<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
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
----------------------------------------------------------------------
(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 _____
---
1,271,979,907
------------------------
(Number of shares of common stock
outstanding as of March 31, 2002)
================================================================================
<PAGE>
McDONALD'S CORPORATION
---------------
INDEX
-----
<TABLE>
<CAPTION>
Page Reference
<S> <C>
Part I. Financial Information
Item 1 - Financial Statements
Condensed consolidated balance sheet,
March 31, 2002 (unaudited) and
December 31, 2001 3
Condensed consolidated statement of income (unaudited), first
quarters ended March 31, 2002 and 2001 4
Condensed consolidated statement of cash flows (unaudited), first
quarters ended March 31, 2002 and 2001 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2 - Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
Item 3 - Quantitative and 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
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------------------------------------
(unaudited)
In millions, except per share data March 31, 2002 December 31, 2001
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 437.7 $ 418.1
Accounts and notes receivable 859.8 881.9
Inventories, at cost, not in excess of market 98.1 105.5
Prepaid expenses and other current assets 458.3 413.8
-------------------------------------------------------------------------------------------------------------
Total current assets 1,853.9 1,819.3
-------------------------------------------------------------------------------------------------------------
Other assets
Investments in and advances to affiliates 972.7 990.2
Goodwill, net 1,258.1 1,320.4
Miscellaneous 990.4 1,115.1
-------------------------------------------------------------------------------------------------------------
Total other assets 3,221.2 3,425.7
-------------------------------------------------------------------------------------------------------------
Property and equipment
Property and equipment, at cost 23,998.2 24,106.0
Accumulated depreciation and amortization (6,877.7) (6,816.5)
-------------------------------------------------------------------------------------------------------------
Net property and equipment 17,120.5 17,289.5
-------------------------------------------------------------------------------------------------------------
Total assets $ 22,195.6 $ 22,534.5
=============================================================================================================
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 84.1 $ 184.9
Accounts payable 531.3 689.5
Income taxes 90.0 20.4
Other taxes 188.5 180.4
Accrued interest 158.6 170.6
Other accrued liabilities 729.2 824.9
Current maturities of long-term debt 481.9 177.6
-------------------------------------------------------------------------------------------------------------
Total current liabilities 2,263.6 2,248.3
-------------------------------------------------------------------------------------------------------------
Long-term debt 8,417.4 8,555.5
Other long-term liabilities and minority interests 558.6 629.3
Deferred income taxes 1,116.6 1,112.2
Common equity put options and forward contracts 262.5 500.8
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 1,633.2 1,591.2
Unearned ESOP compensation (106.5) (106.7)
Retained earnings 18,861.6 18,608.3
Accumulated other comprehensive income (1,849.2) (1,708.8)
Common stock in treasury, at cost; 388.6 and 379.9 million shares (8,978.8) (8,912.2)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,576.9 9,488.4
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 22,195.6 $ 22,534.5
=============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
-------------------------------------------------------------------------------------------------------------
Quarters ended
In millions, except March 31
per common share data 2002 2001
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Sales by Company-operated restaurants $2,678.5 $2,614.2
Revenues from franchised and affiliated restaurants 918.9 897.5
-------------------------------------------------------------------------------------------------------------
Total revenues 3,597.4 3,511.7
-------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 2,309.6 2,243.4
Franchised restaurants - occupancy expenses 202.7 196.9
Selling, general, and administrative expenses 384.9 397.8
Other operating (income) expense, net 58.9 (21.6)
-------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,956.1 2,816.5
-------------------------------------------------------------------------------------------------------------
Operating income 641.3 695.2
-------------------------------------------------------------------------------------------------------------
Interest expense 92.3 120.9
Nonoperating expense, net 11.8 18.3
-------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and cumulative effect of accounting
change 537.2 556.0
-------------------------------------------------------------------------------------------------------------
Provision for income taxes 185.5 177.7
-------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 351.7 378.3
-------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax benefit of $17.6 (98.6)
-------------------------------------------------------------------------------------------------------------
Net income $ 253.1 $ 378.3
