2 Defense Firms’ Results Differ on Same Program

With the aid of some unusual accounting procedures, McDonnell Douglas has decided not to take a charge against its earnings in the second quarter to cover cost overruns on the highly classified A-12 aircraft program for the U.S. Navy.

What makes that decision so unusual is that the firm has teamed up with General Dynamics to build the attack jet, but General Dynamics is taking a charge of about $450 million in estimated cost overruns on the program. Both aerospace firms are based in St. Louis.

McDonnell Douglas chose not to write off the cost overruns because it hopes to get the money back through claims asking the Navy to bail it out for going over budget on the fixed-price contract. General Dynamics plans to make similar claims but decided to take the charge against earnings. So far, the Navy has not agreed to bail out other contractors in similar straits.

The McDonnell Douglas move was disclosed Wednesday when it released its second-quarter earnings report, which showed $57 million in net profit--but would have shown a sizable loss if not for the unusual accounting.

General Dynamics also reported second-quarter earnings Wednesday that show a loss for the quarter of $240 million. The company blamed the loss on a special charge against earnings of $500 million--cost overruns amounting to about $450 million on the A-12 program and $50 million on its Singcars radio contract with the U.S. Army.

In a separate earnings report Wednesday by another big aerospace concern, Los Angeles-based Northrop Corp. reported net income of $29.3 million for the second quarter, contrasted with a loss of $78.1 million in the year-ago period. Sales were virtually identical for both reporting periods--about $1.4 billion.

McDonnell Douglas’ decision not to take a charge against earnings even before it has filed its claims with the Navy is like counting on the award in a civil lawsuit before the jury comes back. Some analysts on Wednesday questioned the company’s judgment.

“It doesn’t make any sense,” said Phil W. Friedman, an analyst in New York for the Paine Webber brokerage. “It is not standard operating procedure. They are doing things that other defense companies historically have not done. It is our opinion that this company’s balance sheet is deteriorating rapidly.”

But Howard Rubel, an analyst with the C. J. Lawrence financial firm in New York, was quoted by Associated Press as saying, “Neither is wrong. Each company is using its own consistent accounting approach. This is not a scheme by McDonnell Douglas to try to fool anybody.”

Lawrence M. Harris, a senior analyst for the Los Angeles-based Bateman Eichler, Hill Richards investment firm, characterized McDonnell Douglas’ and General Dynamics’ differing decisions as reflecting their varying degrees of optimism over whether the Navy will come through with the money.

“General Dynamics assumed that they would not be able to obtain relief from the Navy, would not be able to successfully file claims,” Harris said. “McDonnell Douglas assumed that . . . the companies would be able to obtain redress, file claims successfully with the Navy.”

Barbara Anderson, a spokeswoman for McDonnell Douglas, said the company was justified in not writing off the cost overruns.

“We did not make a move like this without the approval of our external auditors, our accountants, our counsel and the board of directors,” Anderson said. “We feel our claims are valid. I don’t think it is unusual. We feel that we are reporting our earnings in a prudent, conservative manner.”

But then, so does General Dynamics. In addition to deciding differently about writing off the excess spending, General Dynamics also estimated those cost overruns differently. While McDonnell Douglas put them at about a pretax $140 million, General Dynamics pegged them at a pretax $450 million.

“‘We are very conservative as far as our accounting is concerned,” said General Dynamics spokesman Christopher Schildz in explaining the companies’ differences. “We are consistently following our accounting practices, and they are following theirs. It is not unusual for two companies to choose different methods of accounting.”

McDonnell Douglas’ $57-million net income for the quarter contrasts with a net loss of $48 million in the same period last year. Revenue rose 22% to $4.119 billion, up from $3.37 billion for the same period in 1989.