================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 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
----- -----
1,287,156,129
----------------------------
(Number of shares of common stock
outstanding as of June 30, 2001)
McDONALD'S CORPORATION
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INDEX
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Page Reference
Part I. Financial Information
Item 1 - Financial Statements
Condensed consolidated balance sheet,
June 30, 2001 (unaudited) and
December 31, 2000 3
Condensed consolidated statement of income
(unaudited), quarters and six months ended
June 30, 2001 and 2000 4
Condensed consolidated statement of
cash flows (unaudited), quarters and six months
ended June 30, 2001 and 2000 5
Financial comments (unaudited) 6
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
Item 3 - Quantitative & Qualitative Disclosures
About Market Risk 16
Part II. Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 17
(a) Exhibits
The exhibits listed in the
accompanying Exhibit Index are
filed as part of this report 17
(b) Reports on Form 8-K 19
Signature 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
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(unaudited)
In millions June 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 413.3 $ 421.7
Accounts and notes receivable 767.0 796.5
Inventories, at cost, not in excess of market 92.3 99.3
Prepaid expenses and other current assets 395.3 344.9
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TOTAL CURRENT ASSETS 1,667.9 1,662.4
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OTHER ASSETS 3,042.2 2,973.5
PROPERTY AND EQUIPMENT
Property and equipment, at cost 23,272.7 23,569.0
Accumulated depreciation and amortization (6,597.1) (6,521.4)
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NET PROPERTY AND EQUIPMENT 16,675.6 17,047.6
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TOTAL ASSETS $21,385.7 $21,683.5
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 92.8 $ 275.5
Accounts payable 338.0 684.9
Income taxes 73.1 92.2
Other taxes 183.8 195.5
Accrued interest 131.8 149.9
Other accrued liabilities 575.8 608.4
Current maturities of long-term debt 284.6 354.5
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TOTAL CURRENT LIABILITIES 1,679.9 2,360.9
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LONG-TERM DEBT 8,194.0 7,843.9
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 600.8 489.5
DEFERRED INCOME TAXES 1,130.0 1,084.9
COMMON EQUITY PUT OPTIONS 537.5 699.9
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 1,525.5 1,441.8
Unearned ESOP compensation (114.9) (115.0)
Retained earnings 18,079.1 17,259.4
Accumulated other comprehensive income (1,625.4) (1,287.3)
Common stock in treasury, at cost; 373.5 and 355.7 million shares (8,637.4) (8,111.1)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,243.5 9,204.4
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,385.7 $21,683.5
=======================================================================================================================
See accompanying Financial comments.
3
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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
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Quarters ended Six Months ended
In millions, except June 30 June 30
per common share data 2001 2000 2001 2000
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REVENUES
Sales by Company-operated restaurants $2,738.2 $2,582.0 $5,352.4 $5,021.9
Revenues from franchised and affiliated restaurants 969.3 978.6 1,866.8 1,882.5
- --------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,707.5 3,560.6 7,219.2 6,904.4
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OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,341.6 2,147.0 4,585.0 4,180.1
Franchised restaurants - occupancy expenses 197.9 194.6 394.8 388.4
Selling, general, and administrative expenses 414.6 393.4 812.4 771.0
Other operating income, net (19.1) (50.7) (40.7) (80.0)
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 2,935.0 2,684.3 5,751.5 5,259.5
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 772.5 876.3 1,467.7 1,644.9
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Interest expense 117.1 106.2 238.0 206.6
Nonoperating (income) expense, net 1.7 (2.9) 20.0 2.6
- --------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 653.7 773.0 1,209.7 1,435.7
- --------------------------------------------------------------------------------------------------
Provision for income taxes 212.8 247.1 390.5 458.9
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NET INCOME $ 440.9 $ 525.9 $ 819.2 $ 976.8
==================================================================================================
NET INCOME PER COMMON SHARE $ 0.34 $ 0.40 $ 0.63 $ 0.73
NET INCOME PER COMMON SHARE - DILUTED 0.34 0.39 0.62 0.71
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES 1,289.7 1,327.1 1,295.2 1,335.3
