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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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1,269,312,796
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(Number of shares of common stock
outstanding as of September 30, 2002)
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McDONALD'S CORPORATION
INDEX
Page Reference
Part I. Financial Information
Item 1 - Financial Statements
Condensed consolidated balance sheet, September 30,
2002 (unaudited) and December 31, 2001 3
Condensed consolidated statement of income (unaudited),
quarters and nine months ended September 30, 2002 and 2001 4
Condensed consolidated statement of cash flows (unaudited),
quarters and nine months ended September 30, 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 9
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4 - Controls and Procedures 21
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 21
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index are
filed as part of this report 21
(b) Reports on Form 8-K 23
Signatures 24
Certifications 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
In millions, except per share data September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 423.4 $ 418.1
Accounts and notes receivable 840.0 881.9
Inventories, at cost, not in excess of market 102.0 105.5
Prepaid expenses and other current assets 423.5 413.8
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,788.9 1,819.3
- ------------------------------------------------------------------------------------------------------------------------
Other assets
Investments in and advances to affiliates 1,086.4 990.2
Goodwill, net 1,430.3 1,320.4
Miscellaneous 1,347.8 1,115.1
- ------------------------------------------------------------------------------------------------------------------------
Total other assets 3,864.5 3,425.7
- ------------------------------------------------------------------------------------------------------------------------
Property and equipment
Property and quipment, at cost 25,323.4 24,106.0
Accumulated depreciation and amortization (7,383.3) (6,816.5)
- ------------------------------------------------------------------------------------------------------------------------
Net property and equipment 17,940.1 17,289.5
- ------------------------------------------------------------------------------------------------------------------------
Total assets $23,593.5 $22,534.5
========================================================================================================================
Liabilities and shareholders' equity
Current liabilities
Notes payable $ - $ 184.9
Accounts payable 503.3 689.5
Income taxes 142.0 20.4
Other taxes 218.2 180.4
Accrued interest 181.0 170.6
Accrued payroll and other liabilities 751.2 824.9
Current maturities of long-term debt 70.2 177.6
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,865.9 2,248.3
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt 9,484.8 8,555.5
Other long-term liabilities and minority interests 524.5 629.3
Deferred income taxes 1,014.3 1,112.2
Common equity put options and forward contracts 62.5 500.8
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 1,730.8 1,591.2
Unearned ESOP compensation (102.8) (106.7)
Retained earnings 19,846.3 18,608.3
Accumulated other comprehensive income (1,855.3) (1,708.8)
Common stock in treasury, at cost; 391.3 and 379.9 million shares (8,994.1) (8,912.2)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,641.5 9,488.4
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $23,593.5 $22,534.5
========================================================================================================================
See notes to condensed consolidated financial statements.
3
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
Quarters ended Nine Months ended
In millions, except September 30 September 30
per common share data 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants $ 3,019.3 $ 2,876.9 $ 8,566.8 $ 8,229.3
Revenues from franchised and affiliated restaurants 1,027.7 1,002.4 2,939.7 2,869.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 4,047.0 3,879.3 11,506.5 11,098.5
- ----------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 2,584.8 2,440.8 7,348.3 7,025.8
Franchised restaurants - occupancy expenses 214.2 203.4 622.9 598.2
Selling, general, and administrative expenses 438.2 415.9 1,226.0 1,228.3
Other operating (income) expense, net (20.0) 72.6 (7.0) 31.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,217.2 3,132.7 9,190.2 8,884.2
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 829.8 746.6 2,316.3 2,214.3
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense 93.8 110.6 279.5 348.6
McDonald's Japan IPO gain - (137.1) - (137.1)
Nonoperating expense, net 20.7 22.6 53.1 42.6
- ----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and cumulative effect of accounting change 715.3 750.5 1,983.7 1,960.2
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 228.6 205.0 647.8 595.5
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 486.7 545.5 1,335.9 1,364.7
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax benefit of $17.6 (98.6)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 486.7 $ 545.5 $ 1,237.3 $ 1,364.7
==================================================================================================================================
Per common share:
Income before cumulative effect of accounting change $ 0.38 $ 0.42 $ 1.05 $ 1.06
Cumulative effect of accounting change (0.08)
Net income $ 0.38 $ 0.42 $ 0.97 $ 1.06
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share diluted:
Income before cumulative effect of accounting change $ 0.38 $ 0.42 $ 1.04 $ 1.04
Cumulative effect of accounting change (0.08)
Net income $ 0.38 $ 0.42 $ 0.96 $ 1.04
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares 1,273.1 1,286.1 1,274.5 1,292.1
Weighted average shares - diluted 1,280.5 1,305.8 1,286.8 1,313.4
==================================================================================================================================
See notes to condensed consolidated financial statements.
4
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
In millions 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 486.7 $ 545.5 $ 1,237.3 $ 1,364.7
Adjustments to reconcile to cash provided by operations
Cumulative effect of accounting change 98.6
Depreciation and amortization 281.0 270.9 787.7 809.6
Changes in working capital items 196.1 178.0 32.5 (80.1)
Other 36.7 (6.3) 47.6 (22.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 1,000.5 988.1 2,203.7 2,071.5
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Property and equipment expenditures (510.9) (412.3) (1,286.4) (1,243.7)
Purchases and sales of restaurant businesses and
sales of property (43.7) 24.2 (124.3) (56.8)
Other (82.4) (44.3) (199.3) (107.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (637.0) (432.4) (1,610.0) (1,407.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Notes payable and long-term financing issuances and repayments (246.4) (389.8) (109.6) 87.6
Treasury stock purchases (149.1) (172.0) (605.9) (895.7)
Other (20.5) 68.4 127.1 198.0
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (416.0) (493.4) (588.4) (610.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents increase (decrease) (52.5) 62.3 5.3 53.9
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period 475.9 413.3 418.1 421.7
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 423.4 $ 475.6 $ 423.4 $ 475.6
====================================================================================================================================
See notes to condensed consolidated financial statements.
