Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 74± 340K
2: EX-10.(C) Supplemental Profit Sharing and Savings Plan 13 78K
3: EX-10.(G) Executive Retention Plan as Amended and Restated 23 96K
4: EX-10.(K) Tier I Change of Control Employment Agreement 36 151K
5: EX-10.(L) Written Description of Oral Agreement 1 6K
6: EX-12 Statement Re: Computation of Ratios 2± 11K
7: EX-21 Subsidiaries of the Registrant 1 7K
8: EX-23 Consent of Independant Auditors 1 8K
9: EX-99 Press Release Dated March 22, 2002 3 14K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common stock, $.01 par value New York Stock Exchange
Chicago Stock Exchange
8-7/8 % Debentures due 2011 New York Stock Exchange
7-3/8% Debentures due 2033 New York Stock Exchange
6-5/8% Notes due 2005 New York Stock Exchange
7.05% Debentures due 2025 New York Stock Exchange
7.31% Subordinated Deferrable Interest Debentures due 2027 New York Stock Exchange
6-3/8% Debentures due 2028 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $34,749,648,863 and the number of shares of common stock
outstanding is 1,281,311,354 as of January 31, 2002.
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 2001 definitive proxy statement
which will be filed no later than 120 days after December 31, 2001.
McDonald's Corporation 3
Part I
Item 1. Business
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McDonald's Corporation, the registrant, together with its subsidiaries, is
referred to herein as the "Company."
(a) GENERAL DEVELOPMENT OF BUSINESS
There have been no significant changes to the Company's corporate structure
during 2001, or material changes in the Company's method of conducting business.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Industry segment data for the years ended December 31, 2001, 2000 and 1999 are
included in Part II, Item 8, pages 30-31 of this Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
General
The Company operates in the food service industry and primarily operates
quick-service restaurant businesses under the McDonald's brand. These
restaurants serve a varied, yet limited, value-priced menu (see Products) in 121
countries around the world.
To capture additional meal occasions, the Company operates other restaurant
concepts under its Partner Brands: Boston Market, Chipotle and Donatos Pizzeria
which are all located primarily in the U.S. and Aroma Cafe, located primarily in
the U.K. In addition, the Company has a minority ownership in U.K.-based Pret A
Manger. In fourth quarter 2001, the Company approved a plan to dispose of its
Aroma Cafe business in the U.K. and expects to complete the sale in the first
half of 2002.
Since McDonald's restaurant business comprises virtually all of the
Company's consolidated operating results, this narrative primarily relates to
the McDonald's restaurant business, unless otherwise noted.
All restaurants are operated by the Company or, under the terms of
franchise arrangements, by franchisees who are independent entrepreneurs, or by
affiliates operating under joint-venture agreements between the Company and
local business people.
The Company's operations are designed to assure consistency and high
quality at every McDonald's restaurant. When granting franchises and forming
joint-venture agreements, the Company is selective and is not in the practice of
franchising to, or partnering with, investor groups or passive investors.
Under the conventional franchise arrangement, franchisees provide capital
by initially investing in the equipment, signs, seating and decor of their
restaurant businesses, and by reinvesting in the business over time. The Company
shares the investment by generally owning or leasing the land and building.
Franchisees in the U.S. generally have the option to own new restaurant
buildings while leasing the land from the Company. Franchisees contribute to the
Company's revenue stream through payment of rent and service fees based upon a
percent of sales, with specified minimum payments, along with initial fees. The
conventional franchise arrangement typically lasts 20 years and franchising
practices are generally consistent throughout the world. A discussion regarding
site selection is included in Part I, Item 2, page 5 of this Form 10-K.
The Company, its franchisees and affiliates purchase food, packaging,
equipment, etc. from numerous independent suppliers who have been approved by
the Company. The Company has established and strictly enforces high-quality
standards. We have quality assurance labs around the world that work to ensure
that our high standards are consistently met. The quality assurance process not
only involves ongoing product reviews, but also on-site inspections of
suppliers' facilities. Further, we have a Quality Assurance Board, composed of
the Company's technical, safety and supply chain specialists, which provides
strategic global leadership for all aspects of food quality and safety. In
addition, the Company works closely with McDonald's suppliers to encourage
innovation, assure best practices and drive continuous improvement.
Independently owned and operated distribution centers, also approved by the
Company, distribute products and supplies to most McDonald's restaurants. In
addition, restaurant personnel are trained in the proper storage, handling and
preparation of our products and in the delivery of customer service
expectations.
McDonald's global brand is well known. Marketing, promotional and public
relations activities are designed to nurture this brand image and differentiate
the Company from competitors. Marketing and promotional efforts focus on value,
food taste and the customer experience. In addition, the Company is focused on
being a leader in the area of social responsibility, as we believe it is
important to give back to the people around the world who are responsible for
our success.
Products
McDonald's restaurants offer a substantially uniform menu. In addition,
McDonald's tests new products on an ongoing basis.
McDonald's menu includes hamburgers and cheeseburgers, Big Mac, Quarter
Pounder with Cheese, Filet-O-Fish and several chicken sandwiches, Chicken
McNuggets, french fries, salads, milk shakes, McFlurry desserts, sundaes and
soft-serve cones, pies, cookies and soft drinks and other beverages. In
addition, the restaurants sell a variety of other products during limited-time
promotions.
McDonald's restaurants operating in the U. S. and certain international
markets are open during breakfast hours and offer a full-or limited-breakfast
menu. Breakfast offerings include Egg McMuffin and Sausage McMuffin with Egg
sandwiches, hotcakes, biscuit and bagel sandwiches, and muffins.
4 McDonald's Corporation
Chipotle is a fresh-Mex grill serving gourmet burritos and tacos. Donatos
sells pizza, subs and salads. Boston Market is a home-meal replacement concept
serving chicken, meatloaf and a variety of side dishes. Pret A Manger is a
quick-service food concept that serves mainly cold sandwiches, snacks and drinks
during lunchtime.
Food preparation
The Made For You food preparation system is installed in virtually all
McDonald's restaurants in the U.S., Canada and Puerto Rico as well as about
one-third of the restaurants in Japan. Made For You is based on a just-in-time
production philosophy where each sandwich is assembled to order. Through
advances in equipment and technology, the new system aims to provide customers
with fresh-tasting food. In addition, the system can support future growth
through product development because it can easily accommodate an expanded menu.
Intellectual Property
The Company owns valuable intellectual property including trademarks, service
marks, patents, copyrights, trade secrets and other proprietary information,
some of which, including "McDonald's," "Ronald McDonald," "Big Mac" and other
related marks, are of material importance to the Company's business. The Company
also has certain patents on restaurant equipment which, while valuable, are not
material to its business.
Seasonal operations
The Company does not consider its operations to be seasonal to any material
degree.
Working capital practices
Information about the Company's working capital practices is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations for the years ended December 31, 2001, 2000 and 1999 in
Part II, Item 7, pages 8-20, and the Consolidated statement of cash flows for
the years ended December 31, 2001, 2000 and 1999 in Part II, Item 8, page 24 of
this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small group of
customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the U.S. government.
Competition
McDonald's restaurants compete with international, national, regional and local
retailers of food products. The Company competes on the basis of price,
convenience and service and by offering quality food products. The Company's
competition in the broadest perspective includes restaurants, quick-service
eating establishments, pizza parlors, coffee shops, street vendors, convenience
food stores, delicatessens and supermarkets.
In the U.S., there are about 515,000 restaurants that generate $303 billion
in annual sales. McDonald's restaurant business accounts for 2.5% of those
restaurants and 6.6% of the sales. No reasonable estimate can be made of the
number of competitors outside the U.S.; however, the Company's business in
foreign markets continues to grow.
Research and development
The Company operates a research and development facility in Illinois. While
research and development activities are important to the Company's business,
these expenditures are not material. Independent suppliers also conduct research
activities for the benefit of the McDonald's System, which includes franchisees
and suppliers, as well as the Company, its subsidiaries and joint ventures.
Environmental matters
The Company is not aware of any federal, state or local environmental laws or
regulations that will materially affect its earnings or competitive position, or
result in material capital expenditures; however, the Company cannot predict the
effect on its operations of possible future environmental legislation or
regulations. During 2001, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Number of employees
During 2001, the Company's average number of employees worldwide, including
Company-operated restaurant employees, was approximately 395,000. This includes
McDonald's restaurants as well as other restaurant concepts operated by the
Company.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about foreign and domestic markets is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations in Part II, Item 7, pages 8-20 and Segment and geographic
information in Part II, Item 8, pages 30-31 of this Form 10-K.
McDonald's Corporation 5
Item 2. Properties
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The Company identifies and develops sites that offer convenience to customers
and provide for long-term sales and profit potential. To assess potential, the
Company analyzes traffic and walking patterns, census data, school enrollments
and other relevant data. The Company's experience and access to advanced
technology aid in evaluating this information. The Company generally owns or
secures long-term land and building leases for restaurant sites, which ensures
long-term occupancy rights and helps control related costs. Restaurant
profitability for both the Company and franchisees is important; therefore,
ongoing efforts are made to control average development costs through
construction and design efficiencies and standardization and by leveraging the
Company's global sourcing network. Additional information about the Company's
properties is included in Management's discussion and analysis of financial
condition and results of operations in Part II, Item 7, pages 8-20 and in
Financial statements and supplementary data in Part II, Item 8, pages 21-36 of
this Form 10-K.
Item 3. Legal proceedings
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The Company has pending a number of lawsuits which have been filed from time to
time in various jurisdictions. These lawsuits cover a broad variety of
allegations spanning the Company's entire business. The following is a brief
description of the more significant of these categories of lawsuits. In
addition, the Company is subject to various federal, state and local regulations
that impact various aspects of its business, as discussed below. The Company
does not believe that any such claims, lawsuits or regulations will have a
material adverse effect on its financial condition or results of operations.
Franchising
A substantial number of McDonald's restaurants are franchised to independent
entrepreneurs operating under arrangements with the Company. In the course of
the franchise relationship, occasional disputes arise between the Company and
its franchisees relating to a broad range of subjects including, without
limitation, quality, service and cleanliness issues, contentions regarding
grants or terminations of franchises, franchisee claims for additional
franchises or rewrites of franchises, and delinquent payments. Additionally, on
occasion, disputes arise between the Company and individuals who claim they
should have been granted a McDonald's franchise.
Suppliers
The Company and its affiliates and subsidiaries do not supply, with minor
exceptions outside the U.S., food, paper, or related items to any McDonald's
restaurants. The Company relies upon numerous independent suppliers that are
required to meet and maintain the Company's high standards and specifications.
On occasion, disputes arise between the Company and its suppliers on a number of
issues including, by way of example, compliance with product specifications and
the Company's business relationship with suppliers. In addition, on occasion,
disputes arise on a number of issues between the Company and individuals or
entities who claim that they should be (or should have been) granted the
opportunity to supply products or services to the Company's restaurants.
Employees
Thousands of people are employed by the Company and in restaurants owned and
operated by subsidiaries of the Company. In addition, thousands of people, from
time to time, seek employment in such restaurants. In the ordinary course of
business, disputes arise regarding hiring, firing and promotion practices.
Customers
The Company's restaurants serve a large cross-section of the public and in the
course of serving so many people, disputes arise as to products, service,
accidents, advertising and other matters typical of an extensive restaurant
business such as that of the Company.
Intellectual Property
The Company has registered trademarks and service marks, some of which are of
material importance to the Company's business. The Company also has certain
patents on restaurant equipment, which while valuable, are not material to its
business. From time to time, the Company may become involved in litigation to
defend and protect its use of its intellectual property.
Government regulations
Local, state and federal governments have adopted laws and regulations involving
various aspects of the restaurant business, including, but not limited to,
franchising, health, safety, environment, zoning and employment. The Company
does not believe that it is in violation of any existing statutory or
administrative rules, but it cannot predict the effect on its operations from
the issuance of additional requirements in the future.
6 McDonald's Corporation
Item 4. Submission of matters to a vote of shareholders
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None.
THE FOLLOWING ARE THE EXECUTIVE OFFICERS OF OUR COMPANY:
Jack M. Greenberg, 59, is Chairman and Chief Executive Officer. He was
appointed to that position in May 1999. Previously, he was President and Chief
Executive Officer since August 1998. Prior to that, he served as Vice Chairman
of McDonald's Corporation, and Chairman and Chief Executive Officer of
McDonald's U.S.A. Mr. Greenberg has been with the Company for more than 20
years.
Mats Lederhausen, 39, is Executive Vice President--Strategy and Business
Development. He has served in that position since his appointment in July 2001.
From May to July 2001, Mr. Lederhausen served as Senior Vice President,
Corporate Strategy. Prior to that, he served as Vice President, Corporate
Strategy following his appointment to that position in April 1999. Before
joining McDonald's corporate staff, Mr. Lederhausen was Managing Director and
Joint Venture Partner for Svenska McDonald's Development AB, a subsidiary of the
Company. He is no longer Managing Director and Joint Venture Partner of the
subsidiary. Mr. Lederhausen has been with the McDonald's System for 17 years.
Matthew H. Paull, 50, is Executive Vice President, Chief Financial Officer,
a position to which he was appointed in July 2001. Prior to that time, he served
as Senior Vice President, Corporate Tax and Finance from December 2000 to July
2001, Senior Vice President from January 2000 to December 2000, and Vice
President from June 1993 to January 2000. Mr. Paull has been with the Company
for 8 years.
David M. Pojman, 42, is Senior Vice President-Controller, a position he
has held since March 2002. Previously, he served as Vice President and Corporate
Controller from January 2002. Prior to that time, he served as Vice President
and Acting Controller from October 2001. From January 2000 to October 2001, Mr.
Pojman served as Vice President and Assistant Corporate Controller. From July
1997 to January 2000, he served as Vice President and International Controller.
Mr. Pojman has been with the Company for 19 years.
Gloria Santona, 51, is Senior Vice President, General Counsel and
Secretary, a position she has held since June 2001. From December 2000 to June
2001, she was Vice President, U.S. General Counsel and Secretary; from March
1997 to December 2000, she was Vice President, Deputy General Counsel and
Secretary; and from January 1996 to March 1997, she served as Vice President,
Associate General Counsel and Secretary. Ms. Santona has been with the Company
for 24 years.
James A. Skinner, 57, is President and Chief Operating Officer--McDonald's
Worldwide Restaurant Group. Mr. Skinner was promoted to his current position in
January 2002. Previously, he served as President and Chief Operating Officer of
McDonald's Europe/Asia/Pacific since May 2001. Prior to that, he was President
of McDonald's Europe. Mr. Skinner has been with the Company for 31 years.
Stanley R. Stein, 59, is Executive Vice President, Global Human Resources,
a position he has held since July 1997. Prior to that time Mr. Stein served as
Senior Vice President. He has been with the Company for 27 years.
Fred L. Turner, 69, is Senior Chairman. He has been with the Company for
more than 45 years.
Part II
Item 5. Market for registrant's common equity and related shareholder matters
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The Company's common stock trades under the symbol MCD and is listed on the New
York and Chicago stock exchanges in the U.S.
The following table sets forth the common stock price ranges on the New
York Stock Exchange composite tape and dividends declared per common share.
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2001 2000
DOLLARS ------------------------- ---------------------------
PER SHARE High Low Dividend High Low Dividend
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Quarter:
First 35.06 24.75 -- 43.63 29.81 --
Second 30.96 25.39 -- 39.94 31.00 --
Third 31.00 26.00 -- 34.25 26.38 .215
Fourth 30.10 25.00 .225 34.50 27.56 --
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Year 35.06 24.75 .225 43.63 26.38 .215
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The approximate number of shareholders of record and beneficial owners of
the Company's common stock as of January 31, 2002 was estimated to be 1,027,000.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchases. Accordingly, the common stock dividend
yield is modest. The Company has paid dividends on common stock for 26
consecutive years through 2001 and has increased the dividend amount at least
once every year. Additional dividend increases will be considered after
reviewing returns to shareholders, profitability expectations and financing
needs. Dividends are declared and paid on an annual basis. As in the past,
future dividends will be declared at the discretion of the Company's Board of
Directors.
McDonald's Corporation 7
Item 6. Selected financial data
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11-year summary
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DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
==================================================================================================================================
Franchised sales $24,838 24,463 23,830 22,330 20,863 19,969 19,123 17,146 15,756 14,474 12,959
Company-operated sales $11,040 10,467 9,512 8,895 8,136 7,571 6,863 5,793 5,157 5,103 4,908
Affiliated sales $ 4,752 5,251 5,149 4,754 4,639 4,272 3,928 3,048 2,674 2,308 2,061
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Total Systemwide sales $40,630 40,181 38,491 35,979 33,638 31,812 29,914 25,987 23,587 21,885 19,928
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Total revenues $14,870 14,243 13,259 12,421 11,409 10,687 9,795 8,321 7,408 7,133 6,695
Operating income $ 2,697(1) 3,330 3,320 2,762(3) 2,808 2,633 2,601 2,241 1,984 1,862 1,679
Income before taxes $ 2,330(2) 2,882 2,884 2,307(3) 2,407 2,251 2,169 1,887 1,676 1,448 1,299
Net income $ 1,637(2) 1,977 1,948 1,550(3) 1,642 1,573 1,427 1,224 1,083 959 860
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Cash provided by operations $ 2,688 2,751 3,009 2,766 2,442 2,461 2,296 1,926 1,680 1,426 1,423
Capital expenditures $ 1,906 1,945 1,868 1,879 2,111 2,375 2,064 1,539 1,317 1,087 1,129
Free cash flow $ 782 806 1,141 887 331 86 232 387 363 339 294
Treasury stock purchases $ 1,090 2,002 933 1,162 765 605 321 500 628 92 117
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Financial position at year end
Total assets $22,535 21,684 20,983 19,784 18,242 17,386 15,415 13,592 12,035 11,681 11,349
Total debt $ 8,918 8,474 7,252 7,043 6,463 5,523 4,836 4,351 3,713 3,857 4,615
Total shareholders' equity $ 9,488 9,204 9,639 9,465 8,852 8,718 7,861 6,885 6,274 5,892 4,835
Shares outstanding IN MILLIONS 1,280.7 1,304.9 1,350.8 1,356.2 1,371.4 1,389.2 1,399.5 1,387.4 1,414.7 1,454.1 1,434.5
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Per common share
Net income $ 1.27(2) 1.49 1.44 1.14(3) 1.17 1.11 .99 .84 .73 .65 .59
Net income-diluted $ 1.25(2) 1.46 1.39 1.10(3) 1.15 1.08 .97 .82 .71 .63 .57
Dividends declared $ .23 .22 .20 .18 .16 .15 .13 .12 .11 .10 .09
Market price at year end $ 26.47 34.00 40.31 38.41 23.88 22.69 22.56 14.63 14.25 12.19 9.50
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Franchised restaurants 17,395 16,795 15,949 15,086 14,197 13,374 12,186 10,944 9,918 9,237 8,735
Company-operated restaurants 8,378 7,652 6,059 5,433 4,887 4,294 3,783 3,216 2,733 2,551 2,547
Affiliated restaurants 4,320 4,260 4,301 3,994 3,844 3,216 2,330 1,739 1,476 1,305 1,136
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Total Systemwide restaurants 30,093 28,707 26,309 24,513 22,928 20,884 18,299 15,899 14,127 13,093 12,418
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(1) Includes $378 million of pretax special operating charges primarily related
to the U.S. business reorganization and other global change initiatives,
and the closing of 163 underperforming restaurants in international markets
discussed on page 9.
