===============================================================================
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 September 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 _____
---
1,311,305,786
----------------------------
(Number of shares of common stock
outstanding as of September 30, 2000)
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McDONALD'S CORPORATION
----------------------
INDEX
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Page Reference
Part I. Financial Information
Item 1 - Financial Statements
Condensed consolidated balance sheet,
September 30, 2000 (unaudited) and
December 31, 1999 3
Condensed consolidated statement of
income (unaudited), quarters and nine months ended
September 30, 2000 and 1999 4
Condensed consolidated statement of
cash flows (unaudited), quarters and nine months ended
September 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 6 - Exhibits and Reports on Form 8-K 16
(a) Exhibits
The exhibits listed in the
accompanying Exhibit Index are
filed as part of this report 16
(b) Reports on Form 8-K 18
Signature 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited)
In millions September 30, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 350.0 $ 419.5
Accounts and notes receivable 701.0 708.1
Inventories, at cost, not in excess of market 84.7 82.7
Prepaid expenses and other current assets 449.6 362.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,585.3 1,572.3
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 2,915.7 3,086.4
PROPERTY AND EQUIPMENT
Property and equipment, at cost 22,719.4 22,450.8
Accumulated depreciation and amortization (6,337.8) (6,126.3)
- -----------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,381.6 16,324.5
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $20,882.6 $20,983.2
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 747.2 $ 1,073.1
Accounts payable 701.7 585.7
Income taxes 216.2 117.2
Other taxes 190.5 160.1
Accrued interest 129.1 131.4
Other accrued liabilities 635.0 660.0
Current maturities of long-term debt 728.3 546.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,348.0 3,274.3
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 6,191.5 5,632.4
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 545.1 538.4
DEFERRED INCOME TAXES 1,154.2 1,173.6
COMMON EQUITY PUT OPTIONS 837.7 725.4
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 1,402.7 1,288.3
Unearned ESOP compensation (114.5) (133.3)
Retained earnings 16,805.9 15,562.8
Accumulated other comprehensive income (1,345.7) (886.8)
Common stock in treasury, at cost; 349.3 and 309.8 million shares (7,958.9) (6,208.5)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,806.1 9,639.1
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,882.6 $20,983.2
=======================================================================================================================
See accompanying Financial comments.
3
- -----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
In millions, except September 30 September 30
per common share data 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $2,768.5 $2,474.4 $ 7,790.4 $7,087.6
Revenues from franchised and affiliated restaurants 980.5 969.8 2,863.0 2,798.8
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,749.0 3,444.2 10,653.4 9,886.4
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,297.6 2,015.6 6,477.7 5,818.8
Franchised restaurants - occupancy expenses 192.0 186.8 580.4 546.0
Selling, general, and administrative expenses 409.2 368.0 1,180.2 1,073.4
Other operating (income) expense (60.6) (33.9) (140.6) (54.6)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,838.2 2,536.5 8,097.7 7,383.6
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 910.8 907.7 2,555.7 2,502.8
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense 111.4 95.4 318.0 298.1
Nonoperating (income) expense 10.3 12.0 12.9 30.9
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 789.1 800.3 2,224.8 2,173.8
- ----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 240.6 259.4 699.5 712.1
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 548.5 $ 540.9 $ 1,525.3 $1,461.7
============================================================================================================================
NET INCOME PER COMMON SHARE $ 0.42 $ 0.40 $ 1.15 $ 1.08
NET INCOME PER COMMON SHARE - DILUTED 0.41 0.39 1.12 1.04
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .21500 $ .04875 $ .21500 $ .14653
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 1,315.6 1,354.7 1,328.7 1,355.8
WEIGHTED AVERAGE SHARES - DILUTED 1,346.0 1,403.1 1,364.2 1,405.4
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying Financial comments.
