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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                      to                     

Commission File Number 1-5231

MCDONALD’S CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

(630) 623-3000

(Registrant’s Telephone Number, including Area Code)

_____________________________________________________________________________________________

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 þ No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No ¨

1,256,243,821

(Number of shares of common stock

outstanding as of June 30, 2004)

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McDONALD’S CORPORATION

INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

See notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements.

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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 and six months ended June 30, 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 quarters and six months ended June 30, 2004 and 2003:

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, restructuring markets and eliminating positions. The Company made cash payments of $14.2 million during the second quarter and $28.2 million during the six months ended June 30, 2004, primarily related to lease obligations. The remaining balance of $87.5 million at June 30, 2004 primarily related to lease obligations.

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 12.0 million shares and 5.0 million shares for the second quarter 2004 and 2003, respectively, and 12.8 million shares and 1.9 million shares for the six months ended June 30, 2004 and 2003, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 89.7 million shares and 163.8 million shares for the second quarter 2004 and 2003, respectively, and 94.3 million shares and 185.1 million shares for the six months ended June 30, 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.

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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.

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.

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

Overview

Description of Business

The Company primarily operates and franchises McDonald’s restaurants. In addition, the Company operates certain

non-McDonald’s brands that are not material to the Company’s overall results. Of the more than 30,000 McDonald’s restaurants in over 100 countries, more than 8,000 are operated by the Company, approximately 18,000 are operated by franchisees and about 4,000 are operated by affiliates under license agreements. Regardless of who operates the restaurant, the Company generally owns the land and building or secures long-term leases for restaurant sites. This ensures long-term occupancy rights and helps control related costs.

Revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees primarily include rent, service fees and/or royalties that are based on a percent of sales, with specified minimum rent payments. Fees vary by type of site, amount of Company investment and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise agreements that generally have 20-year terms.

We manage the business based on geographic segments: United States; Europe; Asia/Pacific, the Middle East and Africa (APMEA); Latin America and Canada. In addition, throughout this report we present a segment entitled “Other” that includes

non-McDonald’s brands. The U.S. and Europe segments account for approximately 70% of total revenues.

Strategic Direction

In early 2003, the Company introduced a comprehensive revitalization plan to increase McDonald’s relevance to today’s consumers as well as improve our financial discipline. We redefined our strategy to emphasize growth through adding more customers to existing restaurants. In line with this, we took a more disciplined approach to capital allocation and put a greater emphasis on controlling expenses. We aligned the System (includes franchisees and suppliers as well as the Company, its subsidiaries and joint ventures) around our customer-focused Plan to Win, designed to deliver operational excellence and leadership marketing. This Plan contains aggressive goals and measures for success based on the five drivers of exceptional customer experiences—people, products, place, price and promotion.

In 2003, we made significant progress in operational excellence and marketing leadership. We also made progress from a financial perspective. We improved our comparable sales and Company-operated margin trends, reduced capital expenditures by $700 million, paid down about $900 million of debt, bought back stock and increased the dividend by 70%.

The progress has continued into 2004, as we take our revitalization efforts to the next level. We are focused on providing better service; further enhancing our food taste, menu variety and value offerings; and creating more relevant marketing. For the first half of the year, the comparable sales increase was the highest in 20 years, and despite commodity cost pressures, the Company-operated margin significantly improved as a percent of sales. We continued to pay down debt and plan to return more than $1 billion to shareholders during the year through share repurchases and dividends.

All geographic segments posted strong comparable sales and the Company delivered double-digit growth in Systemwide sales, revenues, operating income and earnings per share for both the quarter and six months.

In the U.S., second quarter comparable sales performance remained strong and Company-operated margins reached 19.5%, a level not achieved since 1994, despite a challenging commodity cost environment. Commodity cost increases are expected to continue, with the impact lessening in the second half of the year.

