x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Delaware | 36-2361282 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
One McDonald’s Plaza Oak Brook, Illinois | 60523 | |
(Address of Principal Executive Offices) | (Zip Code) |
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (do not check if a smaller reporting company) | Smaller reporting company ¨ |
Page Reference | |
Item 1 – Financial Statements | |
Item 4 – Controls and Procedures | |
Item 1 – Legal Proceedings | |
Item 1A – Risk Factors | |
Item 6 – Exhibits | |
CONDENSED CONSOLIDATED BALANCE SHEET | |||||||||
(unaudited) | |||||||||
In millions, except per share data | March 31, 2013 | December 31, 2012 | |||||||
Assets | |||||||||
Current assets | |||||||||
Cash and equivalents | $ | 1,869.3 | $ | 2,336.1 | |||||
Accounts and notes receivable | 1,230.0 | 1,375.3 | |||||||
Inventories, at cost, not in excess of market | 105.2 | 121.7 | |||||||
Prepaid expenses and other current assets | 986.7 | 1,089.0 | |||||||
Total current assets | 4,191.2 | 4,922.1 | |||||||
Other assets | |||||||||
Investments in and advances to affiliates | 1,290.4 | 1,380.5 | |||||||
Goodwill | 2,789.5 | 2,804.0 | |||||||
Miscellaneous | 1,562.6 | 1,602.7 | |||||||
Total other assets | 5,642.5 | 5,787.2 | |||||||
Property and equipment | |||||||||
Property and equipment, at cost | 38,095.8 | 38,491.1 | |||||||
Accumulated depreciation and amortization | (13,805.7 | ) | (13,813.9 | ) | |||||
Net property and equipment | 24,290.1 | 24,677.2 | |||||||
Total assets | $ | 34,123.8 | $ | 35,386.5 | |||||
Liabilities and shareholders’ equity | |||||||||
Current liabilities | |||||||||
Accounts payable | $ | 831.6 | $ | 1,141.9 | |||||
Income taxes | 523.9 | 298.7 | |||||||
Other taxes | 372.6 | 370.7 | |||||||
Accrued interest | 140.2 | 217.0 | |||||||
Accrued payroll and other liabilities | 1,148.8 | 1,374.8 | |||||||
Total current liabilities | 3,017.1 | 3,403.1 | |||||||
Long-term debt | 12,797.9 | 13,632.5 | |||||||
Other long-term liabilities | 1,442.2 | 1,526.2 | |||||||
Deferred income taxes | 1,638.4 | 1,531.1 | |||||||
Shareholders’ equity | |||||||||
Preferred stock, no par value; authorized—165.0 million shares; issued—none | — | — | |||||||
Common stock, $.01 par value; authorized—3.5 billion shares; issued 1,660.6 million shares | 16.6 | 16.6 | |||||||
Additional paid-in capital | 5,852.7 | 5,778.9 | |||||||
Retained earnings | 39,776.4 | 39,278.0 | |||||||
Accumulated other comprehensive income | 393.8 | 796.4 | |||||||
Common stock in treasury, at cost; 658.1 and 657.9 million shares | (30,811.3 | ) | (30,576.3 | ) | |||||
Total shareholders’ equity | 15,228.2 | 15,293.6 | |||||||
Total liabilities and shareholders’ equity | $ | 34,123.8 | $ | 35,386.5 |
CONDENSED CONSOLIDATED STATEMENT OF NET INCOME (UNAUDITED) | |||||||||
Quarters Ended | |||||||||
March 31, | |||||||||
In millions, except per share data | 2013 | 2012 | |||||||
Revenues | |||||||||
Sales by Company-operated restaurants | $ | 4,445.4 | $ | 4,432.2 | |||||
Revenues from franchised restaurants | 2,159.9 | 2,114.4 | |||||||
Total revenues | 6,605.3 | 6,546.6 | |||||||
Operating costs and expenses | |||||||||
Company-operated restaurant expenses | 3,726.0 | 3,654.4 | |||||||
Franchised restaurants—occupancy expenses | 395.2 | 374.7 | |||||||
Selling, general & administrative expenses | 596.5 | 592.5 | |||||||
Other operating (income) expense, net | (61.9 | ) | (39.6 | ) | |||||
Total operating costs and expenses | 4,655.8 | 4,582.0 | |||||||
Operating income | 1,949.5 | 1,964.6 | |||||||
Interest expense | 128.1 | 128.9 | |||||||
Nonoperating (income) expense, net | 4.6 | (11.8 | ) | ||||||
Income before provision for income taxes | 1,816.8 | 1,847.5 | |||||||
Provision for income taxes | 546.6 | 580.8 | |||||||
Net income | $ | 1,270.2 | $ | 1,266.7 | |||||
Earnings per common share-basic | $ | 1.27 | $ | 1.24 | |||||
Earnings per common share-diluted | $ | 1.26 | $ | 1.23 | |||||
Dividends declared per common share | $ | 0.77 | $ | 0.70 | |||||
Weighted average shares outstanding-basic | 1,002.7 | 1,018.2 | |||||||
Weighted average shares outstanding-diluted | 1,010.8 | 1,030.0 |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) | ||||||||
Quarters Ended | ||||||||
March 31, | ||||||||
In millions | 2013 | 2012 | ||||||
Net income | $ | 1,270.2 | $ | 1,266.7 | ||||
Other comprehensive income (loss), net of tax | ||||||||
Foreign currency translation adjustments: | ||||||||
Gain (loss) recognized in accumulated other comprehensive income (AOCI), including net investment hedges | (386.4 | ) | 352.5 | |||||
Foreign currency translation adjustments-net of tax benefit (expense) of $(59.6) and $(9.3) | (386.4 | ) | 352.5 | |||||
Cash flow hedges: | ||||||||
Gain (loss) recognized in AOCI | (8.2 | ) | (6.5 | ) | ||||
Reclassification of (gain) loss to net income | (9.3 | ) | 3.0 | |||||
Cash flow hedges-net of tax benefit (expense) of $2.7 and $1.9 | (17.5 | ) | (3.5 | ) | ||||
Defined benefit pension plans: | ||||||||
Gain (loss) recognized in AOCI | 1.2 | (0.6 | ) | |||||
Reclassification of (gain) loss to net income | 0.1 | 1.1 | ||||||
Defined benefit pension plans-net of tax benefit (expense) of $(0.3) and $0.8 | 1.3 | 0.5 | ||||||
Total other comprehensive income (loss), net of tax | (402.6 | ) | 349.5 | |||||