5
- --------------------------------------------------------------------------------
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 the
Company's December 31, 2001 Annual Report on Form 10-K. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation have been included. The results for the quarter and nine
months ended September 30, 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
The following table presents the components of comprehensive income for the
quarters and nine months ended September 30, 2002 and 2001:
Quarters ended Nine months ended
September 30 September 30
In millions 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
Net income $ 486.7 $ 545.5 $ 1,237.3 $ 1,364.7
Other comprehensive income (loss):
Foreign currency translation adjustments (177.1) 29.5 (149.5) (316.8)
Deferred hedging adjustments 10.6 (35.0) 3.0 (26.8)
------- ------- --------- ---------
Total other comprehensive income (loss) (166.5) (5.5) (146.5) (343.6)
-------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 320.2 $ 540.0 $ 1,090.8 $ 1,021.1
=============================================================================================================
Common Equity Put Options and Forward Contracts
During first quarter 2002, 3.0 million common equity put options were
exercised at a cost of $87.5 million; during second quarter 2002, 1.2 million
common equity put options were exercised at a cost of $36.3 million and 2.1
million expired unexercised; and during third quarter 2002, 3.5 million common
equity put options were exercised at a cost of $100.0 million. At September 30,
2002, 2.3 million common equity put options were outstanding. The options expire
at various dates through November 2002, at exercise prices between $26.37 and
$27.47. The $62.5 million total exercise price of the options outstanding was
classified in common equity put options in the Condensed consolidated balance
sheet at September 30, 2002 and the related offset was recorded in common stock
in treasury, net of premiums received.
During 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 fourth quarter 2001.
Special Charges
In first quarter 2002, the Company recorded $43.0 million (pre and after
tax) of non-cash asset impairment charges in other operating expense, 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.
In second quarter 2001, the Company recorded a $24.0 million (pre and after
tax) non-cash asset impairment charge in other operating expense due to an
assessment of the ongoing impact of Turkey's significant currency devaluation on
our business.
In third quarter 2001, the Company recorded charges in other operating
expense of $84.1 million ($63.9 million after tax) primarily related to the
closing of 154 underperforming restaurants in international markets and $17.4
million ($12.1 million after tax) primarily related to the write-off of certain
technology investments. In addition, the Company recorded a $12.4 million ($8.1
million after tax) charge in nonoperating expense primarily related to the
write-off of a corporate investment.
In fourth quarter 2001, the Company recorded a $200.0 million pretax
special charge ($136.1 million after tax) related to strategic changes and
ongoing restaurant initiatives in the U.S. and certain international markets.
The changes and initiatives were designed to
6
improve the customer experience and grow McDonald's global business. In
connection with these initiatives, the Company eliminated approximately 850
positions, consisting of 700 positions in the U.S., primarily in the divisions
and regions, and 150 positions in international markets. The special charge
primarily consisted of (i) severance and other employee-related costs and (ii)
lease cancellation and other costs related to the closing of U.S. region and
division facilities. The remaining liability, primarily related to employee
severance and lease payments for facilities that have been closed, was
approximately $56 million at September 30, 2002 and is included in Accrued
payroll and other liabilities in the Condensed consolidated balance sheet. No
significant adjustments have been made to the original plan approved by
management in fourth quarter 2001.
Japan Initial Public Offering (IPO) Gain
In third quarter 2001, McDonald's Japan, the Company's largest market in
the Asia/Pacific, Middle East and Africa segment, completed an IPO of 12 million
shares at an offering price of 4,300 Yen per share ($34.77 per share). The
Company owns 50% of McDonald's Japan while the Company's partner Den Fujita and
his family own approximately 26% and continue to be involved in the business.
The Company recorded a $137.1 million gain (pre and after tax) to reflect an
increase in the carrying value of its investment as a result of the cash
proceeds from the IPO received by McDonald's Japan.
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 7.4 million shares and 19.7
million shares for the third quarter 2002 and 2001, respectively, and 12.3
million shares and 21.3 million shares for the nine months ended September 30,
2002 and 2001, respectively. Stock options that were not included in diluted
weighted-average shares because they would have been antidilutive were 168.8
million shares and 87.1 million shares for the third quarter 2002 and 2001,
respectively, and 104.0 million shares and 87.3 million shares for the nine
months ended September 30, 2002 and 2001, respectively.
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
eliminates the amortization of goodwill (and intangible assets deemed to have
indefinite lives) and instead subjects it 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 initial required goodwill impairment test as of
January 1, 2002, and recorded a non-cash pretax charge of $116.2 million ($98.6
million after tax or $0.08 per diluted share) in first quarter 2002 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. Third
quarter 2001 pro-forma net income, adjusted for the application of the
nonamortization provisions of SFAS No. 142, was $553.0 million and pro-forma
diluted net income per common share was $0.42, the same as the reported diluted
net income per common share. Pro-forma net income for the nine months ended
September 30, 2001, adjusted for the application of the nonamortization
provisions of SFAS No. 142, was $1,386.9 million and pro-forma diluted net
income per common share was $1.06, $.02 higher than 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).
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
(APMEA) - $171.3; Latin America - $158.5; Canada - $51.2; and Partner Brands -
$144.1). The carrying amount of goodwill, as of September 30, 2002, totaled
$1,430.3 million (U.S. - $601.4; Europe - $329.2; APMEA - $208.6; Latin America
- - $71.8; Canada - $73.1; Partner Brands - $146.2). The changes in the carrying
amounts of goodwill from December 31, 2001 to September 30, 2002 were due to (i)
the charge of $116.2 million for the cumulative effect of the accounting change,
(ii) goodwill generated in 2002 as a result of purchases of McDonald's
restaurant businesses and (iii) foreign currency exchange rate fluctuations.
