McDonald’s Corporation
Annual Report Project
Nevena Dragoshinova
Ralitsa Ilieva
Lyubykh Victoria
BUS 220 b
1
McDonald’s Corporation (NYSE: MCD) is in the fast food restaurant business. As at 2011
year end, the company is presented in 33,510 restaurants in 119 countries. Although the
company owns 6435 restaurants, management considers franchising to be the main business
activity, while operating the company owned restaurants is essential for the company’s image
as “credible franchisor”, as well as for the further perfecting the operational management and
providing operational experience to employees and management. Also, the company owns or
has secured a long-term lease on the majority of its sites and receives rental income.
Analysis of sales revenue and gross margins:
Company
operated
$’mln
2011
Revenues
Expenses
Gross
margin
2010
Revenues
Expenses
Gross
margin
%yoy
Revenues
Expenses
Gross
margin
%v
%h
Franchised
%v
%h
$’mln
Total
%v
$’mln
18,293 100.0% 67.7%
14,838 81.1% 90.9%
8,713 100.0% 32.3%
1,482 17.0% 9.1%
27,006 100.0% 100.0%
16,319 60.4% 100.0%
3,455 18.9% 32.3%
7,232 83.0% 67.7%
10,687 39.6% 100.0%
16,233 100.0% 67.4%
13,060 80.4% 90.5%
7,841 100.0% 32.6%
1,378 17.6% 9.5%
24,075 100.0% 100.0%
14,437 60.0% 100.0%
3,174 19.6% 32.9%
6,464 82.4% 67.1%
9,637 40.0% 100.0%
12.7%
13.6%
11.1%
7.5%
12.2%
13.0%
8.9%
11.9%
10.9%
We can notice the increase of total sales was 12.2% in 2011. This includes increases in
revenues in both company owned and franchised sites – 12.7% and 11.1%, respectively.
In comparison with the Dow Jones Industrials average in 2010 (104) McDonald’s performed
almost 2.5 times better. As for Standard & Poor’s average (94) McDonald’s shows an even
better performance. The same tendencies are kept in 2011.
Total gross margin, as a percentage of sales, declined somewhat from 40.0% in 2010 to
39.6% in 2011. The reduction comes from stronger decrease in gross margin of company
owned restaurants (from 19.6% to 18.9%, caused by increases of raw materials costs, mainly
food and paper) partially offset by increase in gross profit of franchised sites (from 82.4% in
2010 to 83.0% in 2011).
Analysis of other income statement items:
Income Statement
Revenues
Direct expenses
%h
2011
$’mln
27,006
16,319
2
%v
100.0%
60.4%
2010
$’mln
24,075
14,437
%v
%yoy
100.0%
60.0%
12.2%
13.0%
Gross margin
Selling, general & administrative
expenses
Operating income
Interest expense
Nonoperating (income) expense, net
Income before provision for income
taxes
Provision for income taxes
Net income
10,687
39.6%
9,637
40.0%
10.9%
2,157
8,530
493
25
8.0%
31.6%
1.8%
0.1%
2,164
7,473
451
22
9.0%
31.0%
1.9%
0.1%
-0.3%
14.1%
9.3%
12.8%
8,012
2,509
5,503
29.7%
9.3%
20.4%
7,000
2,054
4,946
29.1%
8.5%
20.5%
14.5%
22.2%
11.3%
Even though gross margin percentage decreased in 2011, operating income showed an
increase as a percentage of sales revenue. The 14.1% rise year-on-year increased operating
income shows the increase of efficiency in the company’s management of overhead costs.
Net income stays stable at 20.4% of sales in 2011, compared to 20.5% in 2010.
The annual report makes no mention of any changes in the company’s accounting policies
during 2011.
A significant event influencing the company’s accounting policies is the retirement of the
CEO Jim Skinner, announced in March 2012. The former COO Donald Thompson replaced
Skinner and became the first African American to head McDonalds since its founding in
1955 (McDonald's Skinner Leaves, Thompson Leads).
