House Panel Says McDonnell Not Paying Suppliers

McDonnell Douglas has withheld more than $400 million in payments to three of its major aircraft parts suppliers, raising new questions about the beleaguered aerospace firm’s claims of a financial recovery, congressional investigators say.

The St. Louis-based aerospace firm asserts that the “payment deferrals” were triggered by supplier deficiencies and poor product quality rather than an inability by McDonnell to meet its obligations or a desire to conserve its own cash.

But staff members at the House Energy and Commerce Committee, which will hold a hearing on McDonnell’s problems Thursday, said the deferrals appear to be part of independent government and private industry efforts to prop up McDonnell.

Key suppliers not getting paid include General Electric, Pratt & Whitney and General Dynamics. As of June 30, the amount owed the three suppliers was an estimated $335 million, but the total has continued to rise and now exceeds $400 million, the committee staff said.

In addition to the payments withheld from private-sector vendors, the federal government has provided McDonnell financial relief amounting to nearly $2 billion, the committee staff said.

Earlier this year, the Navy canceled the A-12 attack jet program and demanded that McDonnell and its partner, General Dynamics, repay $1.35 billion. But the Pentagon--on the heels of reports by its own analysts that McDonnell was a candidate for bankruptcy--then deferred the repayment demand until a legal dispute over the cancellation was resolved.

The committee also cited excessive payments provided to the company on the Navy T-45 trainer jet program as further evidence that the Pentagon was seeking to ease the financial pressures on McDonnell. The Navy did not demand immediate repayment but allowed McDonnell to slowly “work off” the amount, the committee said.

Andrew Wilson, a McDonnell spokesman, acknowledged that the firm had withheld payments to the three suppliers, but said Tuesday that he could not confirm the $400-million figure and did not have any other figures.

“It was not a cash-driven deal where we were trying to invent problems to save cash,” Wilson said.

Most of the deferrals apparently involve the MD-11 jetliner. GE and Pratt provided engines that did not meet fuel-efficiency requirements, Wilson said, while General Dynamics supplied aircraft structures not up to McDonnell quality standards.

“Are we supposed to pay in full and pay promptly when we are very dissatisfied with the quality of the products we are receiving?” Wilson asked. “I think the answer is no.”

McDonnell has asserted that the worst of its longstanding financial travails are past. It has boasted that it slashed its debt by $360 million in the second quarter, from $3.305 billion to $2.94 billion. It credited the reduction to improved financial performance and better cash management.

But the nonpayment of $400 million would also appear to have helped that debt-reduction effort, according to analysts and congressional staff members.

“If you increase accounts payable--that is if you reduce the amount by which you pay your bills--then that effectively generates cash or reduces the need to borrow,” said Lawrence Harris, an analyst at Kemper Securities Group. “I wouldn’t say that not paying bills is solely responsible for the reduction in debt that has occurred so far this year, but it would certainly be one of the factors.”

The firm’s accounts payable entry on its balance sheet, Harris noted, went up $400 million--from $2.8 billion to $3.2 billion--between the end of December and the end of June.

But Wilson responded that the problems encountered with the suppliers and the resulting cash deferral caused McDonnell a “net cash loss.”

Separately, Harris said he downgraded his recommendation on McDonnell stock this week from a hold to a sell, citing technical factors. McDonnell shares traded at a 1991 high of $65 Tuesday before closing unchanged at $64.625.

Harris said the remarkable increase in McDonnell shares, which have traded in the $40s for much of this year, is due in part to the efforts of investors with short positions covering their losses. (A short investor benefits when the stock goes down.)

“McDonnell is the only prime contractor that has not retreated in the past several days,” Harris remarked. “At some point, it is due for a correction.”

By contrast, the Wall Street brokerage Wertheim Schroeder recently upgraded McDonnell to a “buy” rating after test flights of its military C-17 cargo jet.

Harris estimated that the deferral of $400 million would represent about two months worth of bills on the MD-11 program, which is expected to generate revenue of $3.8 billion this year.

Robert Conboy, GE’s general manager for commercial jet engines, issued a statement on the deferrals:

“GE and McDonnell Douglas have reached a mutual agreement and resolution of the aircraft and engine performance situation. But the proprietary nature of the agreement prevents any disclosure to third parties. We are working together with McDonnell to continue to improve both aircraft and engine to enhance the satisfaction of our airline customers.”

A Pratt spokesman said company policy precludes comment on financial arrangements with customers. General Dynamics officials did not respond to an inquiry.

Separately, the Air Force said Tuesday that McDonnell will not meet the delivery schedule for the C-17--a development that will prompt a demand by the Air Force for financial reimbursement. So far, the service said it does not have an estimate of how much it will seek for the delays.