(2) Includes the $378 million of pretax special operating charges noted above
and $125 million of net pretax special nonoperating income items primarily
related to a gain on the initial public offering of McDonald's Japan, for a
net pretax expense of $253 million ($143 million after tax or $0.11 per
share). Net income also reflects an effective tax rate of 29.8 percent,
primarily due to the one-time benefit of tax law changes in certain
international markets ($147 million). See page 9 for further details.
(3) Includes $162 million of Made For You costs and the $160 million special
charge related to the home office productivity initiative for a pretax
total of $322 million ($219 million after tax or $0.16 per share).
8 McDonald's Corporation
Item 7. Management's discussion and analysis of financial condition and results
of operations
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Nature of business
==================
The Company operates in the food service industry and primarily operates
quick-service restaurant businesses under the McDonald's brand. Approximately
80% of McDonald's restaurants and more than 80% of the Systemwide sales of
McDonald's restaurants are in eight markets: Australia, Brazil, Canada, France,
Germany, Japan, the United Kingdom and the United States. Throughout this
discussion, McDonald's restaurant businesses in these eight markets collectively
are referred to as "major markets."
To capture additional meal occasions, the Company also operates other
restaurant concepts under its Partner Brands: Aroma Cafe, Boston Market,
Chipotle and Donatos Pizzeria. In addition, the Company has a minority ownership
in Pret A Manger. In fourth quarter of 2001, the Company approved a plan to
dispose of its Aroma Cafe business in the U.K., and expects to complete the sale
in the first half of 2002.
The segments presented in all tables and related discussion reflect the
Company's current management structure. Previously, McDonald's restaurant
operations in Canada, the Middle East and Africa, as well as the Partner Brands
were included in the Other segment. The new APMEA segment includes results for
McDonald's restaurant operations in Asia/Pacific, the Middle East and Africa,
while Canada and the Partner Brands are now presented as individual operating
segments. In addition, U.S. and Corporate selling, general & administrative
expenses reflect a realignment of certain home office departments'
responsibilities, for all years presented.
Consolidated operating results
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Operating results
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2001 2000 1999
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DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA Amount Increase/(decrease) Amount Increase/(decrease) Amount
=========================================================================================================================
Systemwide sales $40,630 1% $40,181 4% $38,491
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Revenues
Sales by Company-operated restaurants $11,041 5% $10,467 10% $ 9,512
Revenues from franchised and affiliated 3,829 1 3,776 1 3,747
restaurants
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Total revenues 14,870 4 14,243 7 13,259
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Operating costs and expenses
Company-operated restaurants 9,454 8 8,750 12 7,829
Franchised restaurants 800 4 772 5 738
Selling, general & administrative expenses 1,662 5 1,587 7 1,477
Special charge-global change initiatives 200 nm - - -
Other operating (income) expense, net 57 nm (196) nm (105)
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Total operating costs and expenses 12,173 12 10,913 10 9,939
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Operating income 2,697 (19) 3,330 - 3,320
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Interest expense 452 5 430 8 396
McDonald's Japan IPO gain (137) nm - - -
Nonoperating expense, net 52 nm 18 nm 40
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Income before provision for income taxes 2,330 (19) 2,882 - 2,884
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Provision for income taxes 693 (23) 905 (3) 936
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Net income $ 1,637 (17)% $ 1,977 2% $ 1,948
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Net income per common share $ 1.27 (15)% $ 1.49 3% $ 1.44
Net income per common share -diluted 1.25 (14) 1.46 5 1.39
=========================================================================================================================
nm Not meaningful.
McDonald's Corporation 9
The following table presents the 2001 growth rates for reported results, results
adjusted for the special items noted below, and the adjusted results on a
constant currency basis. In addition, the table includes the 2000 growth rates
for reported and constant currency results. 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. Constant currency results are calculated
by translating the current year results at prior year monthly average exchange
rates.
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Key highlights
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2001 2000
Increase (decrease) Increase
-------------------------------------------- ---------------------
Adjusted
As constant As Constant
reported/(1)/ Adjusted/(2)/ currency/(2,3)/ reported currency/(3)/
===================================================================================================
Systemwide sales 1% 1% 4% 4% 7%
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Revenues 4 4 8 7 12
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Operating income (19) (8) (5) - 5
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Net income (17) (10) (8) 2 6
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Net income per
common share (15) (7) (5) 3 8
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Net income per
common share-
diluted (14) (7) (5) 5 10
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(1) The reported effective tax rate was 29.8%, primarily due to the one-time
benefit of tax law changes in certain international markets ($147 million).
(2) Adjusted operating income of $3.1 billion and adjusted net income of $1.8
billion exclude the following special items:
Operating income:
* $200 million of charges ($136 million after tax) related to the U.S.
business reorganization and other global change initiatives discussed
on page 13.
* $91 million of charges ($69 million after tax) related to the closing
of 163 underperforming restaurants in international markets.
* $25 million of charges ($17 million after tax) primarily related to
unrecoverable costs incurred in connection with the theft of
promotional game pieces and the related termination of a supplier
discussed on page 14.
* $24 million asset impairment charge (pre and after tax) in Turkey.
* $20 million charge ($14 million after tax) related to the anticipated
disposition of Aroma Cafe in the U.K.
* $18 million of charges ($12 million after tax) primarily related to
the write-off of certain technology costs.
Nonoperating income:
* $137 million gain (pre and after tax) on the initial public offering
of McDonald's Japan.
* $12 million of charges ($8 million after tax) primarily related to the
write-off of a corporate investment.
(3) Excludes the effect of foreign currency translation on reported results.
The primary currencies negatively affecting reported results in 2001 and
2000 were the Euro, which is the currency in 12 of our European markets
including France and Germany, the British Pound and the Australian Dollar. In
addition, the Japanese Yen and Canadian Dollar negatively impacted reported
results in 2001, while the Japanese Yen positively impacted reported results in
2000.
SYSTEMWIDE SALES
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. We continue to focus on growing market share by increasing
comparable sales with an emphasis on improving customer satisfaction through
Quality, Service, Cleanliness and Value as well as strategic restaurant
development. Restaurant expansion, partly offset by negative comparable sales,
drove the constant currency sales increase in 2001, while restaurant expansion
along with positive comparable sales drove the increase in 2000.
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------
Systemwide sales
--------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------- ------------------- --------
Increase/(decrease) Increase/(decrease)
---------------------------------- -----------------------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency/(1)/ Amount reported currency/(1)/ Amount
====================================================================================================================
U.S. $ 20,051 2% na $ 19,573 3% na $ 19,006
Europe 9,412 1 5% 9,293 (3) 9% 9,557
APMEA 7,010 (6) 3 7,477 10 9 6,826
Latin America 1,733 (3) 6 1,790 7 9 1,665
Canada 1,447 - 5 1,443 7 7 1,346
Partner Brands 977 61 62 605 nm nm 91
--------------------------------------------------------------------------------------------------------------------
Total $ 40,630 1% 4% $ 40,181 4% 7% $ 38,491
====================================================================================================================
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
In all segments, the constant currency sales increases in 2001 and 2000
were primarily driven by expansion.
In the U.S., comparable sales were slightly positive in 2001 and positive
in 2000. The introduction of the New Tastes Menu in early 2001 and successful
promotions and new product introductions in 2000, combined with local market
initiatives in both years, contributed to the increases.
In Europe, comparable sales were negative in 2001 and positive in 2000. The
primary contributors to Europe's constant currency sales growth in both years
were France and the U.K. In addition, the Netherlands and Russia delivered
strong performances in 2001, while results in 2000 also benefited from increases
in Germany, Italy and Spain. Despite the Company's outstanding quality and
safety record, Europe's results in both years were negatively impacted by
consumer confidence issues regarding the European beef supply. However, the
impact lessened as we progressed through 2001, and we do not expect the negative
impact from these issues to be significant going forward.
In APMEA, comparable sales were negative in 2001 and slightly negative in
2000. Sales in 2001 were impacted by weak economic conditions in Japan, Taiwan
and Turkey and weak consumer spending in Australia, which also impacted the
second half of 2000. Beginning in the fourth quarter of 2001, sales were also
dampened by consumer confidence issues regarding the Japanese beef supply,
10 McDonald's Corporation
despite the fact that McDonald's Japan does not use Japanese beef. Although we
are proactively communicating our strong beef safety and quality messages, we
expect Japan's results in the near term to continue to be negatively affected by
these consumer concerns. Positive comparable sales in China contributed to this
segment's total constant currency sales increases in both years.
In Latin America, comparable sales were negative in 2001 and 2000 as weak
economic conditions affected most markets in this segment. Positive comparable
sales in Mexico and Venezuela helped drive this segment's total constant
currency sales increases in both years.
We expect the weak economic conditions in many Asian, Middle Eastern and
Latin American markets to continue in the near term.
In Canada, comparable sales were positive in 2001 and 2000. Canada's value
program combined with drive-thru initiatives, extended hours and new product
introductions drove the increases in both years.
The sales increases in the Partner Brands in 2001 and 2000 were primarily
due to the acquisition of Boston Market in second quarter 2000. Expansion of
Chipotle along with strong comparable sales at Chipotle and Boston Market also
helped drive the increases in both years.
--------------------------------------------------------------------------------
Average annual sales--McDonald's restaurants
--------------------------------------------------------------------------------
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2001 2000 1999
------------------ ------------------ -------
Increase/ Increase/
(decrease) (decrease)
--------- ---------
Constant Constant
DOLLARS IN THOUSANDS Amount currency/(2)/ Amount currency/(2)/ Amount
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Per restaurant/(1)/
------------------------------------------------------------------------------------------------
Traditional:
U.S. $1,650 - $1,647 1% $1,625
Europe 1,722 (4)% 1,851 (2) 2,130
APMEA 1,190 (5) 1,376 (2) 1,411
Latin America 1,154 (5) 1,333 (7) 1,464
Canada 1,469 - 1,530 6 1,451
------------------------------------------------------------------------------------------------
Satellite:
U.S. $ 546 2% $ 536 9% $ 490
Outside the U.S./(3)/ 533 (1) 598 2 561
================================================================================================
Per new restaurant/(4)/
------------------------------------------------------------------------------------------------
Traditional:
U.S. $1,550 (1)% $1,570 7% $1,473
Europe 1,304 (6) 1,430 (4) 1,673
APMEA 984 (6) 1,143 2 1,110
Latin America 888 (5) 1,030 (9) 1,152
Canada 1,144 (7) 1,278 5 1,218
------------------------------------------------------------------------------------------------
Satellite:/(5)/
Outside the U.S./(3)/ $ 591 2% $ 649 8% $ 574
================================================================================================
(1) McDonald's restaurants in operation at least 13 consecutive months.
(2) Excludes the effect of foreign currency translation on reported results.
(3) Represents satellite restaurants located in Canada and Japan, which
comprise substantially all satellites outside the U.S.
(4) McDonald's restaurants in operation at least 13 consecutive months but not
more than 25 months.
(5) Excludes U.S. because the Company did not open a significant number of
satellite restaurants in the U.S.
Average sales per restaurant in constant currencies are affected by
comparable sales as well as the size, location and number of new restaurants.
The number of new restaurants affects average sales because new restaurants
typically take a few years to reach long-term sales volumes. In addition, over
the last several years more restaurants outside the U.S. have opened in
lower-density areas and in countries with lower average sales volumes and
correspondingly lower average development costs.
In 2001, average annual sales per traditional restaurant were relatively
flat for the U.S. and Canada in constant currencies. In the other segments,
average annual sales per traditional restaurant declined in constant currencies
due to negative comparable sales and the significant number of new restaurants
added, partly offset by the benefit of closing 163 underperforming restaurants.
In 2000, positive comparable sales in the U.S. and Canada drove their increases
in average annual sales per traditional restaurant. In the other segments, the
declines were mainly due to new restaurant development.
Satellite restaurants generally have significantly lower development costs
and sales volumes than traditional restaurants. The use of these small,
limited-menu restaurants has allowed profitable expansion into areas that
otherwise would not have been feasible. In 2001 and 2000, average annual sales
for satellite restaurants increased in the U.S. partly due to the closing of
certain low-volume satellites. Outside the U.S., average annual sales for
satellite restaurants declined slightly in constant currencies in 2001 primarily
due to negative comparable sales in Japan, after increasing in 2000 primarily
due to higher sales volumes for openings in Japan.
In 2001, average sales for new traditional restaurants in the U.S. remained
at about $1.6 million as we continued our selective expansion in higher volume
locations with the development of larger facilities that support higher average
sales. In segments outside the U.S., average sales for new traditional
restaurants in constant currencies declined due to a higher proportion of
openings in lower volume markets such as South Korea and Mexico and lower sales
volumes for new traditional restaurants opened in Germany, Italy, the U.K.,
Japan, Argentina and Canada. The lower volumes in Germany, Italy and Japan were
partly due to the consumer confidence issues regarding the beef supply.
In 2000, average sales for new traditional restaurants in the U.S.
increased due to selective expansion and the development of larger facilities.
In Europe and Latin America, average sales for new traditional restaurants in
constant currencies decreased due to a higher proportion of openings in lower
volume markets. In APMEA, average sales for new traditional restaurants
increased due to higher sales volumes in China and a higher proportion of
openings in higher volume markets such as Japan.
McDonald's Corporation 11
TOTAL REVENUES
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. Fees vary by type of site and
investment by the Company and also according to local business conditions. These
fees, along with occupancy and operating rights, are stipulated in franchise
agreements that generally have 20-year terms.
Revenues grow as new restaurants are added and as sales build in existing
restaurants. Menu price changes also affect revenues and sales, but it is
impractical to quantify their impact because of different pricing structures,
new products, promotions and product-mix variations among restaurants and
markets.
--------------------------------------------------------------------------------
Revenues
--------------------------------------------------------------------------------
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2001 2000 1999
------------------------------- -------------------------------- ------
Increase/(decrease) Increase/(decrease)
------------------ ------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency/(1)/ Amount reported currency/(1)/ Amount
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
U.S. $ 5,396 3% na $ 5,259 3% na $ 5,093
Europe 4,752 - 4% 4,754 (3) 7% 4,925
APMEA 2,203 5 12 2,102 9 11 1,928
Latin America 971 2 12 949 40 41 680
Canada 608 (1) 3 615 7 7 576
Partner Brands 940 67 67 564 nm nm 57
-----------------------------------------------------------------------------------------------------------------
Total $14,870 4% 8% $14,243 7% 12% $13,259
=================================================================================================================
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
On a constant currency basis, total revenues increased at a higher rate
than sales in 2001 primarily due to the second quarter 2000 acquisition of
Boston Market restaurants, which are all Company-operated, and the restructuring
of our ownership in the Philippines, effective July 1, 2001. As a result of the
restructuring, most of our restaurants in the Philippines are now
Company-operated rather than franchised. In addition, revenues benefited from an
increase in the royalty percent received from our Japanese affiliate, effective
January 1, 2001. In 2000, total revenues increased at a higher rate than sales
due the acquisition of Boston Market and the acquisition of Donatos in third
quarter 1999 as well as the consolidation of Argentina and Indonesia for
financial reporting purposes in 2000.
OPERATING INCOME
Consolidated operating income decreased 19% in 2001 and was relatively flat in
2000 compared with 1999. Excluding the special items noted in the footnote to
the table on page 9, adjusted operating income decreased 5% in constant
currencies in 2001. Adjusted operating income decreased in 2001 primarily due to
lower combined operating margin dollars and lower other operating income along
with higher selling, general & administrative expenses. In constant currencies,
operating income increased 5% in 2000, primarily due to higher combined
operating margin dollars and higher other operating income, partly offset by
higher selling, general & administrative expenses.
Operating income from the major markets accounted for more than 90% of
consolidated operating income in 2001, 2000 and 1999.
