MCD-12.31.2012-10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
FORM 10-K
 
 
 
 T ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number 1-5231
 
 
 
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-2361282
(I.R.S. Employer
Identification No.)
 
 
One McDonald’s Plaza
Oak Brook, Illinois
(Address of principal executive offices)
 
60523
(Zip code)
Registrant’s telephone number, including area code: (630) 623-3000
 
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange
on which registered
Common stock, $.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
 
(Title of class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes T  No £
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £  No T
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes T  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer  T         Accelerated filer  ¨
Non-accelerated filer  ¨  (do not check if a smaller reporting company)        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No T
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2012 was $89,222,241,655.
The number of shares outstanding of the registrant’s common stock as of January 31, 2013 was 1,002,791,769.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s 2013 definitive proxy statement which will be filed no later than 120 days after December 31, 2012
 


McDONALD’S CORPORATION
INDEX

Page reference
 
 
 
 
Part I.
 
 
 
 
Item 1
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
Part II.
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
 
 
 
Part III.
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
 
 
 
Part IV.
 
 
 
 
Item 15
 
 
 
 
Exhibits
 
All trademarks used herein are the property of their respective owners.


PART I
 
ITEM 1. Business
 
McDonald’s Corporation, the registrant, together with its sub-sidiaries, is referred to herein as the “Company.”
a. General development of business
During 2012, there have been no material changes to the Company’s corporate structure or in its method of conducting business. In 2012, the Company has continued the process it began in 2005 to realign certain subsidiaries to develop a corporate structure within its geographic segments that better reflects the operation of the McDonald’s worldwide business.
b. Financial information about segments
Segment data for the years ended December 31, 2012, 2011, and 2010 are included in Part II, Item 8, page 40 of this Form 10-K.
c. Narrative description of business
▪
General
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a broad menu (see Products) at various price points providing value in 119 countries around the world.
All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements.
The Company’s operations are designed to assure consistency and high quality at every restaurant. When granting franchises or licenses, the Company is selective and generally is not in the practice of franchising to passive investors.
Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. A discussion regarding site selection is included in Part I, Item 2, page 5 of this Form 10-K.
Conventional franchisees contribute to the Company’s revenue stream through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees received upon the opening of a new restaurant or the granting of a new franchise term. The conventional franchise arrangement typically lasts 20 years, and franchising practices are generally consistent throughout the world. Over 70% of franchised restaurants operate under conventional franchise arrangements.
Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. While the Company has no capital invested, it receives a royalty based on a percent of sales, as well as initial fees. The largest of these developmental license arrangements operates over 1,900 restaurants across 19 countries in Latin America and the Caribbean.
The Company has an equity investment in a limited number of foreign affiliated markets, referred to as "affiliates." The largest of these affiliates is Japan, where there are nearly 3,300 restaurants. The Company receives a royalty based on a percent of sales in these markets and records its share of net results in Equity in earnings of unconsolidated affiliates.
 
The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and strictly enforces high quality standards and product specifications. The Company has quality centers around the world to ensure that its high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site supplier visits. A quality leadership board, composed of the Company’s technical, safety and supply chain specialists, provides strategic global leadership for all aspects of food quality and safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term.
Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to most McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of products and in the delivery of customer service.
McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand image and differentiate the Company from competitors. Marketing and promotional efforts focus on value, food taste, menu choice, nutrition, convenience and the customer experience. The Company continuously endeavors to improve its social responsibility and environmental practices to achieve long-term sustainability, which benefits McDonald’s and the communities it serves.
 
▪
Products
McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis.
McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Snack Wraps, french fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.
McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes.
 
▪
Intellectual property
The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. The Company considers the trademarks “McDonald’s” and “The Golden Arches Logo” to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying remaining durations.
 
▪
Seasonal operations
The Company does not consider its operations to be seasonal to any material degree.
 
