================================================================================
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 June 30, 2000
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 (I.R.S. Employer
incorporation or organization) 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
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(Former name, former address and former fiscal year, if changed since last
report.)
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.
Yes X No _____
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1,320,703,030
----------------------------
(Number of shares of common stock
outstanding as of June 30, 2000)
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McDONALD'S CORPORATION
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INDEX
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Page Reference
Part I. Financial Information
Item 1 - Financial Statements
Condensed consolidated balance sheet,
June 30, 2000 (unaudited) and
December 31, 1999 3
Condensed consolidated statement of
income (unaudited), quarters and six months ended
June 30, 2000 and 1999 4
Condensed consolidated statement of
cash flows (unaudited), quarters and six months ended
June 30, 2000 and 1999 5
Financial comments (unaudited) 6
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
Item 3 - Quantitative & Qualitative Disclosures
About Market Risk 16
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 17
(a) Exhibits
The exhibits listed in the
accompanying Exhibit Index are
filed as part of this report 17
(b) Reports on Form 8-K 19
Signature 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
In millions June 30, 2000 December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 411.1 $ 419.5
Accounts and notes receivable 746.9 708.1
Inventories, at cost, not in excess of market 85.7 82.7
Prepaid expenses and other current assets 431.4 362.0
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,675.1 1,572.3
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 2,968.0 3,086.4
PROPERTY AND EQUIPMENT
Property and equipment, at cost 22,901.3 22,450.8
Accumulated depreciation and amortization (6,333.5) (6,126.3)
- -------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,567.8 16,324.5
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $21,210.9 $20,983.2
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,446.2 $ 1,073.1
Accounts payable 451.2 585.7
Income taxes 140.9 117.2
Other taxes 184.7 160.1
Accrued interest 122.4 131.4
Other accrued liabilities 609.7 660.0
Current maturities of long-term debt 735.3 546.8
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,690.4 3,274.3
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 5,786.3 5,632.4
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 548.9 538.4
DEFERRED INCOME TAXES 1,210.8 1,173.6
COMMON EQUITY PUT OPTIONS 975.4 725.4
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 1,367.7 1,288.3
Unearned ESOP compensation (126.7) (133.3)
Retained earnings 16,539.4 15,562.8
Accumulated other comprehensive income (1,106.9) (886.8)
Common stock in treasury, at cost; 339.9 and 309.8 million shares (7,691.0) (6,208.5)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,999.1 9,639.1
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,210.9 $20,983.2
===================================================================================================================
See accompanying Financial comments.
3
- ------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
Quarters ended Six months ended
In millions, except June 30 June 30
per common share data 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $2,582.0 $2,434.1 $5,021.9 $4,613.2
Revenues from franchised and affiliated restaurants 978.6 973.0 1,882.5 1,829.0
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,560.6 3,407.1 6,904.4 6,442.2
- ------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,147.0 1,985.2 4,180.1 3,803.2
Franchised restaurants - occupancy expenses 194.6 180.4 388.4 359.2
Selling, general, and administrative expenses 393.4 365.5 771.0 705.4
Other operating (income) expense (50.7) (7.5) (80.0) (20.7)
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,684.3 2,523.6 5,259.5 4,847.1
- ------------------------------------------------------------------------------------------------------------
OPERATING INCOME 876.3 883.5 1,644.9 1,595.1
- ------------------------------------------------------------------------------------------------------------
Interest expense 106.2 97.5 206.6 202.7
Nonoperating (income) expense (2.9) 13.2 2.6 18.9
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 773.0 772.8 1,435.7 1,373.5
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes 247.1 254.7 458.9 452.7
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 525.9 $ 518.1 $ 976.8 $ 920.8
============================================================================================================
NET INCOME PER COMMON SHARE $ 0.40 $ 0.37 $ 0.73 $ 0.68
NET INCOME PER COMMON SHARE - DILUTED 0.39 0.37 0.71 0.65
- ------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ - $ .04875 $ - $ .09750
- ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 1,327.1 1,355.5 1,335.3 1,356.4
WEIGHTED AVERAGE SHARES - DILUTED 1,365.5 1,405.6 1,374.2 1,407.1
- ------------------------------------------------------------------------------------------------------------
See accompanying Financial comments.