4
- ----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
In millions 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 548.5 $ 540.9 $ 1,525.3 $ 1,461.7
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 250.2 248.6 779.5 720.4
Changes in operating working capital items 37.2 153.4 (76.8) 190.5
Other (34.7) (52.6) (91.9) 0.5
- ----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 801.2 890.3 2,136.1 2,373.1
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (446.7) (491.7) (1,301.0) (1,245.7)
Purchases and sales of restaurant businesses and
sales of property (18.0) (89.8) (59.4) (133.7)
Other (30.6) (98.8) (98.1) (265.0)
- ----------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (495.3) (680.3) (1,458.5) (1,644.4)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Notes payable and long-term financing issuances and repayments 26.9 124.8 854.2 97.8
Treasury stock purchases (424.5) (202.6) (1,718.5) (643.9)
Common stock dividends - (66.4) - (198.7)
Other 30.6 (48.8) 117.2 141.7
- ----------------------------------------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (367.0) (193.0) (747.1) (603.1)
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (61.1) 17.0 (69.5) 125.6
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period 411.1 407.8 419.5 299.2
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 350.0 $ 424.8 $ 350.0 $ 424.8
============================================================================================================================
See accompanying Financial comments.
5
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FINANCIAL COMMENTS (UNAUDITED)
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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 nine months
ended September 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 $309.7 million and $586.2 million for the third quarters
of 2000 and 1999, respectively, and $1,066.4 million and $1,187.9 million for
the nine months ended September 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 30.4
million shares and 48.4 million shares for the third quarters of 2000 and 1999,
respectively, and 35.5 million shares and 49.6 million shares for the nine
months ended September 30, 2000 and 1999, respectively.
Common Equity Put Options
At September 30, 2000, 24.4 million of common equity put options were
outstanding. The options expire at various dates through November 2001, at
exercise prices between $30.11 and $42.04. The $837.7 million total exercise
price of the options outstanding was classified in common equity put options at
September 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 Nos. 137 and 138, 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 will 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, Boston Market, Chipotle Mexican Grill and Donatos Pizza. 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 Nine months ended
September 30 September 30
In millions 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
REVENUES
U.S. $1,347.7 $1,303.1 $ 3,937.3 $3,834.2
Europe 1,229.3 1,258.0 3,590.3 3,651.3
Asia/Pacific 520.4 503.9 1,523.5 1,374.2
Latin America 246.4 174.2 701.1 503.6
Other 405.2 205.0 901.2 523.1
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $3,749.0 $3,444.2 $10,653.4 $9,886.4
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
U.S. $ 426.2 $ 389.6 $ 1,213.8 $1,132.8
Europe 313.5 324.8 856.8 881.1
Asia/Pacific 117.2 119.8 333.1 305.0
Latin America 29.8 36.5 82.9 94.1
Other 24.1 37.0 69.1 89.8
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 910.8 $ 907.7 $ 2,555.7 $2,502.8
- ----------------------------------------------------------------------------------------------------------------------------
7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- ----------------------------------------------------------------------------------------------------------------------------
Dollars in millions, except Quarter ended Nine months ended
per common share data September 30, 2000 September 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
% Increase/ % Increase/
Amount (Decrease) Amount (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $10,512.4 5% $30,256.7 5%
- ----------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants 2,768.5 12 7,790.4 10
Revenues from franchised and affiliated restaurants 980.5 1 2,863.0 2
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,749.0 9 10,653.4 8
- -------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,297.6 14 6,477.7 11
Franchised restaurants - occupancy costs 192.0 3 580.4 6
Selling, general, and administrative expenses 409.2 11 1,180.2 10
Other operating (income) expense (60.6) N/M (140.6) N/M
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,838.2 12 8,097.7 10
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 910.8 - 2,555.7 2
- -------------------------------------------------------------------------------------------------------------------------
Interest expense 111.4 17 318.0 7
Nonoperating (income) expense 10.3 N/M 12.9 N/M
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 789.1 (1) 2,224.8 2
- ----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 240.6 (7) 699.5 (2)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 548.5 1% $ 1,525.3 4%
============================================================================================================================
NET INCOME PER COMMON SHARE $ 0.42 5% $ 1.15 6%
NET INCOME PER COMMON SHARE-DILUTED 0.41 5 1.12 8
- ----------------------------------------------------------------------------------------------------------------------------
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, Boston Market, Chipotle Mexican Grill and Donatos Pizza. 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 nine months ended
September 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*
----------------------------------------------------------------------------------
Quarter ended September 30, 2000
----------------------------------------------------------------------------------
Systemwide sales 5% 8%
----------------------------------------------------------------------------------
Total revenues 9 13
----------------------------------------------------------------------------------
Operating income - 5
----------------------------------------------------------------------------------
Net income 1 6
---------------------------------------------------------------------------------
Net income per common share - diluted 5 10
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Nine months ended September 30, 2000
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Systemwide sales 5% 7%
----------------------------------------------------------------------------------
Total revenues 8 12
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Operating income 2 6
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Net income 4 8
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Net income per common share - diluted 8 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 nine 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. As a result of the weaker foreign currencies, we believe our
reported earnings per share for full year 2000 could be negatively impacted by
up to seven cents due to foreign currency translation.
