Form 10-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number 1-5231

 

McDONALD’S CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

   

 

 

36-2361282

(I.R.S. Employer

Identification No.)

  

  

  

One McDonald’s Plaza

Oak Brook, Illinois

(Address of principal executive offices)

   

 

60523

(Zip code)

  

  

Registrant’s telephone number, including area code: (630) 623-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Name of each exchange

on which registered

 
Common stock, $.01 par value     New York Stock Exchange   

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer  x         Accelerated filer  ¨

Non-accelerated filer  ¨  (do not check if a smaller reporting company)        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2011 was $86,947,538,692.

The number of shares outstanding of the registrant’s common stock as of January 31, 2012 was 1,018,555,678.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates information by reference from the registrant’s 2012 definitive proxy statement which will be filed no later than 120 days after December 31, 2011.

 

 


Table of Contents

McDONALD’S CORPORATION

 

INDEX

 

 

        Page reference  
Part I.      
  Item 1   Business     1   
  Item 1A   Risk Factors and Cautionary Statement Regarding Forward-Looking Statements     3   
  Item 1B   Unresolved Staff Comments     6   
  Item 2   Properties     6   
  Item 3   Legal Proceedings     6   
  Item 4   Mine Safety Disclosures     6   
Part II.      
  Item 5   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     8   
  Item 6   Selected Financial Data     9   
  Item 7   Management’s Discussion and Analysis of Financial Condition and Results of Operations     10   
  Item 7A   Quantitative and Qualitative Disclosures About Market Risk     26   
  Item 8   Financial Statements and Supplementary Data     26   
  Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     47   
  Item 9A   Controls and Procedures     47   
  Item 9B   Other Information     47   
Part III.      
  Item 10   Directors, Executive Officers and Corporate Governance     47   
  Item 11   Executive Compensation     47   
  Item 12   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters     47   
  Item 13   Certain Relationships and Related Transactions, and Director Independence     48   
  Item 14   Principal Accountant Fees and Services     48   
Part IV.      
  Item 15   Exhibits and Financial Statement Schedules     48   
Signatures     51   
Exhibits  

All trademarks used herein are the property of their respective owners and are used with permission.


Table of Contents

PART I

 

 

ITEM 1. Business

 

 

McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the “Company.”

a. General development of business

During 2011, there have been no material changes to the Company’s corporate structure or in its method of conducting business. In 2011, the Company has continued the process it began in 2005 to realign certain subsidiaries to develop a corporate structure within its geographic segments that better reflects the operation of the McDonald’s worldwide business.

b. Financial information about segments

Segment data for the years ended December 31, 2011, 2010, and 2009 are included in Part II, Item 8, page 40 of this Form 10-K.

c. Narrative description of business

 

 

General

The Company franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a broad menu (see Products) at various price points providing value in 119 countries around the world.

All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements.

The Company’s operations are designed to assure consistency and high quality at every restaurant. When granting franchises or licenses, the Company is selective and generally is not in the practice of franchising to passive investors.

Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. A discussion regarding site selection is included in Part I, Item 2, page 6 of this Form 10-K.

Conventional franchisees contribute to the Company’s revenue stream through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees received upon the opening of a new restaurant or the granting of a new franchise term. The conventional franchise arrangement typically lasts 20 years, and franchising practices are generally consistent throughout the world. Over 70% of franchised restaurants operate under conventional franchise arrangements.

Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. While the Company has no capital invested, it receives a royalty based on a percent of sales, as well as initial fees. The largest of these developmental license arrangements operates over 1,800 restaurants across 19 countries in Latin America and the Caribbean.

The Company has an equity investment in a limited number of foreign affiliated markets, referred to as affiliates. The largest of these affiliates is Japan, where there are approximately 3,300 restaurants. The Company receives a royalty based on a percent of sales in these markets and records its share of net results in Equity in earnings of unconsolidated affiliates.

The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and strictly enforces high quality standards and product specifications. The Company has quality centers around the world to ensure that its high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site supplier visits. A quality leadership board, composed of the Company’s technical, safety and supply chain specialists, provides strategic global leadership for all aspects of food quality and safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term.

Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to most McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of products and in the delivery of customer service.

McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand image and differentiate the Company from competitors. Marketing and promotional efforts focus on value, food taste, menu choice, nutrition, convenience and the customer experience. The Company continuously endeavors to improve its social responsibility and environmental practices to achieve long-term sustainability, which benefits McDonald’s and the communities it serves.

 

 

Products

McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis.

McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Snack Wraps, french fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.

McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes.

 

 

Intellectual property

The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. The Company considers the trademarks “McDonald’s” and “The Golden Arches Logo” to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid

 

 

 

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as long as they are used and/or registered. Patents, copyrights and licenses are of varying remaining durations.

 

 

Seasonal operations

The Company does not consider its operations to be seasonal to any material degree.

 

 

Working capital practices

Information about the Company’s working capital practices is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations for the years ended December 31, 2011, 2010, and 2009 in Part II, Item 7, pages 10 through 26, and the Consolidated statement of cash flows for the years ended December 31, 2011, 2010, and 2009 in Part II, Item 8, page 29 of this Form 10-K.

 

 

Customers

The Company’s business is not dependent upon either a single customer or small group of customers.

 

 

Backlog

Company-operated restaurants have no backlog orders.

 

 

Government contracts

No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

 

 

Competition

McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry.

In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry. The Company’s primary competition, which management refers to as the Informal Eating Out (IEO) segment, includes the following restaurant categories defined by Euromonitor International: quick-service eating establishments, casual dining full-service restaurants, 100% home delivery/takeaway providers, street stalls or kiosks, specialist coffee shops, juice/smoothie bars and self-service cafeterias. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining.

Based on data from Euromonitor International, the global IEO segment was composed of approximately 6.5 million outlets and generated $933 billion in annual sales in 2010, the most recent year for which data is available. McDonald’s Systemwide 2010 restaurant business accounted for approximately 0.5% of those outlets and about 8% of the sales.

Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all other full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 13.7 million outlets and generated about $1.86 trillion in annual sales in 2010. McDonald’s Systemwide restaurant business accounted for approximately 0.2% of those outlets and about 4% of the sales.

 

Research and development

The Company operates research and development facilities in the U.S., Europe and Asia. While research and development activities are important to the Company’s business, these expenditures are not material. Independent suppliers also conduct research activities that benefit the Company, its franchisees and suppliers (collectively referred to as the System).

 

 

Environmental matters

Increased focus by U.S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations may increase costs, including for the Company, its franchisees and suppliers. Also, there is a possibility that governmental initiatives, or actual or perceived effects of changes in weather patterns or climate, could have a direct impact on the operations of our restaurants or the operations of our suppliers in ways which we cannot predict at this time.

The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. At this time, the Company has already begun to undertake its own initiatives relating to preservation of the environment, including the development of means to monitor and reduce energy use, in many of its markets.

 

 

Number of employees

The Company’s number of employees worldwide, including Company-operated restaurant employees, was approximately 420,000 as of year-end 2011.

d. Financial information about geographic areas

Financial information about geographic areas is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 10 through 26 and Segment and geographic information in Part II, Item 8, page 40 of this Form 10-K.

e. Available information

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information.

Financial and other information can also be accessed on the investor section of the Company’s website at www.aboutmcdonalds.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623 or by sending a request to

 

 

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McDonald’s Corporation Shareholder Services, Department 720, 2111 McDonald’s Drive, Oak Brook, Illinois 60523.

Also posted on McDonald’s website are the Company’s Corporate Governance Principles, the charters of McDonald’s Audit Committee, Compensation Committee and Governance Committee, the Company’s Standards of Business Conduct, the Code of Ethics for Chief Executive Officer and Senior Financial Officers and the Code of Conduct for the Board of Directors. Copies of these documents are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, 2111 McDonald’s Drive, Oak Brook, Illinois 60523.

Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them.

ITEM 1A. Risk Factors and Cautionary Statement Regarding Forward-Looking Statements

 

 

The information on this report includes forward-looking statements about our plans and future performance, including those under Outlook for 2012. These statements use such words as “may,” “will,” “expect,” “believe” and “plan.” They reflect our expectations and speak only as of the date of this report. We do not undertake to update them. Our expectations (or the underlying assumptions) may change or not be realized, and you should not rely unduly on forward-looking statements.

Our business and execution of our strategic plan, the Plan to Win, are subject to risks. The most important of these is whether we can remain relevant to our customers and a brand they trust. Meeting customer expectations is complicated by the risks inherent in our global operating environment. The IEO segment of the restaurant industry, although largely mature in our major markets, is highly fragmented and competitive. The IEO segment has been contracting in many markets, including some major markets, due to unfavorable economic conditions, and this may continue. Persistently high unemployment rates in many markets have also increased consumer focus on value and heightened pricing sensitivity. Combined with increasing pressure on commodity and labor costs, these circumstances affect restaurant sales and margin growth despite the strength of our brand and value proposition. We have the added challenge of the cultural, economic and regulatory differences that exist within and among the more than 100 countries where we operate. Initiatives we undertake may not have universal appeal among different segments of our customer base and can drive unanticipated changes in guest counts and customer perceptions. Our operations, plans and results are also affected by regulatory and similar initiatives around the world, notably the focus on nutritional content and the production, processing and preparation of food “from field to front counter,” as well as industry marketing practices.

These risks can have an impact both in the near- and long-term and are reflected in the following considerations and factors that we believe are most likely to affect our performance.

Our ability to remain a relevant and trusted brand and to increase sales and profits depends largely on how well we execute the Plan to Win.

The Plan to Win addresses the key drivers of our business and results—people, products, place, price and promotion. The quality of our execution depends mainly on the following:

 

 

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;

 

 

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 local law or otherwise, costly to exercise or subject to litigation;

 

 

Our ability to drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours, and to 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 our restaurant reimaging and rebuilding plans, which remain a priority, are targeted at the elements of the restaurant experience that will best accomplish our goals and whether we can complete our plans as and when projected;

 

 

The costs and operational risks associated with our increasing reliance on information technology (including our point-of-sale and other in-store technology systems or platforms), including the risk that we will not realize fully the benefits of our investments in technology, which we are accelerating, as well as the potential for system failures, programming errors or breaches of security involving our systems or those of third-party operators of our systems;

 

 

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 products (including their nutritional content), promotions and premiums, such as Happy Meals (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;

 

 

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The impact of social media and other mobile communications or photo applications that can be used to promote adverse perceptions of our operations or those of our suppliers, or to promote or threaten boycotts or other actions involving us or our suppliers, with significantly greater speed and scope than traditional media outlets;

 

 

The success of our tiered approach to menu offerings and our ability to introduce new 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 expansion, particularly in markets where pricing or cost pressures are significant or have been exacerbated by the current challenging economic and operating environment;

 

 

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 conditions;

 

 

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 directly or adversely affect 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 local personnel to manage our operations and growth, particularly in certain developing markets; and

 

 

Our ability to leverage promotional or operating successes in individual markets into other markets in a timely and cost-effective way.

Our results and financial condition are affected by global and local market conditions, which can adversely affect our sales, margins and net income.

Our results of operations are substantially affected not only by global economic conditions, but also by local operating and economic conditions, which can vary substantially by market. Unfavorable conditions can depress sales in a given market or daypart (e.g., breakfast). To mitigate the impact of these conditions, we may take promotional or other actions that adversely affect our margins, limit our operating flexibility or result in charges or restaurant closings. Some macroeconomic conditions have an even more wide-ranging and prolonged impact. The current environment has been characterized by weak economies, persistently high unemployment rates, inflationary pressures and extreme volatility in financial markets worldwide, which has been exacerbated by the significant uncertainty associated with the ongoing sovereign debt crisis in certain Eurozone countries. This environment has adversely affected both business and consumer confidence and spending, and uncertainty about the long-term investment environment could further depress capital investment and economic activity. These unfavorable conditions are expected to persist for the foreseeable future in many of our most important markets. The key factors that can affect our operations, plans and results in this environment are the following:

 

 

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 uncertain economic outlook, resurgent competitors and a more 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 recent volatility in commodity and gasoline prices, which we expect will continue and may be exacerbated by current events in the Middle East, and the impact of pricing, hedging and other actions that we, franchisees and suppliers may take to address this environment;

 

 

The impact on our margins of labor costs given our labor-intensive business model, the long-term trend toward higher wages in both mature and developing markets and any potential impact of union organizing efforts;

 

 

The impact of foreign exchange and interest rates on our financial condition and results;

 

 

Whether we are able to identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants from year to year, and whether new sites are as profitable as expected;

 

 

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; and

 

 

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.

Increasing legal and regulatory complexity will continue to affect our operations and results in material ways.

