Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number 1-5231

McDONALD'S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

        Indicate by check ü  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 ý    No o

Indicate by check ü  whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý    No o

McDONALD'S CORPORATION

INDEX

2

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

See notes to condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

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, 2002 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 six months ended June 30, 2003 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 six months ended June 30, 2003 and 2002:

Restructuring and Restaurant Closing Costs

        In second quarter 2003, the Company recorded a $14.0 million pretax charge in selling, general and administrative expenses for severance and other employee-related costs, in connection with streamlining restaurant development functions.

        In first quarter 2002, the Company recorded $43.0 million (pre and after tax) of asset impairment charges in other operating expense, primarily related to the impairment of assets in certain 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 fourth quarter 2002, the Company recorded $810.2 million of pretax charges ($656.9 million after tax) primarily related to: restructuring certain markets in the Middle East and Latin America; eliminating approximately 600 positions; reallocating resources and consolidating certain home office facilities; management's decision to close 719 underperforming restaurants primarily in the U.S. and Japan; and the write-off of software development costs.

        The following table presents the activity included in accrued restructuring and restaurant closing costs in the Condensed consolidated balance sheet.

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 5.0 million shares and 17.4 million shares for the second quarter 2003 and 2002, respectively, and 1.9 million shares and 16.1 million shares for the six months ended June 30, 2003 and 2002, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 163.8 million shares and 71.0 million shares for the second quarter 2003 and 2002, respectively, and 185.1 million shares and 91.9 million shares for the six months ended June 30, 2003 and 2002, respectively.

6

Stock-Based Compensation

        The Company accounts for stock options as prescribed by Accounting Principles Board Opinion No. 25 and includes pro forma information, as provided by Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation.

        Pro forma net income and net income per common share were determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was estimated at the date of grant using an option pricing model. The model was designed to estimate the fair value of exchange-traded options that, unlike employee stock options, can be traded at any time and are fully transferable. In addition, such models require the input of highly subjective assumptions including the expected volatility of the stock price. For pro forma disclosures, the options' estimated fair value was amortized over their vesting period.

Variable Interest Entities

        Prior to June 2003, the Company and six unaffiliated companies that supply the "McDonald's System" (McDonald's franchisees, suppliers and the Company) were equal owners of System Capital Corporation (SCC). In June 2003, the Company sold its share of SCC back to SCC. SCC's purpose is to provide funding to the McDonald's System and to build equity within SCC that will benefit the McDonald's System. The Company has determined that it is not required to consolidate or disclose information about SCC in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities.

Changes in Accounting Standards

Asset retirement obligations — 2003

        Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. In first quarter 2003, the Company recorded a charge of $36.8 million after tax ($0.03 per diluted share) related to lease obligations in certain international markets to reflect the cumulative effect of this accounting change. The adoption of the new rule will not have a material effect on the Company's ongoing results of operations or financial position.

Goodwill — 2002

        Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminates the amortization of goodwill (and intangible assets deemed to have indefinite lives) and instead subjects it to annual impairment tests. The Company performed the initial required goodwill impairment test as of January 1, 2002, and recorded a charge of $98.6 million after tax ($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 had weakened significantly.

7

Segment Information

        The Company operates in the food service industry and primarily operates and franchises quick-service restaurant businesses under the McDonald's brand (McDonald's restaurants). The Company also operates other restaurant concepts under its Partner Brands: Boston Market, Chipotle Mexican Grill and Donatos Pizzeria.

        The following table presents the Company's revenues and operating income by geographic segment. APMEA represents McDonald's restaurant operations in Asia/Pacific, the Middle East and Africa.

8

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

OPERATING RESULTS

n/m Not meaningful

9

CONSOLIDATED OPERATING RESULTS

The Company operates in the food service industry and primarily operates and franchises quick-service restaurant businesses under the McDonald's brand (McDonald's restaurants). The Company also operates other restaurant concepts under its Partner Brands.

