Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants. Of the
36,290
restaurants in
119
countries at
March 31, 2015
,
29,556
were licensed to franchisees (including
20,787
franchised to conventional franchisees,
5,261
licensed to developmental licensees and
3,508
licensed to foreign affiliates ("affiliates") – primarily Japan) and
6,734
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 enabling restaurant performance levels that are among the highest in the industry. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives.
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 or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe franchising is paramount to both delivering great, locally-relevant customer experiences and driving profitability. Franchising enables an individual to own a restaurant business and maintain control over personnel, purchasing, marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald's. However, directly operating restaurants is important 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. For the quarter ended
March 31, 2015
, the U.S., Europe and APMEA segments accounted for
33%
,
36%
and
26%
of total revenues, respectively.
Strategic Direction
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's long-term success and in building a powerful and enduring economic advantage. By leveraging our System, we are able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, our business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. The strength of our business model is enduring, but the reality is our performance has not met expectations.
As we celebrate 60 years of McDonald’s, we are focused on the urgent need to reset and turn around the business. In our effort to shape McDonald's future as a modern, progressive burger company, our priorities are threefold - driving operational growth, returning excitement to our brand and unlocking financial value.
The immediate priority for our business is restoring growth under a new organizational structure and ownership mix designed to provide greater focus on the customer, improve our operating fundamentals and drive a recommitment to running great restaurants. As we turn around our business, we will look to create more excitement around the brand and ensure that we build on our rich heritage of positively impacting the communities we serve.
Beginning July 1, 2015, McDonald’s will operate under a new organizational structure with the following four segments that combine markets with similar needs, challenges, and opportunities for growth:
|
|
|
|
•
|
U.S
. - the Company’s largest segment, accounting for more than 40% of the Company’s 2014 operating income;
|
|
|
|
|
•
|
International Lead Markets
- established markets including Australia, Canada, France, Germany, and the UK, which operate within similar economic and competitive dynamics, offer similar growth opportunities and collectively represented about 40% of the Company’s 2014 operating income;
|
|
|
|
|
•
|
High-Growth Markets
- markets with relatively higher restaurant expansion and franchising potential including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands. Together these markets accounted for about 10% of the Company’s 2014 operating income; and
|
|
|
|
|
•
|
Foundational Markets
- the remaining markets in the McDonald’s system, each of which has the potential to operate under a largely franchised model. Corporate activities will also be reported within this segment.
|
As we restructure our organization and instill greater customer focus, the turnaround effort will be governed by stronger financial discipline, faster decision making and clear management accountability. The enhancements to McDonald’s operating approach will be accompanied by plans to further optimize the Company’s restaurant ownership mix, deliver G&A savings and accelerate cash returned to shareholders. Specifically, the Company expects to:
|
|
|
|
•
|
Accelerate the pace of refranchising by increasing the global franchised percentage from the current 81% to about 90% by the end of 2018 through refranchising about 3,500 restaurants. In conjunction with our refranchising plans, we will take a market-by-market approach, set higher financial screens for markets operating company-operated restaurants, and leverage both conventional and developmental licensee structures across the segments. Our new, more heavily-franchised business model will generate more stable and predictable revenue and cash flow streams and will require a less resource-intensive support structure;
|
|
|
|
|
•
|
Deliver approximately $300 million in net annual G&A savings, most of which will be realized by the end of 2017, in connection with the Company's organizational restructure, refranchising strategy, and more stringent discipline around spending throughout the organization; and
|
|
|
|
|
•
|
Return $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3-year $18 to $20 billion cash return to shareholders target by the end of 2016.
|
While we continue our efforts to regain our business momentum through our turnaround plan and improve sales at our more than 36,000 restaurants around the world, our current performance reflects the ongoing pressures of the business, which we expect to persist at least through the first half of the year.
Financial Performance
Global comparable sales decreased 2.3% for the quarter, reflecting negative guest traffic in all major segments. On a consolidated basis, comparable guest counts decreased 4.7% for the quarter. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. The goal is to achieve a balanced contribution from both guest counts and average check.
U.S. comparable sales decreased 2.6% for the quarter, reflecting negative sales and guest traffic as the segment's product and promotional offers did not overcome the competitive activity. With new U.S. leadership, the U.S. is focused on a strategic roadmap that includes a revamped marketing approach, localization of initiatives that are designed to address customer insights and the competitive dynamics that are unique to each market, and menu simplification. In addition, the U.S. is focused on strengthening its menu pipeline by providing more choice and customization, as well as refining its value proposition to offer the right balance of value and choice to create more logical relationships across menu price tiers.
In Europe, comparable sales decreased 0.6% for the quarter as positive performance in the U.K. was more than offset by weak results in France and Russia. McDonald's Europe continues to target opportunities to improve critical aspects of its business amidst ongoing macro-economic headwinds across much of the segment.
In APMEA, comparable sales decreased 8.3% for the quarter primarily due to the impact of prolonged, broad-based consumer perception issues in Japan, along with negative but improving performance in China. The Company continues to aggressively execute brand recovery efforts related to the 2014 supplier issue in these markets.