Our legal and regulatory environment worldwide exposes us to complex compliance, litigation and similar risks that affect our operations and results in material ways. In many of our markets, including the United States and Europe, we are subject to increasing regulation, which has increased our cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. Among the more important regulatory and litigation risks we face and must manage are the following:

 

 

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

 

 

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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 regulation that can affect our business plans, such as those relating to marketing and the 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 risks and costs to us, our franchisees and our supply chain of increased focus by U.S. and overseas governmental authorities and non-governmental organizations on environmental matters, such as environmental sustainability, climate change, greenhouse gases and water consumption, including initiatives that effectively impose a tax on carbon emissions;

 

 

The impact of litigation trends, particularly in our major markets, including class actions, labor and employment claims, 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 of our products, or the appropriateness or accuracy of our marketing or other communication practices;

 

 

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, immigration, healthcare, 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 associated with information technology, such as the costs of compliance with privacy, consumer protection and other laws, the potential costs associated with alleged security breaches (including the loss of consumer confidence that may result and the risk of criminal penalties or civil liability to consumers or employees whose

   

data is alleged to have been collected or used inappropriately) and potential challenges to the associated intellectual property rights or to our use of that intellectual property; 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 trading volatility and price of our common stock may be affected by many factors.

Many factors affect the volatility and price of our common stock in addition to our operating results and prospects. The most important of these, some of which are outside our control, are the following:

 

 

The continuing unfavorable global economic and extremely 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 reflect market commentary (including commentary that may be unreliable or incomplete in some cases) or 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.

Our results and prospects can be adversely affected by events such as severe weather conditions, natural disasters, hostilities and social unrest, among others.

Severe weather conditions, natural disasters, hostilities and social unrest, terrorist activities, health epidemics or pandemics (or expectations about them) can adversely affect consumer spending and confidence levels or other factors that affect our results and

 

 

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prospects, such as commodity costs. Our receipt of proceeds under any insurance we maintain with respect to certain of these risks may be delayed or the proceeds may be insufficient to offset our losses fully.

ITEM 1B. Unresolved Staff Comments

 

 

None.

ITEM 2. Properties

 

 

The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for restaurant sites, which ensures long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network. Additional information about the Company’s properties is included in Management’s discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 10 through 26 and in Financial statements and supplementary data in Part II, Item 8, pages 26 through 43 of this Form 10-K.

ITEM 3. Legal Proceedings

 

 

The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company’s entire business. The following is a brief description of the more significant types of lawsuits. In addition, the Company is subject to various federal, state and local regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.

 

 

Franchising

A substantial number of McDonald’s restaurants are franchised to independent entrepreneurs operating under contractual arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, contentions regarding grants or terminations of franchises, delinquent payments of rents and fees, and franchisee claims for additional franchises or rewrites of franchises. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald’s franchise.

 

Suppliers

The Company and its affiliates and subsidiaries do not supply food, paper or related items to any McDonald’s restaurants. The Company relies upon numerous independent suppliers that are required to meet and maintain the Company’s high standards and specifications. On occasion, disputes arise between the Company and its suppliers which include, by way of example, compliance with product specifications and the Company’s business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that they should be (or should have been) granted the opportunity to supply products or services to the Company’s restaurants.

 

 

Employees

Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, firing, promotion and pay practices, including wage and hour disputes, alleged discrimination and compliance with employment laws.

 

 

Customers

Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public. In so doing, disputes arise as to products, service, incidents, advertising, nutritional and other disclosures, as well as other matters common to an extensive restaurant business such as that of the Company.

 

 

Intellectual Property

The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property.

 

 

Government Regulations

Local, state and federal governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising, franchising, health, safety, environment, zoning and employment. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from the issuance of additional requirements in the future.

ITEM 4. Mine Safety Disclosures

 

 

Not applicable.

 

 

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The following are the Executive Officers of our Company (as of the date of this filing):

Jose Armario, 52, is Corporate Executive Vice President—Global Supply Chain, Development and Franchising, a position he has held since October 2011. He previously served as Group President, McDonald’s Canada and Latin America from February 2008 through September 2011 and President, McDonald’s Latin America from December 2003 to February 2008. Mr. Armario has been with the Company for 15 years.

Peter J. Bensen, 49, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since January 2008. From April 2007 through December 2007, he served as Corporate Senior Vice President—Controller. Prior to that time, Mr. Bensen served as Corporate Vice President–Assistant Controller from February 2002 through March 2007. Mr. Bensen has been with the Company for 15 years.

Timothy J. Fenton, 54, is President, McDonald’s Asia/Pacific, Middle East and Africa, a position he has held since January 2005. From May 2003 to January 2005, he served as President, East Division for McDonald’s USA. Mr. Fenton has been with the Company for 38 years.

Janice L. Fields, 56, is President, McDonald’s USA, a position she has held since January 2010. She previously served as Executive Vice President and Chief Operations Officer for McDonald’s USA from August 2006 to January 2010, and President, Central Division of McDonald’s USA from May 2003 to August 2006. Ms. Fields has been with the Company for 33 years.

Richard Floersch, 54, is Corporate Executive Vice President and Chief Human Resources Officer. Mr. Floersch joined the Company in November 2003. He previously served as Senior Vice President of Human Resources for Kraft Foods from 1998 through 2003. Mr. Floersch has been with the Company for eight years.

Douglas M. Goare, 59, is President, McDonald’s Europe, a position he has held since October 2011. From February 2011 through September 2011, he served as Corporate Executive Vice President of Supply Chain and Development. From June 2007 through November 2010, he held the position of Corporate Senior Vice President of Supply Chain. In addition to this role, Mr. Goare assumed responsibility for Development in December 2010 and served as Corporate Senior Vice President of Supply Chain and Development through January 2011. He previously served as U.S. Vice President and General Manager of the

Greater Chicago Region from October 2004 through May 2007. Mr. Goare has been with the Company for 33 years.

Kevin L. Newell, 54, is Corporate Executive Vice President and Global Chief Brand Officer, a position he has held since February 2011. From September 2009 through January 2011, he served as U.S. Senior Vice President and Restaurant Support Officer for the West Division. Prior to that time, Mr. Newell served as U.S. Vice President & General Manager of the Greater Southern Region from November 2006 through August 2009. Mr. Newell has been with the Company for 22 years.

Kevin M. Ozan, 48, is Corporate Senior Vice President–Controller, a position he has held since February 2008. From May 2007 through January 2008, he served as Corporate Vice President—Assistant Controller. He previously served as a Senior Director in Investor Relations from May 2006 to April 2007. Mr. Ozan has been with the Company for 14 years.

Gloria Santona, 61, is Corporate Executive Vice President, General Counsel and Secretary, a position she has held since July 2003. From June 2001 to July 2003, she served as Corporate Senior Vice President, General Counsel and Secretary. Ms. Santona has been with the Company for 34 years.

James A. Skinner, 67, is Vice Chairman and Chief Executive Officer, a post to which he was elected in November 2004, and also has served as a Director since that date. He served as Vice Chairman from January 2003 to November 2004. Mr. Skinner has been with the Company for 40 years.

Jeffrey P. Stratton, 56, is Corporate Executive Vice President–Chief Restaurant Officer, a position he has held since January 2005. He previously served as U.S. Executive Vice President, Chief Restaurant Officer from January 2004 through December 2004. Prior to that time, he served as Senior Vice President, Chief Restaurant Officer of McDonald’s USA from May 2002 to January 2004. Mr. Stratton has been with the Company for 38 years.

Donald Thompson, 48, is President and Chief Operating Officer, a position to which he was elected in January 2010. Mr. Thompson was also elected a Director in January 2011. He previously served as President, McDonald’s USA, from August 2006 to January 2010, and as Executive Vice President and Chief Operations Officer for McDonald’s USA from January 2005 to August 2006. Mr. Thompson has been with the Company for 21 years.

 

 

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PART II

 

 

ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

 

The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S.

The following table sets forth the common stock price ranges on the New York Stock Exchange and dividends declared per common share:

 

     2011         2010  

Dollars

per share

   High      Low      Dividend          High      Low      Dividend  

Quarter:

                  

First

     77.59         72.14         0.61          67.49         61.06         0.55   

Second

     84.91         75.66         0.61          71.84         65.55         0.55   

Third

     91.22         82.01         1.31       76.26         65.31         1.16

Fourth

     101.00         83.74                     80.94         74.40            

Year

     101.00         72.14         2.53            80.94         61.06         2.26   

 

* Includes a $0.61 and $0.55 per share dividend declared and paid in third quarter of 2011 and 2010, respectively, and a $0.70 and $0.61 per share dividend declared in third quarter and paid in fourth quarter of 2011 and 2010, respectively.

The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2012 was estimated to be 1,583,000.

Given the Company’s returns on equity, incremental invested capital and assets, management believes it is prudent to reinvest in the business in markets with acceptable returns and/or opportunity for long-term growth and use excess cash flow to return cash to shareholders through dividends, share repurchases or a combination of both. The Company has paid dividends on common stock for 36 consecutive years through 2011 and has increased the dividend amount at least once every year. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

 

 

 

Issuer purchases of equity securities*

The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2011:

 

 

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)

 

October 1-31, 2011

     1,569,393         87.96         1,569,393       $ 3,719,828,000   

November 1-30, 2011

     1,269,073         93.00         1,269,073         3,601,803,000   

December 1-31, 2011

     897,530         98.40         897,530         3,513,486,000   

Total

     3,735,996         92.18         3,735,996       $ 3,513,486,000   

 

* 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 September 24, 2009, the Company’s Board of Directors approved a share repurchase program that authorizes the purchase of up to $10 billion of the Company’s outstanding common stock with no specified expiration date.

 

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ITEM 6. Selected Financial Data

 

 

6-Year Summary

 

 

Dollars in millions, except per share data    2011      2010      2009     2008     2007     2006  

Company-operated sales

   $ 18,293         16,233         15,459        16,561        16,611        15,402   

Franchised revenues

   $ 8,713         7,842         7,286        6,961        6,176        5,493   

Total revenues

   $ 27,006         24,075         22,745        23,522        22,787        20,895   

Operating income

   $ 8,530         7,473         6,841 (1)      6,443        3,879 (4)      4,433 (7) 

Income from continuing operations

   $ 5,503         4,946         4,551 (1,2)      4,313 (3)      2,335 (4,5)      2,866 (7) 

Net income

   $ 5,503         4,946         4,551 (1,2)       4,313 (3)      2,395 (4,5,6)       3,544 (7,8)  

Cash provided by operations

   $ 7,150         6,342         5,751        5,917        4,876        4,341   

Cash used for investing activities

   $ 2,571         2,056         1,655        1,625        1,150        1,274   

Capital expenditures

   $ 2,730         2,135         1,952        2,136        1,947        1,742   

Cash used for financing activities

   $ 4,533         3,729         4,421        4,115        3,996        5,460   

Treasury stock repurchased(9)

   $ 3,373         2,648         2,854        3,981        3,949        3,719   

Common stock cash dividends

   $ 2,610         2,408         2,235        1,823        1,766        1,217   

Financial position at year end:

              

Total assets

   $ 32,990         31,975         30,225        28,462        29,392        28,974   

Total debt

   $ 12,500         11,505         10,578        10,218        9,301        8,408   

Total shareholders’ equity

   $ 14,390         14,634         14,034        13,383        15,280        15,458   

Shares outstanding in millions

     1,021         1,054         1,077        1,115        1,165        1,204   

Per common share:

              

Income from continuing operations-diluted

   $ 5.27         4.58         4.11 (1,2)      3.76 (3)      1.93 (4,5)      2.29 (7) 

Earnings-diluted

   $ 5.27         4.58         4.11 (1,2)      3.76 (3)      1.98 (4,5,6)      2.83 (7,8) 

Dividends declared

   $ 2.53         2.26         2.05        1.63        1.50        1.00   

Market price at year end

   $ 100.33         76.76         62.44        62.19        58.91        44.33   

Company-operated restaurants

     6,435         6,399         6,262        6,502        6,906        8,166   

Franchised restaurants

     27,075         26,338         26,216        25,465        24,471        22,880   

Total Systemwide restaurants

     33,510         32,737         32,478        31,967        31,377        31,046   

Franchised sales(10)

   $ 67,648         61,147         56,928        54,132        46,943        41,380   

 

(1) Includes pretax income due to Impairment and other charges (credits), net of $61.1 million ($91.4 million after tax or $0.08 per share) primarily related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction.

 

(2) Includes income of $58.8 million ($0.05 per share) in Gain on sale of investment related to the sale of the Company’s minority ownership interest in Redbox Automated Retail, LLC.

 

(3) Includes income of $109.0 million ($0.09 per share) in Gain on sale of investment from the sale of the Company’s minority ownership interest in U.K.- based Pret A Manger.