Comprehensive income | 867.6 | 1,616.2 |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) | |||||||||
Quarters Ended | |||||||||
March 31, | |||||||||
In millions | 2013 | 2012 | |||||||
Operating activities | |||||||||
Net income | $ | 1,270.2 | $ | 1,266.7 | |||||
Adjustments to reconcile to cash provided by operations | |||||||||
Charges and credits: | |||||||||
Depreciation and amortization | 391.1 | 364.7 | |||||||
Deferred income taxes | 22.8 | 22.6 | |||||||
Share-based compensation | 22.8 | 26.5 | |||||||
Other | 67.0 | (48.9 | ) | ||||||
Changes in working capital items | (87.0 | ) | 1.9 | ||||||
Cash provided by operations | 1,686.9 | 1,633.5 | |||||||
Investing activities | |||||||||
Capital expenditures | (634.2 | ) | (588.4 | ) | |||||
Sales and purchases of restaurant businesses and property sales | 45.5 | 9.7 | |||||||
Other | 64.2 | (18.7 | ) | ||||||
Cash used for investing activities | (524.5 | ) | (597.4 | ) | |||||
Financing activities | |||||||||
Short-term borrowings and long-term financing issuances and repayments | (622.4 | ) | 267.2 | ||||||
Treasury stock purchases | (339.4 | ) | (812.6 | ) | |||||
Common stock dividends | (772.2 | ) | (712.3 | ) | |||||
Proceeds from stock option exercises | 112.9 | 84.4 | |||||||
Excess tax benefit on share-based compensation | 52.4 | 46.7 | |||||||
Other | (0.2 | ) | (4.8 | ) | |||||
Cash used for financing activities | (1,568.9 | ) | (1,131.4 | ) | |||||
Effect of exchange rates on cash and cash equivalents | (60.3 | ) | 48.7 | ||||||
Cash and equivalents decrease | (466.8 | ) | (46.6 | ) | |||||
Cash and equivalents at beginning of period | 2,336.1 | 2,335.7 | |||||||
Cash and equivalents at end of period | $ | 1,869.3 | $ | 2,289.1 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Restaurants at March 31, | 2013 | 2012 | |||
Conventional franchised | 19,893 | 19,487 | |||
Developmental licensed | 4,420 | 3,965 | |||
Foreign affiliated | 3,657 | 3,622 | |||
Total Franchised | 27,970 | 27,074 | |||
Company-operated | 6,595 | 6,443 | |||
Systemwide restaurants | 34,565 | 33,517 |
• | Certain Financial Assets and Liabilities Measured at Fair Value |
In millions | Level 1 | Level 2 | Carrying Value | |||||||||||
March 31, 2013 | ||||||||||||||
Investments | 166.7 | 166.7 | ||||||||||||
Derivative assets | 150.6 | $ | 111.1 | 261.7 | ||||||||||
Total assets at fair value | $ | 317.3 | $ | 111.1 | $ | 428.4 | ||||||||
Derivative liabilities | $ | (56.6 | ) | $ | (56.6 | ) | ||||||||
Total liabilities at fair value | $ | (56.6 | ) | $ | (56.6 | ) |
• | Certain Financial Assets and Liabilities not Measured at Fair Value |
Derivative Assets | Derivative Liabilities | ||||||||||||||||||
In millions | March 31, 2013 | December 31, 2012 | March 31, 2013 | December 31, 2012 | |||||||||||||||
Total derivatives designated as hedging instruments | $ | 106.5 | $ | 85.1 | $ | (55.3 | ) | $ | (35.8 | ) | |||||||||
Total derivatives not designated as hedging instruments | 155.2 | 133.3 | (1.3 | ) | (6.8 | ) | |||||||||||||
Total derivatives | $ | 261.7 | $ | 218.4 | $ | (56.6 | ) | $ | (42.6 | ) |
Gain (Loss) Recognized in Accumulated OCI | Gain (Loss) Reclassified into Income from Accumulated OCI | Gain (Loss) Recognized in Income on Derivative(1) | |||||||||||||||||||||||||||
In millions | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||
Cash Flow Hedges | $ | (6.7 | ) | $ | (9.8 | ) | $ | 13.5 | $ | (4.4 | ) | $ | (3.3 | ) | $ | (2.5 | ) | ||||||||||||
Net Investment Hedges | $ | 423.8 | $ | (1.5 | ) | $ | — | $ | — | ||||||||||||||||||||
Undesignated derivatives | $ | 19.8 | $ | (3.8 | ) |
(1) | Includes amounts excluded from effectiveness testing, ineffectiveness, and undesignated gains (losses). |
• | Fair Value Hedges |
• | Cash Flow Hedges |
• | Net Investment Hedges |
• | Credit Risk |
Quarters Ended | |||||||
March 31, | |||||||
In millions | 2013 | 2012 | |||||
Revenues | |||||||
U.S. | $ | 2,088.5 | $ | 2,102.3 | |||
Europe | 2,586.4 | 2,535.5 | |||||
APMEA | 1,593.7 | 1,556.6 | |||||
Other Countries & Corporate | 336.7 | 352.2 | |||||
Total revenues | $ | 6,605.3 | $ | 6,546.6 | |||
Operating Income | |||||||
U.S. | $ | 844.7 | $ | 871.3 | |||
Europe | 708.1 | 699.3 | |||||
APMEA | 381.9 | 383.9 | |||||
Other Countries & Corporate | 14.8 | 10.1 | |||||
Total operating income | $ | 1,949.5 | $ | 1,964.6 |
• | Global comparable sales decreased 1.0%. |
• | Consolidated revenues increased 1% (1% in constant currencies). |
• | Consolidated operating income decreased 1% (flat in constant currencies). |
• | Diluted earnings per share was $1.26, up 2% (3% in constant currencies). Foreign currency translation had a negative impact of $0.01 on diluted earnings per share. |
• | The Company paid total dividends of $0.77 per share or $772.2 million and repurchased 3.7 million shares for $354.3 million. |
• | Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2013 Systemwide sales growth (in constant currencies), most of which will be due to the 1,135 net traditional restaurants added in 2012. |
• | The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in comparable sales for either the U.S. or Europe would increase annual diluted earnings per share by about 4 cents. |
• | With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2013, the total basket of goods cost is expected to increase 1.5-2.5% in the U.S. and 2.5-3.5% in Europe. |
