McDonaldโs Corporation is an American operator and franchisor of fast food restaurants represented worldwide and the biggest fast food company in the world.
1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 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 60521 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (630) 623-3000 -------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 697,713,217 --------------------------------- (Number of shares of common stock outstanding as of September 30, 1996)
2 McDONALD'S CORPORATION ---------------------- INDEX ----- Page Reference Part I. Financial Information Item 1 - Financial Statements Condensed consolidated balance sheet, September 30, 1996 (unaudited) and December 31, 1995 3 Condensed consolidated statement of income (unaudited), nine months and third quarters ended September 30, 1996 and 1995 4 Condensed consolidated statement of cash flows (unaudited), nine months and third quarters ended September 30, 1996 and 1995 5 Financial comments (unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information Item 6 - Exhibits and Reports on Form 8-K 16 (a) Exhibits The exhibits listed in the accompanying Exhibit Index are filed as part of this report 16 (b) Reports on Form 8-K 20 Signature 21
3 PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ----------------------------- <TABLE> CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> (unaudited) Dollars in millions September 30, 1996 December 31, 1995 --------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and equivalents $ 255.5 $ 334.8 Accounts receivable 434.1 377.3 Notes receivable 35.1 36.3 Inventories, at cost, not in excess of market 61.0 58.0 Prepaid expenses and other current assets 170.1 149.4 --------------------------------------------------------------------------- TOTAL CURRENT ASSETS 955.8 955.8 --------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES 1,112.0 1,112.7 --------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment, at cost 18,468.7 17,137.6 Accumulated depreciation and amortization (4,660.3) (4,326.3) --------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 13,808.4 12,811.3 --------------------------------------------------------------------------- INTANGIBLE ASSETS-NET 666.9 534.8 --------------------------------------------------------------------------- TOTAL ASSETS $16,543.1 $15,414.6 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 497.2 $ 413.0 Accounts payable 446.5 564.3 Income taxes 120.1 55.4 Other taxes 127.3 127.1 Accrued interest 99.3 117.4 Other accrued liabilities 371.2 352.5 Current maturities of long-term debt 105.4 165.2 --------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,767.0 1,794.9 --------------------------------------------------------------------------- LONG-TERM DEBT 4,618.3 4,257.8 OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 709.8 664.7 DEFERRED INCOME TAXES 893.6 835.9
SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized - 165.0 million shares; issued - 7.2 thousand 358.0 358.0 Common stock, 1996-$.01 par; 1995-no par value; authorized, 1996-3.5 billion shares; 1995-1.25 billion shares; issued-830.3 million 8.3 92.3 Additional paid-in capital 548.0 387.4 Guarantee of ESOP notes (213.6) (214.2) Retained earnings 10,822.0 9,831.3 Foreign currency translation adjustment (144.1) (87.1) --------------------------------------------------------------------------- 11,378.6 10,367.7 --------------------------------------------------------------------------- Common stock in treasury, at cost; 132.6 and 130.6 million shares (2,824.2) (2,506.4) --------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 8,554.4 7,861.3 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,543.1 $15,414.6 =========================================================================== See accompanying Financial comments. /TABLE
4 <TABLE> CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <CAPTION> Dollars in millions, except Nine Months Ended Quarters Ended per common share data September 30 September 30 1996 1995 1996 1995 ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> REVENUES Sales by Company-operated restaurants $5,565.2 $5,051.3 $1,965.6 $1,811.9 Revenues from franchised restaurants 2,299.7 2,157.7 808.2 768.2 ------------------------------------------------------------------------------ TOTAL REVENUES 7,864.9 7,209.0 2,773.8 2,580.1 ------------------------------------------------------------------------------ OPERATING COSTS AND EXPENSES Company-operated restaurants 4,524.5 4,070.9 1,582.1 1,448.0 Franchised restaurants- occupancy expenses 420.1 377.7 142.2 131.7 General, administrative and selling expenses 985.4 894.9 347.9 314.1 Other operating (income) expense-net (83.7) (89.7) (42.4) (35.8) ------------------------------------------------------------------------------ TOTAL OPERATING COSTS AND EXPENSES 5,846.3 5,253.8 2,029.8 1,858.0 ------------------------------------------------------------------------------ OPERATING INCOME 2,018.6 1,955.2 744.0 722.1 ------------------------------------------------------------------------------ Interest expense 252.3 252.5 84.7 86.1 Nonoperating