 

(4) Includes pretax operating charges of $1.7 billion ($1.32 per share) due to Impairment and other charges (credits), net primarily as a result of the Company’s sale of its businesses in 18 Latin American and Caribbean markets to a developmental licensee.

 

(5) Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of an Internal Revenue Service (IRS) examination of the Company’s 2003-2004 U.S. federal tax returns.

 

(6) Includes income of $60.1 million ($0.05 per share) related to discontinued operations primarily from the sale of the Company’s investment in Boston Market.

 

(7) Includes pretax operating charges of $134 million ($98 million after tax or $0.08 per share) due to Impairment and other charges (credits), net.

 

(8) Includes income of $678 million ($0.54 per share) related to discontinued operations primarily resulting from the disposal of the Company's investment in Chipotle.

 

(9) Represents treasury stock purchases as reflected in Shareholders' equity.

 

(10) While franchised sales are not recorded as revenues by the Company, management believes they are 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.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Overview

DESCRIPTION OF THE BUSINESS

The Company franchises and operates McDonald’s restaurants. Of the 33,510 restaurants in 119 countries at year-end 2011, 27,075 were franchised or licensed (including 19,527 franchised to conventional franchisees, 3,929 licensed to developmental licensees and 3,619 licensed to foreign affiliates (affiliates)—primarily Japan) and 6,435 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate and/or franchise restaurants within a market.

We view ourselves primarily as a franchisor and believe franchising is important to delivering great, locally-relevant customer experiences and driving profitability. However, directly operating restaurants is paramount to being a credible franchisor and is essential to providing Company personnel with restaurant operations experience. In our Company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced in the restaurants. We continually review, and as appropriate adjust, our mix of Company-operated and franchised (conventional franchised, developmental licensed and foreign affiliated) restaurants to help optimize overall performance.

The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.

The business is managed as distinct geographic segments. Significant reportable segments include the United States (U.S.), Europe, and Asia/Pacific, Middle East and Africa (APMEA). In addition, throughout this report we present “Other Countries & Corporate” that includes operations in Canada and Latin America, as well as Corporate activities. The U.S., Europe and APMEA segments account for 32%, 40% and 22% of total revenues, respectively. The United Kingdom (U.K.), France and Germany,

collectively, account for over 50% of Europe’s revenues; and China, Australia and Japan (a 50%-owned affiliate accounted for under the equity method), collectively, account for over 55% of APMEA’s revenues. These six markets along with the U.S. and Canada are referred to as “major markets” throughout this report and comprise approximately 70% of total revenues.

In analyzing business trends, management considers a variety of performance and financial measures, including comparable sales and comparable guest count growth, Systemwide sales growth and returns.

 

 

Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currencies and bases certain incentive compensation plans on these results because we believe this better represents the Company’s underlying business trends.

 

 

Comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of acceptance of the Company’s initiatives as well as local economic and consumer trends. Increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions, respectively, from the same period in the prior year for all restaurants, whether operated by the Company or 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. Growth in comparable sales is driven by guest counts and average check, which is affected by changes in pricing and product mix. Generally, the goal is to achieve a balanced contribution from both guest counts and average check.

McDonald’s reports on a calendar basis and therefore the comparability of the same month, quarter and year with the corresponding period of the prior year will be impacted by the mix of days. The number of weekdays and weekend days in a given timeframe can have a positive or negative impact on comparable sales and guest counts. The Company refers to these impacts as calendar shift/trading day adjustments. In addition, the timing of holidays can impact comparable sales and guest counts. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales and guest counts while the annual impacts are typically minimal.

 

 

Systemwide sales include sales at all restaurants. 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.

 

 

Return on incremental invested capital (ROIIC) is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the business units, the effectiveness of capital deployed and the future allocation of capital. The return is calculated by dividing the change in operating income plus depreciation and amortization (numerator) by the adjusted cash used for investing activities

 

 

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(denominator), primarily capital expenditures. The calculation uses a constant average foreign exchange rate over the periods included in the calculation.

STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE

The strength of the alignment between the Company, its franchisees and suppliers (collectively referred to as the System) has been key to McDonald’s success. This business model enables McDonald’s to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. In addition, it facilitates our ability to identify, implement and scale innovative ideas that meet customers’ changing needs and preferences.

McDonald’s customer-focused Plan to Win—which concentrates on being better, not just bigger—provides a common framework for our global business while allowing for local adaptation. Through the execution of multiple initiatives surrounding the five elements of our Plan to Win—People, Products, Place, Price and Promotion—we have enhanced the restaurant experience for customers worldwide and grown comparable sales and customer visits in each of the last eight years. This Plan, combined with financial discipline, has delivered strong results for our shareholders.

We have exceeded our long-term, constant currency financial targets of average annual Systemwide sales growth of 3% to 5%; average annual operating income growth of 6% to 7%; and annual returns on incremental invested capital in the high teens every year since the Plan’s implementation in 2003, after adjusting for the loss in 2007 from the Latin America developmental license transaction. Given the size and scope of our global business, we believe these financial targets are realistic and sustainable over time, keeping us focused on making the best decisions for the long-term benefit of our System.

In 2011, we remained focused on customers’ needs and accelerated efforts within the Plan to Win where the greatest opportunity exists. The Company’s key global priorities of optimizing our menu, modernizing the customer experience, and broadening accessibility to our Brand represent areas where we are intensifying our efforts to drive the business further. Initiatives supporting these priorities resonated with consumers, driving increases in sales and customer visits despite challenging economies and a contracting Informal Eating Out (IEO) segment in many markets. As a result, every area of the world contributed to 2011 global comparable sales and guest counts increasing 5.6% and 3.7%, respectively.

Specific menu pricing actions across our system reflect local market conditions as well as other factors, notably the food away from home and food at home inflation indices. In our Company-operated restaurants, we manage menu board prices to ensure value at all price points, increase profitability and mitigate inflation, all while trying to maintain guest count momentum. In order to accomplish these objectives, we utilize a strategic pricing tool that balances price, product mix and promotion. Franchisees also have access to, and many utilize, this strategic pricing tool. In general, we believe franchisees employ a similar pricing strategy. In 2011, we increased average price at Company-operated restaurants in each area of the world, although increases varied by market and region. We look to optimize product mix by utilizing a menu with entry-point value, core, premium and fourth-tier offerings. We also introduce new products that meet customer needs, which can expand average check and increase guest counts.

In the U.S., we grew sales, guest counts and market share with comparable sales up for the ninth consecutive year, rising 4.8% in 2011, while comparable guest counts rose 3.3%. These results were achieved despite a slight decline in the IEO segment. We remained focused on maximizing our core business while providing customers with affordable products and value throughout our menu including options available on the Dollar Menu at breakfast and the rest of the day. We highlighted core menu items like Chicken McNuggets that featured new sauces, breakfast products including our new Fruit & Maple Oatmeal, additions to the McCafé beverage line and limited-time offerings such as the McRib sandwich. The national launch of the McCafé Frozen Strawberry Lemonade and Mango Pineapple real-fruit smoothie provided meaningful extensions to the McCafé beverage line. Convenient locations also continued to provide a competitive advantage with extended hours and efficient drive-thru service. Modernizing the customer experience remained a focus with the expansion of our major remodeling program to enhance the appearance and functionality of our restaurants and make our restaurants more relevant to our customers’ daily lives. Over 900 existing restaurants were remodeled during 2011 with the majority adding drive-thru capacity to capture additional guest counts. We also completed our two-year, Systemwide roll-out of a new point-of-sale system. This allows us to continue expanding our menu offerings while making it easier for our crew to fulfill every order accurately.

In Europe, comparable sales rose 5.9%, marking the eighth consecutive year of comparable sales increases, and comparable guest counts rose 3.4%. Major contributors were the U.K., France, Russia and Germany. Initiatives that helped drive our business included leveraging our tiered menu featuring everyday affordable prices, menu variety including new and limited-time offerings, and reimaging over 900 restaurants. We continue to expand our coffee business and have over 1,500 McCafé locations, which in Europe are generally separate areas inside the restaurants that serve specialty coffees, indulgent desserts and snacks. We completed the rollout of the new drive-thru customer order display system in over 4,500 restaurants. In addition, we increased our accessibility and convenience with extended operating hours. We offered new premium menu items such as the 1955 burger and expanded McWraps across several European markets. In many markets, we have continued to offer a fourth-tier platform—such as Little Tasters in the U.K.—a range of tasty and appealing items in smaller portion sizes. Finally, we continued building customer trust in our brand through communications that emphasized the quality and origin of McDonald’s food and our commitment to sustainable business practices.

In APMEA, our momentum continued with nearly every country delivering positive comparable sales, led by China and Australia. Comparable sales rose 4.7% and comparable guest counts rose 4.3% with performance driven by strategies emphasizing value, breakfast, convenience, core menu extensions, desserts and promotional food events. Australia launched a Value Lunch program that features meals at discounted price points for certain hours while China and Japan concentrated on affordability by continuing their Value Lunch platforms. New menu items such as real-fruit smoothies and frappés in Australia and the extension of the Value Breakfast program in China were popular with customers. Japan executed another successful U.S. themed burger promotion and celebrated its 40th anniversary by offering popular core menu items at reduced prices. Desserts

 

 

McDonald’s Corporation Annual Report 2011    11


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continue to play a meaningful role as we seek to deliver on customers’ menu expectations through products such as the McFlurry and unique delivery storefronts like the dessert kiosks in China, where we are now one of the largest ice cream retailers. Our breakfast business continues to evolve and is now offered in approximately 75% of APMEA restaurants. In Japan, rotational breakfast items, including the Chicken Muffin and Tuna Muffin, were offered during several months, while Australia launched new breakfast menu items such as bagel sandwiches. Nearly two-thirds of APMEA restaurants are now offering some form of extended operating hours and over 4,600 restaurants are open 24 hours. Delivery is offered in many APMEA markets and is now available in over 1,500 restaurants, including nearly 500 in China. McDonald’s Japan was negatively impacted by the natural disaster last March and as a result, continued to face some challenges throughout 2011. However, we remain confident that the market will continue to drive long-term profitable growth.

Our approach to offering affordable value to our customers is complemented by a focus on driving operating efficiencies and effectively managing restaurant-level food and paper costs by leveraging our scale, supply chain infrastructure and risk management practices. Our ability to execute our strategies in every area of the world, grow comparable sales and control selling, general & administrative expenses resulted in combined operating margin (operating income as a percent of total revenues) of 31.6% in 2011, an improvement of 0.6 percentage points over 2010.

In 2011, strong global sales and margin performance grew cash from operations, which rose $808 million to $7.2 billion. Our substantial cash flow, strong credit rating and continued access to credit provide us flexibility to fund capital expenditures and debt repayments as well as return cash to shareholders. Capital expenditures of approximately $2.7 billion were invested in our business primarily to open new restaurants and reimage existing restaurants. Across the System, 1,150 restaurants were opened and over 2,500 existing locations were reimaged. In addition, we returned $6.0 billion to shareholders consisting of $3.4 billion in share repurchases and $2.6 billion in dividends.

Cash from operations continues to benefit from our heavily franchised business model as the rent and royalty income received from owner/operators is a very stable revenue stream that has relatively low costs. In addition, the franchise business model is less capital intensive than the Company-owned model. We believe locally-owned and operated restaurants maximize brand performance and are at the core of our competitive advantages, making McDonald’s not just a global brand but also a locally-relevant one.

HIGHLIGHTS FROM THE YEAR INCLUDED:

 

 

Comparable sales grew 5.6% and guest counts rose 3.7%, building on 2010 increases of 5.0% and 4.9%, respectively.

 

 

Revenues increased 12% (8% in constant currencies).

 

 

Operating income increased 14% (10% in constant currencies).

 

 

Combined operating margin increased 0.6 percentage points to 31.6%.

 

 

Diluted earnings per share was $5.27, an increase of 15% (11% in constant currencies).

 

 

Cash provided by operations increased $808 million to $7.2 billion.

 

One-year ROIIC was 37.6% and three-year ROIIC was 37.8% for the period ended December 31, 2011 (see reconciliation on page 25).

 

 

The Company increased the quarterly cash dividend per share 15% to $0.70 for the fourth quarter—bringing our current annual dividend to $2.80 per share.

 

 

The Company returned $6.0 billion to shareholders through share repurchases and dividends paid.

OUTLOOK FOR 2012

We will continue to drive success in 2012 and beyond by enhancing the customer experience across all elements of our Plan to Win. Our global System continues to be energized by our ongoing momentum and significant growth opportunities.