--------------------------------------------------------------------------------
Operating income
--------------------------------------------------------------------------------
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2001 2000 1999
--------------------------------- ------------------ ------
Increase/(decrease) Increase/(decrease)
--------------------------------- ------------------
Adjusted
DOLLARS IN As Constant constant As Constant
MILLIONS Amount reported currency/(1)/ currency/(1,2)/ Amount reported currency/(1)/ Amount
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
U.S. $ 1,622 (10)% na - $ 1,795 7% na $ 1,679
Europe 1,063 (10) (7)% (3)% 1,180 (6) 6% 1,257
APMEA 325 (28) (20) (10) 451 4 5 433
Latin America 11 (89) (91) (46) 103 (23) (23) 133
Canada 124 (2) 2 10 126 12 11 113
Partner
Brands (66) (61) (62) (1) (41) nm nm (7)
Corporate (382) (35) na (22) (284) 1 na (288)
---------------------------------------------------------------------------------------------------------------------------------
Total $ 2,697 (19)% (17)% (5)% $ 3,330 -% 5% $ 3,320
=================================================================================================================================
(1) Excludes the effect of foreign currency translation on reported results.
(2) Excludes the special items noted in the footnote to the table on page 9 and
quantified below.
na Not applicable.
nm Not meaningful.
U.S. operating income for 2001 included $181 million of special charges,
primarily related to the U.S. business reorganization and costs incurred in
connection with the theft of promotional game pieces and related termination of
a supplier discussed on page 14. U.S. operating income accounted for over 50% of
consolidated operating income in 2001, 2000 and 1999. Excluding the special
charges, U.S. adjusted operating income was relatively flat in 2001 compared
with an increase of $116 million or 7% in 2000. The increase in 2000 was due to
higher combined operating margin dollars and higher other operating income.
Europe's operating income for 2001 included $46 million of special charges
related to the closing of 50 underperforming restaurants across Europe and
global change initiatives. Europe's operating income accounted for more than 35%
of consolidated operating income in 2001, 2000 and 1999. Excluding the special
charges, Europe's adjusted operating income decreased 3% in 2001 and increased
6% in 2000 in constant currencies. In both years, consumer confidence issues
regarding the European beef supply negatively impacted results. This segment's
results in 2001 benefited from strong performances in France and Russia. The
increase in 2000 was primarily driven by strong operating results in France,
Italy and Spain. France, Germany and the U.K. accounted for about 75% of
Europe's operating income in 2001, 2000 and 1999.
APMEA's operating income for 2001 included $42 million of special charges,
primarily related to the closing of 50 underperforming restaurants, mainly in
Malaysia and the Philippines, and the asset impairment charge in
12 McDonald's Corporation
Turkey. Excluding the special charges, APMEA's adjusted operating income
decreased 10% in 2001 and increased 5% in 2000 in constant currencies. In 2001,
strong results in China, the increase in the royalty percent received from our
affiliate in Japan and a gain on the sale of real estate in Singapore were more
than offset by weak operating results in Australia, Japan, Taiwan and Turkey.
The increase in 2000 was driven primarily by Japan, which benefited from the
partial sale of its ownership in Toys `R' Us Japan, as well as strong results in
China and South Korea. Results in both years were negatively affected by the
introduction of the goods and services tax in Australia in July 2000. Australia
and Japan accounted for more than 60% of APMEA's operating income in 2001, 2000
and 1999.
Latin America's operating income for 2001 included $40 million of special
charges related to the closing of 58 underperforming restaurants, primarily in
Brazil and Puerto Rico, and global change initiatives. Excluding the special
charges, Latin America's adjusted operating income decreased 46% in 2001 and 23%
in 2000 in constant currencies. Results in both years were negatively impacted
by the continuing difficult economic conditions experienced by most markets in
the segment. Brazil accounted for more than 55% of Latin America's operating
income in each of the past three years.
Canada's operating income for 2001 included $10 million of special charges
related to the closing of five underperforming restaurants and to global change
initiatives.
Operating income for the Partner Brands in 2001 included special charges of
$20 million related to the anticipated disposal of Aroma Cafe and $5 million
related to global change initiatives.
Results in the Corporate segment included $34 million of special charges
related to global change initiatives and the write-off of certain technology
costs. Excluding the special charges, the adjusted decrease in the Corporate
segment of 22% in 2001 was primarily due to increased spending on future
restaurant-related technology improvements.
As a result of continuing economic weakness in Latin America and Turkey,
the Company expects to record a non-cash charge of approximately $45 million
(pre and after tax) related to the impairment of assets in Latin America and
closing of underperforming restaurants in Turkey in first quarter 2002.
OPERATING MARGINS
Operating margin information and discussions relate to McDonald's restaurants
only and exclude Partner Brands.
Company-operated margins
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Company-operated
margin dollars declined $145 million in 2001 and $4 million in 2000. In constant
currencies, Company-operated margin dollars declined $96 million or 6% in 2001,
compared with an increase of $73 million or 4% in 2000. The 2001 constant
currency decrease was primarily due to negative comparable sales, partly offset
by expansion, while the 2000 constant currency increase was due to expansion and
positive comparable sales.
Company-operated margins were 15.1% of sales in 2001, 16.9% in 2000 and
17.7% in 1999. Operating cost trends as a percent of sales were as follows: food
& paper costs as well as occupancy & other operating expenses increased in 2001
and 2000; payroll costs increased in 2001 and were flat in 2000.
-------------------------------------------------------------------------------
Company-operated margins--McDonald's restaurants
-------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
===============================================================================
U.S. $ 501 $ 521 $ 516
Europe 626 683 743
APMEA 240 296 274
Latin America 83 95 70
Canada 75 75 71
-------------------------------------------------------------------------------
Total $1,525 $1,670 $1,674
===============================================================================
PERCENT OF SALES
-------------------------------------------------------------------------------
U.S. 16.0% 17.0% 17.5%
Europe 16.8 18.3 19.2
APMEA 12.4 15.9 16.4
Latin America 10.1 12.4 14.1
Canada 15.6 15.4 15.7
-------------------------------------------------------------------------------
Total 15.1% 16.9% 17.7%
===============================================================================
In the U.S., food & paper costs were lower as a percent of sales in 2001
and 2000, while payroll costs and occupancy & other expenses were higher in both
years.
Europe's Company-operated margins as a percent of sales declined in 2001,
primarily due to higher payroll costs and negative comparable sales. In 2000,
Europe's Company-operated margin percent declined as all costs increased as a
percent of sales.
In APMEA, negative comparable sales in 2001 and slightly negative
comparable sales in 2000 affected Company-operated margins as a percent of
sales. In 2001, the change in restaurant classification in the Philippines also
contributed to APMEA's margin decline because its Company-operated margins were
lower than the average for the segment.
In Latin America, the margin declines were due to difficult economic
conditions in most markets and negative comparable sales in both years.
Franchised margins
Franchised margin dollars are equal to revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with those sites. Franchised margin dollars represented more than 60%
of the combined operating margins in 2001, 2000 and 1999. Franchised margin
dollars increased $26 million in 2001, compared with a $6 million decline in
2000. In constant currencies, the franchised margin dollars increased $91
million or 3% in 2001 and $119 million or 4% in 2000, primarily driven by the
increase in the Japan royalty percent effective January 1, 2001, as well as
expansion in both years and positive comparable sales in 2000.
McDonald's Corporation 13
-------------------------------------------------------------------------------
Franchised margins--McDonald's restaurants
-------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
U.S. $ 1,799 $ 1,765 $ 1,730
Europe 792 802 828
APMEA 229 199 211
Latin America 103 135 144
Canada 105 101 95
-------------------------------------------------------------------------------
Total $ 3,028 $ 3,002 $ 3,008
===============================================================================
PERCENT OF REVENUES
-------------------------------------------------------------------------------
U.S. 79.7% 80.4% 81.0%
Europe 77.2 78.3 79.0
APMEA 86.2 81.5 82.3
Latin America 68.4 73.0 77.5
Canada 80.4 80.2 79.9
-------------------------------------------------------------------------------
Total 79.1% 79.5% 80.3%
===============================================================================
The declines in the consolidated franchised margin percent in 2001 and 2000
reflected higher occupancy costs due to an increased number of leased sites in
all geographic segments. Our strategy of leasing a higher proportion of new
sites over the past few years has reduced initial capital requirements and
related interest expense. However, as anticipated, franchised margins as a
percent of applicable revenues have been negatively impacted because financing
costs implicit in the lease are included in rent expense, which affects these
margins. For owned sites, financing costs are reflected in interest expense,
which does not affect these margins.
In 2001, franchised margins as a percent of applicable revenues decreased
in Europe and Latin America partly due to rent assistance provided to
franchisees in certain markets and negative comparable sales. We expect to
continue providing rent assistance in certain Latin American markets in 2002.
The franchised margin percent in APMEA increased for 2001 and decreased in 2000.
The 2001 increase was primarily due to an increase in the royalty percent
received from our Japanese affiliate and the restructuring of the Philippines'
operations that resulted in the reclassification of franchised margins that were
lower than the average for the segment. In 2000, our purchase of a majority
interest in certain affiliate markets in both APMEA and Latin America shifted
revenues from franchised and affiliated restaurants to Company-operated
restaurants, which contributed to the reduction in the franchised restaurant
margin percents.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general & administrative expenses increased 5% in 2001 and
7% in 2000 (7% and 11% in constant currencies). Selling, general &
administrative expenses as a percent of sales were 4.1% in 2001, 4.0% in 2000
and 3.8% in 1999. The increase in 2001 was partly due to increased spending on
future restaurant-related technology improvements in the Corporate segment and
higher selling, general & administrative expenses for the Partner Brands. The
increase in 2000 was primarily due to spending to support the development of
Partner Brands and the consolidation of Argentina and Indonesia for financial
reporting purposes. Selling, general & administrative expenses in both years
benefited from weaker foreign currencies and lower expense for performance-based
incentive compensation.
As a result of the global change initiatives described below, the Company
expects ongoing annual selling, general & administrative savings of about $100
million in 2002, compared with what otherwise would have been spent.
--------------------------------------------------------------------------------
Selling, general & administrative expenses
--------------------------------------------------------------------------------
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2001 2000 1999
------------------------------- -------------------------------- ------
Increase/(decrease) Increase/(decrease)
------------------ ------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency/(1)/ Amount reported currency/(1)/ Amount
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
U.S. $ 563 1% na $ 559 - na $ 559
Europe 328 (2) 1% 336 (3)% 8% 348
APMEA 152 2 9 149 10 16 135
Latin America 126 5 14 120 45 45 83
Canada 51 (6) (2) 54 4 4 52
Partner Brands 102 20 20 85 nm nm 12
Corporate 340 20 na 284 (1) na 288
--------------------------------------------------------------------------------------------------------------
Total $1,662 5% 7% $1,587 7% 11% $1,477
==============================================================================================================
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
Corporate expenses consist of home office support costs in areas such as
facilities, finance, human resources, information technology, legal, supply
chain management and training.
SPECIAL CHARGE--GLOBAL CHANGE INITIATIVES
In fourth quarter 2001, the Company recorded a $200 million pretax special
charge ($136 million after tax) related to strategic changes and ongoing
restaurant initiatives in the U.S. and certain international markets. The
changes and initiatives are designed to improve the customer experience and grow
McDonald's global business. The changes in the U.S. included streamlining
operations by reducing the number of regions and divisions, enabling the Company
to combine staff functions and improve efficiency. In addition, the U.S.
business introduced a variety of initiatives designed to improve the restaurant
experience including accelerated operations training, restaurant simplification,
incentives for outstanding restaurant operations and an enhanced national
restaurant evaluation system.
In connection with these initiatives, the Company eliminated approximately
850 positions, consisting of 700 positions in the U.S., primarily in the
divisions and regions, and 150 positions in international markets.
The special charge consisted of $114 million of severance and other
employee-related costs; $69 million of lease cancellation and other costs
related to the closing of region and division facilities; and $17 million of
other cash costs, primarily consisting of payments made to facilitate a timely
and smooth change of ownership from franchisees who have had a history of
financial difficulty and consequently were unable to deliver the level of
operational excellence needed to succeed in the future.
14 McDonald's Corporation
Of the original $200 million pretax special charge, the remaining accrual
of approximately $126 million at year-end 2001 primarily related to employee
severance and lease payments for facilities that have been closed and was
included in other accrued liabilities in the Consolidated balance sheet.
Employee severance is paid in installments over a period of up to one year after
termination, and the remaining lease payments for facilities that have been
closed will be paid through 2010. No significant adjustments have been made to
the original plan approved by management. The Company expects to use cash
provided by operations to fund the remaining employee severance and lease
obligations.
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense includes gains on sales of restaurant
businesses, equity in earnings of unconsolidated affiliates, restaurant closing
and asset impairment charges, and other transactions related to franchising and
the food service business.
--------------------------------------------------------------------------------
Other operating (income) expense, net
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
Gains on sales of restaurant businesses $(112) $ (87) $ (75)
Equity in earnings of unconsolidated affiliates (62) (121) (138)
Charges for underperforming restaurant closings 91 - -
Asset impairment charges 44 - -
Other, net 96 12 108
--------------------------------------------------------------------------------
Total $ 57 $(196) $(105)
================================================================================
Gains on sales of restaurant businesses include gains from sales of
Company-operated restaurants as well as gains from exercises of purchase options
by franchisees with business facilities lease arrangements (arrangements where
the Company leases the businesses, including equipment, to franchisees who have
options to purchase the businesses). The Company's purchases and sales of
businesses with its franchisees and affiliates are aimed at achieving an optimal
ownership mix in each market. Resulting gains or losses are recorded in
operating income because the transactions are an integral part of our business.
Equity in earnings of unconsolidated affiliates--businesses in which the
Company actively participates but does not control--is reported after interest
expense and income taxes, except for U.S. restaurant partnerships, which are
reported before income taxes. The decrease in 2001 was due to weaker results in
Japan, the increase in Japan's royalty expense and a weaker Japanese Yen.
Although the increase in royalty expense reduced McDonald's equity in earnings
for Japan, it was more than offset by the royalty benefit McDonald's received in
franchised revenues. In 1999, equity in earnings of unconsolidated affiliates
included a $21 million gain from the sale of real estate in a U.S. partnership.
The Company recorded $91 million of pretax charges ($69 million after tax)
in 2001 related to the closing of 163 underperforming restaurants in
international markets. The losses on these closed restaurants were recognized in
the period the restaurant ceased operations, and the charges primarily consisted
of asset write-offs and lease termination costs.
The asset impairment charges in 2001 consisted of a $24 million charge (pre
and after tax) as a result of an assessment of the ongoing impact of significant
currency devaluation on McDonald's cash flows in Turkey and a pretax charge of
$20 million ($14 million after tax) related to the anticipated sale of Aroma
which we expect to be completed in the first half of 2002.
Other expense for 2001 included a pretax charge of $25 million ($17 million
after tax) in the U.S., primarily related to unrecoverable costs incurred in
connection with the theft of winning game pieces from the Company's Monopoly and
certain other promotional games over an extended period of time, and the related
termination of the supplier of the game pieces. Fifty-one people (none of whom
were Company employees) were subsequently indicted on conspiracy and mail fraud
charges. In 2001, the Company also recorded a pretax charge of $17 million ($12
million after tax), primarily related to the write-off of certain technology
costs in the Corporate segment. Other expense for 1999 included the write-off of
$24 million ($16 million after tax) of software not used in the business.
INTEREST EXPENSE
Interest expense increased in 2001 and 2000 due to higher average debt levels,
partly offset by weaker foreign currencies in both years and lower average
interest rates in 2001. Average debt levels were higher in both years because
the Company used its available credit capacity to repurchase shares of its
common stock. Based on current interest rates, we anticipate interest expense
will decline in 2002.
McDONALD'S JAPAN INITIAL PUBLIC OFFERING (IPO) GAIN
In third quarter 2001, McDonald's Japan, the Company's largest market in the
APMEA segment, completed an IPO of 12 million shares at an offering price of
4,300 Yen per share ($34.77 per share). The Company owns 50% of McDonald's Japan
while the Company's partner Den Fujita and his family own approximately 26% and
continue to be involved in the business. The Company recorded a $137 million
gain (pre and after tax) in nonoperating income to reflect an increase in the
carrying value of its investment as a result of the cash proceeds from the IPO
received by McDonald's Japan.
NONOPERATING EXPENSE, NET
Nonoperating expense includes miscellaneous income and expense items such as
interest income, minority interests, and gains and losses related to other
investments, financings and translation. Results in 2001 included the write-off
of a corporate investment, the write-off of a financing
McDonald's Corporation 15
receivable from a supplier in Latin America and minority interest expense
related to the sale of real estate in Singapore, partly offset by translation
gains. Results in 2000 reflected lower minority interest expense and lower
translation losses than 1999 and a gain related to the sale of a partial
ownership interest in a majority-owned international subsidiary.
PROVISION FOR INCOME TAXES
The effective income tax rate was 29.8% in 2001, 31.4% in 2000 and 32.5% in
1999. The lower effective income tax rate in 2001 was primarily due to the
one-time benefit of tax law changes in certain international markets. Also
contributing to the decrease in the income tax rate was the Japan IPO gain,
partly offset by certain restaurant closing charges and the Turkey asset
impairment charge, none of which were tax-affected for financial reporting
purposes. The decrease in the income tax rate in 2000 was the result of a tax
benefit resulting from an international transaction. The Company expects its
2002 effective income tax rate to be approximately 32.0% to 33.0%.
Consolidated net deferred tax liabilities included tax assets, net of
valuation allowance, of $720 million in 2001 and $523 million in 2000.
Substantially all of the net tax assets arose in the U.S. and other profitable
markets.
NET INCOME AND NET INCOME PER COMMON SHARE
In 2001, net income decreased 17%, and diluted net income per common share
decreased 14%. Excluding the special items noted in the footnote to the table on
page 9, net income decreased 8%, and diluted net income per common share
decreased 5% in constant currencies. In 2000, net income increased 2%, and
diluted net income per common share increased 5%. On a constant currency basis,
these increases were 6% and 10%. The spread between the percent change in net
income and diluted net income per common share for both years was due to lower
weighted average shares outstanding as a result of shares repurchased and a less
dilutive effect from stock options.