4
- -------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
Quarters ended Six months ended
June 30 June 30
In millions 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 525.9 $ 518.1 $ 976.8 $ 920.8
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 273.5 237.7 529.3 471.8
Changes in operating working capital items (106.0) (35.8) (114.0) 37.1
Other (25.6) 45.9 (57.2) 53.1
- -------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 667.8 765.9 1,334.9 1,482.8
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (475.6) (417.8) (854.3) (754.0)
Purchases and sales of restaurant businesses and
sales of property (50.3) 43.4 (41.4) (43.9)
Other (19.9) 54.3 (67.5) (166.2)
- -------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (545.8) (320.1) (963.2) (964.1)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Notes payable and long-term financing issuances and repayments 584.7 (344.0) 827.3 (27.0)
Treasury stock purchases (715.3) (283.5) (1,294.0) (441.3)
Common stock dividends - (66.0) - (132.3)
Other 51.7 95.3 86.6 190.5
- -------------------------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (78.9) (598.2) (380.1) (410.1)
- -------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) 43.1 (152.4) (8.4) 108.6
- -------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period 368.0 560.2 419.5 299.2
- -------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 411.1 $ 407.8 $ 411.1 $ 407.8
=============================================================================================================
See accompanying Financial comments.
5
- --------------------------------------------------------------------------------
FINANCIAL COMMENTS (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 1999 Annual Report to Shareholders. In the opinion of the Company, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been included. The results for the quarter and six months
ended June 30, 2000 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.
Comprehensive Income
Comprehensive income consists of net income and foreign currency
translation adjustments and totaled $421.9 million and $459.6 million for the
second quarters of 2000 and 1999, respectively, and $756.7 million and $601.7
million for the six months ended June 30, 2000 and 1999, respectively.
Per Common Share Information
Diluted net income per common share is calculated using net income divided
by weighted average shares on a diluted basis. Weighted average shares on a
diluted basis include weighted average shares outstanding plus the dilutive
effect of stock options, calculated using the treasury stock method, of 38.4
million shares and 50.1 million shares for the second quarters of 2000 and 1999,
respectively, and 38.9 million shares and 50.7 million shares for the six months
ended June 30, 2000 and 1999, respectively.
Common Equity Put Options
At June 30, 2000, 27.7 million of common equity put options were
outstanding, of which 11.1 million were sold in second quarter 2000. The options
expire at various dates through November 2001, at exercise prices between $30.11
and $42.04. The $975.4 million total exercise price of the options outstanding
was classified in common equity put options at June 30, 2000, and the related
offset was recorded in common stock in treasury, net of premiums received.
New Accounting Standard - Financial Instruments
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, subsequently
amended by Statement No. 137, which is required to be adopted in years beginning
after June 15, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged item
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The Company expects to adopt the new Statement
effective January 1, 2001. Management does not anticipate that the adoption will
have a significant effect on the Company's results of operations or financial
position.
6
Segment Information
McDonald's operates primarily in the quick-service hamburger restaurant
business. In addition, the Company operates other restaurant concepts: Aroma
Cafe, Chipotle Mexican Grill, Donatos Pizza and, effective May 26, 2000, Boston
Market. The Other segment includes McDonald's restaurant business operations in
Canada, Africa and the Middle East as well as the other restaurant concepts.
The following table presents the Company's revenues and operating income by
geographic segment:
Quarters ended Six months ended
June 30 June 30
In millions 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------
REVENUES
U.S. $1,380.0 $1,379.8 $2,589.6 $2,531.1
Europe 1,190.0 1,237.1 2,361.0 2,393.3
Asia/Pacific 476.5 448.7 1,003.1 870.3
Latin America 225.8 165.8 454.7 329.4
Other 288.3 175.7 496.0 318.1
- --------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $3,560.6 $3,407.1 $6,904.4 $6,442.2
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
U.S. $ 443.4 $ 428.4 $ 787.6 $ 743.2
Europe 281.5 303.5 543.3 556.3
Asia/Pacific 102.5 93.9 215.9 185.2
Latin America 23.3 25.7 53.1 57.6
Other 25.6 32.0 45.0 52.8
- --------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 876.3 $ 883.5 $1,644.9 $1,595.1
- --------------------------------------------------------------------------------------------------------------------
7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
- -------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- -------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except Quarter ended Six months ended
per common share data June 30, 2000 June 30, 2000
- -------------------------------------------------------------------------------------------------------------------------
% Increase/ % Increase/
Amount (Decrease) Amount (Decrease)
- -------------------------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $10,237.6 3% $19,744.3 5%
- -------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants 2,582.0 6 5,021.9 9
Revenues from franchised and affiliated restaurants 978.6 1 1,882.5 3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,560.6 5 6,904.4 7
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,147.0 8 4,180.1 10
Franchised restaurants - occupancy costs 194.6 8 388.4 8
Selling, general, and administrative expenses 393.4 8 771.0 9
Other operating (income) expense (50.7) N/M (80.0) N/M
- -------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,684.3 6 5,259.5 9
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 876.3 (1) 1,644.9 3
- -------------------------------------------------------------------------------------------------------------------------
Interest expense 106.2 9 206.6 2
Nonoperating (income) expense (2.9) N/M 2.6 N/M
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 773.0 - 1,435.7 5
- -------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 247.1 (3) 458.9 1
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 525.9 2% $ 976.8 6%
=========================================================================================================================
NET INCOME PER COMMON SHARE $ 0.40 5% $ 0.73 7%
NET INCOME PER COMMON SHARE-DILUTED 0.39 5 0.71 9
- -------------------------------------------------------------------------------------------------------------------------
N/M Not meaningful
CONSOLIDATED OPERATING RESULTS
McDonald's operates primarily in the quick-service hamburger restaurant
business. In addition, the Company operates other restaurant concepts: Aroma
Cafe, Chipotle Mexican Grill, Donatos Pizza and, effective May 26, 2000, Boston
Market. Collectively these four businesses are referred to as "Other Brands."