• | The Company expects full-year 2013 selling, general and administrative expenses to increase approximately 2-3% in constant currencies, with fluctuations expected between the quarters. |
• | Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2013 to increase approximately 3-4% compared with 2012. |
• | A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents. |
• | The Company expects the effective income tax rate for the full-year 2013 to be 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside the annual range. |
• | The Company expects capital expenditures for 2013 to be approximately $3.2 billion. Over half of this amount will be used to open new restaurants. The Company expects to open between 1,500 - 1,600 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of between 1,200 - 1,300 traditional restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. More than 1,600 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company. |
• | Information in constant currency is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results because they believe this better represents the Company’s underlying business trends. |
• | Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. |
• | Comparable sales represent sales at all restaurants and comparable guest counts represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Comparable sales exclude the impact of currency translation. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends. The number of weekdays and weekend days, referred to as the calendar shift/trading day adjustment, can impact comparable sales and guest counts. In addition, the timing of holidays can also impact comparable sales and guest counts. |
CONSOLIDATED OPERATING RESULTS | |||||||
Quarter Ended | |||||||
Dollars in millions, except per share data | March 31, 2013 | ||||||
Amount | Increase/ (Decrease) | ||||||
Revenues | |||||||
Sales by Company-operated restaurants | $ | 4,445.4 | 0 | % | |||
Revenues from franchised restaurants | 2,159.9 | 2 | |||||
Total revenues | 6,605.3 | 1 | |||||
Operating costs and expenses | |||||||
Company-operated restaurant expenses | 3,726.0 | 2 | |||||
Franchised restaurants—occupancy expenses | 395.2 | 6 | |||||
Selling, general & administrative expenses | 596.5 | 1 | |||||
Other operating (income) expense, net | (61.9 | ) | (56 | ) | |||
Total operating costs and expenses | 4,655.8 | 2 | |||||
Operating income | 1,949.5 | (1 | ) | ||||
Interest expense | 128.1 | (1 | ) | ||||
Nonoperating (income) expense, net | 4.6 | n/m | |||||
Income before provision for income taxes | 1,816.8 | (2 | ) | ||||
Provision for income taxes | 546.6 | (6 | ) | ||||
Net income | $ | 1,270.2 | 0 | % | |||
Earnings per common share-basic | $ | 1.27 | 2 | % | |||
Earnings per common share-diluted | $ | 1.26 | 2 | % |
IMPACT OF FOREIGN CURRENCY TRANSLATION | ||||||||||||||
Dollars in millions, except per share data | ||||||||||||||
Currency Translation (Cost) | ||||||||||||||
Quarters Ended March 31, | 2013 | 2012 | 2013 | |||||||||||
Revenues | $ | 6,605.3 | $ | 6,546.6 | $ | (6.0 | ) | |||||||
Company-operated margins | 719.4 | 777.8 | (0.8 | ) | ||||||||||
Franchised margins | 1,764.7 | 1,739.7 | (12.0 | ) | ||||||||||
Selling, general & administrative expenses | 596.5 | 592.5 | (0.7 | ) | ||||||||||
Operating income | 1,949.5 | 1,964.6 | (15.8 | ) | ||||||||||
Net income | 1,270.2 | 1,266.7 | (11.3 | ) | ||||||||||
Earnings per share-diluted | $ | 1.26 | $ | 1.23 | $ | (0.01 | ) |
REVENUES | ||||||||||||||
Dollars in millions | ||||||||||||||
Quarters Ended March 31, | 2013 | 2012 | Inc/ (Dec) | Inc/ (Dec) Excluding Currency Translation | ||||||||||
Company-operated sales | ||||||||||||||
U.S. | $ | 1,071.7 | $ | 1,089.6 | (2 | )% | (2 | )% | ||||||
Europe | 1,862.4 | 1,834.6 | 2 | 2 | ||||||||||
APMEA | 1,331.6 | 1,306.5 | 2 | 1 | ||||||||||
Other Countries & Corporate | 179.7 | 201.5 | (11 | ) | (10 | ) | ||||||||
Total | $ | 4,445.4 | $ | 4,432.2 | 0 | % | 0 | % | ||||||
Franchised revenues | ||||||||||||||
U.S. | $ | 1,016.8 | $ | 1,012.7 | 0 | % | 0 | % | ||||||
Europe | 724.0 | 700.9 | 3 | 3 | ||||||||||
APMEA | 262.1 | 250.1 | 5 | 8 | ||||||||||
Other Countries & Corporate | 157.0 | 150.7 | 4 | 8 | ||||||||||
Total | $ | 2,159.9 | $ | 2,114.4 | 2 | % | 3 | % | ||||||
Total revenues | ||||||||||||||
U.S. | $ | 2,088.5 | $ | 2,102.3 | (1 | )% | (1 | )% | ||||||
Europe | 2,586.4 | 2,535.5 | 2 | 2 | ||||||||||
APMEA | 1,593.7 | 1,556.6 | 2 | 2 | ||||||||||
Other Countries & Corporate | 336.7 | 352.2 | (4 | ) | (2 | ) | ||||||||
Total | $ | 6,605.3 | $ | 6,546.6 | 1 | % | 1 | % |
• | In the U.S., the decrease in revenues for the quarter was due to negative comparable sales reflecting the challenging eating-out environment. The U.S. remained focused on a balanced approach to value and menu variety, while enhancing the customer experience through ongoing restaurant reimaging. |
• | In Europe, the constant currency increase in revenues for the quarter was driven by expansion, primarily in Russia (which is entirely Company-operated). Revenue growth was negatively impacted by a decrease in comparable sales, as positive results in the U.K. and Russia were more than offset by weaker performance in Germany, France and many other markets due to ongoing economic uncertainty. |