income (expense)-net (38.8) (73.2) (9.4) (26.5) ------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 1,727.5 1,629.5 649.9 609.5 ------------------------------------------------------------------------------ Provision for income taxes 564.9 569.0 209.3 209.4 ------------------------------------------------------------------------------ NET INCOME $1,162.6 $1,060.5 $ 440.6 $ 400.1 ============================================================================== NET INCOME PER COMMON SHARE $ 1.63 $ 1.46 $ 0.62 $ 0.56 ------------------------------------------------------------------------------ Weighted average common shares outstanding 699.1 699.6 697.8 698.4 ------------------------------------------------------------------------------ See accompanying Financial comments. /TABLE
5 <TABLE> CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <CAPTION> Nine Months Ended Quarters Ended September 30 September 30 Dollars in millions 1996 1995 1996 1995 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING ACTIVITIES Net income $1,162.6 $1,060.5 $440.6 $400.1 Adjustments to reconcile to cash provided by operations Depreciation and amortization 546.7 521.8 175.1 175.9 Changes in operating working capital items 12.7 72.3 106.7 153.0 Other 0.5 (34.4) (20.7) (51.1) ------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS 1,722.5 1,620.2 701.7 677.9 ------------------------------------------------------------------------------- INVESTING ACTIVITIES Property and equipment expenditures (1,599.2) (1,380.7) (614.7) (587.8) Purchases and sales of restaurant businesses and sales of other property 37.4 72.5 20.0 52.3 Other (218.8) (120.2) (132.1) (35.7) ------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (1,780.6) (1,428.4) (726.8) (571.2) ------------------------------------------------------------------------------- FINANCING ACTIVITIES Notes payable and long-term financing issuances and repayments 463.0 350.3 150.2 123.5 Treasury stock purchases (395.5) (284.1) (156.0) (195.0) Common and preferred stock dividends (172.6) (170.6) (60.6) (56.2) Other 83.9 50.3 1.3 19.6 ------------------------------------------------------------------------------- CASH USED FOR FINANCING ACTIVITIES (21.2) (54.1) (65.1) (108.1) ------------------------------------------------------------------------------- CASH AND EQUIVALENTS INCREASE (DECREASE) (79.3) 137.7 (90.2) (1.4) ------------------------------------------------------------------------------- Cash and equivalents at beginning of period 334.8 179.9 345.7 319.0 ------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF PERIOD $255.5 $317.6 $255.5 $317.6 =============================================================================== See accompanying Financial comments. /TABLE
6 FINANCIAL COMMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's 1995 Annual Report to Shareholders. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. 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. NET INCOME PER COMMON SHARE Net income per common share was computed using net income, reduced by preferred stock cash dividends (net of tax) of $20.7 and $31.8 million for the first nine months of 1996 and 1995, and $6.9 and $8.0 million for the third quarters of 1996 and 1995, respectively. In addition, net income per common share for the first nine months of 1995 was reduced by $4.3 million for the one-time effect of the exchange of preferred stock for debt completed in June 1995. Adjusted net income was divided by the weighted average shares of common stock outstanding: 699.1 and 699.6 million for the nine months ended September 30, 1996 and 1995, and 697.8 and 698.4 million for the third quarters of 1996 and 1995, respectively. During 1995, shares of Series B and C Preferred Stock were converted into 8.7 million common shares. Including the effect of potentially dilutive securities, fully diluted earnings per common share amounts were $1.59 and $1.42 for the nine months ended September 30, 1996 and 1995, and $0.61 and $0.55 for the third quarters of 1996 and 1995, respectively. CAPITAL STOCK In May 1996, the shareholders of the Company approved an increase in the total number of authorized shares of Common Stock from 1.25 billion shares with no par value to 3.5 billion shares with $.01 par value. The change in par value did not affect any of the existing rights of shareholders and has been recorded as an adjustment to additional paid-in capital and common stock. NEW ACCOUNTING STANDARD - ASSET IMPAIRMENT The Company adopted Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of, in the first quarter 1996. This statement requires impairment losses be recognized for long-lived assets, whether these assets are held for disposal or continue to be used in operations, when indicators of impairment are present and the fair value of assets are estimated to be less than carrying amounts. The fair value of assets was based on projected future cash flows. The adoption of this standard resulted in a $16 million noncash pre-tax charge in first quarter 1996 to other operating (income) expense, equivalent to 2 cents per common share, related to restaurant sites in Mexico.
