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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 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) | |
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark 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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesþ No¨
1,257,205,376
(Number of shares of common stock
outstanding as of September 30, 2004)
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McDONALD’S CORPORATION
| Page Reference | ||||||
Part I. | Financial Information | |||||
Item 1 - | Financial Statements | |||||
| Condensed consolidated balance sheet, September 30, 2004 (unaudited) and December 31, 2003 | 3 | |||||
| Condensed consolidated statement of income (unaudited), quarters and nine months ended September 30, 2004 and 2003 | 4 | |||||
| Condensed consolidated statement of cash flows (unaudited), quarters and nine months ended September 30, 2004 and 2003 | 5 | |||||
| Notes to condensed consolidated financial statements (unaudited) | 6 | |||||
Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||||
Item 3 - | Quantitative and Qualitative Disclosures About Market Risk | 18 | ||||
Item 4 - | Controls and Procedures | 19 | ||||
Part II. | Other Information | |||||
Item 5 - | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | 19 | ||||
Item 6 - | Exhibits | 19 | ||||
| 22 | ||||||
Exhibits | 23 | |||||
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
| In millions, except per share data | (unaudited) September 30, | December 31, 2003 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and equivalents | $ | 1,556.9 | $ | 492.8 | ||||
Accounts and notes receivable | 648.7 | 734.5 | ||||||
Inventories, at cost, not in excess of market | 140.4 | 129.4 | ||||||
Prepaid expenses and other current assets | 561.8 | 528.7 | ||||||
Total current assets | 2,907.8 | 1,885.4 | ||||||
Other assets | ||||||||
Investments in and advances to affiliates | 1,054.2 | 1,089.6 | ||||||
Goodwill, net | 1,755.6 | 1,665.1 | ||||||
Miscellaneous | 970.1 | 960.3 | ||||||
Total other assets | 3,779.9 | 3,715.0 | ||||||
Property and equipment | ||||||||
Property and equipment, at cost | 29,071.7 | 28,740.2 | ||||||
Accumulated depreciation and amortization | (9,421.1 | ) | (8,815.5 | ) | ||||
Net property and equipment | 19,650.6 | 19,924.7 | ||||||
Total assets | $ | 26,338.3 | $ | 25,525.1 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 529.4 | $ | 577.4 | ||||
Dividend payable | 691.0 | — | ||||||
Income taxes | 71.4 | 71.5 | ||||||
Other taxes | 231.6 | 222.0 | ||||||
Accrued interest | 171.1 | 193.1 | ||||||
Accrued restructuring and restaurant closing costs | 79.7 | 115.7 | ||||||
Accrued payroll and other liabilities | 1,007.2 | 918.1 | ||||||
Current maturities of long-term debt | 170.6 | 388.0 | ||||||
Total current liabilities | 2,952.0 | 2,485.8 | ||||||
Long-term debt | 8,692.7 | 9,342.5 | ||||||
Other long-term liabilities and minority interests | 707.2 | 699.8 | ||||||
Deferred income taxes | 1,025.8 | 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 | 2,016.2 | 1,837.5 | ||||||
Unearned ESOP compensation | (85.8 | ) | (90.5 | ) | ||||
Retained earnings | 21,362.8 | 20,172.3 | ||||||
Accumulated other comprehensive income (loss) | (644.0 | ) | (635.5 | ) | ||||
Common stock in treasury, at cost; 403.4 and 398.7 million shares | (9,705.2 | ) | (9,318.5 | ) | ||||
Total shareholders’ equity | 12,960.6 | 11,981.9 | ||||||
Total liabilities and shareholders’ equity | $ | 26,338.3 | $ | 25,525.1 | ||||
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
| In millions, except per common share data | Quarters Ended September 30 | Nine Months Ended September 30 | |||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||
Revenues | |||||||||||||
Sales by Company-operated restaurants | $ | 3,664.8 | $ | 3,351.2 | $ | 10,459.7 | $ | 9,397.0 | |||||
Revenues from franchised and affiliated restaurants | 1,260.9 | 1,153.4 | 3,594.7 | 3,188.1 | |||||||||
Total revenues | 4,925.7 | 4,504.6 | 14,054.4 | 12,585.1 | |||||||||
Operating costs and expenses | |||||||||||||
Company-operated restaurant expenses | 3,086.3 | 2,840.6 | 8,899.2 | 8,094.0 | |||||||||
Franchised restaurants – occupancy expenses | 252.9 | 236.0 | 745.0 | 690.3 | |||||||||
Selling, general, and administrative expenses | 474.6 | 456.3 | 1,428.6 | 1,319.1 | |||||||||
Other operating expense, net | 13.0 | 7.8 | 58.4 | 17.0 | |||||||||
Total operating costs and expenses | 3,826.8 | 3,540.7 | 11,131.2 | 10,120.4 | |||||||||
Operating income | 1,098.9 | 963.9 | 2,923.2 | 2,464.7 | |||||||||
Interest expense | 88.1 | 93.8 | 267.9 | 297.3 | |||||||||
Nonoperating expense, net | 5.3 | 47.0 | 26.1 | 88.5 | |||||||||
Income before provision for income taxes and cumulative effect of accounting change | 1,005.5 | 823.1 | 2,629.2 | 2,078.9 | |||||||||
Provision for income taxes | 227.1 | 275.7 | 748.6 | 696.4 | |||||||||