=============================================================================================================
Per common share:
Income before cumulative effect of accounting change $ 0.28 $ 0.29
Cumulative effect of accounting change (0.08)
Net income $ 0.20 $ 0.29
-------------------------------------------------------------------------------------------------------------
Per common share - diluted:
Income before cumulative effect of accounting change $ 0.27 $ 0.29
Cumulative effect of accounting change (0.07)
Net income $ 0.20 $ 0.29
-------------------------------------------------------------------------------------------------------------
Weighted average shares 1,277.2 1,300.7
-------------------------------------------------------------------------------------------------------------
Weighted average shares - diluted 1,292.7 1,325.3
=============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters ended
March 31
In millions 2002 2001
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 253.1 $ 378.3
Adjustments to reconcile to cash provided by operations
Cumulative effect of accounting change 98.6
Depreciation and amortization 254.0 269.9
Changes in operating working capital items (117.6) (155.3)
Other 52.5 13.5
---------------------------------------------------------------------------------------------------
Cash provided by operations 540.6 506.4
---------------------------------------------------------------------------------------------------
Investing activities
Property and equipment expenditures (370.9) (348.6)
Purchases and sales of restaurant businesses and
sales of property (10.7) (104.0)
Other (28.9) (37.5)
---------------------------------------------------------------------------------------------------
Cash used for investing activities (410.5) (490.1)
---------------------------------------------------------------------------------------------------
Financing activities
Notes payable and long-term financing issuances and repayments 156.1 277.1
Treasury stock purchases (322.8) (384.8)
Other 56.2 72.7
---------------------------------------------------------------------------------------------------
Cash used for financing activities (110.5) (35.0)
---------------------------------------------------------------------------------------------------
Cash and equivalents increase (decrease) 19.6 (18.7)
---------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period 418.1 421.7
---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 437.7 $ 403.0
===================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
Basis of Presentation
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in McDonald's
Corporation (the "Company" or "McDonald's") Annual Report on Form 10-K for the
year ended December 31, 2001. In the opinion of the Company, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation for
the interim period presented have been included. The results for the quarter
ended March 31, 2002 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 deferred fair value adjustments on cash flow hedges and totaled
$112.7 million and $33.3 million for the first quarter of 2002 and 2001,
respectively.
Common Equity Put Options and Forward Contracts
During the first quarter 2002, 3.0 million common equity put options
were exercised at a cost of $87.5 million. At March 31, 2002, 9.2 million
common equity put options were outstanding. The options expire at various dates
through November 2002, at exercise prices between $26.37 and $30.23. The $262.5
million total exercise price of the options outstanding was classified in common
equity put options at March 31, 2002 and the related offset was recorded in
common stock in treasury, net of premiums received.
During the first quarter 2002, the Company also completed the purchase
of 5.5 million shares of common stock for $150.8 million under equity forward
contracts entered into during the fourth quarter 2001.
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 15.5 million shares for the first
quarter 2002 and 24.6 million shares for the first quarter 2001. Stock options
that were not included in diluted weighted-average shares because they would
have been antidilutive were 106.1 million shares for the first quarter 2002 and
38.2 million shares for the first quarter 2001.
Adoption of New Accounting Standards - Goodwill
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, effective
for acquisitions initiated on or after July 1, 2001, and No. 142, Goodwill and
Other Intangible Assets, effective for fiscal years beginning after December 15,
2001. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, and includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations. SFAS No. 142 indicates that goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. The Company
adopted the new rules effective January 1, 2002.
The Company performed the first of required goodwill impairment tests as of
January 1, 2002 and recorded a non-cash pretax charge of $116.2 million ($98.6
million after tax or $0.07 per diluted share) for the cumulative effect of this
accounting change. The impaired goodwill was primarily in Argentina, Uruguay and
other markets in Latin America and the Middle East, where economies have
weakened significantly over the last several years. First quarter 2001 pro-forma
net income, adjusted for the application of the nonamortization provisions of
SFAS No. 142, was $385.1 million and pro-forma diluted net income per common
share was $0.29, the same as the reported diluted net income per common share.