• | In APMEA, the constant currency increase in revenues for the quarter was driven by expansion, partly offset by the impact of negative comparable sales including China, which reflected the consumer sensitivity around the supply chain issue in the chicken industry. |
COMPARABLE SALES | |||||
Increase/ (Decrease) | |||||
Quarters Ended March 31,* | 2013 | 2012 | |||
U.S. | (1.2 | )% | 8.9 | % | |
Europe | (1.1 | ) | 5.0 | ||
APMEA | (3.3 | ) | 5.5 | ||
Other Countries & Corporate | 5.6 | 11.6 | |||
Total | (1.0 | )% | 7.3 | % |
* | On a consolidated basis, comparable guest counts decreased 1.9% and increased 4.8% for the quarters 2013 and 2012, respectively. |
SYSTEMWIDE SALES | ||||
Quarter Ended March 31, 2013 | Inc/ (Dec) | Increase Excluding Currency Translation | ||
U.S. | 0 | % | 0 | % |
Europe | 2 | 2 | ||
APMEA | (3 | ) | 1 | |
Other Countries & Corporate | 3 | 9 | ||
Total | 0 | % | 2 | % |
FRANCHISED SALES | ||||||||||||
Dollars in millions | ||||||||||||
Quarters Ended March 31, | 2013 | 2012 | Inc/ (Dec) | Increase Excluding Currency Translation | ||||||||
U.S. | $ | 7,376.6 | $ | 7,377.5 | 0 | % | 0 | % | ||||
Europe | 4,064.6 | 3,985.8 | 2 | 1 | ||||||||
APMEA | 3,236.6 | 3,425.7 | (6 | ) | 2 | |||||||
Other Countries & Corporate | 1,978.0 | 1,889.1 | 5 | 11 | ||||||||
Total* | $ | 16,655.8 | $ | 16,678.1 | 0 | % | 2 | % |
* | Sales from developmental licensed restaurants or foreign affiliated markets where the Company earns a royalty based on a percent of sales were $3,726.4 million and $3,891.9 million in 2013 and 2012, respectively. The remaining balance of franchised sales is derived from conventional franchised restaurants where the Company earns rent and royalties based primarily on a percent of sales. |
FRANCHISED AND COMPANY-OPERATED RESTAURANT MARGINS | |||||||||||||||||||
Dollars in millions | |||||||||||||||||||
Percent | Amount | Inc/ (Dec) | Inc/ (Dec) Excluding Currency Translation | ||||||||||||||||
Quarters Ended March 31, | 2013 | 2012 | 2013 | 2012 | |||||||||||||||
Franchised | |||||||||||||||||||
U.S. | 82.9 | % | 83.4 | % | $ | 843.2 | $ | 844.4 | 0 | % | 0 | % | |||||||
Europe | 77.1 | 77.9 | 557.9 | 545.7 | 2 | 2 | |||||||||||||
APMEA | 87.7 | 88.6 | 229.9 | 221.6 | 4 | 8 | |||||||||||||
Other Countries & Corporate | 85.2 | 85.0 | 133.7 | 128.0 | 4 | 9 | |||||||||||||
Total | 81.7 | % | 82.3 | % | $ | 1,764.7 | $ | 1,739.7 | 1 | % | 2 | % | |||||||
Company-operated | |||||||||||||||||||
U.S. | 17.4 | % | 18.8 | % | $ | 186.8 | $ | 204.7 | (9 | )% | (9 | )% | |||||||
Europe | 16.7 | 17.5 | 311.7 | 321.7 | (3 | ) | (3 | ) | |||||||||||
APMEA | 14.6 | 16.9 | 194.1 | 220.4 | (12 | ) | (12 | ) | |||||||||||
Other Countries & Corporate | 14.9 | 15.4 | 26.8 | 31.0 | (14 | ) | (13 | ) | |||||||||||
Total | 16.2 | % | 17.5 | % | $ | 719.4 | $ | 777.8 | (8 | )% | (7 | )% |
• | In the U.S., the franchised margin percent decreased for the quarter due to higher depreciation related to reimaging and negative comparable sales performance. |
• | In Europe, while the franchised margin dollars increased for the quarter, the margin percent decreased due to higher rent expense and negative comparable sales performance. |
• | In APMEA, while the franchised margin dollars increased for the quarter, the margin percent decreased primarily due to negative comparable sales performance in Japan and the impact of the weaker Yen, which reduced Japan's favorable contribution to the segment's margin percent. |
• | In the U.S., the Company-operated margin percent for the quarter decreased primarily due to higher labor and other operating costs. |
• | In Europe, the Company-operated margin percent for the quarter decreased due to higher crew labor, commodity costs and depreciation related to reimaging. |
• | In APMEA, the Company-operated margin percent for the quarter decreased due to the acceleration of new restaurant openings, mainly in China, and higher crew labor, occupancy and other operating costs throughout the segment. Similar to other markets, new restaurants in China initially open with lower margins that grow significantly over time. |
CONSOLIDATED COMPANY-OPERATED RESTAURANT EXPENSES AND MARGINS AS A PERCENT OF SALES | |||||
Quarters Ended March 31, | 2013 | 2012 | |||
Food & paper | 33.8 | % | 34.3 | % | |
Payroll & employee benefits | 26.3 | 25.6 | |||
Occupancy & other operating expenses | 23.7 | 22.6 | |||
Total expenses | 83.8 | % | 82.5 | % | |
Company-operated margins | 16.2 | % | 17.5 | % |
OTHER OPERATING (INCOME) EXPENSE, NET | |||||||
Dollars in millions | |||||||
Quarters Ended March 31, | 2013 | 2012 | |||||
Gains on sales of restaurant businesses | $ | (52.7 | ) | $ | (15.7 | ) | |
Equity in earnings of unconsolidated affiliates | (18.7 | ) | (40.4 | ) | |||
Asset dispositions and other (income) expense, net | 9.5 | 16.5 | |||||
Total | $ | (61.9 | ) | $ | (39.6 | ) |
OPERATING INCOME | |||||||||||||
Dollars in millions | |||||||||||||
Quarters Ended March 31, | 2013 | 2012 | Inc/ (Dec) | Inc/ (Dec) Excluding Currency Translation | |||||||||
U.S. | $ | 844.7 | $ | 871.3 | (3 | )% | (3 | )% | |||||
Europe | 708.1 | 699.3 | 1 | 1 | |||||||||
APMEA | 381.9 | 383.9 | (1 | ) | 2 | ||||||||
Other Countries & Corporate | 14.8 | 10.1 | 45 | n/m | |||||||||
Total | $ | 1,949.5 | $ | 1,964.6 | (1 | )% | 0 | % |
• | Combined Operating Margin |