Income before cumulative effect of accounting change | 778.4 | 547.4 | 1,880.6 | 1,382.5 | |||||||||
Cumulative effect of accounting change, net of tax benefit of $9.4 | (36.8 | ) | |||||||||||
Net income | $ | 778.4 | $ | 547.4 | $ | 1,880.6 | $ | 1,345.7 | |||||
Per common share: | |||||||||||||
Income before cumulative effect of accounting change | $ | 0.62 | $ | 0.43 | $ | 1.49 | $ | 1.09 | |||||
Cumulative effect of accounting change | (0.03 | ) | |||||||||||
Net income | $ | 0.62 | $ | 0.43 | $ | 1.49 | $ | 1.06 | |||||
Per common share–diluted: | |||||||||||||
Income before cumulative effect of accounting change | $ | 0.61 | $ | 0.43 | $ | 1.48 | $ | 1.08 | |||||
Cumulative effect of accounting change | (0.03 | ) | |||||||||||
Net income | $ | 0.61 | $ | 0.43 | $ | 1.48 | $ | 1.05 | |||||
Dividends declared per common share | $ | 0.55 | $ | 0.40 | $ | 0.55 | $ | 0.40 | |||||
Weighted average shares | 1,256.7 | 1,271.5 | 1,258.1 | 1,271.2 | |||||||||
Weighted average shares–diluted | 1,268.4 | 1,281.0 | 1,270.6 | 1,276.2 | |||||||||
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarters Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| In millions | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 778.4 | $ | 547.4 | $ | 1,880.6 | $ | 1,345.7 | ||||||||
Adjustments to reconcile to cash provided by operations | ||||||||||||||||
Cumulative effect of accounting change | 36.8 | |||||||||||||||
Depreciation and amortization | 293.2 | 274.9 | 882.6 | 832.6 | ||||||||||||
Deferred income taxes | (48.1 | ) | 131.8 | (48.7 | ) | 219.1 | ||||||||||
Changes in working capital items | 217.1 | 49.7 | 151.8 | (215.1 | ) | |||||||||||
Other | 30.2 | 26.4 | 89.9 | 49.1 | ||||||||||||
Cash provided by operations | 1,270.8 | 1,030.2 | 2,956.2 | 2,268.2 | ||||||||||||
Investing activities | ||||||||||||||||
Property and equipment expenditures | (311.7 | ) | (257.5 | ) | (795.5 | ) | (878.0 | ) | ||||||||
Purchases and sales of restaurant businesses and sales of property | 14.3 | 9.9 | 94.8 | 18.9 | ||||||||||||
Other | (13.7 | ) | (16.9 | ) | (44.0 | ) | (46.0 | ) | ||||||||
Cash used for investing activities | (311.1 | ) | (264.5 | ) | (744.7 | ) | (905.1 | ) | ||||||||
Financing activities | ||||||||||||||||
Notes payable and long-term financing issuances and repayments | (342.3 | ) | (530.8 | ) | (779.7 | ) | (921.7 | ) | ||||||||
Treasury stock purchases | (77.2 | ) | (139.5 | ) | (611.0 | ) | (165.5 | ) | ||||||||
Stock option exercises | 78.1 | 27.4 | 308.3 | 102.5 | ||||||||||||
Other | 7.8 | 4.2 | (65.0 | ) | (61.4 | ) | ||||||||||
Cash used for financing activities | (333.6 | ) | (638.7 | ) | (1,147.4 | ) | (1,046.1 | ) | ||||||||
Cash and equivalents increase | 626.1 | 127.0 | 1,064.1 | 317.0 | ||||||||||||
Cash and equivalents at beginning of period | 930.8 | 520.4 | 492.8 | 330.4 | ||||||||||||
Cash and equivalents at end of period | $ | 1,556.9 | $ | 647.4 | $ | 1,556.9 | $ | 647.4 | ||||||||
See notes to condensed consolidated financial statements.
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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 and nine months ended September 30, 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 quarters and nine months ended September 30, 2004 and 2003:
Quarters Ended September 30 | Nine Months Ended September 30 | ||||||||||||
| In millions | 2004 | 2003 | 2004 | 2003 | |||||||||
Net income | $ | 778.4 | $ | 547.4 | $ | 1,880.6 | $ | 1,345.7 | |||||
Other comprehensive income (loss): | |||||||||||||
Foreign currency translation adjustments | 192.8 | 40.9 | (10.7 | ) | 575.5 | ||||||||
Deferred hedging adjustments | 0.5 | 7.7 | 2.2 | 7.1 | |||||||||
Total other comprehensive income (loss) | 193.3 | 48.6 | (8.5 | ) | 582.6 | ||||||||
Total comprehensive income | $ | 971.7 | $ | 596.0 | $ | 1,872.1 | $ | 1,928.3 | |||||
Accrued Restructuring and Restaurant Closing Costs
In 2003 and 2002, the Company recorded certain charges primarily related to the disposition of certain non-McDonald’s brands, restaurant closings, restructuring markets and eliminating positions. The Company made cash payments of $7.8 million during the third quarter and $36.0 million during the nine months ended September 30, 2004, primarily related to lease obligations. The remaining balance of $79.7 million at September 30, 2004 primarily related to lease obligations.
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-based employee compensation, calculated using the treasury stock method, of 11.7 million shares and 9.5 million shares for the third quarter 2004 and 2003, respectively, and 12.5 million shares and 5.0 million shares for the nine months ended September 30, 2004 and 2003, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 83.5 million shares and 159.1 million shares for the third quarter 2004 and 2003, respectively, and 90.0 million shares and 167.1 million shares for the nine months ended September 30, 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.
