Mc Donnell Douglas: Unfasten The Seat Belts

Plenty of words have been used to describe McDonnell Douglas Corp. since John F. McDonnell became chief executive in 1988. Most popular: "troubled," "cash-strapped," and "debt-laden." But now, the McDonnell family scion is finally hearing a term he likes: turnaround candidate.

The signs of a comeback at McDonnell Douglas are mounting. The aerospace giant's 1993 earnings, before accounting adjustments, surged 145%, to $396 million, despite a 17% drop in sales, to $14.5 billion. And in just 15 months, McDonnell has sliced nonfinance-company debt by 45%. Investors have applauded the performance so far, sending McDonnell's share price soaring 236%, to $115.13, since September, 1992 (chart).

BUYING TIME. One more sign of the company's resurgence came on Jan. 27, when Israel announced that it would buy 20 McDonnell Douglas F-15 fighters valued at $2 billion. Rival planemaker Lockheed Corp. had fought hard for the order, but the Israelis were swayed by the range and firepower of the F-15. "We've put to rest our critics on the question of our viability--we're going to be around," crows McDonnell Executive Vice-President Herbert J. Lanese. Agrees John McDonnell, who says his company could even consider a small aerospace acquisition this year: "Now we can switch from a defensive mode to an offensive mode."

That's a far cry from just four years ago, when the St. Louis-based manufacturer found itself hurtling toward insolvency after pursuing four expensive, fixed-cost development programs simultaneously. Just as the company was running out of cash in mid-1990, John McDonnell launched a drastic restructuring that eventually slashed operating costs by more than $700 million annually. He sacked 40% of the company's work force and peddled noncore assets such as the profitable European information-systems unit.

Lately, things have been going McDonnell's way. Saudi Arabia could have broken the company's momentum with its recent effort to back away from a $9 billion U.S. defense gear order, which included 72 F-15s worth $5 billion. But under a deal reached in late January, the Saudi government will still purchase all 72 planes, only slowing deliveries originally scheduled for the mid-1990s.

The real payoff of that deal's restructuring could come this year, when the Saudis are expected to begin an overhaul of the state airline. The resulting order could total $6 billion--and McDonnell is likely to get a piece.

Things even seem to be looking up for McDonnell Douglas' long-troubled

C-17 transport aircraft. The company had sought $1.6 billion from the Pentagon in compensation for what it claims were costly changes to the C-17. In late 1993, it dropped the claims and was forced to swallow a $450 million pretax charge in the fourth quarter to cover cost overruns and new technology. In return, the Air Force guaranteed that it would purchase 40 of the massive planes--far below the 120 units originally planned. Lanese concedes that "that's a hell of a price for McDonnell to pay" to keep the program alive. "But it's a bet I'm willing to make because once they see this airplane perform, they'll want more of them." Agrees A.G. Edwards & Sons Inc. analyst Kent Newcomb: "Once the C-17 is flying, there's just no competition."

"UNDER THE GUN." McDonnell hasn't won the battle yet. Although Congress is expected to sign off on the C-17 settlement, any more delays or performance problems on the first 40 aircraft will endanger follow-on orders. "They're going to be watched carefully, and they know they are under the gun," notes House Majority Leader Richard A. Gephardt (D-Mo.).

Likewise, McDonnell's long-term future in commercial aircraft is far from certain. Although rabid cost-cutting has kept its commercial unit in the black for three years, orders remain sluggish: McDonnell had more plane orders canceled in 1993 than it won; Boeing Co., in contrast, got 34 net new orders. And jetliner orders aren't expected to pick up before at least next year.

Those are long-term concerns, however. For now, McDonnell executives are still basking in the afterglow of having beaten the odds by mounting a viable comeback. "These things never happen as speedily as you'd like," says John McDonnell, "but our actions are finally bearing fruit, and our gains are sustainable." Typical CEO talk, to be sure. But McDonnell Douglas shareholders sure like the sound of it.

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