▪
Working capital practices
Information about the Company’s working capital practices is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations for the


 
McDonald's Corporation 2012 Annual Report 1

years ended December 31, 2012, 2011, and 2010 in Part II, Item 7, pages 10 through 26, and the Consolidated statement of cash flows for the years ended December 31, 2012, 2011, and 2010 in Part II, Item 8, page 30 of this Form 10-K.
 
▪
Customers
The Company’s business is not dependent upon either a single customer or small group of customers.
 
▪
Backlog
Company-operated restaurants have no backlog orders.
 
▪
Government contracts
No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
 
▪
Competition
McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry.
In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry. The Company’s primary competition, which management refers to as the Informal Eating Out ("IEO") segment, includes the following restaurant categories defined by Euromonitor International: quick-service eating establishments, casual dining full-service restaurants, 100% home delivery/takeaway providers, street stalls or kiosks, specialist coffee shops, juice/smoothie bars and self-service cafeterias. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 7.0 million outlets and generated $1.05 trillion in annual sales in 2011, the most recent year for which data is available. McDonald’s Systemwide 2011 restaurant business accounted for approximately 0.5% of those outlets and about 8% of the sales.
Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all other full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 14.8 million outlets and generated about $2.11 trillion in annual sales in 2011. McDonald’s Systemwide restaurant business accounted for approximately 0.2% of those outlets and about 4% of the sales.

▪
Research and development
The Company operates research and development facilities in the U.S., Europe and Asia. While research and development activities are important to the Company’s business, these expenditures are not material. Independent suppliers also conduct research activities that benefit the Company, its franchisees and suppliers (collectively referred to as the "System").
 
▪
Environmental matters
Increased focus by U.S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations may increase
 
costs, including for the Company, its franchisees and suppliers. Also, there is a possibility that governmental initiatives, or actual or perceived effects of changes in weather patterns or climate, could have a direct impact on the operations of our restaurants or the operations of our suppliers in ways which we cannot predict at this time.
The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. At this time, the Company has already begun to undertake its own initiatives relating to preservation of the environment, including the development of a means to monitor and reduce energy use, in many of its markets.
 
▪
Number of employees
The Company’s number of employees worldwide, including Company-operated restaurant employees, was approximately 440,000 as of year-end 2012.
d. Financial information about geographic areas
Financial information about geographic areas is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 10 through 26 and Segment and geographic information in Part II, Item 8, page 40 of this Form 10-K.
e. Available information
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"). The Company therefore files periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information.
Financial and other information can also be accessed on the investor section of the Company’s website at www.aboutmcdonalds.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.
Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit Committee, Compensation Committee and Governance Committee; the Company’s Standards of Business Conduct; the Code of Ethics for Chief Executive Officer and Senior Financial Officers; and the Code of Conduct for the Board of Directors. Copies of these documents are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.
Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them. 