Application of the nonamortization provisions for the full year 2001 would have
increased net income by approximately $30 million ($0.02 per share).
6
<PAGE>
The carrying amount of goodwill, as of December 31, 2001, totaled $1,320.4
million (U.S. - $516.7; Europe - $278.6; Asia/Pacific, Middle East and Africa -
$171.3; Latin America - $158.5; Canada - $51.2; and Partner Brands - $144.1).
The carrying amount of goodwill, as of March 31, 2002, totaled $1,258.1 million
(U.S. - $515.9; Europe - $278.5; Asia/Pacific, Middle East and Africa - $168.5;
Latin America - $92.6; Canada - $58.0; and Partner Brands - $144.6). The changes
in the carrying amounts of goodwill from December 31, 2001 to March 31, 2002
were due to (i) the charge of $116.2 million for the cumulative effect of the
accounting change, (ii) goodwill generated in the first quarter 2002 as a result
of purchases of McDonald's restaurant businesses and (iii) foreign currency
exchange rate fluctuations.
Segment Information
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
under its Partner Brands: Boston Market, Chipotle and Donatos Pizzeria. In
addition, McDonald's has a minority ownership in Pret A Manger. In fourth
quarter 2001, the Company approved a plan to dispose of its Aroma Cafe business
in the U.K. and completed the sale in March 2002.
The following table presents the Company's revenues and operating income by
geographic segment. The segments presented reflect the Company's current
management structure. Previously, McDonald's restaurant operations in Canada,
the Middle East and Africa, as well as the Partner Brands were included in the
Other segment. The newly created APMEA segment includes results for McDonald's
restaurant operations in Asia/Pacific, the Middle East and Africa, while Canada
and the Partner Brands are presented as individual operating segments. In
addition, U.S. and Corporate selling, general and administrative expenses
reflect a realignment of certain home office departments' responsibilities for
all periods presented.
Quarters ended
March 31
In millions 2002 2001
------------------------------------------------------------------------------
Revenues
U.S. $1,266.3 $1,270.4
Europe 1,146.3 1,094.9
APMEA 584.0 534.8
Latin America 217.2 254.6
Canada 138.2 140.9
Partner Brands 245.4 216.1
------------------------------------------------------------------------------
Total revenues $3,597.4 $3,511.7
------------------------------------------------------------------------------
Operating income (loss)
U.S. $ 402.1 $ 408.9
Europe 242.9 222.8
APMEA 71.2 113.7
Latin America (13.2) 22.3
Canada 27.6 28.4
Partner Brands (11.6) (14.9)
Corporate (77.7) (86.0)
------------------------------------------------------------------------------
Total operating income $ 641.3 $ 695.2
------------------------------------------------------------------------------
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
--------------------------------------------------------------------------------------------------------------
Dollars in millions, except Quarter ended
per common share data March 31, 2002
--------------------------------------------------------------------------------------------------------------
% Increase/
Amount (Decrease)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Systemwide sales $9,698.5 1 %
--------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants 2,678.5 2
Revenues from franchised and affiliated restaurants 918.9 2
--------------------------------------------------------------------------------------------------------------
Total revenues 3,597.4 2
--------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 2,309.6 3
Franchised restaurants - occupancy costs 202.7 3
Selling, general, and administrative expenses 384.9 (3)
Other operating expense, net 58.9 N/M
--------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 2,956.1 5
--------------------------------------------------------------------------------------------------------------
Operating income 641.3 (8)
--------------------------------------------------------------------------------------------------------------
Interest expense 92.3 (24)
Nonoperating expense, net 11.8 N/M
--------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and
cumulative effect of accounting change 537.2 (3)
--------------------------------------------------------------------------------------------------------------
Provision for income taxes 185.5 4
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 351.7 (7)
--------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax benefit of $17.6 (98.6) N/M
--------------------------------------------------------------------------------------------------------------
Net income $ 253.1 (33)%
==============================================================================================================
Per common share:
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 0.28 (3)%
--------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change (0.08) N/M
--------------------------------------------------------------------------------------------------------------
Net income $ 0.20 (31)%
--------------------------------------------------------------------------------------------------------------
Per common share - diluted:
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $ 0.27 (7)%
--------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change (0.07) N/M
--------------------------------------------------------------------------------------------------------------
Net income $ 0.20 (31)%
==============================================================================================================
</TABLE>
N/M Not meaningful
8
<PAGE>
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
under its Partner Brands: Boston Market, Chipotle and Donatos Pizzeria. In
addition, McDonald's has a minority ownership in Pret A Manger. In fourth
quarter 2001, the Company approved a plan to dispose of its Aroma Cafe business
in the U.K. and completed the sale in March 2002.