WEIGHTED AVERAGE SHARES - DILUTED 1,311.1 1,365.5 1,317.9 1,374.2
- --------------------------------------------------------------------------------------------------
See accompanying Financial comments.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Quarters ended Six months ended
June 30 June 30
In millions 2001 2000 2001 2000
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OPERATING ACTIVITIES
Net income $ 440.9 $ 525.9 $ 819.2 $ 976.8
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 268.8 273.5 538.7 529.3
Changes in operating working capital items (102.8) (106.0) (258.1) (114.0)
Other (29.9) (25.6) (16.4) (57.2)
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CASH PROVIDED BY OPERATIONS 577.0 667.8 1,083.4 1,334.9
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INVESTING ACTIVITIES
Property and equipment expenditures (482.8) (475.6) (831.4) (854.3)
Purchases and sales of restaurant businesses and
sales of property 23.0 (50.3) (81.0) (41.4)
Other (25.2) (19.9) (62.7) (67.5)
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CASH USED FOR INVESTING ACTIVITIES (485.0) (545.8) (975.1) (963.2)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Notes payable and long-term financing issuances and repayments 200.3 584.7 477.4 827.3
Treasury stock purchases (338.9) (715.3) (723.7) (1,294.0)
Other 56.9 51.7 129.6 86.6
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CASH USED FOR FINANCING ACTIVITIES (81.7) (78.9) (116.7) (380.1)
- ----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) 10.3 43.1 (8.4) (8.4)
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Cash and equivalents at beginning of period 403.0 368.0 421.7 419.5
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CASH AND EQUIVALENTS AT END OF PERIOD $ 413.3 $ 411.1 $ 413.3 $ 411.1
==========================================================================================================
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 and six months
ended June 30, 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
$447.8 million and $421.9 million for the second quarter of 2001 and 2000,
respectively, and $481.1 million and $756.7 million for the six months ended
June 30, 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 21.4 million shares and 38.4
million shares for the second quarter of 2001 and 2000, respectively, and 22.7
million shares and 38.9 million shares for the six months ended June 30, 2001
and 2000, respectively.
Common Equity Put Options
At June 30, 2001, 17.5 million of common equity put options were
outstanding, of which 3.3 million were sold in the second quarter 2001. The
options expire at various dates through May 2002, at exercise prices between
$28.74 and $32.26. The $537.5 million total exercise price of the options
outstanding was classified in common equity put options at June 30, 2001 and the
related offset was recorded in common stock in treasury, net of premiums
received.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning January 1, 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net income
of approximately $30 million ($0.02 per share) per year. The Company will
perform the first of required impairment tests of goodwill as of January 1,
2002, and management does not anticipate that the result of this test will have
a material impact on the Company's financial statements.
6
Segment Information
The Company operates in the food service industry and primarily operates
quick service restaurant businesses under the McDonald's brand. The Company also
operates other restaurant concepts: Aroma Cafe, Boston Market, Chipotle Mexican
Grill and Donatos Pizza. In addition, McDonald's has a minority interest in
U.K.-based Pret A Manger. The Other Segment includes McDonald's restaurant
business operations in Canada, Africa and the Middle East as well as the other
restaurant concepts.
The following table presents the Company's revenues and operating income by
geographic segment:
Quarters ended Six months ended
June 30 June 30
In millions 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------
REVENUES
U.S. $1,399.6 $1,380.0 $2,670.0 $2,589.6
Europe 1,155.7 1,190.0 2,250.6 2,361.0
Asia/Pacific 497.2 476.5 1,007.4 1,003.1
Latin America 243.2 225.8 497.8 454.7
Other 411.8 288.3 793.4 496.0
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES $3,707.5 $3,560.6 $7,219.2 $6,904.4
- ----------------------------------------------------------------------------------------------
OPERATING INCOME*
U.S. $ 475.5 $ 481.9 $ 878.2 $ 870.6
Europe 264.2 297.1 487.0 573.5
Asia/Pacific 98.9 109.4 214.4 227.6
Latin America 14.2 24.4 36.5 56.1
Other (4.3) 28.0 7.4 48.8
Corporate (76.0) (64.5) (155.8) (131.7)
- ----------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 772.5 $ 876.3 $1,467.7 $1,644.9
- ----------------------------------------------------------------------------------------------
*Segment operating income has been restated for 2000 to break out corporate
expenses from other operating segments.