2 McDonald's Corporation 2012 Annual Report

ITEM 1A. Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
 
 
The information on this report includes forward-looking statements about our plans and future performance, including those under Outlook for 2013. These statements use such words as “may,” “will,” “expect,” “believe” and “plan.” They reflect our expectations and speak only as of the date of this report. We do not undertake to update them. Our expectations (or the underlying assumptions) may change or not be realized, and you should not rely unduly on forward-looking statements.
Our business and execution of our strategic plan, the Plan to Win, are subject to risks. The most important of these is whether we can remain relevant to our customers and a brand they trust. Meeting customer expectations is complicated by the risks inherent in our global operating environment. The IEO segment of the restaurant industry, although largely mature in our major markets, is highly fragmented and competitive. The IEO segment has been flat or contracting in many of our markets, including some of our major markets, due to unfavorable global economic conditions, and this environment is expected to continue. Persistently high unemployment rates in many of these markets, and declining economic growth rates or recessionary conditions in some of them, have also increased consumer focus on value and heightened pricing sensitivity. Combined with pressure on labor and occupancy costs and volatility in commodity prices, as well as aggressive competitive activity, these circumstances affect restaurant sales and are expected to continue to pressure margins during 2013 in all of our geographic segments. We have the added challenge of the cultural and regulatory differences that exist within and among the more than 100 countries where we operate. Initiatives we undertake may not have universal appeal among different segments of our customer base and can drive unanticipated changes in guest counts and customer perceptions. Our operations, plans and results are also affected by regulatory and similar initiatives around the world, notably the focus on nutritional content and the production, processing and preparation of food “from field to front counter,” as well as industry marketing practices.
These risks can have an impact both in the near- and long-term and are reflected in the following considerations and factors that we believe are most likely to affect our performance.
Our ability to remain a relevant and trusted brand and to increase sales and profits depends largely on how well we execute the Plan to Win and our global priorities.
The Plan to Win addresses the key drivers of our business and results - people, products, place, price and promotion - and we are focused on our three global priorities that represent the greatest opportunities under our Plan to Win: optimizing our menu, modernizing the customer experience and broadening accessibility to our Brand. The quality of our execution depends mainly on the following:
▪
Our ability to anticipate and respond effectively to trends or other factors that affect the IEO segment and our competitive position in the diverse markets we serve, such as spending patterns, demographic changes, trends in food preparation, consumer preferences and publicity about us, all of which can drive popular perceptions of our business or affect the willingness of other companies to enter into site, supply or other arrangements or alliances with us;
▪
The risks associated with our franchise business model, including whether our franchisees and developmental licensees will have the experience and financial resources to be effective operators and remain aligned with us on
 
operating, promotional and capital-intensive initiatives and the potential impact on us if they experience food safety or other operational problems or project a brand image inconsistent with our values, particularly if our contractual and other rights and remedies are limited by law or otherwise, costly to exercise or subject to litigation;
▪
The success of our tiered approach to menu offerings and our ability to introduce new offerings, as well as the impact of our competitors' actions, including in response to our menu changes, and our ability to continue robust menu development and manage the complexity of our restaurant operations;
▪
Our ability to differentiate the McDonald's experience in a way that balances consumer value with margin levels, particularly in markets where pricing or cost pressures are significant or have been exacerbated by the current challenging economic and operating environment;
▪
The impact of pricing, marketing and promotional plans on sales and margins and our ability to adjust these plans to respond quickly to changing economic and heightened competitive conditions;
▪
Our ability to drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours, and to motivate our restaurant personnel and our franchisees to achieve consistency and high service levels so as to improve consumer perceptions of our ability to meet expectations for quality food served in clean and friendly environments;
▪
Whether we can complete our restaurant reimaging and rebuilding plans as projected, and whether we are able to identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants, as well as sales and profitability targets;
▪
The costs and risks associated with our increasing reliance on information systems (e.g., point-of-sale and other in-store systems or platforms) that support our restaurants and that we make available to franchisees along with related services, including the risk that we will not realize fully the benefits of the significant investments we are making, which are intended to enhance the customer experience; the potential for system failures, programming errors, security breaches involving our systems or those of third-party system operators; legal and tax risks associated with providing these services to franchisees, including those relating to data protection and management; and litigation risk involving intellectual property rights or our rights and obligations to others under related contractual arrangements;
▪
The success of our initiatives to support menu choice, physical activity and nutritional awareness and to address these and other matters of social responsibility in a way that communicates our values effectively and inspires trust and confidence;
▪
Our ability to respond effectively to adverse perceptions about the quick-service category of the IEO segment or about our food (including its nutritional content and preparation), promotions and premiums, such as Happy Meal toys (collectively, our "products"), how we source the commodities we use, and our ability to manage the potential impact on McDonald's of food-borne illnesses or product safety issues;
▪
The impact of campaigns by labor organizations and activists or the use of social media and other mobile communications and applications to promote adverse perceptions of our operations or those of our suppliers, or to promote or