The segments presented in all tables and related discussion reflect the
Company's current management structure. Previously, McDonald's restaurant
operations in Canada, the Middle East and Africa, as well as the Partner Brands
were included in the Other segment. The newly created APMEA segment includes
results for McDonald's restaurant operations in Asia/Pacific, the Middle East
and Africa, while Canada and the Partner Brands are presented as individual
operating segments. In addition, U.S. and Corporate selling, general &
administrative expenses reflect a realignment of certain home office
departments' responsibilities for all periods presented.
The following table presents the reported results for the quarters ended
March 31, 2002 and 2001 and the percent change in the results on both a reported
and constant currency basis. 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. Constant currency results are calculated by translating the current
year results at prior year monthly average exchange rates.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Key highlights - Consolidated
Percent
Dollars in millions, except per common share data Increase/(Decrease)
-------------------------------------------------------------------------------------------------------------------------
As Constant
Quarters ended March 31 2002 2001 Reported Currency*
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Systemwide sales $9,698.5 $9,649.7 1 3
-------------------------------------------------------------------------------------------------------------------------
Total revenues 3,597.4 3,511.7 2 6
-------------------------------------------------------------------------------------------------------------------------
Operating income 641.3 695.2 (8) (6)
-------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 351.7 378.3 (7) (6)
-------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax (98.6) - n/m n/m
-------------------------------------------------------------------------------------------------------------------------
Net income 253.1 378.3 (33) (32)
-------------------------------------------------------------------------------------------------------------------------
Per common share - diluted:
Income before cumulative effect of accounting change 0.27 0.29 (7) (3)
Cumulative effect of accounting change (0.07) - n/m n/m
Net income 0.20 0.29 (31) (31)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Excluding the effect of foreign currency translation on reported
results.
n/m Not meaningful
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.
Foreign currency translation had a negative impact on reported results for
the quarter primarily due to the weaker Euro, Japanese Yen and Brazilian Real.
Cumulative Effect of Accounting Change and Asset Impairment Charges
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which indicates that goodwill will no longer be
amortized but will be subject to annual impairment tests. As a result of the
first of required goodwill impairment tests, the Company recorded a non-cash
charge of $98.6 million after tax in the first quarter for the cumulative effect
of this accounting change. The impaired goodwill was primarily in Argentina,
Uruguay and other markets in Latin America and the Middle East, where economies
have weakened significantly over the last several years.
The Company also recorded $43.0 million of non-cash asset impairment
charges in the first quarter, primarily related to the impairment of assets in
existing restaurants in Chile and other Latin American markets and the closing
of 32 underperforming restaurants in Turkey, as a result of continued economic
weakness.
9
<PAGE>
Net Income and Diluted Net Income Per Common Share
Income before the cumulative effect of the goodwill accounting change
declined 7%, while net income, which included the $98.6 million after tax charge
for the cumulative effect of the goodwill accounting change, declined 33% for
the quarter. Diluted income per common share before the cumulative effect of the
accounting change declined 7% to 27 cents, while diluted net income per common
share declined 31% to 20 cents for the quarter.
Excluding the $43.0 million of asset impairment charges, income before the
cumulative effect of the accounting change increased 4% and diluted income per
common share before the cumulative effect of the accounting change increased 7%
to 31 cents.
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 11.9 million shares of its common stock during the quarter for
approximately $331 million.
