10-QPeriod: Q1 FY2002

MCDONALDS CORP Quarterly Report for Q1 Ended Mar 31, 2002

Filed May 10, 2002For Securities:MCD

Summary

McDonald's Corporation's first quarter 2002 results, filed on May 9, 2002, show a significant year-over-year decline in net income primarily due to a one-time non-cash charge related to the adoption of new accounting standards for goodwill. Excluding this charge, income before the cumulative effect of accounting changes saw a more modest decrease, indicating underlying operational pressures. While systemwide sales experienced slight growth, this was largely driven by restaurant expansion, with comparable sales remaining flat or negative in many regions, particularly in the U.S. and Latin America. Geographically, Europe showed strong performance with positive comparable sales and increased operating income, while the APMEA and Latin America segments faced challenges due to economic weakness and specific market issues. The company is implementing operational improvements and value initiatives to boost top-line sales. Despite the reported net income drop, the company continued its share repurchase program, signaling confidence in shareholder value enhancement.

Key Highlights

  • 1Net income decreased by 33% to $253.1 million, largely impacted by a $98.6 million after-tax charge for the cumulative effect of adopting SFAS No. 142 regarding goodwill amortization.
  • 2Excluding the goodwill charge, income before the cumulative effect of accounting change decreased by 7% to $351.7 million, with diluted earnings per share also declining.
  • 3Systemwide sales increased by 1% to $9.7 billion, but this was driven by restaurant expansion, as comparable sales for the McDonald's restaurant business globally decreased by 0.8%.
  • 4Operating income declined by 8% (6% in constant currency) to $641.3 million, impacted by asset impairment charges and lower other operating income.
  • 5Europe demonstrated strength with a 10% constant currency sales increase and a 13% constant currency operating income increase, driven by positive comparable sales in key markets like France, Germany, and the U.K.
  • 6Latin America and APMEA segments faced significant headwinds, with constant currency sales declining (14% and 8% respectively) and operating income decreasing substantially due to economic weakness and specific market challenges.
  • 7The company repurchased 11.9 million shares of common stock for approximately $331 million in the quarter, continuing its strategy to enhance shareholder value.

Frequently Asked Questions

The substantial decrease in net income was primarily due to a one-time, non-cash charge of $98.6 million after tax (or $0.07 per diluted share) related to the adoption of SFAS No. 142, which changed the accounting for goodwill from amortization to impairment testing. This charge represents the cumulative effect of this accounting change.

Performance varied by region. Europe showed strong growth with a 10% constant currency sales increase and a 13% constant currency operating income increase, benefiting from positive comparable sales. However, APMEA and Latin America experienced declines in constant currency sales (8% and 14% respectively) and significant drops in operating income, largely due to economic weakness, consumer concerns (in APMEA), and asset impairment charges (in Latin America).

Under SFAS No. 142, goodwill will no longer be amortized, which was reflected in the current quarter's results with the adoption charge. Instead, goodwill will be tested annually for impairment. This change is expected to increase future net income by eliminating amortization expenses, though companies must now account for potential impairment charges.

Yes, McDonald's continues to expand its restaurant base, with systemwide restaurants increasing by over 1,200 globally in the quarter. However, comparable sales across the McDonald's restaurant business declined by 0.8% globally in constant currency, indicating that sales at existing, established restaurants are under pressure. The U.S. comparable sales were flat, and many international markets saw declines.