First
Quarter Operating Results Included:
|
|
|
|
•
|
Global comparable sales decrease of 2.3%, reflecting negative guest traffic in all major segments
|
|
|
|
|
•
|
Consolidated revenues decrease of 11% (1% in constant currencies)
|
|
|
|
|
•
|
Consolidated operating income decrease of 28% (20% in constant currencies) due to weaker operating performance and $195 million of strategic charges related to restaurant closings and other management actions
|
|
|
|
|
•
|
Diluted earnings per share of $0.84, a decrease of 31% (23% in constant currencies), which includes strategic charges totaling $0.17 per share and a negative foreign currency translation impact of $0.09 per share. In constant currencies and excluding the strategic charges, earnings per share decreased $0.11 or 9%
|
|
|
|
|
•
|
Return of $1.4 billion to shareholders through dividends and share repurchases
|
Outlook
While the Company does not provide specific guidance on earnings per share, the following information is provided to assist in forecasting the Company's future results, both for the remainder of 2015 as well as over the long term in connection with our announced turnaround plan. Our current performance reflects the ongoing pressures of the business, which we expect to persist through at least the first half of 2015.
2015
|
|
|
|
•
|
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 2015 Systemwide sales growth (in constant currencies), most of which will be due to the 829 net restaurants (981 net traditional openings less 152 net satellite closings) added in 2014.
|
|
|
|
|
•
|
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 change in comparable sales for either the U.S. or Europe would change annual diluted earnings per share by about 4 cents.
|
|
|
|
|
•
|
With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2015, the total basket of goods cost is expected to increase 1.5%-2.5% in the U.S. and 2%-3% in Europe.
|
|
|
|
|
•
|
The Company is currently analyzing the impact of the turnaround plan on full-year 2015 selling, general and administrative expenses, including the potential impact and timing of any one-time items. Guidance will be provided when the Company reports results for the quarter and six months ended June 30, 2015.
|
|
|
|
|
•
|
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full-year 2015 to increase about 15% compared with 2014 based on plans to return $8 to $9 billion to shareholders this year.
|
|
|
|
|
•
|
A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 70% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents.
|
|
|
|
|
•
|
The Company expects the effective income tax rate for the full-year 2015 to be at the high end of the existing 31%-33% range. Some volatility may be experienced between the quarters resulting in a quarterly tax rate outside of the annual range.
|
|
|
|
|
•
|
The Company expects capital expenditures for 2015 to be approximately $2.0 billion. About half of this amount will be used to open new restaurants. The Company expects to open more than 1,000 restaurants including about 450 restaurants in affiliated and developmental licensee markets where the Company does not fund any capital expenditures. The Company expects net additions of about 300 restaurants, reflecting 700 restaurant closings. The remaining capital will be used to reinvest in existing locations.
|
Long-term
|
|
|
|
•
|
The Company expects to return $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3-year $18 to $20 billion cash return to shareholders target by the end of 2016 through a combination of dividends and share repurchases.
|
|
|
|
|
•
|
The Company expects to refranchise about 3,500 restaurants with franchised restaurants accounting for approximately 90% of global restaurants by the end of 2018.
|
|
|
|
|
•
|
The Company expects to achieve net annual savings on selling, general and administrative expenses of about $300 million, most of which will be realized by the end of 2017, in connection with the Company's organizational restructure, refranchising strategy, and more stringent discipline around spending throughout the organization.
|
The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
|
|
|
|
•
|
Information in
constant currency
is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results because they believe this better represents the Company’s underlying business trends.
|
|
|
|
|
•
|
Systemwide sales
include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.
|
|
|
|
|
•
|
Comparable sales
represent sales at all restaurants and
comparable guest counts
represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Comparable sales exclude the impact of currency translation. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends. The number of weekdays and weekend days, referred to as the
calendar shift/trading day adjustment
, can impact comparable sales and guest counts. In addition, the timing of holidays can also impact comparable sales and guest counts.
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED OPERATING RESULTS
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Dollars in millions, except per share data
|
March 31, 2015
|
|
|
Amount
|
|
|
Increase/
(Decrease)
|
|
|
Revenues
|
|
|
|
|
|
Sales by Company-operated restaurants
|
|
$
|
3,914.1
|
|
|
(13
|
)%
|
|
Revenues from franchised restaurants
|
|
2,044.8
|
|
|
(7
|
)
|
|
Total revenues
|
|
5,958.9
|
|
|
(11
|
)
|
|
Operating costs and expenses
|
|
|
|
|
|
Company-operated restaurant expenses
|
|
3,354.3
|
|
|
(11
|
)
|
|
Franchised restaurants—occupancy expenses
|
|
403.6
|
|
|
(3
|
)
|
|
Selling, general & administrative expenses
|
|
582.8
|
|
|
(6
|
)
|
|
Other operating (income) expense, net
|
|
232.7
|
|
|
n/m
|
|
|
Total operating costs and expenses
|
|
4,573.4
|
|
|
(4
|
)
|
|
Operating income
|
|
1,385.5
|
|
|
(28
|
)
|
|
Interest expense
|
|
147.3
|
|
|
9
|
|
|
Nonoperating (income) expense, net
|
|
(15.9
|
)
|
|
n/m
|
|
|
Income before provision for income taxes
|
|
1,254.1
|
|
|
(30
|
)
|
|
Provision for income taxes
|
|
442.6
|
|
|
(23
|
)
|
|
Net income
|
|
$
|
811.5
|
|
|
(33
|
)%
|
|
Earnings per common share-basic
|
|
$
|
0.84
|
|
|
(31
|
)%
|
|
Earnings per common share-diluted
|
|
$
|
0.84
|
|
|
(31
|
)%
|
n/m Not meaningful
Impact of Foreign Currency Translation
While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results, because they believe this better represents the Company's underlying business trends. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMPACT OF FOREIGN CURRENCY TRANSLATION
|
|
|
|
|
|
|
|
|
|
Dollars in millions, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Benefit/ (Cost)
|
|
|
Quarters Ended March 31,
|
|
2015
|
|
|
|
2014
|
|
|
|
2015
|
|
|
Revenues
|
|
$
|
5,958.9
|
|
|
|
$
|
6,700.3
|
|
|
|
$
|
(700.7
|
)
|
|
Company-operated margins
|
|
559.8
|
|
|
|
723.4
|
|
|
|
(71.2
|
)
|
|
Franchised margins
|
|
1,641.2
|
|
|
|
1,792.7
|
|
|
|
(142.4
|
)
|
|
Selling, general & administrative expenses
|
|
582.8
|
|
|
|
620.4
|
|
|
|
39.9
|
|
|
Operating income
|
|
1,385.5
|
|
|
|
1,936.0
|
|
|
|
(157.3
|
)
|
|
Net income
|
|
811.5
|
|
|
|
1,204.8
|
|
|
|
(84.6
|
)
|
|
Earnings per share-diluted
|
|
$
|
0.84
|
|
|
|
$
|
1.21
|
|
|
|
$
|
(0.09
|
)
|
The impact of foreign currency translation on consolidated operating results for the quarter reflected the weaker Euro, Russian Ruble, Australian Dollar and most other currencies.