NONOPERATING (INCOME) EXPENSE, NET | |||||||
Dollars in millions | |||||||
Quarters Ended March 31, | 2013 | 2012 | |||||
Interest Income | $ | (4.0 | ) | $ | (11.5 | ) | |
Foreign currency and hedging activity | 0.5 | 0.5 | |||||
Other (income) expense, net | 8.1 | (0.8 | ) | ||||
Total | $ | 4.6 | $ | (11.8 | ) |
• | Our ability to anticipate and respond effectively to trends or other factors that affect the IEO segment and our competitive position in the diverse markets we serve, such as spending patterns, demographic changes, trends in food preparation, consumer preferences and publicity about us, all of which can drive popular perceptions of our business or affect the willingness of other companies to enter into site, supply or other arrangements or alliances with us; |
• | Our continued innovation in all aspects of the McDonald's experience, including particularly our menu offerings, and our ability to adapt our plans to deliver a locally-relevant experience in a highly competitive, value-driven operating environment; |
• | The risks associated with our franchise business model, including whether our franchisees and developmental licensees will have the experience and financial resources to be effective operators and remain aligned with us on operating, promotional and capital-intensive initiatives and the potential impact on us if they experience food safety or other operational problems or project a brand image inconsistent with our values, particularly if our contractual and other rights and remedies are limited by law or otherwise, costly to exercise or subject to litigation; |
• | The success of our tiered approach to menu offerings, as well as the impact of our competitors' actions, including in response to our menu changes, and our ability to continue robust menu development and manage the complexity of our restaurant operations; |
• | Our ability to differentiate the McDonald's experience in a way that balances consumer value with margin levels, particularly in markets where pricing or cost pressures are significant; |
• | The impact of pricing, marketing and promotional plans on sales and margins and our ability to adjust these plans to respond quickly to changing economic and heightened competitive conditions; |
• | Our ability to drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours, and motivate our restaurant personnel and our franchisees to achieve consistency and high service levels so as to improve consumer perceptions of our ability to meet expectations for quality food served in clean and friendly environments; |
• | Whether we can complete our restaurant reimaging and rebuilding plans as projected, and whether we are able to identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants, as well as sales and profitability targets; |
• | The costs and risks associated with our increasing reliance on information systems (e.g., point-of-sale and other in-store systems or platforms) that support our restaurants and that we make available to franchisees along with related services, including the risk that we will not realize fully the benefits of the significant investments we are making to enhance the customer experience; the potential for system failures, programming errors, security breaches involving our systems or those of third-party system operators, and the heightened vulnerability to these problems in the case of systems we implement on a decentralized basis; legal and tax risks associated with providing information-related services to franchisees, including those relating to data protection and management; and litigation risk involving intellectual property rights or our rights and obligations to others under related contractual arrangements; |
• | The success of our initiatives to support menu choice, physical activity and nutritional awareness and to address these and other matters of social responsibility in a way that communicates our values effectively and inspires trust and confidence; |
• | Our ability to respond effectively to adverse perceptions about the quick-service category of the IEO segment or about our food (including its nutritional content and preparation), promotions and premiums, such as Happy Meal toys (collectively, our "products"), how we source the commodities we use, and our ability to manage the potential impact on McDonald's of food-borne illnesses or product safety issues; |
• | The impact of campaigns by labor organizations and activists or the use of social media and other mobile communications and applications to promote adverse perceptions of our brand, our management or our suppliers, or to promote or threaten boycotts or other actions involving us or our suppliers; |
• | The impact of events such as boycotts or protests, labor strikes and supply chain interruptions (including due to lack of supply or price increases) that can adversely affect us or the vendors, franchisees and others that are also part of the McDonald's System and whose performance has a material impact on our results; |
• | Our ability to recruit and retain qualified personnel to manage our operations and growth; and |
• | Our ability to leverage promotional or operating successes in individual markets into other markets in a timely and cost-effective way. |