 
McDonald's Corporation 2012 Annual Report 3

threaten boycotts or other actions involving us or our suppliers;
▪
The impact of events such as boycotts or protests, labor strikes and supply chain interruptions (including due to lack of supply or price increases) that can adversely affect us or the vendors, franchisees and others that are also part of the McDonald's System and whose performance has a material impact on our results;
▪
Our ability to recruit and retain qualified personnel to manage our operations and growth; and
▪
Our ability to leverage promotional or operating successes in individual markets into other markets in a timely and cost-effective way.
Our results and financial condition are affected by global and local market conditions, and the prolonged challenging economic environment can be expected to continue to pressure our results.
Our results of operations are substantially affected by economic conditions, both globally and in local markets, and conditions can also vary substantially by market. The current global environment has been characterized by persistently weak economies, high unemployment rates, inflationary pressures and volatility in financial markets. Many major economies, both advanced and developing, are also facing significant economic issues. These include, in the U.S., concerns about the federal deficit and the potential adverse effects of the automatic spending cuts that will become effective in early 2013 absent further legislation. The Eurozone debt crisis continues to depress consumer and business confidence and spending in many markets. Important markets in Asia, which have been key drivers of global growth, have been experiencing declining growth rates. Uncertainty about the long-term investment environment could further depress capital investment and economic activity.
These conditions are adversely affecting sales and/or guest counts in many of our markets, including some of our major markets. To mitigate their impact, we have intensified our focus on value as a driver of guest counts through menu, pricing and promotional actions. These actions have adversely affected our margin percent, and margins will remain under pressure. The key factors that can affect our operations, plans and results in this environment are the following:
▪
Whether our strategies will be effective in enabling the continued market share gains that we have included in our plans, while at the same time enabling us to achieve our targeted operating income growth despite the current adverse economic conditions, resurgent competitors and a more costly and competitive advertising environment;
▪
The effectiveness of our supply chain management to assure reliable and sufficient product supply on favorable terms;
▪
The impact on consumer disposable income levels and spending habits of governmental actions to manage national economic matters, whether through austerity or stimulus measures and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers;
▪
The impact on restaurant sales and margins of ongoing commodity price volatility, and the effectiveness of pricing, hedging and other actions taken to address this environment;
▪
The impact on our margins of labor costs and the long-term trend toward higher wages and social expenses in both mature and developing markets;
▪
The impact of foreign exchange and interest rates on our financial condition and results;
 
▪
The challenges and uncertainties associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest, all of which are exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment;
▪
The nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment charges that reduce our earnings;
▪
The increasing focus on workplace practices and conditions, which may drive changes in practices or in the general commercial and regulatory environment that affect perceptions of our business or our cost of doing business;
▪
The impact of changes in our debt levels on our credit ratings, interest expense, availability of acceptable counterparties, ability to obtain funding on favorable terms or our operating or financial flexibility, especially if lenders impose new operating or financial covenants; and
▪
The impact of an exit from the Eurozone by any of the EU Member States, which could entail disruption to our business as the exiting Member State establishes a new currency and we, along with our suppliers, franchisees and others, address the challenges associated with redenomination.
Increasing legal and regulatory complexity will continue to affect our operations and results in material ways.
Our legal and regulatory environment worldwide exposes us to complex compliance, litigation and similar risks that affect our operations and results in material ways. In many of our markets, including the United States and Europe, we are subject to increasing regulation, which has increased our cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. Among the more important regulatory and litigation risks we face and must manage are the following:
▪
The cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations we face, especially in the United States where inconsistent standards imposed by local, state and federal authorities can adversely affect popular perceptions of our business and increase our exposure to litigation or governmental investigations or proceedings;
▪
The impact of new, potential or changing regulations that can affect our business plans, such as those relating to product packaging, marketing and the nutritional content and safety of our food and other products, as well as the risks and costs of our labeling and other disclosure practices, particularly given varying legal requirements and practices for testing and disclosure within our industry, ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of information from third-party suppliers;
▪
The impact of nutritional, health and other scientific inquiries and conclusions, which constantly evolve and often have contradictory implications, but nonetheless drive popular opinion, litigation and regulation, including taxation, in ways that could be material to our business;
▪
The impact of litigation trends, particularly in our major markets, including class actions, labor, employment and personal injury claims, franchisee litigation, landlord/tenant disputes and intellectual property claims (including often aggressive or opportunistic attempts to enforce patents used in information technology systems); the relative level of our



