UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2004 |
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 1-5231
MCDONALD’S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 36-2361282 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
McDonald’s Plaza Oak Brook, Illinois | 60523 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, including Area Code:(630) 623-3000
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Indicate by checkü whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ No¨
Indicate by checkü whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesþ No¨
1,259,408,088
(Number of shares of common stock
outstanding as of March 31, 2004)
McDONALD’S CORPORATION
INDEX
2
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEET
| In millions, except per share data | (unaudited) March 31, 2004 | December 31, 2003 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and equivalents | $ | 969.6 | $ | 492.8 | ||||
Accounts and notes receivable | 655.0 | 734.5 | ||||||
Inventories, at cost, not in excess of market | 122.3 | 129.4 | ||||||
Prepaid expenses and other current assets | 568.4 | 528.7 | ||||||
Total current assets | 2,315.3 | 1,885.4 | ||||||
Other assets | ||||||||
Investments in and advances to affiliates | 1,100.1 | 1,089.6 | ||||||
Goodwill, net | 1,696.9 | 1,665.1 | ||||||
Miscellaneous | 993.4 | 960.3 | ||||||
Total other assets | 3,790.4 | 3,715.0 | ||||||
Property and equipment | ||||||||
Property and equipment, at cost | 28,738.0 | 28,740.2 | ||||||
Accumulated depreciation and amortization | (9,025.8 | ) | (8,815.5 | ) | ||||
Net property and equipment | 19,712.2 | 19,924.7 | ||||||
Total assets | $ | 25,817.9 | $ | 25,525.1 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 492.7 | $ | 577.4 | ||||
Income taxes | 172.1 | 71.5 | ||||||
Other taxes | 215.0 | 222.0 | ||||||
Accrued interest | 193.2 | 193.1 | ||||||
Accrued restructuring and restaurant closing costs | 101.7 | 115.7 | ||||||
Accrued payroll and other liabilities | 817.7 | 918.1 | ||||||
Current maturities of long-term debt | 634.9 | 388.0 | ||||||
Total current liabilities | 2,627.3 | 2,485.8 | ||||||
Long-term debt | 9,114.2 | 9,342.5 | ||||||
Other long-term liabilities and minority interests | 701.8 | 699.8 | ||||||
Deferred income taxes | 1,006.2 | 1,015.1 | ||||||
Shareholders’ equity | ||||||||
Preferred stock, no par value; authorized – 165.0 million shares; issued – none | ||||||||
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million | 16.6 | 16.6 | ||||||
Additional paid-in capital | 1,912.9 | 1,837.5 | ||||||
Unearned ESOP compensation | (90.6 | ) | (90.5 | ) | ||||
Retained earnings | 20,684.1 | 20,172.3 | ||||||
Accumulated other comprehensive income (loss) | (654.3 | ) | (635.5 | ) | ||||
Common stock in treasury, at cost; 401.2 and 398.7 million shares | (9,500.3 | ) | (9,318.5 | ) | ||||
Total shareholders’ equity | 12,368.4 | 11,981.9 | ||||||
Total liabilities and shareholders’ equity | $ | 25,817.9 | $ | 25,525.1 | ||||
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarters ended March 31 | |||||||
In millions, except per common share data | 2004 | 2003 | |||||
Revenues | |||||||
Sales by Company-operated restaurants | $ | 3,283.0 | $ | 2,856.1 | |||
Revenues from franchised and affiliated restaurants | 1,116.7 | 943.6 | |||||
Total revenues | 4,399.7 | 3,799.7 | |||||
Operating costs and expenses | |||||||
Company-operated restaurant expenses | 2,827.4 | 2,509.4 | |||||
Franchised restaurants – occupancy expenses | 246.4 | 223.3 | |||||
Selling, general, and administrative expenses | 457.5 | 396.4 | |||||
Other operating (income) expense, net | 10.0 | (4.0 | ) | ||||
Total operating costs and expenses | 3,541.3 | 3,125.1 | |||||
Operating income | 858.4 | 674.6 | |||||
Interest expense | 91.7 | 101.8 | |||||
Nonoperating expense, net | 8.9 | 25.2 | |||||
Income before provision for income taxes and cumulative effect of accounting change | 757.8 | 547.6 | |||||
Provision for income taxes | 246.3 | 183.4 | |||||
Income before cumulative effect of accounting change | 511.5 | 364.2 | |||||
Cumulative effect of accounting change, net of tax benefit of $9.4 | — | (36.8 | ) | ||||
Net income | $ | 511.5 | $ | 327.4 | |||
Per common share: | |||||||
Income before cumulative effect of accounting change | $ | 0.41 | $ | 0.29 | |||
Cumulative effect of accounting change | — | (0.03 | ) | ||||
Net income | $ | 0.41 | $ | 0.26 | |||
Per common share–diluted: | |||||||
Income before cumulative effect of accounting change | $ | 0.40 | $ | 0.29 | |||
Cumulative effect of accounting change | — | (0.03 | ) | ||||
Net income | $ | 0.40 | $ | 0.26 | |||
