UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended March 31, 2004 |
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 Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| McDonald’s Plaza Oak Brook, Illinois |
60523 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, including Area Code: (630) 623-3000
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Indicate by check 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 þ No ¨
Indicate by check ü whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No ¨
1,259,408,088
(Number of shares of common stock
outstanding as of March 31, 2004)
McDONALD’S CORPORATION
INDEX
2
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEET
| In millions, except per share data | (unaudited) March 31, 2004 |
December 31, 2003 |
||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash and equivalents |
$ | 969.6 | $ | 492.8 | ||||
| Accounts and notes receivable |
655.0 | 734.5 | ||||||
| Inventories, at cost, not in excess of market |
122.3 | 129.4 | ||||||
| Prepaid expenses and other current assets |
568.4 | 528.7 | ||||||
| Total current assets |
2,315.3 | 1,885.4 | ||||||
| Other assets |
||||||||
| Investments in and advances to affiliates |
1,100.1 | 1,089.6 | ||||||
| Goodwill, net |
1,696.9 | 1,665.1 | ||||||
| Miscellaneous |
993.4 | 960.3 | ||||||
| Total other assets |
3,790.4 | 3,715.0 | ||||||
| Property and equipment |
||||||||
| Property and equipment, at cost |
28,738.0 | 28,740.2 | ||||||
| Accumulated depreciation and amortization |
(9,025.8 | ) | (8,815.5 | ) | ||||
| Net property and equipment |
19,712.2 | 19,924.7 | ||||||
| Total assets |
$ | 25,817.9 | $ | 25,525.1 | ||||
| Liabilities and shareholders’ equity |
||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | 492.7 | $ | 577.4 | ||||
| Income taxes |
172.1 | 71.5 | ||||||
| Other taxes |
215.0 | 222.0 | ||||||
| Accrued interest |
193.2 | 193.1 | ||||||
| Accrued restructuring and restaurant closing costs |
101.7 | 115.7 | ||||||
| Accrued payroll and other liabilities |
817.7 | 918.1 | ||||||
| Current maturities of long-term debt |
634.9 | 388.0 | ||||||
| Total current liabilities |
2,627.3 | 2,485.8 | ||||||
| Long-term debt |
9,114.2 | 9,342.5 | ||||||
| Other long-term liabilities and minority interests |
701.8 | 699.8 | ||||||
| Deferred income taxes |
1,006.2 | 1,015.1 | ||||||
| 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 |
1,912.9 | 1,837.5 | ||||||
| Unearned ESOP compensation |
(90.6 | ) | (90.5 | ) | ||||
| Retained earnings |
20,684.1 | 20,172.3 | ||||||
| Accumulated other comprehensive income (loss) |
(654.3 | ) | (635.5 | ) | ||||
| Common stock in treasury, at cost; 401.2 and 398.7 million shares |
(9,500.3 | ) | (9,318.5 | ) | ||||
| Total shareholders’ equity |
12,368.4 | 11,981.9 | ||||||
| Total liabilities and shareholders’ equity |
$ | 25,817.9 | $ | 25,525.1 | ||||
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
| Quarters ended March 31 |
|||||||
| In millions, except per common share data |
2004 | 2003 | |||||
| Revenues |
|||||||
| Sales by Company-operated restaurants |
$ | 3,283.0 | $ | 2,856.1 | |||
| Revenues from franchised and affiliated restaurants |
1,116.7 | 943.6 | |||||
| Total revenues |
4,399.7 | 3,799.7 | |||||
| Operating costs and expenses |
|||||||
| Company-operated restaurant expenses |
2,827.4 | 2,509.4 | |||||
| Franchised restaurants – occupancy expenses |
246.4 | 223.3 | |||||
| Selling, general, and administrative expenses |
457.5 | 396.4 | |||||
| Other operating (income) expense, net |
10.0 | (4.0 | ) | ||||
| Total operating costs and expenses |
3,541.3 | 3,125.1 | |||||
| Operating income |
858.4 | 674.6 | |||||
| Interest expense |
91.7 | 101.8 | |||||
| Nonoperating expense, net |
8.9 | 25.2 | |||||
| Income before provision for income taxes and cumulative effect of accounting change |
757.8 | 547.6 | |||||
| Provision for income taxes |
246.3 | 183.4 | |||||
| Income before cumulative effect of accounting change |
511.5 | 364.2 | |||||
| Cumulative effect of accounting change, net of tax benefit of $9.4 |
— | (36.8 | ) | ||||
| Net income |
$ | 511.5 | $ | 327.4 | |||
| Per common share: |
|||||||
| Income before cumulative effect of accounting change |
$ | 0.41 | $ | 0.29 | |||
| Cumulative effect of accounting change |
— | (0.03 | ) | ||||
| Net income |
$ | 0.41 | $ | 0.26 | |||
| Per common share–diluted: |
|||||||
| Income before cumulative effect of accounting change |
$ | 0.40 | $ | 0.29 | |||
| Cumulative effect of accounting change |
— | (0.03 | ) | ||||
| Net income |
$ | 0.40 | $ | 0.26 | |||
| Weighted average shares |
1,261.7 | 1,269.6 | |||||
| Weighted average shares–diluted |
1,275.5 | 1,270.3 | |||||
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| Quarters ended March 31 |
||||||||
| In millions | 2004 | 2003 | ||||||
| Operating activities |
||||||||
| Net income |
$ | 511.5 | $ | 327.4 | ||||
