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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2001
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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1,293,286,965
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(Number of shares of common stock
outstanding as of March 31, 2001)
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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,
March 31, 2001 (unaudited) and
December 31, 2000 3
Condensed consolidated statement of
income (unaudited), first quarters ended March 31, 2001 and
2000 4
Condensed consolidated statement of
cash flows (unaudited), first quarters ended March 31, 2001
and 2000 5
Financial comments (unaudited) 6
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
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
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CONDENSED CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
(unaudited)
In millions March 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 403.0 $ 421.7
Accounts and notes receivable 793.9 796.5
Inventories, at cost, not in excess of market 87.2 99.3
Prepaid expenses and other current assets 383.3 344.9
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,667.4 1,662.4
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 3,137.3 2,973.5
PROPERTY AND EQUIPMENT
Property and equipment, at cost 23,169.4 23,569.0
Accumulated depreciation and amortization (6,524.9) (6,521.4)
- -----------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,644.5 17,047.6
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TOTAL ASSETS $21,449.2 $21,683.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 293.7 $ 275.5
Accounts payable 570.6 684.9
Income taxes 128.7 92.2
Other taxes 188.8 195.5
Accrued interest 147.3 149.9
Other accrued liabilities 550.5 608.4
Current maturities of long-term debt 390.8 354.5
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TOTAL CURRENT LIABILITIES 2,270.4 2,360.9
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LONG-TERM DEBT 7,875.9 7,843.9
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 609.0 489.5
DEFERRED INCOME TAXES 1,150.6 1,084.9
COMMON EQUITY PUT OPTIONS 612.5 699.9
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 1,479.5 1,441.8
Unearned ESOP compensation (114.9) (115.0)
Retained earnings 17,637.9 17,259.4
Accumulated other comprehensive income (1,632.3) (1,287.3)
Common stock in treasury, at cost; 367.3 and 355.7 million shares (8,456.0) (8,111.1)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,930.8 9,204.4
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,449.2 $21,683.5
=======================================================================================================================
See accompanying Financial comments.
3
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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
Quarters ended
In millions, except March 31
per common share data 2001 2000
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REVENUES
Sales by Company-operated restaurants $2,614.2 $2,439.9
Revenues from franchised and affiliated restaurants 897.5 903.9
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,511.7 3,343.8
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OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,243.4 2,033.1
Franchised restaurants - occupancy expenses 196.9 193.8
Selling, general, and administrative expenses 397.8 377.6
Other operating income, net (21.6) (29.3)
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,816.5 2,575.2
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OPERATING INCOME 695.2 768.6
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Interest expense 120.9 100.4
Nonoperating expense 18.3 5.5
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INCOME BEFORE PROVISION FOR INCOME TAXES 556.0 662.7
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Provision for income taxes 177.7 211.8
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NET INCOME $ 378.3 $ 450.9
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NET INCOME PER COMMON SHARE $ 0.29 $ 0.34
NET INCOME PER COMMON SHARE - DILUTED 0.29 0.33
- ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 1,300.7 1,343.4
WEIGHTED AVERAGE SHARES - DILUTED 1,325.3 1,383.8
- -----------------------------------------------------------------------------------------------------------
See accompanying Financial comments.
4
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
Quarters ended
March 31
In millions 2001 2000
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OPERATING ACTIVITIES
Net income $ 378.3 $ 450.9
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 269.9 255.8
Changes in operating working capital items (155.3) (8.0)
Other 13.5 (31.6)
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CASH PROVIDED BY OPERATIONS 506.4 667.1
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INVESTING ACTIVITIES
Property and equipment expenditures (348.6) (378.7)
Purchases and sales of restaurant businesses and
sales of property (104.0) 8.9
Other (37.5) (47.6)
- -------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (490.1) (417.4)
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FINANCING ACTIVITIES
Notes payable and long-term financing issuances and repayments 277.1 242.6
Treasury stock purchases (384.8) (578.7)
Common stock dividends
Other 72.7 34.9
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CASH USED FOR FINANCING ACTIVITIES (35.0) (301.2)
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CASH AND EQUIVALENTS INCREASE (DECREASE) (18.7) (51.5)
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Cash and equivalents at beginning of period 421.7 419.5
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CASH AND EQUIVALENTS AT END OF PERIOD $ 403.0 $ 368.0
===============================================================================================================================
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 2000 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 ended March 31,
2001 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, foreign currency translation
adjustments and net unrealized gains and losses on cash flow hedges and totaled
$33.3 million and $334.8 million for the first quarter of 2001 and 2000,
respectively.