Weighted average shares | 1,261.7 | 1,269.6 | |||||
Weighted average shares–diluted | 1,275.5 | 1,270.3 | |||||
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarters ended March 31 | ||||||||
| In millions | 2004 | 2003 | ||||||
Operating activities | ||||||||
Net income | $ | 511.5 | $ | 327.4 | ||||
Adjustments to reconcile to cash provided by operations | ||||||||
Cumulative effect of accounting change | — | 36.8 | ||||||
Depreciation and amortization | 297.2 | 287.2 | ||||||
Changes in working capital items | 42.3 | (157.4 | ) | |||||
Deferred income taxes | (13.1 | ) | 34.6 | |||||
Other | 27.2 | 23.5 | ||||||
Cash provided by operations | 865.1 | 552.1 | ||||||
Investing activities | ||||||||
Property and equipment expenditures | (180.3 | ) | (304.2 | ) | ||||
Purchases and sales of restaurant businesses and sales of property | 37.2 | (21.8 | ) | |||||
Other | (4.2 | ) | (35.7 | ) | ||||
Cash used for investing activities | (147.3 | ) | (361.7 | ) | ||||
Financing activities | ||||||||
Notes payable and long-term financing issuances and repayments | (11.6 | ) | (46.8 | ) | ||||
Treasury stock purchases | (291.5 | ) | — | |||||
Other | 62.1 | 14.0 | ||||||
Cash used for financing activities | (241.0 | ) | (32.8 | ) | ||||
Cash and equivalents increase | 476.8 | 157.6 | ||||||
Cash and equivalents at beginning of period | 492.8 | 330.4 | ||||||
Cash and equivalents at end of period | $ | 969.6 | $ | 488.0 | ||||
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s December 31, 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter ended March 31, 2004 do not necessarily indicate the results that may be expected for the full year.
The results of operations of restaurant businesses purchased and sold were not material to the condensed consolidated financial statements for periods prior to purchase and sale.
Change in Accounting Standard
Effective January 1, 2003, the Company adopted SFAS No. 143,Accounting for Asset Retirement Obligations. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. In first quarter 2003, the Company recorded a noncash charge of $36.8 million after tax ($0.03 per diluted share) related to lease obligations in certain international markets to reflect the cumulative effect of this accounting change. There is not a material effect to the Company’s ongoing results of operations or financial position as a result of adopting SFAS No. 143.
Comprehensive Income
The following table presents the components of comprehensive income for the first quarters ended March 31, 2004 and 2003:
Quarters ended March 31 | |||||||
| In millions | 2004 | 2003 | |||||
Net income | $ | 511.5 | $ | 327.4 | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustments | (20.5 | ) | 158.2 | ||||
Deferred hedging adjustments | 1.7 | 0.6 | |||||
Total other comprehensive income (loss) | (18.8 | ) | 158.8 | ||||
Total comprehensive income | $ | 492.7 | $ | 486.2 | |||
Accrued Restructuring and Restaurant Closing Costs
In 2003 and 2002, the Company recorded special charges primarily related to the disposition of certain non-McDonald’s brands, restaurant closings, and restructuring markets and eliminating positions. During the first quarter ended March 31, 2004, the Company made cash payments of $14.0 million primarily related to lease obligations. The remaining balance of $101.7 million at March 31, 2004 primarily related to lease obligations and employee-related costs.
Per Common Share Information
Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of stock options, calculated using the treasury stock method, of 13.8 million shares and 0.7 million shares for the first quarter 2004 and 2003, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 100.1 million shares and 208.1 million shares for the first quarter 2004 and 2003, respectively.
Stock-Based Compensation
The Company accounts for all stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25. The Company discloses pro forma net income and net income per common share, as provided by Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation.
6
The pro forma information was determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was estimated at the date of grant using an option pricing model. The model was designed to estimate the fair value of exchange-traded options that, unlike employee stock options, can be traded at any time and are fully transferable. In addition, such models require the input of highly subjective assumptions including the expected volatility of the stock price. For pro forma disclosures, the options’ estimated fair value was amortized over their vesting period.