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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 | Quarters Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
| In millions, except per share data | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income, as reported | $ | 778.4 | $ | 547.4 | $ | 1,880.6 | $ | 1,345.7 | ||||||||
Add: Total stock-based employee compensation included in reported net income, net of related tax effects | 1.2 | 1.3 | 5.5 | 3.1 | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | (34.5 | ) | (50.8 | ) | (116.7 | ) | (172.0 | ) | ||||||||
Pro forma-net income | $ | 745.1 | $ | 497.9 | $ | 1,769.4 | $ | 1,176.8 | ||||||||
Net income per share: | ||||||||||||||||
As reported-basic | $ | 0.62 | $ | 0.43 | $ | 1.49 | $ | 1.06 | ||||||||
Pro forma-basic | $ | 0.59 | $ | 0.39 | $ | 1.41 | $ | 0.93 | ||||||||
As reported-diluted | $ | 0.61 | $ | 0.43 | $ | 1.48 | $ | 1.05 | ||||||||
Pro forma-diluted | $ | 0.59 | $ | 0.39 | $ | 1.40 | $ | 0.92 | ||||||||
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 September 30 | Nine Months Ended September 30 | |||||||||||||||
| In millions | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Revenues | ||||||||||||||||
U.S. | $ | 1,702.9 | $ | 1,593.5 | $ | 4,855.4 | $ | 4,460.6 | ||||||||
Europe | 1,717.6 | 1,525.4 | 4,936.4 | 4,291.2 | ||||||||||||
APMEA | 708.2 | 659.3 | 2,029.4 | 1,811.8 | ||||||||||||
Latin America | 260.8 | 221.3 | 718.9 | 620.4 | ||||||||||||
Canada | 242.7 | 213.8 | 663.1 | 561.6 | ||||||||||||
Other | 293.5 | 291.3 | 851.2 | 839.5 | ||||||||||||
Total revenues | $ | 4,925.7 | $ | 4,504.6 | $ | 14,054.4 | $ | 12,585.1 | ||||||||
Operating income (loss) | ||||||||||||||||
U.S. | $ | 627.8 | $ | 571.0 | $ | 1,748.8 | $ | 1,480.0 | ||||||||
Europe | 412.7 | 382.6 | 1,103.4 | 980.8 | ||||||||||||
APMEA | 96.4 | 91.4 | 252.6 | 208.7 | ||||||||||||
Latin America | 2.3 | (20.2 | ) | (1.3 | ) | (15.2 | ) | |||||||||
Canada | 54.4 | 47.3 | 130.8 | 114.4 | ||||||||||||
Other | 8.2 | (0.2 | ) | 14.7 | (23.4 | ) | ||||||||||
Corporate | (102.9 | ) | (108.0 | ) | (325.8 | ) | (280.6 | ) | ||||||||
Total operating income | $ | 1,098.9 | $ | 963.9 | $ | 2,923.2 | $ | 2,464.7 | ||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Description of Business
The Company primarily operates and franchises McDonald’s restaurants. In addition, the Company operates certain non-McDonald’s brands that are not material to the Company’s overall results. Of the more than 30,000 McDonald’s restaurants in over 100 countries, more than 8,000 are operated by the Company, approximately 18,000 are operated by franchisees and about 4,000 are operated by affiliates under license agreements. In general, the Company owns the land and building or secures long-term leases for restaurant sites regardless of who operates the restaurant. This ensures long-term occupancy rights and helps control related costs.
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. Fees vary by type of site, amount of Company investment and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise agreements that generally have 20-year terms.
The business is managed as distinct geographic segments: United States; Europe; Asia/Pacific, the Middle East and Africa (APMEA); Latin America; and Canada. In addition, throughout this report we present a segment entitled “Other” that includes non-McDonald’s brands. The U.S. and Europe segments account for approximately 70% of total revenues.
Strategic Direction
In early 2003, the Company introduced a comprehensive revitalization plan to increase McDonald’s relevance to today’s consumers as well as improve our financial discipline. We redefined our strategy to emphasize growth through adding more customers to existing restaurants. In line with this, we took a more disciplined approach to capital allocation and put a greater emphasis on controlling expenses. We aligned the System around our customer-focused Plan to Win, designed to deliver operational excellence and leadership marketing. This Plan contains aggressive goals and measures for success based on the five drivers of exceptional customer experiences—people, products, place, price and promotion.
In 2003, we made significant progress in operational excellence and leadership marketing. We also made progress from a financial perspective. We improved our comparable sales and Company-operated margin trends, reduced capital expenditures by $700 million, paid down about $900 million of debt, bought back stock and increased the dividend by 70%.
The progress has continued into 2004. We are focused on providing better service; further enhancing our food taste, menu variety and value offerings; and creating more relevant marketing. The Company has fortified its foundation and is positioned for future growth. We continue to exercise strong financial discipline by managing costs and using our significant and growing cash flow to invest in the business and strengthen our balance sheet. We continue to pay down debt and plan to return at least $1.3 billion to shareholders during the year through share repurchases and dividends.
For each quarter of 2004, McDonald’s increased customer visits, improved margins and delivered double-digit growth in earnings per share.
In the U.S., results were strong, especially in the face of increasingly difficult year-over-year comparisons. Our U.S. business has now posted comparable sales increases along with meaningful margin expansion for six consecutive quarters.
In Europe, high unemployment and low consumer confidence in Germany continue to negatively impact our growth and we expect these challenges to continue to impact our performance in the near-term. We are leveraging the strengths of our everyday value offerings to attract more consumers in this challenging economic environment. In the U.K., we are starting to make progress renewing consumer excitement in our Brand with enhanced food taste and variety and improved service.
For McDonald’s Asia/Pacific, Middle East and Africa segment comparable sales trends were strong in 2004, driven by efforts in Japan, Australia and China to distinguish our Brand through added value and menu variety.
Looking ahead, we will continue to face difficult sales comparisons as well as economic challenges in some key markets outside the U.S. Yet, we remain confident that our initiatives will continue to generate solid results and build on the foundation established last year.
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Our goal is to strengthen our business in the near term and to deliver sustainable growth and returns over the long term. For 2005 and beyond, we are targeting average annual Systemwide sales and revenue growth of 3 percent to 5 percent, average annual operating income growth of 6 percent to 7 percent, and annual returns on incremental invested capital in the high teens. These targets exclude the impact of foreign currency translation.