Net Income and Diluted Earnings per Common Share
For the quarter, net income decreased 33% (26% in constant currencies) to $811.5 million, and diluted earnings per share decreased 31% (23% in constant currencies) to $0.84. Foreign currency translation had a negative impact of $0.09 on diluted earnings per share.
In the first quarter, as part of our focus to optimize the business, the Company recognized strategic charges of $195 million in operating income, negatively impacting earnings per share by $0.17. This included the following costs:
|
|
|
|
•
|
$85 million of asset write-offs related to the Company's previously-announced refranchising initiative and other charges;
|
|
|
|
|
•
|
$72 million of asset write-offs related to management's decision to close about 220 under-performing restaurants, primarily in the U.S. and China, and the decision by McDonald's Japan to close about 130 restaurants. These restaurant closings are in addition to the 350 planned closures globally; and
|
|
|
|
|
•
|
$38 million of restructuring charges in the U.S. in connection with management's initiative to create a flatter, more efficient organization.
|
In constant currencies and excluding the impact of these charges, earnings per share decreased $0.11 or 9%, reflecting lower company-operated margins, weaker results in Japan and a higher effective tax rate, partly offset by a benefit from a decrease in diluted weighted average shares outstanding due to share repurchases.
During the quarter, the Company paid a quarterly dividend of $0.85 per share or $816.3 million and repurchased 6.6 million shares of its stock for $624.5 million.
Revenues
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 affiliates and developmental licensees include a royalty based on a percent of sales and generally include initial fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2015
|
|
|
2014
|
|
|
(Decrease)
|
|
|
Inc/ (Dec) Excluding Currency Translation
|
|
|
Company-operated sales
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
990.2
|
|
|
$
|
1,040.9
|
|
|
(5
|
)%
|
|
(5
|
)%
|
|
Europe
|
|
1,494.7
|
|
|
1,925.8
|
|
|
(22
|
)
|
|
1
|
|
|
APMEA
|
|
1,274.0
|
|
|
1,356.9
|
|
|
(6
|
)
|
|
(2
|
)
|
|
Other Countries & Corporate
|
|
155.2
|
|
|
166.9
|
|
|
(7
|
)
|
|
5
|
|
|
Total
|
|
$
|
3,914.1
|
|
|
$
|
4,490.5
|
|
|
(13
|
)%
|
|
(1
|
)%
|
|
Franchised revenues
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
987.9
|
|
|
$
|
1,013.2
|
|
|
(2
|
)%
|
|
(2
|
)%
|
|
Europe
|
|
669.5
|
|
|
786.4
|
|
|
(15
|
)
|
|
2
|
|
|
APMEA
|
|
250.7
|
|
|
261.9
|
|
|
(4
|
)
|
|
5
|
|
|
Other Countries & Corporate
|
|
136.7
|
|
|
148.3
|
|
|
(8
|
)
|
|
9
|
|
|
Total
|
|
$
|
2,044.8
|
|
|
$
|
2,209.8
|
|
|
(7
|
)%
|
|
1
|
%
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,978.1
|
|
|
$
|
2,054.1
|
|
|
(4
|
)%
|
|
(4
|
)%
|
|
Europe
|
|
2,164.2
|
|
|
2,712.2
|
|
|
(20
|
)
|
|
1
|
|
|
APMEA
|
|
1,524.7
|
|
|
1,618.8
|
|
|
(6
|
)
|
|
(1
|
)
|
|
Other Countries & Corporate
|
|
291.9
|
|
|
315.2
|
|
|
(7
|
)
|
|
7
|
|
|
Total
|
|
$
|
5,958.9
|
|
|
$
|
6,700.3
|
|
|
(11
|
)%
|
|
(1
|
)%
|
Consolidated revenues
decreased
11%
(
1%
in constant currencies) for the quarter. The constant currency decrease reflected the impact of negative comparable sales, mostly offset by expansion.
|
|
|
|
•
|
In the U.S., revenues decreased for the quarter due to negative comparable sales, reflecting negative comparable guest counts as the segment's product and promotional offers did not offset competitive activity.
|
|
|
|
|
•
|
In Europe, the constant currency results for the quarter reflected a benefit from expansion, primarily in Russia and France, and positive comparable sales in the U.K. This was mostly offset by negative comparable sales in France and Russia and the impact of refranchising.
