McDonald’s Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial amounts are U.S. dollars.
Business context
McDonald’s franchises and operates restaurants in 119 countries. At year-end, it had 35,429 Systemwide restaurants, of which 28,691 were franchised or licensed and 6,738 were Company-operated. The business depends on restaurant sales and, for franchised locations, rent and royalty income.
Key financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $28.106 billion | $27.567 billion | +2% |
| Operating income | $8.764 billion | $8.605 billion | +2% |
| Net income | $5.586 billion | $5.465 billion | +2% |
| Diluted earnings per share | $5.55 | $5.36 | +4% |
| Cash provided by operations | $7.121 billion | $6.966 billion | +2% |
| Capital expenditures | $2.825 billion | $3.049 billion | -7% |
| Total debt | $14.130 billion | $13.633 billion | +$0.497 billion |
- Combined operating margin was 31.2%, unchanged from 2012. Company-operated restaurant margin dollars fell 2% to $3.296 billion; franchised margin dollars rose 2% to $7.607 billion.
- Cash and equivalents were $2.799 billion, up from $2.336 billion. Current assets were $5.050 billion and current liabilities $3.170 billion.
- Cash from operations less capital expenditures was approximately $4.296 billion. The Company returned $4.925 billion to shareholders: $3.115 billion in dividends and $1.810 billion in share repurchases.
- Fourth-quarter revenue was $7.093 billion versus $6.952 billion; net income was $1.397 billion versus $1.396 billion; diluted EPS was $1.40 versus $1.38.
Performance versus prior year
- Global comparable sales increased 0.2%, but comparable guest counts declined 1.9%. Systemwide sales grew 1% reported and 3% in constant currencies.
- Comparable sales were down 0.2% in the U.S., flat in Europe and down 1.9% in APMEA. APMEA guest counts fell 3.8%; Japan was a significant contributor to the segment’s decline.
- Revenue growth reflected restaurant expansion, while weak comparable sales and guest counts limited performance. Management said customer-facing initiatives did not generate the expected sales lift.
- Foreign currency translation reduced 2013 operating income by $66 million and diluted EPS by $0.05. EPS growth also benefited from fewer weighted-average shares.
Outlook, risks and notable items
- Management expected 2014 results to remain challenged, citing modest IEO market growth, economic pressure, consumer price sensitivity and intensifying competition. It does not provide specific diluted EPS guidance.
- Long-term average annual targets remained Systemwide sales growth of 3%–5%, operating income growth of 6%–7% and ROIIC in the high teens. For 2013, those measures were 3% constant-currency sales growth, 3% constant-currency operating income growth, 11.4% one-year ROIIC and 20.2% three-year ROIIC.
- 2014 outlook included net restaurant additions of 1,000–1,100; capital expenditures of $2.9–$3.0 billion; commodity basket cost increases of 1%–2% in the U.S. and Europe; SG&A growth of about 8% in constant currencies; interest expense growth of 5%–7%; and an effective tax rate of 31%–33%. The Company expected to return approximately $5 billion to shareholders.
- Major risks include weak consumer demand, menu and pricing execution, wage and commodity inflation, franchisee performance, food safety and reputational issues, regulatory and litigation exposure, foreign-exchange movements, and technology and data-security risks.
- Debt ratings were A/A/A2 for long-term debt and stable. About 41% of debt was foreign-currency-denominated; the Company reported $1.5 billion of unused committed credit capacity. Approximately $2.0 billion of cash was held by foreign subsidiaries and was considered indefinitely reinvested.
- The 2013 effective tax rate was 31.9% and included an approximately $50 million benefit from retroactive tax legislation. IRS examinations of 2009–2010 returns and proposed transfer-pricing adjustments were ongoing; the Company said recorded tax liabilities were appropriate. It reported $512.7 million in gross unrecognized tax benefits.
- The Company said pending litigation was not expected to materially affect financial condition or results, while acknowledging that an unfavorable ruling could materially affect income in a period. No material subsequent events requiring disclosure were reported.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improved, particularly in the U.S., Germany and Japan, and whether new initiatives translated into sustained visits.
- Whether franchised margin growth can continue while Company-operated margins face labor, commodity and occupancy cost pressure.
- Actual 2014 capital spending, restaurant additions, commodity costs, SG&A, tax rate and shareholder distributions versus management’s outlook.
- Debt maturities, refinancing and liquidity needs, and the potential tax and cash-flow effects of any change in the treatment of foreign earnings.
- Developments in IRS transfer-pricing matters, other tax audits, litigation, food-safety risks and material regulatory changes.