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.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Systemwide sales
Percent
Dollars in millions Increase/(Decrease)
---------------------------------------------------------------------------------------------------------------------------
As Constant
Quarters ended March 31 2002 2001 Reported Currency*
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. $4,792.7 $4,676.5 2 n/a
---------------------------------------------------------------------------------------------------------------------------
Europe 2,308.7 2,178.2 6 10
---------------------------------------------------------------------------------------------------------------------------
APMEA 1,632.1 1,782.7 (8) (2)
---------------------------------------------------------------------------------------------------------------------------
Latin America 390.2 455.3 (14) (1)
---------------------------------------------------------------------------------------------------------------------------
Canada 320.1 331.4 (3) 1
---------------------------------------------------------------------------------------------------------------------------
Partner Brands 254.7 225.6 13 13
---------------------------------------------------------------------------------------------------------------------------
Total Systemwide sales $9,698.5 $9,649.7 1 3
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Excluding the effect of foreign currency translation on reported results.
n/a Not applicable
On a global basis, the increases in sales and revenues for the quarter were
primarily due to restaurant expansion, 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 quarter. On a constant currency
basis, revenues increased at a higher rate than sales primarily due to
significantly lower sales from our affiliate in Japan. Under our affiliate
structure, we record a royalty in revenues based on a percentage of Japan's
sales, whereas all of Japan's sales are included in Systemwide sales. For this
reason, Japan's sales decline had a larger negative impact on Systemwide sales
than revenues.
U.S. sales increased 2% for the quarter primarily due to expansion.
Comparable sales were relatively flat for the quarter. We expect our restaurant
operations improvement process, along with menu and value initiatives, to boost
top line sales and help us achieve improved results as the year progresses.
In Europe, expansion and positive comparable sales drove the ten percent
constant currency sales increase for the quarter. Strong performances in France,
Germany and the U.K. were the primary contributors to the increase. In addition,
we are seeing significant improvements in the other markets that were previously
impacted by consumer concerns regarding the European beef supply.
Constant currency sales results in APMEA declined due to negative
comparable sales, partly offset by expansion. APMEA's sales were impacted by
negative comparable sales in Japan due to weak economic conditions and consumer
concerns regarding food safety, partly offset by expansion in China and strong
results in Australia. Although we are proactively communicating our strong
safety and quality messages, including the fact that McDonald's Japan does not
use Japanese beef, we expect Japan's results in the near term to continue to be
negatively affected by these consumer concerns.
10
<PAGE>
In Latin America, constant currency sales declined due to negative
comparable sales in Argentina and most other markets. We expect the weak
economic conditions in many Latin American markets to continue to impact our
business in the near term.
The sales increase in the Partner Brands was primarily due to strong
comparable sales at Chipotle and Boston Market.
Combined Operating Margins
The following combined operating margin information represents margins for
McDonald's restaurant business only and excludes Partner Brands.
----------------------------------------------------------------------
Combined operating margins
Quarters ended
March 31
-----------------------
2002 2001
----------------------------------------------------------------------
Dollars in millions
----------------------------------------------------------------------
Company-operated $ 350.3 $ 359.3
----------------------------------------------------------------------
Franchised 715.9 700.2
----------------------------------------------------------------------
Combined operating margins $1,066.2 $1,059.5
----------------------------------------------------------------------
Percent of sales/revenues
----------------------------------------------------------------------
Company-operated 14.4% 15.0%
----------------------------------------------------------------------
Franchised 78.0 78.1
----------------------------------------------------------------------
In constant currencies, combined operating margin dollars increased $30.9
million or 3% for the quarter. The U.S. and Europe segments accounted for about
80% of the combined margin dollars for the quarter in both years.
Consolidated food & paper costs and occupancy & other operating expenses
increased as a percent of sales for the quarter, while consolidated payroll
costs were flat as a percent of sales.
The U.S. Company-operated margin percent increased for the quarter,
primarily due to the elimination of goodwill amortization and a lower
contribution rate to the national co-op for advertising expenses. As a percent
of sales, food & paper costs decreased, payroll costs increased and occupancy &
other operating expenses decreased.