We hold a strong competitive position in the market place, and we intend to further differentiate our brand by striving to become our customers’ favorite place and way to eat and drink. Growing market share will continue to be a focus as we execute our three global priorities: optimizing our menu, modernizing the customer experience and broadening our accessibility. The menu efforts will include expanding destination beverages and desserts and enhancing our food image. The customer experience efforts will include accelerating our interior and exterior reimaging efforts and providing our restaurant teams with the appropriate tools, training, technology and staffing. The accessibility efforts will include increasing the level and variety of conveniences provided to our customers through greater proximity, extended operating hours and stronger value platforms. We will execute these priorities to increase McDonald’s brand relevance with operational and financial discipline. Consequently, we are confident we can again meet or exceed our long-term constant currency financial targets.

In the U.S., our 2012 initiatives focus on balancing core menu classics with new products and promotional food events such as Chicken McBites, made with bite-sized pieces of premium chicken breast, Blueberry Banana Nut Oatmeal, and additional McCafé beverage offerings such as the Cherry Berry Chiller. We will continue offering value across the menu at breakfast and the rest of the day. Opportunities around additional staffing at peak hours during the breakfast and lunch day parts and increasing restaurants that operate 24 hours per day will allow us to broaden accessibility to our customers. In addition, our plans to elevate the brand experience include leveraging our new point-of-sale system with other technology enhancements such as using hand-held order takers and advancements to improve our front counter service system. We also will expand our major remodel program to another 800 locations in 2012.

Our business plans in Europe are focused on building market share with the right mix of guest counts, average check, strategic restaurant reimaging and expansion. We will increase our local relevance by complementing our tiered menu with a variety of promotional food events as well as new snack and dessert options. In 2012, we will reimage approximately 900 restaurants as we progress towards our goal of having 90% of our interiors and over 65% of our exteriors reimaged by the end of the year. We will leverage service innovations by continuing the deployment of technologies such as updating the point-of-sale system, self-order kiosks and hand-held order devices to enhance the customer experience and help drive increased transactions and

 

 

12    McDonald’s Corporation Annual Report 2011


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labor efficiency. We will also continue working to reduce our impact on the environment with energy management tools that enable us to use green energy in markets where available. In addition, the U.K. will be the proud host of our Olympic sponsorship, marking the ninth consecutive time that McDonald’s will serve as the Official Restaurant of the Olympic Games. In 2012, our European business will continue to face headwinds due to economic uncertainty and additional government-initiated austerity measures implemented in many countries. While we will closely monitor consumer reactions to these measures, we remain confident that our business model will continue to drive profitable growth.

In APMEA, we will continue our efforts to become our customers’ first choice for eating out by continuing to provide robust value platforms and focusing on menu variety, restaurant experience and convenience. Value will continue to be a key growth driver as we reinforce the affordability of our menu to consumers across all dayparts, by building on our successful Value Lunch platforms and expanding our breakfast offerings. The markets will continue to execute against a combination of core menu items, promotional food events, desserts and limited-time offerings to provide a balanced mix of products to our customers. We will grow our business by opening approximately 750 new restaurants and reimaging about 475 existing restaurants while elevating our focus on service and operations to drive efficiencies. In China, we will continue to build a foundation for long-term growth by opening 225 to 250 restaurants in 2012 toward our goal of reaching 2,000 restaurants by the end of 2013. Convenience initiatives will focus on expanding delivery service across the region and building on the success of our extended operating hours.

We continue to maintain strong financial discipline by effectively managing spending in order to maximize financial performance. In making capital allocation decisions, our goal is to make investments that elevate the McDonald’s experience and drive sustainable growth in sales and market share while earning strong returns. We remain committed to returning all of our free cash flow (cash from operations less capital expenditures) to shareholders over the long-term via dividends and share repurchases.

McDonald’s does not provide specific guidance on diluted earnings per share. The following information is provided to assist in analyzing the Company’s results:

 

 

Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2 percentage points to 2012 Systemwide sales growth (in constant currencies), most of which will be due to about 870 net traditional restaurants added in 2011.

 

 

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 3-4 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 2012, the total basket of goods cost is expected to increase 4.5-5.5% in the U.S. and 2.5-3.5% in Europe, with more pressure expected in the first half.

 

 

The Company expects full-year 2012 selling, general & administrative expenses to increase about 6% in constant currencies, driven by certain technology investments, primarily to accelerate future restaurant capabilities, and costs related to the 2012 Worldwide Owner/Operator Convention and Olympics. The Company expects the magnitude of the increase to be confined to 2012. Fluctuations will be experienced between quarters due to the timing of certain items such as the Worldwide Owner/Operator Convention and the Olympics.

 

 

Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2012 to increase approximately 6-8% compared with 2011.

 

 

A significant part of the Company’s operating income is generated outside the U.S., and about 40% 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 24 cents.

 

 

The Company expects the effective income tax rate for the full-year 2012 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 2012 to be approximately $2.9 billion. About half of this amount will be used to open new restaurants. The Company expects to open more than 1,300 restaurants including about 450 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 about 900 restaurants. The remaining capital will be used for reinvestment in existing restaurants. Nearly half of this reinvestment will be used to reimage more than 2,400 locations worldwide, some of which will require no capital investment from the Company.

 

 

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Consolidated Operating Results

 

 

Operating results

 

 

 

             2011                    2010            2009  
Dollars in millions, except per share data    Amount      Increase/
(decrease)
            Amount      Increase/
(decrease)
            Amount  

Revenues

                      

Sales by Company-operated restaurants

   $ 18,293         13        $ 16,233         5        $ 15,459   

Revenues from franchised restaurants

     8,713         11               7,842         8               7,286   

Total revenues

     27,006         12               24,075         6               22,745   

Operating costs and expenses

                      

Company-operated restaurant expenses

     14,838         14             13,060         3             12,651   

Franchised restaurants-occupancy expenses

     1,481         8             1,378         6             1,302   

Selling, general & administrative expenses

     2,394         3             2,333         4             2,234   

Impairment and other charges (credits), net

     (4      nm             29         nm             (61

Other operating (income) expense, net

     (233      (18            (198      11               (222

Total operating costs and expenses

     18,476         11               16,602         4               15,904   

Operating income

     8,530         14             7,473         9             6,841   

Interest expense

     493         9             451         (5          473   

Nonoperating (income) expense, net

     25         13             22         nm             (24

Gain on sale of investment

                                      nm               (95

Income before provision for income taxes

     8,012         14               7,000         8               6,487   

Provision for income taxes

     2,509         22               2,054         6               1,936   

Net income

   $ 5,503         11          $ 4,946         9          $ 4,551   

Earnings per common share—diluted

   $ 5.27         15          $ 4.58         11          $ 4.11   

Weighted-average common shares outstanding—diluted

     1,044.9                        1,080.3                        1,107.4   

nm Not meaningful.

IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS

While changes in foreign currency exchange rates affect reported results, McDonald’s mitigates exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows, and purchasing goods and services in local currencies.

In 2011, foreign currency translation had a positive impact on consolidated operating results driven by the stronger Euro and Australian Dollar as well as most other currencies. In 2010, foreign currency translation had a positive impact on consolidated operating results driven by stronger global currencies, primarily the Australian Dollar and Canadian Dollar, partly offset by the weaker Euro. In 2009, foreign currency translation had a negative impact on consolidated operating results, primarily caused by the weaker Euro, British Pound, Russian Ruble, Australian Dollar and Canadian Dollar.

Impact of foreign currency translation on reported results

 

 

              

Reported amount

           

Currency translation

benefit/(cost)

 
In millions, except per share data    2011        2010        2009              2011        2010        2009  

Revenues

   $ 27,006         $ 24,075         $ 22,745            $ 944         $ 188         $ (1,340

Company-operated margins

     3,455           3,173           2,807              134           35           (178

Franchised margins

     7,232           6,464           5,985              213           (14        (176

Selling, general & administrative expenses

     2,394           2,333           2,234              (55        (12        75   

Operating income

     8,530           7,473           6,841              301           13           (273

Net income

     5,503           4,946           4,551              195           13           (164

Earnings per common share—diluted

     5.27           4.58           4.11                0.19           0.01           (0.15

 

14    McDonald’s Corporation Annual Report 2011


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NET INCOME AND DILUTED EARNINGS PER COMMON SHARE

In 2011, net income and diluted earnings per common share were $5.5 billion and $5.27. Foreign currency translation had a positive impact of $0.19 on diluted earnings per share.

In 2010, net income and diluted earnings per common share were $4.9 billion and $4.58. Results included after tax charges due to Impairment and other charges (credits), net of $25 million or $0.02 per share, primarily related to the Company’s share of restaurant closing costs in McDonald’s Japan (a 50%-owned affiliate) in conjunction with the strategic review of the market’s restaurant portfolio, partly offset by income related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction. Foreign currency translation had a positive impact of $0.01 per share on diluted earnings per share.

In 2009, net income and diluted earnings per common share were $4.6 billion and $4.11. Results benefited by after tax income due to Impairment and other charges (credits), net of $91 million or $0.08 per share, primarily due to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction. Results also benefited by an after tax gain of $59 million or $0.05 per share due to the sale of the Company’s minority ownership interest in Redbox, reflected in Gain on sale of investment. Results were negatively impacted by $0.15 per share due to the effect of foreign currency translation.

The Company repurchased 41.9 million shares of its stock for $3.4 billion in 2011 and 37.8 million shares of its stock for nearly $2.7 billion in 2010, driving reductions of over 3% and 2% of total shares outstanding, respectively, net of stock option exercises.

 

 

 

REVENUES

The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees.

In 2011 and 2010, constant currency revenue growth was driven primarily by positive comparable sales as well as expansion.

Revenues

 

 

 

     Amount           Increase/(decrease)          Increase/(decrease)
excluding currency
translation
 
Dollars in millions    2011        2010        2009            2011      2010           2011      2010  

Company-operated sales:

                             

U.S.

   $ 4,433         $ 4,229         $ 4,295            5      (2 )%         5      (2 )% 

Europe

     7,852           6,932           6,721            13         3           8         5   

APMEA

     5,061           4,297           3,714            18         16           11         9   

Other Countries & Corporate

     947           775           729              22         6             17         (3

Total

   $ 18,293         $ 16,233         $ 15,459              13      5          8      4

Franchised revenues:

                             

U.S.

   $ 4,096         $ 3,883         $ 3,649            5      6        5      6

Europe

     3,034           2,637           2,553            15         3           9         8   

APMEA

     958           769           623            25         23           14         11   

Other Countries & Corporate

     625           553           461              13         20             8         16   

Total

   $ 8,713         $ 7,842         $ 7,286              11      8          8      8

Total revenues:

                             

U.S.

   $ 8,529         $ 8,112         $ 7,944            5      2        5      2

Europe

     10,886           9,569           9,274            14         3           8         6   

APMEA

     6,019           5,066           4,337            19         17           11         9   

Other Countries & Corporate

     1,572           1,328           1,190              18         12             14         4   

Total

   $ 27,006         $ 24,075         $ 22,745              12      6          8      5

 

In the U.S., revenues in 2011 and 2010 were positively impacted by the ongoing appeal of our iconic core products and the success of new products, as well as continued focus on everyday value, convenience and modernizing the customer experience. New products introduced in 2011 included Fruit & Maple Oatmeal and additions to the McCafé beverage line, while new products introduced in 2010 included McCafé frappés and smoothies as well as the Angus Snack Wraps. Refranchising activity negatively impacted revenue growth in 2010.

Europe’s constant currency increase in revenues in 2011 was primarily driven by comparable sales increases in Russia (which is

entirely Company-operated), the U.K., France and Germany, as well as expansion in Russia. The 2010 increase was primarily driven by comparable sales increases in the U.K., France and Russia, as well as expansion in Russia, partly offset by the impact of refranchising activity primarily in the U.K.

In APMEA, the constant currency increase in revenues in 2011 was primarily driven by comparable sales increases in China and most other markets. The 2010 increase was primarily driven by comparable sales increases in China, Australia and most other markets. In addition, expansion in China contributed to the increases in both years.

 

 

McDonald’s Corporation Annual Report 2011    15


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The following tables present comparable sales, comparable guest counts and Systemwide sales increases:

Comparable sales and guest count increases

 

 

    

2011

        

2010

        

2009

 
      Sales      Guest
Counts
          Sales      Guest
Counts
          Sales      Guest
Counts
 

U.S.

     4.8      3.3        3.8      5.3        2.6      0.5

Europe

     5.9         3.4           4.4         2.7           5.2         2.8   

APMEA

     4.7         4.3           6.0         4.9           3.4         1.4   

Other Countries & Corporate

     10.1         4.5             11.3         8.3             5.5         2.4   

Total

     5.6      3.7          5.0      4.9          3.8      1.4

Systemwide sales increases

 

 

    

Excluding currency

translation

 
      2011      2010           2011      2010  

U.S.