Operating Highlights Included:
| • | Consolidated revenues increased 9% (6% in constant currencies) for the quarter and 12% (7% in constant currencies) for the nine months. |
| • | Comparable sales increased 5.8% for the quarter and 7.6% for the nine months. |
| • | Company-operated restaurant margins increased $63 million ($41 million in constant currencies) and 40 basis points for the quarter and $241 million ($171 million in constant currencies) and 100 basis points for the nine months. |
| • | Franchised restaurant margins increased $89 million ($58 million in constant currencies) and 40 basis points for the quarter and $349 million ($242 million in constant currencies) and 100 basis points for the nine months. |
| • | Operating income increased 14% (10% in constant currencies) for the quarter and 19% (13% in constant currencies) for the nine months. |
| • | Net income per common share increased 42% (37% in constant currencies) to $0.61 for the quarter and 37% (32% in constant currencies) to $1.48 for the nine months. In both periods, earnings per share included a significantly lower tax rate compared with prior year. |
| • | In third quarter, McDonald’s Board of Directors approved a 38% increase in the Company’s annual dividend, boosting the annual cash payout to 55 cents per share, or $691 million. |
| • | Cash provided by operations increased $688 million or 30% to nearly $3.0 billion for the nine months. |
| • | We repaid $780 million of debt and repurchased about $600 million of stock during the nine months. |
Outlook
| • | 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 500 traditional McDonald’s restaurants and 250 satellite restaurants and close about 200 traditional restaurants and 150 satellite restaurants. |
| • | McDonald’s does not provide specific guidance on changes in comparable sales. 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 cents to 6 cents. |
| • | For 2004, the Company expects its net debt principal repayments to be approximately $800 million to $900 million. At the end of 2003, McDonald’s debt-to-capital ratio was 44%. We are targeting a debt-to-capital ratio of 35%-40% over the next couple of years. As a result of repayments in 2003 and 2004, the Company expects interest expense to decrease about 8% to 10% compared with 2003, based on current interest and foreign currency exchange rates. |
| • | McDonald’s expects the effective income tax rate for the fourth quarter 2004 to be approximately 30%. This excludes the impact of U.S. legislation signed into law October 2004. However, based on our preliminary review, we currently expect it to have a limited effect on McDonald’s reported results. |
| • | McDonald’s expects capital expenditures for 2004 to be approximately $1.5 billion to $1.6 billion. |
| • | McDonald’s expects to return at least $1.3 billion to shareholders through dividends and share repurchases in 2004. |
The Following Definitions Apply to These Terms as Used Throughout This Form 10-Q:
| • | Constant currency results are calculated by translating current year results at prior year average exchange rates. 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. |
| • | Systemwide sales include sales at all restaurants, including those operated by the Company, franchisees and affiliates. Management believes Systemwide sales information is useful in analyzing the Company’s revenues because franchisees and affiliates pay rent, service fees and/or royalties that generally are based on a percent of sales with specified minimum rent payments. |
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| • | Comparable sales represent sales at all McDonald’s restaurants in operation at least thirteen months, excluding the impact of currency translation. Management reviews the increase or decrease in comparable sales compared with the same period in the prior year to assess business trends. |
Forward-Looking Statements
A number of factors can affect our business, including the effectiveness of operating initiatives and changes in global and local business and economic conditions. These and other risks are noted in the Forward-Looking Statements at the end of Management’s Discussion and Analysis.
CONSOLIDATED OPERATING RESULTS
| Dollars in millions, except per common share data | Quarter Ended September 30, 2004 | Nine Months Ended September 30, 2004 | ||||||||||
| Amount | % Increase / (Decrease) | Amount | % Increase / (Decrease) | |||||||||
Revenues | ||||||||||||
Sales by Company-operated restaurants | $ | 3,664.8 | 9 | $ | 10,459.7 | 11 | ||||||
Revenues from franchised and affiliated restaurants | 1,260.9 | 9 | 3,594.7 | 13 | ||||||||
Total revenues | 4,925.7 | 9 | 14,054.4 | 12 | ||||||||
Operating costs and expenses | ||||||||||||
Company-operated restaurant expenses | 3,086.3 | 9 | 8,899.2 | 10 | ||||||||
Franchised restaurants – occupancy expenses | 252.9 | 7 | 745.0 | 8 | ||||||||
Selling, general, and administrative expenses | 474.6 | 4 | 1,428.6 | 8 | ||||||||
Other operating expense, net | 13.0 | 67 | 58.4 | n/m | ||||||||
Total operating costs and expenses | 3,826.8 | 8 | 11,131.2 | 10 | ||||||||
Operating income | 1,098.9 | 14 | 2,923.2 | 19 | ||||||||
Interest expense | 88.1 | (6 | ) | 267.9 | (10 | ) | ||||||
Nonoperating expense, net | 5.3 | (89 | ) | 26.1 | (71 | ) | ||||||
Income before provision for income taxes and cumulative effect of accounting change | 1,005.5 | 22 | 2,629.2 | 26 | ||||||||
Provision for income taxes | 227.1 | (18 | ) | 748.6 | 7 | |||||||
Income before cumulative effect of accounting change | 778.4 | 42 | 1,880.6 | 36 | ||||||||
Net income | $ | 778.4 | 42 | $ | 1,880.6 | 40 | ||||||
Per common share: | ||||||||||||
Income before cumulative effect of accounting change | $ | 0.62 | 44 | $ | 1.49 | 37 | ||||||
Net income | $ | 0.62 | 44 | $ | 1.49 | 41 | ||||||
Per common share–diluted: | ||||||||||||
Income before cumulative effect of accounting change | $ | 0.61 | 42 | $ | 1.48 | 37 | ||||||
Net income | $ | 0.61 | 42 | $ | 1.48 | 41 | ||||||
n/m Not meaningful
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Net Income and Diluted Net Income Per Common Share
For the quarter, net income increased $231.0 million or 42%, and diluted income per common share increased $0.18 or 42%.