4 McDonald's Corporation 2012 Annual Report

defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings; the cost and other effects of settlements or judgments, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products; and the scope and terms of insurance or indemnification protections that we may have;
▪
Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices;
▪
The risks and costs to us, our franchisees and our supply chain of the effects of climate change, as well as of increased focus by U.S. and overseas governmental and non-governmental organizations on environmental sustainability matters (e.g., climate change, land use, energy and water resources, packaging and waste, and animal health and welfare) and the increased pressure to make commitments or set targets and take actions to meet them, which could expose the Company to market, operational and execution costs or risks, particularly when actions are undertaken Systemwide;
▪
The increasing costs and other effects of compliance with U.S. and overseas regulations affecting our workforce and labor practices, including regulations relating to wage and hour practices, workplace conditions, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination;
▪
Disruptions in our operations or price volatility in a market that can result from governmental actions, such as price, foreign exchange or import-export controls, increased tariffs or government-mandated closure of our or our vendors' operations, and the cost and disruption of responding to governmental investigations or proceedings, whether or not they have merit;
▪
The legal and compliance risks and costs associated with privacy, consumer data protection and similar laws, particularly as they apply to children, the potential costs (including the loss of consumer confidence) arising from alleged security breaches of our information systems, and the risk of criminal penalties or civil liability to consumers, employees or franchisees whose data is alleged to have been collected or used inappropriately; and
▪
The impact of changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, changes in tax accounting or tax laws (or related authoritative interpretations), particularly if corporate tax reform becomes a key component of budgetary initiatives in the United States and elsewhere, and the impact of settlements of pending or any future adjustments proposed by the IRS or other taxing authorities in connection with our tax audits, all of which will depend on their timing, nature and scope.
The trading volatility and price of our common stock may be affected by many factors.
Many factors affect the volatility and price of our common stock in addition to our operating results and prospects. The most important of these, some of which are outside our control, are the following:
▪
The continuing unfavorable global economic and volatile market conditions;
▪
Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the United States which is
 
the principal trading market for our common stock, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to our business;
▪
Changes in financial or tax reporting and accounting principles or practices that materially affect our reported financial condition and results and investor perceptions of our performance;
▪
Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can reflect market commentary (including commentary that may be unreliable or incomplete in some cases) or expectations about our business, our creditworthiness or investor confidence generally; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald's may be included, such as the S&P 500 Index and the Dow Jones Industrial Average;
▪
The impact of our stock repurchase program or dividend rate; and
▪
The impact on our results of other corporate actions, such as those we may take from time to time as part of our continuous review of our corporate structure in light of business, legal and tax considerations.
Our results and prospects can be adversely affected by events such as severe weather conditions, natural disasters, hostilities and social unrest, among others.
Severe weather conditions, natural disasters, hostilities and social unrest, terrorist activities, health epidemics or pandemics (or expectations about them) can adversely affect consumer spending and confidence levels or other factors that affect our results and prospects, such as commodity costs. Our receipt of proceeds under any insurance we maintain with respect to certain of these risks may be delayed or the proceeds may be insufficient to offset our losses fully.
ITEM 1B. Unresolved Staff Comments
 
None.
ITEM 2. Properties
 
The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for restaurant sites, which ensures long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network. Additional information about the Company’s properties is included in Management’s discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 10 through 26 and in Financial statements and supplementary data in Part II, Item 8, pages 26 through 43 of this Form 10-K.


