McDonalds 2014 Annual Report Download

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2014 Annual Report

Table of contents

  • Page 1
    2014 Annual Report

  • Page 2

  • Page 3
    ..., supplier partners and company employees, all committed to delivering the very best customer experience. By our standards, McDonald's 2014 financial performance was disappointing. While we grew systemwide sales by 1%*, global comparable sales decreased 1% and operating income declined 8%*. We...

  • Page 4
    THIS PAGE IS INTENTIONALLY LEFT BLANK

  • Page 5
    ...OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 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...

  • Page 6
    ... Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Quantitative and Qualitative Disclosures About Market Risk ...Financial Statements and Supplementary Data ...Changes...

  • Page 7
    ... segments Segment data for the years ended December 31, 2014, 2013, and 2012 are included in Part II, Item 8, page 42 of this Form 10-K. c. Narrative description of business General The Company operates and franchises McDonald's restaurants, which serve a locally-relevant menu of quality food and...

  • Page 8
    ... durations. 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...

  • Page 9
    ..., we may not be able to increase revenues or market share. To drive future results, our global growth strategies must be effective in achieving market share gains while at the same time delivering operating income growth. Our strategies are aligned McDonald's Corporation 2014 Annual Report 3

  • Page 10
    ... 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...

  • Page 11
    ...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...

  • Page 12
    ...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 6 McDonald's Corporation 2014 Annual Report

  • Page 13
    ... 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...

  • Page 14
    ... In the ordinary course of business, disputes arise regarding hiring, termination, 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...

  • Page 15
    ...served as Group President, McDonald's Canada and Latin America from February 2008 through September 2011. Mr. Armario has been with the Company for 18 years. Peter J. Bensen, 52, was promoted, effective March 1, 2015, to the newly-created role of Chief Administrative Officer. Mr. Bensen is currently...

  • Page 16
    ...stock the Company made during the quarter ended December 31, 2014*: 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) Period Total Number of Shares Purchased Average Price...

  • Page 17
    ... stock purchases(1) Common stock cash dividends Financial position at year end: Total assets Total debt Total shareholders' equity Shares outstanding in millions Per common share: Earnings-diluted Dividends declared Market price at year end Company-operated restaurants Franchised restaurants Total...

  • Page 18
    ... 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...

  • Page 19
    ... enhance our customers' experience and build shareholder value over the long-term. To measure our performance as we strive to build the business, we have the following long-term, average annual constant currency financial targets: Systemwide sales growth of 3% to 5%; Operating income growth of 6% to...

  • Page 20
    ... longer-term growth opportunities in our industry. Even in periods of softer performance, McDonald's unique business model and structure enable us to generate significant cash flows. Cash from operations benefits from our heavily franchised business model as the rent and royalty income we receive...

  • Page 21
    ..., selling, general and administrative expenses would increase approximately 1%-2%, due to costs associated with expansion of the Restaurant Experience of the Future global initiatives, including our digital strategy. Fluctuations between quarters may occur. McDonald's Corporation 2014 Annual Report...

  • Page 22
    ... 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 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside...

  • Page 23
    ...Reported amount In millions, except per share data Currency translation benefit/(cost) Revenues Company-operated margins Franchised margins Selling, general & administrative expenses Operating income Net income Earnings per common share-diluted NET INCOME AND DILUTED EARNINGS PER COMMON SHARE 2014...

  • Page 24
    ...of its stock for $1.8 billion in 2013, driving reductions in weighted-average shares outstanding on a diluted basis in both periods, which positively benefited earnings per share. REVENUES The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by...

  • Page 25
    .../(decreases): Franchised sales Increase/(decrease) excluding currency translation Amount Dollars in millions Increase/(decrease) U.S. Europe APMEA Other Countries & Corporate Total RESTAURANT MARGINS 2014 $31,096 18,376 12,309 7,836 $69,617 2013 $31,344 17,737 12,759 8,411 $70,251 2012 $31...

  • Page 26
    ...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 and administrative expenses as a percent of revenues was 9.1% in 2014, 8.5% in 2013...

  • Page 27
    ...margin dollars, mostly offset by lower Companyoperated margin dollars. Combined operating margin Combined operating margin is defined as operating income as a percent of total revenues. Combined operating margin was 29.0% in 2014 and 31.2% in 2013 and 2012. McDonald's Corporation 2014 Annual Report...