In Europe, Company-operated margins were flat for the quarter. France,
Germany and the U.K.'s margins increased for the quarter; however, this was
offset by higher food costs in certain other markets. Company-operated margins
in APMEA and Latin America decreased primarily due to negative comparable sales
and difficult economic conditions in many markets.
The decline in the consolidated franchised margin percent reflects higher
occupancy costs due to an increased number of leased sites. Our strategy of
leasing a higher proportion of new sites over the past few years has reduced
initial capital requirements and related interest expense. However, as
anticipated, franchised margins as a percent of applicable revenues have been
negatively impacted because financing costs implicit in the lease are included
in rent expense, which affects these margins. For owned sites, financing costs
are reflected in interest expense, which does not affect these margins.
Europe's franchised margin percent increased slightly for the quarter
primarily due to positive comparable sales and a decrease in the amount of rent
relief granted to franchisees compared with the prior year. The franchised
margin percent in APMEA increased for the quarter primarily due to a
restructuring of our ownership in the Philippines in July 2001. The
restructuring resulted in the reclassification of our restaurants and related
margins, that were lower than the average for the segment, from franchised to
Company-operated.
Selling, General & Administrative Expenses
Selling, general & administrative expenses decreased 3% for the quarter or
1% in constant currencies. As a result of the global change initiatives
introduced in late 2001, the Company expects ongoing annual selling, general &
administrative savings of about $100 million beginning in 2002, compared with
what otherwise would have been spent.
11
<PAGE>
Other Operating Income (Expense), net
--------------------------------------------------------------------------------
Other operating income (expense), net Quarters ended
Dollars in millions March 31
--------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------
Gains on sales of restaurant businesses $ 10.1 $15.3
--------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates 8.3 11.9
--------------------------------------------------------------------------------
Asset impairment - Latin America and Turkey (43.0) -
--------------------------------------------------------------------------------
Front counter team service system payments - U.S. (21.6) -
--------------------------------------------------------------------------------
Other income (expense) (12.7) (5.6)
--------------------------------------------------------------------------------
Total $(58.9) $21.6
--------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates decreased for the quarter,
primarily due to lower earnings from our Japanese affiliate and a weaker
Japanese Yen. The front counter team service system payments represent $21.6
million of payments to U.S. owner/operators to facilitate the introduction of a
new front counter system. In 2001, other income (expense) included a gain on the
sale of real estate in Singapore, partly offset by the write-off of certain
technology costs.
Operating Income
Consolidated operating income for the quarter decreased 8% (6% in constant
currencies). Excluding the $43.0 million of asset impairment charges,
consolidated operating income was relatively flat in constant currencies due to
higher combined operating margin dollars and lower selling, general &
administrative expenses, offset by lower other operating income.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Operating income
Percent
Dollars in millions Increase/(Decrease)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As Constant
Quarters ended March 31 2002 2001 Reported Currency/(1)/
--------------------------------------------------------------------------------------
U.S. $402.1/(2)/ $408.9 (2) n/a
--------------------------------------------------------------------------------------
Europe 242.9 222.8 9 13
--------------------------------------------------------------------------------------
APMEA 71.2/(3)/ 113.7 (37) (34)
--------------------------------------------------------------------------------------
Latin America (13.2)/(4)/ 22.3 n/m n/m
--------------------------------------------------------------------------------------
Canada 27.6 28.4 (3) 1
--------------------------------------------------------------------------------------
Partner Brands (11.6) (14.9) 22 21
--------------------------------------------------------------------------------------
Corporate (77.7) (86.0) 10 n/a
--------------------------------------------------------------------------------------
Total operating income $641.3 $695.2 (8) (6)
--------------------------------------------------------------------------------------
</TABLE>
(1) Excluding the effect of foreign currency translation on reported results.
(2) Includes $21.6 million of front counter team service system payments.
(3) Includes $15.9 million of asset impairment charges in Turkey.
(4) Includes $27.1 million of asset impairment charges.
n/a Not applicable
n/m Not meaningful
U.S. operating income decreased 2% primarily due to the $21.6 million of
payments made to U.S. owner/operators, partly offset by higher combined
operating margin dollars and lower selling, general & administrative expenses.
