10-QPeriod: Q1 FY2001

MCDONALDS CORP Quarterly Report for Q1 Ended Mar 31, 2001

Filed May 10, 2001For Securities:MCD

Summary

McDonald's Corporation's first quarter 2001 report shows a decline in net income to $378.3 million from $450.9 million in the prior year, resulting in diluted EPS of $0.29 compared to $0.33 in Q1 2000. This decrease was primarily driven by higher operating costs, particularly for company-operated restaurants, and increased interest expenses. While total revenues saw a 5% increase to $3.51 billion, this was tempered by a 6% decrease in operating income in constant currency, reflecting challenges in certain international markets like Europe and Asia/Pacific due to factors such as consumer confidence and currency fluctuations. Despite the headwinds, McDonald's continues to invest in growth, with systemwide sales increasing by 2% (6% in constant currency) to $9.65 billion. The company is expanding its restaurant footprint, planning to add 1,600-1,700 locations in 2001, including a significant focus on the "Other Brands" segment which saw substantial sales growth. Management's strategy to lease more sites to reduce initial capital requirements is impacting franchised margins but is a key part of their expansion plan. The company also remains committed to shareholder returns, repurchasing $452 million of common stock in the quarter, and expects to complete its current repurchase program by year-end. The Euro conversion is not anticipated to have a material impact.

Key Highlights

  • 1Net income decreased by 16% to $378.3 million, with diluted EPS falling to $0.29 from $0.33 in the prior year.
  • 2Total revenues increased by 5% to $3.51 billion, driven by a 7% rise in company-operated restaurant sales, though franchised revenues slightly declined.
  • 3Operating income declined by 10% (6% in constant currency) to $695.2 million, reflecting increased operating costs and weaker performance in Europe and Asia/Pacific.
  • 4Systemwide sales grew 2% (6% in constant currency) to $9.65 billion, with strong growth in the U.S. and significant expansion in the "Other" segment, largely due to the acquisition of Boston Market.
  • 5The company repurchased $452 million of common stock in Q1 2001, as part of its ongoing share repurchase program, and plans to add 1,600-1,700 restaurants in 2001.
  • 6Adoption of SFAS No. 133 for derivative accounting resulted in a $17.0 million after-tax reduction to accumulated other comprehensive income, with ongoing hedging activities largely offsetting currency and interest rate risks.
  • 7The Europe segment's operating income saw a significant 19% decrease (13% in constant currency) due to consumer confidence issues related to the European beef supply and difficult year-over-year comparisons.

Frequently Asked Questions

In the first quarter of 2001, McDonald's reported a 16% decrease in net income to $378.3 million, with diluted earnings per share falling to $0.29 from $0.33 in the first quarter of 2000. While total revenues increased by 5% to $3.51 billion, operating income saw a 10% decrease (6% in constant currency) to $695.2 million, primarily due to higher operating costs and weaker performance in certain international markets.

Systemwide sales grew 2% (6% in constant currency) to $9.65 billion. The U.S. market showed a 4% increase in sales. Europe experienced a sales decline, partly due to consumer concerns about the beef supply. Asia/Pacific also saw a sales decrease, impacted by challenging comparisons and weak consumer spending in Australia. Latin America's sales were affected by difficult economic conditions in many markets. The 'Other' segment, which includes acquired businesses like Boston Market, showed significant sales growth.

McDonald's plans to add between 1,600 and 1,700 new restaurants in 2001, with a significant portion being McDonald's branded locations. The company is actively repurchasing its shares, having spent $452 million in the first quarter of 2001 and expecting to complete its $4.5 billion repurchase program by year-end, viewing it as a strategy to enhance shareholder value.

McDonald's utilizes various financial instruments, including foreign currency denominated debt and derivatives, to hedge against foreign currency fluctuations and interest rate risks. The company has adopted SFAS No. 133 for accounting for these derivatives. Regarding the Euro conversion, McDonald's has been preparing for years and anticipates no significant impact on its financial position, results of operations, or cash flows from the adoption of the Euro in early 2002.