McDonald’s Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone quarterly report; Q4 figures are identified separately below. Amounts are in U.S. dollars.
Business context and reporting period
McDonald’s franchises and operates restaurants in 117 countries. At year-end, it had 32,737 Systemwide restaurants, of which 26,338 were franchised or licensed and 6,399 were Company-operated. The business is managed across the U.S., Europe, APMEA, and Other Countries & Corporate. Management emphasized its Plan to Win, focusing on people, products, place, price, and promotion.
Financial performance and position
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Total revenue | $24.1 billion | $22.7 billion | +6% reported; +5% excluding currency translation |
| Operating income | $7.47 billion | $6.84 billion | +9% |
| Net income | $4.95 billion | $4.55 billion | +9% |
| Diluted EPS | $4.58 | $4.11 | +11% |
| Cash provided by operations | $6.34 billion | $5.75 billion | +$591 million |
| Capital expenditures | $2.14 billion | $1.95 billion | +$183 million |
| Cash and equivalents at year-end | $2.39 billion | $1.80 billion | +$591 million |
| Total debt at year-end | $11.51 billion | $10.58 billion | +$927 million |
| Shareholders’ equity at year-end | $14.63 billion | $14.03 billion | +$600 million |
- Combined operating margin was 31.0%, up from 30.1%. Company-operated margin was 19.6% of sales, versus 18.2%; franchised margin was 82.4% of franchised revenue, versus 82.1%.
- Global comparable sales increased 5.0% and comparable guest counts rose 4.9%. Comparable sales increased 3.8% in the U.S., 4.4% in Europe, and 6.0% in APMEA.
- Operating cash flow exceeded capital expenditures by approximately $4.2 billion. The Company returned about $5.1 billion to shareholders: $2.4 billion in dividends and $2.65 billion in share repurchases.
- At year-end, current assets were $4.37 billion and current liabilities were $2.92 billion. The Company cited substantial operating cash flow, credit access, and an unused $1.3 billion committed credit line as sources of liquidity.
- Q4 2010 revenue was $6.21 billion, operating income $1.86 billion, net income $1.24 billion, and diluted EPS $1.16. Q4 2009 comparatives were $5.97 billion, $1.83 billion, $1.22 billion, and $1.11, respectively.
Material changes versus the prior comparable period
- Revenue and earnings improved, supported by positive comparable sales and guest-count growth across all reported regions. The filing attributes margin gains to sales growth, lower commodity costs, and cost control.
- Cash from operations rose 10%; capital expenditures also increased, primarily due to higher investment in new restaurants.
- Debt rose to $11.5 billion, primarily reflecting net debt issuance and foreign-exchange movements. The weighted-average interest rate on total debt declined to 4.3% from 4.5%.
- Share repurchases fell to $2.65 billion from $2.85 billion, while dividends paid rose to $2.41 billion from $2.24 billion. The quarterly dividend was raised 11% to $0.61 in Q4.
- Impairment and other items were a net $29 million expense in 2010, versus $61 million of net income in 2009. The 2010 charge primarily reflected McDonald’s share of restaurant-closing costs in Japan; 2009 benefited primarily from resolution of retained Latin America transaction liabilities.
Outlook, risks, contingencies, and unusual items
- Management said it was confident it could meet or exceed its long-term constant-currency financial targets, but did not provide specific diluted EPS guidance. It expected net restaurant additions to contribute about 1.5 percentage points to 2011 Systemwide sales growth.
- For 2011, management expected U.S. commodity basket costs to increase 2%–2.5% and European costs 3.5%–4.5%; SG&A to decrease 2%–3% in constant currencies; interest expense to increase about 7%; and the effective tax rate to be approximately 30%–32%.
- Planned 2011 capital expenditures were approximately $2.5 billion. The Company expected to open about 1,100 restaurants, including licensed and affiliated locations, and to reimage approximately 2,200 restaurants worldwide.
- Key risks include intense competition, weak economic conditions and consumer spending, pricing and value pressures, food and labor cost inflation, food safety and supply-chain disruptions, franchisee execution, foreign-exchange exposure, regulatory and litigation risk, environmental requirements, and technology-system reliability. Management noted European austerity measures as a potential headwind.
- The Company disclosed ongoing disagreement with the IRS over proposed foreign tax-credit adjustments of about $400 million, excluding interest and potential penalties. Management said it intended to pursue available remedies and did not expect resolution to materially affect results or cash flows. Gross unrecognized tax benefits were $573 million.
- The filing describes a range of pending lawsuits and routine disputes; management did not believe matters under review would materially adversely affect financial condition or results, while acknowledging an unfavorable ruling could materially affect earnings in the period incurred.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether comparable-sales, traffic, and margin momentum continued, particularly amid expected commodity-cost increases and economic pressure.
- How much earnings growth reflected operating performance versus share repurchases and currency translation; reported 2010 diluted EPS benefited from a lower share count, while currency translation added about $0.01 per share.
- Whether 2011 capital-spending, restaurant-opening, and reimaging plans were delivered within budget and generated expected returns.
- Debt maturities, refinancing plans, lease commitments, and the effect of higher interest expense or currency movements on cash flow and earnings.
- Developments in the IRS foreign-tax-credit dispute, other tax exposures, and material litigation or franchisee and supplier contingencies.