7
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 Six months ended
per common share data June 30, 2001 June 30, 2001
- --------------------------------------------------------------------------------------------------------------
% Increase/ % Increase/
Amount (Decrease) Amount (Decrease)
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SYSTEMWIDE SALES $10,238.8 - $19,888.5 1%
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REVENUES
Sales by Company-operated restaurants 2,738.2 6 5,352.4 7
Revenues from franchised and affiliated restaurants 969.3 (1) 1,866.8 (1)
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,707.5 4 7,219.2 5
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OPERATING COSTS AND EXPENSES
Company-operated restaurants 2,341.6 9 4,585.0 10
Franchised restaurants - occupancy costs 197.9 2 394.8 2
Selling, general, and administrative expenses 414.6 5 812.4 5
Other operating income, net (19.1) N/M (40.7) 49
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TOTAL OPERATING COSTS AND EXPENSES 2,935.0 9 5,751.5 9
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME 772.5 (12) 1,467.7 (11)
- -------------------------------------------------------------------------------------------------------------
Interest expense 117.1 10 238.0 15
Nonoperating expense 1.7 N/M 20.0 N/M
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 653.7 (15) 1,209.7 (16)
- -------------------------------------------------------------------------------------------------------------
Provision for income taxes 212.8 (14) 390.5 (15)
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 440.9 (16)% $ 819.2 (16)%
=============================================================================================================
NET INCOME PER COMMON SHARE $ 0.34 (15)% $ 0.63 (14)%
NET INCOME PER COMMON SHARE-DILUTED 0.34 (13) 0.62 (13)
- -------------------------------------------------------------------------------------------------------------
N/M Not meaningful
8
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
businesses are referred to as "Partner Brands". In addition, McDonald's has a
minority ownership in Pret A Manger.
The following table presents the growth rates for reported results and the
results on a constant currency basis for the six months and quarter ended
June 30, 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.
===============================================================================================================
Key highlights - Consolidated
Percent
Dollars in millions, except per common share data Increase/(Decrease)
- ---------------------------------------------------------------------------------------------------------------
As Constant
Six months ended June 30 2001 2000 Reported Currency*
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Systemwide sales $19,888.5 $19,744.3 1 5
- ---------------------------------------------------------------------------------------------------------------
Total revenues 7,219.2 6,904.4 5 9
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Operating income 1,467.7 1,644.9 (11) (7)
- ---------------------------------------------------------------------------------------------------------------
Net income 819.2 976.8 (16) (12)
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Net income per common share - diluted .62 .71 (13) (8)
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Quarters ended June 30
- ---------------------------------------------------------------------------------------------------------------
Systemwide sales $10,238.8 $10,237.6 - 4
- ---------------------------------------------------------------------------------------------------------------
Total revenues 3,707.5 3,560.6 4 8
- ---------------------------------------------------------------------------------------------------------------
Operating income 772.5 876.3 (12) (8)
- ---------------------------------------------------------------------------------------------------------------
Net income 440.9 525.9 (16) (13)
- ---------------------------------------------------------------------------------------------------------------
Net income per common share - diluted .34 .39 (13) (10)
===============================================================================================================
* 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.
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 six months and quarter were negatively affected by
foreign currency translation primarily due to the weaker Euro, British Pound,
Japanese Yen, Australian Dollar and the Brazilian Real.
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 the six months
and quarter were primarily due to restaurant expansion and the acquisition of
Boston Market in the second quarter 2000, partly offset by negative comparable
sales. Foreign currency translation had a negative effect on the growth rates
for both Systemwide sales and revenues for the six months and quarter. On a
constant currency basis, revenues increased at a higher rate than sales for both
periods 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.