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
due to expansion and positive comparable sales. Foreign currency translation
had a negative effect on the growth rates for both Systemwide sales and revenues
for the quarter and nine months. The stronger Japanese Yen had a greater
positive currency translation effect on sales compared with 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 primarily due to the addition of Other Brands and the
consolidation of Argentina and Indonesia, for financial reporting purposes,
beginning in first quarter 2000.
9
- -------------------------------------------------------------------------------------------------------------------------
Systemwide sales
Dollars in millions 2000 1999 Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------------------------
In Constant
As Reported Currencies*
- -------------------------------------------------------------------------------------------------------------------------
Quarters ended September 30
- -------------------------------------------------------------------------------------------------------------------------
U.S. $ 5,051.4 $ 4,870.8 4% n/a
- -------------------------------------------------------------------------------------------------------------------------
Europe 2,449.9 2,458.1 - 13%
- -------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 1,820.2 1,725.1 6 5
- -------------------------------------------------------------------------------------------------------------------------
Latin America 456.2 431.9 6 5
- -------------------------------------------------------------------------------------------------------------------------
Other** 734.7 511.9 44 44
- -------------------------------------------------------------------------------------------------------------------------
Total Systemwide sales $10,512.4 $ 9,997.8 5% 8%
- -------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
- -------------------------------------------------------------------------------------------------------------------------
U.S. $14,748.9 $14,324.0 3% n/a
- -------------------------------------------------------------------------------------------------------------------------
Europe 7,082.4 7,107.2 - 11%
- -------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 5,302.1 4,738.7 12 8
- -------------------------------------------------------------------------------------------------------------------------
Latin America 1,319.8 1,227.6 8 9
- -------------------------------------------------------------------------------------------------------------------------
Other** 1,803.5 1,343.5 34 34
- -------------------------------------------------------------------------------------------------------------------------
Total Systemwide sales $30,256.7 $28,741.0 5% 7%
- -------------------------------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported results.
** Includes Other Brands' systemwide sales of $219.0 million and $378.2
million for the quarter and nine months of 2000, respectively. In 1999,
Other Brands' systemwide sales were $36.3 million and $46.1 million for the
quarter and nine months, respectively.
n/a Not applicable
U.S. sales increased four percent for the quarter and three percent for the
nine months due to expansion and positive comparable sales. The positive
comparable sales for the quarter were driven by local market initiatives and
"McDonald's Taste Trials" promotion associated with the 2000 Olympics.
In Europe, expansion and positive comparable sales drove the constant currency
sales increases for the quarter and the nine months. This segment benefited
from strong performances in France, the Netherlands and Spain for both periods
and Germany for the quarter. Italy and the United Kingdom also contributed
significantly to the increases for both periods.
In Asia/Pacific and Latin America, the constant currency sales increases were
driven by expansion, partly offset by negative comparable sales for the quarter
and nine months. Weak consumer spending continues to negatively affect many
markets in these segments; however, China and Mexico posted strong positive
comparable sales in both periods.
