UNITED STATES SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO QUARTERLY REPORT ON FORM 10-Q pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 for the quarter ended
June 30, 1997, to amend Part I, Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Exhibits 3,
10(b)(iii) and 10(e) to correct errors in EDGAR version.
McDONALD'S CORPORATION
Commission File No. 1-5231
Delaware No. 36-2361282
(State of Incorporation) (I.R.S. Employer I.D. No.)
McDonald's Plaza
Oak Brook, Illinois 60523
(630) 623-3000
(Address and Phone Number of Principal Executive Offices)
SIGNATURE
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 hereunto duly authorized.
McDONALD'S CORPORATION
(Registrant)
By: /s/ Michael L. Conley
-----------------------------
Michael L. Conley
Executive Vice President,
Chief Financial Officer
Date: August 13, 1997
1
Item 2. Management's Discussion And Analysis Of Financial Condition
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And Results Of Operations
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INCREASES (DECREASES) IN OPERATING RESULTS OVER 1996
Dollars in millions, except Six Months Quarter
per common share data Ended June 30 Ended June 30
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SYSTEMWIDE SALES $1,066.7 7% $543.1 7%
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REVENUES
Sales by Company-operated
restaurants $ 267.7 7% $128.3 7%
Revenues from franchised and
affiliated restaurants 91.4 6 39.2 5
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TOTAL REVENUES 359.1 7 167.5 6
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OPERATING COSTS AND EXPENSES
Company-operated restaurants 224.8 8 117.0 8
Franchised restaurants-
occupancy costs 21.5 8 10.4 7
General, administrative
and selling expenses 43.7 7 20.9 6
Other operating (income)
expense-net (14.0) N/M (12.2) N/M
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TOTAL OPERATING COSTS
AND EXPENSES 276.0 7 136.1 7
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OPERATING INCOME 83.1 7 31.4 4
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Interest expense 8.6 5 3.4 4
Nonoperating (income)
expense-net (6.7) N/M 10.4 N/M
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INCOME BEFORE PROVISION FOR
INCOME TAXES 81.2 8 17.6 3
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Provision for income taxes 20.5 6 (0.2) 0
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NET INCOME $ 60.7 8% $ 17.8 4%
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NET INCOME PER COMMON
SHARE $ .10 10% $ .04 7%
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(N/M) Not meaningful
2
CONSOLIDATED OPERATING RESULTS
Net income per common share and net income increased 10 and eight percent,
respectively, for the six months, and seven and four percent,
respectively, for the quarter. Changing foreign currencies significantly
reduced reported results for the six months and quarter. Excluding the $16
million non-cash charge for the adoption of SFAS 121 in first quarter 1996
and foreign currency impact, net income per common share and net income
would have increased 11 and 10 percent for the six months, respectively.
For the quarter, net income per common share and net income would have
increased 10 and eight percent, respectively, excluding foreign currency
impact.
During the quarter, the Company repurchased four million shares of
common stock for approximately $200 million, bringing total share
repurchase for the six months to 10.7 million shares for about $500
million. Fewer shares outstanding resulted in higher increases in net
income per common share compared with the increases in net income.
Systemwide sales represent sales by Company-operated, franchised
and affiliated restaurants. Total revenues consist of sales by Company-
operated restaurants and fees from restaurants operated by franchisees and
affiliates. These fees are based upon a percent of sales with specified
minimum payments. On a global basis, the increases in sales and revenues
for both periods were due to expansion, offset in part by weaker foreign
currencies. The unusually low number of net U.S. restaurant additions in
both periods was primarily due to a greater number of restaurant closings,
particularly satellite restaurant closings previously announced.