For the nine months, income before the cumulative effect of accounting changes increased $498.1 million or 36%, and diluted income per common share before the cumulative effect of accounting change increased $0.40 or 37%. Net income, including the cumulative effect of the accounting change, increased $534.9 million or 40% and diluted net income per common share increased $0.43 or 41%.
Diluted weighted average shares outstanding were lower for both periods compared with the prior year due to shares repurchased partially offset by higher dilution from outstanding stock options.
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 note on page 6 for further discussion of this charge.
Impact of Foreign Currency Translation on Reported Results
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS Dollars in millions |
| |||||||||
Quarters Ended September 30, | | Reported Amount 2004 2003 | | Currency Translation Benefit (Loss 2004 | ) | |||||
Revenues | $ | 4,925.7 | $ | 4,504.6 | $ | 170.3 | ||||
Combined operating margins* | 1,554.6 | 1,402.3 | 53.6 | |||||||
Selling, general & administrative expenses | 474.6 | 456.3 | (11.5 | ) | ||||||
Operating income | 1,098.9 | 963.9 | 42.5 | |||||||
Net income | 778.4 | 547.4 | 24.7 | |||||||
Net income per common share – diluted | 0.61 | 0.43 | 0.02 | |||||||
Nine Months Ended September 30, | 2004 | 2003 | 2004 | |||||||
Revenues | $ | 14,054.4 | $ | 12,585.1 | $ | 593.7 | ||||
Combined operating margins* | 4,322.7 | 3,732.6 | 176.9 | |||||||
Selling, general & administrative expenses | 1,428.6 | 1,319.1 | (43.5 | ) | ||||||
Operating income | 2,923.2 | 2,464.7 | 133.1 | |||||||
Income before cumulative effect of accounting change | 1,880.6 | 1,382.5 | 69.0 | |||||||
Income before cumulative effect of accounting change – per diluted common share | 1.48 | 1.08 | 0.05 | |||||||
| * | Excludes non-McDonald’s brands |
Foreign currency translation had a positive impact on the growth rates of consolidated revenues, operating income and earnings per share for the quarter and nine months, primarily due to the strengthening of the Euro and British Pound.
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Revenues
REVENUES Dollars in millions |
| |||||||||||
Quarters Ended September 30, | 2004 | 2003 | % Inc / (Dec | ) | % Inc / (Dec) Excluding Currency Translation | | ||||||
Company-operated sales | ||||||||||||
U.S. | $ | 995.0 | $ | 941.7 | 6 | 6 | ||||||
Europe | 1,315.9 | 1,161.4 | 13 | 3 | ||||||||
APMEA | 625.3 | 584.3 | 7 | 5 | ||||||||
Latin America | 240.5 | 199.6 | 20 | 25 | ||||||||
Canada | 196.6 | 173.7 | 13 | 7 | ||||||||
Other | 291.5 | 290.5 | — | — | ||||||||
Total | $ | 3,664.8 | $ | 3,351.2 | 9 | 5 | ||||||
Franchised and affiliated revenues | ||||||||||||
U.S. | $ | 707.9 | $ | 651.8 | 9 | 9 | ||||||
Europe | 401.7 | 364.0 | 10 | 1 | ||||||||
APMEA | 82.9 | 75.0 | 11 | 4 | ||||||||
Latin America | 20.3 | 21.7 | (6 | ) | (2 | ) | ||||||
Canada | 46.1 | 40.1 | 15 | 9 | ||||||||
Other | 2.0 | 0.8 | n/m | n/m | ||||||||
Total | $ | 1,260.9 | $ | 1,153.4 | 9 | 6 | ||||||
Total revenues | ||||||||||||
U.S. | $ | 1,702.9 | $ | 1,593.5 | 7 | 7 | ||||||
Europe | 1,717.6 | 1,525.4 | 13 | 3 | ||||||||
APMEA | 708.2 | 659.3 | 7 | 5 | ||||||||
Latin America | 260.8 | 221.3 | 18 | 22 | ||||||||
Canada | 242.7 | 213.8 | 14 | 8 | ||||||||
Other | 293.5 | 291.3 | 1 | 1 | ||||||||
Total | $ | 4,925.7 | $ | 4,504.6 | 9 | 6 | ||||||
n/m Not meaningful
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REVENUES Dollars in millions |
| |||||||||||
| Nine Months Ended September 30, | 2004 | 2003 | % Inc / (Dec | ) | % Inc /(Dec) Excluding Currency Translation | | ||||||
Company-operated sales | ||||||||||||
U.S. | $ | 2,840.9 | $ | 2,662.3 | 7 | 7 | ||||||
Europe | 3,784.0 | 3,279.8 | 15 | 5 | ||||||||
APMEA | 1,788.0 | 1,605.9 | 11 | 7 | ||||||||
Latin America | 660.0 | 556.1 | 19 | 19 | ||||||||
Canada | 540.3 | 455.4 | 19 | 11 | ||||||||
Other | 846.5 | 837.5 | 1 | 1 | ||||||||
Total | $ | 10,459.7 | $ | 9,397.0 | 11 | 6 | ||||||
Franchised and affiliated revenues | ||||||||||||
U.S. | $ | 2,014.5 | $ | 1,798.3 | 12 | 12 | ||||||
Europe | 1,152.4 | 1,011.4 | 14 | 3 | ||||||||
APMEA | 241.4 | 205.9 | 17 | 5 | ||||||||
Latin America | 58.9 | 64.3 | (8 | ) | (6 | ) | ||||||
Canada | 122.8 | 106.2 | 16 | 8 | ||||||||
Other | 4.7 | 2.0 | n/m | n/m | ||||||||
Total | $ | 3,594.7 | $ | 3,188.1 | 13 | 8 | ||||||
Total revenues | ||||||||||||
U.S. | $ | 4,855.4 | $ | 4,460.6 | 9 | 9 | ||||||
Europe | 4,936.4 | 4,291.2 | 15 | 4 | ||||||||
APMEA | 2,029.4 | 1,811.8 | 12 | 7 | ||||||||
Latin America | 718.9 | 620.4 | 16 | 16 | ||||||||
Canada | 663.1 | 561.6 | 18 | 10 | ||||||||
Other | 851.2 | 839.5 | 1 | 1 | ||||||||
Total | $ | 14,054.4 | $ | 12,585.1 | 12 | 7 | ||||||
n/m Not meaningful
In the U.S., the increase in revenues for the quarter and nine months is due to alignment, focus and discipline behind delivering menu variety, choice and value, better tasting food, more convenient hours, stronger marketing and improved service. Franchised and affiliated revenues increased at a higher rate than Company-operated sales for both periods due to a higher percentage of franchised restaurants in 2004 compared with 2003. We remain confident that our combination of initiatives will continue to generate solid results and build on the foundation established last year.