Other Brands financial information is included in the Other segment, except
where specifically noted.
The following table presents the growth rates for reported results and the
results on a constant currency basis for the quarter and six months ended June
30, 2000. Information in constant currencies excludes the effect of foreign
currency translation on reported results, except for hyperinflationary
economies, such as Russia, whose functional currency is the U.S. Dollar.
8
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Key highlights - Consolidated Increase/(Decrease)
----------------------------------------------------------------------------------------------
As In Constant
Reported Currencies*
----------------------------------------------------------------------------------------------
Quarters ended June 30, 2000
----------------------------------------------------------------------------------------------
Systemwide sales 3% 5%
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Total revenues 5 8
----------------------------------------------------------------------------------------------
Operating income (1) 2
----------------------------------------------------------------------------------------------
Net income 2 4
----------------------------------------------------------------------------------------------
Net income per common share - diluted 5 8
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Six months ended June 30, 2000
----------------------------------------------------------------------------------------------
Systemwide sales 5% 7%
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Total revenues 7 10
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Operating income 3 6
----------------------------------------------------------------------------------------------
Net income 6 9
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Net income per common share - diluted 9 12
----------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported
results
Impact of Foreign Currencies on Reported Results
While changing foreign currencies affect reported results, McDonald's
lessens exposures, where practical, by financing in local currencies, hedging
certain foreign-denominated cash flows and by purchasing goods and services in
local currencies.
The primary currencies negatively affecting reported results for the
quarter and six months were the Euro, which is the currency in 11 of our
European markets including France and Germany, the Australian Dollar and the
British Pound. This negative effect was partly offset by the stronger Japanese
Yen in both periods.
Systemwide Sales and Revenues
Systemwide sales represent sales by Company-operated, franchised and
affiliated restaurants. Total revenues include sales by Company-operated
restaurants and fees from restaurants operated by franchisees and affiliates.
These fees include rent, service fees and royalties that are based on a percent
of sales with specified minimum payments along with initial fees.
On a global basis, the increases in sales and revenues for both periods
were partly due to expansion, and for the six months, also due to positive
comparable sales. Foreign currency translation had a negative effect on the
growth rates for both Systemwide sales and revenues for the quarter and six
months. The stronger Japanese Yen had a greater positive currency translation
effect on sales compared to revenues. This is due to our affiliate structure in
Japan. Under this structure, we record a royalty in revenues based on a
percentage of Japan's sales, whereas all of Japan's sales are included in
Systemwide sales. For this reason, sales were less negatively affected by
foreign currency translation than were revenues.
On a constant currency basis, revenues increased at a higher rate than
sales in both periods due to the higher unit growth rate of Company-operated
McDonald's restaurants relative to Systemwide restaurants, the addition of Other
Brands and the consolidation of Argentina and Indonesia, for financial reporting
purposes, in the first quarter 2000.
9
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Systemwide sales
Dollars in millions 2000 1999 Increase/(Decrease)
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In Constant
As Reported Currencies*
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Quarters ended June 30
-----------------------------------------------------------------------------------------------------------
U.S. $ 5,192.5 $5,169.9 - n/a
-----------------------------------------------------------------------------------------------------------
Europe 2,326.8 2,387.3 (3)% 7%
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Asia/Pacific 1,696.3 1,502.3 13 7
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Latin America 429.5 402.1 7 10
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Other 592.5 458.8 29 30
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Total Systemwide sales $10,237.6 $9,920.4 3% 5%
-----------------------------------------------------------------------------------------------------------
Six months ended June 30
-----------------------------------------------------------------------------------------------------------
U.S. $ 9,697.5 $9,453.1 3% n/a
-----------------------------------------------------------------------------------------------------------
Europe 4,632.5 4,649.1 - 10%
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Asia/Pacific 3,481.9 3,013.6 16 10
-----------------------------------------------------------------------------------------------------------
Latin America 863.6 795.7 9 11
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Other 1,068.8 831.7 29 28
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Total Systemwide sales $19,744.3 $18,743.2 5% 7%
-----------------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported
results
n/a Not applicable
U.S. sales were flat for the quarter as expansion was offset by negative
comparable sales. If Teenie Beanie Babies sales had equaled last year's level,
U.S. sales would have increased about five percent for the quarter. For the six
months, U.S. sales increased three percent, due to restaurant expansion and
positive comparable sales.