|
|
|
|
|
•
|
In APMEA, the constant currency decrease for the quarter was driven by negative comparable sales primarily in China and Japan, mostly offset by a benefit from expansion in the segment and positive comparable sales in Australia.
|
The following table presents the percent change in comparable sales for the quarters ended
March 31, 2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
COMPARABLE SALES
|
|
|
|
Increase/ (Decrease)
|
|
Quarters Ended March 31,*
|
2015
|
|
|
2014
|
|
|
U.S.
|
(2.6
|
)%
|
|
(1.7
|
)%
|
|
Europe
|
(0.6
|
)
|
|
1.4
|
|
|
APMEA
|
(8.3
|
)
|
|
0.8
|
|
|
Other Countries & Corporate
|
6.4
|
|
|
6.1
|
|
|
Total
|
(2.3
|
)%
|
|
0.5
|
%
|
|
|
|
|
*
|
On a consolidated basis, comparable guest counts
decreased
4.7%
and
3.1%
for the quarters
2015
and
2014
, respectively.
|
The following table presents the percent change in Systemwide sales for the quarter ended
March 31, 2015
:
|
|
|
|
|
|
|
|
|
|
SYSTEMWIDE SALES
|
|
Quarter Ended March 31, 2015
|
(Decrease)
|
|
|
Inc/ (Dec)
Excluding
Currency
Translation
|
|
|
U.S.
|
(2
|
)%
|
|
(2
|
)%
|
|
Europe
|
(17
|
)
|
|
2
|
|
|
APMEA
|
(12
|
)
|
|
(5
|
)
|
|
Other Countries & Corporate
|
(11
|
)
|
|
9
|
|
|
Total
|
(9
|
)%
|
|
0
|
%
|
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/(decreases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRANCHISED SALES
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
|
2015
|
|
|
2014
|
|
|
(Decrease)
|
|
|
Inc/ (Dec)
Excluding
Currency
Translation
|
|
|
U.S.
|
|
$
|
7,247.4
|
|
|
$
|
7,338.1
|
|
|
(1
|
)%
|
|
(1
|
)%
|
|
Europe
|
|
3,780.0
|
|
|
4,402.2
|
|
|
(14
|
)
|
|
2
|
|
|
APMEA
|
|
2,673.2
|
|
|
3,108.8
|
|
|
(14
|
)
|
|
(6
|
)
|
|
Other Countries & Corporate
|
|
1,648.0
|
|
|
1,867.6
|
|
|
(12
|
)
|
|
9
|
|
|
Total*
|
|
$
|
15,348.6
|
|
|
$
|
16,716.7
|
|
|
(8
|
)%
|
|
0
|
%
|
|
|
|
|
*
|
Sales from developmental licensed restaurants and foreign affiliated markets where the Company earns a royalty based on a percent of sales totaled $2,943.3 million and $3,548.5 million for the quarters 2015 and 2014, respectively. Results were impacted by negative comparable sales and the weaker Yen in Japan, and many weaker currencies in Latin America. The remaining balance of franchised sales is derived from conventional franchised restaurants where the Company earns rent and royalties based primarily on a percent of sales.
|
Restaurant Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRANCHISED AND COMPANY-OPERATED RESTAURANT MARGINS
|
|
Dollars in millions
|
|
|
Percent
|
|
Amount
|
|
(Decrease)
|
|
|
Inc/ (Dec) Excluding Currency Translation
|
|
|
Quarters Ended March 31,
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Franchised
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
81.3
|
%
|
|
82.5
|
%
|
|
$
|
803.5
|
|
|
$
|
836.1
|
|
|
(4
|
)%
|
|
(4
|
)%
|
|
Europe
|
76.0
|
|
|
76.9
|
|
|
509.1
|
|
|
604.8
|
|
|
(16
|
)
|
|
1
|
|
|
APMEA
|
84.9
|
|
|
86.3
|
|
|
212.8
|
|
|
226.1
|
|
|
(6
|
)
|
|
3
|
|
|
Other Countries & Corporate
|
84.8
|
|
|
84.8
|
|
|
115.8
|
|
|
125.7
|
|
|
(8
|
)
|
|
11
|
|
|
Total
|
80.3
|
%
|
|
81.1
|
%
|
|
$
|
1,641.2
|
|
|
$
|
1,792.7
|
|
|
(8
|
)%
|
|
(1
|
)%
|
|
Company-operated
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
15.3
|
%
|
|
17.3
|
%
|
|
$
|
151.1
|
|
|
$
|
180.1
|
|
|
(16
|
)%
|
|
(16
|
)%
|
|
Europe
|
16.3
|
|
|
17.0
|
|
|
243.8
|
|
|
328.0
|
|
|
(26
|
)
|
|
(8
|
)
|
|
APMEA
|
11.3
|
|
|
14.0
|
|
|
143.4
|
|
|
190.5
|
|
|
(25
|
)
|
|
(20
|
)
|
|
Other Countries & Corporate
|
13.9
|
|
|
14.9
|
|
|
21.5
|
|
|
24.8
|
|
|
(13
|
)
|
|
(2
|
)
|
|
Total
|
14.3
|
%
|
|
16.1
|
%
|
|
$
|
559.8
|
|
|
$
|
723.4
|
|
|
(23
|
)%
|
|
(13
|
)%
|
Franchised margin dollars decreased $151.5 million or 8% (1% in constant currencies) for the quarter.
|
|
|
|
•
|
In the U.S., the franchised margin percent decreased for the quarter primarily due to higher lease expense and negative comparable sales.
|
|
|
|
|
•
|
In Europe, the franchised margin percent decreased for the quarter primarily due to higher lease expense, the impact of refranchising and lower rental income as a percentage of franchised sales.
|
|
|
|
|
•
|
In APMEA, the franchised margin percent decreased for the quarter partly due to weaker operating performance in Japan, which reduced Japan's favorable contribution to the segment's margin percent. In addition, higher lease expense and refranchising negatively impacted the margin percent. While refranchising may have a dilutive effect on the franchised margin percent, it results in higher franchised margin dollars.
|
Company-operated margin dollars decreased $163.6 million or 23% (13% in constant currencies) for the quarter. The constant currency decrease was primarily due to weak performance across all segments.
|
|
|
|
•
|
In the U.S., the Company-operated margin percent decreased for the quarter due to the impact of negative comparable guest counts and higher labor and commodity costs, partly offset by a higher average check.
|
|
|
|
|
•
|
In Europe, the Company-operated margin percent decreased for the quarter reflecting weaker results in Russia due to negative comparable sales performance and the impact of currency and inflationary pressures on commodity costs.
|
|
|
|
|
•
|
In APMEA, the Company-operated margin percent decreased for the quarter primarily due to weak performance in China and other Asian markets. The ongoing impact from the 2014 supplier issue continued to pressure sales and commodity costs in China.
|
The following table presents Company-operated restaurant margin components as a percent of sales:
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED COMPANY-OPERATED RESTAURANT EXPENSES AND MARGINS AS A PERCENT OF SALES
|
|
Quarters Ended March 31,
|
2015
|
|
|
2014
|
|
|
Food & paper
|
33.9
|
%
|
|
33.7
|
%
|
|
Payroll & employee benefits
|
26.8
|
|
|
26.2
|
|
|
Occupancy & other operating expenses
|
25.0
|
|
|
24.0
|
|
|
Total expenses
|
85.7
|
%
|
|
83.9
|
%
|
|
Company-operated margins
|
14.3
|
%
|
|
16.1
|
%
|
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $37.6 million or 6% (0% in constant currencies) for the quarter. The constant currency results reflect the benefit from comparison to prior year costs related to the 2014 Winter Olympics, partly offset by higher marketing costs.
Selling, general and administrative expenses as a percent of revenues increased to 9.8% for the quarter 2015 compared with 9.3% for 2014, and as a percent of Systemwide sales increased to 3.0% for the quarter 2015 compared with 2.9% for 2014, as weaker foreign currencies are having a bigger impact on revenues and sales.
Other Operating (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING (INCOME) EXPENSE, NET
|
|
Dollars in millions
|
|
Quarters Ended March 31,
|
2015
|
|
|
2014
|
|
|
Gains on sales of restaurant businesses
|
$
|
(24.6
|
)
|
|
$
|
(29.0
|
)
|
|
Equity in earnings of unconsolidated affiliates
|
63.4
|
|
|
(16.5
|
)
|
|
Asset dispositions and other (income) expense, net
|
193.9
|
|
|
5.2
|
|
|
Total
|
$
|
232.7
|
|
|
$
|
(40.3
|
)
|
Equity in earnings of unconsolidated affiliates decreased for the quarter primarily due to results in Japan, reflecting negative operating performance and the impact of the decision by McDonald's Japan to close under-performing restaurants.
Asset dispositions and other expense increased for the quarter, primarily due to asset write-offs related to the decision to close under-performing restaurants, mostly in the U.S. and China, other asset write-offs as part of the refranchising initiative and U.S. restructuring charges.
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
Dollars in millions
|
|
Quarters Ended March 31,
|
2015
|
|
|
2014
|
|
|
(Decrease)
|
|
|
(Decrease) Excluding Currency Translation
|
|
|
U.S.
|
$
|
731.8
|
|
|
$
|
820.8
|
|
|
(11
|
)%
|
|
(11
|
)%
|
|
Europe
|
600.9
|
|
|
752.5
|
|
|
(20
|
)
|
|
(4
|
)
|
|
APMEA
|
68.5
|
|
|
345.1
|
|
|
(80
|
)
|
|
(77
|
)
|
|
Other Countries & Corporate
|
(15.7
|
)
|
|
17.6
|
|
|
n/m
|
|
|
(57
|
)
|
|
Total
|
$
|
1,385.5
|
|
|
$
|
1,936.0
|
|
|
(28
|
)%
|
|
(20
|
)%
|
Operating income decreased $550.5 million or 28% (20% in constant currencies) for the quarter, partly reflecting strategic charges of $195 million.
|
|
|
|
•
|
In the U.S., operating income for the quarter decreased due to lower restaurant margin dollars, and restructuring and restaurant closing charges.
|
|
|
|
|
•
|
In Europe, constant currency operating income for the quarter decreased primarily due to lower Company-operated margin dollars in Russia and lower other operating income, partly offset by lower selling, general and administrative expenses which benefited from prior year costs related to the 2014 Winter Olympics.
|
|
|
|
|
•
|
In APMEA, constant currency operating income for the quarter decreased primarily due to strategic charges related to the impact from restaurant closings incremental to plan and other management actions, negative operating performance in Japan and lower Company-operated margin dollars.
|
|
|
|
|
•
|
Combined Operating Margin
|
Combined operating margin is defined as operating income as a percent of total revenues. Combined operating margin was 23.3% and 28.9% for the quarters 2015 and 2014, respectively.
Interest Expense
Interest expense increased 9% (15% in constant currencies) for the quarter primarily due to higher average debt balances, partly offset by weaker foreign currencies.
