McDonald’s Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; the annual discussion below is not a standalone Q4 summary. McDonald’s franchises and operates restaurants in 119 countries. At year-end, its 34,480 restaurants included 27,882 franchised or licensed locations.
Financial performance and position
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Total revenue | $27.567 billion | $27.006 billion | Up 2% reported; 5% excluding currency translation |
| Operating income | $8.605 billion | $8.530 billion | Up 1% reported; 4% excluding currency translation |
| Net income | $5.465 billion | $5.503 billion | Down 1% reported; up 3% excluding currency translation |
| Diluted EPS | $5.36 | $5.27 | Up 2% reported; up 5% excluding currency translation |
| Combined operating margin | 31.2% | 31.6% | Down 0.4 percentage points |
| Cash provided by operations | $6.966 billion | $7.150 billion | Down 3%; exceeded capital expenditures by about $3.9 billion |
| Capital expenditures | $3.049 billion | $2.730 billion | Up 12% |
| Total debt | $13.633 billion | $12.500 billion | Up about $1.1 billion, primarily from net debt issuance |
| Cash and equivalents | $2.336 billion | $2.336 billion | Essentially unchanged |
Company-operated restaurant sales were $18.603 billion, while franchised revenues were $8.964 billion. Franchise revenue comprises rents, royalties and initial fees. More than 80% of restaurants were franchised, supporting a comparatively less capital-intensive revenue stream.
At year-end, current assets were $4.922 billion and current liabilities were $3.403 billion. The company reported $1.5 billion available under a committed credit line and additional unused, primarily uncommitted, credit lines. Its long-term debt ratings were A/A/A2 from S&P, Fitch and Moody’s, respectively, each with a stable outlook.
Shareholders received $5.5 billion through dividends and repurchases. Dividends paid were $2.897 billion; treasury-stock purchases were $2.605 billion. The declared annual dividend was $2.87 per share, and the quarterly rate rose 10% to $0.77 for the fourth quarter.
Material changes and operating trends
- Global comparable sales rose 3.1% and comparable guest counts rose 1.6%, compared with 5.6% and 3.7%, respectively, in 2011. Fourth-quarter comparable guest counts declined slightly, according to management; the filing’s quarterly table does not provide a clear Q4 comparable-sales or guest-count value.
- Comparable sales increased 3.3% in the U.S., 2.4% in Europe and 1.4% in APMEA. European guest counts declined 0.5%; U.S. and APMEA guest counts increased 1.9% and 2.2%.
- Franchised margin dollars increased 3% reported (6% in constant currencies), while company-operated margin dollars declined 2% reported (increased 1% in constant currencies). Company-operated margin percentage fell from 18.9% to 18.2%, reflecting higher commodity, labor and occupancy costs.
- Foreign currency translation reduced FY2012 revenue by approximately $726 million, operating income by $261 million, net income by $178 million and diluted EPS by $0.17.
- Debt increased while operating cash flow eased, reflecting higher tax payments and adverse currency translation. Capital spending rose primarily for restaurant openings and reinvestment; approximately 2,400 existing locations were reimaged.
Fourth quarter: Revenue was $6.952 billion versus $6.823 billion; operating income was $2.198 billion versus $2.120 billion; net income was $1.396 billion versus $1.377 billion; and diluted EPS was $1.38 versus $1.33 in Q4 2011.
Outlook, risks and unusual items
- Management did not provide specific diluted EPS guidance. Its long-term average annual targets were 3%–5% Systemwide sales growth, 6%–7% operating income growth and ROIIC in the high teens. FY2012 results were 3% Systemwide sales growth (5% in constant currencies), 1% operating income growth (4% in constant currencies), 15.4% one-year ROIIC and 28.6% three-year ROIIC.
- For 2013, management expected net traditional restaurant additions to contribute about 2.5 percentage points to Systemwide sales growth in constant currencies; commodity-basket cost increases of 1.5%–2.5% in the U.S. and 3%–4% in Europe; SG&A growth of approximately 2%–3% in constant currencies; interest expense growth of 4%–6%; and an effective tax rate of 31%–33%.
- 2013 capital expenditures were projected at about $3.2 billion. Management expected 1,500–1,600 restaurant openings, including licensed and affiliate markets, and net additions of 1,200–1,300 traditional restaurants. More than 1,600 restaurants were expected to be reimaged worldwide.
- Management anticipated flat-to-declining informal eating-out markets in many countries and continued pressure on margins from weak economic conditions, value-focused pricing, competition, wage and occupancy costs, and commodity-price volatility. Other risks include currency and interest-rate movements, food safety and supply disruptions, changing nutrition, labor and environmental regulation, litigation, technology and data-security risks, and franchisee execution.
- McDonald’s reported $8 million of impairment and other charges in 2012, compared with a $4 million net credit in 2011. Higher SG&A included costs related to the London Olympics, technology investment and the worldwide owner/operator convention.
- The 2012 effective tax rate was 32.4%, versus 31.3% in 2011. U.S. legislation enacted in January 2013 reinstated certain tax benefits retroactively; the company expected an approximately $50 million tax benefit in Q1 2013. The filing disclosed $482 million of gross unrecognized tax benefits and continuing tax examinations.
- The company said pending claims were not expected to materially adversely affect its financial condition or results, while noting an unfavorable ruling could materially affect earnings in the period incurred. No unresolved SEC staff comments were reported. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether sales and guest-count momentum, particularly the slight Q4 guest-count weakness and declining European traffic, improved after year-end.
- Whether planned pricing and value initiatives offset commodity, labor and occupancy inflation without further margin deterioration.
- Whether 2013 opening, reimaging and capital-spending plans achieved expected growth and returns.
- Debt maturities, refinancing costs, cash-flow coverage and the effect of currency movements; over 60% of operating income was generated outside the U.S.
- Developments in tax audits and unrecognized tax benefits, litigation and regulatory matters, and food-safety, supply-chain and data-security risks.