  • Page 28
    ... sales and profit performance or loss of real estate tenure. Systemwide restaurants at year end(1) 2014 14,350 7,855 10,345 3,708 36,258 2013 14,278 7,602 9,918 3,631 35,429 2012 14,157 7,368 9,454 3,501 34,480 U.S. Europe APMEA Other Countries & Corporate Total (1) In May 2014, the Financial...

  • Page 29
    ... after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company's Board of Directors. New restaurant investments in all years were concentrated in markets with strong returns or opportunities for long-term growth. Average development costs vary...

  • Page 30
    ... for the years ended December 31, 2014 and 2013, respectively. In addition, where practical, the Company's restaurants purchase goods and services in local currencies resulting in natural hedges. See the Summary of significant accounting policies note to the consolidated financial statements related...

  • Page 31
    ...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 similar assets, taking into account anticipated technological or other changes. The Company...

  • Page 32
    ... 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...

  • Page 33
    ... by management over one-year and three-year time periods to evaluate the overall profitability of our markets, 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...

  • Page 34
    ... of shareholders' equity for each of the three years in the period ended December 31, 2014 Notes to consolidated financial statements Quarterly results (unaudited) Management's assessment of internal control over financial reporting Report of independent registered public accounting firm Report of...

  • Page 35
    Consolidated Statement of Income Years ended December 31, 2014 In millions, except per share data REVENUES Sales by Company-operated restaurants $ 18,169.3 Revenues from franchised restaurants 9,272.0 Total revenues 27,441.3 OPERATING COSTS AND EXPENSES Company-operated restaurant expenses Food & ...

  • Page 36
    ... to consolidated financial statements. (1,971.6) 15.2 (1,956.4) 40.1 (6.8) 33.3 (26.6) 2.4 (24.2) (1,947.3) $2,810.5 (279.4) - (279.4) (73.4) 35.9 (37.5) (52.8) 0.9 (51.9) (368.8) $5,217.1 274.7 (0.1) 274.6 19.8 10.8 30.6 33.1 8.4 41.5 346.7 $5,811.5 30 McDonald's Corporation 2014 Annual Report

  • Page 37
    Consolidated Balance Sheet December 31, 2014 ASSETS Current assets Cash and equivalents $ 2,077.9 Accounts and notes receivable 1,214.4 Inventories, at cost, not in excess of market 110.0 Prepaid expenses and other current assets 783.2 Total current assets 4,185.5 Other assets Investments in and ...

  • Page 38
    ...based compensation Other Changes in working capital items: Accounts receivable Inventories, prepaid expenses and other current assets Accounts payable Income taxes Other accrued liabilities Cash provided by operations Investing activities Capital expenditures Purchases of restaurant businesses Sales...

  • Page 39
    ... stock cash dividends ($3.28 per share) Treasury stock purchases Share-based compensation Stock option exercises and other (including tax benefits of $70.2) Balance at December 31, 2014 (697.7) $ (35,177.1) See Notes to consolidated financial statements. McDonald's Corporation 2014 Annual Report...

  • Page 40
    ... a restaurant or granting of a new franchise term, which is when the Company has performed substantially all initial services required by the franchise arrangement. Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period in Selling...

  • Page 41
    ...annually reviewing McDonald's restaurant assets for potential impairment, assets are initially grouped together in the U.S. at a television market level, and internationally, at a country level. The Company manages its restaurants as a group or portfolio with significant common costs and promotional...

  • Page 42
    ... that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded primarily...

  • Page 43
    ... accumulated OCI into income is recorded in Interest expense. The amount of gain (loss) recognized in income on the derivatives used to hedge the supplemental benefit plan liabilities is primarily recorded in Selling, general & administrative expenses. McDonald's Corporation 2014 Annual Report 37

  • Page 44
    ...than not threshold, a tax liability may still be recorded depending on management's assessment of how the tax position will ultimately be settled. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes. 38 McDonald's Corporation 2014 Annual Report

  • Page 45
    ...): 2014-5.3 ; 2013-4.7; 2012-4.7. The Company has elected to exclude the pro forma deferred tax asset associated with share-based compensation in earnings per share. STATEMENT OF CASH FLOWS Other Operating (Income) Expense, Net In millions 2014 2013 2012 Gains on sales of restaurant businesses...