Nonoperating (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
NONOPERATING (INCOME) EXPENSE, NET
|
|
Dollars in millions
|
|
Quarters Ended March 31,
|
2015
|
|
|
2014
|
|
|
Interest Income
|
$
|
(2.3
|
)
|
|
$
|
(3.4
|
)
|
|
Foreign currency and hedging activity
|
(15.9
|
)
|
|
12.0
|
|
|
Other (income) expense, net
|
2.3
|
|
|
8.6
|
|
|
Total
|
$
|
(15.9
|
)
|
|
$
|
17.2
|
|
Income Taxes
The effective income tax rate was was 35.3% and 32.4% for the quarters 2015 and 2014, respectively. The higher effective tax rate for 2015 was primarily due to certain first quarter strategic charges that had limited tax benefits and weaker operating performance in certain foreign markets that resulted in an unfavorable shift in the mix of income.
Cash Flows and Financial Position
The Company generates significant cash from operations and has substantial credit capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
Cash provided by operations totaled
$1.7 billion
and exceeded capital expenditures by
$1.3 billion
for the first quarter
2015
. Cash provided by operations
decreased
$207.8 million
compared with the first quarter
2014
, primarily due to lower operating results.
Cash used for investing activities totaled
$349.2 million
for the first quarter
2015
, a
decrease
of
$259.0 million
compared with the first quarter
2014
, primarily due to lower capital expenditures and a decrease in other investing activities related to short-term time deposits.
Cash used for financing activities totaled
$1.6 billion
for the first quarter
2015
, an
increase
of
$238.2 million
compared with the first quarter
2014
, primarily due to higher treasury stock purchases.
Debt obligations at
March 31, 2015
totaled
$14.3 billion
compared with
$15.0 billion
at
December 31, 2014
. The decrease was primarily due to net debt repayments and the impact of foreign currency translation.
Recently Issued Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board issued guidance codified in Accounting Standards Codification (ASC) 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC 605, "Revenue Recognition." The provisions of this update are effective as of January 1, 2017; however, in April 2015, the FASB proposed a one-year deferral of the effective date. The Company is currently evaluating the impact of the provisions of ASC 606.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The provisions of this update are effective as of January 1, 2016, and are not expected to significantly impact the Company.
Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
The information in this report includes forward-looking statements about our plans and future performance, including those under Outlook. 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 results are subject to a variety of risks that are reflected in the following considerations and factors that we believe are most likely to affect our performance.
If we do not successfully design and execute our business strategies, we may not be able to increase revenues or market share.
To drive future results, our business strategies must be effective in achieving market share gains while at the same time delivering operating income growth. These strategies are aligned around the priorities that represent our greatest opportunities to drive results. Whether we successfully execute these strategies depends mainly on our System’s ability to:
|
|
|
|
•
|
Continue to innovate and differentiate in all aspects of the McDonald’s experience in a way that balances value with profitability;
|
|
|
|
|
•
|
Reinvest in our restaurants and identify and develop restaurant sites consistent with our System’s plans for net growth of System-wide restaurants;
|
|
|
|
|
•
|
Provide clean and friendly environments that deliver a consistent McDonald's experience and demonstrate high service levels;
|
|
|
|
|
•
|
Drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours; and
|
|
|
|
|
•
|
Manage the complexity of our restaurant operations.
|
If we are unsuccessful in executing our strategies, or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.
If our announced turnaround plans are not successful in driving improved performance, our results may suffer.
On May 4, 2015, we announced our initial turnaround plans with several components: restructure market segments, optimize restaurant ownership mix through accelerated refranchising effort and deliver cost savings. If our initial turnaround plans are not successful, take longer than initially projected, or are not executed effectively, our business operations and financial results could be adversely affected.
In addition, the initial turnaround plans present various risks to the McDonald’s System and increase the chances that existing risks described elsewhere in this section will have an adverse effect. A more detailed description of the initial turnaround plans can be found in our Strategic Direction section of this report.
We face intense competition in our markets, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. In some of our major markets, IEO segments have remained stagnant in recent periods, have experienced only modest growth or have declined. As a result, we are facing sustained, intense competition from both traditional and other competitors, which include many non-traditional market participants such as convenience stores and coffee shops. In addition, in recent periods we have experienced emerging and growing competition from the fast casual category of restaurants. We expect our environment to continue to be highly competitive and in any particular reporting period our results may be impacted by new actions of our competition, which may have a short- or long-term impact.
We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, develop new products, price our products appropriately, manage the complexity of our restaurant operations and respond effectively to our competitors’ actions. Recognizing these dependencies, we have intensified our focus in recent periods on strategies to achieve these goals and we will likely continue to modify existing strategies and implement new strategies in the future. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics.
If we do not anticipate and address evolving consumer preferences, our business could suffer.
Our continued success depends on our System’s ability to anticipate and respond effectively to continuously shifting consumer demographics, trends in food sourcing, food preparation and consumer preferences in the IEO segment. We must continuously adapt to deliver a relevant experience for our customers amidst a highly competitive, value-driven operating environment. Over the last year, we have implemented initiatives to address these shifts at a more aggressive pace. There is no assurance that such initiatives will be successful and, if they are not, our financial results could be adversely impacted.
If our pricing, promotional and marketing plans are not effective, our results may be negatively impacted.
Our results depend on the impact of our pricing, promotional and marketing plans and our System’s ability to adjust these plans to respond quickly to economic and competitive conditions. Our existing or future pricing strategies and the value proposition they represent will continue to be important components of our overall plan, may not be successful and could negatively impact sales and margins. The promotion of our menu offerings may yield results below desired levels.