In Europe, expansion, partly offset by negative comparable sales, drove the
constant currency sales increase for the quarter, while expansion and positive
comparable sales drove the increase for the six months. Strong performances in
Italy, the Netherlands and Spain drove the increases in both periods. France and
the United Kingdom also contributed significantly to the increases for both
periods. The segment's sales growth rate was negatively impacted by difficult
sales comparisons in Germany as a result of successful non-food promotions in
1999, unusually hot weather and high television viewership of the Euro 2000
Soccer Championship, which reduced eating out activity.
In Asia/Pacific, the constant currency sales increase for the quarter was
driven by expansion, partly offset by negative comparable sales, while the sales
growth for the six months was driven by expansion and positive comparable sales.
Positive comparable sales in several markets, including double-digit comparable
sales growth in China, and expansion in Japan drove the segment's sales
increases in both periods. Australia's results for the second quarter were
negatively impacted by the announcement of a new goods and services tax,
effective July 1, 2000. We expect this tax to continue to negatively impact
sales in Australia in the near term.
In Latin America, constant currency sales increases for the quarter and six
months were driven by expansion, partly offset by negative comparable sales.
Contributing to the increases were expansion for both periods and positive
comparable sales in Brazil for the six months, and double-digit comparable sales
in Mexico for both periods.
In the Other segment, positive comparable sales and expansion in Canada and
South Africa contributed to the increases for both periods. The sales increases
for the quarter and six months included $106.1 million and $149.3 million,
respectively, related to the addition of Other Brands.
10
Combined Operating Margins
The following combined operating margin information represents margins
for McDonald's restaurant business only.
- -------------------------------------------------------------------------------------------------------
Combined operating margins Quarters ended Six months ended
June 30 June 30
-------------------------------------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------
Dollars in millions
- -------------------------------------------------------------------------------------------------------
Company-operated $ 428.2 $ 448.9 $ 831.5 $ 810.0
- -------------------------------------------------------------------------------------------------------
Franchised 783.6 792.6 1,493.3 1,469.8
- -------------------------------------------------------------------------------------------------------
Combined operating margins $ 1,211.8 $1,241.5 $2,324.8 $ 2,279.8
- -------------------------------------------------------------------------------------------------------
Percent of sales/revenues
- -------------------------------------------------------------------------------------------------------
Company-operated 17.3% 18.4% 17.0% 17.6%
- -------------------------------------------------------------------------------------------------------
Franchised 80.1 81.5 79.4 80.4
- -------------------------------------------------------------------------------------------------------
Combined operating margin dollars decreased $29.7 million, or two percent,
for the quarter, and increased $45.0 million, or two percent, for the six
months. In constant currencies, combined operating margin dollars increased by
$12.3 million, or one percent for the quarter and $120.7 million, or five
percent for the six months. The U.S. and Europe segments accounted for over 80
percent of the combined margin dollars in both periods.
As a percent of sales, Company-operated margins decreased for both periods.
Food & paper costs as a percent of sales decreased for the quarter and increased
for the six months, while payroll costs as a percent of sales increased for the
quarter and decreased for the six months. Occupancy and other operating expenses
increased as a percent of sales for both periods.
In the U.S. and Europe, Company-operated margins decreased as a percent of
sales for the quarter and six months. As a percent of sales in both segments,
food & paper costs decreased, while payroll costs and occupancy & other
operating expenses increased for both periods. In the U.S., approximately one-
half of the second quarter's margin percent decline was due to the comparison to
last year's Teenie Beanie Babies promotion. Germany, which also faced
challenging comparisons due to strong promotions last year, accounted for half
of Europe's margin percent decline for the quarter.
As a percent of sales, Asia/Pacific's Company-operated margins decreased
for the quarter and increased for the six months. Latin America's Company-
operated margins decreased as a percent of sales for both periods, primarily due
to difficult economic conditions experienced by most markets, partly offset by
the consolidation of Argentina.
Franchised margins as a percent of applicable revenues decreased for the
quarter and six months. The decrease in the margin as a percent of revenues was
primarily due to higher occupancy costs as a result of our strategy to lease
more sites. By leasing a higher proportion of new sites, we have reduced initial
capital requirements. However, as anticipated, this practice reduces franchised
margins since the financing costs implicit in the lease are included in
occupancy expense, whereas for owned sites, financing costs are reflected in
interest expense.