9
============================================================================================
Systemwide sales
Percent
Dollars in millions Increase/(Decrease)
- --------------------------------------------------------------------------------------------
As Constant
Six months ended June 30 2001 2000 Reported Currency*
- --------------------------------------------------------------------------------------------
U.S. $ 9,865.1 $ 9,697.5 2 n/a
- --------------------------------------------------------------------------------------------
Europe 4,449.4 4,632.5 (4) 3
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Asia/Pacific 3,322.7 3,481.9 (5) 6
- --------------------------------------------------------------------------------------------
Latin America 887.0 863.6 3 10
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Other** 1,364.3 1,068.8 28 32
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Total Systemwide sales $19,888.5 $19,744.3 1 5
- --------------------------------------------------------------------------------------------
Quarters ended June 30
- --------------------------------------------------------------------------------------------
U.S. $ 5,188.6 $ 5,192.5 - n/a
- --------------------------------------------------------------------------------------------
Europe 2,271.2 2,326.8 (2) 4
- --------------------------------------------------------------------------------------------
Asia/Pacific 1,635.2 1,696.3 (4) 9
- --------------------------------------------------------------------------------------------
Latin America 431.7 429.5 1 10
- --------------------------------------------------------------------------------------------
Other** 712.1 592.5 20 24
- --------------------------------------------------------------------------------------------
Total Systemwide sales $10,238.8 $10,237.6 - 4
============================================================================================
* Excluding the effect of foreign currency translation on reported results.
** Includes Systemwide sales for Partner Brands in 2001 of $467.7 million for
the six months and $242.1 million for the quarter. In 2000, Systemwide sales
for Partner Brands were $159.2 million for the six months and $111.8 million
for the quarter.
n/a Not applicable
U.S. sales increased 2% for the six months and were flat for the quarter.
The growth for the six months was due to expansion, partly offset by negative
comparable sales. Both periods were negatively impacted by the difficult
comparison with the successful June 2000 Teenie Beanie Babies promotion.
In Europe, Asia/Pacific and Latin America, constant currency sales
increased for the six months and quarter due to expansion, partly offset by
negative comparable sales.
In Europe, France and the U.K. were primary contributors to the sales
growth for the quarter and six months. Also, the Netherlands and Russia
delivered strong performances in both periods. Comparable sales continued to be
affected by consumer confidence issues regarding the European beef supply in
certain markets. Sales trends are improving in several markets, most notably
France, which had positive comparable sales in each month from March through
June. We expect the impact from the concerns regarding European beef will
continue to lessen as the year progresses.
In Asia/Pacific, the six months and quarter benefited from positive
comparable sales in China and strong results in several Southeast Asia markets.
Japan also contributed significantly to the increases for both periods. Weak
consumer spending in Australia, partly due to the goods and services tax
introduced in July 2000, continued to negatively impact sales growth. As we pass
the anniversary of the introduction of the tax, our comparisons become easier;
however, consumer spending remains weak in Australia.
In Latin America, expansion and positive comparable sales in Mexico for the
six months and quarter and in Brazil for the six months were the primary
contributors to the sales increases. Weak consumer spending continued to
negatively affect most markets in this segment.
In the Other segment, the increases for the six months and quarter were
primarily driven by Canada and the Partner Brands.
10
Combined Operating Margins
The following combined operating margin information represents margins for
McDonald's restaurant business only.
Combined operating margins Six months ended Quarters ended
June 30 June 30
-----------------------------------------
2001 2000 2001 2000
-----------------------------------------
Dollars in millions
- -------------------------------------------------------------------------------------------------
Company-operated $ 745.3 $ 831.5 $ 386.0 $ 428.2
- -------------------------------------------------------------------------------------------------
Franchised 1,471.2 1,493.3 771.0 783.6
- -------------------------------------------------------------------------------------------------
Combined operating margins $2,216.5 $2,324.8 $1,157.0 $1,211.8
- -------------------------------------------------------------------------------------------------
Percent of sales/revenues
- -------------------------------------------------------------------------------------------------
Company-operated 15.2% 17.0% 15.4% 17.3%
- -------------------------------------------------------------------------------------------------
Franchised 78.8 79.4 79.6 80.1
- -------------------------------------------------------------------------------------------------
In constant currencies, combined operating margin dollars decreased by $25.4
million for the six months and $12.4 million for the quarter; a 1% decline for
both periods. The U.S. and Europe segments accounted for over 80% of the
combined margin dollars in both periods.