In the Other segment, the increases were primarily driven by the addition of
Other Brands, as well as positive comparable sales and expansion in Canada and
South Africa for both periods.
10
Combined Operating Margins
The following combined operating margin information represents margins for
McDonald's restaurant business only.
- ----------------------------------------------------------------------------------------------------------------------
Combined operating margins Quarters ended Nine months ended
September 30 September 30
------------------------- ---------------------------
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Dollars in millions
- ----------------------------------------------------------------------------------------------------------------------
Company-operated $ 453.1 $ 455.3 $1,284.6 $1,265.3
- ----------------------------------------------------------------------------------------------------------------------
Franchised 788.0 782.7 2,281.3 2,252.5
- ----------------------------------------------------------------------------------------------------------------------
Combined operating margins $1,241.1 $1,238.0 $3,565.9 $3,517.8
- ----------------------------------------------------------------------------------------------------------------------
Percent of sales/revenues
- ----------------------------------------------------------------------------------------------------------------------
Company-operated 17.7% 18.6% 17.3% 17.9%
- ----------------------------------------------------------------------------------------------------------------------
Franchised 80.4 80.7 79.7 80.5
- ----------------------------------------------------------------------------------------------------------------------
Combined operating margin dollars increased $3.1 million for the quarter and
$48.1 million for the nine months. In constant currencies, combined operating
margin dollars increased by $59.9 million for the quarter and $180.6 million for
the nine months; a growth rate of five percent in both periods. The U.S. and
Europe segments accounted for over 80 percent of the combined margin dollars in
both periods.
As a percent of sales, consolidated Company-operated margins decreased for the
quarter and nine months. Food & paper costs and occupancy & other operating
expenses increased as a percent of sales for both periods, while payroll costs
as a percent of sales were flat for the quarter and decreased slightly for the
nine months.
Company-operated margins also decreased as a percent of sales for the quarter
and nine months for each segment. In the U.S., payroll costs as a percent of
sales increased for both periods. As a percent of sales, food & paper costs
increased for the quarter and decreased for the nine months, while occupancy &
other operating expenses decreased for the quarter and increased for the nine
months.
Europe's Company-operated margin decrease for the quarter was primarily due to
higher food & paper costs as a percent of sales, partly offset by lower payroll
costs. For the nine months, Europe's decrease was primarily due to higher
payroll costs and occupancy & other operating expenses as a percent of sales. In
both periods, Latin America's decreases were partly offset by the consolidation
of Argentina.
Franchised margins as a percent of applicable revenues decreased for the
quarter and nine months. The decreases in the margins as a percent of revenues
were 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 because the financing costs implicit in the lease are
included in occupancy expense, whereas for owned sites, financing costs are
reflected in interest expense.
Higher occupancy costs negatively impacted franchised margins in all segments
for both periods. Additionally, 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 11 percent for the
quarter and 10 percent for the nine months. The increases were primarily due to
spending to support the development of Other Brands and the consolidation of
Argentina and Indonesia. Excluding Other Brands and the consolidations, selling,
general & administrative expenses increased two percent for the quarter and
three percent for the nine 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 nine months 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 for the quarter and nine months was primarily due to lower
provisions for property dispositions, higher gains on sales of excess property,
costs in 1999 associated with the implementation of our Made For You food
preparation system and the write-off of software in second quarter 1999.