Pro forma disclosures
| In millions, except per share data | 2004 | 2003 | ||||||
As reported – net income | $ | 511.5 | $ | 327.4 | ||||
Add: Total stock-based employee compensation included in reported net income, net of related tax effects | 1.4 | 0.4 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all rewards, net of related tax effects | (44.2 | ) | (65.8 | ) | ||||
Pro forma – net income | $ | 468.7 | $ | 262.0 | ||||
Net income per share: | ||||||||
As reported – basic | $ | 0.41 | $ | 0.26 | ||||
Pro forma – basic | $ | 0.37 | $ | 0.21 | ||||
As reported – diluted | $ | 0.40 | $ | 0.26 | ||||
Pro forma – diluted | $ | 0.37 | $ | 0.21 | ||||
Segment Information
The Company primarily operates and franchises McDonald’s restaurants in the food service industry. In addition, the Company operates certain non-McDonald’s brands that are not material to the Company’s overall results.
The following table presents the Company’s revenues and operating income by geographic segment. The APMEA segment represents McDonald’s restaurant operations in Asia/Pacific, the Middle East and Africa. The Other segment represents non-McDonald’s brands.
Quarters ended March 31 | ||||||||
| In millions | 2004 | 2003 | ||||||
Revenues | ||||||||
U.S. | $ | 1,490.0 | $ | 1,316.1 | ||||
Europe | 1,556.5 | 1,302.5 | ||||||
APMEA | 657.6 | 581.7 | ||||||
Latin America | 224.8 | 186.4 | ||||||
Canada | 198.9 | 151.1 | ||||||
Other | 271.9 | 261.9 | ||||||
Total revenues | $ | 4,399.7 | $ | 3,799.7 | ||||
Operating income (loss) | ||||||||
U.S. | $ | 516.8 | $ | 405.7 | ||||
Europe | 321.6 | 268.4 | ||||||
APMEA | 90.0 | 69.4 | ||||||
Latin America | (1.8 | ) | 2.2 | |||||
Canada | 33.3 | 26.2 | ||||||
Other | 0.7 | (12.9 | ) | |||||
Corporate | (102.2 | ) | (84.4 | ) | ||||
Total operating income | $ | 858.4 | $ | 674.6 | ||||
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED OPERATING RESULTS
Dollars in millions, except per common share data | Quarter ended March 31, 2004 | |||||
| Amount | % Increase/ (Decrease) | |||||
Revenues | ||||||
Sales by Company-operated restaurants | $ | 3,283.0 | 15 | |||
Revenues from franchised and affiliated restaurants | 1,116.7 | 18 | ||||
Total revenues | 4,399.7 | 16 | ||||
Operating costs and expenses | ||||||
Company-operated restaurant expenses | 2,827.4 | 13 | ||||
Franchised restaurants – occupancy expenses | 246.4 | 10 | ||||
Selling, general, and administrative expenses | 457.5 | 15 | ||||
Other operating expense, net | 10.0 | n/m | ||||
Total operating costs and expenses | 3,541.3 | 13 | ||||
Operating income | 858.4 | 27 | ||||
Interest expense | 91.7 | (10 | ) | |||
Nonoperating expense, net | 8.9 | (65 | ) | |||
Income before provision for income taxes and cumulative effect of accounting change | 757.8 | 38 | ||||
Provision for income taxes | 246.3 | 34 | ||||
Income before cumulative effect of accounting change | 511.5 | 40 | ||||
Net income | $ | 511.5 | 56 | |||
Per common share: | ||||||
Income before cumulative effect of accounting change | $ | 0.41 | 41 | |||
Net income | $ | 0.41 | 58 | |||
Per common share–diluted: | ||||||
Income before cumulative effect of accounting change | $ | 0.40 | 38 | |||
Net income | $ | 0.40 | 54 | |||
n/m Not meaningful
8
Net Income and Diluted Net Income Per Common Share
Income before the cumulative effect of accounting change increased $147.3 million or 40% and diluted income per common share before the cumulative effect of accounting change increased $0.11 or 38% for the quarter. Net income, including the cumulative effect of accounting change, increased $184.1 million or 56%, and diluted net income per common share increased $0.14 or 54%.
Diluted weighted average shares outstanding were higher for the quarter compared with the prior year due to a more dilutive effect from outstanding stock options, partly offset by share repurchases.
The Company repurchased $271 million of its common stock during the first quarter.
Cumulative Effect of Accounting Change
First quarter 2003 included a noncash charge of $36.8 million after tax ($0.03 per diluted share) for the cumulative effect of an accounting change that impacted lease obligations in certain international markets. See change in accounting standard on page 6 for further discussion of this charge.