As a percent of sales, consolidated Company-operated margins decreased for the
six months and quarter. Food & paper costs, payroll costs and occupancy & other
operating expenses all increased as a percent of sales for both periods.
In the U.S., Company-operated margins decreased as a percent of sales for both
periods. As a percent of sales, food & paper costs decreased while payroll
costs increased for both periods. Occupancy & other operating expenses were
flat for the six months and increased for the quarter.
In each of the remaining segments, Company-operated margins decreased as a
percent of sales for both periods. In Europe and Latin America, the decline was
primarily due to negative comparable sales and higher food costs. In addition,
Europe experienced higher labor costs. Asia/Pacific's Company-operated margin
percent decreased primarily due to negative comparable sales and higher labor
costs for the six months and higher food & paper costs and occupancy & other
operating expenses for the quarter.
Franchised margins as a percent of applicable revenues in the U.S., Europe and
Latin America decreased for the six months and quarter, partly due to negative
comparable sales for both periods. In addition, the decreases in Europe for the
six months and Latin America for both periods were partly due to temporary rent
assistance provided to franchisees in certain markets. The franchised margin
percent in Asia/Pacific increased for both periods 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 six months and
quarter. The increases were primarily due to the acquisition of Boston Market
and increased spending on future store technology improvements, partly offset by
weaker foreign currencies. Excluding Partner Brands, selling, general &
administrative expenses increased 2% for the six months and 3% for the quarter.
11
Other Operating Income, net
Equity in earnings of unconsolidated affiliates decreased for both periods,
primarily due to the increase in Japan's royalty expense and a weaker Japanese
Yen and, for the six months, weaker results in Japan. 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.
Other expense for the second quarter included a $24 million asset impairment
charge in Turkey due to our assessment of the ongoing impact of significant
currency devaluation on our business. For the six months, other expense also
included the write-off of certain technology costs and a gain on the sale of
real estate in Singapore.
As previously disclosed in our July 24th, 2001 Form 8K, we are in the process
of reviewing approximately 250 underperforming restaurants for possible closing,
which are primarily located in certain emerging markets. We expect this will
result in charges to other operating expense in the second half of the year.
Other operating income, net
Six months ended Quarters ended
June 30 June 30
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in millions 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Gains on sales of restaurant businesses $ 46.3 $ 37.9 $ 31.0 $22.3
- --------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates 37.1 59.9 25.2 33.5
- --------------------------------------------------------------------------------------------------------------------------------
Other expense (42.7) (17.8) (37.1) (5.1)
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 40.7 $ 80.0 $ 19.1 $50.7
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income
Consolidated operating income decreased $113.3 million, or 7%, for the six
months and $70.2 million, or 8%, for the quarter, in constant currencies. The
decreases for both periods were due to lower combined operating margin dollars,
lower other operating income and higher selling, general & administrative
expenses, partly due to the acquisition of Boston Market.