Per Common Share Information
Diluted net income per common share is calculated using net income divided
by diluted weighted-average shares. Diluted weighted-average shares include
weighted average shares outstanding plus the dilutive effect of stock options,
calculated using the treasury stock method, of 24.6 million shares and 40.4
million shares for the first quarter of 2001 and 2000, respectively.
Common Equity Put Options
At March 31, 2001 19.8 million of common equity put options were
outstanding. The options expire at various dates through February 2002, at
exercise prices between $28.74 and $32.26. The $612.5 million total exercise
price of the options outstanding was classified in common equity put options at
March 31, 2001 and the related offset was recorded in common stock in treasury,
net of premiums received.
Financial Instruments
The Company is exposed to the impact of interest-rate changes and foreign
currency fluctuations. To minimize these risks, the Company employs risk
management policies and procedures and finances with debt in the currencies in
which assets are denominated. The Company uses foreign currency denominated debt
and derivatives to hedge foreign currency royalties, intercompany financings and
long-term investments in foreign subsidiaries and affiliates. This reduces the
impact of fluctuating foreign currencies on net income and shareholders' equity.
The Company does not use derivatives with a level of complexity or with a risk
higher than the exposures to be hedged and does not hold or issue derivatives
for trading purposes.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended. SFAS No. 133 requires companies to recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. SFAS No. 133 also requires companies to designate all derivatives that
qualify as hedging instruments, as either a fair value hedge, a cash flow hedge
or a hedge of a net investment in a foreign operation. This designation is based
upon the exposure being hedged. For derivatives not designated as hedging
instruments, the gain or loss is recognized in current earnings.
The Company recorded a transition adjustment at January 1, 2001, related to
cash flow hedges, that reduced accumulated other comprehensive income in
shareholders' equity by $17.0 million, after-tax. The cumulative effect of
adopting SFAS No. 133 at January 1, 2001 was not material to the Company's
statement of income.
All derivatives, primarily foreign currency exchange agreements, interest-
rate exchange agreements and forward foreign exchange contracts were classified
in the Company's balance sheet at March 31, 2001 as other assets or other
long-term liabilities (excluding accrued interest) and totaled $223.8 million
and $110.3 million, respectively.
6
Fair Value Hedges
- -----------------
The Company enters into fair value hedges to reduce the exposure to changes
in the fair value of an asset or a liability, or an identified portion thereof,
which is attributable to a particular risk. The types of fair value hedges the
Company enters into include: (i) interest-rate exchange agreements to convert a
portion of its fixed-rate debt to floating-rate debt and (ii) foreign currency
exchange agreements for the exchange of various currencies and interest rates.
The foreign currency exchange agreements are entered into to hedge the currency
risk associated with debt and intercompany loans denominated in foreign
currencies, and essentially result in floating-rate assets or liabilities
denominated in U.S. Dollars or appropriate functional currencies.
For fair value hedges, the gains or losses on derivatives as well as the
offsetting gains or losses on the related hedged items are recognized in current
earnings. During the quarter ended March 31, 2001, there was no significant
impact to the Company's earnings related to either the ineffective portion of
fair value hedging instruments or to portions of hedging instruments the Company
excluded from its assessment of hedge effectiveness.
Cash Flow Hedges
- ----------------
The Company enters into cash flow hedges to mitigate the exposure to
variability in expected future cash flows attributable to a particular risk. The
types of cash flow hedges the Company enters into include: (i) interest-rate
exchange agreements that effectively convert a portion of floating-rate debt to
fixed-rate debt (designed to reduce the impact of interest-rate changes on
future interest expense), (ii) forward foreign exchange contracts and foreign
currency options (designed to protect against the reduction in value of
forecasted foreign currency cash flows such as royalties and other payments
denominated in foreign currencies), and (iii) foreign currency exchange
agreements for the exchange of various currencies and interest rates. The
foreign currency exchange agreements are entered into to hedge the currency
risk associated with debt and intercompany loans denominated in foreign
currencies, and essentially result in fixed-rate assets or liabilities
denominated in U.S. Dollars or appropriate functional currencies.
