McDonnell Outlook Brightens : Aerospace: The company’s aggressive cost cutting has helped bring a rebound this year. Profit is up and debt is falling.
McDonnell Douglas Corp., still dogged by familiar problems in its commercial jetliner business and with its C-17 military cargo plane, is nonetheless enjoying a startling financial rebound this year.
While the jetliner and C-17 divisions still cloud McDonnell’s future, the company’s profit is up sharply, its heavy debt is falling, and it is expected to generate $1 billion in 1993 that will be used to further pare its debt--all while sales are dropping.
The results have Wall Street cheering. McDonnell’s stock price has more than doubled over the last year, closing Thursday at $90.375 a share in New York Stock Exchange composite trading after surpassing $92 earlier in the week.
Why the improvement? Although the C-17 program is not yet in full production and merely breaks even, and the jetliner unit is only modestly profitable, most of McDonnell’s defense-related operations are earning more money because of aggressive cost cutting.
The drop in operating expenses--down another 21% in the six months ended June 30--is swelling profit margins for such other projects as the F/A-18 and F-15 fighter jets, Apache helicopter and Tomahawk and Harpoon missiles.
“We’ve hit our cost structure very hard,” said Herbert J. Lanese, McDonnell’s chief financial officer.
The biggest cost saver has been massive layoffs. More than a third of McDonnell’s work force has vanished during the last four years--to 74,000 today from 128,000. (Part of the reduction stems from asset sales by the company.)
The cutbacks also apply to McDonnell’s work on the space station. The company said Thursday that its aerospace operation plans to lay off about 1,000 workers in Huntington Beach, Houston and St. Louis.
McDonnell isn’t alone, of course. The aerospace industry is going through a painful retrenching in response to smaller Pentagon budgets, with defense contractors chopping away at their payrolls and other costs.
But the actions are also boosting their earnings and stock prices. Shares of Raytheon Co., Loral Corp. and GM Hughes Electronics Corp., the parent of Hughes Aircraft, are among those up 20% or more this year, compared to a 5.4% gain for Standard & Poor’s 500 index.
McDonnell posted record profit in the six months ended June 30 of $207 million--excluding onetime gains and charges--despite a 16% sales drop. In all of 1992, McDonnell earned a meager $161 million--before a special accounting charge--on sales of $17.4 billion.
Besides lowering overhead, McDonnell achieved the gains by pressuring suppliers to cut their prices. By paring its long-term debt to $3.7 billion by the end of June, the company also halved its interest payments in the first half of 1993 to $125 million.
But cost cutting can lift a company only so much. Indeed, McDonnell’s profit in the first half of this year, while an improvement, still amounted to only 3 cents per dollar of sales. That’s “about half of what the good companies in our industry are averaging,” Lanese said.
So the question remains whether McDonnell can keep building its profit even as its sales keep falling.
In McDonnell’s favor, the Pentagon’s recent “bottom-up review” of U.S. military needs endorsed the next generation of F/A-18s, which will keep McDonnell busy making the Navy plane well into the 21st Century.
Also, because much of the research-and-development costs of the C-17 and its MD-11 wide-body passenger jet are behind McDonnell, more of the planes’ revenues will now flow to the bottom line.
Sales growth is less certain for some other McDonnell programs, such as the F-15 and the Apache helicopter. But Lanese predicted that the C-17 will go forward, giving a big push to McDonnell’s results.
Paul Nisbet, an analyst with the JSA Research consulting firm in Newport, R.I., agreed. The C-17 “will go into full-scale production, and they’ll produce more than anyone is now contemplating,” he said.
The program, which employs about 10,000 people in Southern California, has been plagued by mechanical problems and is $1.4 billion over budget. The Pentagon currently plans to buy 120 C-17s for roughly $40 billion, but it has threatened to cancel the project unless the problems ended.
A Defense Department panel is expected to decide the C-17’s fate later this month. But investors are betting that at least 60 planes will be ordered, which is another factor lifting McDonnell’s stock, analysts said. (Two C-17s have been delivered to the Air Force so far.)
Less certain is the future of McDonnell’s Douglas Aircraft unit, whose 13,000 Long Beach workers make the MD-80 and MD-90 commercial jetliners in addition to the MD-11.
Douglas Aircraft, though profitable, is struggling to sign new orders amid a worldwide slump in airliner demand and competition from its two larger rivals, Boeing Co. and Airbus Industrie of Europe.
Lanese made no predictions about Douglas’ outlook, saying he has “trouble understanding when that whole business will turn around.” Douglas’ prospects, in fact, have been glum for many years, with the company steadily losing market share and failing to develop all-new models of jetliners.
Douglas’ current backlog should keep production busy until the late 1990s, but unless it signs new orders soon, pressure is likely to build on McDonnell to shed or close the division--a move the company has steadfastly denied.
According to Nisbet, McDonnell will keep the business and orders at Douglas Aircraft will start climbing in the late 1990s while it finds a partner to help finance development of future planes. “They’re going to get stronger,” he said.
But Paine Webber analyst Jack Modzelewski said McDonnell’s rising stock price partly reflects Wall Street expectations “that they’re on an exit path to get out of commercial aircraft.”
Taking Flight
After slumping in 1992, shares of McDonnell Douglas Corp. have more than doubled in price over the last 12 months. Monthly closes except latest:
Thursday: $90.375, up 0.50
Source: Dow Jones