In Europe, the increase in revenues for both periods was due to strong comparable sales in Russia, which is entirely Company-operated, positive comparable sales in France and the U.K and expansion. Germany’s poor performance had a negative impact on the quarter.
In APMEA, the increase in revenues for the quarter and nine months was primarily due to strong performance in China and Australia as well as positive comparable sales in many other markets.
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The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2004 and 2003:
| COMPARABLE SALES – McDONALD’S RESTAURANTS* | ||||||||||||
| % Increase / (Decrease) | ||||||||||||
| Quarters Ended September 30, | | Nine Months Ended September 30, | | |||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
U.S. | 8.5 | 9.5 | 10.4 | 4.3 | ||||||||
Europe | 0.3 | (0.1 | ) | 2.7 | (2.0 | ) | ||||||
APMEA | 5.4 | (3.9 | ) | 6.5 | (6.2 | ) | ||||||
Latin America | 15.5 | (1.8 | ) | 11.2 | 2.5 | |||||||
Canada | 5.5 | 0.7 | 7.2 | (1.8 | ) | |||||||
McDonald’s Restaurants | 5.8 | 3.9 | 7.6 | 0.7 | ||||||||
* Excludes non-McDonald’s brands. | ||||||||||||
The following table presents Systemwide sales growth rates for the quarter and nine months ended September 30, 2004: |
| |||||||||||
| SYSTEMWIDE SALES PERCENT INCREASE / (DECREASE) | ||||||||||||
| Quarter Ended September 30, 2004 | | Nine Months Ended September 30, 2004 | | |||||||||
| % Inc / (Dec | ) | % Inc /(Dec) Excluding Currency Translation | | % Inc / (Dec | ) | % Inc /(Dec) Excluding Currency Translation | | |||||
U.S. | 9 | 9 | 11 | 11 | ||||||||
Europe | 11 | 2 | 15 | 4 | ||||||||
APMEA | 11 | 6 | 14 | 6 | ||||||||
Latin America | 12 | 16 | 11 | 12 | ||||||||
Canada | 13 | 7 | 16 | 9 | ||||||||
Other* | (2 | ) | (2 | ) | (1 | ) | (1 | ) | ||||
Total sales | 10 | 6 | 12 | 8 | ||||||||
| * | Reflects the sale of Donatos Pizzeria and the closing of all Donatos and Boston Market international locations in fourth quarter 2003. |
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Operating Margins
COMPANY-OPERATED AND FRANCHISED RESTAURANT MARGINS – McDONALD’S RESTAURANTS Dollars in millions |
| ||||||||||||
| Percent | Amount | % Inc / (Dec) | | ||||||||||
Quarters Ended September 30, | 2004 | 2003 | 2004 | 2003 | |||||||||
Company-operated | |||||||||||||
U.S. | 19.6 | 18.6 | $ | 194.9 | $ | 175.5 | 11 | ||||||
Europe | 16.7 | 17.0 | 219.2 | 197.5 | 11 | ||||||||
APMEA | 12.3 | 12.2 | 76.7 | 71.4 | 7 | ||||||||
Latin America | 10.0 | 5.7 | 24.0 | 11.4 | n/m | ||||||||
Canada | 17.1 | 17.1 | 33.6 | 29.7 | 13 | ||||||||
Total | 16.3 | 15.9 | $ | 548.4 | $ | 485.5 | 13 | ||||||
Franchised | |||||||||||||
U.S. | 81.3 | 80.4 | $ | 575.5 | $ | 524.3 | 10 | ||||||
Europe | 77.2 | 77.4 | 310.2 | 281.6 | 10 | ||||||||
APMEA | 85.8 | 86.7 | 71.1 | 65.0 | 9 | ||||||||
Latin America | 63.5 | 64.7 | 13.0 | 14.1 | (8 | ) | |||||||
Canada | 79.2 | 79.3 | 36.4 | 31.8 | 14 | ||||||||
Total | 79.9 | 79.5 | $ | 1,006.2 | $ | 916.8 | 10 | ||||||
Nine Months Ended September 30, | 2004 | 2003 | 2004 | 2003 | |||||||||
Company-operated | |||||||||||||
U.S. | 19.1 | 17.3 | $ | 544.0 | $ | 461.6 | 18 | ||||||
Europe | 15.5 | 15.5 | 587.6 | 509.7 | 15 | ||||||||
APMEA | 11.3 | 9.9 | 202.5 | 159.4 | 27 | ||||||||
Latin America | 8.8 | 7.1 | 58.1 | 39.6 | 47 | ||||||||
Canada | 15.7 | 14.5 | 84.9 | 66.0 | 29 | ||||||||
Total | 15.4 | 14.4 | $ | 1,477.1 | $ | 1,236.3 | 19 | ||||||
Franchised | |||||||||||||
U.S. | 80.7 | 79.5 | $ | 1,625.7 | $ | 1,429.6 | 14 | ||||||
Europe | 76.4 | 75.8 | 880.5 | 766.9 | 15 | ||||||||
APMEA | 85.6 | 85.0 | 206.7 | 175.1 | 18 | ||||||||
Latin America | 62.7 | 64.9 | 37.0 | 41.7 | (11 | ) | |||||||
Canada | 78.0 | 78.3 | 95.7 | 83.0 | 15 | ||||||||
Total | 79.3 | 78.3 | $ | 2,845.6 | $ | 2,496.3 | 14 | ||||||
Combined operating margin dollars increased $152.3 million or 11% for the quarter (7% in constant currencies) and $590.1 million or 16% for the nine months (11% in constant currencies). The U.S. and Europe segments accounted for approximately 85% of the combined margin dollars and more than 75% of the increases in both periods of 2004.