Impact of Foreign Currencies on Reported Results
Management reviews and analyzes business results excluding the effect of foreign currency translation and bases certain compensation plans on these results because it believes they better represent the Company’s underlying business trends. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS Dollars in millions | |||||||||
| Reported amount | Currency translation benefit (loss) | ||||||||
Quarters ended March 31, | 2004 | 2003 | 2004 | ||||||
Revenues | $ | 4,399.7 | $ | 3,799.7 | $288.0 | ||||
Combined operating margins | 1,301.1 | 1,048.6 | 83.2 | ||||||
Selling, general & administrative expenses | 457.5 | 396.4 | (22.6 | ) | |||||
Operating income | 858.4 | 674.6 | 59.9 | ||||||
Income before cumulative effect of accounting change | 511.5 | 364.2 | 30.0 | ||||||
Income before cumulative effect of accounting change – per diluted common share | 0.40 | 0.29 | 0.02 | ||||||
Foreign currency translation had a positive impact on the growth rates of consolidated revenues, operating income and earnings per share for the quarter, primarily due to the strengthening of the Euro, as well as several other major currencies.
9
Revenues
Revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees primarily include rent, service fees and/or royalties that are based on a percent of sales, with specified minimum rent payments.
REVENUES Dollars in millions | ||||||||||||
| Quarters ended March 31, | 2004 | 2003 | % Inc / (Dec) | % Inc / Excluding Currency Translation | ||||||||
Company-operated sales: | ||||||||||||
U.S. | $ | 875.5 | $ | 790.0 | 11 | 11 | ||||||
Europe | 1,191.5 | 999.9 | 19 | 5 | ||||||||
APMEA | 577.1 | 517.4 | 12 | 4 | ||||||||
Latin America | 205.6 | 165.2 | 24 | 15 | ||||||||
Canada | 162.9 | 122.3 | 33 | 16 | ||||||||
Other | 270.4 | 261.3 | 3 | 3 | ||||||||
Total | $ | 3,283.0 | $ | 2,856.1 | 15 | 7 | ||||||
Franchised and affiliated revenues: | ||||||||||||
U.S. | $ | 614.5 | $ | 526.1 | 17 | 17 | ||||||
Europe | 365.0 | 302.6 | 21 | 4 | ||||||||
APMEA | 80.5 | 64.3 | 25 | 5 | ||||||||
Latin America | 19.2 | 21.2 | (9 | ) | (13 | ) | ||||||
Canada | 36.0 | 28.8 | 25 | 9 | ||||||||
Other | 1.5 | 0.6 | n/m | n/m | ||||||||
Total | $ | 1,116.7 | $ | 943.6 | 18 | 11 | ||||||
Total revenues: | ||||||||||||
U.S. | $ | 1,490.0 | $ | 1,316.1 | 13 | 13 | ||||||
Europe | 1,556.5 | 1,302.5 | 20 | 4 | ||||||||
APMEA | 657.6 | 581.7 | 13 | 4 | ||||||||
Latin America | 224.8 | 186.4 | 21 | 12 | ||||||||
Canada | 198.9 | 151.1 | 32 | 15 | ||||||||
Other | 271.9 | 261.9 | 4 | 4 | ||||||||
Total | $ | 4,399.7 | $ | 3,799.7 | 16 | 8 | ||||||
n/m Not meaningful
Consolidated revenues increased 16% (8% in constant currencies) as comparable sales were positive for each month of the quarter. The quarter’s performance benefited from an extra day due to leap year.
In the U.S., ongoing menu, service and value initiatives drove the strong revenue increase for the quarter. These initiatives included McGriddles breakfast sandwiches, Premium Salads, Chicken McNuggets made with white meat, the Dollar Menu, popular Happy Meals, extended hours and a heightened focus on operations. Franchised and affiliated revenues increased at a higher rate than Company-operated sales due to a higher percentage of franchised restaurants in 2004 than 2003. U.S. sales remained strong in April and although more difficult sales comparisons lie ahead, we remain confident that our combination of initiatives will continue to deliver solid results.
In Europe,the increase in revenues was driven by positive comparable sales in most markets, especially Russia. In April, sales trends improved significantly compared with March, following the successful launch of the Salads Plus menu in the U.K., Germany and other key markets. While still early, initial results are encouraging, and this menu will be expanded into additional European markets in the coming months.
In APMEA,the increase in revenues was primarily due to strong performance in Australia driven by the ongoing popularity of its Salads Plus menu, and positive comparable sales in China, partly offset by negative comparable sales in South Korea and Taiwan.
In Latin America, revenues increased for the quarter due to expansion in Mexico as well as the effect of lapping the temporary closure of restaurants in Venezuela for a portion of first quarter 2003 due to a national strike.