Balance sheet analysis:
BALANCE SHEET
As at December 31,
ASSETS
Cash and equivalents
Accounts and notes receivable
Inventories, at cost, not in excess of market
Prepaid expenses and other current assets
Total current assets
Investments, goodwill and other
noncurrent assets
Property and equipment, at cost
Accumulated depreciation and amortization
Net property and equipment
Total assets
2011
$'mln
%v
2010
$'mln
2,335.7
1,334.7
116.8
615.8
4,403.0
7.1%
4.0%
0.4%
1.9%
13.3%
2,387.0
1,179.1
109.9
692.5
4,368.5
%v
7.5% -2.1%
3.7% 13.2%
0.3% 6.3%
2.2% -11.1%
13.7% 0.8%
5,752.4 17.4%
5,546.1 17.3%
35,737.6 108.3% 34,482.4 107.8%
(12,903.1) -39.1% (12,421.8) -38.8%
22,834.5 69.2% 22,060.6 69.0%
32,989.9 100.0% 31,975.2 100.0%
LIABILITIES AND SHAREHOLDERS
EQUITY
Accounts payable
Accrued payroll, taxes and other liabilities
Current maturities of long-term debt
Total current liabilities
961.3
2,181.3
366.6
3,509.2
3
2.9%
6.6%
1.1%
10.6%
943.9
1,972.5
8.3
2,924.7
%yoy
3.7%
3.6%
3.9%
3.5%
3.2%
3.0% 1.8%
6.2% -6.6%
0.0%
…
9.1% 20.0%
Long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
Shareholders equity
Common stock, at .01 par value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock in treasury, at cost
Total shareholders equity
Total liabilities and shareholders equity
12,133.8
1,612.6
1,344.1
18,599.7
36.8%
4.9%
4.1%
56.4%
11,497.0
1,586.9
1,332.4
17,341.0
36.0%
5.0%
4.2%
54.2%
5.5%
1.6%
0.9%
7.3%
16.6
0.1%
16.6
0.1% 0.0%
5,487.3 16.6%
5,196.4 16.3% 5.6%
36,707.5 111.3% 33,811.7 105.7% 8.6%
449.7
1.4%
752.9
2.4% -40.3%
(28,270.9) -85.7% (25,143.4) -78.6% 12.4%
14,390.2 43.6% 14,634.2 45.8% -1.7%
32,989.9 100.0% 31,975.2 100.0% 3.2%
It is easy to notice the stability of assets’ composition over 2010 and 2011. In general, this is
to indicate that the business is mature. A significant share of total assets is made up of
noncurrent assets. Current assets account for only 13.3% of total assets.
Both long-term and current liabilities have increased in 2011 from 54.2% to 56.4%. The main
reason is the rise of long-term debt and current portion of long-term debt respectively, which
altogether have increased by $1 billion.
According to the Chairman of the Board of Directors, Andy McKenna, the company returned
$6 billion dollars through share repurchases and dividends paid. The company paid $2.6
billion in dividends in 2011 ($2.53 per share) up from $2.4 billion in 2010 ($2.26 per share).
(McDonald’s Annual Report, McKenna, Andy)
During the year 2011 a total of $5,983 million were returned to shareholders, up from $5,056
million in 2010. This makes up for approximately 35% return on investment and thus
McDonalds became a top performing company according to the Dow Jones Index.
The debt/equity ratio reaches 0.87 at the end of 2011, compared to 0.79 one year before. The
industry average debt to equity ratio (0.80) shows that McDonald’s had leverage increase
above the industry average, according to Morningstar Inc. The higher leverage is beneficial to
shareholders because of the company’s stable revenues and preferential borrowing condition.
However, if the company continues to increase its leverage, the markets may consider future
investments to be more risky and require a realistic increase in bond yields. Therefore, the
investors can withdraw some part of their fresh capital and the company might struggle if in
case it aims for expansion.
Share data
Weighted-average shares outstanding basic
Weighted-average shares outstanding diluted
Market price per share of common stock
Earnings per share diluted
Dividends per share
Price/earnings ratio
Dividend yield
millions of shares
millions of shares
$ per share
$ per share
$ per share
multiple
%
4
2011
2010
1032
1045
100.33
5.27
2.53
18.8
2.5%
1066
1080
76.76
4.58
2.26
16.5
2.9%
According to the data above there is the 23.57 increase in the market price of shares of
common stock that implies the market’s positive view on the company’s shares and its
profitability.
Cash flow analysis:
There are no significant changes in the structure of cash flows in 2011. By analyzing cash
flows we can see the increase in the percentage of operating activities (from 77% to 78 %).