In the U.S., the Company-operated margin percent increased in both periods primarily due to positive comparable sales, partly offset by higher commodity costs. Commodity cost increases are expected to have less of an impact during the remainder of the year.
In Europe, the Company-operated margin percent for both periods reflected improved margin performance in Russia and weak performance in the U.K. In addition, the quarter was negatively impacted by weak sales in Germany and higher food costs as a percent of sales in our three largest markets.
In APMEA, the Company-operated margin percent for both periods reflected strong comparable sales in Australia, improved operating performance in Hong Kong and China and poor performance in South Korea. In addition, 2003 margins for both periods benefited from SARS-related sales tax relief received from the Chinese government.
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The consolidated franchised margin percent increased for both periods primarily due to strong comparable sales in the U.S., partly offset by the impact of increased rent expense in part resulting from a higher proportion of sites being leased by the Company.
The following table presents margin components as a percent of sales:
| COMPANY-OPERATED RESTAURANT EXPENSES AND MARGINS AS A PERCENT OF SALES – McDONALD’S RESTAURANTS | ||||||||
| Quarters Ended September 30, | Nine Months Ended September 30, | |||||||
| 2004 | 2003 | 2004 | 2003 | |||||
Food & paper | 34.1 | 33.6 | 34.1 | 33.7 | ||||
Payroll & employee benefits | 25.5 | 25.7 | 26.0 | 26.6 | ||||
Occupancy & other operating expenses | 24.1 | 24.8 | �� | 24.5 | 25.3 | |||
Total Company-operated restaurant expenses | 83.7 | 84.1 | 84.6 | 85.6 | ||||
Company-operated margins | 16.3 | 15.9 | 15.4 | 14.4 | ||||
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased 4% for the quarter (2% in constant currencies) and 8% for the nine months (5% in constant currencies), primarily due to higher performance-based incentive compensation. Selling, general & administrative expenses as a percent of revenues declined from 10.5% for the nine months 2003 to 10.2% for the nine months 2004 and as a percent of Systemwide sales declined from 3.9% in 2003 to 3.8% in 2004. Selling, general & administrative expenses for the nine months of 2003 included $14 million of severance costs, primarily associated with streamlining restaurant development functions, and $11 million of incremental marketing.
Other Operating (Income) Expense, Net
| ||||||||
OTHER OPERATING (INCOME) EXPENSE, NET Dollars in millions | ||||||||
| | Quarters Ended September 30, | | | Nine Months Ended September 30, | | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Gains on sales of restaurant businesses | $ | (6.1 | ) | $ | (11.5 | ) | $ | (29.3 | ) | $ | (42.3 | ) | ||||
Equity in earnings of unconsolidated affiliates | (18.7 | ) | (20.7 | ) | (40.8 | ) | (24.2 | ) | ||||||||
Other expense | 37.8 | 40.0 | 128.5 | 83.5 | ||||||||||||
Total | $ | 13.0 | $ | 7.8 | $ | 58.4 | $ | 17.0 | ||||||||
For the nine months, equity in earnings of unconsolidated affiliates results increased primarily due to stronger performance in the U.S. and improved results from our Japanese affiliate. For the quarter, results were negatively impacted by a deferred tax adjustment in Japan.
Other expense for both periods of 2004 reflected higher losses on asset dispositions and lower provisions for uncollectible receivables. In addition, other expense for the nine months of 2004 included a $13 million write-off of goodwill in Thailand.
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Operating Income
OPERATING INCOME Dollars in millions |
| |||||||||||||
Quarters Ended September 30, | 2004 | 2003 | % Inc / (Dec | ) | % Inc / (Dec) Excluding Currency Translation | | ||||||||
U.S. | $ | 627.8 | $ | 571.0 | 10 | 10 | ||||||||
Europe | 412.7 | 382.6 | 8 | (1 | ) | |||||||||
APMEA | 96.4 | 91.4 | 5 | — | ||||||||||
Latin America | 2.3 | (20.2 | ) | n/m | n/m | |||||||||
Canada | 54.4 | 47.3 | 15 | 9 | ||||||||||
Other | 8.2 | (0.2 | ) | n/m | n/m | |||||||||
Corporate | (102.9 | ) | (108.0 | ) | 5 | 5 | ||||||||
Total operating income | $ | 1,098.9 | $ | 963.9 | 14 | 10 | ||||||||
Nine Months Ended September 30, | 2004 | 2003 | ||||||||||||
U.S. | $ | 1,748.8 | $ | 1,480.0 | 18 | 18 | ||||||||
Europe | 1,103.4 | 980.8 | 13 | 2 | ||||||||||
APMEA | 252.6 | 208.7 | 21 | 9 | ||||||||||
Latin America | (1.3 | ) | (15.2 | ) | 91 | n/m | ||||||||
Canada | 130.8 | 114.4 | 14 | 7 | ||||||||||
Other | 14.7 | (23.4 | ) | n/m | n/m | |||||||||
Corporate | (325.8 | ) | (280.6 | ) | (16 | ) | (16 | ) | ||||||
Total operating income | $ | 2,923.2 | $ | 2,464.7 | 19 | 13 | ||||||||
n/m Not meaningful
In the U.S., operating income increased for the quarter and nine months primarily due to higher combined operating margin dollars.