Operating income**
Percent
Dollars in millions Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------------------------
As Constant
Six months ended June 30 2001 2000 Reported Currency*
- -------------------------------------------------------------------------------------------------------------------------
U.S. $ 878.2 $ 870.6 1 n/a
- -------------------------------------------------------------------------------------------------------------------------
Europe 487.0 573.5 (15) (9)
- -------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 214.4 227.6 (6) 5
- -------------------------------------------------------------------------------------------------------------------------
Latin America 36.5 56.1 (35) (32)
- -------------------------------------------------------------------------------------------------------------------------
Other*** 7.4 48.8 n/m n/m
- -------------------------------------------------------------------------------------------------------------------------
Corporate (155.8) (131.7) (18) n/a
- -------------------------------------------------------------------------------------------------------------------------
Total operating income $1,467.7 $1,644.9 (11) (7)
- -------------------------------------------------------------------------------------------------------------------------
Quarters ended June 30
- -------------------------------------------------------------------------------------------------------------------------
U.S. $ 475.5 $ 481.9 (1) n/a
- -------------------------------------------------------------------------------------------------------------------------
Europe 264.2 297.1 (11) (5)
- -------------------------------------------------------------------------------------------------------------------------
Asia/Pacific 98.9 109.4 (10) 2
- -------------------------------------------------------------------------------------------------------------------------
Latin America 14.2 24.4 (42) (37)
- -------------------------------------------------------------------------------------------------------------------------
Other*** (4.3) 28.0 n/m n/m
- -------------------------------------------------------------------------------------------------------------------------
Corporate (76.0) (64.5) (18) n/a
- -------------------------------------------------------------------------------------------------------------------------
Total operating income $ 772.5 $ 876.3 (12) (8)
- -------------------------------------------------------------------------------------------------------------------------
* 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 Partner Brands in 2001 of $27.4 million for
the six months and $12.5 million for the quarter.
In 2000, operating losses for Partner Brands were $17.9 million for the six
months and $8.8 million for the quarter.
n/a Not applicable
n/m Not meaningful
12
U.S. operating income increased $7.6 million, or 1%, for the six months,
while decreasing $6.4 million, or 1%, for the quarter. The increase for the six
months was due to higher combined operating margin dollars and other operating
income, partly offset by higher selling, general & administrative expenses. The
decrease for the quarter was mainly due to lower combined operating margin
dollars and higher selling, general & administrative expenses, partly offset by
higher other operating income.
Europe's operating income decreased 9% for the six months and 5% for the
quarter in constant currencies. Driving this segment's improved performance over
the first quarter was significant improvement in France's results, as well as
strong results in the Netherlands and Russia. However, operating income
continued to be negatively affected by the decline in consumer confidence
regarding the safety of the European beef supply in certain markets.
Operating income in Asia/Pacific increased 5% for the six months and 2% for
the quarter in constant currencies. In both periods, this segment benefited from
a strong performance in China and an increase in the royalty percent received
from Japan. In addition, a gain on the sale of real estate in Singapore
contributed significantly to the increase for the six months.
Latin America's operating income decreased 32% for the six months and 37%
for the quarter in constant currencies. Both periods were negatively impacted by
the continuing difficult economic conditions experienced by most markets in the
region.
In the Other segment, the results for both periods were impacted by the
asset impairment charge in Turkey, driven by the recent currency devaluation.
INTEREST, NONOPERATING (INCOME) EXPENSE AND INCOME TAXES
For both periods, higher interest expense was primarily due to higher average
debt levels, partly offset by lower average interest rates and weaker foreign
currencies. The higher average debt levels were a result of the Company using
its available credit capacity to repurchase shares of its common stock.
Nonoperating (income) expense for the six months included lower foreign
currency translation losses, while the quarter included lower foreign currency
translation gains. In addition, nonoperating expense included the first quarter
write-off of a financing receivable from a Latin American supplier and minority
interest expense related to the sale of real estate in Singapore. Also, second
quarter 2000 included a gain related to the sale of a partial ownership interest
in a majority-owned subsidiary outside the U.S.
McDonald's Japan, our largest market in the Asia/Pacific segment, had an
initial public offering (IPO) on July 26, 2001. After the IPO, McDonald's
retained 50% ownership in McDonald's Japan. Our partner, Den Fujita continues to
actively manage the business. He and his family now own approximately 26%. As a
result of this transaction, McDonald's will record a nonoperating gain of
approximately $130 million in third quarter 2001, to reflect an increase in the
carrying value of our investment, as a result of the cash proceeds to McDonald's
Japan from the IPO.
The effective income tax rate was 32.3% and 32.6% for the six months and
quarter 2001, respectively. The 2000 effective tax rate was 32.0% for both
periods. The increase in the income tax rate in 2001 was primarily the result of
the Turkey asset impairment charge, which could not be tax-effected for
financial reporting purposes.