 
McDonald's Corporation 2012 Annual Report 5

ITEM 3. Legal Proceedings
 
The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company’s entire business. The following is a brief description of the more significant types of lawsuits. In addition, the Company is subject to various federal, state and local regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.
 
▪
Franchising
A substantial number of McDonald’s restaurants are franchised to independent entrepreneurs operating under contractual arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, contentions regarding grants or terminations of franchises, delinquent payments of rents and fees, and franchisee claims for additional franchises or rewrites of franchises. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald’s franchise.

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

▪
Employees
Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, firing, promotion and pay practices, including wage and hour disputes, alleged discrimination and compliance with employment laws.
 
▪
Customers
Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public. In so doing, disputes arise as to products, service, incidents, advertising, nutritional and other disclosures, as well as other matters common to an extensive restaurant business such as that of the Company.
 
▪
Intellectual Property
The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property.
 
▪
Government Regulations
Local, state and federal governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising, franchising, health, safety, environment, zoning and employment. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from the issuance of additional requirements in the future.
ITEM 4. Mine Safety Disclosures
 
Not applicable.



6 McDonald's Corporation 2012 Annual Report

The following are the Executive Officers of our Company (as of the date of this filing):
Jose Armario, 53, is Corporate Executive Vice President—Global Supply Chain, Development and Franchising, a position he has held since October 2011. He previously served as Group President, McDonald’s Canada and Latin America from February 2008 through September 2011 and President, McDonald’s Latin America from December 2003 to February 2008. Mr. Armario has been with the Company for 16 years.
Peter J. Bensen, 50, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since January 2008. From April 2007 through December 2007, he served as Corporate Senior Vice President—Controller. Prior to that time, Mr. Bensen served as Corporate Vice President–Assistant Controller from February 2002 through March 2007. Mr. Bensen has been with the Company for 16 years.
Timothy J. Fenton, 55, is Chief Operating Officer, a position he has held since July 2012. From January 2005 through June 2012, he held the position of President, McDonald's Asia/Pacific, Middle East and Africa and he served as President, East Division for McDonald’s USA from May 2003 to January 2005. Mr. Fenton has been with the Company for 39 years.
Richard Floersch, 55, is Corporate Executive Vice President and Chief Human Resources Officer. Mr. Floersch joined the Company in November 2003. He previously served as Senior Vice President of Human Resources for Kraft Foods from 1998 through 2003. Mr. Floersch has been with the Company for nine years.
Douglas M. Goare, 60, is President, McDonald’s Europe, a position he has held since October 2011. From February 2011 through September 2011, he served as Corporate Executive Vice President of Supply Chain and Development. From June 2007 through November 2010, he held the position of Corporate Senior Vice President of Supply Chain. In addition to this role, Mr. Goare assumed responsibility for Development in December 2010 and served as Corporate Senior Vice President of Supply Chain and Development through January 2011. Mr. Goare has been with the Company for 34 years.
David L. Hoffmann, 45, is President of Asia/Pacific, Middle East and Africa, a position he has held since July 2012. From January 2012 through June 2012, he held the position of Senior Vice President and Restaurant Support Officer for Asia/Pacific, Middle East and Africa. Prior to that time, he held the position of Vice President of Strategy, Insights and Development for Asia/Pacific, Middle East and Africa from May 2011 through December 2011. From November 2008 through April 2011, he held the position of Executive Vice President of McDonald's Japan. He held the position of Senior Vice President—Strategy and Franchising of
 