7 Item 2. Management's Discussion And Analysis Of Financial Condition -------------------------------------------------------------------- And Results Of Operations ------------------------- <TABLE> INCREASES (DECREASES) IN OPERATING RESULTS OVER 1995 <CAPTION> Dollars in millions, except Nine Months Third Quarter per common share data Ended September 30 Ended September 30 ------------------------------------------------------------------------- <S> <C> <C> <C> <C> SYSTEMWIDE SALES $1,348.1 6% $419.5 5% ------------------------------------------------------------------------- REVENUES Sales by Company-operated restaurants $513.9 10% $153.7 8% Revenues from franchised restaurants 142.0 7 40.0 5 ------------------------------------------------------------------------- TOTAL REVENUES 655.9 9 193.7 8 ------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Company-operated restaurants 453.6 11 134.1 9 Franchised restaurants- occupancy costs 42.4 11 10.5 8 General, administrative and selling expenses 90.5 10 33.8 11 Other operating (income) expense-net 6.0 (7) (6.6) 18 ------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 592.5 11 171.8 9 ------------------------------------------------------------------------- OPERATING INCOME 63.4 3 21.9 3 ------------------------------------------------------------------------- Interest expense (0.2) 0 (1.4) (2) Nonoperating income (expense)-net 34.4 (47) 17.1 (65) ------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 98.0 6 40.4 7 ------------------------------------------------------------------------- Provision for income taxes (4.1) (1) (0.1) 0 ------------------------------------------------------------------------- NET INCOME $102.1 10% $40.5 10% ========================================================================= NET INCOME PER COMMON SHARE $ .17 12% $ .06 11% ------------------------------------------------------------------------- /TABLE
8 CONSOLIDATED OPERATING RESULTS Net income and net income per common share increased 10 and 12 percent for the nine months, respectively, and 10 and 11 percent for the quarter, respectively. Excluding the noncash charge for the adoption of SFAS 121, net income and net income per common share increased 11 and 13 percent for the nine months, respectively. In the first nine months of 1996, the Company repurchased about $390 million of its common stock. Systemwide sales represent sales by Company-operated, franchised and affiliated restaurants. Total revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees are based upon a percent of sales with specified minimum payments. The increases in sales and revenues for both periods were due to worldwide expansion, offset in part by negative comparable sales and weaker foreign currencies. ---------------------------------------------------------------------- SYSTEMWIDE RESTAURANT ADDITIONS Nine Months Quarters Ended Ended September 30 September 30 1996 1995 1996 1995 ---------------------------------------------------------------------- Traditional restaurants U.S. 319 326 136 142 Outside of the U.S. 878 568 450 250 ---------------------------------------------------------------------- Total traditional restaurant 1,197 894 586 392 additions ---------------------------------------------------------------------- Satellite restaurants U.S. 165 389 35 150 Outside of the U.S. 249 170 107 77 ---------------------------------------------------------------------- Total satellite restaurant 414 559 142 227 additions ---------------------------------------------------------------------- Systemwide restaurants U.S. 484 715 171 292 Outside of the U.S. 1,127 738 557 327 ---------------------------------------------------------------------- Systemwide restaurant 1,611 1,453 728 619 additions ---------------------------------------------------------------------- TRADITIONAL RESTAURANTS UNDER CONSTRUCTION At September 30 1996 1995 ---------------------------------------------------------------------- U.S. 191 203 Outside of the U.S. 396 313 ---------------------------------------------------------------------- Total traditional restaurants under construction 587 516 ----------------------------------------------------------------------
9 Franchised margin dollars comprised about two-thirds of the combined operating margins, the same as in the prior year. Franchised margins as a percent of applicable revenues declined for both periods. This decline reflected negative comparable sales and a higher proportion of leased sites which have financing costs embedded in rent expense, contrasted with owned sites whose financing costs are reflected in interest expense. Company-operated margins as a percent of sales decreased for both periods as food & paper and payroll costs were relatively flat, while occupancy & other operating costs increased as a percent of sales. ----------------------------------------------------------------------- CONSOLIDATED OPERATING MARGINS Nine Months Ended Quarters Ended September 