10-Q/APeriod: Q3 FY2002

MCDONALDS CORP Quarterly Report (Amendment) for Q3 Ended Sep 30, 2002

Filed November 19, 2002For Securities:MCD

Summary

McDonald's Corporation reported its financial results for the third quarter and nine months ended September 30, 2002. The company experienced a decline in net income for both periods, primarily impacted by a cumulative effect of an accounting change related to goodwill impairment and various special charges. However, revenues showed modest growth, driven by expansion and positive sales in certain international markets like Europe, partially offset by weaker performance in others such as Latin America and Japan. The company's strategic focus appears to be on optimizing its existing business, as indicated by plans to restructure countries and close underperforming restaurants, which are expected to incur significant charges in the fourth quarter. Key financial indicators reveal a decrease in diluted earnings per share, reflecting the net income decline. The balance sheet shows an increase in total assets, largely due to growth in property and equipment and other assets. While current liabilities decreased, long-term debt increased, suggesting a shift in the company's capital structure. Cash flow from operations remained robust, providing resources for capital expenditures and share repurchases. Investors should note the planned operational optimizations and associated charges for Q4 2002, which will impact near-term profitability.

Key Highlights

  • 1Total revenues increased by 4% for the quarter and 4% for the nine months ended September 30, 2002, compared to the prior year, on a reported basis.
  • 2Operating income saw a significant increase of 11% for the quarter and 5% for the nine months, indicating improved operational efficiency.
  • 3Net income declined by 11% for the quarter and 9% for the nine months, largely due to a $98.6 million after-tax charge for the cumulative effect of adopting SFAS No. 142 (Goodwill and Other Intangible Assets) and other special charges.
  • 4The company's balance sheet shows total assets growing to $23.59 billion from $22.53 billion, driven by increases in property and equipment and other assets.
  • 5Total current liabilities decreased significantly from $2.25 billion to $1.87 billion, while long-term debt increased from $8.56 billion to $9.48 billion.
  • 6Cash provided by operations remained strong at $1,000.5 million for the quarter and $2,203.7 million for the nine months.
  • 7Future profitability is expected to be impacted by significant restructuring and restaurant closures planned for the fourth quarter of 2002, with an estimated pretax charge of $350-$425 million.

Frequently Asked Questions

The primary reason for the decline in net income is the adoption of SFAS No. 142, 'Goodwill and Other Intangible Assets,' which resulted in a non-cash charge of $98.6 million (after tax) for the cumulative effect of this accounting change in the first quarter of 2002. Additionally, various special charges related to asset impairments and restaurant closures in certain international markets contributed to the decrease.

Foreign currency translation had a positive impact on reported total revenues and operating income for the quarter, primarily due to a stronger Euro and British Pound, although this was partially offset by weaker Latin American currencies. For the nine-month period, the impact on revenues was minimal, but operating income saw a positive impact. Net income also saw a positive impact from currency translation for both periods.

McDonald's has approved plans to optimize its existing business, which include restructuring four countries by transferring ownership to developmental licensees, closing three small countries, closing approximately 175 underperforming restaurants in about 10 other countries, and eliminating 400-600 job positions. These actions are expected to result in a pretax income reduction of approximately $350-$425 million in the fourth quarter of 2002, mostly non-cash.

For the first nine months of 2002, cash provided by operations exceeded capital expenditures. The company expects total capital expenditures for the full year 2002 to be approximately $1.9 billion. For 2003, capital expenditures are expected to be around $1.9 billion as well, with a shift towards reinvestment in existing restaurants. McDonald's repurchased approximately $620 million of its common stock in the first nine months of 2002 and plans to repurchase at least $500 million in 2003.