Europe’s momentum continued to build in the second quarter, with the segment reporting its strongest comparable sales growth rate in more than two years. We are encouraged by this progress and confident that our service, food, value and marketing initiatives will generate steady improvements over the long term.

We have also seen renewed strength in Asia/Pacific with continued robust trends in Australia, a strong rebound in China, and encouraging signs of improvement in Japan.

Looking ahead, sales comparisons will be more difficult and we expect continued pressure on commodity costs in the second half of the year.  In addition, some key markets outside the U.S. continue to experience economic challenges. Yet, we believe the combination of initiatives that benefited the business in 2003 and the first half of 2004 will continue to create positive momentum.

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We will remain focused on operational excellence, leadership marketing, innovation and financial discipline. We’ll continue to share successful initiatives throughout the System such as our Salads Plus menu, restaurant reimaging concepts, and branded affordability programs.

Our goal is to strengthen the foundation of our business in the near term and to deliver attractive growth and returns on a sustained basis over the long term. For 2005 and beyond, we are targeting average annual Systemwide sales and revenue growth of 3 percent to 5 percent, average annual operating income growth of 6 percent to 7 percent, and annual returns on incremental invested capital in the high teens. These targets exclude the impact of foreign currency translation.

Operating Highlights Included:

Outlook

The Following Definitions Apply to These Terms as Used Throughout This Form 10-Q:

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Forward-Looking Statements

A number of factors can affect our business, including the effectiveness of operating initiatives and changes in global and local business and economic conditions. These and other risks are noted in the Forward-Looking Statements at the end of Management’s Discussion and Analysis.

CONSOLIDATED OPERATING RESULTS

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Net Income and Diluted Net Income Per Common Share

For the quarter, net income increased $119.8 million or 25%, and diluted income per common share increased $0.10 or 27%.

For the six months, income before the cumulative effect of accounting changes increased $267.1 million or 32%, and diluted income per common share before the cumulative effect of accounting change increased $0.21 or 32%. Net income, including the cumulative effect of the accounting change, increased $303.9 million or 38% and diluted net income per common share increased $0.24 or 38%.

Diluted weighted average shares outstanding were lower for both periods compared with the prior year due to shares repurchased partially offset by higher dilution from outstanding stock options.

Cumulative Effect of Accounting Change

First quarter 2003 included a noncash charge of $36.8 million after tax ($0.03 per diluted share) for the cumulative effect of an accounting change that impacted lease obligations in certain international markets. See change in accounting standard note on page 6 for further discussion of this charge.

Impact of Foreign Currencies on Reported Results

* Includes McDonald’s Restaurants only

Foreign currency translation had a positive impact on the growth rates of consolidated revenues, operating income and earnings per share for the quarter and six months, primarily due to the strengthening of the Euro and British Pound.

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Revenues

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In the U.S., ongoing execution of complementary, customer-focused initiatives drove the strong revenue increases for the quarter and six months. These initiatives included Chicken McNuggets made with white meat, McGriddles breakfast sandwiches, Premium Salads, the Dollar Menu, popular Happy Meals, extended hours and a heightened focus on operations. Franchised and affiliated revenues increased at a higher rate than Company-operated sales for both periods due to a higher percentage of franchised restaurants in 2004 than 2003. While sales comparisons in the second half of the year will be more challenging, we remain confident that our combination of initiatives will continue to deliver solid results and build on the foundation established last year.

In Europe, the increase in revenues in both periods was driven by positive comparable sales in most markets. Our new Salads Plus menu, introduced in 15 European countries during the second quarter, is connecting with customers, enhancing our brand image and generating higher average checks.

In APMEA, the increase in revenues for the quarter and six months was primarily due to strong performance in Australia driven by the ongoing popularity of its Salads Plus menu and positive comparable sales in China. In addition, second quarter 2004’s performance is being compared with prior year results which were negatively impacted by concerns about SARS (Severe Acute Respiratory Syndrome) in several key markets.

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The following table presents the percent change in comparable sales for the quarters and six months ended June 30, 2004 and 2003: