McDonaldโs Corporation is an American operator and franchisor of fast food restaurants represented worldwide and the biggest fast food company in the world.
================================================================================ 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, 2000 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 - -------------------------------------------------------------------------------- (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 ----- ----- 1,336,234,747 ---------------------------- (Number of shares of common stock outstanding as of March 31, 2000) ================================================================================
McDONALD'S CORPORATION ---------------------- INDEX ----- <TABLE> <CAPTION> Page Reference <S> <C> <C> Part I. Financial Information Item 1 - Financial Statements Condensed consolidated balance sheet, March 31, 2000 (unaudited) and December 31, 1999........................................................ 3 Condensed consolidated statement of income (unaudited), first quarters ended March 31, 2000 and 1999..................................................................... 4 Condensed consolidated statement of cash flows (unaudited), first quarters ended March 31, 2000 and 1999................................................................. 5 Financial comments (unaudited)........................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 8 Item 3 - Quantitative & Qualitative Disclosures About Market Risk..................................................14 Part II. Other Information Item 6 - Exhibits and Reports on Form 8-K...................................14 (a) Exhibits The exhibits listed in the accompanying Exhibit Index are filed as part of this report.......................................14 (b) Reports on Form 8-K................................................16 Signature....................................................................17 </TABLE> 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------- (unaudited) In millions March 31, 2000 December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS <S> <C> <C> Cash and equivalents $ 368.0 $ 419.5 Accounts and notes receivable 664.3 708.1 Inventories, at cost, not in excess of market 79.6 82.7 Prepaid expenses and other current assets 393.1 362.0 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,505.0 1,572.3 - ----------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 2,941.2 3,086.4 PROPERTY AND EQUIPMENT Property and equipment, at cost 22,606.0 22,450.8 Accumulated depreciation and amortization (6,222.1) (6,126.3) - ----------------------------------------------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 16,383.9 16,324.5 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $20,830.1 $20,983.2 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 821.6 $ 1,073.1 Accounts payable 411.4 585.7 Income taxes 210.4 117.2 Other taxes 187.9 160.1 Accrued interest 135.9 131.4 Other accrued liabilities 544.3 660.0 Current maturities of long-term debt 457.3 546.8 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,768.8 3,274.3 - ----------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 6,131.2 5,632.4 OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 566.0 538.4 DEFERRED INCOME TAXES 1,190.1 1,173.6 COMMON EQUITY PUT OPTIONS 762.9 725.4 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 1,315.6 1,288.3 Unearned ESOP compensation (126.1) (133.3) Retained earnings 16,013.5 15,562.8 Accumulated other comprehensive income (1,002.9) (886.8) Common stock in treasury, at cost; 324.4 and 309.8 million shares (6,805.6) (6,208.5) - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 9,411.1 9,639.1 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,830.1 $20,983.2 ======================================================================================================================= </TABLE> See accompanying Financial comments. 3
<TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------- Quarters ended In millions, except March 31 per common share data 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> REVENUES Sales by Company-operated restaurants $2,439.9 $2,179.1 Revenues from franchised and affiliated restaurants 903.9 856.0 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 3,343.8 3,035.1 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Company-operated restaurants 2,033.1 1,818.0 Franchised restaurants - occupancy expenses 193.8 178.8 Selling, general, and administrative expenses 377.6 339.9 Other operating (income) expense (29.3) (13.2) - ------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 2,575.2 2,323.5 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 768.6 711.6 - ------------------------------------------------------------------------------------------------------------------------------- Interest expense 100.4 105.2 Nonoperating (income) expense 5.5 5.7 - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 662.7 600.7 - ------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes 211.8 198.0 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 450.9 $ 402.7 =============================================================================================================================== NET INCOME PER COMMON SHARE $ 0.34 $ 0.30 NET INCOME PER COMMON SHARE - DILUTED 0.33 0.29 - ------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER COMMON SHARE $ - $ .04875 - ------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES 1,343.4 1,357.3 WEIGHTED AVERAGE SHARES - DILUTED 1,383.8 1,409.2 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying Financial comments. 4
<TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------- Quarters ended March 31 In millions 2000 1999 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 450.9 $ 402.7 Adjustments to reconcile to cash provided by operations Depreciation and amortization 255.8 234.1 Changes in operating working capital items (8.0) 72.9 Other (31.6) 7.2 - ---------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS 667.1 716.9 - ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Property and equipment expenditures (378.7) (336.2) Purchases and sales of restaurant businesses and sales of property 8.9 (87.3) Other (47.6) (220.5) - ---------------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (417.4) (644.0) - ---------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Notes payable and long-term financing issuances and repayments 242.6 317.0 Treasury stock purchases (578.7) (157.8) Common stock dividends (66.3) Other 34.9 95.2 - ---------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (301.2) 188.1 - ---------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS INCREASE (DECREASE) (51.5) 261.0 - ---------------------------------------------------------------------------------------------------------------- Cash and equivalents at beginning of period 419.5 299.2 - ---------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 368.0 $ 560.2 ================================================================================================================ </TABLE> See accompanying Financial comments. 5
- -------------------------------------------------------------------------------- FINANCIAL COMMENTS (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 1999 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 for the quarter ended March 31, 2000 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 Comprehensive income consists of net income and foreign currency translation adjustments and totaled $334.8 million and $142.1 million for the first quarter of 2000 and 1999, respectively. Per Common Share Information Diluted net income per common share is calculated using net income divided by weighted average shares on a diluted basis. Weighted average shares on a diluted basis include weighted average shares outstanding plus the dilutive effect of stock options, calculated using the treasury stock method, of 40.4 million shares and 51.9 million shares for the first quarter of 2000 and 1999, respectively. Common Equity Put Options At March 31, 2000, 19.7 million of common equity put options were outstanding, of which 5.7 million were sold in first quarter 2000. The options expire at various dates through May 2001, at exercise prices between $30.11 and $44.03. The $762.9 million total exercise price of the options outstanding was classified in common equity put options at March 31, 2000, and the related offset was recorded in common stock in treasury, net of premiums received. New Accounting Standard - Financial Instruments In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, subsequently amended by Statement No. 137, which is required to be adopted in years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company expects to adopt the new Statement effective January 1, 2001. Management does not anticipate that the adoption will have a significant effect on the Company's results of operations or financial position. 6
Segment Information McDonald's operates primarily in the quick-service hamburger restaurant business. In addition, the Company operates other restaurant concepts: Aroma Cafe; Chipotle Mexican Grill and Donatos Pizza. The Other Segment includes McDonald's restaurant business operations in Canada, Africa and the Middle East as well as the other restaurant concepts. The following table presents the Company's revenues and operating income by geographic segment: Quarters ended March 31 In millions 2000 1999 - -------------------------------------------------------------------------------- REVENUES U.S. $1,209.6 $1,151.3 Europe 1,171.0 1,156.2 Asia/Pacific 526.6 421.6 Latin America 228.9 163.6 Other 207.7 142.4 - -------------------------------------------------------------------------------- TOTAL REVENUES $3,343.8 $3,035.1 - -------------------------------------------------------------------------------- OPERATING INCOME U.S. $ 344.2 $ 314.8 Europe 261.8 252.8 Asia/Pacific 113.4 91.3 Latin America 29.8 31.9 Other 19.4 20.8 - -------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 768.6 $ 711.6 - -------------------------------------------------------------------------------- 7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations - -------------------------------------------------------------------------------- OPERATING RESULTS - -------------------------------------------------------------------------------- Dollars in millions, except Quarter ended per common share data March 31, 2000 - -------------------------------------------------------------------------------- % Increase/ Amount (Decrease) - -------------------------------------------------------------------------------- SYSTEMWIDE SALES $9,506.7 8% - -------------------------------------------------------------------------------- REVENUES Sales by Company-operated restaurants 2,439.9 12 Revenues from franchised and affiliated restaurants 903.9 6 - -------------------------------------------------------------------------------- TOTAL REVENUES 3,343.8 10 - -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Company-operated restaurants 2,033.1 12 Franchised restaurants - occupancy costs 193.8 8 Selling, general, and administrative expenses 377.6 11 Other operating (income) expense (29.3) N/M - -------------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 2,575.2 11 - -------------------------------------------------------------------------------- OPERATING INCOME 768.6 8 - -------------------------------------------------------------------------------- Interest expense 100.4 (5) Nonoperating (income) expense 5.5 (4) - -------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 662.7 10 - -------------------------------------------------------------------------------- Provision for income taxes 211.8 7 - -------------------------------------------------------------------------------- NET INCOME $ 450.9 12% ================================================================================ NET INCOME PER COMMON SHARE $ 0.34 13% NET INCOME PER COMMON SHARE-DILUTED 0.33 14 - -------------------------------------------------------------------------------- N/M Not meaningful CONSOLIDATED OPERATING RESULTS 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. The primary currency negatively affecting reported results for the first quarter was the Euro, which is the currency in 11 of our European markets including France and Germany. This negative effect was partly offset by the stronger Japanese Yen. The following table presents the growth rates for reported results and the results on a constant currency basis. All information in constant currencies excludes the effect of foreign currency translation on reported results, except for hyperinflationary economies, such as Russia, whose functional currency is the U.S. Dollar. - -------------------------------------------------------------------------------- Quarter ended March 31, 2000 Increase/(Decrease) ------------------------- As In Constant Reported Currencies* - -------------------------------------------------------------------------------- Systemwide sales 8% 9% - -------------------------------------------------------------------------------- Total revenues 10 13 - -------------------------------------------------------------------------------- Operating income 8 11 - -------------------------------------------------------------------------------- Net income 12 16 - -------------------------------------------------------------------------------- Net income per common share 13 17 - -------------------------------------------------------------------------------- Net income per common share-diluted 14% 17% - -------------------------------------------------------------------------------- * Excluding the effect of foreign currency translation on reported results. 8
Net Income and Net Income per Common Share - Diluted Net income increased 12 percent and diluted net income per common share increased 14 percent for the quarter (16 and 17 percent in constant currencies, respectively). Weighted average shares outstanding for the quarter were lower compared with the prior year primarily due to shares repurchased. In addition, outstanding stock options had a less dilutive effect than in the prior year. During the first quarter, the Company repurchased 16.6 million shares of its common stock for $574 million. OPERATING RESULTS McDonald's operates primarily in the quick-service hamburger restaurant business. In addition, the Company operates other restaurant concepts: Aroma Cafe, Chipotle Mexican Grill and Donatos Pizza. Collectively these three businesses are referred to as "Other Brands." Throughout this discussion, Other Brands financial information is included in the Other segment, except where specifically noted. Systemwide Sales and Revenues Systemwide sales represent sales by Company-operated, franchised and affiliated restaurants. Total revenues include sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees include rent, service fees and royalties that are based on a percent of sales with specified minimum payments, along with initial fees. On a global basis, the increases in sales and revenues were due to expansion and positive comparable sales. Foreign currency translation had a negative effect on the growth rates for both Systemwide sales and revenues. The stronger Japanese Yen had a greater positive currency translation effect on sales compared with revenues. This is due to our affiliate structure in Japan. Under this 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, sales were less negatively affected by foreign currency translation than were revenues. On a constant currency basis, revenues increased at a higher rate than sales due to the higher unit growth rate of Company-operated restaurants relative to Systemwide restaurants and the consolidation of Argentina and Indonesia for financial reporting purposes. - -------------------------------------------------------------------------------- Systemwide sales Dollars in millions 2000 1999 Increase/(Decrease) - -------------------------------------------------------------------------------- As In Constant Reported Currencies* - -------------------------------------------------------------------------------- Quarters ended March 31 - -------------------------------------------------------------------------------- U.S. $4,505.0 $4,283.2 5% n/a - -------------------------------------------------------------------------------- Europe 2,305.7 2,261.8 2 12% - -------------------------------------------------------------------------------- Asia/Pacific 1,785.6 1,511.3 18 12 - -------------------------------------------------------------------------------- Latin America 434.1 393.6 10 12 - -------------------------------------------------------------------------------- Other 476.3 372.9 28 25 - -------------------------------------------------------------------------------- Total Systemwide sales $9,506.7 $8,822.8 8% 9% - -------------------------------------------------------------------------------- * Excluding the effect of foreign currency translation on reported results. n/a Not applicable U.S. sales increased due to positive comparable sales and expansion. In Europe, expansion and positive comparable sales drove the constant currency sales increase. This segment's results benefited from strong performances in France, Italy and Spain. Germany and the United Kingdom also contributed significantly to the increase. Expansion and positive comparable sales also drove the constant currency sales increase in Asia/Pacific. Strong performances in China and South Korea, along with strong sales in Taiwan and several other markets, helped by the very successful Hello Kitty promotions, drove the results. Japan also contributed substantially to the segment's increase due to expansion. The Company has begun to see improvement in Japan's sales trends, although its weak economy is still negatively impacting the business. In Latin America, expansion, partly offset by negative comparable sales, drove the constant currency sales increase. This segment's results benefited from positive comparable sales in Brazil, Mexico and Venezuela. In the Other segment, Canada's strong comparable sales and expansion contributed to the increase in sales. In addition, Other Brands contributed $43.2 million to the increase. 9
Combined Operating Margins The combined operating margin information that follows represents margins for the McDonald's restaurant business only. -------------------------------------------------------- Combined operating margins Quarters ended March 31 -------------------- 2000 1999 -------------------------------------------------------- Dollars in millions -------------------------------------------------------- Company-operated $ 403.3 $ 361.1 -------------------------------------------------------- Franchised 709.7 677.2 -------------------------------------------------------- Combined operating margins $1,113.0 $1,038.3 -------------------------------------------------------- Percent of sales/revenues -------------------------------------------------------- Company-operated 16.8% 16.6% -------------------------------------------------------- Franchised 78.6 79.1 -------------------------------------------------------- Combined operating margin dollars increased $75 million, or seven percent for the quarter. The increase was primarily driven by expansion and positive comparable sales, partly offset by weaker foreign currencies. Foreign currency translation negatively impacted combined operating margin dollars by $34 million or three percent. Margin dollars in the U.S. and Europe segments accounted for about 80 percent of the combined margin dollars in both years. Company-operated margin dollars increased 12 percent and also increased as a percent of sales for the quarter. Payroll costs and occupancy & other expenses decreased as a percent of sales, while food & paper costs increased as a percent of sales. As a percent of sales, the U.S. Company-operated margin increased for the quarter. As a percent of sales, food & paper costs decreased, payroll costs increased and occupancy & other operating expenses were flat. In Europe, the Company-operated margin also increased as a percent of sales. Payroll costs and occupancy & other operating expenses decreased as a percent of sales, while food & paper costs increased as a percent of sales. The increase in Asia/Pacific's Company-operated margin as a percent of sales was primarily due to strong sales performance. In Latin America, the decline in the Company-operated margin as a percent of sales was primarily due to difficult economic conditions experienced by most markets, partly offset by the consolidation of Argentina. Franchised margin dollars increased five percent for the quarter, despite a decline in franchised margins as a percent of applicable revenues. The decrease in the margin as a percent of revenues was primarily due to higher occupancy costs as a result of our strategy to lease more sites. By leasing a higher proportion of new sites, we have reduced initial capital requirements. However, as anticipated, this practice reduces franchised margins since the financing costs implicit in the lease are included in occupancy expense, whereas, for owned sites, financing costs are reflected in interest expense. In the U.S., Asia/Pacific and Latin America, franchised margins as a percent of revenues declined primarily due to increased occupancy costs. In addition, the consolidation of Argentina and Indonesia contributed to the decline in margins as a percent of revenues in Latin America and Asia/Pacific, respectively. Selling, General & Administrative Expenses Selling, general & administrative expenses increased 11 percent for the quarter, primarily due to spending to support the development of both McDonald's restaurants and Other Brands. Selling, general & administrative expenses included $11 million related to Other Brands. In addition, the consolidation of Argentina and Indonesia contributed to the increase. Excluding Other Brands and the consolidations, selling, general & administrative expenses increased six percent for the quarter. 10
Other Operating Income and Expense --------------------------------------------------------------------- Other operating income and expense Quarters ended March 31 -------------------- Dollars in millions 2000 1999 --------------------------------------------------------------------- Gains on sales of restaurant businesses $ 15.6 $ 11.3 --------------------------------------------------------------------- Equity in earnings of unconsolidated affiliates 26.4 21.7 --------------------------------------------------------------------- Other (12.7) (19.8) --------------------------------------------------------------------- Total $ 29.3 $ 13.2 --------------------------------------------------------------------- Other operating income and expense consists of transactions related to franchising and the food service business. The decrease in other expense was primarily related to lower provisions for property dispositions in 2000 and the absence of costs associated with the 1999 implementation of our Made For You food preparation system. Operating Income Operating income increased $57 million, or eight percent for the quarter; 11 percent in constant currencies. The increase was primarily driven by higher combined operating margin dollars and higher other operating income, partly offset by higher selling, general & administrative expenses and weaker foreign currencies. - -------------------------------------------------------------------------------- Operating income Increase/(Decrease) As In Constant Dollars in millions 2000 1999 Reported Currencies* - -------------------------------------------------------------------------------- Quarters ended March 31 - -------------------------------------------------------------------------------- U.S. $344.2 $314.8 9% n/a - -------------------------------------------------------------------------------- Europe 261.8 252.8 4 15% - -------------------------------------------------------------------------------- Asia/Pacific 113.4 91.3 24 20 - -------------------------------------------------------------------------------- Latin America 29.8 31.9 (7) (4) - -------------------------------------------------------------------------------- Other 19.4 20.8 (7) (12) - -------------------------------------------------------------------------------- Total operating income $768.6 $711.6 8% 11% - -------------------------------------------------------------------------------- * Excluding the effect of foreign currency translation on reported results. n/a Not applicable U.S. operating income increased $29 million or nine percent for the quarter. The increase was driven by higher combined operating margin dollars and higher other operating income, partly offset by higher selling, general & administrative expenses. Europe's operating income increased 15 percent in constant currencies. This performance was primarily due to strong results in France, Italy and Spain. Germany and the United Kingdom also contributed to the increase. Operating income in Asia/Pacific increased 20 percent in constant currencies. This segment benefited from strong performances in Australia, South Korea and Taiwan. Latin America's operating income declined four percent in constant currencies. The decline was due to difficult economic conditions in most markets in the region, as well as a difficult comparison with strong first quarter 1999 results in Puerto Rico. Partly offsetting this were the strong performances in Brazil and Venezuela as well as the consolidation of Argentina. The Company expects profits in Latin America to improve as we progress throughout 2000. In the Other segment, strong performances in Canada and several other markets were offset by Other Brands operating losses of $9.1 million. Interest Expense and Income Taxes Lower interest expense for the quarter was primarily the result of lower average interest rates and weaker foreign currencies, partly offset by higher average debt levels. The effective income tax rate was 32.0 percent for the first quarter of 2000 compared with 33.0 percent for the first quarter of 1999. For the year 2000, the Company expects its effective income tax rate to be about 32.0 percent. 11
FINANCIAL POSITION Free cash flow - cash provided by operations less capital expenditures - for the three months ended March 31, 2000 decreased $92.3 million to $288.4 million, primarily due to changes in working capital items and higher capital expenditures. Free cash flow, together with other sources of cash such as borrowings, was used primarily for share repurchases and debt repayments. The changes in working capital items were primarily due to timing and the capital expenditure increase of 13% was primarily due to higher McDonald's restaurant openings, the addition of Other Brands, and the consolidation of Argentina and Indonesia. The Company expects to add between 1,800 and 1,900 McDonald's restaurants this year, with about 90 percent in locations outside the U.S. In April 2000, the Company announced a $1 billion increase in its share repurchase program bringing the total program to $4.5 billion through 2001. Management believes the strength of the Company's business around the world and its strong cash flow puts the Company in a position to increase stock buybacks while maintaining a strong credit rating. The Company believes that buying back its stock continues to be an excellent way to provide shareholder value. Therefore, the Company purchased $574 million, or 16.6 million shares of its common stock in the first quarter. This brought the cumulative purchases to $1.8 billion, or 51 million shares under the three-year share repurchase program. In November 1999, the Company announced its intention to pay cash dividends on an annual, instead of quarterly, basis beginning in 2000. Future dividends declared at the discretion of the Board of Directors will be paid annually in December. NEW ACCOUNTING STANDARD - FINANCIAL INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, subsequently amended by Statement No. 137, which is required to be adopted in years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged item, through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company expects to adopt the new Statement effective January 1, 2001. Management does not anticipate that the adoption will have a significant effect on the Company's results of operations or financial position. EURO CONVERSION On January 1, 1999, 11 member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency, the Euro. The Euro is trading on currency exchanges and may be used in certain transactions such as electronic payments. Beginning in January 2002, new Euro-denominated notes and coins will be issued, and legacy currencies will be withdrawn from circulation. The conversion to the Euro has eliminated currency exchange rate risk for transactions between the member countries, which for the Company, primarily consist of payments to suppliers. In addition, since the Company uses foreign-denominated debt and derivatives to meet its financing requirements and to minimize its foreign currency risks, certain of these financial instruments are denominated in Euros. The Company has restaurants located in all member countries and has been preparing for the introduction of the Euro for the past several years. The Company is currently addressing the issues involved with the new currency, which include converting information technology systems, recalculating currency risk, recalibrating derivatives and other financial instruments and revising processes for preparing accounting and taxation records. Based on the work to date, the Company does not believe the Euro conversion will have a significant impact on its financial position, results of operations or cash flows. 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 and involve a number of risks and uncertainties. Actual results could differ materially due to the effectiveness of operating initiatives and advertising and promotional efforts, the effects of the Euro conversion, 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; availability and cost of land and construction; legislation and government regulation; and accounting policies and practices. 12