10
Comparable sales are a key performance indicator used within the retail industry and are reviewed by management to assess business trends for McDonald’s restaurants. Increases or decreases in comparable sales represent the percent change in constant currency sales from the same period in the prior year for all Systemwide restaurants in operation at least thirteen months.
| COMPARABLE SALES – McDONALD’S RESTAURANTS | |||||
| % Inc / (Dec) | |||||
| Quarters ended March 31, | 2004 | 2003 | |||
U.S. | 14.2 | (2.0 | ) | ||
Europe | 3.5 | (4.4 | ) | ||
APMEA | 5.0 | (8.3 | ) | ||
Latin America | 8.8 | 3.4 | |||
Canada | 10.7 | (6.1 | ) | ||
McDonald’s Restaurants | 9.4 | (3.6 | ) | ||
The following table presents Systemwide sales growth rates for the quarter. Systemwide sales include sales at all restaurants, whether operated by the Company, by franchisees or by affiliates. While sales by franchisees and affiliates are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised and affiliated revenues and are indicative of the financial health of our franchisee base.
| SYSTEMWIDE SALES PERCENT CHANGE | ||||
| Quarter ended March 31, 2004 | % Inc | % Inc Excluding Currency Translation | ||
U.S. | 15 | 15 | ||
Europe | 21 | 5 | ||
APMEA | 16 | 5 | ||
Latin America | 17 | 9 | ||
Canada | 29 | 13 | ||
Other | 1 | 1 | ||
Total | 17 | 10 | ||
Operating Margins
COMPANY-OPERATED AND FRANCHISED RESTAURANT MARGINS – McDONALD’S RESTAURANTS* Dollars in millions | |||||||||||||
| Percent | Amount | % Inc / (Dec) | |||||||||||
| Quarters ended March 31, | 2004 | 2003 | 2004 | 2003 | |||||||||
Company-operated | |||||||||||||
U.S. | 18.2 | 14.5 | $ | 159.5 | $ | 114.4 | 39 | ||||||
Europe | 14.4 | 13.8 | 171.1 | 138.1 | 24 | ||||||||
APMEA | 10.7 | 9.7 | 62.0 | 50.0 | 24 | ||||||||
Latin America | 8.0 | 7.8 | 16.5 | 12.9 | 28 | ||||||||
Canada | 14.1 | 10.9 | 23.0 | 13.3 | 73 | ||||||||
Total | 14.3 | 12.7 | $ | 432.1 | $ | 328.7 | 31 | ||||||
Franchised | |||||||||||||
U.S. | 79.3 | 77.2 | $ | 487.2 | $ | 405.9 | 20 | ||||||
Europe | 75.0 | 74.1 | 273.7 | 224.3 | 22 | ||||||||
APMEA | 85.7 | 83.8 | 69.0 | 53.9 | 28 | ||||||||
Latin America | 60.9 | 66.0 | 11.7 | 14.0 | (16 | ) | |||||||
Canada | 76.1 | 75.8 | 27.4 | 21.8 | 26 | ||||||||
Total | 77.9 | 76.3 | $ | 869.0 | $ | 719.9 | 21 | ||||||
| * | Operating margin information relates only to McDonald’s restaurants (excludes non-McDonald’s brands). |
11
Combined operating margin dollars increased $252.5 million or 24% for the quarter (16% in constant currencies). The U.S. and Europe segments accounted for more than 80% of the combined margin dollars in both years.
In the U.S., the Company-operated margin percent increased for the quarter primarily due to positive comparable sales, partly offset by higher commodity costs. Commodity cost pressures are expected to continue, with the impact lessening in the fourth quarter.
In Europe, the Company-operated margin percent improvement in 2004 reflected better margin performance in Germany, France and Russia and weak performance in the U.K. as we continue to establish an appropriate value strategy.
In APMEA, a strong comparable sales performance in Australia primarily drove the Company-operated margin percent improvement for the quarter.
The consolidated franchised margin percent increased for the quarter primarily due to strong comparable sales in the U.S., partly offset by the impact of a higher proportion of sites leased by the Company.
The following table presents margin components as a percent of sales.
COMPANY-OPERATED COSTS AND MARGINS AS A PERCENT OF SALES – McDONALD’S RESTAURANTS* | ||||
| Quarters ended March 31, | 2004 | 2003 | ||
Food & paper | 33.8 | 33.9 | ||
Payroll & employee benefits | 26.6 | 27.2 | ||
Occupancy & other operating expenses | 25.3 | 26.2 | ||
Total expenses | 85.7 | 87.3 | ||
Company-operated margins | 14.3 | 12.7 | ||
| * | Operating margin information relates only to McDonald’s restaurants (excludes non-McDonald’s brands). |
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased 15% for the quarter (10% in constant currencies) primarily due to higher performance-based incentive compensation, primarily in the U.S. Selling, general & administrative expenses as a percent of revenues were 10.4% and as a percent of Systemwide sales were 3.9% for both years.
Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET Dollars in millions | ||||||||
| Quarters ended March 31, | 2004 | 2003 | ||||||
Gains on sales of restaurant businesses | $ | (15.9 | ) | $ | (18.4 | ) | ||
Equity in earnings of unconsolidated affiliates | (10.9 | ) | (0.8 | ) | ||||
Other expense | 36.8 | 15.2 | ||||||
Total | $ | 10.0 | $ | (4.0 | ) | |||
Equity in earnings of unconsolidated affiliates increased for the quarter primarily due to stronger performance in the U.S. and improved results from our Japanese affiliate.