For all segments, excluding Other, franchised margins as a percent of
revenues declined for the quarter and the six months primarily due to increased
occupancy costs. In addition, the consolidation of Argentina and Indonesia
contributed to the decline in margins as a percent of revenues in Latin America
and Asia/Pacific, respectively, for both periods.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased eight percent for the
quarter and nine percent for the six months. This increase was primarily due to
spending to support the development of Other Brands and the consolidation of
Argentina and Indonesia. Selling, general & administrative expenses included
$14.3 million and $25.2 million related to Other Brands for the quarter and six
months, respectively. Excluding Other Brands and the consolidations, selling,
general & administrative expenses increased two percent for the quarter and four
percent for the six months.
11
Other Operating Income and Expense
Other operating income and expense consists of transactions related to
franchising and the food service business. Equity in earnings of unconsolidated
affiliates decreased for the quarter primarily as a result of a gain reported in
1999 on the sale of real estate in a U.S. partnership. The decrease in other
expense was primarily related to lower provisions for property dispositions in
2000 and costs in 1999 related to the write-off of software and the
implementation of our Made For You food preparation system.
- ------------------------------------------------------------------------------------------------------------------------
Other operating income and expense Quarters ended Six months ended
June 30 June 30
- ------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Gains on sales of restaurant
Businesses $22.3 $11.1 $37.9 $22.4
- ------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated
Affiliates 33.5 52.2 59.9 73.9
- ------------------------------------------------------------------------------------------------------------------------
Other (5.1) (55.8) (17.8) (75.6)
- ------------------------------------------------------------------------------------------------------------------------
Total $50.7 $ 7.5 $80.0 $20.7
- ------------------------------------------------------------------------------------------------------------------------
Operating Income
Consolidated operating income decreased $7.2 million, or one percent, for
the quarter, while increasing two percent in constant currencies. For the six
months, consolidated operating income increased $49.8 million, or three percent;
six percent in constant currencies. The increases, in constant currencies, were
due to higher combined operating margin dollars and higher other operating
income, partly offset by higher selling, general & administrative expenses.
Operating income by segment includes the allocation of corporate selling,
general & administrative expenses.
- ----------------------------------------------------------------------------------------------------------------------------
Operating income Increase/(Decrease)
- ----------------------------------------------------------------------------------------------------------------------------
As In Constant
Dollars in millions 2000 1999 Reported Currencies*
- ----------------------------------------------------------------------------------------------------------------------------
Quarters ended June 30
- ----------------------------------------------------------------------------------------------------------------------------
U.S. $ 443.4 $ 428.4 4 % n/a
- ----------------------------------------------------------------------------------------------------------------------------
Europe 281.5 303.5 (7) 3%
- ----------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 102.5 93.9 9 7
- ----------------------------------------------------------------------------------------------------------------------------
Latin America 23.3 25.7 (9) (8)
- ----------------------------------------------------------------------------------------------------------------------------
Other** 25.6 32.0 (20) (19)
- ----------------------------------------------------------------------------------------------------------------------------
Total operating income $ 876.3 $ 883.5 (1)% 2%
- ----------------------------------------------------------------------------------------------------------------------------
Six months ended June 30
- ----------------------------------------------------------------------------------------------------------------------------
U.S. $ 787.6 $ 743.2 6 % n/a
- ----------------------------------------------------------------------------------------------------------------------------
Europe 543.3 556.3 (2) 8%
- ----------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 215.9 185.2 17 13
- ----------------------------------------------------------------------------------------------------------------------------
Latin America 53.1 57.6 (8) (6)
- ----------------------------------------------------------------------------------------------------------------------------
Other** 45.0 52.8 (15) (16)
- ----------------------------------------------------------------------------------------------------------------------------
Total operating income $1,644.9 $1,595.1 3 % 6%
- ----------------------------------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported results
** Includes Other Brands operating losses of $8.8 million and $17.9 million
for the quarter and six months of 2000, respectively. In 1999, Other
Brands operating losses were $.6 million and $1.3 million for the quarter
and six months, respectively.
n/a Not applicable
U.S. operating income increased $15.0 million or four percent for the
quarter and $44.4 million or six percent for the six months. The increase for
the quarter was driven by lower selling, general & administrative expenses and
higher other operating income, while for the six months, the increase was due to
higher combined operating margin dollars and higher other operating income.
Europe's operating income increased three percent for the quarter and eight
percent for the six months in constant currencies. Strong results in France,
Italy, Russia and Spain drove this segment's performance in both periods. Weak
results in Germany had a significant impact on the segment's operating income
growth rate. We expect significant improvement in Europe's results in the second
half of the year.
