from $41 million the year earlier, resulting from a special provision in connection with a dispute with the Internal Revenue Service. Negotiations are continuing, the company said.