- -------------------------------------------------------------------------------- FIRST QUARTER HIGHLIGHTS - -------------------------------------------------------------------------------- FINANCIAL INFORMATION <TABLE> <CAPTION> Quarters ended March 31 Dollars in millions 2000 1999 - -------------------------------------------------------------------------------- <S> <C> <C> Systemwide sales by type Operated by franchisees $5,778.7 $5,439.9 Operated by the Company 2,439.9 2,179.1 Operated by affiliates 1,288.1 1,203.8 - -------------------------------------------------------------------------------- Systemwide sales $9,506.7 $8,822.8 - -------------------------------------------------------------------------------- Restaurant margins* Company-operated ---------------- U.S. 16.8% 16.6% Europe 17.6 17.4 Asia/Pacific 17.9 16.2 Latin America 12.6 14.2 Other 13.4 13.1 Total 16.8% 16.6% Franchised ---------- U.S. 79.1% 79.9% Europe 77.3 77.1 Asia/Pacific 82.7 83.4 Latin America 75.6 78.3 Other 76.9 76.2 Total 78.6% 79.1% </TABLE> *Restaurant margin information represents margins for the McDonald's restaurant business only. RESTAURANTS - -------------------------------------------------------------------------------- At March 31, 2000 1999 - -------------------------------------------------------------------------------- By type Operated by franchisees 16,360 15,316 Operated by the Company 6,547 5,693 Operated by affiliates 4,089 3,966 - -------------------------------------------------------------------------------- Systemwide restaurants 26,996 24,975 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Quarters ended March 31 2000 1999 - -------------------------------------------------------------------------------- <S> <C> <C> Additions U.S. (5) (10) Europe 68 49 Asia/Pacific 50 74 Latin America 61 28 Other - McDonald's (5) 14 Other Brands 21 2 - -------------------------------------------------------------------------------- Systemwide additions 190 157 - -------------------------------------------------------------------------------- </TABLE> 13
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, 1999 regarding this matter. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description - -------------- ----------- (3) Restated Certificate of Incorporation, effective as of March 24, 1998, incorporated herein by reference from Form 8-K dated April 17, 1998. By-Laws, effective as of July 8, 1998, incorporated herein by reference from Form 10-Q for the quarter ended June 30, 1998. (4) Instruments defining the rights of security holders, including Indentures (A): (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) 5.90% REset Put Securities due 2011. Supplemental Indenture No. 2 dated as of May 11, 1998, incorporated herein by reference from Exhibit 4(a) of Form 8-K dated May 6, 1998. (iii) 6% REset Put Securities due 2012. Supplemental Indenture No. 3 dated as of June 23, 1998, incorporated herein by reference from Exhibit 4(a) of Form 8-K dated June 18, 1998. (iv) 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. (b) Subordinated Debt Securities Indenture dated as of October 18, 1996, incorporated herein by reference from Form 8-K dated October 18, 1996. (i) 7 1/2% Subordinated Deferrable Interest Debentures due 2036. Supplemental Indenture No. 1 dated as of November 5, 1996, incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated October 18, 1996. (ii) 7 1/2% Subordinated Deferrable Interest Debentures due 2037. Supplemental Indenture No. 2 dated as of January 14, 1997, incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated January 9, 1997. (iii) 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. (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) 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. 14
Exhibit Number Description - -------------- ----------- (ii) 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 (File No. 33-34762), dated May 14, 1990. (iii) 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. (iv) 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. (v) 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. (vi) 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. (vii) 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. (viii) 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. (ix) 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. (x) 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. (10) Material Contracts (a) Directors' Stock Plan, as amended and restated, incorporated herein by reference from Exhibit 10(a) of Form 10-Q for the quarter ended September 30, 1997.* (b) Profit Sharing Program, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1999.* (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.* (d) 1975 Stock Ownership Option Plan, as amended and restated, incorporated herein by reference from Form 10-Q for the quarter ended June 30, 1999.* (e) 1992 Stock Ownership Incentive Plan, as amended and restated, filed herewith.* (f) McDonald's Corporation Deferred Income Plan, as amended and restated, incorporated herein by reference from Form 10-Q for the quarter ended September 30, 1999.* (g) 1999 Non-Employee Director Stock Option Plan, incorporated herein by reference from Form 10-Q for the quarter ended June 30, 1999.* (h) Executive Retention Plan, incorporated herein by reference from Form 10-K for the year ended December 31, 1998.* 15
(12) Statement re: Computation of Ratios (27) Financial Data Schedule _____________________________________ * 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 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. (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 through May 8, 2000. <TABLE> <CAPTION> Financial Statements Date of Report Item Number Required to be Filed -------------- ----------- -------------------- <S> <C> <C> 4/20/00 Item 7 No </TABLE> 16
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 May 8, 2000 - ----------------- 17