12
Operating income in Asia/Pacific increased seven percent for the quarter
and 13 percent for the six months in constant currencies. This segment benefited
in both periods from strong performances in China and South Korea, while
Australia's challenging comparisons and a drop in retail spending hurt results.
In addition, the partial sale of our Japanese affiliate's ownership in Toys `R'
Us Japan, in connection with an initial public offering of Toys `R' Us Japan,
contributed to the increase. Japan's second quarter 1999 results benefited from
a lower effective tax rate.
Latin America's operating income decreased eight percent for the quarter
and six percent for the six months in constant currencies. Both periods were
negatively impacted by the difficult economic conditions experienced by most
markets in the region. Increases in Brazil, Mexico and Venezuela, as well as the
consolidation of Argentina, partly offset the decreases in both periods.
In the Other segment, strong performances in Canada and several other
markets were offset by the investment spending for Other Brands for the quarter
and six months.
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
For both periods, higher interest expense was primarily due to significantly
higher average debt levels, partly offset by lower average interest rates and
weaker foreign currencies. The higher average debt levels were a result of the
Company using its available credit capacity to fund share repurchases.
Nonoperating (income) expense reflected a gain related to the sale of a
partial ownership interest in a majority owned subsidiary outside the U.S. and
lower minority interest expense for the quarter and six months. In addition,
nonoperating (income) expense for the quarter reflected translation gains in
2000 compared with translation losses in 1999.
The effective income tax rate was 32.0 percent for both periods of 2000
compared with 33.0 percent for both periods of 1999.
WEIGHTED AVERAGE SHARES
Weighted average shares outstanding for the second quarter and the six months
were lower compared with the prior year due to shares repurchased. In addition,
outstanding stock options had a less dilutive effect than in the prior year.
During the first six months of 2000, the Company repurchased 35.7 million shares
of its common stock for approximately $1.3 billion.
FINANCIAL POSITION
Free cash flow - cash provided by operations less capital expenditures - for the
six months ended June 30, 2000 decreased $248.2 million to $480.6 million,
primarily due to changes in working capital and other items and higher capital
expenditures. Free cash flow, together with other sources of cash such as
borrowings, was used primarily for share repurchases and debt repayments. The
changes in working capital and other items were primarily due to lower income
tax benefits related to stock option exercises, the timing of income tax
payments and lower non-cash provisions for property dispositions. The capital
expenditure increase of 13% was primarily due to higher McDonald's restaurant
openings, the addition of Other Brands, and the consolidation of Argentina and
Indonesia. The Company expects to add between 1,800 and 1,900 McDonald's
restaurants this year, with about 90 percent in locations outside the U.S.
In April 2000, the Company announced a $1 billion increase in its share
repurchase program bringing the total program to $4.5 billion through 2001.
Management believes the strength of the Company's business around the world and
its strong cash flow put the Company in a position to increase stock buybacks
while maintaining a strong credit rating. The Company believes that buying back
its stock continues to be an excellent way to provide shareholder value.
Therefore, the Company purchased approximately $1.3 billion, or 35.7 million
shares of its common stock in the first six months of 2000. This brought the
cumulative purchases to $2.5 billion, or 70 million shares under the three-year
share repurchase program.
In November 1999, the Company announced its intention to pay cash dividends
on an annual, instead of quarterly, basis beginning in 2000. Future dividends
declared at the discretion of the Board of Directors will be paid annually in
December.
NEW ACCOUNTING STANDARD - FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, subsequently
amended by Statement No. 137, which is required to be adopted in years beginning
after June 15, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged item,
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The Company expects to adopt the new Statement
effective January 1, 2001. Management does not anticipate that the adoption will
have a significant effect on the Company's results of operations or financial
position.
13
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The Euro is trading on currency exchanges and may be
used in certain transactions such as electronic payments. Beginning in January
2002, new Euro-denominated notes and coins will be issued, and legacy currencies
will be withdrawn from circulation. The conversion to the Euro has eliminated
currency exchange rate risk for transactions between the member countries, which
for the Company, primarily consist of payments to suppliers. In addition, since
the Company uses foreign-denominated debt and derivatives to meet its financing
requirements and to minimize its foreign currency risks, certain of these
financial instruments are denominated in Euros.
The Company has restaurants located in all member countries and has been
preparing for the introduction of the Euro for the past several years. The
Company is currently addressing the issues involved with the new currency, which
include converting information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments and revising processes
for preparing accounting and taxation records. Based on the work to date, the
Company does not believe the Euro conversion will have a significant impact on
its financial position, results of operations or cash flows.
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 the effectiveness of operating initiatives and advertising and
promotional efforts, the effects of the Euro conversion, as well as changes in:
global and local business and economic conditions; currency exchange and
interest rates; food, labor and other operating costs; political or economic
instability in local markets; competition; consumer preferences, spending
patterns and demographic trends; legislation and governmental regulation; and
accounting policies and practices.