Cash flows
================================================================================
The Company generates significant cash from operations and has substantial
credit capacity to fund operating and discretionary spending. Cash from
operations totaled $2.7 billion in 2001 and, although slightly lower than the
amount in 2000, exceeded capital expenditures for the eleventh consecutive year.
In 2000, cash from operations totaled $2.8 billion. This amount was less than in
1999, primarily due to higher income tax payments in 2000 as a result of both
lower tax benefits related to stock option exercises and higher gains on the
termination of foreign currency exchange agreements. Cash provided by
operations, along with borrowings and other sources of cash, is used for capital
expenditures, share repurchases, dividends and debt repayments.
--------------------------------------------------------------------------------
Cash provided by operations
--------------------------------------------------------------------------------
DOLLARS IN MILLIONS 2001 2000 1999
================================================================================
Cash provided by operations $ 2,688 $ 2,751 $ 3,009
Free cash flow/(1)/ 782 806 1,141
Cash provided by operations
as a percent of capital expenditures 141% 141% 161%
Cash provided by operations
as a percent of average total debt 31 35 42
================================================================================
(1) Cash provided by operations less capital expenditures.
In addition to its free cash flow, the Company can meet short-term funding
needs through commercial paper borrowings and line of credit agreements.
Accordingly, the Company strategically and purposefully maintains a relatively
low current ratio, which was .81 at year-end 2001.
CAPITAL EXPENDITURES AND RESTAURANT DEVELOPMENT
Capital expenditures decreased $39 million or 2% in 2001 and increased $77
million or 4% in 2000. Capital expenditures for McDonald's restaurants in 2001,
2000 and 1999 reflected our strategy of leasing a higher proportion of new sites
and the U.S. building program, which gives franchisees the option to own new
restaurant buildings. About 80% of new and rebuilt U.S. traditional franchised
and affiliated restaurant buildings in 2001 and 2000 are owned by franchisees
and affiliates. The decrease in capital expenditures in 2001 was primarily due
to lower spending in Europe and Latin America and weaker foreign currencies,
partly offset by additional expenditures for Partner Brands and McDonald's
restaurant business in the U.S. and China. Capital expenditures in 2000
increased due to higher spending for Partner Brands and the consolidation of
Argentina and Indonesia, partly offset by weaker foreign currencies.
Approximately 60% of capital expenditures was invested in major markets
excluding Japan in 2001, 2000 and 1999 (Japan is accounted for under the equity
method, and accordingly, its capital expenditures are not included in
consolidated amounts). Capital expenditures in markets outside the U.S.
accounted for about 65% of total expenditures in 2001 and about 70% in 2000 and
1999.
The Company's expenditures for new restaurants in the U.S. are lower than
they would have been as a result of the leasing strategy and the U.S. building
program. For new franchised and affiliated restaurants, which represent about
85% of U.S. restaurants, the Company generally incurs no capital expenditures.
However, the Company maintains long-term occupancy rights for the land and
receives related rental income.
While the Company no longer makes significant expenditures on new sites in
the U.S., we continue to focus on the System's average development costs (land,
building and equipment) to ensure an appropriate return on investment for the
System. Average development costs for new traditional restaurants in the U.S.
System were $1.7 million in 2001, $1.6 million in 2000 and $1.5 million in 1999.
The
16 McDonald's Corporation
increases were primarily due to the construction of larger facilities designed
to support higher average sales volumes.
Certain of the land the Company leases in the U.S. is leased from System
Capital Corporation (SCC). The Company and six other unaffiliated companies that
supply the McDonald's System are equal owners of SCC. No employees of SCC are
employees of the seven shareholders. The Company's investment in SCC is
accounted for on the cost basis. SCC's purpose is to provide funding to
McDonald's franchisees, suppliers to the McDonald's System and McDonald's
Corporation and to build equity within SCC that will benefit the McDonald's
System. Its function is similar to that of a cooperative. SCC's primary
operating activities include (1) providing loans to qualifying U.S. franchisees
to purchase existing restaurant businesses as well as finance equipment,
buildings and working capital, (2) contracting for construction of restaurant
buildings and selling them to U.S. franchisees, (3) purchasing accounts
receivable and financing inventory and other needs of eligible suppliers and
distributors, and (4) acquiring and leasing land to McDonald's Corporation for
new restaurants, primarily in the U.S. The Company's commitments under these
leases are included in operating lease commitments on pages 19 and 31 and total
approximately $14 million annually based on current interest rates.
SCC funds itself in the capital markets on an independent basis. Moody's,
Standard & Poor's and Fitch periodically review SCC, including reviews of key
performance indicators and asset quality. These rating agencies currently rate
SCC's funding subsidiary's commercial paper A-1, P-1 and F1; and its long-term
debt Aa2, AA and AA, respectively. SCC competes with other lenders who provide
similar financing to franchisees and suppliers.
SCC is not permitted to hold McDonald's stock, and McDonald's has no
commitments or guarantees that provide for the potential issuance of its stock
to SCC. SCC does not engage in speculative derivative activities, and SCC does
not hedge McDonald's positions. In addition, no McDonald's employee is permitted
to invest in SCC.
--------------------------------------------------------------------------------
Capital expenditures
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
New restaurants $ 1,198 $ 1,308 $ 1,231
Existing restaurants/(1)/ 571 507 515
Other properties/(2)/ 137 130 122
--------------------------------------------------------------------------------
Total $ 1,906 $ 1,945 $ 1,868
================================================================================
Total assets $22,535 $21,684 $20,983
================================================================================
(1) Includes technology to improve service and food quality and enhancements to
older facilities in order to achieve higher levels of customer
satisfaction.
(2) Primarily for computer equipment and furnishings for office buildings.
Average development costs outside the U.S. vary widely by market depending
on the types of restaurants built and the real estate and construction costs
within each market. These costs, which include land, buildings and equipment
owned by the Company, are managed through the use of optimally sized
restaurants, construction and design efficiencies, standardization and global
sourcing. In addition, foreign currency fluctuations affect average development
costs.
Average development costs for new traditional restaurants in major markets
outside the U.S. excluding Japan were approximately $1.5 million in 2001, $1.6
million in 2000 and $1.8 million in 1999. Average annual sales for new
traditional restaurants in the same markets were about $1.4 million in 2001,
$1.5 million in 2000 and $1.7 million in 1999. Average development costs for new
satellite restaurants located in Canada and Japan, which comprise more than 90%
of the satellites outside the U.S., were about $200,000 (excluding lease costs)
in 2001, 2000 and 1999. The use of these small, limited-menu restaurants, for
which the land and building generally are leased, has allowed expansion into
areas that otherwise would not have been feasible.
The Company and its affiliates owned 38% of the land for its restaurant
sites at year-end 2001 and 40% at year-end 2000.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were about $181 million in 2001, $204 million in 2000 and $259 million
in 1999. The decrease in 2000 was primarily due to the consolidation of
Argentina in 2000.
--------------------------------------------------------------------------------
Systemwide restaurants at year end/(1)/
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. 13,099 12,804 12,629
Europe 5,794 5,460 4,943
APMEA 7,321 6,771 6,097
Latin America 1,581 1,510 1,299
Canada 1,223 1,154 1,125
Partner Brands 1,075 1,008 216
--------------------------------------------------------------------------------
Total 30,093 28,707 26,309
================================================================================
(1) Includes satellite units at December 31, 2001, 2000 and 1999 as follows:
U.S.--1,004, 999, 1,048; Europe--63, 46, 44; APMEA (primarily
Japan)--1,879, 1,681, 1,354; Latin America--46, 45, 41; and Canada--307,
280, 259.
McDonald's continues to focus on managing capital outlays effectively
through selective expansion. In 2001, the Company added 1,319 McDonald's
restaurants Systemwide, compared with 1,606 in 2000 and 1,598 in 1999. In
addition, the Company added 67 restaurants in 2001 operated by Partner Brands,
compared with 792 restaurants in 2000, 707 of which were the result of the
Boston Market acquisition. In 2002, the Company expects to add 1,300 to 1,400
McDonald's restaurants and open 100 to 150 new Partner Brands' restaurants.
In 2001, more than 60% of McDonald's restaurant additions was in the major
markets, and we anticipate a similar percent for 2002. Almost 50% of
Company-operated restaurants and nearly 85% of franchised restaurants were
located in the major markets at the end of 2001. Franchisees and affiliates
operated 74% of McDonald's restaurants at year-end 2001. Partner Brands'
restaurants are primarily Company-operated.
McDonald's Corporation 17
SHARE REPURCHASES AND DIVIDENDS
The Company uses free cash flow and credit capacity to repurchase shares, as we
believe this enhances shareholder value. During 2001, the Company purchased 36.1
million shares for approximately $1.1 billion. Cumulative share purchases over
the past five years totaled $6.0 billion or 187.4 million shares. In 2002, the
Company began purchasing shares under a new $5.0 billion share repurchase
program announced in October 2001. We expect to purchase shares under this
program over the next four years, depending on free cash flow.
To reduce the overall cost of treasury stock purchases, the Company sells
common equity put options in connection with its share repurchase program and
receives premiums for these options. The Company sold 12.2 million common equity
put options in 2001 and 16.8 million in 2000 and received premiums of $32
million in 2001 and $56 million in 2000. These premiums were reflected in
shareholders' equity as a reduction of the cost of treasury stock purchased. At
December 31, 2001, 12.2 million common equity put options were outstanding, of
which 3.0 million were exercised in February 2002 at a cost of $87 million. The
remaining options expire at various dates through November 2002, with exercise
prices between $26.37 and $30.23.
During 2001, the Company also entered into equity forward contracts in
connection with its share repurchase program. The equity forward contracts,
totaling $151 million for 5.5 million shares, settled in March 2002 at an
average price of $27.41 per share.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchases. Accordingly, the common stock dividend
yield is modest. However, the Company has paid dividends on common stock for 26
consecutive years and has increased the dividend amount every year. Additional
dividend increases will be considered after reviewing returns to shareholders,
profitability expectations and financing needs. Cash dividends are declared and
paid on an annual basis. As in the past, future dividends will be declared at
the discretion of the Board of Directors.
Financial position and capital resources
================================================================================
TOTAL ASSETS AND RETURNS
Total assets grew by $851 million or 4% in 2001 and $700 million or 3% in 2000.
At year-end 2001 and 2000, more than 60% of consolidated assets was located in
the major markets excluding Japan. Net property and equipment rose $242 million
in 2001 and represented 77% of total assets at year end.
Operating income is used to compute return on average assets, while net
income is used to calculate return on average common equity. Month-end balances
are used to compute both average assets and average common equity.
--------------------------------------------------------------------------------
Returns on assets and equity
--------------------------------------------------------------------------------
2001/(1)/ 2000 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Return on average assets 14.1% 15.9% 16.6%
Return on average common equity 19.1 21.6 20.8
================================================================================
(1) Excludes the special items noted in footnote 2 to the table on page 9.
Including the special items, return on average assets was 12.3% and return
on average common equity was 17.5%.
Both return on average assets and return on average common equity declined
in 2001, primarily due to lower operating income as a result of consumer
confidence issues regarding the European beef supply and weak operating results
in APMEA and Latin America previously discussed. In general, returns benefited
from the Company's continued focus on more efficient capital deployment. This
included a more prudent site selection process, leasing a higher proportion of
new sites, the U.S. building program and the use of free cash flow for share
repurchases. In 2000, return on average common equity benefited from an increase
in the average amount of common equity put options outstanding compared with
1999, which reduced average common equity.
FINANCINGS AND MARKET RISK
The Company generally borrows on a long-term basis and is exposed to the impact
of interest-rate changes and foreign currency fluctuations. In managing the
impact of these changes, the Company uses interest-rate exchange agreements and
finances in the currencies in which assets are denominated. All derivatives used
to minimize these risks were recorded at fair value in the Company's
Consolidated balance sheet at December 31, 2001, and totaled $213 million in
miscellaneous other assets and $134 million in other long-term liabilities. See
summary of significant accounting policies related to financial instruments on
pages 27-28 for additional information regarding their use and the impact of
SFAS No.133 regarding derivatives.
The Company uses major capital markets, bank financings and derivatives to
meet its financing requirements and reduce interest expense. For example,
foreign currency exchange agreements in conjunction with borrowings help obtain
desired currencies at attractive rates and maturities. Interest-rate exchange
agreements effectively convert fixed-rate to floating-rate debt, or vice versa.
The Company also manages the level of fixed-rate debt to take advantage of
changes in interest rates.
The Company uses foreign currency debt and derivatives to hedge certain
foreign currency royalties, intercompany financings and long-term investments in
foreign subsidiaries and affiliates. This reduces the impact of fluctuating
foreign currencies on net income and shareholders' equity. Total foreign
currency denominated debt, including the effects of foreign currency exchange
agreements, was $5.0 billion and $5.1 billion at year-end 2001 and 2000,
respectively.
18 McDonald's Corporation
The Company does not have significant exposure to any individual
counterparty and has master agreements that contain netting arrangements.
Certain of these agreements also require each party to post collateral if credit
ratings fall below, or aggregate exposures exceed, certain contractual limits.
At December 31, 2001, neither the Company nor its counterparties was required to
post collateral for any obligation.
[Download Table]
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Debt highlights/(1)/
--------------------------------------------------------------------------------
2001 2000 1999
================================================================================
Fixed-rate debt as a percent of total debt 45% 58% 70%
Weighted-average annual interest rate
of total debt 5.4 5.8 5.9
Foreign currency-denominated debt as a
percent of total debt 57 60 76
Total debt as a percent of total capitalization
(total debt and total shareholders' equity) 48 48 43
================================================================================
(1) All percentages are as of December 31, except for the weighted-average
annual interest rate, which is for the year.
Moody's, Standard & Poor's and Fitch currently rate McDonald's debt Aa3, A+
and AA, respectively. A strong rating is important to the Company because of its
global development plans. The Company has not experienced, and does not expect
to experience, difficulty in obtaining financing or in refinancing existing
debt. Certain of the Company's debt obligations contain cross-default provisions
and restrictions on Company and subsidiary mortgages and the long-term debt of
certain subsidiaries. There are no provisions in the Company's debt obligations
that would accelerate repayment of debt as a result of a change in credit
ratings.
At year-end 2001, the Company had $1.3 billion available under committed
line of credit agreements (see debt financing note on page 31) as well as $1.2
billion under a U.S. shelf registration and $1.1 billion under a Euro
Medium-Term Notes program for future debt issuance. In early 2002, the Company
issued $450 million of Medium-Term Notes ($150 million at a rate of 4.15% due
2005 and $300 million at a rate of 5.75% due 2012) under the U.S. shelf
registration to pay down commercial paper. At the time of these issuances, the
Company entered into interest-rate exchange agreements to convert fixed-rate
interest payments on the debt to a floating-rate based on LIBOR. Also in early
2002, the Company redeemed $50 million of 6.0% Medium-Term Notes originally due
2008. The notes were redeemed at 100% of principal plus accrued interest.
The Company manages its debt portfolio in response to changes in interest
rates and foreign currency rates by periodically retiring, redeeming and
repurchasing debt, terminating exchange agreements and using derivatives. The
Company does not use derivatives with a level of complexity or with a risk
higher than the exposures to be hedged and does not hold or issue derivatives
for trading purposes. All exchange agreements are over-the-counter instruments.
The Company actively hedges selected currencies to minimize the cash
exposure of foreign currency royalty and other payments received in the U.S. In
addition, where practical, McDonald's restaurants purchase goods and services in
local currencies resulting in natural hedges, and the Company typically finances
in local currencies, creating economic hedges.
The Company's exposure is diversified among a broad basket of currencies.
At year-end 2001 and 2000, assets in hyperinflationary markets were principally
financed in U.S. Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) at year end were as
follows:
--------------------------------------------------------------------------------
Foreign currency exposures
--------------------------------------------------------------------------------
IN MILLIONS OF U.S. DOLLARS 2001 2000
================================================================================
Euro $1,251 $1,185
British Pounds Sterling 786 638
Canadian Dollars 738 763
Australian Dollars 516 329
Brazilian Reais 490 491
================================================================================
The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest-rate analysis assumed
a one percentage point adverse change in interest rates on all financial
instruments but did not consider the effects of the reduced level of economic
activity that could exist in such an environment. The foreign currency rate
analysis assumed that each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all financial instruments; however, the
analysis did not include the potential impact on sales levels or local currency
prices or the effect of fluctuating currencies on the Company's anticipated
foreign currency royalties and other payments received in the U.S. Based on the
results of these analyses of the Company's financial instruments, neither a one
percentage point adverse change in interest rates from 2001 levels nor a 10%
adverse change in foreign currency rates from 2001 levels would materially
affect the Company's results of operations, cash flows or the fair value of its
financial instruments.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in the form of lease
and debt obligations. In addition, the Company has long-term contractual revenue
and cash flow streams that relate to its franchise arrangements. Cash provided
by operations (including cash provided by these franchise arrangements) along
with our borrowing capacity and other sources of cash will be used to satisfy
the obligations. The following table summarizes the Company's contractual
obligations and their aggregate maturities as well as future minimum contractual
rent payments due to the Company under existing franchise arrangements as of
December 31, 2001 (see discussions of cash flows, financial position and capital
resources in
McDonald's Corporation 19
Management's discussion and analysis as well as the Notes to the consolidated
financial statements for further details):
--------------------------------------------------------------------------------
Contractual cash flows
--------------------------------------------------------------------------------
Outflows Inflows
----------------------------- ----------------------
Operating Debt Minimum rent under
IN MILLIONS leases obligations/(1)/ franchise arrangements
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2002 $ 841 $ 363 $ 1,669
2003 815 796 1,651
2004 779 1,621 1,624
2005 722 1,072 1,576
2006 690 844 1,532
Thereafter 6,069 4,128 13,368
--------------------------------------------------------------------------------
Total $9,916 $8,824 $21,420
================================================================================
(1) The maturities reflect reclassifications of short-term obligations to
long-term obligations of $750 million in 2004 and $500 million in 2007 as
they are supported by long-term line of credit agreements. Debt obligations
do not include $94 million of fair value adjustments recorded as a result
of SFAS No.133, Accounting for Derivative Instruments and Hedging
Activities.