Other expense for 2004 reflected higher losses on property retirements and dispositions.
12
Operating Income
OPERATING INCOME Dollars in millions | ||||||||||||||
| Quarters ended March 31, | 2004 | 2003 | % Inc / (Dec) | % Inc /(Dec) Excluding Currency Translation | ||||||||||
U.S. | $ | 516.8 | $ | 405.7 | 27 | 27 | ||||||||
Europe | 321.6 | 268.4 | 20 | 4 | ||||||||||
APMEA | 90.0 | 69.4 | 30 | 9 | ||||||||||
Latin America | (1.8 | ) | 2.2 | n/m | n/m | |||||||||
Canada | 33.3 | 26.2 | 27 | 11 | ||||||||||
Other | 0.7 | (12.9 | ) | n/m | n/m | |||||||||
Corporate | (102.2 | ) | (84.4 | ) | (21 | ) | (21 | ) | ||||||
Total operating income | $ | 858.4 | $ | 674.6 | 27 | 18 | ||||||||
n/m Not meaningful
Consolidated operating income for the quarter increased due to higher combined operating margin dollars, partly offset by higher selling, general & administrative expenses and higher losses on property retirements and dispositions compared with 2003.
In the U.S., operating income increased for the quarter primarily due to higher combined operating margin dollars, partly offset by higher selling, general & administrative expenses.
In Europe, strong performances in Germany, France and Russia were partly offset by weak results in the U.K.
In APMEA, operating income increased primarily due to strong performance in Australia.
In Latin America, operating income declined primarily due to continuing difficult economic conditions in Brazil.
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
Interest expense decreased for the quarter due to lower average interest rates and debt levels, partly offset by stronger foreign currencies.
Nonoperating expense decreased for the quarter primarily due to losses on certain corporate investments in 2003.
The effective income tax rate was 32.5% for first quarter 2004 compared with 33.5% in 2003. The lower income tax rate in 2004 was primarily due to higher tax benefits in certain international markets.
CASH FLOWS AND FINANCIAL POSITION
Cash provided by operations totaled $865.1 million and exceeded capital expenditures by $684.8 million for the quarter. Cash provided by operations increased $313.0 million due to strong operating results, primarily in the U.S., and changes in working capital. Capital expenditures decreased $123.9 million or 41% for the quarter primarily due to lower restaurant openings in 2004, partly offset by stronger foreign currencies. As a result, the Company’s cash balance increased $476.8 million from December 31, 2003 to March 31, 2004. For the year, the Company expects capital expenditures to be $1.5 to $1.6 billion compared with $1.3 billion for 2003. See the followingOUTLOOKsection for the Company’s expectations regarding other uses of cash from operations in 2004.
Debt obligations at March 31, 2004 totaled $9,749.1 million compared with $9,730.5 million at December 31, 2003. The increase in 2004 is due to the impact of changes in exchange rates on foreign currency-denominated debt of $15.8 million and SFAS No. 133 noncash fair value adjustments of $14.4 million, partly offset by net repayments of $11.6 million.
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RESTAURANT INFORMATION
The following table presents restaurant information by ownership type.
| Restaurants at March 31, | 2004 | 2003 | ||
Operated by franchisees | 18,149 | 17,816 | ||
Operated by the Company | 8,982 | 9,147 | ||
Operated by affiliates | 4,023 | 4,209 | ||
Systemwide restaurants | 31,154 | 31,172 | ||
OUTLOOK
The information provided below is as of the date of this report.
| • | McDonald’s expects net restaurant additions to add approximately one percentage point to sales and operating income growth in 2004 (in constant currencies). Most of this anticipated growth will result from restaurants opened in 2003. |
In 2004, McDonald’s expects to open about 550 traditional McDonald’s restaurants and 300 satellite restaurants and close about 300 traditional restaurants and 100 satellite restaurants.