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RESTAURANT ADDITIONS Six Months Ended Quarters Ended
June 30 June 30
1997 1996 1997 1996
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U.S. 84 313 74 184
Outside the U.S. 677 570 433 383
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Total restaurant additions 761 883 507 567
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RESTAURANTS UNDER CONSTRUCTION At June 30
1997 1996
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U.S. 78 153
Outside the U.S. 359 389
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Total restaurants under construction 437 542
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3
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CONSOLIDATED OPERATING MARGINS Six Months Ended Quarters Ended
June 30 June 30
1997 1996 1997 1996
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In millions of dollars
Company-operated $ 700.1 $ 657.2 $ 374.0 $ 362.7
Franchised 1,283.5 1,213.6 667.4 638.6
Combined operating margins $1,983.6 $1,870.8 $1,041.4 $1,001.3
As a percent of sales/revenues
Company-operated 18.1 18.3 18.6 19.2
Franchised 81.1 81.4 81.5 81.9
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Company-operated margins as a percent of sales were about flat for the six
months and lower for the quarter. As a percent of sales, food & paper costs
increased, while payroll costs decreased for both periods. Occupancy & other
operating costs as a percent of sales increased slightly for the six months
and decreased slightly for the quarter.
Franchised margin dollars comprised about two-thirds of the combined
operating margins, the same as in the prior year. While franchised
margins as a percent of applicable revenues decreased slightly for both
periods, franchised margin dollars increased six percent for the six
months and five percent for the quarter.
The increases in general, administrative & selling expenses were primarily
due to strategic global spending to support the Convenience, Value and
Execution Strategies, including costs associated with expansion outside
the U.S. and continued investment in developing countries, offset in part
by weaker foreign currencies.
Other operating (income) expense--net is composed of transactions
related to franchising and the foodservice business. Gains on sales of
restaurant businesses were lower since fewer restaurants were sold. The
other category reflected lower expense for both periods. This was
primarily due to lower provisions for property dispositions in 1997 for
the quarter, and for the six months, the $16 million charge for the
adoption of SFAS 121 in first quarter 1996.
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OTHER OPERATING (INCOME) Six Months Ended Quarters Ended
EXPENSE-NET June 30 June 30
In millions of dollars 1997 1996 1997 1996
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Gains on sales of restaurant
businesses $(27.6) $(42.3) $(20.0) $(33.3)
Equity in earnings of
unconsolidated affiliates (33.2) (34.4) (17.3) (15.9)
Other (income) expense 5.5 35.4 (12.0) 12.1
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Other operating (income)
expense--net $(55.3) $(41.3) $(49.3) $(37.1)
========================================================================
4
Consolidated operating income increased $83 million or seven percent and
$31 million or four percent for the six months and quarter, respectively.
The increases reflected higher combined operating margin dollars and other
operating income, offset in part by higher general, administrative &
selling expenses and weaker foreign currencies.
Higher interest expense in both periods reflected higher debt levels,
offset in part by lower average interest rates and weaker foreign
currencies.
Nonoperating (income) expense reflected translation losses in both
periods of 1997 compared with translation gains in 1996, and in the six
months ended June 30, 1996, losses associated with the reduction of the
carrying value of the Company's investment in Discovery Zone common stock
to zero.
The effective income tax rate was 32.5 and 31.9 percent for the six
months and quarter of 1997, respectively, compared with 33.0 and 32.8
percent for the corresponding periods of 1996. For the year 1997, the
Company expects the effective tax rate to be in the range of 32.0 to 32.5
percent.
OPERATING RESULTS OUTSIDE THE U.S.
The sales increases outside the U.S. for both periods were driven
primarily by expansion, offset in part by weaker foreign currencies.
Comparable sales in constant currencies increased slightly for the quarter
and decreased slightly for the six months. If exchange rates had remained
at 1996 levels, sales outside the U.S. would have increased 18 and 16
percent for the quarter and six months, respectively. Severe weather in
Europe in the first quarter and weak economies in both periods negatively
affected results.