• | Whether our strategies will be effective in enabling the continued market share gains that we have included in our plans, while at the same time enabling us to achieve our targeted operating income growth despite the current adverse economic conditions, resurgent competitors and an increasingly complex, costly and competitive advertising environment; |
• | The effectiveness of our supply chain management to assure reliable and sufficient product supply on favorable terms; |
• | The impact on consumer disposable income levels and spending habits of governmental actions to manage national economic matters, whether through austerity or stimulus measures and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers; |
• | The impact on restaurant sales and margins of ongoing commodity price volatility, and the effectiveness of pricing, hedging and other actions taken to address this environment; |
• | The impact on our margins of labor costs and the long-term trend toward higher wages and social expenses in both mature and developing markets; |
• | The impact of foreign exchange and interest rates on our financial condition and results; |
• | The challenges and uncertainties associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest, all of which are exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment; |
• | The nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment charges that reduce our earnings; |
• | The increasing focus on workplace practices and conditions, which may drive changes in practices or in the general commercial and regulatory environment that affect perceptions of our business or our cost of doing business, and our exposure to reputational and other harm as a result of practices of our franchisees; |
• | The impact of changes in our debt levels on our credit ratings, interest expense, availability of acceptable counterparties, ability to obtain funding on favorable terms or our operating or financial flexibility, especially if lenders impose new operating or financial covenants; and |
• | The impact of an exit from the Eurozone by any of the EU Member States, which could entail disruption to our business as the exiting Member State establishes a new currency and we, along with our suppliers, franchisees and others, address the challenges associated with redenomination. |
• | The cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations we face, especially in the United States where inconsistent standards imposed by local, state and federal authorities can adversely affect popular perceptions of our business and increase our exposure to litigation or governmental investigations or proceedings; |
• | The impact of new, potential or changing regulations that can affect our business plans, such as those relating to product packaging, marketing and the nutritional content and safety of our food and other products, as well as the risks and costs of our labeling and other disclosure practices, particularly given varying legal requirements and practices for testing and disclosure within our industry, ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of information from third-party suppliers; |
• | The impact of nutritional, health and other scientific inquiries and conclusions, which constantly evolve and often have contradictory implications, but nonetheless drive popular opinion, litigation and regulation, including taxation, in ways that could be material to our business; |
• | The impact of litigation trends, particularly in our major markets, including class actions, labor, employment and personal injury claims, franchisee litigation, landlord/tenant disputes and intellectual property claims (including often aggressive or opportunistic attempts to enforce patents used in information technology systems); the relative level of our defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings; the cost and other effects of settlements or judgments, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products; and the scope and terms of insurance or indemnification protections that we may have; |
• | Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices; |
• | The risks and costs to us, our franchisees and our supply chain of the effects of climate change, as well as of increased focus by U.S. and overseas governmental and non-governmental organizations on environmental sustainability matters (e.g., climate change, land use, energy and water resources, packaging and waste, and animal health and welfare) and the increased pressure to make commitments or set targets and take actions to meet them, which could expose the Company to market, operational and execution costs or risks, particularly when actions are undertaken Systemwide; |
• | The increasing costs and other effects of compliance with U.S. and overseas regulations affecting our workforce and labor practices, including regulations relating to wage and hour practices, workplace conditions, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination; |
• | Disruptions in our operations or price volatility in a market that can result from governmental actions, such as price, foreign exchange or import-export controls, increased tariffs or government-mandated closure of our or our vendors' operations, and the cost and disruption of responding to governmental investigations or proceedings, whether or not they have merit; |