McDonald's Japan from August 2007 through October 2008. Mr. Hoffmann has been with the Company for 16 years.
Kenneth M. Koziol, 53, became Corporate Executive Vice President—Chief Restaurant Officer in February 2013. From July 2006 through January 2013, he held the position of Corporate Senior Vice President—Innovation. Prior to that time, Mr. Koziol served as Corporate Vice President Restaurant Solutions Group Worldwide Innovation from June 2004 to July 2006. Mr. Koziol has been with the Company for 24 years.
Kevin L. Newell, 55, is Corporate Executive Vice President and Global Chief Brand Officer, a position he has held since February 2011. Effective March 1, 2013, Mr. Newell will have a new role as U.S. Chief Brand and Strategy Officer. From September 2009 through January 2011, he served as U.S. Senior Vice President and Restaurant Support Officer for the West Division. Prior to that time, Mr. Newell served as U.S. Vice President & General Manager of the Great Southern Region from November 2006 through August 2009. Mr. Newell has been with the Company for 23 years.
Kevin M. Ozan, 49, is Corporate Senior Vice President–Controller, a position he has held since February 2008. From May 2007 through January 2008, he served as Corporate Vice President—Assistant Controller. He previously served as a Senior Director in Investor Relations from May 2006 to April 2007. Mr. Ozan has been with the Company for 15 years.
Gloria Santona, 62, is Corporate Executive Vice President, General Counsel and Secretary, a position she has held since July 2003. From June 2001 to July 2003, she served as Corporate Senior Vice President, General Counsel and Secretary. Ms. Santona has been with the Company for 35 years.
Jeffrey P. Stratton, 57, is President, McDonald's USA, a position he has held since December 2012. He previously served as Corporate Executive Vice President–Chief Restaurant Officer from January 2005 through November 2012 and prior to that, served as U.S. Executive Vice President, Chief Restaurant Officer from January 2004 through December 2004. Preceding this, he served as Senior Vice President, Chief Restaurant Officer of McDonald’s USA from May 2002 to January 2004. Mr. Stratton has been with the Company for 39 years.
Donald Thompson, 49, is President and Chief Executive Officer, a position he has held since July 2012. He served as President and Chief Operating Officer from January 2010 through June 2012. Mr. Thompson was also elected a Director in January 2011. Prior to that he served as President, McDonald’s USA, from August 2006 to January 2010, and as Executive Vice President and Chief Operations Officer for McDonald’s USA from January 2005 to August 2006. Mr. Thompson has been with the Company for 22 years.


 
McDonald's Corporation 2012 Annual Report 7

PART II
 
 
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S. The following table sets forth the common stock price ranges on the New York Stock Exchange and dividends declared per common share:
 
 
2012
 
 
2011
 
 
Dollars per share
High

 
Low

 
Dividend

 
High

 
Low

 
Dividend

 
Quarter:
 
 
 
 
 
 
 
 
 
 
 
 
First
102.22

 
95.13

 
0.70

 
77.59

 
72.14

 
0.61

 
Second
99.50

 
85.92

 
0.70

 
84.91

 
75.66

 
0.61

 
Third
94.00

 
86.15

 
1.47

*
91.22

 
82.01

 
1.31

*
Fourth
94.16

 
83.31

 
 
 
101.00

 
83.74

 
 
 
Year
102.22

 
83.31

 
2.87

 
101.00

 
72.14

 
2.53

 
 
 
*
Includes a $0.70 and $0.61 per share dividend declared and paid in third quarter of 2012 and 2011, respectively, and a $0.77 and $0.70 per share dividend declared in third quarter and paid in fourth quarter of 2012 and 2011, respectively.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2013 was estimated to be 1,811,000.
Given the Company’s returns on equity, incremental invested capital and assets, management believes it is prudent to reinvest in the business in markets with acceptable returns and/or opportunity for long-term growth and use excess cash flow to return cash to shareholders through dividends and share repurchases. The Company has paid dividends on common stock for 37 consecutive years through 2012 and has increased the dividend amount at least once every year. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2012*:
Period
Total Number of
Shares Purchased

 
Average Price
Paid per Share

 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)

 
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
 
October 1-31, 2012
2,196,461

 
90.03

 
2,196,461

 
 
$
9,403,831,013

November 1-30, 2012
1,586,118

 
85.83

 
1,586,118

 
 
9,267,690,809

December 1-31, 2012
176,500

 
88.73

 
176,500

 
 
9,252,029,146

   Total
3,959,079

 
88.29

 
3,959,079

 
 

 
 
 
 
 
 
 
 
 
 
*
Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)
On July 19, 2012, the Company's Board of Directors approved a share repurchase program, effective August 1, 2012, that authorizes the purchase of up to $10 billion of the Company's outstanding common stock with no specified expiration date.