Europe's operating income increased 13% in constant currencies. Strong
results in France, Germany, and the U.K. drove this segment's performance.
APMEA's operating income decreased 34% for the quarter in constant
currencies due to weak results in Japan, the $15.9 million of asset impairment
charges in Turkey and a gain on the sale of real estate in Singapore in the
prior year. Australia and China delivered significant growth in operating income
for the quarter.
Latin America's operating results declined significantly as Argentina and
most other markets continued to experience difficult economic conditions. In
addition, the segment's reported operating income included $27.1 million of
asset impairment charges.
12
<PAGE>
The increase in operating income for the Partner Brands was primarily
driven by improved results for Chipotle and Boston Market and the elimination of
goodwill amortization, partly offset by higher losses for Aroma Cafe.
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
Interest expense decreased for the quarter primarily due to lower average
interest rates, partly offset by higher average debt levels. We expect the
percentage decrease in interest expense to moderate throughout the year.
Nonoperating expense decreased for the quarter primarily due to higher
minority interest expense in 2001 related to the gain on the sale of real estate
in Singapore and foreign currency translation gains in 2002 compared with
foreign currency translation losses in 2001.
The first quarter effective income tax rate was 34.5% compared with 32.0%
in 2001. The increase in the effective income tax rate was due to the asset
impairment charges that were not tax-effected for financial reporting purposes.
We expect the annual 2002 effective tax rate to be approximately 32.5% to 33.0%.
CASH FLOWS AND FINANCIAL POSITION
Free cash flow - cash provided by operations less capital expenditures - for the
first quarter ended March 31, 2002 totaled $169.7 million compared with $157.8
million last year. Free cash flow, together with other sources of cash such as
borrowings, was and is expected to continue to be used primarily for share
repurchases and debt repayments. Capital expenditures increased 6% for the first
quarter 2002 primarily due to a 4% increase in capital expenditures associated
with McDonald's restaurant business and higher capital expenditures for the
Partner Brands. The increase in capital expenditures for McDonald's restaurant
business was primarily due to a greater number of restaurant openings in the
U.S. and Canada in first quarter 2002 compared with first quarter 2001. For the
full year 2002, the Company expects to add 1,300 to 1,400 McDonald's
restaurants, net of restaurant closings, and open 100 to 150 new Partner Brands'
restaurants.
The Company believes that buying back its stock enhances shareholder value.
Therefore, the Company purchased 11.9 million shares of its common stock in the
first quarter 2002 for approximately $330.5 million.
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, 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.
13
<PAGE>
--------------------------------------------------------------------------------
FIRST QUARTER HIGHLIGHTS
--------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended
March 31
Systemwide sales by type (in millions) 2002 2001
----------------------------------------------------------------------------
Operated by franchisees $5,997.6 $5,824.8
Operated by the Company 2,678.5 2,614.2
Operated by affiliates 1,022.4 1,210.7
----------------------------------------------------------------------------
Systemwide sales $9,698.5 $9,649.7
----------------------------------------------------------------------------
Quarters ended
March 31
Comparable sales* 2002 2001
----------------------------------------------------------------------------
U.S. (0.1)% 1.5%
Europe 5.0 (5.2)
APMEA (8.0) (5.1)
Latin America (5.5) (1.6)
Canada (3.3) 4.1
----------------------------------------------------------------------------
Total (0.8)% (1.5)%
----------------------------------------------------------------------------
* Comparable sales represent the percent change in constant currency sales from
the same period in the prior year for restaurants in operation at least thirteen
months. Comparable sales information is for the McDonald's restaurant business
only.
Quarters ended
March 31
Restaurant margins* 2002 2001
-------------------------------------------------------------------------------
Company-operated
----------------
U.S. 16.8% 16.3%
Europe 14.7 14.7
APMEA 12.4 14.3
Latin America 10.1 12.7
Canada 12.9 15.2
Total 14.4% 15.0%
Franchised
----------
U.S. 78.6% 79.0%
Europe 75.9 75.4
APMEA 86.4 84.8
Latin America 67.8 68.5
Canada 77.8 78.4
Total 78.0% 78.1%
* Restaurant margin information represents margins for the McDonald's restaurant
business only.