30 September 30 1996 1995 1996 1995 ----------------------------------------------------------------------- In millions of dollars Company-operated $1,040.7 $ 980.4 $383.5 $363.9 Franchised 1,879.6 1,780.0 666.0 636.5 As a percent of sales/revenues Company-operated 18.7 19.4 19.5 20.1 Franchised 81.7 82.5 82.4 82.9 ----------------------------------------------------------------------- The increases in general, administrative & selling expenses were primarily due to strategic global spending to support the Convenience, Value and Execution Strategies including new country development and new U.S. food taste initiatives. The increases in consolidated operating income primarily reflected higher combined operating margin dollars, partially offset by higher general, administrative & selling expenses and lower other operating income for the nine months. Other operating (income) expense--net is composed of transactions related to franchising and the foodservice business, the details of which are shown in the following chart. The decrease in equity in earnings for the nine months occurred primarily because of nonrecurring income items recognized in 1995, partially offset by stronger operating results from affiliates. A weaker Japanese Yen contributed to the decreases for both periods. The increase in other expenses for the nine months reflected the $16 million noncash charge related to the adoption of SFAS 121 recorded in the first quarter of 1996 and increased provisions for property dispositions. The decrease in other expenses for the quarter reflected lower provisions for property dispositions. ------------------------------------------------------------------------ OTHER OPERATING (INCOME) Nine Months Ended Quarters Ended EXPENSE-NET September 30 September 30 In millions of dollars 1996 1995 1996 1995 ------------------------------------------------------------------------ Gains on sales of restaurant businesses $(57.1) $(45.0) $(14.8) $(16.6) Equity in earnings of unconsolidated affiliates (60.8) (75.9) (26.4) (28.2) Other 34.2 31.2 (1.2) 9.0 ------------------------------------------------------------------------ Other operating (income) expense--net $(83.7) $(89.7) $(42.4) $(35.8) ========================================================================
10 The decreases in interest expense were due to lower average interest rates and weaker foreign currencies, partially offset by higher debt levels. Nonoperating income (expense) was impacted by lower losses associated with the Company's investment in Discovery Zone common stock, as the carrying value of this investment was reduced to zero in the first quarter of 1996. Nonoperating income (expense) also reflected translation gains in 1996 compared to translation losses in 1995. The effective income tax rate was 32.7 percent for the first nine months of 1996, compared to 34.9 percent for the first nine months of 1995 and 34.2 percent for the year 1995. The 1996 decrease was primarily due to lower taxes related to foreign operations. For the year, the Company expects the effective tax rate to be about 32.5 percent. U.S. OPERATING RESULTS Restaurant expansion was responsible for increasing U.S. sales as we added 899 restaurants in the last 12 months. Comparable U.S. sales were negative for both periods reflecting an extremely competitive U.S. operating environment, and at times, difficult comparisons and severe weather. The U.S. business continued its emphasis on value and customer satisfaction in the form of Extra Value Meals, Happy Meals and the three-tier value program as well as through promotions like "When the U.S. Wins, You Win" in July and Walt Disney World 25th Anniversary collector glasses in September. ---------------------------------------------------------------------- U.S. OPERATING RESULTS Nine Months Ended Quarters Ended September 30 September 30 1996 1995 1996 1995 ---------------------------------------------------------------------- Percent increase/(decrease) Sales 3 7 2 5 Revenues 3 8 1 6 Operating income (3) 3 (5) 2 ---------------------------------------------------------------------- As a percent of sales/revenues Company-operated margins 16.8 17.8 16.8 18.3 Franchised margins 81.7 82.7 82.1 82.6 ---------------------------------------------------------------------- The decreases in U.S. operating income for both periods reflected lower Company-operated margin dollars and higher general, administrative & selling expenses, partially offset by higher franchised margin dollars. Higher other operating expenses also contributed to the nine month decrease. The declines in Company-operated margins as a percent of sales primarily resulted from higher payroll and occupancy & other operating expenses, partially offset by lower food & paper costs. The declines in franchised margins as a percent of revenues were due to negative comparable sales and increased rent expense reflecting a higher proportion of leased sites resulting from accelerated expansion.