| • | McDonald’s does not provide specific guidance on comparable sales expectations. However, as a perspective, assuming no change in cost structure, a one percentage point increase in U.S. comparable sales would impact annual earnings per share by about 2 cents. Similarly, an increase of one percentage point in Europe’s comparable sales would impact annual earnings per share by about 1.5 cents. |
| • | McDonald’s expects full year 2004 selling, general & administrative expenses to be up modestly (less than 5%) in constant currencies and to decline as a percent of revenues and Systemwide sales compared with 2003. |
| • | A significant part of McDonald’s operating income is from outside the U.S., and about 70% of total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro and the British Pound. If the Euro and the British Pound both move 10% in the same direction (compared with 2003 average rates), McDonald’s annual earnings per share would change by about 5 to 6 cents. |
| • | For 2004, the Company expects its net debt principal repayments to be approximately $400 million to $700 million. As a result of repayments in 2003 and 2004, the Company expects interest expense to decrease about 4% to 8% compared with 2003, based on current interest and foreign currency exchange rates. |
| • | McDonald’s expects the effective income tax rate for 2004 to be between 32.0% and 33.0%. |
| • | McDonald’s expects capital expenditures for 2004 to be approximately $1.5 billion to $1.6 billion. |
| • | McDonald’s expects to return at least $1 billion to shareholders through dividends and share repurchases in 2004. The Company repurchased $271 million of its common stock during the first quarter. |
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this report. They use such words as “may,” “will,” “expect,” “believe,” “plan” and other similar terminology. These statements reflect management’s current expectations regarding future events and operating performance and speak only as of the date of this report. These forward-looking statements involve a number of risks and uncertainties. The following are some of the factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements: effectiveness of operating initiatives; success in advertising and promotional efforts; changes in global and local business and economic conditions, including their impact on consumer confidence; fluctuations in currency exchange and interest rates; food, labor and other operating costs; political or economic instability in local markets, including the effects of war and terrorist activities; competition, including pricing and marketing initiatives and new product offerings by the Company’s competitors; consumer preferences or perceptions concerning the Company’s product offerings; spending patterns and demographic trends; availability of qualified restaurant personnel; severe weather conditions; existence of positive or negative publicity regarding the Company or its industry generally; effects of legal claims; cost and deployment of capital; changes in future effective tax rates; changes in governmental regulations; and changes in applicable accounting policies and practices. The foregoing list of important factors is not all-inclusive.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosure made in the Annual Report on Form 10-K for the year ended December 31, 2003 regarding this matter.
Item 4. Controls and Procedures
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2004. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Such officers also confirm that there was no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The following table presents information related to repurchases of common stock the Company made during the three months ended March 31, 2004.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased Under the Program * | Maximum Dollar Amount that May Yet Be Purchased Under the Program | ||||
January 1-31, 2004 | 1,035,496 | $25.38 | 1,035,496 | $3,999,882,000 | ||||
February 1-29, 2004 | 4,452,546 | $27.31 | 4,452,546 | $3,878,267,000 | ||||
March 1-31, 2004 | 4,341,831 | $28.43 | 4,341,831 | $3,754,813,000 | ||||
Total | 9,829,873 | $27.60 | 9,829,873 | $3,754,813,000 | ||||
* In October 2001, the Company announced that its Board of Directors authorized a $5.0 billion share repurchase program with no specified expiration date. In accordance with the Company’s internal policy, the Company repurchases shares only during limited time frames in each month.
Item 6. Exhibits and Reports on Form 8-K
Exhibit Number | Description | |||||
| (3) | (a) | Restated Certificate of Incorporation, effective as of March 24, 1998, incorporated herein by reference from Form 8-K, dated April 17, 1998. | ||||
| (b) | By-Laws, effective as of July 11, 2002, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2002. | |||||
| (4) | Instruments defining the rights of security holders, including Indentures: ** | |||||
(a) | Senior Debt Securities Indenture, dated as of October 19, 1996, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration Statement (File No. 333-14141). | |||||
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| (i) | 6-3/8% Debentures due January 8, 2028. Supplemental Indenture No. 1, dated as of January 8, 1998, incorporated herein by reference from Exhibit (4)(a) of Form 8-K, dated January 5, 1998. | |||||
| (ii) | Medium-Term Notes, Series F, due from 1 Year to 60 Years from the Date of Issue. Supplemental Indenture No. 4, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-59145), dated July 15, 1998. | |||||
| (iii) | Medium-Term Notes, Series G, due from 1 Year to 60 Years from Date of Issue. Supplemental Indenture No. 6, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-60170), dated May 3, 2001. | |||||
| (iv) | Medium-Term Notes, Series H, due from 1 Year to 60 Years from Date of Issue. Supplemental Indenture No. 7, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-92212), dated July 10, 2002. | |||||