- --------------------------------------------------------------------------------------------------------------------------
Other operating income and expense Quarters ended Nine months ended
September 30 September 30
- --------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Gains on sales of restaurant businesses $20.5 $ 16.2 $ 58.4 $ 38.6
- --------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates 32.9 35.7 92.8 109.6
- --------------------------------------------------------------------------------------------------------------------------
Other 7.2 (18.0) (10.6) (93.6)
- --------------------------------------------------------------------------------------------------------------------------
Total $60.6 $ 33.9 $140.6 $ 54.6
- --------------------------------------------------------------------------------------------------------------------------
Operating Income
Consolidated operating income increased $3.1 million for the quarter and,
in constant currencies, $47.2 million, or five percent. For the nine months,
consolidated operating income increased $52.9 million and, in constant
currencies, $149.2 million or six percent. The constant currency increases for
both periods 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 September 30
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. $ 426.2 $ 389.6 9% n/a
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 313.5 324.8 (3) 10%
- ----------------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 117.2 119.8 (2) -
- ----------------------------------------------------------------------------------------------------------------------------------
Latin America 29.8 36.5 (18) (20)
- ----------------------------------------------------------------------------------------------------------------------------------
Other** 24.1 37.0 (35) (35)
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating income $ 910.8 $ 907.7 -% 5%
- ----------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. $1,213.8 $1,132.8 7% n/a
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 856.8 881.1 (3) 9%
- -----------------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 333.1 305.0 9 8
- -----------------------------------------------------------------------------------------------------------------------------------
Latin America 82.9 94.1 (12) (11)
- -----------------------------------------------------------------------------------------------------------------------------------
Other** 69.1 89.8 (23) (24)
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating income $2,555.7 $2,502.8 2% 6%
- ----------------------------------------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported results.
** Includes Other Brands' operating losses of $15.5 million and $33.4 million
for the quarter and nine months of 2000, respectively. In 1999, Other
Brands' operating losses were $1.3 million and $2.6 million for the quarter
and nine months, respectively.
n/a Not applicable
U.S. operating income increased $36.6 million, or nine percent, for the
quarter and $81.0 million, or seven percent, for the nine months. The increases
for both periods were driven by higher combined operating margin dollars and
higher other operating income. Selling, general, and administrative expenses
increased slightly for the quarter and were relatively flat for the nine months.
Europe's operating income increased 10 percent for the quarter and nine
percent for the nine months in constant currencies. Strong results in France,
Italy and Spain drove this segment's performance in both periods. Germany's
strong performance for the quarter also contributed significantly to the
increase.
12
Operating income in Asia/Pacific was flat for the quarter and increased eight
percent for the nine months in constant currencies. This segment benefited in
both periods from strong performances in China and South Korea, while
Australia's drop in retail spending had a significant negative impact on
results. We believe the drop in retail spending in Australia will likely
continue for some period of time. 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 for the nine months.
Latin America's operating income decreased 20 percent for the quarter and 11
percent for the nine months in constant currencies. Both periods were negatively
impacted by the continuing difficult economic conditions experienced by most
markets in the region. Strong performance in Mexico, as well as the
consolidation of Argentina, partly offset the decreases in both periods.
In the Other segment, strong performance in Canada was offset by the
investment spending for Other Brands for the quarter and nine months.
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
For both periods, higher interest expense was primarily due to higher average
debt levels, partly offset by 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 for the quarter reflected translation gains in
2000 compared with translation losses in 1999 and lower minority interest
expense. For the nine months, nonoperating (income) expense also reflected lower
minority interest expense as well as lower translation losses and a gain related
to the sale of a partial ownership interest in a majority-owned subsidiary
outside the U.S.
The third quarter effective income tax rate was 30.5 percent compared with
32.4 percent in 1999. The effective tax rate for the nine months was 31.4
percent compared with 32.8 percent in 1999. The decrease in the income tax rate
was the result of a tax benefit resulting from an international transaction. For
the full year, the tax rate is expected to be about 31.4 percent.
WEIGHTED AVERAGE SHARES
Weighted average shares outstanding for the third quarter and nine 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. The
Company repurchased $426 million or 12.3 million shares of its common stock in
the third quarter, bringing the total for the first nine months of 2000 to 48.0
million shares for approximately $1.7 billion.
EARNINGS PER SHARE
Diluted earnings per share grew 10 percent for the quarter and 12 percent for
the nine months in constant currencies. Achieving higher than the midpoint of
our 10-15 percent annual earnings per share target would require a very strong
fourth quarter. Based on our current outlook, the more realistic expectation is
that our annual earnings per share increase will be closer to our year-to-date
performance.