11 OPERATING RESULTS OUTSIDE OF THE U.S. Expansion was primarily responsible for sales increases outside of the U.S., offset in part by weaker foreign currencies. The difference between the percentage increase in sales and revenues for both periods is primarily due to the weakening Japanese Yen that had a greater effect on sales versus revenues and the higher growth rate in Company- operated versus franchised restaurants. If exchange rates had remained at 1995 levels, sales outside of the U.S. would have increased 15 and 14 percent for the nine months and quarter, respectively. ---------------------------------------------------------------------- OPERATING RESULTS OUTSIDE OF Nine Months Ended Quarters Ended THE U.S. September 30 September 30 1996 1995 1996 1995 ---------------------------------------------------------------------- Percent increase Sales 10 30 9 24 Revenues 14 31 13 25 Operating income 9 34 11 25 ---------------------------------------------------------------------- As a percent of sales/revenues Company-operated margins 19.8 20.5 21.0 21.2 Franchised margins 81.7 82.1 82.8 83.2 ---------------------------------------------------------------------- Of the fifteen largest international markets, the following had strong sales and operating income growth for the first nine months of 1996: Japan and Hong Kong in Asia/Pacific; and England, Italy, Spain and Sweden in Europe. In the third quarter, Hong Kong, England, Italy, Spain, Sweden and Taiwan had strong sales and operating income growth. In Latin America, Brazil's results were good compared with exceptional performance last year. Results in Mexico continued to be weak due to its adverse economy and currency devaluation; however, we continue to believe this market offers long-term potential and are encouraged by recent improvement in operating results. Our business in Canada, France and Germany continued to be negatively impacted by weak economies. The increases in operating income outside of the U.S. were driven by higher combined operating margin dollars resulting from expansion and cost efficiencies, partially offset by weaker foreign currencies and higher general, administrative & selling expenses driven by new country development. Excluding the impact of weaker foreign currencies and the $16 million noncash charge for the adoption of the accounting standard for asset impairment for restaurant sites in Mexico recorded in the first quarter of 1996, operating income outside of the U.S. increased 13 percent for the nine months and 14 percent for the quarter.