| (b) | Subordinated Debt Securities Indenture, dated as of October 18, 1996, incorporated herein by reference from Exhibit (4)(a) of Form 8-K, dated October 18, 1996. | |||||
| (i) | 7.31% Subordinated Deferrable Interest Debentures due 2027. Supplemental Indenture No. 3, dated September 24, 1997, incorporated herein by reference from Exhibit (4)(b) of Form 8-K, dated September 19, 1997. | |||||
| (c) | Debt Securities. Indenture, dated as of March 1, 1987, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration Statement (File No. 33-12364). | |||||
| (i) | 8-7/8% Debentures, due 2011. Supplemental Indenture No. 17, incorporated herein by reference from Exhibit (4) of Form 8-K, dated April 22, 1991. | |||||
| (ii) | Medium-Term Notes, Series D, due from nine months (U.S. Issue)/184 days (Euro Issue) to 60 years from Date of Issue. Supplemental Indenture No. 18, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration Statement (File No. 33-42642), dated September 10, 1991. | |||||
| (iii) | Medium-Term Notes, Series E, due from nine months (U.S. Issue)/ 184 days (Euro Issue) to 60 years from the Date of Issue. Supplemental Indenture No. 22, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration Statement (File No. 33-60939), dated July 13, 1995. | |||||
| (iv) | 7.05% Debentures, due 2025. Form of Supplemental Indenture No. 24, incorporated herein by reference from Exhibit (4)(a) of Form 8-K, dated November 13, 1995. | |||||
| (d) | McDonald’s Corporation 2002 QSC Rewards Program, effective as of February 13, 2002, incorporated herein by reference from Exhibit (4) of Form S-3A Registration Statement (File No. 333-82920), dated March 14, 2002. | |||||
| (i) | Prospectus dated March 15, 2002, incorporated by reference from Form 424(b)(4) (File No. 333-82920), filed March 20, 2002. | |||||
| (ii) | Prospectus Supplement (to Prospectus dated March 15, 2002) dated March 4, 2003, incorporated by reference from Form 424(b)(3) (File No. 333-82920). | |||||
| (iii) | Prospectus Supplement (to Prospectus dated March 15, 2002, and to Prospectus Supplement dated March 4, 2003) dated September 25, 2003, incorporated by reference from Form 424(b)(3) (File No. 333-82920). | |||||
| (10) | Material Contracts | |||||
| (a) | Directors’ Stock Plan, as amended and restated December 3, 2003, incorporated herein by reference from Form 10-K, for the year ended December 31, 2003.* | |||||
| (b) | Profit Sharing Program, as amended and restated, incorporated herein by reference from Form 10-K, for the year ended December 31, 1999.* | |||||
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| (i) | First Amendment to the McDonald’s Profit Sharing Program, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2000.* | |||||
| (ii) | Second Amendment to the McDonald’s Profit Sharing Program, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2001.* | |||||
| (iii) | Third Amendment to the McDonald’s Profit Sharing Program, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2001.* | |||||
| (iv) | Fourth Amendment to the McDonald’s Profit Sharing Program, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2002. * | |||||
| (c) | McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, incorporated herein by reference from Form 10-K, for the year ended December 31, 2001.* | |||||
| (i) | First Amendment to McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, incorporated herein by reference from Form 10-K, for the year ended December 31, 2002.* | |||||
| (d) | 1975 Stock Ownership Option Plan, as amended and restated, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2001.* | |||||
| (e) | 1992 Stock Ownership Incentive Plan, as amended and restated, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2001.* | |||||
| (f) | 1999 Non-Employee Director Stock Option Plan, as amended and restated, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2000.* | |||||
| (g) | Executive Retention Plan, as amended and restated January 21, 2004, incorporated herein by reference from Form 10-K, for the year ended December 31, 2003.* | |||||
| (h) | McDonald’s Corporation 2001 Omnibus Stock Ownership Plan, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2001.* | |||||
| (i) | Form of McDonald’s Corporation Tier I Change of Control Employment Agreement, as amended, authorized by the Board of Directors on December 3, 2003, incorporated herein by reference from Form 10-K, for the year ended December 31, 2003.* | |||||
| (12) | Computation of ratio of earnings to fixed charges | |||||
| (31.1) | Rule 13a – 14(a) Certification of Chief Executive Officer | |||||
| (31.2) | Rule 13a – 14(a) Certification of Chief Financial Officer | |||||
| (32.1) | Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
| (32.2) | Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
* Denotes compensatory plan.
** Other instruments defining the rights of holders of long-term debt of the registrant and all of its subsidiaries for which consolidated financial statements are required to be filed and which are not required to be registered with the Commission, are not included herein as the securities authorized under these instruments, individually, do not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of any such instruments to the Commission upon request has been filed with the Commission.
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The following reports on Form 8-K were filed during the last quarter covered by this report and subsequently through May 6, 2004.
Date of Report | Item Reported | Financial Statements Required to be Filed | ||||
3/5/04 | Item 12 | No | ||||
4/13/04 | Item 12 | No | ||||
4/19/04 | Item 5 | No | ||||
4/27/04 | Item 12 | No |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
McDONALD’S CORPORATION (Registrant) | ||||||||
| May 6, 2004 | /s/ Matthew H. Paull | |||||||
Matthew H. Paull Corporate Executive Vice President and Chief Financial Officer | ||||||||
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