For cash flow hedges, the effective portion of the gains or losses on
derivatives is reported as a component of other comprehensive income in
shareholders' equity and reclassified into earnings in the same period or
periods in which the hedged transaction affects earnings. The remaining gain or
loss in excess of the cumulative change in the present value of future cash
flows of the hedged item, if any, is recognized in current earnings during the
period of change. During the quarter ended March 31, 2001, there was no
significant impact to the Company's earnings related to either the ineffective
portion of cash flow hedging instruments or to amounts excluded from the
assessment of hedge effectiveness.
Subsequent to the transition adjustment recorded at January 1, 2001, the
Company recorded net hedging gains of $9.6 million, after-tax, related to cash
flow hedges during the first quarter in other comprehensive income in
shareholders' equity. Based on foreign currency exchange rates at March 31,
2001, the Company estimates that about $10 million of net cash flow hedging
gains, after-tax, included in accumulated other comprehensive income in
shareholders' equity at March 31, 2001, will be reclassified into earnings by
the end of 2001 as the underlying hedged transactions are realized. The maximum
maturity date of any cash flow hedges of forecasted transactions at March 31,
2001 was 15 months, excluding instruments hedging forecasted payments of
variable interest on existing financial instruments.
Hedges of Net Investments in Foreign Operations
- -----------------------------------------------
The Company uses forward foreign exchange contracts and foreign currency
denominated debt to hedge its investments in foreign subsidiaries and
affiliates. Realized and unrealized gains and losses from these hedges are
included in shareholders' equity as other comprehensive income and offset
translation gains and losses on the underlying investments in foreign
subsidiaries and affiliates which also are recorded in other comprehensive
income.
During the quarter ended March 31, 2001, the Company recorded $155.2
million of net gains, after-tax, included as foreign currency translation
adjustments in other comprehensive income. These gains related primarily to
foreign currency denominated debt designated as hedges of net investments.
7
Segment Information
The Company operates in the food service industry and primarily operates
quick service restaurant businesses under the McDonald's brand. In addition, the
Company also 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
March 31
In millions 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
REVENUES
U.S. $1,270.4 $1,209.6
Europe 1,094.9 1,171.0
Asia/Pacific 510.2 526.6
Latin America 254.6 228.9
Other 381.6 207.7
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TOTAL REVENUES $3,511.7 $3,343.8
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
U.S. $ 402.7 $ 388.7
Europe 222.8 276.4
Asia/Pacific 115.5 118.2
Latin America 22.3 31.7
Other 11.7 20.8
Corporate (79.8) (67.2)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 695.2 $ 768.6
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8
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
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OPERATING RESULTS
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Dollars in millions, except Quarter ended
per common share data March 31, 2001
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% Increase/
Amount (Decrease)
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SYSTEMWIDE SALES $9,649.7 2%
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REVENUES
Sales by Company-operated restaurants 2,614.2 7
Revenues from franchised and affiliated restaurants 897.5 (1)
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TOTAL REVENUES 3,511.7 5
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OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,243.4 10
Franchised restaurants - occupancy costs 196.9 2
Selling, general, and administrative expenses 397.8 5
Other operating income, net (21.6) N/M
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TOTAL OPERATING COSTS AND EXPENSES 2,816.5 9
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OPERATING INCOME 695.2 (10)
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Interest expense 120.9 20
Nonoperating expense 18.3 N/M
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INCOME BEFORE PROVISION FOR INCOME TAXES 556.0 (16)
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Provision for income taxes 177.7 (16)
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NET INCOME $ 378.3 (16)%
==================================================================================================================================
NET INCOME PER COMMON SHARE $ 0.29 (15)%
NET INCOME PER COMMON SHARE-DILUTED 0.29 (12)
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N/M Not meaningful
CONSOLIDATED OPERATING RESULTS
The Company operates in the food service industry and primarily operates quick-
service restaurant businesses under the McDonald's brand. To capture additional
meal occasions, the Company also operates other restaurant concepts: Aroma Cafe,
Boston Market, Chipotle Mexican Grill and Donatos Pizza. Collectively these four
businesses are referred to as "Other Brands".
The following table presents the growth rates for reported results and the
results on a constant currency basis for the quarter ended March 31, 2001.
Information on a constant currency basis 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.
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Key highlights - Consolidated
Dollars in millions, except per common share Percent
data Increase/(Decrease)
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As Constant
Quarters ended March 31 2001 2000 Reported Currency*
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Systemwide sales $9,649.7 $9,506.7 2 6
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Total revenues 3,511.7 3,343.8 5 10
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Operating income 695.2 768.6 (10) (6)
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Net income 378.3 450.9 (16) (12)
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Net income per common share - diluted .29 .33 (12) (9)
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* Excluding the effect of foreign currency translation on reported
results.