12 Company-operated margins as a percent of sales declined for both periods, however, the decrease continued to narrow in the third quarter. The slight decrease for the quarter was primarily due to increases in occupancy & other operating costs, significantly offset by lower payroll costs. Food & paper costs were relatively flat for the quarter. For the nine months, food & paper and occupancy & other operating costs increased, while payroll costs were relatively flat. While Brazil and Taiwan contributed to the decline in Company-operated margins for the nine months, margin trends in both markets improved in the third quarter and strategic initiatives implemented in both markets resulted in sales and market share gains. Franchised margins as a percent of revenues decreased slightly for both periods, reflecting pressure on comparable sales primarily in Europe and Canada. IMPACT OF FOREIGN CURRENCIES ON REPORTED RESULTS While changing foreign currencies impact reported results, McDonald's lessens short-term cash exposures by primarily purchasing goods and services in local currencies, financing in local currencies and hedging foreign-denominated cash flows. The weakening of the Japanese Yen and Deutsche Mark were the primary foreign currency changes impacting 1996 results. If exchange rates had remained at 1995 levels, results would have been as follows: -------------------------------------------------------------------------- FOREIGN CURRENCY IMPACT ON INTERNATIONAL RESULTS -------------------------------------------------------------------------- Dollars in millions Nine Months Ended September 30, 1996 -------------------------------------------------------------------------- Reported Adjusted Adjustment Reported Adjusted -------------------------------------------------------------------------- Sales $11,342.9 $11,835.4 $(492.5) 10% 15% Operating income 1,131.1 1,159.4 (28.3) 9 12 -------------------------------------------------------------------------- Quarter Ended September 30, 1996 -------------------------------------------------------------------------- Reported Adjusted Adjustment Reported Adjusted -------------------------------------------------------------------------- Sales $ 4,103.0 $ 4,282.5 $(179.5) 9% 14% Operating income 439.6 450.8 (11.2) 11 14 --------------------------------------------------------------------------
13 -------------------------------------------------------------------------- FOREIGN CURRENCY IMPACT ON WORLDWIDE RESULTS -------------------------------------------------------------------------- Dollars in millions Nine Months Ended September 30, 1996 -------------------------------------------------------------------------- Reported Adjusted Adjustment Reported Adjusted -------------------------------------------------------------------------- Systemwide sales $23,527.6 $24,020.1 $(492.5) 6% 8% Operating income 2,018.6 2,046.9 (28.3) 3 5 Net income 1,162.6 1,171.1 (8.5) 10 10 -------------------------------------------------------------------------- Quarter Ended September 30, 1996 -------------------------------------------------------------------------- Reported Adjusted Adjustment Reported Adjusted -------------------------------------------------------------------------- Systemwide sales $ 8,286.1 $ 8,465.6 $(179.5) 5% 8% Operating income 744.0 755.2 (11.2) 3 5 Net income 440.6 445.0 (4.4) 10 11 -------------------------------------------------------------------------- FINANCIAL POSITION Cash provided by operations for the nine months ended September 30, 1996 increased 6% compared to the same period a year ago. Together with other sources of cash such as borrowings, cash provided by operations was used primarily for capital expenditures, debt repayments, share repurchases and dividends. In connection with accelerated expansion, capital expenditures increased 16% in the first nine months (3% in the U.S. and 26% outside of the U.S.). NEW ACCOUNTING STANDARD The Company adopted Statement of Financial Accounting Standard 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, in the first quarter 1996. This statement requires impairment losses be recognized for long-lived assets, whether these assets are held for disposal or continue to be used in operations, when indicators of impairment are present and the fair value of assets are estimated to be less than carrying amounts. The fair value of assets was based on projected future cash flows. The adoption of this standard resulted in a $16 million noncash pre-tax charge in other operating (income) expense, equivalent to 2 cents per common share, related to restaurant sites in Mexico.