     5      4        5      4

Europe

     14         3           9         7   

APMEA

     16         15           7         7   

Other Countries & Corporate

     17         13             12         13   

Total

     11      7          7      6

Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the health of the franchisee base. The following table presents Franchised sales and the related increases:

Franchised Sales

 

 

     Amount           Increase          Increase excluding
currency translation
 
Dollars in millions    2011        2010        2009            2011      2010           2011      2010  

U.S.

   $ 29,739         $ 28,166         $ 26,737            6      5        6      5

Europe

     17,243           15,049           14,573            15         3           9         8   

APMEA

     13,041           11,373           9,871            15         15           6         7   

Other Countries & Corporate

     7,625           6,559           5,747              16         14             12         15   

Total

   $ 67,648         $ 61,147         $ 56,928              11      7          7      7

 

RESTAURANT MARGINS

 

 

Franchised margins

Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about two-thirds of the combined restaurant margins in 2011, 2010 and 2009. Franchised margin dollars increased $768 million or 12% (9% in constant currencies) in 2011 and $479 million or 8% (8% in constant currencies) in 2010. Positive comparable sales were the primary driver of the constant currency growth in franchised margin dollars in both years.

Franchised margins

 

 

 

In millions    2011     2010     2009  

U.S.

   $ 3,436      $ 3,239      $ 3,031   

Europe

     2,400        2,063        1,998   

APMEA

     858        686        559   

Other Countries & Corporate

     538        476        397   

Total

   $ 7,232      $ 6,464      $ 5,985   
                          
Percent of revenues                      

U.S.

     83.9     83.4     83.1

Europe

     79.1        78.2        78.3   

APMEA

     89.5        89.3        89.6   

Other Countries & Corporate

     86.1        86.0        86.1   

Total

     83.0     82.4     82.1

In the U.S., the franchised margin percent increase in 2011 and 2010 was primarily due to positive comparable sales, partly offset by higher occupancy costs.

In Europe, the franchised margin percent increase in 2011 was primarily due to positive comparable sales, partly offset by

 

 

16    McDonald’s Corporation Annual Report 2011


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higher occupancy costs. Europe’s franchised margin percent decreased in 2010 as positive comparable sales were more than offset by higher occupancy expenses, the cost of strategic brand and sales building initiatives and the refranchising strategy.

In APMEA, the franchised margin percent increase in 2011 was primarily due to a contractual escalation in the royalty rate for Japan in addition to positive comparable sales in most markets, partly offset by a negative impact from the strengthening of the Australian dollar. The 2010 decrease was primarily driven by a negative impact from the strengthening of the Australian dollar.

The franchised margin percent in APMEA and Other Countries & Corporate is higher relative to the U.S. and Europe due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.

 

 

Company-operated margins

Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. Company-operated margin dollars increased $282 million or 9% (5% in constant currencies) in 2011 and increased $366 million or 13% (12% in constant currencies) in 2010. The constant currency growth in Company-operated margin dollars in 2011 was driven by positive comparable sales partially offset by higher costs, primarily commodity costs, in all segments. Positive comparable sales and lower commodity costs were the primary drivers of the constant currency growth in Company-operated margin dollars in 2010.

Company-operated margins

 

 

 

In millions    2011     2010     2009  

U.S.

   $ 914      $ 902      $ 832   

Europe

     1,514        1,373        1,240   

APMEA

     876        764        624   

Other Countries & Corporate

     151        134        111   

Total

   $ 3,455      $ 3,173      $ 2,807   
                          
Percent of sales                      

U.S.

     20.6     21.3     19.4

Europe

     19.3        19.8        18.4   

APMEA

     17.3        17.8        16.8   

Other Countries & Corporate

     16.0        17.2        15.2   

Total

     18.9     19.6     18.2

In the U.S., the Company-operated margin percent decreased in 2011 due to higher commodity and occupancy costs, partially offset by positive comparable sales. The margin percent increased in 2010 due to lower commodity costs and positive comparable sales, partly offset by higher labor costs. Refranchising also had a positive impact on the margin percent in 2010.

Europe’s Company-operated margin percent decreased in 2011 primarily due to higher commodity, labor, and occupancy costs, partially offset by positive comparable sales. The margin percent increased in 2010 primarily due to positive comparable sales and lower commodity costs, partly offset by higher labor costs.

In APMEA, the Company-operated margin percent in 2011 reflected positive comparable sales, offset by higher commodity, labor and occupancy costs. Acceleration of new restaurant openings in China negatively impacted the margin percent. Similar to

other markets, new restaurants in China initially open with lower margins that grow significantly over time. The APMEA margin percent increased in 2010 due to positive comparable sales and lower commodity costs, partly offset by higher occupancy & other costs and increased labor costs.

Supplemental information regarding Company-operated restaurants

We continually review our restaurant ownership mix with a goal of improving local relevance, profits and returns. In most cases, franchising is the best way to achieve these goals, but as previously stated, Company-operated restaurants are also important to our success.

We report results for Company-operated restaurants based on their sales, less costs directly incurred by that business including occupancy costs. We report the results for franchised restaurants based on franchised revenues, less associated occupancy costs. For this reason and because we manage our business based on geographic segments and not on the basis of our ownership structure, we do not specifically allocate selling, general & administrative expenses and other operating (income) expenses to Company-operated or franchised restaurants. Other operating items that relate to the Company-operated restaurants generally include gains/losses on sales of restaurant businesses and write-offs of equipment and leasehold improvements.

We believe the following information about Company-operated restaurants in our most significant segments provides an additional perspective on this business. Management responsible for our Company-operated restaurants in these markets analyzes the Company-operated business on this basis to assess its performance. Management of the Company also considers this information when evaluating restaurant ownership mix, subject to other relevant considerations.

The following table seeks to illustrate the two components of our Company-operated margins. The first of these relates exclusively to restaurant operations, which we refer to as “Store operating margin.” The second relates to the value of our brand and the real estate interest we retain for which we charge rent and royalties. We refer to this component as “Brand/real estate margin.” Both Company-operated and conventional franchised restaurants are charged rent and royalties, although rent and royalties for Company-operated restaurants are eliminated in consolidation. Rent and royalties for both restaurant ownership types are based on a percentage of sales, and the actual rent percentage varies depending on the level of McDonald’s investment in the restaurant. Royalty rates may also vary by market.

As shown in the following table, in disaggregating the components of our Company-operated margins, certain costs with respect to Company-operated restaurants are reflected in Brand/real estate margin. Those costs consist of rent payable by McDonald’s to third parties on leased sites and depreciation for buildings and leasehold improvements and constitute a portion of occupancy & other operating expenses recorded in the Consolidated statement of income. Store operating margins reflect rent and royalty expenses, and those amounts are accounted for as income in calculating Brand/real estate margin.

While we believe that the following information provides a perspective in evaluating our Company-operated business, it is not intended as a measure of our operating performance or as an alternative to operating income or restaurant margins as reported by the Company in accordance with accounting principles

 

 

McDonald’s Corporation Annual Report 2011    17


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generally accepted in the U.S. In particular, as noted previously, we do not allocate selling, general & administrative expenses to our Company-operated business. However, we believe that about $50,000 per restaurant, on average, is the typical cost to support this business in the U.S. The actual costs in markets outside the

U.S. will vary depending on local circumstances and the organizational structure of the market. These costs reflect the indirect services we believe are necessary to provide the appropriate support of the restaurant.

 

 

 

 

     U.S.             Europe  
Dollars in millions    2011        2010        2009              2011        2010        2009  

As reported

                              

Number of Company-operated restaurants at year end

     1,552           1,550           1,578              1,985           2,005           2,001   

Sales by Company-operated restaurants

   $ 4,433         $ 4,229         $ 4,295            $ 7,852         $ 6,932         $ 6,721   

Company-operated margin

   $ 914         $ 902         $ 832              $ 1,514         $ 1,373         $ 1,240   

Store operating margin

                              

Company-operated margin

   $ 914         $ 902         $ 832            $ 1,514         $ 1,373         $ 1,240   

Plus:

                              

Outside rent expense(1)

     56           60           65              242           223           222   

Depreciation—buildings & leasehold improvements(1)

     69           65           70              118           105           100   

Less:

                              

Rent & royalties(2)

     (651        (619        (634             (1,598        (1,409        (1,363

Store operating margin

   $ 388         $ 408         $ 333              $ 276         $ 292         $ 199   

Brand/real estate margin

                              

Rent & royalties(2)

   $ 651         $ 619         $ 634            $ 1,598         $ 1,409         $ 1,363   

Less:

                              

Outside rent expense(1)

     (56        (60        (65           (242        (223        (222

Depreciation—buildings & leasehold improvements(1)

     (69        (65        (70             (118        (105        (100

Brand/real estate margin

   $ 526         $ 494         $ 499              $ 1,238         $ 1,081         $ 1,041   

 

(1) Represents certain costs recorded as occupancy & other operating expenses in the Consolidated statement of income – rent payable by McDonald’s to third parties on leased sites and depreciation for buildings and leasehold improvements. This adjustment is made to reflect these occupancy costs in Brand/real estate margin. The relative percentage of sites that are owned versus leased varies by country.

 

(2) Reflects average Company-operated rent and royalties (as a percent of sales: U.S.: 2011 – 14.7%; 2010 – 14.6%; 2009 – 14.8%; Europe: 2011 – 20.4%; 2010 – 20.3%; 2009 – 20.3%). This adjustment is made to reflect expense in Store operating margin and income in Brand/real estate margin. Countries within Europe have varying economic profiles and a wide range of rent and royalty rates as a percentage of sales.

 

 

 

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

Consolidated selling, general & administrative expenses increased 3% (flat in constant currencies) in 2011 and increased 4% (4% in constant currencies) in 2010. The growth rate for 2011 was flat as higher employee and other costs were offset by lower incentive based compensation and costs in 2010 related to the Vancouver Olympics and the Company’s biennial Worldwide Owner/Operator Convention. The Olympics and Convention contributed to the increase in 2010.

Selling, general & administrative expenses

 

 

 

     Amount             Increase/
(decrease)
         Increase/(decrease)
excluding currency
translation
 
Dollars in millions    2011        2010        2009              2011     2010           2011     2010  

U.S.

   $ 779         $ 781         $ 751              0     4        0     4

Europe

     699           653           655              7        0           2        2   

APMEA

     341           306           276              12        10           5        4   

Other Countries & Corporate(1)

     575           593           552                (3     7             (4     5   

Total

   $ 2,394         $ 2,333         $ 2,234                3     4          0     4

 

(1) Included in Other Countries & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training.

Selling, general & administrative expenses as a percent of revenues were 8.9% in 2011 compared with 9.7% in 2010 and 9.8% in 2009. Selling, general & administrative expenses as a percent of Systemwide sales were 2.8% in 2011 compared with 3.0% in 2010 and 3.1% in 2009. Management believes that analyzing selling, general & administrative expenses as a percent of Systemwide sales, as well as revenues, is meaningful because these costs are incurred to support Systemwide restaurants.

 

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IMPAIRMENT AND OTHER CHARGES (CREDITS), NET

The Company recorded impairment and other charges (credits), net of ($4) million in 2011, $29 million in 2010 and ($61) million in 2009. Management does not include these items when reviewing business performance trends because we do not believe these items are indicative of expected ongoing results.

Impairment and other charges (credits), net

 

 

 

In millions, except per share data    2011     2010     2009  

Europe

     $ 1      $ 4   

APMEA

   $ (4 )       49     

Other Countries & Corporate

             (21     (65

Total

   $ (4   $ 29      $ (61

After tax(1)

   $ 17      $ 25      $ (91

Earnings per common share-diluted

   $ 0.01      $ 0.02      $ (0.08

 

(1) Certain items were not tax affected.

In 2010, the Company recorded expense of $29 million primarily related to its share of restaurant closing costs in McDonald’s Japan in conjunction with the strategic review of the market’s restaurant portfolio, partly offset by income related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction.

In 2009, the Company recorded income of $61 million related primarily to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction. The Company also recognized a tax benefit in 2009 in connection with this income, mainly related to the release of a tax valuation allowance.

OTHER OPERATING (INCOME) EXPENSE, NET

Other operating (income) expense, net

 

 

 

In millions    2011     2010     2009  

Gains on sales of restaurant businesses

   $ (82   $ (79   $ (113

Equity in earnings of unconsolidated affiliates

     (178     (164     (168

Asset dispositions and other expense

     27        45        59   

Total

   $ (233   $ (198   $ (222
 

Gains on sales of restaurant businesses

Gains on sales of restaurant businesses include gains from sales of Company-operated restaurants as well as gains from exercises of purchase options by franchisees with business facilities lease arrangements (arrangements where the Company leases the businesses, including equipment, to franchisees who generally have options to purchase the businesses). The Company’s purchases and sales of businesses with its franchisees are aimed at achieving an optimal ownership mix in each market. Resulting gains or losses are recorded in operating income because the transactions are a recurring part of our business. The Company realized lower gains on sales of restaurant businesses in 2010 compared with 2009 primarily as a result of selling fewer Company-operated restaurants to franchisees.