9
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.
Reported results for the quarter were negatively affected by foreign
currency translation primarily due to the weaker Euro, British Pound, Australian
Dollar and Japanese Yen.
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.
- ----------------------------------------------------------------------------------------------------------------
Systemwide sales
Percent
Dollars in millions Increase/(Decrease)
- ----------------------------------------------------------------------------------------------------------------
As Constant
Quarters ended March 31 2001 2000 Reported Currency*
- ----------------------------------------------------------------------------------------------------------------
U.S. $4,676.5 $4,505.0 4 n/a
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Europe 2,178.2 2,305.7 (6) 2
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Asia/Pacific 1,687.5 1,785.6 (5) 4
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Latin America 455.3 434.1 5 11
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Other** 652.2 476.3 37 42
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Total Systemwide sales $9,649.7 $9,506.7 2 6
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* Excluding the effect of foreign currency translation on reported results.
** Includes Systemwide sales for Other Brands of $225.6 million and $47.4
million for first quarter 2001 and 2000, respectively.
n/a Not applicable
On a global basis, the increases in sales and revenues for the quarter were
primarily due to restaurant expansion and the acquisition of Boston Market in
the second quarter 2000. Foreign currency translation had a negative effect on
the growth rates for both Systemwide sales and revenues for the quarter. On a
constant currency basis, revenues increased at a higher rate than sales for the
quarter, primarily due to the acquisition of Boston Market restaurants, which
are all Company-operated, and an increase in the royalty percent received from
our Japanese affiliate, effective January 1, 2001.
U.S. sales increased 4% for the quarter due to expansion and positive
comparable sales, despite the extra day in 2000 due to leap year. The comparable
sales increase was driven by the introduction of the New Tastes Menu, which
offers customers more variety, the national rollout of the Big N' Tasty sandwich
and local market initiatives.
In Europe, constant currency sales increased due to expansion and strong
performance in the Netherlands and Russia, substantially offset by negative
comparable sales. Comparable sales were affected by the decline in consumer
confidence regarding the European beef supply in certain markets, as well as
difficult comparisons with strong promotions last year. Sales trends are
improving in several markets including France, which had positive comparable
sales in March. We are optimistic that the impact from the concerns regarding
European beef will continue to lessen as the year progresses.
Expansion, partly offset by negative comparable sales, drove the constant
currency sales increase in Asia/Pacific. This segment continued to benefit from
strong positive comparable sales in China. However, Asia/Pacific's comparable
sales growth was negatively affected by a difficult comparison with last year's
very successful Hello Kitty promotion in several markets and weak consumer
spending in Australia, due to the goods and services tax introduced in July
2000. We expect comparable sales in Australia to improve in the second half of
the year as we pass the anniversary of the introduction of the tax.
In Latin America, the constant currency sales increase was due to
expansion, partly offset by negative comparable sales. Expansion and positive
comparable sales in Mexico and Brazil were the primary contributors to the
increase; however, weak consumer spending continued to negatively affect most
markets in this segment.
10
In the Other segment, the constant currency sales increase was driven by
the acquisition of Boston Market and positive comparable sales and expansion for
Canada, Chipotle and Donatos.
Combined Operating Margins
The following combined operating margin information represents margins for
McDonald's restaurant business only.
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Combined operating margins Quarters ended
March 31
--------------------------
2001 2000
- ------------------------------------------------------------------------------
Dollars in millions
- ------------------------------------------------------------------------------
Company-operated $ 359.3 $ 403.3
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Franchised 700.2 709.7
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Combined operating margins $1,059.5 $1,113.0
- ------------------------------------------------------------------------------
Percent of sales/revenues
- ------------------------------------------------------------------------------
Company-operated 15.0% 16.8%
- ------------------------------------------------------------------------------
Franchised 78.1 78.6
- ------------------------------------------------------------------------------
Combined operating margin dollars decreased by $13.0 million, or 1%, for
the quarter, in constant currencies. The U.S. and Europe segments accounted for
nearly 80% of the combined margin dollars for the quarter.
As a percent of sales, Company-operated margins decreased for the quarter.
Food & paper costs as a percent of sales were flat, while payroll costs and
occupancy & other operating expenses increased.