<PAGE>
RESTAURANTS
--------------------------------------------------------------------------------
At March 31, 2002 2001
--------------------------------------------------------------------------------
By type
Operated by franchisees 17,422 16,803
Operated by the Company 8,404 7,814
Operated by affiliates 4,366 4,288
--------------------------------------------------------------------------------
Systemwide restaurants 30,192 28,905
--------------------------------------------------------------------------------
Quarters ended
March 31
Additions 2002 2001
--------------------------------------------------------------------------------
U.S. 49 7
Europe 31 50
APMEA 40 69
Latin America 10 38
Canada 15 8
Partner Brands* (46) 26
--------------------------------------------------------------------------------
Systemwide additions 99 198
--------------------------------------------------------------------------------
* Decrease in 2002 was primarily due to sale of the Aroma Cafe business in the
U.K. in March 2002.
<PAGE>
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, 2001 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) 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) 7.31% Subordinated Deferrable Interest
Debentures due 2027. Supplemental Indenture
No. 3, dated September 24, 1997, incorporated
herein by reference from Exhibit (4)(b) of
Form 8-K, dated September 19, 1997.
(c) Debt Securities. Indenture dated as of March 1, 1987,
incorporated herein by reference from Exhibit 4(a) of
Form S-3 Registration Statement (File No. 33-12364).
(i) Medium-Term Notes, Series B, due from nine
months to 30 years from Date of Issue.
Supplemental Indenture No. 12, incorporated
herein by reference from Exhibit (4) of Form
8-K, dated August 18, 1989 and Forms of
Medium-Term Notes, Series B, incorporated
herein by reference from Exhibit (4)(b) of
Form 8-K, dated September 14, 1989.
<PAGE>
(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.
(d) McDonald's Corporation 2002 QSC Rewards Program, effective as of
February 13, 2002, incorporated herein by reference from Exhibit
4 of Form S-3A Registration Statement (File No. 333-82920) dated
March 14, 2002.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated
herein by reference from Form 10-Q, for the quarter ended June
30, 2001.*
(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 Corporation Supplemental Profit Sharing and Savings
Plan, incorporated herein by reference from Form 10-K, for the
year ended December 31, 2001.*
(d) 1975 Stock Ownership Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q, for the quarter
ended September 30, 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) 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.*
17
<PAGE>
(g) Executive Retention Plan, as amended and restated March 20, 2002,
incorporated herein by reference from Form 10-K, for the year
December 31, 2001.*
(h) Senior Director Letter Agreement between Gordon C. Gray and the
Company, incorporated herein by reference from Form 10-Q, for the
quarter ended June 30, 2001.*
(i) Senior Director Letter Agreement between Donald R. Keough and the
Company, incorporated herein by reference from Form 10-Q, for the
quarter ended June 30, 2001.*
(j) McDonald's Corporation 2001 Omnibus Stock Ownership Plan,
incorporated herein by reference from Form 10-Q, for the quarter
ended June 30, 2001.*
(k) Form of McDonald's Corporation Tier I Change of Control
Employment Agreement authorized by the Board of Directors and
expected to be entered into between the Company and certain key
executives, incorporated herein by reference from Form 10-K, for
the year ended December 31, 2001.
(l) Written description of oral arrangement between Jack M. Greenberg
and the Company, dated March 21, 2002, incorporated herein by
reference from Form 10-K, for the year ended December 31, 2001.
(12) Computation of Ratio of Earnings to Fixed Charges
_________________
* 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 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 Commission upon
request has been filed with the Commission.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the last quarter covered
by this report, and subsequently through May 10, 2002.
Financial Statements
Date of Report Item Reported Required to be Filed
-------------- ------------- --------------------
4/18/02 Item 5 and Item 7 No
18
<PAGE>
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)
/s/ Matthew H. Paull
----------------
Matthew H. Paull
Executive Vice President
Chief Financial Officer
May 10, 2002
------------------
19
</TEXT>
</DOCUMENT>