| Adjustments to reconcile to cash provided by operations |
||||||||
| Cumulative effect of accounting change |
— | 36.8 | ||||||
| Depreciation and amortization |
297.2 | 287.2 | ||||||
| Changes in working capital items |
42.3 | (157.4 | ) | |||||
| Deferred income taxes |
(13.1 | ) | 34.6 | |||||
| Other |
27.2 | 23.5 | ||||||
| Cash provided by operations |
865.1 | 552.1 | ||||||
| Investing activities |
||||||||
| Property and equipment expenditures |
(180.3 | ) | (304.2 | ) | ||||
| Purchases and sales of restaurant businesses and sales of property |
37.2 | (21.8 | ) | |||||
| Other |
(4.2 | ) | (35.7 | ) | ||||
| Cash used for investing activities |
(147.3 | ) | (361.7 | ) | ||||
| Financing activities |
||||||||
| Notes payable and long-term financing issuances and repayments |
(11.6 | ) | (46.8 | ) | ||||
| Treasury stock purchases |
(291.5 | ) | — | |||||
| Other |
62.1 | 14.0 | ||||||
| Cash used for financing activities |
(241.0 | ) | (32.8 | ) | ||||
| Cash and equivalents increase |
476.8 | 157.6 | ||||||
| Cash and equivalents at beginning of period |
492.8 | 330.4 | ||||||
| Cash and equivalents at end of period |
$ | 969.6 | $ | 488.0 | ||||
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, 2003 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 ended March 31, 2004 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.
Change in Accounting Standard
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 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 noncash 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. There is not a material effect to the Company’s ongoing results of operations or financial position as a result of adopting SFAS No. 143.
Comprehensive Income
The following table presents the components of comprehensive income for the first quarters ended March 31, 2004 and 2003:
| Quarters ended March 31 | |||||||
| In millions | 2004 | 2003 | |||||
| Net income |
$ | 511.5 | $ | 327.4 | |||
| Other comprehensive income (loss): |
|||||||
| Foreign currency translation adjustments |
(20.5 | ) | 158.2 | ||||
| Deferred hedging adjustments |
1.7 | 0.6 | |||||
| Total other comprehensive income (loss) |
(18.8 | ) | 158.8 | ||||
| Total comprehensive income |
$ | 492.7 | $ | 486.2 | |||
Accrued Restructuring and Restaurant Closing Costs
In 2003 and 2002, the Company recorded special charges primarily related to the disposition of certain non-McDonald’s brands, restaurant closings, and restructuring markets and eliminating positions. During the first quarter ended March 31, 2004, the Company made cash payments of $14.0 million primarily related to lease obligations. The remaining balance of $101.7 million at March 31, 2004 primarily related to lease obligations and employee-related costs.
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 13.8 million shares and 0.7 million shares for the first quarter 2004 and 2003, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 100.1 million shares and 208.1 million shares for the first quarter 2004 and 2003, respectively.
Stock-Based Compensation
The Company accounts for all stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25. The Company discloses pro forma net income and net income per common share, as provided by Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation.
6
The pro forma information was 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.
Pro forma disclosures
| In millions, except per share data | 2004 | 2003 | ||||||
| As reported – net income |
$ | 511.5 | $ | 327.4 | ||||
| Add: Total stock-based employee compensation included in reported net income, net of related tax effects |
1.4 | 0.4 | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair value method for all rewards, net of related tax effects |
(44.2 | ) | (65.8 | ) | ||||
| Pro forma – net income |
$ | 468.7 | $ | 262.0 | ||||
| Net income per share: |
||||||||
| As reported – basic |
$ | 0.41 | $ | 0.26 | ||||
| Pro forma – basic |
$ | 0.37 | $ | 0.21 | ||||
| As reported – diluted |
$ | 0.40 | $ | 0.26 | ||||
| Pro forma – diluted |
$ | 0.37 | $ | 0.21 | ||||
Segment Information
The Company primarily operates and franchises McDonald’s restaurants in the food service industry. In addition, the Company operates certain non-McDonald’s brands that are not material to the Company’s overall results.
The following table presents the Company’s revenues and operating income by geographic segment. The APMEA segment represents McDonald’s restaurant operations in Asia/Pacific, the Middle East and Africa. The Other segment represents non-McDonald’s brands.
| Quarters ended March 31 |
||||||||
| In millions | 2004 | 2003 | ||||||
| Revenues |
||||||||
| U.S. |
$ | 1,490.0 | $ | 1,316.1 | ||||
| Europe |
1,556.5 | 1,302.5 | ||||||
| APMEA |
657.6 | 581.7 | ||||||
| Latin America |
224.8 | 186.4 | ||||||
| Canada |
198.9 | 151.1 | ||||||
| Other |
271.9 | |||||||