In the U.S., Company-operated margins for the quarter decreased as a
percent of sales, primarily due to higher labor and energy costs, partly offset
by lower food & paper costs. In Europe and Asia/Pacific, the Company-operated
margin percent decreased primarily due to negative comparable sales and higher
labor costs. In addition, Europe experienced higher food costs. Latin America's
Company-operated margin percent was relatively flat.
Franchised margins as a percent of applicable revenues in the U.S. were
relatively flat, while margin percents in Europe and Latin America declined,
primarily due to negative comparable sales and temporary rent assistance
provided to franchisees in certain markets. The franchised margin percent in
Asia/Pacific increased primarily due to an increase in the royalty percent
received from our Japanese affiliate.
Franchised margins as a percent of revenues in all segments were also
negatively impacted by 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.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased 5% for the quarter,
primarily due to the acquisition of Boston Market and spending to support the
development of Other Brands, partly offset by weaker foreign currencies.
Excluding Other Brands, selling, general & administrative expenses increased 1%
for the quarter.
Other Operating Income, net
Equity in earnings of unconsolidated affiliates decreased for the quarter
primarily due to weaker results in Japan, the increase in Japan's royalty
expense and a weaker Japanese Yen. Although the increase in royalty expense
reduced McDonald's equity in earnings for Japan, it was more than offset by the
royalty benefit McDonald's received in franchised revenues. The decrease in
other expense for the quarter was primarily due to a gain on the sale of real
estate in Singapore, partly offset by the write-off of certain technology costs.
11
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Other operating income, net
Dollars in millions
-------------------------------------------------------------------------------
Quarters ended March 31 2001 2000
-------------------------------------------------------------------------------
Gains on sales of restaurant businesses $15.3 $ 15.6
-------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates 11.9 26.4
-------------------------------------------------------------------------------
Other expense (5.6) (12.7)
-------------------------------------------------------------------------------
Total $21.6 $ 29.3
-------------------------------------------------------------------------------
Operating Income
Consolidated operating income for the quarter decreased $43.1 million, or
6%, in constant currencies. The constant currency decrease for the quarter was
due to lower combined operating margin dollars and other operating income, and
higher selling, general & administrative expenses incurred primarily in
developing the Other Brands.
- ----------------------------------------------------------------------------------------------------------------
Operating income**
Percent
Dollars in millions Increase/(Decrease)
- ----------------------------------------------------------------------------------------------------------------
Quarters ended March 31 2001 2000 As Constant
Reported Currency*
- ----------------------------------------------------------------------------------------------------------------
U.S. $402.7 $388.7 4 n/a
- ----------------------------------------------------------------------------------------------------------------
Europe 222.8 276.4 (19) (13)
- ----------------------------------------------------------------------------------------------------------------
Asia/Pacific 115.5 118.2 (2) 8
- ----------------------------------------------------------------------------------------------------------------
Latin America 22.3 31.7 (30) (27)
- ----------------------------------------------------------------------------------------------------------------
Other*** 11.7 20.8 (44) (38)
- ----------------------------------------------------------------------------------------------------------------
Corporate (79.8) (67.2) (19) n/a
- ----------------------------------------------------------------------------------------------------------------
Total operating income $695.2 $768.6 (10) (6)
- ----------------------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported results.
** Segment operating income has been restated for 2000 to break out corporate
expenses from the other operating segments.
*** Includes operating losses for Other Brands of $14.9 million and $9.1
million for first quarter 2001 and 2000, respectively.
n/a Not applicable
U.S. operating income increased $14.0 million, or 4%, for the quarter. The
increase was driven by higher combined operating margin dollars and higher other
operating income, partly offset by higher selling, general and administrative
expenses.
Europe's operating income decreased as the decline in consumer confidence
regarding the safety of the European beef supply continued to negatively affect
results.
Operating income in Asia/Pacific increased 8% in constant currencies. This
segment benefited from a strong performance in China, an increase in the royalty
percent received from Japan and a gain on the sale of real estate in Singapore.
Latin America's operating income decreased as strong results in Mexico were
offset by lower franchised margins in countries continuing to experience
difficult economic conditions.
In the Other segment, Canada's continued strong performance was offset by
weak results in several markets in the Middle East & Africa and spending to
support restaurant development in the Other Brands.
12
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
Higher interest expense for the quarter 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
repurchase shares of common stock. We expect the rate of increase in interest
expense to moderate throughout the year.
