McDonald’s Corporation — FY 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011, with 2010 comparatives. McDonald’s franchises and operates restaurants in 119 countries. At year-end, it had 33,510 restaurants, of which 27,075 were franchised or licensed; more than 80% of Systemwide restaurants were franchised.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $27.006 billion | $24.075 billion | +12% reported; +8% in constant currencies |
| Operating income | $8.530 billion | $7.473 billion | +14% reported; +10% in constant currencies |
| Net income | $5.503 billion | $4.946 billion | +11% |
| Diluted EPS | $5.27 | $4.58 | +15%; currency translation contributed $0.19 per share |
| Combined operating margin | 31.6% | 31.0% | +0.6 percentage points |
| Cash provided by operations | $7.150 billion | $6.342 billion | +$808 million |
| Capital expenditures | $2.730 billion | $2.136 billion | +28% |
| Total debt at year-end | $12.500 billion | $11.505 billion | +$995 million |
Cash and equivalents were $2.336 billion, versus $2.387 billion a year earlier. Current assets were $4.403 billion and current liabilities $3.509 billion. Debt was 46% of total capitalization; the weighted-average debt interest rate was 4.2%. Cash from operations exceeded capital expenditures by approximately $4.4 billion. The company returned approximately $6.0 billion to shareholders through $3.4 billion of share repurchases and $2.6 billion of dividends; the declared annual dividend was $2.53 per share, including a fourth-quarter increase to $0.70.
Comparable sales rose 5.6% and comparable guest counts 3.7% worldwide. Sales and guest counts increased in each major geographic segment. Company-operated restaurant margins rose in dollars, but the margin rate declined to 18.9% from 19.6%, reflecting higher commodity, labor and occupancy costs. Franchised margins were $7.232 billion, about two-thirds of combined restaurant margins.
Fourth-quarter snapshot: Revenue was $6.823 billion, operating income $2.120 billion, net income $1.377 billion and diluted EPS $1.33. The comparable fourth-quarter 2010 figures were $6.214 billion, $1.857 billion, $1.242 billion and $1.16, respectively.
Material changes and notable items
- Revenue growth reflected comparable-sales gains, restaurant expansion and favorable currency translation; reported revenue growth exceeded constant-currency growth.
- Operating income increased despite higher food, labor and occupancy expenses. Selling, general and administrative expenses were $2.394 billion, up 3% reported and flat in constant currencies.
- Capital spending rose to $2.730 billion, primarily for new restaurants and reinvestment in existing locations. The System opened 1,150 restaurants and reimaged more than 2,500 locations during 2011.
- Debt increased primarily because of net debt issuance. The company reported a stable credit outlook and access to a $1.5 billion committed credit line, which was unused at year-end.
- There were no material impairment charges in 2011; net impairment and other credits were $4 million. Currency translation benefited reported 2011 results.
Outlook, risks and contingencies
Management said it was confident of meeting or exceeding its long-term constant-currency financial targets, but did not provide specific 2012 diluted EPS guidance. It expected net restaurant additions to contribute approximately 2 percentage points to 2012 Systemwide sales growth in constant currencies. 2012 capital expenditures were projected at about $2.9 billion, with approximately 900 net restaurant additions. Management expected the U.S. commodity basket to rise 4.5%–5.5%, Europe’s 2.5%–3.5%, SG&A to increase about 6% in constant currencies, interest expense to rise 6%–8%, and the effective tax rate to be 31%–33%.
Key risks include weak economic conditions and consumer price sensitivity, commodity and labor inflation, competition, foreign exchange and interest-rate movements, food safety and reputational issues, franchisee execution, supply interruptions, regulatory and litigation exposure, environmental requirements, and technology or data-security failures. Management highlighted continuing economic uncertainty and austerity measures in Europe.
The IRS had proposed approximately $400 million of adjustments, excluding interest and potential penalties, relating to foreign tax credits for 2007–2008; McDonald’s disputed the proposed adjustments and expected the appeals process to conclude in 2012. The company stated that it believed recorded tax liabilities were adequate and did not expect resolution to materially affect results or cash flows. The filing also describes ordinary-course lawsuits and claims; management did not expect currently reviewed matters to have a material adverse effect, while noting an unfavorable ruling could materially affect income in the period incurred. Gross unrecognized tax benefits were $565 million at year-end. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2012 commodity inflation and labor costs pressure company-operated margins more than pricing and sales growth can offset.
- Progress against 2012 restaurant-opening, remodeling and capital-spending plans, and the returns generated by those investments.
- Resolution and financial impact, if any, of the IRS foreign-tax-credit dispute and other tax audits.
- Debt maturities, refinancing plans and the effects of foreign exchange, interest rates and European economic conditions.
- Whether comparable-sales growth and franchisee financial health remain strong across regions.