FINANCIAL POSITION
Free cash flow - cash provided by operations less capital expenditures - for the
nine months ended September 30, 2000 decreased $292.3 million to $835.1 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 4% was primarily due to the addition of Other Brands and
the consolidation of Argentina and Indonesia. The Company expects to add about
1,800 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 puts 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 $1.7 billion, or 48.0 million
shares of its common stock in the first nine months of 2000. This brought the
cumulative purchases to $2.9 billion, or 82.4 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. The annual dividend
for 2000, of 21.5 cents per share, was declared by the Board of Directors in
September 2000 and will be paid in December 2000.
13
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 Nos. 137 and 138, 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 will 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.
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
(particularly the Euro) 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
- -----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER AND NINE MONTHS HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended Nine Months ended
September 30 September 30
Dollars in millions 2000 1999 2000 1999
- ----------------------------------------------- ----------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 6,391.8 $6,162.0 $18,521.7 $17,860.5
Operated by the Company 2,768.5 2,474.4 7,790.4 7,087.6
Operated by affiliates 1,352.1 1,361.4 3,944.6 3,792.9
- ----------------------------------------------- ----------------------------------------------------------------------------------
Systemwide sales $10,512.4 $9,997.8 $30,256.7 $28,741.0
- ----------------------------------------------- ----------------------------------------------------------------------------------
Restaurant margins*
Company-operated
----------------
U.S. 17.1% 17.2% 17.1% 17.8%
Europe 19.9 20.2 18.7 19.1
Asia/Pacific 16.8 18.9 17.0 17.3
Latin America 12.8 15.0 12.8 14.1
Other 16.3 16.6 15.1 15.5
Total 17.7% 18.6% 17.3% 17.9%
Franchised
----------
U.S. 80.9% 81.2% 80.5% 81.3%
Europe 80.1 79.9 78.6 79.0
Asia/Pacific 83.1 84.0 82.6 83.6
Latin America 73.4 77.0 74.1 77.6
Other 81.0 80.0 79.0 78.7
Total 80.4% 80.7% 79.7% 80.5%
*Restaurant margin information relates to McDonald's restaurant business only
RESTAURANTS
- ----------------------------------------------- ----------------------------------------------------------------------------------
At September 30, 2000 1999
- ----------------------------------------------- ----------------------------------------------------------------------------------
By type
Operated by franchisees 16,783 15,774
Operated by the Company 7,530 6,043
Operated by affiliates 4,141 4,137
- ----------------------------------------------- ----------------------------------------------------------------------------------
Systemwide restaurants 28,454 25,954
- -----------------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
2000 1999 2000 1999
- ----------------------------------------------- ----------------------------------------------------------------------------------
Additions
U.S. 45 39 74 57
Europe 111 131 300 268
Asia/Pacific 158 138 334 344
Latin America 60 66 194 215
Other - McDonald's 22 44 40 75
Other Brands 12 170* 706** 177*
- ----------------------------------------------- ----------------------------------------------------------------------------------
Systemwide additions 408 588 1,648 1,136
- ----------------------------------------------- ----------------------------------------------------------------------------------
* Primarily relates to the acquisition of Donatos in third quarter 1999
**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 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, incorporated herein
by reference from Form 10-Q for the quarter ended June 30,
2000.
(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.
(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).
16
Exhibit Number Description
- -------------- -----------
(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.
(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) 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.
(vii) 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.
(viii) 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.
(ix) 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.*
(i) First Amendment to the McDonald's Profit Sharing Program
filed herewith.
(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, as amended and
restated, filed herewith.*
17
(h) Executive Retention Plan, incorporated herein by reference
from Form 10-K for the year ended December 31, 1998.*
(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 November 8, 2000.
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
10/19/00 Item 7 No
18
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
November 8, 2000
- -----------------
19