In Europe, for the quarter and nine months, operating income in constant currencies benefited from strong performance in Russia and positive results in France, but were negatively impacted by weak results in the U.K. Results in Germany had a negative impact on the quarter but benefited the nine months. We expect the economic challenges in Germany to continue to impact our performance in the near-term.
In APMEA, operating income in constant currencies for both periods benefited from Australia’s performance as well as improved performance in Hong Kong and China, partially offset by poor performance in South Korea. Third quarter 2003 included the sales tax relief benefit in China, which negatively impacted APMEA’s 2004 quarterly operating income growth rate by 5 percentage points. In addition, the nine months included the goodwill write-off in Thailand.
In Latin America, both periods of 2003 reflected significantly higher provisions for uncollectible receivables.
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
Interest expense decreased for the quarter and nine months due to lower average interest rates and debt levels, partly offset by stronger foreign currencies.
Nonoperating expense decreased for the quarter primarily due to a loss on the early extinguishment of debt in 2003 as well as higher interest income in 2004.
The effective income tax rate was 22.6% for third quarter 2004 and 28.5% for the nine months 2004 compared with 33.5% for both periods in 2003. The lower income tax rates in 2004 were primarily due to a transfer of shares between subsidiaries and a change in assumptions about the utilization of certain loss carryforwards. These items primarily impact 2004.
CASH FLOWS AND FINANCIAL POSITION
The Company generates significant cash from operations and has substantial available credit capacity to fund operating spending and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
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Cash provided by operations totaled $2,956.2 million and exceeded capital expenditures by $2,160.7 million for the nine months. Cash provided by operations increased $688.0 million due to strong operating results, primarily in the U.S., and changes in working capital, partly offset by higher income tax payments.
Cash used for investing activities totaled $744.7 million for the nine months, a decrease of $160.4 million due to lower capital spending and lower purchases of restaurant businesses. Capital expenditures decreased $82.5 million or 9% for the nine months primarily due to lower restaurant openings in 2004 and timing of expenditures related to remodels.
Cash used for financing activities totaled $1,147.4 million for the nine months, an increase of $101.3 million primarily due to higher share repurchases, partly offset by higher proceeds from stock options exercised.
Debt obligations at September 30, 2004 totaled $8,863.3 million compared with $9,730.5 million at December 31, 2003. The decrease in 2004 was due to net repayments of $779.7 million, the impact of changes in exchange rates on foreign currency-denominated debt of $59.3 million and SFAS No. 133 noncash fair value adjustments of $28.2 million.
As a result of the above activity, the Company’s cash balance increased $1,064.1 million from December 31, 2003 to $1,556.9 million at September 30, 2004. For the full year, the Company expects capital expenditures to be approximately $1.5 billion to $1.6 billion, debt repayments to be approximately $800 million to $900 million and to return at least $1.3 billion to shareholders through dividends ($0.55 per share or $691 million payable December 1, 2004) and share repurchases.
RESTAURANT INFORMATION
The following table presents restaurant information by ownership type:
Restaurants at September 30, | 2004 | 2003 | ||
Operated by franchisees | 18,191 | 18,031 | ||
Operated by the Company | 9,095 | 9,211 | ||
Operated by affiliates | 4,072 | 4,053 | ||
Systemwide restaurants | 31,358 | 31,295 |
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.
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.
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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 September 30, 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 September 30, 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 September 30, 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 | ||||
July 1-31, 2004 | 0 | n/a | 0 | $3,509,678,000 | ||||
August 1-31, 2004 | 2,871,020 | $26.30 | 2,871,020 | $3,434,177,000 | ||||
September 1-30, 2004 | 70,213 | $26.92 | 70,213 | $3,432,287,000 | ||||
Total | 2,941,233 | $26.31 | 2,941,233 | $3,432,287,000 |
| * | 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. |
| n/a | Not applicable |
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 May 19, 2004, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2004. | |||||
| (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). | |||||
| (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. | |||||
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| (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 November 1, 1998, incorporated herein by reference from Form 10-K, for the year ended December 31, 1999.* | |||||
| (i) | First Amendment to the McDonald’s Profit Sharing Program, effective as of June 1, 2000, 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, effective as of January 1, 2001, 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, effective as of March 1, 2001, 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, effective November 1, 1998, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2002. * | |||||
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| (c) | McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective as of September 1, 2001, 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, effective as of January 1, 2002, 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 July 30, 2001, 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 January 1, 2001, 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 September 12, 2000, 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.* | |||||
| (i) | Exhibit A, Form of Transition Period Agreement, filed herewith.* | |||||
| (ii) | Exhibit B, Form of Continued Employment Period Agreement, filed herewith.* | |||||
| (iii) | Exhibit C, Form of Termination Agreement, filed herewith.* | |||||
| (h) | McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended and restated March 18, 2004, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2004.* | |||||
| (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.* | |||||
| (j) | McDonald’s Corporation 2004 Cash Incentive Plan, effective as of January 1, 2004, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2004.* | |||||
| (k) | Senior Director Letter Agreement between Donald G. Lubin and the Company, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2004. | |||||
| (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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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) | ||||
November 5, 2004 | /s/ Matthew H. Paull | |||
Matthew H. Paull | ||||
| Corporate Senior Executive Vice President and Chief Financial Officer | ||||
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