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OPERATING RESULTS OUTSIDE Six Months Ended Quarters Ended
THE U.S. June 30 June 30
1997 1996 1997 1996
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Percent increase
SALES
As reported 9 10 11 5
Excluding foreign currency
impact 16 15 18 12
REVENUES
As reported 13 15 14 11
Excluding foreign currency
impact 17 17 19 15
OPERATING INCOME
As reported 12 8 10 7
Excluding foreign currency
impact 17 10 15 11
Excluding SFAS 121 charge and
foreign currency impact 15 13 15 11
As a percent of sales/revenues
Company-operated margins 18.7 19.2 19.0 19.8
Franchised margins 81.2 81.1 81.7 81.2
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5
Revenues increased at a faster rate than sales in both periods. This
was primarily due to the weakening Japanese Yen, which had a greater
effect on sales than revenues due to our affiliate structure in Japan, and
the higher growth rate in Company-operated versus franchised restaurants.
Of the larger international markets, the following had strong
sales and operating income growth for both periods of 1997: the
Philippines and Taiwan in Asia/Pacific; England, Italy, Spain, Sweden and
Switzerland in Europe; and Mexico in Latin America. Our operations in
Canada were negatively affected by increased competition and low consumer
spending due to high unemployment; weak economies also negatively affected
our operations in France and Germany, although France improved in the
second quarter.
The increases in operating income outside the U.S. in both periods
were driven by higher Company-operated and franchised margin dollars, and
increases in other operating income. Weaker foreign currencies and higher
general, administrative & selling expenses necessary to fund expansion and
continued investment in developing countries partly offset these
increases.
Company-operated margins as a percent of sales declined in both
periods. As a percent of sales, increases in food & paper costs and
occupancy & other operating costs were offset in part by decreases in
payroll costs.
Franchised margins as a percent of revenues were relatively flat
in the six months and up for the quarter.
6
IMPACT OF FOREIGN CURRENCIES ON REPORTED RESULTS
While changing foreign currencies affect reported results, McDonald's
lessens exposures by primarily purchasing goods and services in local
currencies, financing in local currencies and hedging certain foreign-
denominated cash flows.
The weakening of the Japanese Yen and Deutsche Mark were the primary
foreign currency changes that negatively affected results in
both periods. The following table illustrates what 1997 results would have
been if exchange rates had remained at 1996 levels compared with reported
results.
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FOREIGN CURRENCY IMPACT ON WORLDWIDE RESULTS
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Dollars in millions except
per common share data
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Increase
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Adjusted Reported Change Adjusted Reported
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Six months ended June 30, 1997
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Systemwide sales $16,810.4 $16,308.2 $502.2 10% 7%
Operating income 1,395.3 1,357.7 37.6 9 7
Net income 803.8 782.7 21.1 11 8
Net income per
common share 1.14 1.11 .03 13 10
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Quarter ended June 30, 1997
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Systemwide sales $8,737.9 $8,475.1 $262.8 10% 7%
Operating income 762.0 743.5 18.5 7 4
Net income 453.1 438.2 14.9 8 4
Net income per
common share .65 .63 .02 10 7
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U.S. OPERATING RESULTS
U.S. sales increased in both periods due to restaurant expansion (497
restaurants were added in the 12 months ended June 30, 1997). U.S. comparable
sales were slightly positive for the six months and slightly negative for
the quarter. This performance reflected successful marketing and
promotions including Monopoly, Chicken McNuggets and Teenie Beanie Babies
and disappointing results from the price component of Campaign 55.
7
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U.S. OPERATING RESULTS Six Months Ended Quarters Ended
June 30 June 30
1997 1996 1997 1996
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Percent increase/(decrease)
Sales 5 3 3 3
Revenues 0 4 (3) 4
Operating income 1 (1) (2) 0
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As a percent of sales/revenues
Company-operated margins 16.9 16.8 17.7 18.3
Franchised margins 81.0 81.5 81.4 82.4
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U.S. sales increased at a faster rate than revenues primarily
because the number of U.S. franchised and affiliated restaurants increased
over the past year while the number of Company-operated restaurants
decreased.