7
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 March 2002,
the Company sold its Aroma Cafe business in the U.K.
The following table presents the Company's revenues and operating income by
geographic segment. The segments presented reflect the Company's current
management structure. In 2001, 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 Nine months ended
September 30 September 30
In millions 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Revenues
U.S. $ 1,408.1 $ 1,390.8 $ 4,076.3 $ 4,060.8
Europe 1,380.7 1,267.5 3,789.1 3,518.1
APMEA 623.7 576.7 1,788.0 1,631.6
Latin America 201.2 241.3 619.4 739.1
Canada 172.9 161.3 473.7 458.7
Partner Brands 260.4 241.7 760.0 690.2
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,047.0 $ 3,879.3 $ 11,506.5 $ 11,098.5
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss)
U.S. $ 479.9 $ 479.3 $ 1,400.0 $ 1,370.4
Europe 336.3 288.0 877.7 775.0
APMEA 84.2 75.8 229.6 261.1
Latin America 6.7 (22.3) (2.7) 14.2
Canada 39.3 34.7 104.8 98.6
Partner Brands (10.1) (10.4) (28.7) (37.8)
Corporate (106.5) (98.5) (264.4) (267.2)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income $ 829.8 $ 746.6 $ 2,316.3 $ 2,214.3
=======================================================================================================================
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
OPERATING RESULTS
- --------------------------------------------------------------------------------
Dollars in millions, except Quarter ended Nine months ended
per common share data September 30, 2002 September 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
% Increase/ % Increase/
Amount (Decrease) Amount (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants $ 3,019.3 5 $ 8,566.8 4
Revenues from franchised and affiliated restaurants 1,027.7 3 2,939.7 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 4,047.0 4 11,506.5 4
- ------------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 2,584.8 6 7,348.3 5
Franchised restaurants - occupancy costs 214.2 5 622.9 4
Selling, general, and administrative expenses 438.2 5 1,226.0 -
Other operating income, net (20.0) n/m (7.0) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,217.2 3 9,190.2 3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 829.8 11 2,316.3 5
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 93.8 (15) 279.5 (20)
Nonoperating expense, net and Japan IPO gain 20.7 n/m 53.1 n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and cumulative effect of accounting change 715.3 (5) 1,983.7 1
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 228.6 12 647.8 9
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 486.7 (11)% 1,335.9 (2)%
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax benefit of $17.6 (98.6) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 486.7 (11)% $ 1,237.3 (9)%
====================================================================================================================================
Per common share:
Income before cumulative effect of accounting change $ 0.38 (10)% $ 1.05 (1)%
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change (0.08) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.38 (10)% $ 0.97 (8)%
- ------------------------------------------------------------------------------------------------------------------------------------
Per common share - diluted:
Income before cumulative effect of accounting change $ 0.38 (10)% $ 1.04 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change (0.08) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.38 (10)% $ 0.96 (8)%
====================================================================================================================================
n/m Not meaningful
9
CONSOLIDATED OPERATING RESULTS
The following table presents the reported results for the quarter and nine
months ended September 30, 2002 and 2001 and the percent change in the results
on a reported and on a constant currency basis. Information on a constant
currency basis excludes the effect of foreign currency translation on reported
results, except for hyperinflationary economies, 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.
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Key highlights - Consolidated
-------------------------------------------------------------------------------------------------------------------
Percent
Dollars in millions, except per common share data Increase/(Decrease)
-------------------------------------------------------------------------------------------------------------------
As Constant
Quarters ended September 30 2002 2001 Reported Currency*
-------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,047.0 $ 3,879.3 4 3
-------------------------------------------------------------------------------------------------------------------
Operating income 829.8 746.6 11 6
-------------------------------------------------------------------------------------------------------------------
Net income 486.7 545.5 (11) (14)
-------------------------------------------------------------------------------------------------------------------
Net income per common share diluted 0.38 0.42 (10) (12)
-------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
-------------------------------------------------------------------------------------------------------------------
Total revenues $11,506.5 $11,098.5 4 4
-------------------------------------------------------------------------------------------------------------------
Operating income 2,316.3 2,214.3 5 3
-------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 1,335.9 1,364.7 (2) (4)
-------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change, net of tax (98.6) - n/m n/m
-------------------------------------------------------------------------------------------------------------------
Net income 1,237.3 1,364.7 (9) (11)
-------------------------------------------------------------------------------------------------------------------
Per common share - diluted:
Income before cumulative effect of
accounting change 1.04 1.04 - (2)
Cumulative effect of accounting change (0.08) - n/m n/m
Net income 0.96 1.04 (8) (10)
-------------------------------------------------------------------------------------------------------------------
* 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 positive impact on the total revenues
growth rate for the quarter primarily due to the stronger Euro and British
Pound, partly offset by weaker Latin American currencies (primarily the
Argentine Peso, Brazilian Real and Venezuelan Bolivar). For the nine months,
foreign currency translation had a minimal impact on the total revenues growth
rate as the stronger Euro and British Pound were offset primarily by the weaker
Latin American currencies. Foreign currency translation had a positive impact on
the consolidated operating income growth rate for both periods primarily due to
the stronger Euro.
See the following table for the effect of foreign currency translation on
consolidated reported results for the quarter and nine months.