 

 

Equity in earnings of unconsolidated affiliates

Unconsolidated affiliates and partnerships are businesses in which the Company actively participates, but does not control. The Company records equity in earnings from these entities representing McDonald’s share of results. For foreign affiliated markets—primarily Japan—results are reported after interest expense and income taxes. McDonald’s share of results for partnerships in certain consolidated markets such as the U.S. is reported before income taxes. These partnership restaurants are operated under conventional franchise arrangements and, therefore, are classified as conventional franchised restaurants. Results in 2011 reflected a benefit from stronger foreign currencies partly offset by the decline in the number of unconsolidated partnerships in the U.S. Results in 2010 reflected a reduction in the number of unconsolidated partnerships worldwide partly offset by improved operating performance in Japan.

 

 

Asset dispositions and other expense

Asset dispositions and other expense consists of gains or losses on excess property and other asset dispositions, provisions for restaurant closings and uncollectible receivables, asset write-offs due to restaurant reinvestment, and other miscellaneous income and expenses. Asset dispositions and other expense declined in 2011 primarily due to higher gains on unconsolidated partnership dissolutions in the U.S.

 

 

 

OPERATING INCOME

Operating income

 

 

 

     Amount           Increase/(decrease)          Increase/(decrease)
excluding currency
translation
 
Dollars in millions    2011        2010        2009            2011      2010           2011      2010  

U.S.

   $ 3,666         $ 3,446         $ 3,232            6      7 %             6      7

Europe

     3,227           2,797           2,588            15         8           10         12   

APMEA

     1,526           1,200           989            27         21           17         11   

Other Countries & Corporate

     111           30           32              nm         (6          nm         (43

Total

   $ 8,530         $ 7,473         $ 6,841              14      9          10      9

nm Not meaningful.

 

In the U.S., 2011 and 2010 results increased primarily due to higher combined restaurant margin dollars, primarily franchised margin dollars.

In Europe, results for 2011 and 2010 were driven by stronger operating performance in France, the U.K., Russia and Germany. The increases in 2011 and 2010 were driven by higher combined

 

 

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restaurant margin dollars, primarily franchised margin dollars in 2011 and Company-operated margin dollars in 2010.

In APMEA, 2011 results increased due to stronger operating results in many markets. Results for 2010 were primarily driven by stronger results in Australia and many other markets. Impairment charges in 2010 positively impacted the constant currency growth rate for 2011 by 4 percentage points and negatively impacted the 2010 growth rate by 4 percentage points.

 

 

Combined operating margin

Combined operating margin is defined as operating income as a percent of total revenues. Combined operating margin for 2011, 2010 and 2009 was 31.6%, 31.0% and 30.1%, respectively.

INTEREST EXPENSE

Interest expense increased in 2011 primarily due to higher average debt balances and stronger foreign currencies, partly offset by lower average interest rates. Interest expense decreased in 2010 primarily due to lower average interest rates slightly offset by higher average debt balances.

NONOPERATING (INCOME) EXPENSE, NET

Nonoperating (income) expense, net

 

 

 

In millions    2011     2010     2009  

Interest income

   $ (39   $ (20   $ (19

Foreign currency and hedging activity

     9        (2     (32

Other expense

     55        44        27   

Total

   $ 25      $ 22      $ (24

Interest income consists primarily of interest earned on short-term cash investments. Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams. Other expense primarily consists of miscellaneous nonoperating income and expense items such as amortization of debt issuance costs.

GAIN ON SALE OF INVESTMENT

In 2009, the Company sold its minority ownership interest in Redbox to Coinstar, Inc., the majority owner, for total consideration of $145 million. As a result of the transaction, the Company recognized a nonoperating pretax gain of $95 million (after tax – $59 million or $0.05 per share).

PROVISION FOR INCOME TAXES

In 2011, 2010 and 2009, the reported effective income tax rates were 31.3%, 29.3% and 29.8%, respectively.

In 2011, the effective income tax rate increased due to lower tax benefits related to certain foreign tax credits, partially offset by nonrecurring deferred tax benefits related to certain foreign operations.

In 2010, the effective income tax rate decreased due to higher tax benefits related to foreign operations.

In 2009, the effective income tax rate benefited by 0.7 percentage points primarily due to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction.

Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $1.5 billion and $1.6 billion in 2011 and 2010, respectively. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.

ACCOUNTING CHANGES

 

 

Fair value measurements

In May 2011, the Financial Accounting Standards Board (FASB) issued an update to Topic 820 – Fair Value Measurement of the Accounting Standards Codification (ASC). This update provides guidance on how fair value accounting should be applied where its use is already required or permitted by other standards and does not extend the use of fair value accounting. The Company will adopt this guidance effective January 1, 2012, as required, and does not expect the adoption to have a significant impact on its consolidated financial statements.

 

 

Comprehensive Income

In June 2011, the FASB issued an update to Topic 220 – Comprehensive Income of the ASC. The update is intended to increase the prominence of other comprehensive income in the financial statements. The guidance requires that the Company presents components of comprehensive income in either one continuous statement or two separate consecutive statements and no longer permits the presentation of comprehensive income in the Consolidated statement of shareholders’ equity. The Company will adopt this new guidance effective January 1, 2012, as required.

 

 

Variable interest entities and consolidation

In June 2009, the FASB issued amendments to the guidance on variable interest entities and consolidation, codified primarily in the Consolidation Topic of the FASB ASC. This guidance modifies the method for determining whether an entity is a variable interest entity as well as the methods permitted for determining the primary beneficiary of a variable interest entity. In addition, this guidance requires ongoing reassessments of whether a company is the primary beneficiary of a variable interest entity and enhanced disclosures related to a company’s involvement with a variable interest entity. The Company adopted this guidance as of January 1, 2010.

On an ongoing basis, the Company evaluates its business relationships such as those with franchisees, joint venture partners, developmental licensees, suppliers, and advertising cooperatives to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the consolidation guidance. The Company has concluded that consolidation of any such entities is not appropriate for the periods presented. As a result, the adoption did not have any impact on the Company’s consolidated financial statements.

Cash Flows

 

 

The Company generates significant cash from its operations and has substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.

Cash provided by operations totaled $7.2 billion and exceeded capital expenditures by $4.4 billion in 2011, while cash provided by operations totaled $6.3 billion and exceeded capital expenditures by $4.2 billion in 2010. In 2011, cash provided by operations increased $808 million or 13% compared with 2010 primarily due to higher operating results. In 2010, cash provided by operations increased $591 million or 10% compared with 2009 primarily due to higher operating results.

 

 

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Cash used for investing activities totaled $2.6 billion in 2011, an increase of $515 million compared with 2010. This reflects higher capital expenditures, partly offset by higher proceeds from sales of restaurant businesses. Cash used for investing activities totaled $2.1 billion in 2010, an increase of $401 million compared with 2009. This reflects higher capital expenditures and lower proceeds from sales of investments and restaurant businesses.

Cash used for financing activities totaled $4.5 billion in 2011, an increase of $804 million compared with 2010, primarily due to higher treasury stock purchases, an increase in the common stock dividend, and lower proceeds from stock option exercises, partly offset by higher net debt issuances. Cash used for financing activities totaled $3.7 billion in 2010, a decrease of $692 million compared with 2009, primarily due to higher net debt issuances, higher proceeds from stock option exercises and lower treasury stock purchases, partly offset by an increase in the common stock dividend.

As a result of the above activity, the Company’s cash and equivalents balance decreased $51 million in 2011 to $2.3 billion, compared with an increase of $591 million in 2010. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.

RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES

In 2011, the Company opened 1,118 traditional restaurants and 32 satellite restaurants (small, limited-menu restaurants for which the land and building are generally leased), and closed 246 traditional restaurants and 131 satellite restaurants. In 2010, the Company opened 957 traditional restaurants and 35 satellite restaurants, and closed 406 traditional restaurants and 327 satellite restaurants. Of these closures, there were over 400 in McDonald’s Japan due to the strategic review of the market’s restaurant portfolio. The majority of restaurant openings and closings occurred in the major markets in both years. The Company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.

Systemwide restaurants at year end(1)

 

 

 

      2011        2010        2009  

U.S.

     14,098           14,027           13,980   

Europe

     7,156           6,969           6,785   

APMEA

     8,865           8,424           8,488   

Other Countries & Corporate

     3,391           3,317           3,225   

Total

     33,510           32,737           32,478   

 

(1) Includes satellite units at December 31, 2011, 2010 and 2009 as follows: U.S.—1,084, 1,112, 1,155; Europe—240, 239, 241; APMEA (primarily Japan)—949, 1,010, 1,263; Other Countries & Corporate—459, 470, 464.

Approximately 65% of Company-operated restaurants and over 75% of franchised restaurants were located in the major markets at the end of 2011. Over 80% of the restaurants at year-end 2011 were franchised.

Capital expenditures increased $595 million or 28% in 2011 primarily due to higher reinvestment in existing restaurants and higher investment in new restaurants. Capital expenditures increased $183 million or 9% in 2010 primarily due to higher investment in new restaurants. In both years, capital expenditures

reflected the Company’s commitment to grow sales at existing restaurants, including reinvestment initiatives such as reimaging in many markets around the world.

Capital expenditures invested in major markets, excluding Japan, represented over 65% of the total in 2011, 2010 and 2009. Japan is accounted for under the equity method, and accordingly its capital expenditures are not included in consolidated amounts.

Capital expenditures

 

 

 

In millions    2011      2010      2009  

New restaurants

   $ 1,193       $ 968       $ 809   

Existing restaurants

     1,432         1,089         1,070   

Other(1)

     105         78         73   

Total capital expenditures

   $ 2,730       $ 2,135       $ 1,952   

Total assets

   $ 32,990       $ 31,975       $ 30,225   

 

(1) Primarily corporate equipment and other office-related expenditures.

New restaurant investments in all years were concentrated in markets with acceptable returns or opportunities for long-term growth. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment, are managed through the use of optimally sized restaurants, construction and design efficiencies, and leveraging best practices. Although the Company is not responsible for all costs for every restaurant opened, total development costs (consisting of land, buildings and equipment) for new traditional McDonald’s restaurants in the U.S. averaged approximately $2.7 million in 2011.

The Company owned approximately 45% of the land and about 70% of the buildings for restaurants in its consolidated markets at year-end 2011 and 2010.

SHARE REPURCHASES AND DIVIDENDS

For the last three years, the Company returned a total of $16.1 billion to shareholders through a combination of shares repurchased and dividends paid.

Shares repurchased and dividends

 

 

 

In millions, except per share data   2011      2010      2009  

Number of shares repurchased

    41.9         37.8         50.3   

Shares outstanding at year end

    1,021         1,054         1,077   

Dividends declared per share

  $ 2.53       $ 2.26       $ 2.05   

Dollar amount of shares repurchased

  $ 3,373       $ 2,648       $ 2,854   

Dividends paid

    2,610         2,408         2,235   

Total returned to shareholders

  $ 5,983       $ 5,056       $ 5,089   

In September 2009, the Company’s Board of Directors approved a $10 billion share repurchase program with no specified expiration date. In 2009, 2010 and 2011 combined, approximately 87 million shares have been repurchased for $6.5 billion under this program.

The Company has paid dividends on its common stock for 36 consecutive years and has increased the dividend amount every year. The 2011 full year dividend of $2.53 per share reflects the quarterly dividend paid for each of the first three quarters of $0.61 per share, with an increase to $0.70 per share paid in the fourth quarter. This 15% increase in the quarterly dividend

 

 

McDonald’s Corporation Annual Report 2011    21


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equates to a $2.80 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

Financial Position and Capital Resources

 

 

TOTAL ASSETS AND RETURNS

Total assets increased $1.0 billion or 3% in 2011. Excluding the effect of changes in foreign currency exchange rates, total assets increased $1.4 billion in 2011. Over 75% of total assets were in major markets at year-end 2011. Net property and equipment increased $774 million in 2011 and represented about 70% of total assets at year end. Excluding the effect of changes in foreign currency exchange rates, net property and equipment increased $1.1 billion primarily due to capital expenditures, partly offset by depreciation.

Operating income is used to compute return on average assets, while net income is used to calculate return on average common equity. Month-end balances are used to compute both average assets and average common equity.