• | The legal and compliance risks and costs associated with privacy, consumer data protection and similar laws, particularly as they apply to children, the potential costs (including the loss of consumer confidence) arising from alleged security breaches of our information systems, and the risk of criminal penalties or civil liability to consumers, employees or franchisees whose data is alleged to have been collected or used inappropriately; |
• | The impact on our operations of tax and other regulations affecting capital flows, financial markets or financial institutions, which can limit our ability to manage and deploy our liquidity or increase our funding costs; and |
• | The impact of changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, changes in tax accounting or tax laws (or related authoritative interpretations), particularly if corporate tax reform becomes a key component of budgetary initiatives in the United States and elsewhere, and the impact of settlements of pending or any future adjustments proposed by the IRS or other taxing authorities in connection with our tax audits, all of which will depend on their timing, nature and scope. |
• | The continuing unfavorable global economic and volatile market conditions; |
• | Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the United States which is the principal trading market for our common stock, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to our business; |
• | Changes in financial or tax reporting and accounting principles or practices that materially affect our reported financial condition and results and investor perceptions of our performance; |
• | Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance or plans, expectations about our business, our creditworthiness or investor confidence generally; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald's may be included, such as the S&P 500 Index and the Dow Jones Industrial Average; |
• | The impact of our stock repurchase program or dividend rate; and |
• | The impact on our results of other corporate actions, such as those we may take from time to time as part of our continuous review of our corporate structure in light of business, legal and tax considerations. |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||
January 1 - 31, 2013 | 1,119,640 | $ | 92.21 | 1,119,640 | $ | 9,148,788,407 | ||||||||
February 1 - 28, 2013 | 1,523,428 | 94.79 | 1,523,428 | 9,004,378,495 | ||||||||||
March 1 - 31, 2013 | 1,088,649 | 97.94 | 1,088,649 | 8,897,756,727 | ||||||||||
Total | 3,731,717 | $ | 94.94 | 3,731,717 |
* | Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements. |
(1) | On July 19, 2012, the Company's Board of Directors approved a share repurchase program, effective August 1, 2012, that authorizes the purchase of up to $10 billion of the Company's outstanding common stock with no specified expiration date. |
Exhibit Number | Description | ||||||
(3) | (a) | Restated Certificate of Incorporation, effective as of June 14, 2012, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2012. | |||||
(b) | By-Laws, as amended and restated with effect as of July 19, 2012, incorporated herein by reference from Form 8-K, filed July 20, 2012. | ||||||
(4) | Instruments defining the rights of security holders, including Indentures:* | ||||||
(a) | Senior Debt Securities Indenture, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration Statement (File No. 333-14141), filed October 15, 1996. | ||||||
(b) | Subordinated Debt Securities Indenture, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration Statement (File No. 333-14141), filed October 15, 1996. | ||||||
(10) | Material Contracts | ||||||
(a) | Directors’ Deferred Compensation Plan, effective as of January 1, 2008, incorporated herein by reference from Form 8-K, filed December 4, 2007.** | ||||||
(b) | McDonald’s Excess Benefit and Deferred Bonus Plan, effective January 1, 2011, as amended and restated March 22, 2010, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2010.** | ||||||
(c) | McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective as of September 1, 2001, incorporated herein by reference from Form 10-K, for the year ended December 31, 2001.** | ||||||
(i) | First Amendment to the McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective as of January 1, 2002, incorporated herein by reference from Form 10-K, for the year ended December 31, 2002.** | ||||||
(ii) | Second Amendment to the McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective January 1, 2005, incorporated herein by reference from Form 10-K, for the year ended December 31, 2004.** | ||||||
(d) | 1975 Stock Ownership Option Plan, as amended and restated July 30, 2001, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2001.** | ||||||
(i) | First Amendment to McDonald’s Corporation 1975 Stock Ownership Option Plan, as amended and restated, effective as of February 14, 2007, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2007.** | ||||||
(e) | 1992 Stock Ownership Incentive Plan, as amended and restated January 1, 2001, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2001.** | ||||||
(i) | First Amendment to McDonald’s Corporation 1992 Stock Ownership Incentive Plan, as amended and restated, effective as of February 14, 2007, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2007.** | ||||||
