Business Context and Reporting Period
Company: McDonald's Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: The Company primarily franchises and operates McDonald's restaurants globally, serving a value-priced menu in over 100 countries. It also operates Boston Market and held a minority interest in Pret A Manger. In 2006, the Company completed the disposition of its entire investment in Chipotle Mexican Grill via public offerings and a tax-free exchange of shares.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $21,586 million | $19,832 million |
| Operating Income | $4,445 million | $3,992 million |
| Net Income | $3,544 million | $2,602 million |
| Diluted EPS (Net Income) | $2.83 | $2.04 |
| Cash Provided by Operations | $4,341 million | $4,337 million |
| Capital Expenditures | $1,742 million | $1,607 million |
| Total Debt | $8,434 million | $10,137 million |
| Shareholders' Equity | $15,458 million | $15,146 million |
| Dividends Declared per Share | $1.00 | $0.67 |
Operational Highlights: Global comparable sales increased 5.7%. Systemwide sales increased 7%. The Company returned approximately $5 billion to shareholders in 2006 through dividends and share repurchases (including shares acquired in the Chipotle exchange).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9% year-over-year, driven by positive comparable sales and favorable foreign currency translation (stronger Euro, Canadian Dollar, and British Pound).
- Profitability: Net income increased 36% to $3.5 billion. This includes $671 million ($0.53 per share) of income from discontinued operations related to the Chipotle disposition. Income from continuing operations increased 11% to $2.9 billion.
- Debt Reduction: Total debt decreased by approximately $1.7 billion, primarily due to net repayments of $2.3 billion, partly offset by foreign exchange impacts.
- Share Count: Shares outstanding decreased by approximately 5% due to aggressive share repurchases and the Chipotle exchange.
- Dividend Increase: The annual dividend was increased nearly 50% to $1.00 per share.
Guidance, Outlook, and Risks
Outlook for 2007
- Restaurant Expansion: The Company expects to open approximately 800 McDonald's restaurants (700 traditional, 100 satellites) and close approximately 400 net units.
- Capital Expenditures: Expected to be approximately $1.9 billion, with half reinvested in existing restaurants.
- Shareholder Returns: The Company expects to return at least an additional $5 billion to shareholders in 2007 and 2008 combined via dividends and repurchases.
- Financial Targets: The Company expects to maintain a debt-to-capital ratio of 35% to 40% and an effective income tax rate of 31% to 33%.
- Cost Structure: Selling, general, and administrative expenses are expected to decline modestly as a percent of revenues. U.S. beef costs are expected to be down slightly, while chicken costs are expected to rise.
Risks and Contingencies
- Strategic Transition: The Company plans to transition approximately 2,300 Company-operated restaurants (primarily in Latin America and APMEA) to developmental licensees by the end of 2008. This is expected to result in a significant aggregate loss as the Company anticipates not recovering the net book value of these assets.
- Legal Proceedings: Significant pending litigation includes a shareholder class action regarding alleged securities fraud (dismissed with prejudice but under appeal), an obesity-related class action in New York, and a public civil action in Brazil regarding tax guidance payments.
- Market Risks: Results are sensitive to foreign currency fluctuations (particularly the Euro and British Pound) and commodity price volatility (beef and chicken).
Investor Verification Checklist
- Discontinued Operations: Verify the impact of the $671 million gain from the Chipotle disposition on net income versus continuing operations performance.
- Developmental License Strategy: Monitor the execution of the plan to convert 2,300 restaurants to developmental licenses and the associated impairment charges expected in 2007-2008.
- Currency Sensitivity: Assess the impact of foreign exchange rates on reported earnings, as approximately 80% of debt is denominated in foreign currencies and a significant portion of revenue is international.
- Share Repurchases: Confirm the remaining authorization under the new $5.0 billion share repurchase program authorized in March 2006.
- Legal Exposure: Track the status of the obesity-related litigation in New York and the shareholder derivative actions.