Nonoperating expense increased for the quarter primarily due to the write-
off of a financing receivable from a Latin American supplier and minority
interest expense related to the sale of real estate in Singapore.
The effective income tax rate was 32.0% for the first quarter in both 2001
and 2000, and is expected to be about 32.0% for the year.
WEIGHTED AVERAGE SHARES
Weighted average shares outstanding for the quarter 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 $452
million or 14.4 million shares of its common stock in the first quarter.
CASH FLOWS
Cash provided by operations totaled $506.4 million and exceeded capital
expenditures. This amount was less than in 2000, primarily due to lower net
income and changes in various working capital items in international markets.
Cash provided by operations, together with other sources of cash such as
borrowings, was used primarily for capital expenditures, share repurchases and
debt repayments. Capital expenditures decreased 8% as expenditures related to
McDonald's restaurant business declined 14%, partially offset by higher
expenditures related to Other Brands. The Company expects to add 1,600 to 1,700
restaurants this year, including 1,500 to 1,600 McDonald's restaurants.
The Company believes that buying back its stock enhances shareholder value.
Therefore, the Company purchased $452 million, or 14.4 million shares of its
common stock in the first quarter of 2001. This brought cumulative purchases to
$3.8 billion, or 105.5 million shares under the three-year, $4.5 billion share
repurchase program. The Company expects to complete the program by the end of
the year.
EURO CONVERSION
Twelve member countries of the European Union have established fixed conversion
rates between their existing currencies ("legacy currencies") and one common
currency, the Euro. The Euro is traded 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 Euro.
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.
13
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this report. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of the date
of this report. These forward-looking statements involve a number of risks and
uncertainties. The following are some of the factors that could cause actual
results to differ materially from those expressed in or underlying our forward-
looking statements: 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. The foregoing list of important factors is
not exclusive.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
14
- --------------------------------------------------------------------------------
FIRST QUARTER HIGHLIGHTS
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended
March 31
Dollars in millions 2001 2000
- --------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $5,824.8 $5,778.7
Operated by the Company 2,614.2 2,439.9
Operated by affiliates 1,210.7 1,288.1
- --------------------------------------------------------------------------------
Systemwide sales $9,649.7 $9,506.7
- --------------------------------------------------------------------------------
Restaurant margins*
Company-operated
----------------
U.S. 16.3% 16.8%
Europe 14.7 17.6
Asia/Pacific 14.9 17.9
Latin America 12.7 12.6
Other 13.0 13.4
Total 15.0% 16.8%
Franchised
----------
U.S. 79.0% 79.1%
Europe 75.4 77.3
Asia/Pacific 86.2 82.7
Latin America 68.5 75.6
Other 77.2 76.9
Total 78.1% 78.6%
* Restaurant margin information represents margins for the McDonald's restaurant
business only.
RESTAURANTS
- --------------------------------------------------------------------------------
At March 31, 2001 2000*
- --------------------------------------------------------------------------------
By type
Operated by franchisees 16,803 16,024
Operated by the Company 7,814 6,355
Operated by affiliates 4,288 4,083
- --------------------------------------------------------------------------------
Systemwide restaurants 28,905 26,462
- --------------------------------------------------------------------------------
Quarters ended
March 31
2001 2000*
- --------------------------------------------------------------------------------
Additions
U.S. 7 (5)
Europe 50 68
Asia/Pacific 64 50
Latin America 38 24
Other - McDonald's 13 (5)
Other Brands 26 21
- --------------------------------------------------------------------------------
Systemwide additions 198 153
- --------------------------------------------------------------------------------
* Adjusted to exclude dessert only kiosks.
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, 2000 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,
incorporated herein by reference from Form 10-Q for the
quarter ended September 30, 2000.
(ii) Second Amendment to the McDonald's Profit Sharing
Program, filed herewith.
(iii) Third 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, filed
herewith. *
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
filed herewith. *
(f) McDonald's Corporation Deferred Income Plan, as amended and
restated, incorporated herein by reference from Form 10-K for the
year ended December 31, 2000. *
17
(g) 1999 Non-Employee Director Stock Option Plan, as amended and
restated incorporated herein by reference from Form 10-Q for the
quarter ended September 30, 2000. *
(h) Executive Retention Plan, as amended March 20, 2001, filed
herewith. *
(12) Statement re: Computation of Ratios
_____________________________________
*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 May 10, 2001.
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
4/19/01 Item 5 and 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
May 10, 2001
- ------------
19