In addition to long-term obligations, the Company had certain other
commitments at December 31, 2001. In connection with its share repurchase
program, the Company had 12.2 million common equity put options outstanding at
December 31, 2001, with a total exercise price of $350 million, of which 3.0
million were exercised in February 2002 at a cost of $87 million. The remaining
options expire at various dates through November 2002 with exercise prices
between $26.37 and $30.23. In addition, the Company entered into equity forward
contracts, in connection with its share repurchase program, totaling $151
million for 5.5 million shares that settled in March 2002. The Company also
guaranteed certain affiliate and other loans totaling $148 million.
Other matters
================================================================================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. On an ongoing basis,
the Company evaluates its estimates and judgments based on historical experience
and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
The Company annually reviews its financial reporting and disclosure
practices and accounting policies to ensure that its financial reporting and
disclosures provide accurate and transparent information relative to the current
economic and business environment. The Company believes that of its significant
accounting policies (see summary of significant accounting policies more fully
described on pages 26-28), the following policies involve a higher degree of
judgment and/or complexity.
Property and equipment
Property and equipment are depreciated or amortized over their useful lives
based on management's estimates of the period over which the assets will
generate revenue. The Company periodically reviews these lives relative to
physical factors, economic factors and industry trends.
Asset impairment
In assessing the recoverability of the Company's fixed assets, goodwill and
other non-current assets, the Company considers changes in economic conditions
and makes assumptions regarding estimated future cash flows and other factors.
If these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges.
Restructuring and litigation accruals
In 2001, the Company recorded a $200 million pretax special charge related to
strategic changes and ongoing restaurant initiatives in the U.S. and certain
international markets. The accrual recorded included estimates pertaining to
employee termination costs and remaining lease obligations for closed
facilities. Although we do not anticipate significant changes, the actual costs
may differ from these estimates.
From time to time, the Company is subject to proceedings, lawsuits and
other claims primarily related to franchisees, suppliers, employees, customers
and competitors. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of accrual required, if any, for these
contingencies is made after careful analysis of each matter. The required
accrual may change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in dealing with
these matters. The Company does not believe that any such matter will have a
material adverse effect on its financial condition or results of operations.
Financial instruments
The Company's derivatives are recorded in the Consolidated balance sheet at fair
value. Fair value is estimated using various pricing models or discounted cash
flow analyses that incorporate quoted market prices. The use of different
pricing models or assumptions could produce different results.
Income taxes
The Company records a valuation allowance to reduce its deferred tax assets if
it is more likely than not that some portion or all of the deferred assets will
not be realized. While the Company has considered future taxable income and
ongoing feasible tax strategies in assessing the need for the valuation
allowance, if these estimates and assumptions change in the future, the Company
may be required to adjust its valuation allowance. This could result in a charge
to, or an increase in, income in the period such determination is made.
20 McDonald's Corporation
Deferred U.S. income taxes have not been recorded for basis differences
totaling $2.7 billion related to investments in certain foreign subsidiaries or
affiliates. The basis differences consist primarily of undistributed earnings
considered permanently invested in the businesses. If management's intentions
change in the future, deferred taxes may need to be provided.
In addition, the Company operates within multiple taxing jurisdictions and
is subject to audit in these jurisdictions. The Company records accruals for the
estimated outcomes of these audits, and the accruals may change in the future
due to new developments in each matter.
NEW ACCOUNTING STANDARDS
Goodwill
In June 2001, the Financial Accounting Standards Board issued SFAS No.141,
Business Combinations, effective for acquisitions initiated on or after July 1,
2001, and No.142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No.141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations. SFAS
No.142 indicates that goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
The Company began applying the new rules on accounting for goodwill and
other intangible assets January 1, 2002. Application of the nonamortization
provisions of SFAS No.142 would have increased 2001 net income by approximately
$30 million ($0.02 per share) and is expected to result in a similar increase in
2002. The Company is performing the first of required goodwill impairment tests
as of January 1, 2002, and expects to record a non-cash charge of about $100
million after tax ($0.08 per share), primarily in certain Latin American
markets. The impairment charge required to be recognized upon adoption of SFAS
No.142 will be reflected as the cumulative effect of a change in accounting
principle in the first quarter of 2002.
Long-lived assets
In August 2001, the Financial Accounting Standards Board issued SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which provides
additional guidance on the financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company adopted the new rules as of
January 1, 2002, and the adoption will not have a material effect on the
Company's results of operations or financial position.
EFFECTS OF CHANGING PRICES--INFLATION
The Company has demonstrated an ability to manage inflationary cost increases
effectively. This is because of rapid inventory turnover, the ability to adjust
menu prices, cost controls and substantial property holdings--many of which are
at fixed costs and partly financed by debt made less expensive by inflation. In
hyperinflationary markets, menu board prices typically are adjusted to keep pace
with inflation, mitigating the effect on reported results.
EURO CONVERSION
Twelve member countries of the European Union have established fixed conversion
rates between their existing currencies ("legacy currencies") and one common
currency, the Euro. Since January 1, 2002, the new Euro-denominated notes and
coins are in circulation, and legacy currencies have been withdrawn from
circulation. The Company has restaurants located in all member countries, and
the conversion to the Euro has eliminated currency exchange rate risk for
transactions among the member countries, which for the Company primarily
consists of payments to suppliers. In addition, because the Company uses
foreign-denominated debt and derivatives to meet its financing requirements and
to reduce its foreign currency risks, certain of these financial instruments are
denominated in Euro. The Company successfully addressed all issues involved with
converting to the new currency, and the conversion did not 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
regarding future events and operating performance and speak only as of the date
of this report. These forward-looking statements involve a number of risks and
uncertainties. The following are some of the factors that could cause actual
results to differ materially from those expressed in or underlying our
forward-looking statements: the effectiveness of operating initiatives and
advertising and promotional efforts 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; legislation and governmental regulation; and accounting policies and
practices. The foregoing list of important factors is not exclusive.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 7A. Quantitative and qualitative disclosures about market risk
================================================================================
Quantitative and qualitative disclosures about market risk are included in Part
II, Item 7, pages 17-18 of this Form 10-K.
McDonald's Corporation 21
Item 8. Financial statements and supplementary data
================================================================================
[Enlarge/Download Table]
Index to consolidated financial statements
====================================================================================================================================
PAGE REFERENCE
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Consolidated statement of income for each of the three years in the period ended December 31, 2001 22
Consolidated balance sheet at December 31, 2001 and 2000 23
Consolidated statement of cash flows for each of the three years in the period ended December 31, 2001 24
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 2001 25
Notes to consolidated financial statements 26
Quarterly results (unaudited) 35
Management's report 36
Report of independent auditors 36
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22 McDonald's Corporation
Consolidated statement of income
[Enlarge/Download Table]
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IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 2001 2000 1999
===================================================================================================================
Revenues
Sales by Company-operated restaurants $11,040.7 $10,467.0 $ 9,512.5
Revenues from franchised and affiliated restaurants 3,829.3 3,776.0 3,746.8
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Total revenues 14,870.0 14,243.0 13,259.3
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Operating costs and expenses
Food and packaging 3,802.1 3,557.1 3,204.6
Payroll and employee benefits 2,901.2 2,690.2 2,418.3
Occupancy and other operating expenses 2,750.4 2,502.8 2,206.7
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Total Company-operated restaurant expenses 9,453.7 8,750.1 7,829.6
-------------------------------------------------------------------------------------------------------------------
Franchised restaurants-occupancy expenses 800.2 772.3 737.7
Selling, general & administrative expenses 1,661.7 1,587.3 1,477.6
Special charge-global change initiatives 200.0
Other operating (income) expense, net 57.4 (196.4) (105.2)
-------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 12,173.0 10,913.3 9,939.7
-------------------------------------------------------------------------------------------------------------------
Operating income 2,697.0 3,329.7 3,319.6
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Interest expense-net of capitalized interest of $15.2, $16.3 and $14.3 452.4 429.9 396.3
McDonald's Japan IPO gain (137.1)
Nonoperating expense, net 52.0 17.5 39.2
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Income before provision for income taxes 2,329.7 2,882.3 2,884.1
-------------------------------------------------------------------------------------------------------------------
Provision for income taxes 693.1 905.0 936.2
-------------------------------------------------------------------------------------------------------------------
Net income $ 1,636.6 $ 1,977.3 $ 1,947.9
===================================================================================================================
Net income per common share $ 1.27 $ 1.49 $ 1.44
Net income per common share-diluted $ 1.25 $ 1.46 $ 1.39
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Dividends per common share $ .23 $ .22 $ .20
-------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,289.7 1,323.2 1,355.3
Weighted-average shares-diluted 1,309.3 1,356.5 1,404.2
===================================================================================================================
See notes to consolidated financial statements.
McDonald's Corporation 23
[Enlarge/Download Table]
Consolidated balance sheet
=============================================================================================================
IN MILLIONS, EXCEPT PER SHARE DATA December 31, 2001 2000
=============================================================================================================
Assets
Current assets
Cash and equivalents $ 418.1 $ 421.7
Accounts and notes receivable 881.9 796.5
Inventories, at cost, not in excess of market 105.5 99.3
Prepaid expenses and other current assets 413.8 344.9
-------------------------------------------------------------------------------------------------------------
Total current assets 1,819.3 1,662.4
-------------------------------------------------------------------------------------------------------------
Other assets
Investments in and advances to affiliates 990.2 824.2
Goodwill, net 1,419.8 1,278.2
Miscellaneous 1,015.7 871.1
-------------------------------------------------------------------------------------------------------------
Total other assets 3,425.7 2,973.5
-------------------------------------------------------------------------------------------------------------
Property and equipment
Property and equipment, at cost 24,106.0 23,569.0
Accumulated depreciation and amortization (6,816.5) (6,521.4)
-------------------------------------------------------------------------------------------------------------
Net property and equipment 17,289.5 17,047.6
-------------------------------------------------------------------------------------------------------------
Total assets $22,534.5 $21,683.5
=============================================================================================================
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 184.9 $ 275.5
Accounts payable 689.5 684.9
Income taxes 20.4 92.2
Other taxes 180.4 195.5
Accrued interest 170.6 149.9
Other accrued liabilities 824.9 608.4
Current maturities of long-term debt 177.6 354.5
-------------------------------------------------------------------------------------------------------------
Total current liabilities 2,248.3 2,360.9
-------------------------------------------------------------------------------------------------------------
Long-term debt 8,555.5 7,843.9
Other long-term liabilities and minority interests 629.3 489.5
Deferred income taxes 1,112.2 1,084.9
Common equity put options and forward contracts 500.8 699.9
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 shares 16.6 16.6
Additional paid-in capital 1,591.2 1,441.8
Unearned ESOP compensation (106.7) (115.0)
Retained earnings 18,608.3 17,259.4
Accumulated other comprehensive income (1,708.8) (1,287.3)
Common stock in treasury, at cost; 379.9 and 355.7 million shares (8,912.2) (8,111.1)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,488.4 9,204.4
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,534.5 $21,683.5
=============================================================================================================
See notes to consolidated financial statements.
24 McDonald's Corporation
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Consolidated statement of cash flows
============================================================================================================
IN MILLIONS Years ended December 31, 2001 2000 1999
============================================================================================================
Operating activities
Net income $ 1,636.6 $ 1,977.3 $ 1,947.9
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 1,086.3 1,010.7 956.3
Deferred income taxes (87.6) 60.5 52.9
Changes in operating working capital items
Accounts receivable (104.7) (67.2) (81.9)
Inventories, prepaid expenses and other current assets (62.9) (29.6) (47.7)
Accounts payable 10.2 89.7 (23.9)
Taxes and other liabilities 160.0 (45.8) 270.4
Other 50.4 (244.1) (65.1)
------------------------------------------------------------------------------------------------------------
Cash provided by operations 2,688.3 2,751.5 3,008.9
------------------------------------------------------------------------------------------------------------
Investing activities
Property and equipment expenditures (1,906.2) (1,945.1) (1,867.8)
Purchases of restaurant businesses (331.6) (425.5) (340.7)
Sales of restaurant businesses and property 375.9 302.8 262.4
Other (206.3) (144.8) (315.7)
------------------------------------------------------------------------------------------------------------
Cash used for investing activities (2,068.2) (2,212.6) (2,261.8)
------------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (248.0) 59.1 116.7
Long-term financing issuances 1,694.7 2,381.3 902.5
Long-term financing repayments (919.4) (761.9) (682.8)
Treasury stock purchases (1,068.1) (2,023.4) (891.5)
Common stock dividends (287.7) (280.7) (264.7)
Other 204.8 88.9 193.0
------------------------------------------------------------------------------------------------------------
Cash used for financing activities (623.7) (536.7) (626.8)
------------------------------------------------------------------------------------------------------------
Cash and equivalents increase (decrease) (3.6) 2.2 120.3
------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 421.7 419.5 299.2
------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 418.1 $ 421.7 $ 419.5
============================================================================================================
Supplemental cash flow disclosures
Interest paid $ 446.9 $ 469.7 $ 411.5
Income taxes paid 773.8 854.2 642.2
============================================================================================================
See notes to consolidated financial statements.
McDonald's Corporation 25
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Consolidated statement of shareholders' equity
===================================================================================================================================
Accumulated other
comprehensive income
--------------------
Common Stock Addi- Unearned Deferred Foreign Common stock Total
issued tional ESOP hedging currency in treasury share-
IN MILLIONS, ------------- paid-in compen- Retained adjust- trans- ----------------- holders'
EXCEPT PER SHARE DATA Shares Amount capital sation earnings ment lation Shares Amount equity
===================================================================================================================================
Balance at December 31,1998 1,660.6 $16.6 $ 989.2 $ (148.7) $13,879.6 $ -- $ (522.5) (304.4) $(4,749.5) $9,464.7
-----------------------------------------------------------------------------------------------------------------------------------
Net income 1,947.9 1,947.9
-----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $53.5) (364.3) (364.3)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,583.6
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Common stock cash dividends
($.20 per share) (264.7) (264.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 15.8 15.8
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases (24.2) (932.7) (932.7)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put option
issuances and expirations, net (665.9) (665.9)
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $185.3) 299.1 (0.4) 18.8 139.6 438.3
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,660.6 16.6 1,288.3 (133.3) 15,562.8 -- (886.8) (309.8) (6,208.5) 9,639.1
===================================================================================================================================
Net income 1,977.3 1,977.3
-----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $65.1) (400.5) (400.5)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,576.8
-----------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.22 per share) (280.7) (280.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 20.1 20.1
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases (56.7) (2,002.2) (2,002.2)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put option
issuances and expirations, net 25.5 25.5
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $80.3) 153.5 (1.8) 10.8 74.1 225.8
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,660.6 16.6 1,441.8 (115.0) 17,259.4 -- (1,287.3) (355.7) (8,111.1) 9,204.4
===================================================================================================================================
Net income 1,636.6 1,636.6
-----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $65.7) (412.2) (412.2)
-----------------------------------------------------------------------------------------------------------------------------------
SFAS No. 133 transition adjustment
(including tax benefits of $9.2) (17.0) (17.0)
-----------------------------------------------------------------------------------------------------------------------------------
Fair value adjustments-cash flow
hedges (including taxes of $1.4) 7.7 7.7
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,215.1
-----------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.23 per share) (287.7) (287.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 8.0 8.0
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases (36.1) (1,090.2) (1,090.2)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put option
issuances and expirations, net
and forward contracts 199.2 199.2
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $70.0) 149.4 0.3 11.9 89.9 239.6
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,660.6 $16.6 $1,591.2 $ (106.7) $18,608.3 $ (9.3) $(1,699.5) (379.9) $(8,912.2) $9,488.4
===================================================================================================================================
See notes to consolidated financial statements.
26 McDonald's Corporation
Notes to consolidated financial statements
================================================================================
Summary of significant accounting policies
================================================================================
NATURE OF BUSINESS
The Company operates in the food service industry and primarily operates
quick-service restaurant businesses under the McDonald's brand. To capture
additional meal occasions, the Company operates other restaurant concepts under
its Partner Brands: Aroma Cafe, Boston Market, Chipotle and Donatos Pizzeria. In
addition, the Company has a minority ownership in Pret A Manger. In fourth
quarter 2001, the Company approved a plan to dispose of its Aroma Cafe business
in the U.K. and expects to complete the sale in the first half of 2002.
All restaurants are operated by the Company or, under the terms of
franchise arrangements, by franchisees who are independent entrepreneurs, or by
affiliates operating under joint-venture agreements between the Company and
local business people.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Substantially all investments in affiliates owned 50% or less
are accounted for by the equity method.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales by Company-operated restaurants are recognized on a cash basis. Revenues
from franchised and affiliated restaurants include continuing rent and service
fees as well as initial fees. Continuing fees are recognized in the period
earned. Initial fees are recognized upon opening of a restaurant, which is when
the Company has performed substantially all initial services required by the
franchise arrangement.
FOREIGN CURRENCY TRANSLATION
The functional currency of substantially all operations outside the U.S. is the
respective local currency, except for a small number of countries with
hyperinflationary economies, where the functional currency is the U.S. Dollar.
ADVERTISING COSTS
Production costs for radio and television advertising, which are primarily in
the U.S., are expensed when the commercials are initially aired. Advertising
expenses included in costs of Company-operated restaurants and in selling,
general & administrative expenses were (in millions): 2001-$600.9; 2000-$595.3;
1999-$522.9.