The significant increase in capital expenditures (from 33.7% to 38.2%) was caused by
reconstruction and purchase of new restaurants. The considerable amount of cash of returned
to the shareholders and the bondholders.
Cash flow statement
2011
$'mln
%v
2010
$'mln
%v
%yoy
5,503.10
77.0%
4,946.30
78.0%
11.3%
1,524.30 24.0%
(129.00) -2.0%
6,341.60 100.0%
5.4%
…
12.7%
Investing activities
Capital expenditures
Purchases and sales of restaurant businesses
Cash used for investing activities
(2,729.80) -38.2% (2,135.50) -33.7%
158.90
2.2%
79.50
1.3%
(2,570.90) -36.0% (2,056.00) -32.4%
27.8%
99.9%
25.0%
Financing activities
Net short-term borrowings
Long-term financing issuances
Long-term financing repayments
Treasury stock purchases
Common stock dividends
Proceeds from stock option exercises and other
Cash used for financing activities
260.60
3.6%
3.10
0.0%
…
1,367.30 19.1% 1,931.80 30.5% -29.2%
(624.00) -8.7% (1,147.50) -18.1% -45.6%
(3,363.10) -47.0% (2,698.50) -42.6% 24.6%
(2,609.70) -36.5% (2,408.10) -38.0%
8.4%
435.90
6.1%
590.50
9.3% -26.2%
(4,533.00) -63.4% (3,728.70) -58.8% 21.6%
Operating activities
Net income
Adjustments for depreciation and other non cash
items
Adjustments for changes in working capital
Cash provided by operations
1,607.00 22.5%
40.00
0.6%
7,150.10 100.0%
Effect of exchange rates on cash and
equivalents
(97.50)
-1.4%
34.10
Cash and equivalents increase (decrease)
(51.30)
-0.7%
591.00
Cash and equivalents at beginning of year
Cash and equivalents at end of year
2,387.00
2,335.70
5
1,796.00
2,387.00
0.5%
…
9.3% 108.7%
Ratio analysis
In addition to the share ratios presented above, we have analyzed the following ratios:
2011
1.25
1.25
20.23
231.22
0.87
0.56
37.9%
17.26
Current ratio
Quick ratio
Receivables Turnover Ratio
Inventory Turnover Ratio
Debt/equity
Debt/asset
Rate on shareholders equity
Interest Cover Ratio
2010
1.49
1.49
20.42
219.06
0.79
0.54
34.5%
16.53
Current Ratio:
This ratio shows the dollar amount each company has that is available for payment of each
dollar of debt. In short, it represents the ability of the company to repay its debts, assuming
that their current assets are easily convertible to cash. In general, the higher the reported ratio,
the better it is for the company’s current position. We can notice a considerable decrease
from 2010 to 2011, which means that the company encountered more problems in converting
its assets to cash in 2011.
Quick Ratio:
In essence, this ratio also measures the ability of a company to meet its obligations. However,
it is more conservative than the current ratio, instead of current assets; it takes only the most
liquid assets of the company. It gives a better estimation of a company’s solvency, because it
excludes items such as inventory which may not be immediately converted to cash. It is also
better if the ratio is higher than the average of the industry and when compared to other
companies as well. A quick ratio above 1 is an indicator for a good short-term liquidity. Due
to the increase in current liabilities, the ratios have deteriorated somewhat in 2011.
Receivables Turnover Ratio:
This ratio reflects how many times trade receivables are recorded and collected during the
fiscal period average. The company has diminished because as it operates in a capital
intensive industry. There is a slight decrease in the ratio from 2010 to 2011, mainly because
of the lower level of flexibility of other companies in the business.
Inventory Turnover Ratio:
This ratio indicates how quickly inventory is circulating through the production process to the
ultimate customer. The increase of 12.16 is a good indicator of a company’s liquidity and
operating efficiency.
6
Debt to Equity Ratio:
This ratio is not very practical when making a long-term prognosis, because it does not help
the analyst understand whether the company’s operations can support its debt, but it is good
for short-term predictions. However, the potential return may be greater as well if the
company uses the debt to expand its sales and earnings. There is an increase of 0.8, which is
not a good indicator of the company’s ability to repay its debt. Having in mind market’s
constant fluctuations, the ratio remains relatively stable for both years.
Debt to Asset Ratio:
This ratio that is an indicator of a company’s assets provided via debt. It is a good tool in the
decision making process of investors as it shows the company’s ability to manage assets
versus liabilities.