- ---------------------------------------------------------------------------------------------------------------------------
Effect of foreign currency translation on consolidated
reported results - positive/(negative)
Quarter ended Nine months ended
In millions, except per common share data September 30, 2002 September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $55.5 $(44.6)
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 35.6 45.4
- ---------------------------------------------------------------------------------------------------------------------------
Net income 17.0 19.3
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share - diluted 0.01 0.02
- ---------------------------------------------------------------------------------------------------------------------------
10
Cumulative Effect of Accounting Change
Effective January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets," which eliminates the amortization of goodwill and
instead subjects it to annual impairment tests. As a result of the initial
required goodwill impairment test, the Company recorded a non-cash charge of
$98.6 million after tax in first quarter 2002 to reflect 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.
Special Items
In first quarter 2002, the Company recorded $43.0 million (pre and after
tax) of non-cash asset impairment charges in other operating expense, 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.
In second quarter 2001, the Company recorded a $24.0 million (pre and after
tax) non-cash asset impairment charge in other operating expense due to an
assessment of the ongoing impact of Turkey's significant currency devaluation on
our business.
In third quarter 2001, the Company recorded charges of $84.1 million ($63.9
million after tax) primarily related to the closing of 154 underperforming
restaurants in international markets and $17.4 million ($12.1 million after tax)
primarily related to the write-off of certain technology investments in other
operating expense. In addition, the Company recorded the following nonoperating
items: a $12.4 million ($8.1 million after tax) charge primarily related to the
write-off of a corporate investment and a $137.1 million (pre and after tax)
gain related to the initial public offering of McDonald's Japan. The gain
reflected an increase in the carrying value of our investment as a result of the
cash proceeds from the IPO received by McDonald's Japan.
See the following table for a summary of the special items.
- --------------------------------------------------------------------------------------------------------------------------
Special items - income/(expense)
Pretax After Tax Per Common Share -
In millions, except per common share data Diluted
- --------------------------------------------------------------------------------------------------------------------------
Quarters ended September 30 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Charges for underperforming restaurant
closings $ (84.1) $ (63.9) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------
Technology write-off and other charges (17.4) (12.1) (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Total operating items (101.5) (76.0) (0.06)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
McDonald's Japan IPO gain 137.1 137.1 0.10
- --------------------------------------------------------------------------------------------------------------------------
Corporate investment write-off (12.4) (8.1)
- --------------------------------------------------------------------------------------------------------------------------
Total nonoperating items 124.7 129.0 0.10
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total special items $ 23.2 $ 53.0 $ 0.04
- --------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
- --------------------------------------------------------------------------------------------------------------------------
Charges for underperforming restaurant
closings $ (84.1) $ (63.9) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------
Asset impairment charges $ (43.0) (24.0) $ (43.0) (24.0) $ (0.03) (0.02)
- --------------------------------------------------------------------------------------------------------------------------
Technology write-off and other charges (17.4) (12.1) (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Total operating items (43.0) (125.5) (43.0) (100.0) (0.03) (0.08)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
McDonald's Japan IPO gain 137.1 137.1 0.10
- --------------------------------------------------------------------------------------------------------------------------
Corporate investment write-off (12.4) (8.1)
- --------------------------------------------------------------------------------------------------------------------------
Total nonoperating items 124.7 129.0 0.10
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total special items $ (43.0) $ (0.8) $ (43.0) $ 29.0 $ (0.03) $ 0.02
- --------------------------------------------------------------------------------------------------------------------------
11
Net Income and Diluted Net Income Per Common Share
For the quarter, net income declined $58.8 million or 11% and diluted net
income per common share declined $0.04 or 10%. However, third quarter 2001
results included special items totaling income of $53.0 million or $0.04 per
share.
For the nine months, income before the cumulative effect of an accounting
change declined $28.8 million or 2% and diluted income per common share before
the cumulative effect of this accounting change was flat at $1.04. Results for
the nine months 2002 included special charges of $43.0 million or $0.03 per
share and results for the nine months 2001 included special items totaling $29.0
million or $0.02 of income per share.
As previously mentioned, the Company adopted the new goodwill accounting
rules on January 1, 2002, resulting in a first quarter 2002 non-cash charge of
$98.6 million after tax to reflect the cumulative effect of this accounting
change. For the nine months, net income, which included the charge for the
cumulative effect of the accounting change, declined $127.4 million or 9% and
diluted net income per share declined $0.08 or 8%.
Weighted average shares outstanding for both periods 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 nine
months, the Company repurchased 23.1 million shares of its common stock for
approximately $620 million.
Systemwide Sales and Total Revenues
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. Management believes that Systemwide sales are useful in analyzing
the Company's revenues because franchisees and affiliates pay rent, service fees
and/or royalties that generally are based on a percent of sales with specified
minimum payments, along with initial fees. These fees received from franchisees
and affiliates along with sales from Company-operated restaurants are reported
as revenues.
- -------------------------------------------------------------------------------------------------
Systemwide sales
Percent
Dollars in millions Increase/(Decrease)
- -------------------------------------------------------------------------------------------------
As Constant
Quarters ended September 30 2002 2001 Reported Currency*
- -------------------------------------------------------------------------------------------------
U.S. $ 5,203.4 $ 5,206.5 - n/a
- -------------------------------------------------------------------------------------------------
Europe 2,846.7 2,520.2 13 3
- -------------------------------------------------------------------------------------------------
APMEA 1,829.9 1,828.6 - (2)
- -------------------------------------------------------------------------------------------------
Latin America 357.7 431.4 (17) 8
- -------------------------------------------------------------------------------------------------
Canada 400.5 391.5 2 3
- -------------------------------------------------------------------------------------------------
Partner Brands 269.9 251.0 8 8
- -------------------------------------------------------------------------------------------------
Total Systemwide sales $10,908.1 $10,629.2 3 1
- -------------------------------------------------------------------------------------------------
Nine months ended September 30
- -------------------------------------------------------------------------------------------------
U.S. $15,249.0 $15,071.6 1 n/a
- -------------------------------------------------------------------------------------------------
Europe 7,707.5 6,969.6 11 7
- -------------------------------------------------------------------------------------------------
APMEA 5,085.3 5,344.9 (5) (3)
- -------------------------------------------------------------------------------------------------
Latin America 1,107.7 1,318.4 (16) 2
- -------------------------------------------------------------------------------------------------
Canada 1,098.5 1,094.5 - 2
- -------------------------------------------------------------------------------------------------
Partner Brands 788.5 718.7 10 10
- -------------------------------------------------------------------------------------------------
Total Systemwide sales $31,036.5 $30,517.7 2 2
- -------------------------------------------------------------------------------------------------
* Excluding the effect of foreign currency translation on reported results.
n/a Not applicable
Systemwide sales and revenues may grow at different rates during a given
period, primarily due to a change in the mix of Company-operated, franchised and
affiliated restaurants. For example, mix is impacted by purchases and sales of
restaurants between the Company and franchisees.