STOCK-BASED COMPENSATION
The Company accounts for stock options as prescribed by Accounting Principles
Board Opinion No.25 and includes pro forma information in the stock options
note, as provided by Statement of Financial Accounting Standards (SFAS) No.123,
Accounting for Stock-Based Compensation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and amortization
provided using the straight-line method over the following estimated useful
lives: buildings-up to 40 years; leasehold improvements-the lesser of useful
lives of assets or lease terms including option periods; and equipment-three to
12 years.
GOODWILL
Goodwill represents the excess of cost over the value of net tangible assets of
acquired restaurant businesses and, for acquisitions prior to July 1, 2001, is
amortized using the straight-line method over an average life of about 30 years.
In June 2001, the Financial Accounting Standards Board issued SFAS No.141,
Business Combinations, effective for acquisitions initiated on or after July 1,
2001, and No.142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No.141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations. SFAS
No.142 indicates that goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
The Company began applying the new rules on accounting for goodwill and
other intangible assets January 1, 2002. Application of the nonamortization
provisions of SFAS No.142 would have increased 2001 net income by approximately
$30 million ($0.02 per share) and is expected to result in a similar increase in
2002.
In the first quarter of 2002, the Company is performing the first of
required goodwill impairment tests as of January 1, 2002. The impairment test
compares the fair value of a reporting unit, generally based on discounted cash
flows, with its carrying amount including goodwill (we have defined reporting
units as each individual country for McDonald's restaurant business and each
individual Partner Brand). If the carrying amount of a reporting unit exceeds
its fair value, an impairment loss is measured as the difference between the
fair value of reporting unit goodwill and the carrying amount of the goodwill.
Based on the Company's preliminary analysis, the Company expects to record
a non-cash goodwill impairment charge of about $100 million after tax ($0.08 per
share), primarily in certain Latin American markets. Any impairment
McDonald's Corporation 27
that is required to be recognized when adopting SFAS No. 142 will be reflected
as the cumulative effect of a change in accounting principle in the first
quarter of 2002.
LONG-LIVED ASSETS
In accordance with SFAS No.121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
reviewing McDonald's restaurant assets for potential impairment, assets are
grouped together at a television market level in the U.S. and at a country level
for each of the international markets. For Partner Brands, assets are grouped by
each individual brand. If an indicator of impairment (e.g., negative operating
cash flows for the most recent calendar year) exists for any grouping of assets,
an estimate of undiscounted future cash flows produced by each restaurant within
the asset grouping is compared to its carrying value. If a restaurant is
determined to be impaired, the loss is measured by the excess of the carrying
amount of the restaurant over its fair value as determined by an estimate of
discounted future cash flows.
Losses on assets held for disposal are recognized when management has
approved and committed to a plan to dispose of the assets, and the assets are
available for disposal. Generally, such losses relate to either restaurants that
have closed and ceased operations or businesses that are available for sale.
In August 2001, the Financial Accounting Standards Board issued SFAS
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
provides additional guidance on the financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company will adopt the new
rules as of January 1, 2002, and the adoption will not have a material effect on
the Company's results of operations or financial position.
FINANCIAL INSTRUMENTS
The Company generally borrows on a long-term basis and is exposed to the impact
of interest-rate changes and foreign currency fluctuations. In managing the
impact of these changes, the Company uses interest-rate exchange agreements and
finances in the currencies in which assets are denominated. The Company uses
foreign currency denominated debt and derivatives to hedge foreign currency
royalties, intercompany financings and long-term investments in foreign
subsidiaries and affiliates. This reduces the impact of fluctuating foreign
currencies on net income and shareholders' equity. The Company does not use
derivatives with a level of complexity or with a risk higher than the exposures
to be hedged and does not hold or issue derivatives for trading purposes.
The counterparties to these agreements consist of a diverse group of
financial institutions. The Company continually monitors its positions and the
credit ratings of its counterparties, and adjusts positions as appropriate. The
Company did not have significant exposure to any individual counterparty at
December 31, 2001 and has master agreements that contain netting arrangements.
Certain of these agreements also require each party to post collateral if credit
ratings fall below, or aggregate exposures exceed, certain contractual limits.
At December 31, 2001, neither the Company nor its counterparties was required to
post collateral for any obligation.
Effective January 1, 2001, the Company adopted SFAS No.133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS No.133 requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. SFAS No.133 also requires companies to designate
all derivatives that qualify as hedging instruments as either fair value hedges,
cash flow hedges or hedges of net investments in foreign operations. This
designation is based upon the exposure being hedged.
The Company recorded a transition adjustment at January 1, 2001 related to
cash flow hedges, which reduced accumulated other comprehensive income in
shareholders' equity by $17.0 million, after tax. This adjustment was primarily
related to interest-rate exchange agreements used to lock in long-term borrowing
rates. The cumulative effect of adopting SFAS No.133 at January 1, 2001 was not
material to the Company's statement of income.
All derivatives, primarily interest-rate exchange agreements and foreign
currency exchange agreements, were classified in the Company's Consolidated
balance sheet at December 31, 2001 as either miscellaneous other assets or other
long-term liabilities (excluding accrued interest) and totaled $212.6 million
and $134.2 million, respectively.
Fair value hedges
The Company enters into fair value hedges to reduce the exposure to changes in
the fair value of an asset or a liability, or an identified portion thereof,
which is attributable to a particular risk. The types of fair value hedges the
Company enters into include: (1) interest-rate exchange agreements to convert a
portion of its fixed-rate debt to floating-rate debt and (2) foreign currency
exchange agreements for the exchange of various currencies and interest rates.
The foreign currency exchange agreements are entered into to hedge the currency
risk associated with debt and intercompany loans denominated in foreign
currencies, and essentially result in floating-rate assets or liabilities
denominated in U.S. Dollars or appropriate functional currencies.
For fair value hedges, the gains or losses on derivatives as well as the
offsetting gains or losses on the related hedged items are recognized in current
earnings. During the year ended December 31, 2001, there was no significant
impact to the Company's earnings related to the ineffective portion of fair
value hedging instruments.
Cash flow hedges
The Company enters into cash flow hedges to mitigate the exposure to variability
in expected future cash flows attributable to a particular risk. The types of
cash flow hedges
28 McDonald's Corporation
the Company enters into include: (1) interest-rate exchange agreements that
effectively convert a portion of floating-rate debt to fixed-rate debt and are
designed to reduce the impact of interest-rate changes on future interest
expense, (2) forward foreign exchange contracts and foreign currency options
that are designed to protect against the reduction in value of forecasted
foreign currency cash flows such as royalties and other payments denominated in
foreign currencies, and (3) foreign currency exchange agreements for the
exchange of various currencies and interest rates. The foreign currency exchange
agreements are entered into to hedge the currency risk associated with debt and
intercompany loans denominated in foreign currencies, and essentially result in
fixed-rate assets or liabilities denominated in U.S. Dollars or appropriate
functional currencies.
For cash flow hedges, the effective portion of the gains or losses on
derivatives is reported in the deferred hedging adjustment component of
accumulated other comprehensive income in shareholders' equity and reclassified
into earnings in the same period or periods in which the hedged transaction
affects earnings. The remaining gain or loss in excess of the cumulative change
in the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change. During the year
ended December 31, 2001, there was no significant impact to the Company's
earnings related to the ineffective portion of cash flow hedging instruments.
Subsequent to the transition adjustment recorded at January 1, 2001, the
Company recorded increases to the deferred hedging adjustment component of
accumulated other comprehensive income in shareholders' equity of $7.7 million,
after tax, related to cash flow hedges during the year ended December 31, 2001.
Based on interest rates and foreign currency exchange rates at December 31,
2001, no significant amount of deferred hedging adjustments, after tax, included
in accumulated other comprehensive income in shareholders' equity at December
31, 2001, will be recognized in earnings in 2002 as the underlying hedged
transactions are realized. The maximum maturity date of any cash flow hedge of
forecasted transactions at December 31, 2001 was 15 months, excluding
instruments hedging forecasted payments of variable interest on existing
financial instruments that have various maturity dates through 2011.
Hedges of net investments in foreign operations
The Company uses forward foreign exchange contracts and foreign currency
denominated debt to hedge its investments in certain foreign subsidiaries and
affiliates. Realized and unrealized translation adjustments from these hedges
are included in shareholders' equity in the foreign currency translation
component of accumulated other comprehensive income and offset translation
adjustments on the underlying net assets of foreign subsidiaries and affiliates,
which also are recorded in accumulated other comprehensive income.
During the year ended December 31, 2001, the Company recorded increases in
translation adjustments in accumulated other comprehensive income of $168.5
million, after tax, related primarily to foreign currency denominated debt
designated as hedges of net investments.
COMMON EQUITY PUT OPTIONS AND FORWARD CONTRACTS
During 2001, 2000 and 1999, the Company sold 12.2 million, 16.8 million and 27.0
million common equity put options, respectively, in connection with its share
repurchase program. Premiums received are recorded in shareholders' equity as a
reduction of the cost of treasury stock purchased and were $31.8 million in
2001, $56.0 million in 2000 and $97.5 million in 1999. At December 31, 2001,
12.2 million common equity put options were outstanding. The options expire at
various dates through November 2002 at exercise prices between $26.37 and
$30.23. At December 31, 2001, the $350.0 million total exercise price of these
outstanding options was classified in common equity put options and forward
contracts in the Consolidated balance sheet, and the related offset was recorded
in common stock in treasury, net of the premiums received.
During 2001, the Company also entered into equity forward contracts in
connection with its share repurchase program. The forward contracts, for 5.5
million shares, settle in March 2002 and have an average purchase price of
$27.41. At December 31, 2001, the $150.8 million total purchase price of these
outstanding forward contracts was classified in common equity put options and
forward contracts, and the related offset was recorded in common stock in
treasury.
SALES OF STOCK BY SUBSIDIARIES AND AFFILIATES
As permitted by Staff Accounting Bulletin No. 51 issued by the Securities and
Exchange Commission, when a subsidiary or affiliate sells unissued shares in a
public offering, the Company records an adjustment to reflect an increase or
decrease in the carrying value of its investment and a resulting gain or loss in
nonoperating (income) expense.
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. The dilutive effect of stock options
was (in millions of shares): 2001-19.6; 2000-33.3; 1999-48.9. Stock options that
were not included in dilutive weighted-average shares because they would have
been antidilutive were (in millions of shares): 2001-83.1; 2000-49.2; 1999-9.9.
The dilutive effect of common equity put options and forward contracts was not
significant.
STATEMENT OF CASH FLOWS
The Company considers short-term, highly liquid investments to be cash
equivalents. The impact of fluctuating foreign currencies on cash and
equivalents was not material.
McDonald's Corporation 29
Other operating (income) expense, net
[Download Table]
===============================================================================
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IN MILLIONS 2001 2000 1999
===============================================================================
Gains on sales of restaurant businesses $(112.4) $ (86.9) $ (75.0)
Equity in earnings of unconsolidated affiliates (61.5) (120.9) (138.3)
Charges for underperforming restaurant closings 91.2
Asset impairment charges 44.0
Other, net 96.1 11.4 108.1
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Other operating (income) expense, net $ 57.4 $(196.4) $(105.2)
===============================================================================
CHARGES FOR UNDERPERFORMING RESTAURANT CLOSINGS
In third and fourth quarters 2001, the Company recorded $91.2 million of pretax
charges ($68.8 million after tax) related to the closing of 163 underperforming
restaurants in international markets. The charges primarily consist of asset
write-offs and lease termination payments.
ASSET IMPAIRMENT CHARGES
In second quarter 2001, the Company recorded a $24.0 million asset impairment
charge (pre and after tax) due to an assessment of the ongoing impact of
significant currency devaluation on McDonald's cash flows in Turkey.
In fourth quarter 2001, the Company recorded a pretax charge of $20.0
million ($13.6 million after tax) related to the anticipated disposal of Aroma
Cafe in the U.K.
OTHER, NET
Other, net includes miscellaneous operating income and expense items including
net gains or losses from property dispositions, provisions for bad debts and
other transactions related to franchising and the food service business.
In third quarter 2001, the Company recorded a pretax charge of $17.4 million
($12.0 million after tax) primarily related to the write-off of certain
technology costs in the Corporate segment.
In fourth quarter 2001, the Company recorded a pretax charge of $25.0
million ($17.0 million after tax) in the U.S. primarily related to unrecoverable
costs incurred in connection with the theft of winning game pieces from the
Company's Monopoly and certain other promotional games over an extended period
of time, and the related termination of the supplier of the game pieces.
Fifty-one people (none of whom were Company employees) were subsequently
indicted on conspiracy and mail fraud charges.
In 1999, the Company wrote off $24.0 million ($16.3 million after tax) of
software not used in the business.
Special charge-global change initiatives
================================================================================
In fourth quarter 2001, the Company recorded a $200.0 million pretax special
charge ($136.1 million after tax) related to strategic changes and ongoing
restaurant initiatives in the U.S. and certain international markets. The
changes and initiatives are designed to improve the customer experience and grow
McDonald's global business. The changes in the U.S. included streamlining
operations by reducing the number of regions and divisions, enabling the Company
to combine staff functions and improve efficiency. In addition, the U.S.
business introduced a variety of initiatives designed to improve the restaurant
experience including accelerated operations training, restaurant simplification,
incentives for outstanding restaurant operations and an enhanced national
restaurant evaluation system.
In connection with these initiatives, the Company eliminated approximately
850 positions, consisting of 700 positions in the U.S., primarily in the
divisions and regions, and 150 positions in international markets.
The special charge consisted of $114.4 million of severance and other
employee-related costs; $68.8 million of lease cancellation and other costs
related to the closing of region and division facilities; and $16.8 million of
other cash costs, primarily consisting of payments made to facilitate a timely
and smooth change of ownership from franchisees who have had a history of
financial difficulty and consequently were unable to deliver the level of
operational excellence needed to succeed in the future.
Of the original $200.0 million pretax special charge, the remaining accrual
of approximately $126.0 million at year-end 2001 primarily related to employee
severance and lease payments for facilities that have been closed and was
included in other accrued liabilities in the Consolidated balance sheet.
Employee severance is paid in installments over a period of up to one year after
termination, and the remaining lease payments for facilities that have been
closed will be paid through 2010. No significant adjustments have been made to
the original plan approved by management.
McDonald's Japan initial public offering (IPO) gain
================================================================================
In third quarter 2001, McDonald's Japan, the Company's largest market in the
Asia/Pacific, Middle East and Africa segment, completed an IPO of 12 million
shares at an offering price of 4,300 Yen per share ($34.77 per share). The
Company owns 50% of McDonald's Japan while the Company's partner Den Fujita and
his family now own approximately 26% and continue to be involved in the
business. The Company recorded a $137.1 million gain (pre and after tax) in
nonoperating income to reflect an increase in the carrying value of its
investment as a result of the cash proceeds from the IPO received by McDonald's
Japan.
Franchise arrangements
================================================================================
Individual franchise arrangements generally include a lease and a license and
provide for payment of initial fees as well as continuing rent and service fees
to the Company based upon a percent of sales, with minimum rent payments.
McDonald's franchisees are granted the right to operate a restaurant using the
McDonald's system and, in certain cases, the use of a restaurant facility,
generally for a period of 20 years. Franchisees pay related occupancy costs
including property taxes, insurance and maintenance. Franchisees in the U.S.
generally have the option to own
30 McDonald's Corporation
new restaurant buildings, while leasing the land from McDonald's. In addition,
franchisees outside the U.S. generally pay a refundable, noninterest-bearing
security deposit. Foreign affiliates pay a royalty to the Company based upon a
percent of sales.
The results of operations of restaurant businesses purchased and sold in
transactions with franchisees, affiliates and others were not material to the
consolidated financial statements for periods prior to purchase and sale.
Revenues from franchised and affiliated restaurants consisted of:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
Minimum rents $ 1,477.9 $ 1,465.3 $ 1,473.8
Percent rent and service fees 2,290.2 2,247.0 2,208.8
Initial fees 61.2 63.7 64.2
--------------------------------------------------------------------------------
Revenues from franchised
and affiliated restaurants $ 3,829.3 $ 3,776.0 $ 3,746.8
================================================================================
Future minimum rent payments due to the Company under existing franchise
arrangements are:
--------------------------------------------------------------------------------
Owned Leased
IN MILLIONS sites sites Total
================================================================================
2002 $ 948.7 $ 707.5 $ 1,656.2
2003 935.9 701.4 1,637.3
2004 920.3 689.3 1,609.6
2005 895.7 666.7 1,562.4
2006 870.8 647.2 1,518.0
Thereafter 7,384.0 5,771.9 13,155.9
--------------------------------------------------------------------------------
Total minimum payments $11,955.4 $9,184.0 $21,139.4
================================================================================
At December 31, 2001, net property and equipment under franchise
arrangements totaled $9.0 billion (including land of $2.7 billion) after
deducting accumulated depreciation and amortization of $3.4 billion.
Income taxes
================================================================================
Income before provision for income taxes, classified by source of income, was as
follows:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
U.S. $ 958.2 $1,280.6 $1,222.2
Outside the U.S. 1,371.5 1,601.7 1,661.9
--------------------------------------------------------------------------------
Income before provision for
income taxes $2,329.7 $2,882.3 $2,884.1
================================================================================
The provision for income taxes, classified by the timing and location of
payment, was as follows:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
U.S. federal $ 357.3 $ 361.1 $ 347.4
U.S. state 59.7 77.0 68.9
Outside the U.S. 363.7 406.4 467.0
--------------------------------------------------------------------------------
Current tax provision 780.7 844.5 883.3
--------------------------------------------------------------------------------
U.S. federal 57.7 75.2 31.3
U.S. state 4.3 9.5 12.3
Outside the U.S. (149.6) (24.2) 9.3
--------------------------------------------------------------------------------
Deferred tax provision/(1)/ (87.6) 60.5 52.9
--------------------------------------------------------------------------------
Provision for income taxes $ 693.1 $ 905.0 $ 936.2
================================================================================
(1) Includes the one-time benefit of tax law changes in certain international
markets: 2001-$(147.3) million; amounts in 2000 and 1999 were not
significant.
