McDonald’s Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Financial amounts are U.S. dollars.
Business context
McDonald’s franchises and operates restaurants in 119 countries. At year-end, 30,081 of 36,525 restaurants were franchised (about 82%); the company’s long-term goal is 95% franchised. Effective July 1, 2015, it reorganized reporting into the U.S., International Lead Markets, High Growth Markets, and Foundational Markets & Corporate.
Financial and operating results
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total revenue | $25.413 billion | $27.441 billion | Down 7% reported; up 3% excluding currency translation |
| Operating income | $7.146 billion | $7.949 billion | Down 10% reported; flat excluding currency translation |
| Net income | $4.529 billion | $4.758 billion | Down 5% reported |
| Diluted EPS | $4.80 | $4.82 | Flat reported; up 10% excluding currency translation |
| Operating margin | 28.1% | 29.0% | Down 0.9 percentage points |
| Cash from operations | $6.539 billion | $6.730 billion | Down 3% |
| Capital expenditures | $1.814 billion | $2.583 billion | Down 30% |
| Cash and equivalents | $7.686 billion | $2.078 billion | Higher mainly from borrowing for planned 2016 repurchases |
| Total debt | $24.122 billion | $14.936 billion | Up $9.2 billion; net long-term debt issuance was $9.7 billion |
| Shareholders’ equity | $7.088 billion | $12.853 billion | Down, reflecting repurchases and other equity changes |
Cash from operations exceeded capital expenditures by $4.7 billion. The current balance sheet reports current assets of $9.643 billion and current liabilities of $2.950 billion. Debt was 77% of total capitalization, versus 54% in 2014; the company reported an investment-grade long-term rating of BBB+ from S&P and Baa1 from Moody’s.
Global comparable sales rose 1.5%, while comparable guest counts fell 2.3%. U.S. comparable sales increased 0.5% but guest counts declined 3.0%; International Lead Markets sales increased 3.4%; High Growth Markets increased 1.8%; and Foundational Markets increased 0.7%. Currency translation reduced 2015 revenue by $2.829 billion and diluted EPS by $0.50.
Margins weakened: company-operated restaurant margin was 15.2% of sales versus 15.9% in 2014; franchised margin was 81.5% of franchised revenue versus 81.7%. The U.S. company-operated margin faced higher wage and benefit costs, while Russia’s currency and inflation pressures weighed on High Growth Markets.
Fourth quarter: Revenue was $6.341 billion versus $6.572 billion in Q4 2014; operating income was $1.880 billion versus $1.752 billion; net income was $1.206 billion versus $1.098 billion; diluted EPS was $1.31 versus $1.13.
Material changes and unusual items
- Reported results were affected by currency weakness, refranchising, restructuring, restaurant closures, and changes in operating performance. Refranchising shifts reported sales to lower franchised-fee revenue, while management expects a more stable, less capital-intensive business and higher franchised margin dollars.
- 2015 strategic charges, primarily goodwill and other asset write-offs tied to refranchising and restructuring, plus restaurant-closing costs, were partly offset by a U.S. property-sale gain; their net effect reduced diluted EPS by $0.18. Other operating expense included $235 million of impairment and other charges and a $135 million property-sale gain.
- 2014 included charges that reduced diluted EPS by $0.54: $0.31 from foreign tax matters and $0.23 from the China supplier issue. Excluding these items and 2015 items, management said 2015 EPS in constant currencies would have increased 2%.
- The company repurchased 61.8 million shares for $6.2 billion and paid $3.230 billion in dividends in 2015, returning $9.4 billion in total. It declared dividends of $3.44 per share for the year and raised the quarterly rate to $0.89 in Q4.
Outlook, risks and contingencies
Management provided no specific EPS guidance. For 2016 it expected positive top-line momentum across segments and net restaurant additions to contribute about 1 percentage point to Systemwide sales growth in constant currencies. Forecasts included U.S. commodity basket costs down 1–2%, International Lead Markets costs roughly flat, SG&A down 1–2% in constant currencies, interest expense up 40–45% because of higher average debt, and an effective tax rate of 31–33%. Planned capital expenditures were about $2.0 billion, with approximately 1,000 openings and about 500 net additions.
The company targeted about $30 billion of shareholder returns over the three years ending 2016, with nearly $16 billion returned through 2015 and about $14 billion remaining. It expected to refranchise about 4,000 restaurants through 2018 and achieve about $500 million in annual net G&A savings, mostly by the end of 2017. Management anticipated possible additional strategic charges. Debt-funded shareholder returns had already increased leverage; interest expense was expected to rise.
Principal risks include intense competition, changing consumer preferences, execution of the turnaround and refranchising plans, franchisee financial and operating performance, food safety and supplier disruption, commodity and labor costs, foreign exchange, regulation and litigation, cyber and technology failures, and tax uncertainty. Management identified 5–10% of goodwill as potentially at risk of future impairment. Gross unrecognized tax benefits were $781 million; the European Commission had opened an investigation concerning Luxembourg tax rulings. The company said pending claims were not expected to have a material adverse effect, while acknowledging an unfavorable ruling could materially affect income in the period of resolution. No material legal contingency amount is clearly quantified in the filing.
After year-end, the company authorized a new $15 billion repurchase program effective January 1, 2016. On February 12, 2016, it paid $2.7 billion under an accelerated share repurchase agreement and received an initial 18.5 million shares; final delivery was subject to settlement terms.
Important facts for investors to verify
- Whether positive comparable-sales momentum continued and guest-count declines reversed, particularly in the U.S. and Foundational Markets.
- Whether the planned refranchising, $500 million cost savings, and 2016 shareholder-return target were achieved without undermining franchisee health or operating performance.
- How higher debt and interest costs affected liquidity, credit ratings, EPS, and capacity for dividends and repurchases.
- Whether strategic charges, goodwill impairment exposure, tax audits, and the Luxembourg investigation produced additional costs or cash outflows.
- Whether reported growth and margins improved on a constant-currency basis and after separating unusual items from recurring performance.