For the nine months ended September 30, 2002, about 30% of Systemwide sales
was generated by Company-operated restaurants, while 75% of revenues was
generated by Company-operated restaurants.
12
----------------------------------------------------------------------------------------------------
Total revenues
Percent
Dollars in millions Increase/(Decrease)
----------------------------------------------------------------------------------------------------
As Constant
Quarters ended September 30 2002 2001 Reported Currency*
----------------------------------------------------------------------------------------------------
U.S. $ 1,408.1 $ 1,390.8 1 n/a
----------------------------------------------------------------------------------------------------
Europe 1,380.7 1,267.5 9 -
----------------------------------------------------------------------------------------------------
APMEA 623.7 576.7 8 5
----------------------------------------------------------------------------------------------------
Latin America 201.2 241.3 (17) 13
----------------------------------------------------------------------------------------------------
Canada 172.9 161.3 7 8
----------------------------------------------------------------------------------------------------
Partner Brands 260.4 241.7 8 8
----------------------------------------------------------------------------------------------------
Total revenues $ 4,047.0 $ 3,879.3 4 3
----------------------------------------------------------------------------------------------------
Nine months ended September 30
----------------------------------------------------------------------------------------------------
U.S. $ 4,076.3 $ 4,060.8 - n/a
----------------------------------------------------------------------------------------------------
Europe 3,789.1 3,518.1 8 4
----------------------------------------------------------------------------------------------------
APMEA 1,788.0 1,631.6 10 9
----------------------------------------------------------------------------------------------------
Latin America 619.4 739.1 (16) 6
----------------------------------------------------------------------------------------------------
Canada 473.7 458.7 3 5
----------------------------------------------------------------------------------------------------
Partner Brands 760.0 690.2 10 10
----------------------------------------------------------------------------------------------------
Total revenues $11,506.5 $11,098.5 4 4
----------------------------------------------------------------------------------------------------
* 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 and
nine months were due to restaurant expansion, partly offset by negative
comparable sales. 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 on revenues.
U.S. sales were relatively flat for the quarter as expansion was offset by
negative comparable sales, while U.S. sales increased for the nine months as
expansion more than offset negative comparable sales. U.S. revenues increased
for the quarter due to an increase in the Company-operated restaurant base and
were relatively flat for the nine months.
In Europe, constant currency sales increased for the quarter due to
expansion, partly offset by negative comparable sales, while Europe's sales for
the nine months increased due to expansion and positive comparable sales. Strong
results in France were partly offset in both periods by negative comparable
sales in Germany, where the economy continues to contract, and negative
comparable sales in the U.K. for the quarter. Our marketing messages in Germany
and the U.K. during the quarter did not resonate as well with consumers as we
had hoped. Further, we expect the difficult economic conditions in Germany to
continue in the near term. Europe's revenue growth rates were lower than the
sales growth rates for both periods primarily due to a higher percentage of
franchised restaurants in 2002, compared with 2001.
Constant currency sales results in APMEA declined for both periods due to
negative comparable sales, partly offset by expansion. Positive comparable sales
in Australia and expansion in China were more than offset by negative comparable
sales in Japan in part due to weak economic conditions and consumer concerns
regarding food safety. We expect Japan's results in the near term to continue to
be weak. Despite a decrease in sales, APMEA's constant currency revenues
increased for the quarter and nine months primarily due to a higher percentage
of Company-operated restaurants and our affiliate structure in Japan. In
addition, APMEA's revenues for the nine months benefited from a restructuring of
our ownership in the Philippines in July 2001 that resulted in the
reclassification of restaurants and related revenues from franchised to
Company-operated.
In Latin America, constant currency sales increased for both periods
primarily due to positive comparable sales in Brazil and expansion. Revenues
increased at a higher rate than sales for both periods partly due to a shift to
a higher percentage of Company-operated restaurants in 2002.
The sales and revenues increases in Partner Brands for both periods were
due to expansion and positive comparable sales.
13
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 Nine months ended
September 30 September 30
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Dollars in millions
- ---------------------------------------------------------------------------------------------------------------------
Company-operated $ 416.6 $ 419.2 $ 1,163.6 $ 1,164.5
- ---------------------------------------------------------------------------------------------------------------------
Franchised 812.9 798.6 2,315.4 2,269.8
- ---------------------------------------------------------------------------------------------------------------------
Combined operating margins $ 1,229.5 $ 1,217.8 $ 3,479.0 $ 3,434.3
- ---------------------------------------------------------------------------------------------------------------------
Percent of sales/revenues
- ---------------------------------------------------------------------------------------------------------------------
Company-operated 15.1% 15.9% 14.9% 15.4%
- ---------------------------------------------------------------------------------------------------------------------
Franchised 79.2 79.7 78.8 79.1
- ---------------------------------------------------------------------------------------------------------------------
Combined operating margin dollars increased $11.7 million or 1% for the
quarter (2% decrease in constant currencies) and $44.7 million or 1% for the
nine months (1% in constant currencies). The U.S. and Europe segments accounted
for more than 80% of the combined margin dollars for both periods.
