McDonald’s Corporation — 2009 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2009; the filing was dated February 26, 2010. McDonald’s franchises and operates restaurants in 117 countries. At year-end, it had 32,478 restaurants, of which 81% were franchised, licensed or affiliated. The business is managed across the U.S., Europe, APMEA, and Other Countries & Corporate.
Financial performance
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $22.745 billion | $23.522 billion | Down 3% reported; up 2% excluding currency translation |
| Operating income | $6.841 billion | $6.443 billion | Up 6% reported; up 10% in constant currencies |
| Net income | $4.551 billion | $4.313 billion | Up 6% |
| Diluted EPS | $4.11 | $3.76 | Up 9%; up 13% in constant currencies |
| Cash from operations | $5.751 billion | $5.917 billion | Down 3% |
| Capital expenditures | $1.952 billion | $2.136 billion | Down 9% |
| Year-end debt | $10.578 billion | $10.218 billion | Up $360 million |
Cash from operations exceeded capital expenditures by approximately $3.8 billion. Year-end cash and equivalents were $1.796 billion, down from $2.063 billion. Current assets were $3.416 billion and current liabilities $2.989 billion. Total assets were $30.225 billion and shareholders’ equity $14.034 billion. The weighted-average annual interest rate on debt was 4.5%; $607 million of long-term debt was due in 2010. The company reported an unused $1.3 billion committed credit line and access to commercial paper and other borrowing capacity.
Combined operating margin, defined as operating income as a percentage of revenue, rose to 30.1% from 27.4%. Company-operated restaurant margin was 18.2% of sales, compared with 17.6%; franchised margin was 82.1% of franchised revenue, compared with 82.3%. Comparable sales increased 3.8% globally and guest counts rose 1.4%. Systemwide sales increased 6% excluding currency translation.
Fourth quarter snapshot: Revenue was $5.973 billion versus $5.565 billion in Q4 2008; operating income was $1.826 billion versus $1.502 billion; net income was $1.217 billion versus $985 million; diluted EPS was $1.11 versus $0.87. Q4 2009 included $87 million after tax, or $0.08 per share, primarily from resolving liabilities related to the 2007 Latin America transaction.
Material changes and unusual items
- Company-operated sales fell 7% to $15.459 billion, while franchised revenue grew 5% to $7.286 billion. Refranchising shifted sales from company-operated restaurants to rent and royalty income; franchised restaurants reached 81% of the system, versus 80% in 2008.
- Foreign currency translation reduced 2009 revenue by $1.340 billion and operating income by $273 million; the reported EPS impact was negative $0.15. The stronger dollar also contributed to reported revenue declines.
- 2009 results included $65 million pretax income, primarily from resolving retained Latam liabilities, and a $95 million pretax gain on the sale of the Redbox investment. 2008 included a $160 million pretax gain on the sale of Pret A Manger.
- Cash used for shareholder returns totaled $5.089 billion in 2009: $2.854 billion of repurchases and $2.236 billion of dividends. The annual dividend declared was $2.05 per share; the quarterly rate was raised to $0.55 for Q4.
Outlook, commentary and risks
Management emphasized its “better, not just bigger” Plan to Win, focused on people, products, place, price and promotion, and said it expected to meet or exceed its long-term constant-currency financial targets despite a challenging economic environment. Those targets are average annual Systemwide sales growth of 3%–5%, operating income growth of 6%–7%, and high-teens returns on incremental invested capital.
- For 2010, management expected net restaurant additions to contribute nearly 2 percentage points to Systemwide sales growth in constant currencies. It did not provide specific EPS guidance.
- Planned 2010 capital expenditures were approximately $2.4 billion, with about half for existing restaurants and plans to open about 1,000 restaurants. Management expected roughly 325 net additions, reflecting planned closures, including in Japan.
- The U.S. and Europe commodity basket was expected to be relatively flat for 2010. SG&A was expected to be relatively flat in constant currencies, interest expense to rise slightly, and the effective tax rate to be approximately 29%–31%.
- McDonald’s Japan planned to close approximately 430 restaurants over 12–18 months; McDonald’s expected after-tax impairment charges of approximately $40 million–$50 million, primarily in the first half of 2010.
- Management expected currency translation to benefit 2010 revenue and EPS at then-current rates. A 10% move in the Euro, British Pound, Australian Dollar and Canadian Dollar in the same direction versus 2009 could change annual EPS by about $0.17–$0.19.
Principal risks include recession-related pressure on consumer spending and value pricing, competition, food safety and brand reputation, commodity and labor costs, franchisee performance and alignment, foreign exchange and interest-rate movements, regulation of nutrition, advertising, employment and environmental matters, and litigation. Management stated that pending claims were not expected to materially affect financial condition or results, but adverse rulings could materially affect earnings in the period incurred. The company also disclosed $10.717 billion of future minimum operating-lease payments and $10.499 billion of debt obligations in its contractual-obligations schedule; minimum rent due from franchisees totaled $26.013 billion. Gross unrecognized tax benefits were $492 million. The company said no subsequent events required disclosure and received unqualified audit opinions; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects underlying comparable sales and operating performance versus refranchising, currency effects and one-time items.
- Whether cash generation remains sufficient to fund planned investment, dividends, repurchases, debt maturities and lease commitments.
- Whether 2010 restaurant additions, reimaging, commodity-cost assumptions and Japan closures align with actual results and returns.
- How foreign exchange, labor and food costs, consumer value sensitivity and regulatory or food-safety developments affect margins and brand trust.
- Developments in the Latam indemnification liabilities, tax examinations and pending litigation, including any outcomes that could materially affect earnings.