  • Page 46
    ... follows-Company-operated restaurants: 2014-$164.2; 2013-$175.6; 2012-$169.6. Franchised restaurants: 2014-$182.8; 2013-$187.4; 2012-$178.7. Future minimum payments required under existing operating leases with initial terms of one year or more are: In millions Restaurant Other Total 2015 2016 2017...

  • Page 47
    ... country tax rates that are below the 35% U.S. statutory tax rate and reflect the impact of global transfer pricing. For 2014, the effective income tax rate is higher than in 2013 primarily due to changes in tax reserves related to certain foreign tax matters. In 2014, the Internal Revenue Service...

  • Page 48
    ..., information technology, legal, marketing, restaurant operations, supply chain and training. Corporate assets include corporate cash and equivalents, asset portions of financial instruments and home office facilities. In millions Employee Benefit Plans The Company's Profit Sharing and Savings Plan...

  • Page 49
    ...current assets, miscellaneous other assets or other long-term liabilities. The net increase in 2014 was primarily due to net issuances of $1.5 billion partly offset by changes in exchange rates on foreign currency denominated debt of $663 million. (4) (5) McDonald's Corporation 2014 Annual Report...

  • Page 50
    ... exercised totaled $80.8 million. The Company uses treasury shares purchased under the Company's share repurchase program to satisfy share-based exercises. A summary of the status of the Company's stock option grants as of December 31, 2014, 2013 and 2012, and changes during the years then ended, is...

  • Page 51
    ... 2014 2013 Quarters ended March 31 2014 2013 Revenues Sales by Company-operated restaurants Revenues from franchised restaurants Total revenues Company-operated margin Franchised margin Operating income Net income Earnings per common share-basic Earnings per common share-diluted Dividends declared...

  • Page 52
    ...December 31, 2014, management believes that the Company's internal control over financial reporting is effective. Ernst & Young, LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31, 2014, 2013 and 2012 and the...

  • Page 53
    ...Corporation as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management...

  • Page 54
    ...the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of McDonald's Corporation as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014, and our report dated February 24, 2015, expressed an...

  • Page 55
    ... no change in the Company's internal control over financial reporting during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. MANAGEMENT'S REPORT ITEM 11. Executive Compensation...

  • Page 56
    ... herein by reference from Form 10-Q, for the quarter ended March 31, 2010.** McDonald's Corporation Supplemental Profit Sharing and Savings Plan, effective as of September 1, 2001, incorporated herein by reference from Form 10-K, for the year ended December 31, 2001.** (i) First Amendment to the...

  • Page 57
    ...reference from Form 10-Q, for the quarter ended March 31, 2013.** McDonald's Corporation Cash Performance Unit Plan, effective February 13, 2013, incorporated herein by reference from Form 10-Q, for the quarter ended March 31, 2013.** Form of Executive Stock Option Grant Agreement in connection with...

  • Page 58
    ... not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of any such instruments to the Commission upon request has been filed with the Commission. ** Denotes compensatory plan. 52 McDonald's Corporation 2014 Annual Report

  • Page 59
    ... the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McDonald's Corporation (Registrant) By /s/ Peter J. Bensen Peter J. Bensen Corporate Senior Executive Vice President and Chief Financial Officer...

  • Page 60
    .... The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five -year period ended December 31, 2014. The graph...

  • Page 61
    ..., McDonald's APMEA Brian Mullens Corporate SVP and Controller Kevin M. Ozan Corporate EVP and Chief Financial Officer Gloria Santona Corporate EVP, General Counsel and Secretary James R. Sappington Corporate EVP - Operations and Technology Systems McDonald's Corporation 2014 Annual Report 55

  • Page 62
    ... Officer Inter-Con Security Systems, Inc. Jeanne P. Jackson 5, 6 President, Product and Merchandising NIKE, Inc. Richard H. Lenny 2, 3, 5 Non-executive Chairman Information Resources, Inc. Walter E. Massey 1, 3 President School of the Art Institute of Chicago 56 McDonald's Corporation 2014 Annual...

  • Page 63
    ... Corporate social responsibility www.crmcdonalds.com General information www.aboutmcdonalds.com Key phone numbers Shareholder Services 1.630.623.7428 MCDirect Shares (direct stock purchase plan) 1.800.228.9623 U.S. customer comments/inquiries 1.800.244.6227 Financial media 1.630.623.3678 Franchising...

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