Consolidated food & paper costs decreased as a percent of sales for the
quarter and nine months, while payroll costs and occupancy & other operating
expenses increased as a percent of sales for both periods.
The U.S. Company-operated margin percent decreased for the quarter and
increased for the nine months. As a percent of sales, food & paper costs and
occupancy & other operating expenses decreased for both periods, while payroll
costs increased. In addition, both periods benefited from the elimination of
goodwill amortization and a lower contribution rate to the national co-op for
advertising expenses. However, these benefits were more than offset by higher
labor costs for the quarter.
The Company-operated margin percent in Europe decreased for the quarter,
primarily due to negative comparable sales, and also decreased for the nine
months. Payroll costs as a percent of sales increased in both periods.
Company-operated margins as a percent of sales in APMEA and Latin America were
relatively flat for the quarter but decreased for the nine months.
The declines in the consolidated franchised margin percent for the quarter
and nine months reflect negative comparable sales and higher occupancy costs due
to an increased number of leased sites. The franchised margin percent in APMEA
increased for the nine months primarily due to the 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 increased 5% for the quarter on
both a reported and constant currency basis and were relatively flat for the
nine months (1% increase in constant currencies). Both periods reflected higher
spending on future restaurant-related technology improvements, as well as the
benefit of the global change initiatives introduced in late 2001. The nine
months also included a reduction in certain performance-based compensation
accruals.
14
Other Operating Income (Expense), net
- ------------------------------------------------------------------------------------------------------------------------------------
Other operating income (expense), net
Quarters ended Nine months ended
Dollars in millions September 30 September 30
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Gains on sales of restaurant businesses $ 38.1 $ 21.0 $ 78.5 $ 67.3
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates 14.1 13.6 29.5 50.6
- ------------------------------------------------------------------------------------------------------------------------------------
Team service system payments - U.S. (21.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense (32.2) (5.7) (36.4) (24.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Special items:
- ------------------------------------------------------------------------------------------------------------------------------------
Underperforming restaurant closings (84.1) (84.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Asset impairment (43.0) (24.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Technology write-off and other charges (17.4) (17.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 20.0 $ (72.6) $ 7.0 $ (31.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of unconsolidated affiliates included lower earnings
from our Japanese affiliate for both periods. The team service system payments
consist of payments made to U.S. owner/operators in first quarter 2002 to
facilitate the introduction of a new front counter team service system. Other
expense increased for both periods primarily due to higher provisions for
uncollectible receivables and higher losses on property dispositions, partly
offset by a benefit from the elimination of goodwill amortization.
Operating Income
Consolidated operating income increased $83.2 million or 11% for the
quarter; however, special charges of $101.5 million were included in third
quarter 2001 operating income. Consolidated operating income increased $102.0
million or 5% for the nine months. Special charges of $43.0 million were
included in operating income for the nine months 2002 and $125.5 million of
special charges were included for the nine months 2001.
See page 19 for a reconciliation of segment reported operating income to
adjusted constant currency operating income excluding special items.
15
- -----------------------------------------------------------------------------------------------------------------
Operating income
Dollars in millions Percent Increase/(Decrease)
- -----------------------------------------------------------------------------------------------------------------
Adjusted
As Constant
Quarters ended September 30 2002 2001 Reported Currency/(1)/
- -----------------------------------------------------------------------------------------------------------------
U.S. $ 479.9 $ 479.3 - -
- -----------------------------------------------------------------------------------------------------------------
Europe /(2)/ 336.3 288.0 17 (5)
- -----------------------------------------------------------------------------------------------------------------
APMEA /(3)/ 84.2 75.8 11 (8)
- -----------------------------------------------------------------------------------------------------------------
Latin America /(4)/ 6.7 (22.3) n/m (75)
- -----------------------------------------------------------------------------------------------------------------
Canada /(5)/ 39.3 34.7 13 2
- -----------------------------------------------------------------------------------------------------------------
Partner Brands (10.1) (10.4) 3 3
- -----------------------------------------------------------------------------------------------------------------
Corporate /(6)/ (106.5) (98.5) (8) (26)
- -----------------------------------------------------------------------------------------------------------------
Total operating income $ 829.8 $ 746.6 11 (6)
- -----------------------------------------------------------------------------------------------------------------
Nine months ended September 30
- -----------------------------------------------------------------------------------------------------------------
U.S. $1,400.0 $1,370.4 2 2
- -----------------------------------------------------------------------------------------------------------------
Europe /(2)/ 877.7 775.0 13 4
- -----------------------------------------------------------------------------------------------------------------
APMEA /(3)/ 229.6 261.1 (12) (18)
- -----------------------------------------------------------------------------------------------------------------
Latin America /(4)/ (2.7) 14.2 n/m (70)
- -----------------------------------------------------------------------------------------------------------------
Canada /(5)/ 104.8 98.6 6 4
- -----------------------------------------------------------------------------------------------------------------
Partner Brands (28.7) (37.8) 24 24
- -----------------------------------------------------------------------------------------------------------------
Corporate /(6)/ (264.4) (267.2) 1 (5)
- -----------------------------------------------------------------------------------------------------------------
Total operating income $2,316.3 $2,214.3 5 (1)
- -----------------------------------------------------------------------------------------------------------------
(1) Excluding the effect of foreign currency translation on reported results
and excluding the special items listed below.
(2) As reported amounts include $36.2 million of charges in third quarter
2001 related to the closing of underperforming restaurants.
(3) As reported amounts include asset impairment charges in Turkey of $15.9
million in first quarter 2002 and $24.0 million in second quarter 2001,
and $11.4 million of charges in third quarter 2001 primarily related to
the closing of underperforming restaurants.
