McDonnell May Sell Portions of Douglas Aircraft : Aerospace: Although the unit has grown substantially, it is also a big part of its parent’s debt load. Assets not directly related to its core business might be divested.
McDonnell Douglas has laid the groundwork to divest parts of its Douglas Aircraft unit in Long Beach, which has had sharp growth in recent years but also has imposed a heavy debt burden on the parent corporation, it was learned Thursday.
A corporate policy was recently disclosed inside the company “to consider divesting assets” that are not directly related to Douglas’ main business of assembly and testing of large transport aircraft.
Such a policy would leave open to divestiture a number of Douglas programs and facilities, including the firm’s huge Torrance factory, the largest aircraft parts fabrication plant in California. The Torrance plant employs about 5,300 and the Long Beach plant 37,000.
McDonnell spokesman Michael I. Burch in St. Louis said rumors within Douglas in recent weeks that the Torrance facility is already for sale or is already sold are “wild” and without merit. At the same time, however, he did not exclude a possible future sale of the plant.
Burch confirmed that the company is examining how it can unload some of the work at Douglas and allow the operation to focus its management and other resources on its largest aircraft production programs, which are accelerating rapidly.
The corporate strategy statement, a copy of which was obtained by The Times, suggests that parts fabrication is one area that could be divested. Douglas already relies on outside suppliers for a significant portion of its major parts, including wings, fuselages, control surfaces and a broad range of other structural components.
McDonnell Douglas Canada, which builds the wings for the MD-80 narrow body jetliners and the wings for the new MD-11 jumbo jetliner, reports to Douglas, as well.
A divestiture of parts fabrication facilities would mark a sharp turnaround from recent strategy. Douglas has established parts and sub-assembly plants in Salt Lake City, Macon, Ga., and Columbus, Ohio, in recent years to relieve pressure on its California operations.
As part of its intent to whittle down Douglas Aircraft, McDonnell late last year transferred the Navy’s T-45 trainer aircraft program from Douglas Aircraft to McDonnell Aircraft in St. Louis.
In addition, Douglas’ other non-transport aircraft operations include the production of military ejection seats, bomb racks and training systems.
“If there is property around that we are not using, that is certainly a candidate,” Burch said.
Owing to a historic boom in commercial aircraft sales, Douglas has accumulated an estimated $45 billion backlog, including conditional orders. Its C-17 Air Force cargo jet program is worth an additional $45 billion in future business.
But to deliver on all those orders, Douglas is incurring enormous inventory expenses that have forced the firm to borrow heavily. McDonnell closed 1989 with an estimated $4.5 billion in debt, and securities analysts project that it will have to add another $1 billion this year. It has $3.3 billion in shareholder equity.
“These are tough times right now when interest rates are going up and you have a lot of debt,” said Jack Modzelewski, Paine Webber analyst. “They probably have 15 more months before they can get shipments out on the MD-11 and they are going to be carrying a big inventory build up. This is an action in which you bet the company.”
McDonnell Douglas stock was hammered last year and it is now selling well below its book value. The shares dropped an additional $1.625 each Thursday to a new 52-week low of $58.25. The shares peaked at $94.50 in the past year.
Although Modzelewski said he was not aware of the corporate policy statement to divest assets, he added: “This is like selling the dining room furniture to make the mortgage payment. They don’t want to lose the house.”
The corporate policy also states that parts of McDonnell outside of Douglas could be divested, but the firm has already been selectively selling off some those assets for some time. McDonnell is selling parts of its information systems business, for example.
McDonnell is expected to report its fourth-quarter earnings today and analysts will be watching closely for developments at Douglas. So far this year, Douglas has posted operating losses of $227 million. All of its major programs are running behind schedule.
The policy under which Douglas assets would be sold was disclosed in the minutes of a Jan. 8 meeting of the Douglas Aircraft Executive Council, a joint management-union committee.
The minutes, which were posted on a computer bulletin board at the company, quoted Douglas Deputy President John P. Capellupo as saying that “the corporate policy is that no single MDC (McDonnell Douglas) component will be sold, but consideration may be given to selling parts of MDC components.
“During the next 18 months, DAC (Douglas Aircraft Co.) will move toward focusing on major and final assembly as well as test functions. Although DAC would still have to fabricate some parts, the team has agreed to consider divesting assets that either do not conform to the three above-mentioned functions, or do not relate to transport aircraft.
“Divesting these assets would have the benefit of freeing experienced people to help meet critical assembly needs, team members said. (Douglas President Robert) Hood said the team would pursue these objectives during the course of the year, but no schedule has been set.”