14
- ---------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER AND SIX MONTHS HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended Six Months ended
June 30 June 30
Dollars in millions 2000 1999 2000 1999
- ---------------------------------------------------- ----------------- --------------- ----------------- ----------------
Systemwide sales by type
Operated by franchisees $6,351.2 $ 6,258.6 $12,129.9 $11,698.5
Operated by the Company 2,582.0 2,434.1 5,021.9 4,613.2
Operated by affiliates 1,304.4 1,227.7 2,592.5 2,431.5
- ---------------------------------------------------- ----------------- --------------- ----------------- ----------------
Systemwide sales $10,237.6 $ 9,920.4 $19,744.3 $18,743.2
- ---------------------------------------------------- ----------------- --------------- ----------------- ----------------
Restaurant margins*
Company-operated
----------------
U.S. 17.5% 19.4% 17.1% 18.1%
Europe 18.6 19.4 18.1 18.5
Asia/Pacific 16.3 16.6 17.1 16.4
Latin America 12.9 13.1 12.7 13.6
Other 15.4 16.2 14.5 14.8
Total 17.3% 18.4% 17.0% 17.6%
Franchised
----------
U.S. 81.4% 82.5% 80.3% 81.3%
Europe 78.2 79.8 77.8 78.5
Asia/Pacific 82.1 83.5 82.4 83.4
Latin America 73.3 77.5 74.5 77.9
Other 78.9 79.3 78.0 77.9
Total 80.1% 81.5% 79.4% 80.4%
*Restaurant margin information relates to McDonald's restaurant business only
RESTAURANTS
- --------------------------------------------------------------------------------------------------------------------------
At June 30, 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
By type
Operated by franchisees 16,608 15,565
Operated by the Company 7,281 5,725
Operated by affiliates 4,157 4,076
- --------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants 28,046 25,366
- --------------------------------------------------------------------------------------------------------------------------
Quarters ended Six months ended
June 30 June 30
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Additions
U.S. 34 28 29 18
Europe 121 88 189 137
Asia/Pacific 126 132 176 206
Latin America 73 121 134 149
Other - McDonald's 23 17 18 31
Other Brands 673** 5 694** 7
- --------------------------------------------------------------------------------------------------------------------------
Systemwide additions 1,050 391 1,240 548
- --------------------------------------------------------------------------------------------------------------------------
**Primarily relates to the acquisition of Boston Market in second quarter 2000
15
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, 1999 regarding this matter.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 18, 2000.
(b) Not Applicable.
(c) At the Annual Meeting of Shareholders, the shareholders voted on the
following matters: (1) the election of five directors to serve until the
2003 Annual Meeting of shareholders, (2) the approval of auditors, (3) a
shareholder proposal on genetically engineered crops and foods and (4) a
shareholder proposal to declassify the Board of Directors. The voting
results were as follows:
(1) Each nominee was elected by a vote of the shareholders as follows:
Director For Withheld
-------- --- --------
James R. Cantalupo 1,149,231,757 13,297,703
Enrique Hernandez, Jr. 1,149,135,798 13,393,662
Jeanne P. Jackson 1,148,672,699 13,856,761
Donald R. Keough 1,148,163,865 14,365,595
Michael R. Quinlan 1,146,923,776 15,605,684
Additional Directors, whose terms of office as Directors continued after
the meeting, are as follows:
Term Expiring in 2001 Term Expiring in 2002
--------------------- ---------------------
Jack M. Greenberg Hall Adams, Jr.
Donald G. Lubin Gordon C. Gray
Walter E. Massey Terry L. Savage
Andrew J. McKenna Fred L. Turner
Roger W. Stone
Robert N. Thurston
(2) The proposal to approve the appointment of independent auditors was
approved by shareholders as follows:
For Against Abstain
--- ------- -------
1,149,222,866 8,401,409 4,905,185
(3) The shareholder proposal on genetically engineered crops and foods was not
approved by shareholders as follows:
For Against Abstain Non-Votes
--- ------- ------- ---------
19,639,386 884,438,667 43,189,551 215,261,856
(4) The shareholder proposal to declassify the board was not approved by
shareholders as follows:
For Against Abstain Non-Votes
--- ------- ------- ---------
432,963,150 503,573,008 10,731,446 215,261,856
(d) Not Applicable.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
(3) (i) Restated Certificate of Incorporation, effective as of
March 24, 1998, incorporated herein by reference from Form
8-K dated April 17, 1998.
(ii) By-Laws, effective as of June 1, 2000, filed herewith.