 

 

 

      2011      2010      2009  

Return on average assets

     26.0      24.7      23.4

Return on average common equity

     37.7         35.3         34.0   

In 2011, 2010, and 2009, return on average assets and return on average common equity benefited from strong global operating results. Operating income, as reported, does not include interest income; however, cash balances are included in average assets. The inclusion of cash balances in average assets reduced return on average assets by about two percentage points for all years presented.

FINANCING AND MARKET RISK

The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 2011 totaled $12.5 billion, compared with $11.5 billion at December 31, 2010. The net increase in 2011 was primarily due to net issuances of $1.0 billion.

Debt highlights(1)

 

 

 

      2011     2010     2009  

Fixed-rate debt as a percent of total debt(2,3)

     69     66     68

Weighted-average annual interest rate of total debt(3)

     4.2        4.3        4.5   

Foreign currency-denominated debt as a percent of total debt(2)

     40        41        43   

Total debt as a percent of total capitalization (total debt and total shareholders’ equity)(2)

      
     46        44        43   

Cash provided by operations as a percent of total debt(2)

     57        55        55   

 

(1) All percentages are as of December 31, except for the weighted-average annual interest rate, which is for the year.

 

(2) Based on debt obligations before the effect of fair value hedging adjustments. This effect is excluded as these adjustments have no impact on the obligation at maturity. See Debt financing note to the consolidated financial statements.

 

(3) Includes the effect of interest rate swaps.

Fitch, Standard & Poor’s and Moody’s currently rate, with a stable outlook, the Company’s commercial paper F1, A-1 and P-1, respectively; and its long-term debt A, A and A2, respectively.

Certain of the Company’s debt obligations contain cross-acceleration provisions and restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries. There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. Under existing authorization from the Company’s Board of Directors, at December 31, 2011, the Company had $1.7 billion of authority remaining to borrow funds, including through (i) public or private offering of debt securities; (ii) direct borrowing from banks or other financial institutions; and (iii) other forms of indebtedness. In addition to debt securities available through a medium-term notes program registered with the U.S. Securities and Exchange Commission (SEC) and a Global Medium-Term Notes program, the Company has $1.5 billion available under committed line of credit agreements as well as authority to issue commercial paper in the U.S. and global markets (see Debt financing note to the consolidated financial statements). Debt maturing in 2012 is approximately $964 million of long-term corporate debt. In 2012, the Company expects to issue commercial paper and long-term debt to refinance this maturing debt. Consequently, in February 2012, the Company issued $250.0 million of 10-year U.S. Dollar-denominated notes at a coupon rate of 2.625%, and $500.0 million of 30-year U.S. Dollar-denominated notes at a coupon rate of 3.70%. The Company also has $640 million of foreign currency bank line borrowings outstanding at year-end 2011.

The Company uses major capital markets, bank financings and derivatives to meet its financing requirements and reduce interest expense. The Company manages its debt portfolio in response to changes in interest rates and foreign currency rates by periodically retiring, redeeming and repurchasing debt, terminating swaps and using derivatives. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading purposes. All swaps are over-the-counter instruments.

In managing the impact of interest rate changes and foreign currency fluctuations, the Company uses interest rate swaps and finances in the currencies in which assets are denominated. The Company uses foreign currency debt and derivatives to hedge the foreign currency risk associated with certain royalties, intercompany financings and long-term investments in foreign subsidiaries and affiliates. This reduces the impact of fluctuating foreign currencies on cash flows and shareholders’ equity. Total foreign currency-denominated debt was $5.0 billion and $4.7 billion for the years ended December 31, 2011 and 2010, respectively. In addition, where practical, the Company’s restaurants purchase goods and services in local currencies resulting in natural hedges. See Summary of significant accounting policies note to the consolidated financial statements related to financial instruments and hedging activities for additional information regarding the accounting impact and use of derivatives.

The Company does not have significant exposure to any individual counterparty and has master agreements that contain netting arrangements. Certain of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At

 

 

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December 31, 2011, neither the Company nor its counterparties were required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where our counterparty was required to post collateral on its liability position.

The Company’s net asset exposure is diversified among a broad basket of currencies. The Company’s largest net asset exposures (defined as foreign currency assets less foreign currency liabilities) at year end were as follows:

Foreign currency net asset exposures

 

 

 

In millions of U.S. Dollars      2011        2010  

Euro

     $ 5,905         $ 5,465   

Australian Dollars

       2,409           2,075   

Canadian Dollars

       1,224           1,123   

British Pounds Sterling

       726           547   

Russian Ruble

       594           589   

The Company prepared sensitivity analyses of its financial instruments to determine the impact of hypothetical changes in interest rates and foreign currency exchange rates on the Company’s results of operations, cash flows and the fair value of its financial instruments. The interest rate analysis assumed a one percentage point adverse change in interest rates on all financial instruments, but did not consider the effects of the reduced level of economic activity that could exist in such an environment. The foreign currency rate analysis assumed that each foreign currency rate would change by 10% in the same direction relative to the U.S. Dollar on all financial instruments; however, the analysis did not include the potential impact on revenues, local currency prices or the effect of fluctuating currencies on the Company’s anticipated foreign currency royalties and other payments received in the U.S. Based on the results of these analyses of the Company’s financial instruments, neither a one percentage point adverse change in interest rates from 2011 levels nor a 10% adverse change in foreign currency rates from 2011 levels would materially affect the Company’s results of operations, cash flows or the fair value of its financial instruments.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Company has long-term contractual obligations primarily in the form of lease obligations (related to both Company-operated and franchised restaurants) and debt obligations. In addition, the Company has long-term revenue and cash flow streams that relate to its franchise arrangements. Cash provided by operations (including cash provided by these franchise arrangements) along with the Company’s borrowing capacity and other sources of cash will be used to satisfy the obligations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as well as future minimum rent payments due to the Company under existing franchise arrangements as of December 31, 2011. See discussions of cash flows and financial position and capital resources as well as the Notes to the consolidated financial statements for further details.

 

 

     Contractual cash outflows           Contractual cash inflows  
In millions    Operating
leases
     Debt
obligations(1)
           Minimum rent under
franchise arrangements
 

2012

   $ 1,247       $ 367          $ 2,425   

2013

     1,167         1,026            2,357   

2014

     1,075         738            2,273   

2015

     965         656            2,157   

2016

     852         2,158            2,037   

Thereafter

     6,248         7,499              15,949   

Total

   $ 11,554       $ 12,444            $ 27,198   

 

(1) The maturities reflect reclassifications of short-term obligations to long-term obligations of $1.5 billion, as they are supported by a long-term line of credit agreement expiring in November 2016. Debt obligations do not include $56 million of noncash fair value hedging adjustments or $218 million of accrued interest.

The Company maintains certain supplemental benefit plans that allow participants to (i) make tax-deferred contributions and (ii) receive Company-provided allocations that cannot be made under the qualified benefit plans because of IRS limitations. At December 31, 2011, total liabilities for the supplemental plans were $482 million, and total liabilities for gross unrecognized tax benefits were $565 million.

There are certain purchase commitments that are not recognized in the consolidated financial statements and are primarily related to construction, inventory, energy, marketing and other service related arrangements that occur in the normal course of business. The amounts related to these commitments are not significant to the Company’s financial position. Such commitments are generally shorter term in nature and will be funded from operating cash flows.

Other Matters

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under various assumptions or conditions.

The Company reviews its financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:

 

 

Property and equipment

Property and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management’s estimates of the period over which the assets will generate revenue (not to exceed lease term plus options for leased property). The useful lives are estimated based on historical experience with

 

 

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similar assets, taking into account anticipated technological or other changes. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the accelerated recognition of depreciation and amortization expense or write-offs in future periods.

 

 

Share-based compensation

The Company has a share-based compensation plan which authorizes the granting of various equity-based incentives including stock options and restricted stock units (RSUs) to employees and nonemployee directors. The expense for these equity-based incentives is based on their fair value at date of grant and generally amortized over their vesting period.

The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The pricing model requires assumptions, which impact the assumed fair value, including the expected life of the stock option, the risk-free interest rate, expected volatility of the Company’s stock over the expected life and the expected dividend yield. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future years. The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant less the present value of expected dividends over the vesting period.

 

 

Long-lived assets impairment review

Long-lived assets (including goodwill) are reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company’s long-lived assets, the Company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Estimates of future cash flows are highly subjective judgments based on the Company’s experience and knowledge of its operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. A key assumption impacting estimated future cash flows is the estimated change in comparable sales. If the Company’s estimates or underlying assumptions change in the future, the Company may be required to record impairment charges. Based on the annual goodwill impairment test, conducted in the fourth quarter, the Company does not have any reporting units (defined as each individual country) with goodwill currently at risk of impairment.

 

 

Litigation accruals

In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after

careful analysis of each matter. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.

 

 

Income taxes

The Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred assets will not be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax strategies, including the sale of appreciated assets, in assessing the need for the valuation allowance, if these estimates and assumptions change in the future, the Company may be required to adjust its valuation allowance. This could result in a charge to, or an increase in, income in the period such determination is made.

The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter. In 2010, the Internal Revenue Service (IRS) concluded its field examination of the Company’s U.S. federal income tax returns for 2007 and 2008. In connection with this examination, the Company received notices of proposed adjustments from the IRS related to certain foreign tax credits of about $400 million, excluding interest and potential penalties. The Company disagrees with the IRS’ proposed adjustments. The Company has filed a protest with the IRS Appeals Office and expects resolution on this issue in 2012. The Company does not believe that the resolution will have a material impact on its results of operations or cash flows. The Company’s 2009 and 2010 U.S. federal income tax returns are currently under examination and the completion of the examination is expected in 2013.

Deferred U.S. income taxes have not been recorded for temporary differences totaling $12.6 billion related to investments in certain foreign subsidiaries and corporate affiliates. The temporary differences consist primarily of undistributed earnings that are considered permanently invested in operations outside the U.S. If management’s intentions change in the future, deferred taxes may need to be provided.

EFFECTS OF CHANGING PRICES—INFLATION

The Company has demonstrated an ability to manage inflationary cost increases effectively. This ability is because of rapid inventory turnover, the ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs and partly financed by debt made less expensive by inflation.

RECONCILIATION OF RETURNS ON INCREMENTAL INVESTED CAPITAL

Return on incremental invested capital (ROIIC) is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the business units, the effectiveness of capital deployed and the future allocation of capital. This measure is calculated using operating income and constant foreign exchange rates to exclude the impact of foreign currency translation. The numerator is the Company’s incremental operating income plus depreciation and amortization from the base period.

 

 

24    McDonald’s Corporation Annual Report 2011


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The denominator is the weighted-average adjusted cash used for investing activities during the applicable one-or three-year period. Adjusted cash used for investing activities is defined as cash used for investing activities less cash generated from investing activities related to the Pret A Manger and Redbox transactions. The weighted-average adjusted cash used for investing activities is based on a weighting applied on a quarterly basis. These weightings are used to reflect the estimated contribution of each quarter’s investing activities to incremental operating income. For example, fourth quarter 2011 investing activities are weighted less because the assets purchased have only recently been deployed and would have generated little incremental operating income (12.5% of fourth quarter 2011 investing activities are included in the one-year and three-year calculations). In contrast, fourth quarter 2010 is heavily weighted because the assets purchased were deployed more than 12 months ago, and therefore have a full year impact on 2011 operating income, with little or no impact to the base period (87.5% and 100.0% of fourth quarter 2010 investing activities are included in the one-year and three-year calculations, respectively). Management believes that weighting cash used for investing activities provides a more accurate reflection of the relationship between its investments and returns than a simple average.

The reconciliations to the most comparable measurements, in accordance with accounting principles generally accepted in the U.S., for the numerator and denominator of the one-year and three-year ROIIC are as follows:

One-year ROIIC calculation (dollars in millions):

 

 

 

Years ended December 31,   2011     2010     Incremental
change
 

NUMERATOR:

     

Operating income

  $ 8,529.7      $ 7,473.1      $ 1,056.6   

Depreciation and amortization

    1,415.0        1,276.2        138.8   

Currency translation(1)

                    (331.4

Incremental operating income plus depreciation and amortization (at constant foreign exchange rates)

   

  $ 864.0   

DENOMINATOR:

     

Weighted-average cash used for investing activities(2)

      $ 2,311.7   

Currency translation(1)

                    (11.3

Weighted-average cash used for investing activities (at constant foreign exchange rates)

   

  $ 2,300.4   

One-year ROIIC(3)

                    37.6

 

(1) Represents the effect of foreign currency translation by translating results at an average exchange rate for the periods measured.

 

(2) Represents one-year weighted-average cash used for investing activities, determined by applying the weightings below to the cash used for investing activities for each quarter in the two-year period ended December 31, 2011.