WEIGHTED AVERAGE SHARES
Weighted average shares outstanding for the six months and 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.
During the first six months of 2001, the Company repurchased 24.4 million shares
of its common stock for approximately $738 million.
EARNINGS PER SHARE
Diluted net income per common share was 62 cents for the six months and 34 cents
for the quarter (65 cents and 35 cents in constant currencies, respectively). As
previously disclosed in our July 24th, 2001 Form 8K, we expect relatively flat
constant currency earnings per share for the year ended December 31, 2001.
CASH FLOWS
Cash provided by operations for the six months totaled $1,083.4 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 3% as expenditures related to McDonald's restaurant business
declined 9%, partly offset by higher expenditures related to Partner Brands.
The Company expects to add about 1,500 McDonald's restaurants this year, as well
as add restaurants under our Partner Brands. Any closings resulting from the
review of the 250 underperforming restaurants are not reflected in these
expected net restaurant additions.
13
The Company believes that buying back its stock enhances shareholder value.
Therefore, the Company purchased approximately $738 million, or 24.4 million
shares of its common stock in the first six months of 2001. This brought
cumulative purchases to $4.0 billion, or 115.5 million shares under the
Company's three-year, $4.5 billion share repurchase program.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning January 1, 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net income
of approximately $30 million ($0.02 per share) per year. The Company will
perform the first of required impairment tests of goodwill as of January 1,
2002, and management does not anticipate that the result of this test will have
a material impact on the Company's financial statements.
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 Company uses foreign-denominated debt and
derivatives to meet its financing requirements and to reduce its foreign
currency risks and certain of these financial instruments are denominated in
Euro. 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.
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
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, except to the extent required by law.
14
- ---------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER AND SIX MONTHS HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended Six months ended
June 30 June 30
Dollars in Millions 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 6,296.0 $ 6,351.2 $12,120.8 $12,129.9
Operated by the Company 2,738.2 2,582.0 5,352.4 5,021.9
Operated by affiliates 1,204.6 1,304.4 2,415.3 2,592.5
- ------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $10,238.8 $10,237.6 $19,888.5 $19,744.3
- ------------------------------------------------------------------------------------------------------------------------------
Restaurant margins*
Company-operated
----------------
U.S. 16.5% 17.5% 16.4% 17.1%
Europe 16.5 18.6 15.6 18.1
Asia/Pacific 13.8 16.3 14.4 17.1
Latin America 10.5 12.9 11.6 12.7
Other 13.9 15.4 13.5 14.5
Total 15.4% 17.3% 15.2% 17.0%
Franchised
----------
U.S. 80.6% 81.4% 79.9% 80.3%
Europe 77.3 78.2 76.4 77.8
Asia/Pacific 85.5 82.1 85.9 82.4
Latin America 68.8 73.3 68.6 74.5
Other 80.3 78.9 78.8 78.0
Total 79.6% 80.1% 78.8% 79.4%
* Restaurant margin information represents margins for the McDonald's restaurant
business only.
RESTAURANTS
- -------------------------------------------------------------------------------------------------------------------------------
At June 30, 2001 2000*
- -------------------------------------------------------------------------------------------------------------------------------
By type
Operated by franchisees 17,050 16,282
Operated by the Company 7,923 7,070
Operated by affiliates 4,277 4,150
- -------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants 29,250 27,502
- -------------------------------------------------------------------------------------------------------------------------------
Quarters ended Six months ended
June 30 June 30
2001 2000* 2001 2000*
- ------------------------------------------------------------------------------------------------------------------------------
Additions
U.S. 68 34 75 29
Europe 85 121 135 189
Asia/Pacific 136 126 200 176
Latin America 26 63 64 87
Other - McDonald's 17 23 30 18
Partner Brands 13 673** 39 694**
- ------------------------------------------------------------------------------------------------------------------------------
Systemwide additions 345 1,040 543 1,193
- ------------------------------------------------------------------------------------------------------------------------------
* Adjusted to exclude dessert-only kiosks.