Net deferred tax liabilities consisted of:
--------------------------------------------------------------------------------
IN MILLIONS December 31, 2001 2000
================================================================================
Property and equipment basis differences $ 1,304.4 $ 1,202.6
Other 429.9 353.3
--------------------------------------------------------------------------------
Total deferred tax liabilities 1,734.3 1,555.9
--------------------------------------------------------------------------------
Deferred tax assets before valuation allowance/(1)/ (899.9) (646.9)
Valuation allowance 180.1 124.0
--------------------------------------------------------------------------------
Net deferred tax liabilities/(2)/ $ 1,014.5 $ 1,033.0
================================================================================
(1) Includes tax effects of loss carryforwards (in millions): 2001-$166.0;
2000-$129.4, and foreign tax credit carryforwards: 2001-$21.6; 2000-$41.2.
(2) Net of current tax assets included in prepaid expenses and other current
assets in the Consolidated balance sheet (in millions): 2001-$97.7;
2000-$51.9.
The statutory U.S. federal income tax rate reconciled to the effective
income tax rates as follows:
--------------------------------------------------------------------------------
2001 2000 1999
================================================================================
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.8 1.9 1.8
Benefits and taxes related to
foreign operations/(1)/ (7.8) (4.8) (4.4)
Other, net .8 (.7) .1
--------------------------------------------------------------------------------
Effective income tax rates 29.8% 31.4% 32.5%
================================================================================
(1) Includes the one-time benefit of tax law changes.
Deferred U.S. income taxes have not been recorded for basis differences
related to investments in certain foreign subsidiaries and affiliates. These
basis differences were approximately $2.7 billion at December 31, 2001, and
consisted primarily of undistributed earnings considered permanently invested in
the businesses. Determination of the deferred income tax liability on these
unremitted earnings is not practicable because such liability, if any, is
dependent on circumstances existing if and when remittance occurs.
Segment and geographic information
================================================================================
The Company operates in the food service industry. Substantially all revenues
result from the sale of menu products at restaurants operated by the Company,
franchisees or affiliates. All intercompany revenues and expenses are eliminated
in computing revenues and operating income. Operating income includes the
Company's share of operating results of affiliates after interest expense and
income taxes, except for U.S. affiliates, which are reported before income
taxes. Royalties and other payments received from subsidiaries outside the U.S.
were (in millions): 2001-$607.7; 2000-$603.6; 1999-$568.3.
Segment information reflects the Company's current management structure.
The new APMEA segment includes results for McDonald's restaurant operations in
Asia/Pacific, the Middle East and Africa. The Partner Brands segment includes
results for Aroma Cafe, Boston Market, Chipotle, Donatos and Pret A Manger. In
addition, U.S. and Corporate selling, general & administrative
McDonald's Corporation 31
expenses have been restated to reflect a realignment of certain home office
departments' responsibilities.
Corporate general & administrative expenses are included in the corporate
segment of operating income and consist of home office support costs in areas
such as facilities, finance, human resources, information technology, legal,
supply chain management and training. Corporate assets include corporate cash
and equivalents, asset portions of financing instruments, home office facilities
and deferred tax assets.
[Download Table]
-----------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
===================================================================================
U.S. $ 5,395.6 $ 5,259.1 $ 5,093.0
Europe 4,751.8 4,753.9 4,924.9
APMEA 2,203.3 2,101.8 1,928.8
Latin America 971.3 949.3 680.3
Canada 608.1 615.1 575.6
Partner Brands 939.9 563.8 56.7
-----------------------------------------------------------------------------------
Total revenues $14,870.0 $14,243.0 $13,259.3
===================================================================================
U.S. $ 1,622.5 $ 1,795.7 $ 1,678.6
Europe 1,063.2 1,180.1 1,256.5
APMEA 325.0 451.2 433.5
Latin America 10.9 102.3 133.0
Canada 123.7 126.3 113.3
Partner Brands (66.5) (41.5) (7.5)
Corporate (381.8) (284.4) (287.8)
-----------------------------------------------------------------------------------
Total operating income $ 2,697.0/(1)/ $ 3,329.7 $ 3,319.6
===================================================================================
U.S. $ 8,213.7 $ 7,798.1 $ 7,607.4
Europe 7,139.1 7,083.7 6,966.8
APMEA 3,144.5 2,983.4 3,030.5
Latin America 1,898.3 1,855.6 1,477.5
Canada 574.2 552.0 573.6
Partner Brands 637.1 450.7 203.2
Corporate 927.6 960.0 1,124.2
-----------------------------------------------------------------------------------
Total assets $22,534.5 $21,683.5 $20,983.2
===================================================================================
U.S. $ 545.9 $ 468.6 $ 426.4
Europe 635.8 797.6 881.8
APMEA 275.7 253.5 221.3
Latin America 197.5 245.7 213.2
Canada 80.4 52.5 63.0
Partner Brands 153.3 79.6 16.4
Corporate 17.6 47.6 45.7
-----------------------------------------------------------------------------------
Total capital expenditures $ 1,906.2 $ 1,945.1 $ 1,867.8
===================================================================================
U.S. $ 449.9 $ 417.6 $ 399.7
Europe 313.7 296.5 305.2
APMEA 133.2 129.8 123.5
Latin America 79.3 69.4 45.5
Canada 32.9 34.9 35.3
Partner Brands 36.8 16.6 2.3
Corporate 40.5 45.9 44.8
-----------------------------------------------------------------------------------
Total depreciation and amortization $ 1,086.3 $ 1,010.7 $ 956.3
===================================================================================
(1) Includes $377.6 million of pretax special charges (U.S.-$181.0;
Europe-$45.8; APMEA-$41.5; Latin America-$40.4; Canada-$9.8; Partner
Brands-$24.9 and Corporate-$34.2) primarily related to the U.S. business
reorganization and other global change initiatives, the closing of 163
underperforming restaurants in international markets and asset impairment
charges. See other operating (income) expense, net and special
charge-global change initiatives notes for further discussion.
Total long-lived assets, primarily property and equipment and goodwill,
were (in millions)--Consolidated: 2001-$20,355.3; 2000-$19,798.3;
1999-$19,082.8. U.S. based: 2001-$8,670.4; 2000-$8,373.2; 1999-$7,984.9.
Leasing arrangements
================================================================================
At December 31, 2001, the Company was lessee at 6,866 restaurant locations
through ground leases (the Company leases the land and the Company or franchisee
owns the building) and at 7,089 restaurant locations through improved leases
(the Company leases land and buildings). Lease terms for most restaurants are
generally for 20 to 25 years and, in many cases, provide for rent escalations
and renewal options, with certain leases providing purchase options. For most
locations, the Company is obligated for the related occupancy costs including
property taxes, insurance and maintenance. In addition, the Company is lessee
under noncancelable leases covering offices and vehicles.
Future minimum payments required under existing operating leases with
initial terms of one year or more are:
--------------------------------------------------------------------------------
IN MILLIONS Restaurant Other Total
================================================================================
2002 $ 772.3 $ 69.1 $ 841.4
2003 756.8 57.7 814.5
2004 731.1 48.2 779.3
2005 681.1 41.1 722.2
2006 653.5 36.4 689.9
Thereafter 5,901.6 166.8 6,068.4
--------------------------------------------------------------------------------
Total minimum payments $9,496.4 $419.3 $9,915.7
================================================================================
Rent expense was (in millions): 2001-$958.6; 2000-$886.4; 1999-$796.3.
These amounts included percent rents in excess of minimum rents (in millions):
2001-$119.6; 2000-$133.0; 1999-$117.1.
Debt financing
================================================================================
LINE OF CREDIT AGREEMENTS
At December 31, 2001, the Company had several line of credit agreements with
various banks totaling $1.3 billion, all of which remained unused at year-end
2001. Subsequent to year end, the Company renegotiated these line of credit
agreements as follows: a $750.0 million line expiring in 2003 with a term of 364
days and fees of .045% per annum on the total commitment, with a feature that
allows the Company to convert the borrowings to a one-year term loan at any time
prior to expiration; a $500.0 million line expiring in February 2007 with fees
of .065% per annum on the total commitment; and a $25.0 million line expiring in
2003 with a term of 364 days and fees of .07% per annum on the total commitment.
Borrowings under the agreements bear interest at one of several specified
floating rates selected by the Company at the time of borrowing. In addition,
certain subsidiaries outside the U.S. had unused lines of credit totaling $785.3
million at December 31, 2001; these were principally short term and denominated
in various currencies at local market rates of interest.
32 McDonald's Corporation
The weighted-average interest rate of short-term borrowings, consisting of U.S.
Dollar and Euro commercial paper and foreign currency bank line borrowings, was
3.4% at December 31, 2001 and 6.9% at December 31, 2000.
FAIR VALUES
At December 31, 2001, the fair value of the Company's debt and notes payable
obligations was estimated at $9.1 billion, compared to a carrying amount of $8.9
billion. This fair value was estimated using various pricing models or
discounted cash flow analyses that incorporated quoted market prices. The
Company has no current plans to retire a significant amount of its debt prior to
maturity.
The carrying amounts for both cash and equivalents and notes receivable
approximate fair value. Foreign currency and interest-rate exchange agreements,
foreign currency options and forward foreign exchange contracts were recorded in
the Consolidated balance sheet at fair value estimated using various pricing
models or discounted cash flow analyses that incorporated quoted market prices.
No fair value was estimated for noninterest-bearing security deposits by
franchisees, because these deposits are an integral part of the overall
franchise arrangements. Given the market value of its common stock and its
significant real estate holdings, the Company believes that the fair value of
its total assets was substantially higher than the carrying value at December
31, 2001.
ESOP LOANS AND OTHER GUARANTEES
The Company has guaranteed and included in total debt at December 31, 2001 $26.8
million of Notes issued by the Leveraged Employee Stock Ownership Plan (ESOP)
with payments through 2006. Borrowings related to the ESOP at December 31, 2001,
which include $89.1 million of loans from the Company to the ESOP and the $26.8
million of Notes guaranteed by the Company, are reflected as long-term debt with
a corresponding reduction of shareholders' equity (unearned ESOP compensation).
The ESOP is repaying the loans and interest through 2018 using Company
contributions and dividends from its McDonald's common stock holdings. As the
principal amount of the borrowings is repaid, the debt and the unearned ESOP
compensation are being reduced.
The Company also has guaranteed certain affiliate and other loans totaling
$148.0 million at December 31, 2001.
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public and private
offerings and bank loans. There are no provisions in the Company's debt
obligations that would accelerate repayment of debt as a result of a change in
credit ratings. Certain of the Company's debt obligations contain cross-default
provisions and restrictions on Company and subsidiary mortgages and the
long-term debt of certain subsidiaries. Under certain agreements, the Company
has the option to retire debt prior to maturity, either at par or at a premium
over par. The following table summarizes the Company's debt obligations (the
interest rates reflected in the table include the effects of interest-rate and
foreign currency exchange agreements):
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------
Interest rates(1) Amounts outstanding
December 31 December 31
Maturity ----------- ------------------------
IN MILLIONS OF U.S. DOLLARS dates 2001 2000 2001 2000
===========================================================================================
Fixed-original issue(2) 6.2% 6.8% $ 3,293.8 $ 2,793.2
Fixed-converted via
exchange agreements(3) 5.3 6.1 (1,829.9) (351.5)
Floating 2.3 6.6 2,364.8 914.1
-------------------------------------------------------------------------------------------
Total U.S. Dollars 2002-2033 3,828.7 3,355.8
-------------------------------------------------------------------------------------------
Fixed 5.7 5.7 629.7 679.1
Floating 3.5 4.8 1,724.9 1,609.6
-------------------------------------------------------------------------------------------
Total Euro 2002-2015 2,354.6 2,288.7
-------------------------------------------------------------------------------------------
Fixed 6.1 6.2 698.8 524.6
Floating 5.6 7.2 150.3 233.3
-------------------------------------------------------------------------------------------
Total British Pounds
Sterling 2002-2021 849.1 757.9
-------------------------------------------------------------------------------------------
Fixed 4.5 5.5 276.9 346.5
Floating 6.2 6.7 58.9 25.7
-------------------------------------------------------------------------------------------
Total other European
currencies(4) 2002-2006 335.8 372.2
-------------------------------------------------------------------------------------------
Fixed 2.3 2.7 584.0 589.0
Floating 0.1 0.5 227.9 262.4
-------------------------------------------------------------------------------------------
Total Japanese Yen 2005-2030 811.9 851.4
-------------------------------------------------------------------------------------------
Fixed 7.1 8.6 317.6 322.0
Floating 6.2 7.6 300.0 453.5
-------------------------------------------------------------------------------------------
Total other Asia/Pacific
currencies(5) 2002-2006 617.6 775.5
-------------------------------------------------------------------------------------------
Fixed 5.8 5.6 3.2 4.1
Floating 15.5 12.8 23.2 68.3
-------------------------------------------------------------------------------------------
Total other currencies 2002-2021 26.4 72.4
-------------------------------------------------------------------------------------------
Debt obligations before fair
value adjustments(6) 8,824.1 8,473.9
-------------------------------------------------------------------------------------------
Fair value adjustments(7) 93.9
-------------------------------------------------------------------------------------------
Total debt obligations $ 8,918.0 $ 8,473.9
===========================================================================================
(1) Weighted-average effective rate, computed on a semiannual basis.
(2) Includes $150 million of debentures that mature in 2027 ($500 million of
debentures in 2000), which are subordinated to senior debt and provide for
the ability to defer interest payments up to five years under certain
conditions.
(3) A portion of U.S. Dollar fixed-rate debt effectively has been converted
into other currencies and/or into floating-rate debt through the use of
exchange agreements. The rates shown reflect the fixed rate on the
receivable portion of the exchange agreements. All other obligations in
this table reflect the net effects of these and other interest-rate
exchange agreements.
(4) Primarily consists of Swiss Francs, Swedish Kronor and Danish Kroner in
2001 (Swiss Francs in 2000).
(5) Primarily consists of Korean Won, Chinese Renminbi and New Taiwanese
Dollars in 2001 (Australian Dollars and New Taiwanese Dollars in 2000).
(6) Aggregate maturities for debt balances at December 31, 2001, before fair
value adjustments, were as follows: 2002-$362.5; 2003-$796.4;
2004-$1,621.6; 2005-$1,072.0; 2006-$843.9; and thereafter-$4,127.7. These
amounts include reclassifications of short-term obligations to long-term
obligations of $750.0 in 2004 and $500.0 in 2007 as they are supported by
long-term line of credit agreements discussed on page 31.
(7) Effective January 1, 2001, the Company adopted SFAS 133. As a result, debt
obligations are adjusted to fair value to the extent of related hedging
instruments. The related hedging instruments are also recorded at fair
value in either miscellaneous other assets or long-term liabilities.
McDonald's Corporation 33
Property and equipment
===============================================================================
Net property and equipment consisted of:
-------------------------------------------------------------------------------
IN MILLIONS December 31, 2001 2000
===============================================================================
Land $ 3,975.6 $ 3,932.7
Buildings and improvements on owned land 8,127.0 8,250.0
Buildings and improvements on leased land 8,020.2 7,513.3
Equipment, signs and seating 3,371.7 3,172.2
Other 611.5 700.8
-------------------------------------------------------------------------------
24,106.0 23,569.0
-------------------------------------------------------------------------------
Accumulated depreciation and amortization (6,816.5) (6,521.4)
-------------------------------------------------------------------------------
Net property and equipment $ 17,289.5 $ 17,047.6
===============================================================================
Depreciation and amortization expense was (in millions): 2001-$945.6;
2000-$900.9; 1999-$858.1.
Employee benefit plans
===============================================================================
The Company's Profit Sharing and Savings Plan for U.S.-based employees includes
profit sharing, 401(k) and leveraged employee stock ownership (ESOP) features.
The 401(k) feature allows participants to make pretax contributions that are
partly matched from shares released under the ESOP. McDonald's executives, staff
and restaurant managers participate in additional ESOP allocations and profit
sharing contributions, based on their compensation. The profit sharing
contribution is discretionary, and the Company determines the amount each year.
Participant 401(k) contributions, profit sharing contributions and any
related earnings can be invested in McDonald's common stock or among several
other investment alternatives. The Company's matching contributions and ESOP
allocations are generally invested in McDonald's common stock. Beginning in
first quarter 2002, the Company's matching contributions can be invested in
McDonald's common stock or among the other investment alternatives.
In addition, the Company maintains a nonqualified, unfunded Supplemental
Plan that allows participants to make tax-deferred contributions and receive
Company-provided allocations that cannot be made under the Profit Sharing and
Savings Plan because of Internal Revenue Service limitations. The investment
alternatives in the Supplemental Plan include certain of the same investments as
the Profit Sharing and Savings Plan. Total liabilities under the Supplemental
Plan were $301.1 million at December 31, 2001 and $288.8 million at December 31,
2000, and were included in other long-term liabilities in the Consolidated
balance sheet.
The Company has entered into derivative contracts to hedge the changes in
these liabilities. At December 31, 2001, derivatives with a fair value of $68.2
million indexed to the Company's stock and $18.5 million indexed to certain
market indices were included in miscellaneous other assets in the Consolidated
balance sheet. All changes in Plan liabilities and in the fair value of the
derivatives are recorded in selling, general & administrative expenses. Changes
in fair value of the derivatives indexed to the Company's stock are recorded in
the income statement because the contracts provide the counterparty with a
choice of cash settlement or settlement in shares.