 

     Years ended December 31,  
      2010        2011  

Cash used for investing activities

   $ 2,056.0         $ 2,570.9   

AS A PERCENT

       

Quarters ended:

       

March 31

     12.5 %         87.5

June 30

     37.5           62.5   

September 30

     62.5           37.5   

December 31

     87.5           12.5   

 

(3) The impact of impairment and other charges (credits), net between 2011 and 2010 positively impacted the one-year ROIIC by 3.4 percentage points.

Three-year ROIIC calculation (dollars in millions):

 

 

 

Years ended December 31,   2011     2008     Incremental
change
 

NUMERATOR:

     

Operating income

  $ 8,529.7      $ 6,442.9      $ 2,086.8   

Depreciation and amortization

    1,415.0        1,207.8        207.2   

Currency translation(4)

                    0.2   

Incremental operating income plus depreciation and amortization (at constant foreign exchange rates)

   

  $ 2,294.2   

DENOMINATOR:

     

Weighted-average adjusted cash used for investing activities(5)

      $ 6,026.6   

Currency translation(4)

                    38.1   

Weighted-average adjusted cash used for investing activities (at constant foreign exchange rates)

   

  $ 6,064.7   

Three-year ROIIC(6)

                    37.8

 

(4) Represents the effect of foreign currency translation by translating results at an average exchange rate for the periods measured.

 

(5) Represents three-year weighted-average adjusted cash used for investing activities, determined by applying the weightings below to the adjusted cash used for investing activities for each quarter in the four-year period ended December 31, 2011.

 

    Years ended December 31,  
     2008     2009     2010     2011  

Cash used for investing activities

  $ 1,624.7      $ 1,655.3      $ 2,056.0      $ 2,570.9   

Less: Cash generated from investing activities related to

  

Pret A Manger transaction

    (229.4      

Redbox
transaction

            (144.9                

Adjusted cash used for investing activities

  $ 1,854.1      $ 1,800.2      $ 2,056.0      $ 2,570.9   

AS A PERCENT

       

Quarters ended:

       

March 31

    12.5     100.0     100.0     87.5

June 30

    37.5        100.0        100.0        62.5   

September 30

    62.5        100.0        100.0        37.5   

December 31

    87.5        100.0        100.0        12.5   

 

(6) The impact of impairment and other charges (credits), net between 2011 and 2008 positively impacted the three year ROIIC by 1.2 percentage points.
 

 

McDonald’s Corporation Annual Report 2011    25


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RISK FACTORS AND CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION

This report includes forward-looking statements about our plans and future performance, including those under Outlook for 2012. These statements use such words as “may,” “will,” “expect,” “believe” and “plan.” They reflect our expectations and speak only as of the date of this report. We do not undertake to update them. Our expectations (or the underlying assumptions) may change or not be realized, and you should not rely unduly on forward-looking statements. We have identified the principal risks and uncertainties that affect our performance elsewhere in this report, and investors are urged to consider these risks and uncertainties when evaluating our historical and expected performance.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 

 

Quantitative and qualitative disclosures about market risk are included in Part II, Item 7, page 22 of the Form 10-K.

ITEM 8. Financial Statements and Supplementary Data

 

 

 

Index to consolidated financial statements    Page reference  

Consolidated statement of income for each of the three years in the period ended December 31, 2011

     27   

Consolidated balance sheet at December 31, 2011 and 2010

     28   

Consolidated statement of cash flows for each of the three years in the period ended December 31, 2011

     29   

Consolidated statement of shareholders’ equity for each of the three years in the period ended December  31, 2011

     30   

Notes to consolidated financial statements

     31   

Quarterly results (unaudited)

     43   

Management’s assessment of internal control over financial reporting

     44   

Report of independent registered public accounting firm

     45   

Report of independent registered public accounting firm on internal control over financial reporting

     46   

 

 

 

26    McDonald’s Corporation Annual Report 2011


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Consolidated Statement of Income

 

 

 

In millions, except per share data   Years ended December 31, 2011      2010      2009  

REVENUES

       

Sales by Company-operated restaurants

  $ 18,292.8       $ 16,233.3       $ 15,458.5   

Revenues from franchised restaurants

    8,713.2         7,841.3         7,286.2   

Total revenues

    27,006.0         24,074.6         22,744.7   

OPERATING COSTS AND EXPENSES

       

Company-operated restaurant expenses

       

Food & paper

    6,167.2         5,300.1         5,178.0   

Payroll & employee benefits

    4,606.3         4,121.4         3,965.6   

Occupancy & other operating expenses

    4,064.4         3,638.0         3,507.6   

Franchised restaurants-occupancy expenses

    1,481.5         1,377.8         1,301.7   

Selling, general & administrative expenses

    2,393.7         2,333.3         2,234.2   

Impairment and other charges (credits), net

    (3.9      29.1         (61.1

Other operating (income) expense, net

    (232.9      (198.2      (222.3

Total operating costs and expenses

    18,476.3         16,601.5         15,903.7   

Operating income

    8,529.7         7,473.1         6,841.0   

Interest expense-net of capitalized interest of $14.0, $12.0 and $11.7

    492.8         450.9         473.2   

Nonoperating (income) expense, net

    24.7         21.9         (24.3

Gain on sale of investment

                      (94.9

Income before provision for income taxes

    8,012.2         7,000.3         6,487.0   

Provision for income taxes

    2,509.1         2,054.0         1,936.0   

Net income

  $   5,503.1       $ 4,946.3       $ 4,551.0   

Earnings per common share–basic

  $        5.33       $ 4.64       $ 4.17   

Earnings per common share–diluted

  $ 5.27       $ 4.58       $ 4.11   

Dividends declared per common share

  $        2.53       $ 2.26       $ 2.05   

Weighted-average shares outstanding–basic

    1,032.1         1,066.0         1,092.2   

Weighted-average shares outstanding–diluted

    1,044.9         1,080.3         1,107.4   

See Notes to consolidated financial statements.

 

McDonald’s Corporation Annual Report 2011    27


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Consolidated Balance Sheet

 

 

 

In millions, except per share data    December 31, 2011        2010  

ASSETS

       

Current assets

       

Cash and equivalents

     $   2,335.7         $ 2,387.0   

Accounts and notes receivable

     1,334.7           1,179.1   

Inventories, at cost, not in excess of market

     116.8           109.9   

Prepaid expenses and other current assets

     615.8           692.5   

Total current assets

     4,403.0           4,368.5   

Other assets

       

Investments in and advances to affiliates

     1,427.0           1,335.3   

Goodwill

     2,653.2           2,586.1   

Miscellaneous

     1,672.2           1,624.7   

Total other assets

     5,752.4           5,546.1   

Property and equipment

       

Property and equipment, at cost

     35,737.6           34,482.4   

Accumulated depreciation and amortization

     (12,903.1        (12,421.8

Net property and equipment

     22,834.5           22,060.6   

Total assets

     $ 32,989.9         $ 31,975.2   

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

Current liabilities

       

Accounts payable

     $     961.3         $ 943.9   

Income taxes

     262.2           111.3   

Other taxes

     338.1           275.6   

Accrued interest

     218.2           200.7   

Accrued payroll and other liabilities

     1,362.8           1,384.9   

Current maturities of long-term debt

     366.6           8.3   

Total current liabilities

     3,509.2           2,924.7   

Long-term debt

     12,133.8           11,497.0   

Other long-term liabilities

     1,612.6           1,586.9   

Deferred income taxes

     1,344.1           1,332.4   

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

     5,487.3           5,196.4   

Retained earnings

     36,707.5           33,811.7   

Accumulated other comprehensive income

     449.7           752.9   

Common stock in treasury, at cost; 639.2 and 607.0 million shares

     (28,270.9        (25,143.4

Total shareholders’ equity

     14,390.2           14,634.2   

Total liabilities and shareholders’ equity

     $ 32,989.9         $ 31,975.2   

See Notes to consolidated financial statements.

 

28    McDonald’s Corporation Annual Report 2011


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Consolidated Statement of Cash Flows

 

 

In millions    Years ended December 31, 2011     2010     2009  

Operating activities

      

Net income

     $  5,503.1      $ 4,946.3      $ 4,551.0   

Adjustments to reconcile to cash provided by operations

      

Charges and credits:

      

Depreciation and amortization

     1,415.0        1,276.2        1,216.2   

Deferred income taxes

     188.4        (75.7     203.0   

Impairment and other charges (credits), net

     (3.9     29.1        (61.1

Gain on sale of investment

         (94.9

Share-based compensation

     86.2        83.1        112.9   

Other

     (78.7     211.6        (347.1

Changes in working capital items:

      

Accounts receivable

     (160.8     (50.1     (42.0

Inventories, prepaid expenses and other current assets

     (52.2     (50.8     1.0   

Accounts payable

     35.8        (39.8     (2.2

Income taxes

     198.5        54.9        212.1   

Other accrued liabilities

     18.7        (43.2     2.1   

Cash provided by operations

     7,150.1        6,341.6        5,751.0   

Investing activities

      

Capital expenditures

     (2,729.8     (2,135.5     (1,952.1

Purchases of restaurant businesses

     (186.4     (183.4     (145.7

Sales of restaurant businesses and property

     511.4        377.9        406.0   

Proceeds on sale of investment

         144.9   

Other

     (166.1     (115.0     (108.4

Cash used for investing activities

     (2,570.9     (2,056.0     (1,655.3

Financing activities

      

Net short-term borrowings

     260.6        3.1        (285.4

Long-term financing issuances

     1,367.3        1,931.8        1,169.3   

Long-term financing repayments

     (624.0     (1,147.5     (664.6

Treasury stock purchases

     (3,363.1     (2,698.5     (2,797.4

Common stock dividends

     (2,609.7     (2,408.1     (2,235.5

Proceeds from stock option exercises

     334.0        463.1        332.1   

Excess tax benefit on share-based compensation

     112.5        128.7        73.6   

Other

     (10.6     (1.3     (13.1

Cash used for financing activities

     (4,533.0     (3,728.7     (4,421.0

Effect of exchange rates on cash and equivalents

     (97.5     34.1        57.9   

Cash and equivalents increase (decrease)

     (51.3     591.0        (267.4

Cash and equivalents at beginning of year

     2,387.0        1,796.0        2,063.4   

Cash and equivalents at end of year

     $  2,335.7      $ 2,387.0      $ 1,796.0   

Supplemental cash flow disclosures

      

Interest paid

     $     489.3      $ 457.9      $ 468.7   

Income taxes paid

     2,056.7        1,708.5        1,683.5   

See Notes to consolidated financial statements.

 

McDonald’s Corporation Annual Report 2011    29


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Consolidated Statement of Shareholders’ Equity

 

 

 

    Common stock
issued
                   

Accumulated other

comprehensive income (loss)

        Common stock in
treasury
       
    Additional
paid-in
capital
   

Retained
earnings

       

Pensions

   

Cash flow
hedging
adjustment

   

Foreign
currency
translation

          Total
shareholders’
equity
 
In millions, except per share data   Shares     Amount                         Shares     Amount    

Balance at December 31, 2008

    1,660.6      $ 16.6      $ 4,600.2      $ 28,953.9        $ (98.1   $ 48.0      $ 151.4          (545.3   $ (20,289.4   $ 13,382.6   

Net income

                            4,551.0                                                        4,551.0   

Translation adjustments including net investment hedging
(including taxes of $47.2)

                                                        714.1                            714.1   

Adjustments to cash flow hedges
(including tax benefits of $18.6)

                                                (31.5                                 (31.5

Adjustments related to pensions
(including tax benefits of $25.0)

                                        (36.5                                         (36.5

Comprehensive income

                                                                                    5,197.1   

Common stock cash dividends ($2.05 per share)

                            (2,235.5                                                     (2,235.5

Treasury stock purchases

                                                                    (50.3     (2,854.1     (2,854.1

Share-based compensation

                    112.9                                                                112.9   

Stock option exercises and other
(including tax benefits of $93.3)

                    140.8        1.4                                        11.7        288.7        430.9   

Balance at December 31, 2009

    1,660.6        16.6        4,853.9        31,270.8            (134.6     16.5        865.5            (583.9     (22,854.8     14,033.9   

Net income

                            4,946.3                                                        4,946.3   

Translation adjustments including net investment hedging
(including tax benefits of $52.2)

                                                        (3.0                         (3.0

Adjustments to cash flow hedges
(including tax benefits of $1.1)

                                                (1.5                                 (1.5

Adjustments related to pensions
(including taxes of $3.5)

                                        10.0                                            10.0   

Comprehensive income

                                                                                    4,951.8   

Common stock cash dividends ($2.26 per share)

                            (2,408.1                                           &