(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) 5.90% REset Put Securities due 2011. Supplemental
Indenture No. 2 dated as of May 11, 1998,
incorporated herein by reference from Exhibit 4(a)
of Form 8-K dated May 6, 1998.
(iii) 6% REset Put Securities due 2012. Supplemental
Indenture No. 3 dated as of June 23, 1998,
incorporated herein by reference from Exhibit 4(a)
of Form 8-K dated June 18, 1998.
(iv) 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.
(v) Medium-Term Notes, Series F, due from 1 year to 60
years from the Date of Issue. Supplemental Indenture
No. 5 incorporated herein by reference from Exhibit
(4)(c) of Form S-3 Registration Statement (File No.
333-59145), dated May 26, 2000.
(b) Subordinated Debt Securities Indenture dated as of October
18, 1996, incorporated herein by reference from Form 8-K
dated October 18, 1996.
(i) 7 1/2% Subordinated Deferrable Interest Debentures
due 2036. Supplemental Indenture No. 1 dated as of
November 5, 1996, incorporated herein by reference
from Exhibit (4)(b) of Form 8-K dated October 18,
1996.
(ii) 7 1/2% Subordinated Deferrable Interest Debentures
due 2037. Supplemental Indenture No. 2 dated as of
January 14, 1997, incorporated herein by reference
from Exhibit (4)(b) of Form 8-K dated January 9,
1997.
(iii) 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) Medium-Term Notes, Series B, due from nine months to
30 years from Date of Issue. Supplemental Indenture
No. 12 incorporated herein by reference from Exhibit
(4) of Form 8-K dated August 18, 1989 and Forms of
Medium-Term Notes, Series B, incorporated herein by
reference from Exhibit (4)(b) of Form 8-K dated
September 14, 1989.
17
Exhibit Number Description
- -------------- -----------
(ii) Medium-Term Notes, Series C, due from nine months to
30 years from Date of Issue. Form of Supplemental
Indenture No. 15 incorporated herein by reference
from Exhibit 4(b) of Form S-3 Registration Statement
(File No. 33-34762), dated May 14, 1990.
(iii) Medium-Term Notes, Series C, due from nine months
(U.S. Issue)/184 days (Euro Issue) to 30 years from
Date of Issue. Amended and restated Supplemental
Indenture No. 16 incorporated herein by reference
from Exhibit (4) of Form 10-Q for the period ended
March 31, 1991.
(iv) 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.
(v) 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.
(vi) 6-3/4% Notes due February 15, 2003. Form of
Supplemental Indenture No. 20 incorporated herein by
reference from Exhibit (4) of Form 8-K dated March 1,
1993.
(vii) 7-3/8% Debentures due July 15, 2033. Form of
Supplemental Indenture No. 21 incorporated herein by
reference from Exhibit (4)(a) of Form 8-K dated July
15, 1993.
(viii) 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.
(ix) 6-5/8% Notes due September 1, 2005. Form of
Supplemental Indenture No. 23 incorporated herein by
reference from Exhibit (4)(a) of Form 8-K dated
September 5, 1995.
(x) 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.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated
herein by reference from Exhibit 10(a) of Form 10-Q for the
quarter ended September 30, 1997.*
(b) Profit Sharing Program, as amended and restated, incorporated
herein by reference from Form 10-K for the year ended December
31, 1999.*
(c) McDonald's Supplemental Employee Benefit Equalization Plan,
McDonald's Profit Sharing Program Equalization Plan and
McDonald's 1989 Equalization Plan, as amended and restated,
incorporated herein by reference from Form 10-K for the year
ended December 31, 1995.*
(d) 1975 Stock Ownership Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the
quarter ended June 30, 1999.*
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
incorporated herein by reference on Form 10-Q for the quarter
ended March 31, 2000.*
(f) McDonald's Corporation Deferred Income Plan, as amended and
restated, incorporated herein by reference from Form 10-Q for
the quarter ended September 30, 1999.*
(g) 1999 Non-Employee Director Stock Option Plan, incorporated
herein by reference from Form 10-Q for the quarter ended June
30, 1999.*
(h) Executive Retention Plan, incorporated herein by reference
from Form 10-K for the year ended December 31, 1998.*
18
(12) Statement re: Computation of Ratios
(27) Financial Data Schedule
- -------------------------------------
*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 Securities and Exchange 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 Securities and Exchange Commission upon request has been
filed with the Commission.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter covered by
this report, and subsequently through August 11, 2000.
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
7/25/00 Item 7 No
19
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 thereunto duly authorized.
McDONALD'S CORPORATION
(Registrant)
By /s/ Michael L. Conley
----------------------
(Signature)
Michael L. Conley
Executive Vice President,
Chief Financial Officer
August 11, 2000
- ---------------------------
20