Total U.S. costs for the Profit Sharing and Savings Plan, including
nonqualified benefits and related hedging activities, were (in millions):
2001-$54.6; 2000-$49.6; 1999-$49.4.
Certain subsidiaries outside the U.S. also offer profit sharing, stock
purchase or other similar benefit plans. Total plan costs outside the U.S. were
(in millions): 2001-$39.7; 2000-$38.1; 1999-$37.2.
Other postretirement benefits and postemployment benefits, excluding
severance benefits related to the global change initiatives, were immaterial.
Stock options
===============================================================================
At December 31, 2001, the Company had five stock-based compensation plans for
employees and nonemployee directors. Options to purchase common stock are
granted at the fair market value of the stock on the date of grant. Therefore,
no compensation cost has been recognized in the consolidated financial
statements for these plans.
Substantially all of the options become exercisable in four equal
installments, beginning a year from the date of the grant, and expire 10 years
from the grant date. In 2001, the Board of Directors approved a three-year
extension to the term of 44.2 million options granted between May 1, 1999 and
December 31, 2000 with an exercise price greater than $28.90. Because the market
value of the stock was less than the exercise price of the options at the time
of extension, no compensation expense was required to be recorded.
Also in 2001, the Board of Directors approved a special grant of 11.9
million options at a price of $28.90 as an incentive to meet an operating income
performance goal for calendar year 2003. The options vest on January 31, 2004,
and if the performance goal is met, the options will retain their original
10-year term; otherwise, they will expire on June 30, 2004.
34 McDonald's Corporation
At December 31, 2001, the number of shares of common stock reserved for
issuance under the plans was 263.5 million including 70.6 million available for
future grants. A summary of the status of the Company's plans as of December 31,
2001, 2000 and 1999, and changes during the years then ended, is presented in
the following table.
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Options IN MILLIONS price IN MILLIONS price IN MILLIONS price
=========================================================================================================
Outstanding at
beginning of year 175.8 $25.34 164.7 $23.06 164.0 $ 19.32
Granted(1) 38.6 29.37 26.5 35.16 25.4 40.35
Exercised (11.9) 13.70 (10.8) 13.68 (18.8) 13.89
Forfeited (9.6) 29.03 (4.6) 27.81 (5.9) 18.01
---------------------------------------------------------------------------------------------------------
Outstanding at
end of year 192.9 $26.65 175.8 $25.34 164.7 $ 23.06
=========================================================================================================
Exercisable at
end of year 98.2 79.3 69.4
=========================================================================================================
(1) Includes the special grant in 2001 of 11.9 million options discussed on
page 33.
Options granted each year were 3.0%, 2.0% and 1.9% of weighted average
common shares outstanding for 2001, 2000 and 1999, representing grants to
approximately 15,100, 14,100 and 12,700 employees in those three years.
When stock options are exercised, shares are issued from treasury stock. The
average per share cost of treasury stock issued for option exercises over the
last three years was $7.29, while the average option exercise price over this
period was $13.79. In addition, stock option exercises resulted in $335.6
million of tax benefits for the Company during the three years ended December
31, 2001.
The following table presents information related to options outstanding and
options exercisable at December 31, 2001, based on ranges of exercise prices.
[Download Table]
-----------------------------------------------------------------------------------
December 31, 2001
-----------------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------- ------------------------
Weighted-
average
remaining Weighted- Weighted-
Range Number contractual average Number average
of exercise of options life exercise of options exercise
prices IN MILLIONS IN YEARS price IN MILLIONS price
===================================================================================
$10 to 15 26.9 1.7 $ 13.58 26.9 $ 13.56
16 to 23 36.1 4.4 20.64 22.3 20.05
24 to 34 83.6 7.2 27.25 29.9 25.64
35 to 46 46.3 10.6 37.85 19.1 38.60
-----------------------------------------------------------------------------------
$10 to 46 192.9 6.7 $ 26.65 98.2 $ 23.60
===================================================================================
Pro forma net income and net income per common share were determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. For pro forma disclosures, the options' estimated fair
value was amortized over their expected seven-year life. SFAS No. 123 does not
apply to grants before 1995. As a result, the pro forma disclosures for 2000 and
1999 do not include a full seven years of grants and, therefore, may not be
indicative of anticipated future disclosures. The fair value for 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. Therefore, in management's
opinion, the existing models do not provide a reliable single measure of the
value of employee stock options. The following tables present the pro forma
disclosures and the weighted-average assumptions used to estimate the fair value
of these options:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------
Pro forma disclosures 2001 2000 1999
=============================================================================================
Net income-pro forma IN MILLIONS $ 1,481.8 $ 1,842.4 $ 1,844.0
Net income per common share-
pro forma
Basic 1.15 1.39 1.36
Diluted 1.13 1.36 1.31
Weighted-average fair value
per option granted 10.66 14.11 14.06
=============================================================================================
---------------------------------------------------------------------------------------------
Assumptions 2001 2000 1999
---------------------------------------------------------------------------------------------
Expected dividend yield .65% .65% .65%
Expected stock price volatility 29.9% 38.8% 22.9%
Risk-free interest rate 5.03% 6.39% 5.72%
Expected life of options IN YEARS 7 7 7
=============================================================================================
McDonald's Corporation 35
[Enlarge/Download Table]
Quarterly results (unaudited)
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Quarters ended Quarters ended Quarters ended Quarters ended
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 2001 2000 2001 2000 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $10,112.7 $9,924.5 $10,629.2 $10,512.4 $10,238.8 $10,237.6 $9,649.7 $9,506.7
------------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated
restaurants $ 2,811.4 $2,676.6 $ 2,876.9 $ 2,768.5 $ 2,738.2 $ 2,582.0 $2,614.2 $2,439.9
Revenues from franchised
and affiliated restaurants 960.1 913.0 1,002.4 980.5 969.3 978.6 897.5 903.9
------------------------------------------------------------------------------------------------------------------------------------
Total revenues 3,771.5 3,589.6 3,879.3 3,749.0 3,707.5 3,560.6 3,511.7 3,343.8
------------------------------------------------------------------------------------------------------------------------------------
Company-operated margin 383.5 404.2 436.1 470.9 396.6 435.0 370.8 406.8
Franchised margin 758.1 721.1 799.0 788.5 771.4 784.0 700.6 710.1
Operating income 482.7(1) 774.0 746.6(2) 910.8 772.5(4) 876.3 695.2 768.6
Net income $ 271.9(1) $ 452.0 $ 545.5(3) $ 548.5 $ 440.9(4) $ 525.9 $ 378.3 $ 450.9
------------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ .21(1) $ .35 $ .42(3) $ .42 $ .34(4) $ .40 $ .29 $ .34
Net income per common
share-diluted .21(1) .34 .42(3) .41 .34(4) .39 .29 .33
------------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ .225 $ -- $ -- $ .215 $ -- $ -- $ -- $ --
------------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,282.7 1,307.0 1,286.1 1,315.6 1,289.7 1,327.1 1,300.7 1,343.4
Weighted-average
shares-diluted 1,299.3 1,335.8 1,305.8 1,346.0 1,311.1 1,365.5 1,325.3 1,383.8
------------------------------------------------------------------------------------------------------------------------------------
Market price per common share
High $ 30.10 $ 34.50 $ 31.00 $ 34.25 $ 30.96 $ 39.94 $ 35.06 $ 43.63
Low 25.00 27.56 26.00 26.38 25.39 31.00 24.75 29.81
Close 26.47 34.00 27.14 30.19 27.06 32.94 26.55 37.38
====================================================================================================================================
(1) Includes the following pretax special charges totaling $0.13 of expense per
share:
. $200.0 million ($136.1 million after tax) related to the U.S. business
reorganization and global change initiatives.
. $25.0 million ($17.0 million after tax) related to unrecoverable
costs incurred in connection with the theft of promotional game pieces
and the related termination of a supplier.
. $20.0 million ($13.6 million after tax) related to the anticipated
disposition of Aroma Cafe in the U.K.
. $7.1 million ($4.8 million after tax) related to the closing of an
additional nine underperforming restaurants in international markets.
(2) Includes $101.5 million of pretax special charges ($76.0 million after tax)
related primarily to the closing of 154 underperforming restaurants in
international markets and the write-off of certain technology costs.
(3) In addition to the $101.5 million of pretax special charges noted in (2)
above, includes $137.1 million gain (pre and after tax) on the initial
public offering of McDonald's Japan and $12.4 million of pretax special
charges ($8.1 million after tax) primarily related to the write-off of a
corporate investment (totaling $0.04 of income per share).
(4) Includes $24.0 million asset impairment charge (pre and after tax or $0.02
per share) in Turkey.
36 McDonald's Corporation
Management's report
--------------------------------------------------------------------------------
Management is responsible for the preparation, integrity and fair presentation
of the consolidated financial statements and financial comments. The financial
statements were prepared in accordance with accounting principles generally
accepted in the U.S. and include certain amounts based on management's judgment
and best estimates. Other financial information presented is consistent with the
financial statements.
The Company maintains a system of internal controls over financial
reporting including safeguarding of assets against unauthorized acquisition, use
or disposition, which is designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation of
reliable published financial statements and asset safeguarding. The system
includes a documented organizational structure and appropriate division of
responsibilities; established policies and procedures that are communicated
throughout the Company; careful selection, training, and development of our
people; and utilization of an internal audit program. Policies and procedures
prescribe that the Company and all employees are to maintain high standards of
proper business practices throughout the world.
There are inherent limitations to the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation and safeguarding of assets. Furthermore, the effectiveness of an
internal control system can change with circumstances. The Company believes that
it maintains an effective system of internal control over financial reporting
and safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by independent
auditors, Ernst & Young LLP, who were given unrestricted access to all financial
records and related data. The audit report of Ernst & Young LLP is presented
herein.
The Board of Directors, operating through its Audit Committee composed
entirely of independent Directors, provides oversight to the financial reporting
process. Ernst & Young LLP has unrestricted access to the Audit Committee and
regularly meets with the Committee to discuss accounting, auditing and financial
reporting matters.
McDONALD'S CORPORATION
January 24, 2002
Report of independent auditors
--------------------------------------------------------------------------------
The Board of Directors and Shareholders McDonald's Corporation
We have audited the accompanying Consolidated balance sheet of McDonald's
Corporation as of December 31, 2001 and 2000, and the related Consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of McDonald's Corporation management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the U.S. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McDonald's
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the U.S.
As discussed in the Notes to the consolidated financial statements,
effective January 1, 2001, the Company changed its method for accounting for
derivative financial instruments to conform with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
ERNST & YOUNG LLP
Chicago, Illinois
January 24, 2002
McDonald's Corporation 37
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure
--------------------------------------------------------------------------------
None.
Part III
Item 10. Directors and Executive Officers of the registrant
--------------------------------------------------------------------------------
Information regarding directors is incorporated herein by reference from the
Company's definitive proxy statement, which will be filed no later than 120 days
after December 31, 2001.
Information regarding all of the Company's executive officers is included
in Part I, Item 4, page 6 of this Form 10-K.
Item 11. Executive compensation
--------------------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive proxy statement,
which will be filed no later than 120 days after December 31, 2001.
Item 12. Security ownership of certain beneficial owners and management
--------------------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive proxy statement,
which will be filed no later than 120 days after December 31, 2001.
Item 13. Certain relationships and related transactions
--------------------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive proxy statement,
which will be filed no later than 120 days after December 31, 2001.
Part IV
Item 14. Financial statement schedules, exhibits, and reports on Form 8-K
--------------------------------------------------------------------------------
(a) 1. FINANCIAL STATEMENTS
Consolidated financial statements filed as part of this report are listed under
Part II, Item 8, pages 22-25 of this Form 10-K.
2.FINANCIAL STATEMENT SCHEDULES
No schedules are required because either the required information is not present
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements or the notes thereto.
(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 March 25, 2002.
[Download Table]
--------------------------------------------------------------------------------
Financial statements
Date of report Item number required to be filed
================================================================================
10/17/2001 Item 5 and 7 No
10/29/2001 Item 5 and 7 No
12/14/2001 Item 5 and 7 No
1/24/2002 Item 5 and 7 No
2/12/2002 Item 5 and 7 No
--------------------------------------------------------------------------------
(c) EXHIBITS
The exhibits listed in the accompanying index are filed as part of this report.
38 McDonald's Corporation
McDonald's Corporation exhibit index (Item 14)
================================================================================
Exhibit Number/Description
--------------------------------------------------------------------------------
(3) (i) Restated Certificate of Incorporation, effective as of March 24, 1998,
incorporated herein by reference from Form 8-K dated April 17, 1998.
(ii) By-Laws, effective as of June 1, 2000, incorporated herein by
reference from Form 10-Q for the quarter ended June 30, 2000.
(4) Instruments defining the rights of security holders, including
Indentures: **
(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) 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.
(iii) 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.
(iv) Medium-Term Notes, Series G, due from 1 Year to 60 Years from
Date of Issue. Supplemental Indenture, No. 6 incorporated herein
by reference from Exhibit 4(c) of Form S-3 Registration Statement
(File No. 333-60170) dated May 3, 2001.
(b) Subordinated Debt Securities Indenture dated as of October 18, 1996,
incorporated herein by reference from Form 8-K dated October 18, 1996.
(i) 7.31% 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.
(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) 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.
(vii) 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.
(viii) 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.
(ix) 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.
McDonald's Corporation 39
Exhibit Number/Description
--------------------------------------------------------------------------------
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated herein by
reference from Form 10-Q for the quarter ended June 30, 2001.*
(b) Profit Sharing Program, as amended and restated, incorporated herein
by reference from Form 10-K for the year ended December 31, 1999.*
(i) First Amendment to the McDonald's Profit Sharing Program,
incorporated herein by reference from Form 10-Q for the quarter
ended September 30, 2000.*
(ii) Second Amendment to the McDonald's Profit Sharing Program,
incorporated herein by reference from Form 10-Q for the quarter
ended March 31, 2001.*
(iii) Third Amendment to the McDonald's Profit Sharing Program,
incorporated herein by reference from Form 10-Q for the quarter
ended March 31, 2001.*
(c) McDonald's Corporation Supplemental Profit Sharing and Savings Plan,
filed herewith.*
(d) 1975 Stock Ownership Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
September 30, 2001.*
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
March 31, 2001.*
(f) 1999 Non-Employee Director Stock Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
September 30, 2000.*
(g) Executive Retention Plan, as amended and restated March 20, 2002,
filed herewith.*
(h) Senior Director Letter Agreement between Gordon C. Gray and the
Company, incorporated herein by reference from Form 10-Q for the
quarter ended June 30, 2001.*
(i) Senior Director Letter Agreement between Donald R. Keough and the
Company, incorporated herein by reference from Form 10-Q for the
quarter ended June 30, 2001.*
(j) McDonald's Corporation 2001 Omnibus Stock Ownership Plan, incorporated
herein by reference from Form 10-Q for the quarter ended June 30,
2001.*
(k) Form of McDonald's Corporation Tier I Change of Control Employment
Agreement authorized by the Board of Directors and expected to be
entered into between the Company and certain key executives, and filed
herewith.* The Agreement will be described in the Proxy Statement
circulated in connection with the Company's 2002 Annual Shareholders'
Meeting.
(l) Written description of oral arrangement between Jack M. Greenberg and
the Company, dated March 21, 2002, filed herewith.
(12) Statement re: computation of ratios
(21) Subsidiaries of the registrant
(23) Consent of independent auditors
(99) Press Release dated March 22, 2002--McDonald's First Quarter 2002 Update
--------------------------------------------------------------------------------
* 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.
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40 McDonald's Corporation
Signatures
-------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) 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)
/S/ Matthew H. Paull
-------------------------------------------------------------------------------
By Matthew H. Paull
Executive Vice President, Chief Financial Officer
March 25, 2002
-------------------------------------------------------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in their capacities indicated below on the 25th day of March, 2002:
Signature, Title
/S/ Hall Adams, Jr.
-------------------------------------------------------------------------------
By Hall Adams, Jr.
Director
/S/ James R. Cantalupo
-------------------------------------------------------------------------------
By James R. Cantalupo
Vice Chairman, Emeritus and President, Emeritus and Director
/S/ Jack M. Greenberg
-------------------------------------------------------------------------------
By Jack M. Greenberg
Chairman and Chief Executive Officer and Director
/S/ Enrique Hernandez, Jr.
-------------------------------------------------------------------------------
By Enrique Hernandez, Jr.
Director
/S/ Jeanne P. Jackson
-------------------------------------------------------------------------------
By Jeanne P. Jackson
Director
/S/ Donald G. Lubin
-------------------------------------------------------------------------------
By Donald G. Lubin
Director
/S/ Walter E. Massey
-------------------------------------------------------------------------------
By Walter E. Massey
Director
/S/ Andrew J. McKenna
-------------------------------------------------------------------------------
By Andrew J. McKenna
Director
/S/ Michael R. Quinlan
-------------------------------------------------------------------------------
By Michael R. Quinlan
Director
/S/ Terry L. Savage
-------------------------------------------------------------------------------
By Terry L. Savage
Director
/S/ Roger W. Stone
-------------------------------------------------------------------------------
By Roger W. Stone
Director
/S/ Robert N. Thurston
-------------------------------------------------------------------------------
By Robert N. Thurston
Director
/S/ Fred L. Turner
-------------------------------------------------------------------------------
By Fred L. Turner
Senior Chairman and Director
/S/ Matthew H. Paull
-------------------------------------------------------------------------------
By Matthew H. Paull
Executive Vice President, Chief Financial Officer
/S/ David M. Pojman
-------------------------------------------------------------------------------
By David M. Pojman
Senior Vice President - Controller
Dates Referenced Herein and Documents Incorporated by Reference
16 Subsequent Filings that Reference this Filing
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