(f) | McDonald’s Corporation Executive Retention Replacement Plan, effective as of December 31, 2007 (as amended and restated on December 31, 2008), incorporated herein by reference from Form 10-K, for the year ended December 31, 2008.** | ||||||
(g) | McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, effective July 1, 2008, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2009.** | ||||||
(i) | First amendment to the McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, incorporated herein by reference from Form 10-K, for the year ended December 31, 2008.** | ||||||
(ii) | Second Amendment to the McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan as amended, effective February 9, 2011, incorporated herein by reference from Form 10‑K, for the year ended December 31, 2010.** | ||||||
(h) | McDonald's Corporation 2012 Omnibus Stock Ownership Plan, effective June 1, 2012, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2012.** | ||||||
(i) | McDonald’s Corporation 2009 Cash Incentive Plan, effective as of May 27, 2009, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2009.** | ||||||
(j) | McDonald's Corporation Target Incentive Plan, effective January 1, 2013, filed herewith.** | ||||||
(k) | McDonald's Corporation Cash Performance Unit Plan, effective February 13, 2013, filed herewith.** |
Exhibit Number | Description | ||||||
(l) | Form of Executive Stock Option Grant Agreement in connection with the Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended, incorporated herein by reference from Form 10-K, for the year ended December 31, 2011.** | ||||||
(m) | Form of Executive Performance-Based Restricted Stock Unit Award Agreement in connection with the Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended, incorporated herein by reference from Form 10-K, for the year ended December 31, 2011.** | ||||||
(n) | Form of Executive Stock Option Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, filed herewith.** | ||||||
(o) | Form of Executive Performance-Based Restricted Stock Unit Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, filed herewith.** | ||||||
(p) | Form of Special CPUP Performance-Based Restricted Stock Unit Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, filed herewith.** | ||||||
(q) | McDonald’s Corporation Severance Plan, effective January 1, 2008, incorporated by reference from Form 8-K, filed December 4, 2007.** | ||||||
(i) | First Amendment of McDonald’s Corporation Severance Plan, effective as of October 1, 2008, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2008.** | ||||||
(ii) | Second Amendment of McDonald’s Corporation Severance Plan, effective as of December 5, 2011, incorporated herein by reference from Form 10-K, for the year ended December 31, 2011.** | ||||||
(r) | Form of McDonald's Corporation Tier I Change of Control Employment Agreement, incorporated herein by reference from Form 10-Q, for the quarter ended September 30, 2008.** | ||||||
(s) | Amended Assignment Agreement between Timothy Fenton and the Company, dated January 2008, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2008.** | ||||||
(i) | 2009 Amendment to the Amended Assignment Agreement between Timothy Fenton and the Company, effective as of January 1, 2009, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2009.** | ||||||
(t) | Description of Restricted Stock Units granted to Andrew J. McKenna, incorporated herein by reference from Form 10-Q, for the quarter ended June 30, 2012.** | ||||||
(u) | Terms of the Restricted Stock Units granted pursuant to the Company’s Amended and Restated 2001 Omnibus Stock Ownership Plan, incorporated herein by reference from Form 10-K, for the year ended December 31, 2010.** | ||||||
(v) | Executive Supplement describing the special terms of equity compensation awards granted to certain executive officers, pursuant to the Company’s Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2011.** | ||||||
(12) | Computation of Ratios. |
Exhibit Number | Description | ||||||
(31.1) | Rule 13a-14(a) Certification of Chief Executive Officer. | ||||||
(31.2) | Rule 13a-14(a) Certification of Chief Financial Officer. | ||||||
(32.1) | Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
(32.2) | Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
(101.INS) | XBRL Instance Document. | ||||||
(101.SCH) | XBRL Taxonomy Extension Schema Document. | ||||||
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document. | ||||||
(101.LAB) | XBRL Taxonomy Extension Label Linkbase Document. | ||||||
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||
* | Other instruments defining the rights of holders of long-term debt of the registrant, and all of its subsidiaries for which consolidated financial statements are required to be filed and which are not required to be registered with the Commission, are not included herein as the securities authorized under these instruments, individually, do not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of any such instruments to the Commission upon request has been filed with the Commission. |
** | Denotes compensatory plan. |
McDONALD’S CORPORATION (Registrant) | |||
/s/ Peter J. Bensen | |||
May 1, 2013 | Peter J. Bensen | ||
Corporate Executive Vice President and | |||
Chief Financial Officer |