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 growth rates of consolidated revenue, operating income and earnings per share for the quarter and six months, primarily due to the stronger Euro and British Pound.

        Information in constant currencies excludes the effect of foreign currency translation on reported results. Management reviews and analyzes business results in constant currencies and bases certain compensation plans on these results because it believes these results better represent the Company's underlying business trends.

Net Income and Diluted Net Income Per Common Share

        For the quarter, net income decreased $26.6 million or 5%, and diluted net income per common share decreased $0.02 or 5%. These results included a benefit from foreign currency translation of $34.4 million in net income and $0.03 in diluted net income per common share.

        For the six months, income before the cumulative effect of accounting changes decreased $14.1 million or 2%, and diluted income per common share before the cumulative effect of accounting changes was flat at $0.66. Net income, including the cumulative effect of the accounting changes, increased $47.7 million or 6% and diluted net income per common share increased $0.05 or 9%. These results included a benefit from foreign currency translation of $59.9 million in net income and $0.05 in diluted net income per common share.

        Diluted weighted average shares outstanding were lower for both periods compared with the prior year due to a less dilutive effect from outstanding stock options and shares repurchased during 2002.

        In June, the Company repurchased $26.0 million of its common stock.

Cumulative Effect of Accounting Changes

        Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. In first quarter 2003, the Company recorded a charge of $36.8 million after tax ($0.03 per diluted share) related to lease obligations in certain international markets to reflect the cumulative effect of this accounting change.

        Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminated 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 charge of $98.6 million after tax ($0.08 per diluted share) 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 had weakened significantly.

Systemwide Sales and 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 information is 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. These fees received from franchisees and affiliates along with sales from Company-operated restaurants are reported as revenues.

10

Systemwide sales

*

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, this mix is impacted by purchases and sales of restaurants between the Company and franchisees. For the six months ended June 30, 2003 and 2002, Company-operated restaurants generated about 30% of Systemwide sales and about 75% of revenues.

Total revenues

*

Excluding the effect of foreign currency translation on reported results.

n/a

Not applicable

        Systemwide sales increased 10% for the quarter and 7% for the six months. On a global basis, the increases in Systemwide sales and revenues were due to expansion for the quarter and the six months, and positive comparable sales for the quarter. On a global basis, comparable sales were negative for the six months.

11

        U.S. sales increased 8% for the quarter and 4% for the six months due to positive comparable sales and expansion. Strong customer response to the new premium salads and McGriddles breakfast sandwiches, popular Happy Meals, continued everyday value and focus on improved food taste and service, all contributed to the sales increases. The strong U.S. comparable sales performance continued in July. U.S. revenues increased at a higher rate than sales for both periods due to a slightly higher percentage of Company-operated restaurants.

        In Europe, constant currency sales were relatively flat for the quarter and six months as restaurant expansion offset negative comparable sales. Continued negative results in the U.K. and Germany were offset by expansion in France and strong performances in Russia and Spain. Comparable sales trends in Europe continued to be negative in July. Revenues increased at a lower rate than sales for both periods, primarily due to a higher percentage of franchised restaurants in 2003.

        Constant currency sales results in APMEA declined 4% for the quarter and the six months due to negative comparable sales in most markets. The segment's decline was driven by weak results in Japan and other key markets, compounded by concerns about SARS (Severe Acute Respiratory Syndrome). We expect the impact of SARS to be less in the second half of the year.

        In Latin America, constant currency sales increased 8% for the quarter and 4% for the six months, primarily due to positive comparable sales in many markets. Revenues increased at a higher rate than sales for both periods, primarily due to a higher percentage of Company-operated restaurants in 2003.

        Partner Brands sales and revenues increased in both periods, due to expansion and positive comparable sales at Chipotle Mexican Grill.

Combined Operating Margins

        The following combined operating margin information represents margins for McDonald's restaurant business only and excludes Partner Brands.

Combined operating margins