14 <TABLE> NINE MONTHS AND THIRD QUARTER 1996 HIGHLIGHTS <CAPTION> OPERATING RESULTS -------------------------------------------------------------------------- Dollars in millions, except Nine Months Ended Quarters Ended per common share data September 30 September 30 1996 1995 1996 1995 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Systemwide sales $23,527.6 $22,179.5 $8,286.1 $7,866.6 -------------------------------------------------------------------------- U.S. sales 12,184.7 11,854.2 4,183.1 4,103.3 Operated by franchisees 9,422.6 9,313.1 3,232.5 3,219.5 Operated by the Company 2,085.2 2,034.9 703.7 701.3 Operated by affiliates 676.9 506.2 246.9 182.5 -------------------------------------------------------------------------- Sales outside of the U.S. 11,342.9 10,325.3 4,103.0 3,763.3 Operated by franchisees 5,402.3 4,907.7 1,967.1 1,795.9 Operated by the Company 3,480.0 3,016.4 1,261.9 1,110.6 Operated by affiliates 2,460.6 2,401.2 874.0 856.8 -------------------------------------------------------------------------- Total Revenues 7,864.9 7,209.0 2,773.8 2,580.1 U.S. 3,432.5 3,328.0 1,168.5 1,153.5 Outside of the U.S. 4,432.4 3,881.0 1,605.3 1,426.6 -------------------------------------------------------------------------- Operating Income 2,018.6 1,955.2 744.0 722.1 U.S. 926.4 951.6 321.2 337.4 Outside of the U.S. (A) 1,131.1 1,038.2 439.6 396.9 Corporate G&A (38.9) (34.6) (16.8) (12.2) -------------------------------------------------------------------------- Income before provision for income taxes 1,727.5 1,629.5 649.9 609.5 Net income 1,162.6 1,060.5 440.6 400.1 Net income per common share 1.63 1.46 .62 .56 -------------------------------------------------------------------------- Cash provided by operations 1,722.5 1,620.2 701.7 677.9 -------------------------------------------------------------------------- Total assets 16,543.1 14,901.7 Total shareholders' equity 8,554.4 7,514.3 -------------------------------------------------------------------------- (A)Excluding the impact of weaker foreign currencies and the first quarter $16 million noncash charge related to the adoption of SFAS 121, operating income outside of the U.S. increased 13 percent for the nine months and 14 percent for the quarter. /TABLE
15 <TABLE> RESTAURANTS <CAPTION> ------------------------------------------------------------------------- At September 30, 1996 1995 ------------------------------------------------------------------------- <S> <C> <C> Systemwide restaurants 19,991 17,403 ------------------------------------------------------------------------- Traditional U.S. restaurants 10,660 10,070 Operated by franchisees 8,403 7,989 Operated by the Company 1,604 1,607 Operated by affiliates 653 474 ------------------------------------------------------------------------- Traditional Restaurants outside of the U.S. 7,346 6,029 Operated by franchisees 3,440 2,878 Operated by the Company 2,174 1,743 Operated by affiliates 1,732 1,408 ------------------------------------------------------------------------- Satellite restaurants 1,985 1,304 U.S. 1,192 883 Outside U.S. 793 421 ------------------------------------------------------------------------- /TABLE
16 PART II Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) - Exhibits -------------- Exhibit Number Description -------------- ----------- (3) Restated Certificate of Incorporation, dated May 23, 1996, incorporated herein by reference from Exhibit 3 of Form 10-Q for the quarter ended June 30, 1996; By-Laws dated November 15, 1994, incorporated herein by reference from Exhibit 3 of Form 10-K for the year ended December 31, 1994. (4) Instruments defining the rights of security holders, including indentures (A): (a) Debt Securities. Indenture dated as of March 1, 1987 incorporated herein by reference from Exhibit 4(a) of Form S-3 Registration Statement, SEC file no. 33-12364. (i) Supplemental Indenture No. 5 incorporated herein by reference from Exhibit (4) of Form 8-K dated January 23, 1989. (ii) Medium-Term Notes, Series B, due from nine months to 30 years from Date of Issue. Supplemental Indenture No. 12 incorporated herein by reference from Exhibit (4) of Form 8-K dated August 18, 1989 and Forms of Medium-Term Notes, Series B, incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated September 14, 1989. (iii) Medium-Term Notes, Series C, due from nine months to 30 years from Date of Issue. Form of Supplemental Indenture No. 15 incorporated herein by reference from Exhibit 4(b) of Form S-3 Registration Statement, SEC file no. 33-34762 dated May 14, 1990. (iv) Medium-Term Notes, Series C, due from nine months (U.S. Issue)/184 days (Euro Issue) to 30 years from Date of Issue. Amended and restated Supplemental Indenture No. 16 incorporated herein by reference from Exhibit (4) of Form 10-Q for the period ended March 31, 1991.