U.S. operating income increased slightly for the six months and
decreased slightly for the quarter. This performance reflected lower
Company-operated margin dollars and higher general, administrative &
selling expenses, offset in part by higher franchised margin dollars, and
for the quarter, lower other operating expenses.
Company-operated margins as a percent of sales remained relatively
flat for the six months and declined for the quarter. Cost trends as a
percent of sales follow: food & paper costs increased while payroll and
occupancy & other operating expenses decreased for the six months; for the
quarter, food & paper and payroll costs increased while occupancy & other
operating expenses decreased.
Franchised margins as a percent of revenues declined for both periods.
These declines reflected slower revenue growth as a result of flat to
negative comparable sales and rent adjustments. The margins were also
negatively affected by higher occupancy costs, primarily rent expense,
driven by an increase in the number of leased sites.
FINANCIAL POSITION
Cash provided by operations for the six months ended June 30, 1997
decreased 4%. Together with other sources of cash such as borrowings,
cash provided by operations was used primarily for capital expenditures,
debt repayments, share repurchases and dividends. The consolidated
capital expenditure decrease of 3% for the six months ended June 30,
resulted from a 30% decrease in U.S. capital expenditures offsetting a 14%
capital expenditure increase from outside the U.S. Based on input from
local management, the Company has refined its plans and expects to add
about 2,400 restaurants globally in 1997, with about 80% being outside the
U.S.
8
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
and involve a number of risks and uncertainties. Actual results could
differ materially due to changes in global and local business and economic
conditions; legislation and governmental regulation; competition; success
of operating initiatives and advertising and promotional efforts; food,
labor and other operating costs; availability and cost of land and
construction; accounting policies and practices; consumer preferences,
spending patterns and demographic trends; political or economic
instability in local markets; and currency exchange rates.
9
SIX MONTHS AND SECOND QUARTER HIGHLIGHTS
OPERATING RESULTS
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Dollars in millions, except Six Months Ended Quarters Ended
per common share data June 30 June 30
1997 1996 1997 1996
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Systemwide sales $16,308.2 $15,241.5 $8,475.1 $7,932.0
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U.S. sales 8,409.3 8,001.6 4,420.4 4,278.8
Operated by franchisees 6,516.4 6,190.1 3,423.2 3,305.4
Operated by the Company 1,336.6 1,381.5 698.8 741.5
Operated by affiliates 556.3 430.0 298.4 231.9
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Sales outside the U.S. 7,898.9 7,239.9 4,054.7 3,653.2
Operated by franchisees 3,645.5 3,435.2 1,874.6 1,748.9
Operated by the Company 2,530.7 2,218.1 1,315.3 1,144.3
Operated by affiliates 1,722.7 1,586.6 864.8 760.0
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Total revenues 5,450.2 5,091.1 2,832.6 2,665.1
U.S. 2,262.1 2,264.0 1,178.2 1,211.0
Outside the U.S. 3,188.1 2,827.1 1,654.4 1,454.1
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Operating income 1,357.7 1,274.6 743.5 712.1
U.S. 611.4 605.2 340.2 346.0
Outside the U.S. 772.9 691.5 416.8 377.3
Corporate G&A (26.6) (22.1) (13.5) (11.2)
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Income before provision for
income taxes 1,158.8 1,077.6 643.1 625.5
Net income 782.7 722.0 438.2 420.4
Net income per common share 1.11 1.01 .63 .59
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Cash provided by operations 975.8 1,020.8 443.9 546.5
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Total assets 17,562.0 16,021.4
Total shareholders' equity 8,760.3 8,319.1
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10
RESTAURANTS
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At June 30, 1997 1996
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Systemwide restaurants 21,783 19,263
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U.S. 12,178 11,681
Operated by franchisees 9,537 9,167
Operated by the Company 1,795 1,852
Operated by affiliates 846 662
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Outside the U.S. 9,605 7,582
Operated by franchisees 4,166 3,479
Operated by the Company 2,714 2,170
Operated by affiliates 2,725 1,933
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