Rate on Shareholder’s Equity (ROE):
This ratio measures the return on investment for stockholders. It clearly indicates the
company’s efficiency in generating profits from the shareholders’ equity. Rate on
shareholders’ equity of 37.9% means the business profitability and effective use of leverage
provide its shareholders with an exceptionally good return on their investment.
Interest Cover Ratio:
This ratio presents the company’s ability to pay interest on its outstanding debts, based on its
current financial state and is an indicator to prospective investors as to how much the profit of
purchasing stock might bring. The increase of 0.73 shows that even despite strain in the
global financial market the company shows the stable growth and reliable management.
Comparative ratio analysis with Burger King
2011
1.64
1.39
15.3
N/A
0.74
1.42
N/A
Current Ratio
Quick ratio
Receivable Turnover Ratio
Inventory Turnover Ratio
Debt/asset
Debt/equity
Interest Cover Ratio
2010
1.21
0.94
N/A
N/A
0.75
1.43
6.73
Liquidity and Solvency Analysis:
Current Ratio:
For McDonald’s Corporation the reported current ratio for 2010 is significantly higher than
that of Burger King, while in 2011 Burger King has a higher indicator. Both companies’
ratios however, are higher than the industry average of 1.19, which means they performed
notably well and were able to repay their debts.
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Quick ratio:
In terms of this ratio McDonald’s has better results in 2010; while Burger King performed
better in 2011. Both companies have considerably higher ratios than the industry average of
0.45.
Receivables Turnover Ratio:
For both years 2010 and 2011 McDonald’s showed significantly better results in the
collection of receivables. However, both companies performed worse than the indicator of
industry average, which was respectively 25.06 and 25.63 for 2010 and 2011.
Inventory Turnover Ratio:
McDonald’s performed almost 20 times more efficiently than the industry average of 10.52
(2011) and 10.53 (2010). Burger King did not disclose public information.
Ratio of Assets to Long-term Liabilities:
This ratio measures the financial position of a company and its ability to repay its outstanding
long-term loans. McDonalds showed a lower debt/asset ratio than Burger King, which means
it performed better for both periods. Burger King is closer to the industry average.
Debt to Equity Ratio:
McDonalds has a lower debt/equity ratio for both years compared to Burger King, which
means it has a more stable and risk-free management. The industry averages are significantly
lower, which indicates that McDonald’s and Burger King are taking more risks in their
decision-making.
Interest Cover Ratio:
In the case of McDonald’s, the interest cover ratio is significantly higher than the industry
average for both periods – 11.2 (2011) and 9.82 (2010). As for burger King, the ratios are
significantly lower than the average. From an investor’s point of view, McDonald’s is a better
investment target.
Conclusion:
The financial results and the supporting analysis provide a picture of McDonald’s
Corporation as a very stable and profitable business, enjoying strong revenue growth, share
price appreciation and apparently excellent market expectations. The dividends are paid
regularly and are growing in amount. In addition the company has undertaken to repurchase a
certain amount of its outstanding shares, which further drives share prices upwards. The
company has excellent credit ratings (A2 from Moody’s; ‘A’ long-term Issuer Default Rating
from Fitch). As a whole, an investment in McDonald’s shares seems sound and profitable.
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Sources:
Andy McKenna (2012). McDonalds Annual Report. [ONLINE] Available at:
http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investors%20201
2/2011%20Annual%20Report%20Final.pdf. [Last Accessed 30 November 2012].
Annual Reports ( Apr. 2012). e.g. Training and certification. [ONLINE] Available at:
<http://www.aboutmcdonalds.com/mcd/investors/annual_reports.html>.. [Last Accessed
30.11.2012].
McDonald's Corporation (). MCD McDonald's Corporation Debt, Bond, Rates, Credit.
[ONLINE] Available at: . [Last Accessed 30.11.2012].
Blue MauMau (23 Mar. 2012). McDonald's Skinner Leaves, Thompson Leads. [ONLINE]
Available
at:
http://www.bluemaumau.org/11428/mcdonald%E2%80%99s_skinner_leave_thompson_lead.
[Last Accessed 30.11.2012].
Reeve, Jamen M., Carl S. Warren, and Jonathan E. Duchac, (2009). Principles of
Accouunting. 23th ed. e.g. England: South-Western CENGAGE Learning.
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