Additionally, we operate in an increasingly complex and costly advertising environment. Our marketing and advertising programs may not be successful and we may fail to attract and retain customers. We have increased our emphasis on digital offerings and customer loyalty initiatives, and our success depends in part on whether we can effectively execute such offerings and initiatives in a way that will enhance customer engagement. If our pricing, promotional and marketing plans are not successful, or are not as successful as those of our competitors, our sales, guest counts and market share could decrease.
Failure to preserve the value and relevance of our brand could have a negative impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand. Brand value is based in part on consumer perceptions on a variety of factors, including the nutritional content and preparation of our food, our business practices and the manner in which we source the commodities we use. Consumer acceptance of our offerings is subject to change for a variety of reasons. For example, nutritional, health and other scientific studies and conclusions, which constantly evolve and often have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that affect the IEO segment or perceptions of our brand and could be material to our business. Perceptions may also be affected by activist campaigns to promote adverse perceptions of the quick-service category of the IEO segment or our brand and/or our operations, or to promote or threaten specific economic action involving the industry, us, our suppliers or franchisees. If we are unsuccessful in addressing such adverse perceptions, our brand and our financial results may suffer.
Additionally, the ongoing relevance of our brand may depend on the success of our sustainability initiatives to support our brand ambition of good food, good people and good neighbor, which will require System-wide coordination and alignment. If we are not effective in achieving our stated sustainability goals and addressing these and other matters of social responsibility in a way that inspires trust and confidence, trust in our brand could suffer. In particular, business incidents that erode consumer trust, particularly if such incidents receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.
Unfavorable general economic conditions could adversely affect our business and financial results.
Our results of operations are substantially affected by economic conditions, which can vary significantly by market and can impact consumer disposable income levels and spending habits. Economic conditions can also be impacted by a variety of factors including hostilities, epidemics and actions taken by governments 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. Many major economies, both advanced and developing, continue to face weak economies, high unemployment rates and other ongoing economic issues. Continued adverse economic conditions or adverse changes in economic conditions in our markets could pressure our operating performance, and our business and financial results may suffer.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable and sufficient product supply, including on favorable terms. The products we sell are sourced from a wide variety of suppliers in countries around the world. Supply chain interruptions, including due to lack of supply or price increases, can adversely affect us or the suppliers and franchisees that are also part of our System and whose performance has a significant impact on our results. Such shortages or disruptions could be caused by factors beyond the control of our suppliers or us, including inclement weather, natural disasters, increased demand, problems in production or distribution, disruptions in third party logistics or transportation systems, the inability of our suppliers to obtain credit, or food safety warnings or advisories. If we experience interruptions in our supply chain, our costs could increase and it could limit the availability of products critical to our operations.
Food safety concerns may have an adverse effect on our business.
Our ability to increase sales and profits depends on our System’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products. However, food safety events, including instances of food-borne illness, have occurred in the food industry in the past, and could occur in the future. In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness could adversely affect our brand and reputation as well as our revenues and profits.
Our franchise business model presents a number of risks.
Our success relies in part on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. Our restaurant margins arise from two sources: company-operated restaurants and franchised restaurants. Our franchisees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. Our franchisees may not experience sales growth, and our revenues and margins could be negatively affected as a result. If sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures or delayed or reduced payments to us.
Our success also depends on the willingness and ability of our independent franchisees to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, promotional and capital-intensive reinvestment plans. The ability of our franchisees to contribute to the achievement of our plans is dependent in large part on the availability of funding at reasonable interest rates and may be negatively impacted by the financial markets in general or by the creditworthiness of our franchisees or the Company. Our operating performance could also be negatively affected if our franchisees 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, costly to exercise or subject to litigation. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, the brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.
Our ownership mix also affects our results and financial condition. The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex and changing. Our ability to achieve the benefits of our refranchising strategy, which involves a shift to a greater percentage of franchised restaurants, will depend on various factors, including our ability to identify franchisees that meet our rigorous standards, the performance of our existing franchisees and whether the resulting ownership mix supports our financial objectives.
Changes in commodity and other operating costs could adversely affect our results of operations.
The profitability of our company-operated restaurants depends in part on our ability to anticipate and react to changes in commodity costs, including food, paper, supply, fuel, utilities, distribution and other operating costs. Any volatility in certain commodity prices could adversely affect our operating results by impacting restaurant profitability. The commodity market for some of the ingredients we use, such as beef and chicken, is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, international commodity markets, food safety concerns, product recalls, government regulation and other factors, all of which are beyond our control and, in many instances, unpredictable. We can only partially address future price risk through hedging and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.
The global scope of our operations subjects us to risks that could negatively affect our business.
We face differing cultural, regulatory and economic environments that exist within and among the more than 100 countries where McDonald’s restaurants operate, and our ability to achieve our business objectives depends on our success in these environments. Meeting customer expectations is complicated by the risks inherent in our global operating environment, and our global success is partially dependent on our System’s ability to leverage operating successes across markets. Our initiatives may not have broad appeal with our customer base and could drive unanticipated changes in customer perceptions and guest counts.
Disruptions in our operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or import-export controls, increased tariffs, government-mandated closure of our or our suppliers’ operations and asset seizures. The cost and disruption of responding to governmental investigations or actions, whether or not they have merit, may impact our results. Our international success depends in part on the effectiveness of our strategies and brand-building initiatives to reduce our exposure to such governmental actions. Our results of operations and financial condition are also affected by fluctuations in currency exchange rates, which may adversely affect reported earnings.
Additionally, we face 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. Such challenges 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. If we are unable to effectively manage the risks associated with our international operations, it could have a material adverse effect on our business and financial condition.