** 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, 2000 regarding this matter.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 17, 2001.
(b) Not Applicable.
(c) At the Annual Meeting of Shareholders, the shareholders voted on the
following matters:
(1) the election of six directors to serve until the 2004 Annual Meeting of
shareholders, (2) the approval of 2001 Omnibus Stock Ownership Plan,
(3) the approval of auditors, (4) a shareholder proposal on the China
Principles and (5) a shareholder proposal linking compensation and
corporate social performance. The voting results were as follows:
(1) Each nominee was elected by a vote of the shareholders as follows:
Director For Withheld
-------- --- --------
Jack M. Greenberg 1,158,953,669 19,034,173
Donald G. Lubin 1,132,373,784 45,614,058
Walter E. Massey 1,159,256,353 18,731,489
Andrew J. McKenna 1,124,064,871 53,922,971
Roger W. Stone 1,158,973,362 19,014,480
Robert N. Thurston 1,159,013,448 18,974,394
Additional Directors, whose terms of office as Directors continued
after the meeting, are as follows:
Term Expiring in 2002 Term Expiring in 2003
--------------------- ---------------------
Hall Adams, Jr. James R. Cantalupo
Terry L. Savage Enrique Hernandez, Jr.
Fred L. Turner Jeanne P. Jackson
Michael R. Quinlan
(2) The proposal to approve the 2001 Omnibus Stock Ownership Plan was
approved by shareholders as follows:
For Against Abstain
--- ------- -------
745,061,808 424,316,042 8,609,992
(3) The proposal to approve the appointment of independent auditors was
approved by shareholders as follows:
For Against Abstain
--- ------- -------
1,164,807,291 7,375,030 5,805,521
(4) The shareholder proposal on the China Principles was not approved by
shareholders as follows:
For Against Abstain Non-Votes
--- ------- ------- ---------
81,592,528 798,361,067 58,420,829 239,613,418
(5) The shareholder proposal to link compensation and corporate social
performance was not approved by shareholders as follows:
For Against Abstain Non-Votes
--- ------- ------- ---------
80,871,019 825,943,896 31,559,509 239,613,418
(d) Not Applicable.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
(3) (i) Restated Certificate of Incorporation, effective as of March 24,
1998, incorporated herein by reference from Form 8-K dated April
17, 1998.
(ii) By-Laws, effective as of June 1, 2000, 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) 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.
(iii) 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.
(iv) Medium-Term Notes, Series G, due from 1 Year to 60 Years
from Date of Issue. Supplemental Indenture, No 6
incorporated herein by reference from Exhibit 4(c) of Form
S-3 Registration Statement (File No. 333-60170), dated May
3, 2001.
(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).
17
(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, filed herewith.*
(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,
incorporated herein by reference from Form 10-Q for the
quarter ended March 31, 2001.*
(iii) Third Amendment to the McDonald's Profit Sharing Program,
incorporated herein by reference from Form 10-Q for the
quarter ended March 31, 2001.*
(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.*
18
(d) 1975 Stock Ownership Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the
quarter ended March 31, 2001.*
(e) 1992 Stock Ownership Incentive Plan, as amended and
restated, incorporated herein by reference from Form 10-Q
for the quarter ended March 31, 2001.*
(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.*
(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,
incorporated herein by reference from Form 10-Q for the
quarter ended March 31, 2001.*
(i) Senior Director Letter Agreement between Gordon C. Gray and
the Company, filed herewith.*
(j) Senior Director Letter Agreement between Donald R. Keough
and the Company, filed herewith.*
(k) McDonald's Corporation 2001 Omnibus Stock Ownership Plan,
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 August 10, 2001.
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
06/15/01 Item 5 and Item 7 No
07/20/01 Item 5 No
07/24/01 Item 5 and Item 7 No
19
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDONALD'S CORPORATION
(Registrant)
By /s/ Matthew H. Paull
-------------------------
(Signature)
Matthew H. Paull
Executive Vice President,
Chief Financial Officer
August 10, 2001
- -------------
20