(4) As reported amounts include $27.1 million of asset impairment charges in
first quarter 2002 and $35.4 million of charges in third quarter 2001
related to the closing of underperforming restaurants.
(5) As reported amounts include $4.2 million of charges in third quarter 2001
related to the closing of underperforming restaurants.
(6) As reported amounts include $14.3 million of charges in third quarter
2001 primarily related to the write-off of certain technology
investments.
n/m Not meaningful
U.S. operating income was relatively flat for the quarter. Lower combined
operating margin dollars were offset by lower selling, general & administrative
expenses and higher other operating income. For the nine months, U.S. operating
income increased 2% due to higher combined operating margin dollars and lower
selling, general & administrative expenses. Other operating income was lower for
the nine months due to the $21.6 million of payments made to U.S.
owner/operators for the front counter team service system.
Europe's adjusted constant currency operating income decreased 5% for the
quarter and increased 4% for the nine months. Both periods reflect strong
results in France and weak results in Germany. In addition, the U.K. contributed
to the increase for the nine months.
APMEA's adjusted constant currency operating income decreased 8% for the
quarter and 18% for the nine months, primarily due to weak results in Japan and
Hong Kong, partly offset by strong results in Australia for both periods. The
segment's growth rate for the nine months was also negatively impacted by a gain
on the sale of real estate in Singapore in first quarter 2001.
Latin America's adjusted constant currency operating results declined
significantly for the quarter and nine months as Argentina and most other
markets continue to experience difficult economic conditions.
The increases in operating income for Partner Brands were primarily driven
by improved results for Chipotle and the elimination of goodwill amortization
for both periods.
16
INTEREST, NONOPERATING EXPENSE AND INCOME TAXES
Interest expense decreased for both periods primarily due to lower average
interest rates, partly offset by higher average debt levels.
Nonoperating expense for both periods reflected foreign currency
translation losses in 2002 compared with foreign currency translation gains in
2001. In addition, nonoperating expense in 2001 included a write-off of a
corporate investment.
The effective income tax rate increased from 27.3% in 2001 to 32.0% in 2002
for the quarter and from 30.4% in 2001 to 32.7% in 2002 for the nine months due
to the following special items that were not tax-effected for financial
reporting purposes: the Turkey asset impairment charge recorded in second
quarter 2001, the Japan IPO gain and certain restaurant closing charges recorded
in third quarter 2001, and the asset impairment charges recorded in first
quarter 2002.
CASH FLOWS AND FINANCIAL POSITION
For the nine months, cash provided by operations totaled $2,203.7 million and
exceeded capital expenditures by $917.3 million. Cash provided by operations was
$132.2 million higher than in 2001, primarily due to changes in working capital
items. Capital expenditures increased 3% for the nine months primarily due to
higher capital expenditures in the U.S. as a result of more restaurant openings
in 2002. Cash provided by operations, together with other sources of cash such
as borrowings, was and is expected to continue to be used primarily for capital
expenditures, share repurchases and debt repayments.
In 2003, the Company expects total capital expenditures of approximately
$1.9 billion, which is about $100 million less than expected in 2002. This
reflects a reduction in capital spent on new restaurant openings around the
world of almost $500 million. In 2003, the Company plans to invest nearly $100
million of this capital savings in new buildings for U.S. franchised restaurants
and plans to reallocate approximately $300 million of the capital savings
primarily to increase reinvestments in existing restaurants in the U.S.
For the full year 2002, the Company expects to add approximately 1,100 net
McDonald's restaurants, including 250 satellites, and about 960 net Partner
Brand restaurants. In 2003, the Company expects to add about 600 net traditional
McDonald's restaurants globally, a similar number of satellites as in 2002, and
150 to 175 net Partner Brand restaurants.
The Company repurchased approximately $620 million, or 23.1 million shares
of its common stock during the first nine months of 2002 and plans to repurchase
at least $500 million of its common stock in 2003.
In October 2002, the Board of Directors approved a 4.4 percent increase in
the annual dividend to 23.5 cents per share, payable on December 2, 2002, to
shareholders of record on November 15, 2002.
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 and technology
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.
17
- --------------------------------------------------------------------------------
THIRD QUARTER AND NINE MONTHS HIGHLIGHTS
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION
Quarters ended Nine months ended
September 30 September 30
Systemwide sales by type (in millions) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Operated by franchisees $ 6,715.3 $ 6,485.3 $ 19,221.8 $ 18,606.1
Operated by the Company 3,019.3 2,876.9 8,566.8 8,229.3
Operated by affiliates 1,173.5 1,267.0 3,247.9 3,682.3
- -------------------------------------------------------------------------------------------------------------------------
Systemwide sales $ 10,908.1 $ 10,629.2 $ 31,036.5 $ 30,517.7
- -------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
Comparable sales* 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
U.S. (2.8)% 0.6% (1.6)% (0.1)%
Europe (1.3) (1.2) 2.0 (2.8)
APMEA (8.1) (4.2) (9.2) (3.5)
Latin America 3.6 (3.3) (2.1) (2.4)
Canada (0.9) (0.1) (2.0) 1.4
- -------------------------------------------------------------------------------------------------------------------------
Total (3.0)% (0.9)% (2.1)% (1.4)%
- -------------------------------------------------------------------------------------------------------------------------
* 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 Nine months ended
September 30 September 30
Restaurant margins* 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Company-operated
----------------
U.S. 15.5% 15.9% 16.7% 16.2%
Europe 17.1 18.9 16.0 16.8
APMEA 12.2 12.2 12.3 13.2
Latin America 10.1 10.1 9.2 11.1
Canada 15.1 16.8 14.6 16.2
Total 15.1% 15.9% 14.9% 15.4%
Franchised
----------
U.S. 79.6% 79.9% 79.5% 79.9%
Europe 77.6 78.4 76.9 77.1
APMEA 86.1 88.3 86.1 85.9
Latin America 69.3 68.4 68.1 68.6
Canada 80.6 81.8 79.4 80.5
Total 79.2% 79.7% 78.8% 79.1%
* Restaurant margin information represents margins for the McDonald's restaurant
business only.