Challenges with respect to talent management could harm our business.
Our success depends in part on our System’s ability to recruit and retain qualified personnel to work in our restaurants. Increased costs associated with recruiting and retaining such qualified personnel, whether because of the trend toward higher statutory minimum wages and social expenses or because of voluntary increases in wages necessitated by labor market conditions, could have a negative impact on the margins of our company-operated restaurants. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us or the franchisees and suppliers that are also part of the McDonald’s System and whose performance has a material impact on our results.
We are also impacted by the costs and other effects of compliance with U.S. and overseas regulations affecting our workforce, which includes our staff and employees working in our company-operated restaurants. These regulations are increasingly focused on wage and hour, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers (or perceptions thereof) could have a negative impact on our business.
Information technology system failures or interruptions or breaches of our network security may interrupt our operations.
We are increasingly reliant on our technological systems (e.g., point-of-sale and other in-store systems or platforms) to conduct our business, and any failure of these systems could significantly impact our operations. Despite our implementation of security measures, our technology systems could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or
other catastrophic events. If these systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in our operations. We may also not fully realize the benefits of the significant investments we are making to enhance the customer experience through digital engagement and social media.
Furthermore, security breaches involving our systems or those of third party providers may occur, such as unauthorized access, denial of service, computer viruses and other disruptive problems caused by hackers. Our information technology systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in system disruptions, shutdowns, theft or unauthorized disclosure of confidential information. The occurrence of any of these incidents could result in adverse publicity, loss of consumer confidence, reduced sales and profits, and criminal penalties or civil liabilities.
Increasing regulatory complexity may adversely affect restaurant operations and our financial results.
Our regulatory environment worldwide exposes us to complex compliance and similar risks that could affect our operations and results in material ways. In many of our markets, including the United States and countries in Europe, we are subject to increasing regulation, which has increased our cost of doing business. We are affected by the cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations we face, including where inconsistent standards imposed by multiple governmental authorities can adversely affect our business and increase our exposure to litigation or governmental investigations or proceedings.
Our success depends in part on our ability to manage the impact of new, potential or changing regulations that can affect our business plans. These regulations may relate to product packaging, marketing and the nutritional content and safety of our food and other products, labeling and other disclosure practices (particularly given varying requirements and practices for testing and disclosure), 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.
Additionally, we are keenly aware of and working to manage the risks and costs to us, our franchisees and our supply chain of the effects of climate change, greenhouse gases, energy and water resources. The increased public focus, including by governmental and non-governmental organizations, on these and other environmental sustainability matters (e.g., packaging and waste, animal health and welfare, deforestation and land use) and the increased pressure to make commitments, set targets or establish additional goals and take actions to meet them, could expose us to market, operational and execution costs or risks. If we are unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition.
We are subject to increasing legal complexity and could be party to litigation that could adversely affect us.
Increasing legal complexity will continue to affect our operations and results in material ways. We could be subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations, employment and personal injury claims, landlord/tenant disputes, disputes with current or former suppliers, claims by current or former franchisees, and intellectual property claims (including claims that we infringed another party’s trademarks, copyrights, or patents). Inconsistent standards imposed by governmental authorities can adversely affect our business and increase our exposure to litigation.
Litigation involving our relationship with franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions. We are also subject to the legal and compliance risks associated with privacy, data collection, protection and management, in particular as it relates to information we collect when we provide optional technology-related services to franchisees.
Our operating results could also be affected by the following:
|
|
|
|
•
|
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, judgments or consent decrees, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products;
|
|
|
|
|
•
|
Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices; and
|
|
|
|
|
•
|
The scope and terms of insurance or indemnification protections that we may have.
|
A judgment significantly in excess of any applicable insurance coverage could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from these claims may hurt our business.
We may not be able to adequately protect our intellectual property or adequately ensure that we are not infringing the intellectual property of others, which could harm the value of the McDonald’s brand and our business.
The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded
products. We also license our intellectual property to franchisees and other third parties and we cannot assure you that they will not take actions that hurt the value of our intellectual property.
We have registered certain trademarks and have other trademark registrations pending in the United States and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the United States in which we do business or may do business in the future and may never be registered in all of these countries. The steps we have taken to protect our intellectual property in the United States and foreign countries may not be adequate. In addition, the steps we have taken may not adequately ensure that we do not infringe the intellectual property of others and third parties may claim infringement by us in the future. In particular, we may be involved in intellectual property claims, including often aggressive or opportunistic attempts to enforce patents used in information technology systems, which might affect our operations and results. Any claim of infringement, whether or not it has merit, could be time-consuming, could result in costly litigation and could harm our business.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or related authoritative interpretations, particularly if corporate tax reform becomes a key component of budgetary initiatives in the United States and elsewhere. We are also impacted by 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. Any increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.
Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future operations and results.
New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant effect on our reported results for the affected periods.
A decrease in our credit ratings or an increase in our funding costs could adversely affect our profitability.
We may be negatively affected by the impact of changes in our debt levels or our results of operations 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. Our operations may also be impacted by regulations affecting capital flows, financial markets or financial institutions, which can limit our ability to manage and deploy our liquidity or increase our funding costs. If any of these events were to occur, they could have a material adverse effect on our business and financial condition.
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 unpredictable global economic and 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;
|
|
|
|
|
•
|
Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance, plans or expectations about our business; our actual performance and creditworthiness; 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 corporate actions and market and third-party perceptions and assessments of such actions, such as those we may take from time to time as part of our continuous review of our corporate structure and strategies 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 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.