17 Exhibit Number Description -------------- ----------- (v) 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. (vi) 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, SEC file no. 33-42642 dated September 10, 1991. (vii) 7-3/8% Notes due July 15, 2002. Form of Supplemental Indenture No. 19 incorporated herein by reference from Exhibit (4) of Form 8-K dated July 10, 1992. (viii)6-3/4% Notes due February 15, 2003. Form of Supplemental Indenture No. 20 incorporated herein by reference from Exhibit (4) of Form 8-K dated March 1, 1993. (ix) 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. (x) Medium-Term Notes, Series E, due from nine months to 60 years from date of issue. Form of Supplemental Indenture No. 22, incorporated herein by reference from Exhibit (4) of Form 10-Q for the period ended June 30, 1995. (xi) 6-5/8% Notes due September 1, 2005. Form of Supplemental Indenture No. 23 incorporated herein by reference from Exhibit 4(a) of Form 8-K dated September 5, 1995. (xii) 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. (b) Form of Deposit Agreement dated as of November 25, 1992 by and between McDonald's Corporation, First Chicago Trust Company of New York, as Depositary, and the Holders from time to time of the Depositary Receipts.
18 Exhibit Number Description -------------- ----------- (c) Rights Agreement dated as of December 13, 1988 between McDonald's Corporation and The First National Bank of Chicago, incorporated herein by reference from Exhibit 1 of Form 8-K dated December 23, 1988. (i) Amendment No. 1 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated May 25, 1989. (ii) Amendment No. 2 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated July 25, 1990. (d) Indenture and Supplemental Indenture No. 1 dated as of September 8, 1989, between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(a) of Form 8-K dated September 14, 1989. (e) Form of Supplemental Indenture No. 2 dated as of April 1, 1991, supplemental to the Indenture between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(c) of Form 8-K dated March 22, 1991. (f) 8.35% Subordinated Deferrable Interest Debentures due 2025. Indenture incorporated herein by reference from Exhibit 99.1 of Schedule 13E-4/A Amendment No. 2 dated July 14, 1995. (10) Material Contracts (a) Directors' Stock Plan, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1994.* (b) Profit Sharing Program, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1995.* (c) McDonald's Supplemental Employee Benefit Equalization Plan, McDonald's Profit Sharing Program Equalization Plan and McDonald's 1989 Equalization Plan, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1995.*
19 Exhibit Number Description -------------- ----------- (d) 1975 Stock Ownership Option Plan, as amended and restated, incorporated herein by reference from Exhibit 10(d) of Form 10-Q for the period ended March 31, 1996.* (e) 1992 Stock Ownership Incentive Plan, incorporated herein by reference from Exhibit B on pages 29-41 of McDonald's 1995 Proxy Statement and Notice of 1995 Annual Meeting of Shareholders dated April 12, 1995.* (f) McDonald's Corporation Deferred Incentive Plan, incorporated herein by reference from Form 10-K for the year ended December 31, 1994.* (i) Amendment No. 1 to McDonald's Corporation Deferred Incentive Plan incorporated herein by reference from Exhibit 10(f) of Form 10-Q for the period ended March 31, 1996. (ii) Amendment No. 2 to McDonald's Corporation Deferred Incentive Plan, filed herewith. (g) Non-Employee Director Stock Option Plan, incorporated by reference from Exhibit A on pages 25-28 of McDonald's 1995 Proxy Statement and Notice of 1995 Annual Meeting of Shareholders dated April 12, 1995.* (11) Statement re: Computation of per share earnings. (12) Statement re: Computation of ratios. (27) Financial Data Schedule -------------------- * Denotes compensatory plan. (A) 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 Securities and Exchange 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 Securities and Exchange Commission upon request has been filed with the Commission.
20 (b) Reports on Form 8-K The following reports on Form 8-K were filed for the last quarter covered by this report, and subsequently up to November 13, 1996. Financial Statements Date of Report Item Number Required to be Filed -------------- ----------- -------------------- 07/18/96 Item 7 No 10/07/96 Item 7 No 10/18/96 Item 7 No 10/18/96 Item 5 No
21 Signature ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McDONALD'S CORPORATION (Registrant) By /s/ Michael L. Conley ----------------- (Signature) Michael L. Conley Executive Vice President, Chief Financial Officer November 13, 1996 ------------------ (Date)