18
Reconciliation of Segment Reported Operating Income to Adjusted
Constant Currency Operating Income Excluding Special Items
- ------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
% Increase/ % Increase/
Dollars in millions 2002 2001 Decrease 2002 2001 Decrease
- ------------------------------------------------------------------------------------------------------------------------
Europe
As reported $ 336.3 $288.0 17 $ 877.7 $ 775.0 13
Charges for underperforming restaurant
closings 36.2 36.2
Currency effect (29.0) (32.5)
Adjusted constant currency $ 307.3 $324.2 (5) $ 845.2 $ 811.2 4
- ------------------------------------------------------------------------------------------------------------------------
APMEA
As reported $ 84.2 $ 75.8 11 $ 229.6 $ 261.1 (12)
Charges for underperforming restaurant
closings 8.3 8.3
Asset impairment charges 15.9 24.0
Technology write-off and other charges 3.1 3.1
Currency effect (3.7) (2.8)
Adjusted constant currency $ 80.5 $ 87.2 (8) $ 242.7 $ 296.5 (18)
- ------------------------------------------------------------------------------------------------------------------------
Latin America
As reported $ 6.7 $(22.3) n/m $ (2.7) $ 14.2 n/m
Charges for underperforming restaurant
closings 35.4 35.4
Asset impairment charges 27.1
Currency effect (3.4) (9.5)
Adjusted constant currency $ 3.3 $ 13.1 (75) $ 14.9 $ 49.6 (70)
- ------------------------------------------------------------------------------------------------------------------------
Canada
As reported $ 39.3 $ 34.7 13 $ 104.8 $ 98.6 6
Charges for underperforming restaurant
closings 4.2 4.2
Currency effect 0.5 1.8
Adjusted constant currency $ 39.8 $ 38.9 2 $ 106.6 $ 102.8 4
- ------------------------------------------------------------------------------------------------------------------------
Corporate
As reported $(106.5) $(98.5) (8) $(264.4) $(267.2) 1
Technology write-off 14.3 14.3
Adjusted constant currency $(106.5) $(84.2) (26) $(264.4) $(252.9) (5)
- ------------------------------------------------------------------------------------------------------------------------
19
RESTAURANTS
- --------------------------------------------------------------------------------------------------------------------------
At September 30, At September 30,
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
By type
Operated by franchisees 17,714 17,015
Operated by the Company 8,802 8,137
Operated by affiliates 4,267 4,265
- --------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants 30,783 29,417
- --------------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
September 30 September 30
Additions 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
U.S. 114 74 238 149
Europe 66 27 167 162
APMEA 72 68 206 284
Latin America 19 (28) 36 36
Canada 19 13 41 27
Partner Brands* 29 13 2 52
- --------------------------------------------------------------------------------------------------------------------------
Systemwide additions 319 167 690 710
- --------------------------------------------------------------------------------------------------------------------------
* Decrease for the nine months in 2002 was primarily due to the sale of the
Aroma Cafe business in the U.K. in March, 2002.
20
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.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was conducted under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. Such officers also
confirm that there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation referred to above.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
(3) (a) Restated Certificate of Incorporation, effective as of March 24,
1998, incorporated herein by reference from Form 8-K, dated April
17, 1998.
(b) By-Laws, effective as of July 11, 2002, incorporated herein by
reference from Form 10-Q, for the quarter ended June 30, 2002.
(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) 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.
(iii) 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.
(iv) Medium-Term Notes, Series H, due from 1 Year to 60 Years
from Date of Issue. Supplemental Indenture No. 7,
incorporated herein by reference from Exhibit (4)(c) of Form
S-3 Registration Statement (File No. 333-92212), dated July
10, 2002.
(b) Subordinated Debt Securities Indenture, dated as of October 18,
1996, incorporated herein by reference from Exhibit (4)(a) of
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.
21
(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) 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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.*
(iv) Fourth Amendment to the McDonald's Profit Sharing Program,
incorporated herein by reference from Form 10-Q, for the
quarter ended June 30, 2002. *
(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.*
(g) Executive Retention Plan, as amended and restated October 29,
2002, filed herewith.*
22
(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, 2002.
(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, 2002.
(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
(99.1) Quarterly Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(99.2) Press Release dated November 8, 2002 -- McDonald's Announces
Additional Plans to Optimize Its Existing Business;
Reports October Sales, filed herewith.
________________________
* 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 November 12, 2002.
Financial Statements
Date of Report Item Reported Required to be Filed
-------------- ------------- --------------------
8/13/02 Item 9 No
9/13/02 Item 5 and Item 7 No
10/22/02 Item 5 and Item 7 No
23
SIGNATURES
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)
November 12, 2002 By: /s/ Matthew H. Paull
----------------- -----------------------------
Matthew H. Paull
Corporate Executive Vice
President and Chief Financial
Officer
CERTIFICATIONS
I, Jack M. Greenberg, Chairman of the Board and Chief Executive Officer of
McDonald's Corporation, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of McDonald's
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
24
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
By: /s/ Jack M. Greenberg
-------------------------
Jack M. Greenberg
Chairman of the Board and
Chief Executive Officer
I, Matthew H. Paull, Corporate Executive Vice President and Chief Financial
Officer of McDonald's Corporation, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of McDonald's
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
25
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
By: /s/ Matthew H. Paull
-----------------------------
Matthew H. Paull
Corporate Executive Vice
President and Chief Financial
Officer
26