8 McDonald's Corporation 2012 Annual Report

ITEM 6. Selected Financial Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6-Year Summary
 
 
 
 
 
 
 
 
 
 
 
 
 
Dollars in millions, except per share data
2012

 
2011

 
2010

 
2009

 
2008

 
2007

 
Company-operated sales
$
18,603

 
18,293

 
16,233

 
15,459

 
16,561

 
16,611

  
Franchised revenues
$
8,964

 
8,713

 
7,842

 
7,286

 
6,961

 
6,176

  
Total revenues
$
27,567

 
27,006

 
24,075

  
22,745

 
23,522

  
22,787


Operating income
$
8,605

 
8,530

 
7,473

 
6,841

(1) 
6,443

 
3,879

(4) 
Income from continuing operations
$
5,465

 
5,503

 
4,946

 
4,551

(1,2) 
4,313

(3) 
2,335

(4,5) 
Net income
$
5,465

 
5,503

 
4,946

 
4,551

(1,2)  
4,313

(3) 
2,395

(4,5,6)  
Cash provided by operations
$
6,966

 
7,150

 
6,342

 
5,751

  
5,917

 
4,876

  
Cash used for investing activities
$
3,167

 
2,571

 
2,056

 
1,655

  
1,625

 
1,150

  
Capital expenditures
$
3,049

 
2,730

 
2,135

 
1,952

  
2,136

 
1,947

  
Cash used for financing activities
$
3,850

 
4,533

 
3,729

 
4,421

  
4,115

 
3,996

  
Treasury stock purchases(7)
$
2,605

 
3,373

 
2,648

 
2,854

  
3,981

 
3,949

  
Common stock cash dividends
$
2,897

 
2,610

 
2,408

 
2,235

  
1,823

 
1,766

  
Financial position at year end:
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
35,386

 
32,990

 
31,975

 
30,225

  
28,462

 
29,392

  
Total debt
$
13,633

 
12,500

 
11,505

 
10,578

  
10,218

 
9,301

  
Total shareholders’ equity
$
15,294

 
14,390

 
14,634

 
14,034

  
13,383

 
15,280

  
Shares outstanding in millions
1,003

 
1,021

 
1,054

 
1,077

  
1,115

 
1,165

  
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations-diluted
$
5.36

 
5.27

 
4.58

 
4.11

(1,2) 
3.76

(3) 
1.93

(4,5) 
Earnings-diluted
$
5.36

 
5.27

 
4.58

 
4.11

(1,2) 
3.76

(3) 
1.98

(4,5,6) 
Dividends declared
$
2.87

 
2.53

 
2.26

  
2.05

 
1.63

  
1.50

  
Market price at year end
$
88.21

 
100.33

 
76.76

  
62.44

 
62.19

  
58.91

  
Company-operated restaurants
6,598

 
6,435

 
6,399

 
6,262

 
6,502

 
6,906

  
Franchised restaurants
27,882

 
27,075

 
26,338

 
26,216

 
25,465

 
24,471

  
Total Systemwide restaurants
34,480

 
33,510

 
32,737

 
32,478

 
31,967

 
31,377


Franchised sales(8)
$
69,687

 
67,648

 
61,147

 
56,928

 
54,132

 
46,943

  
(1)
Includes pretax income due to Impairment and other charges (credits), net of $61.1 million ($91.4 million after tax or $0.08 per share) primarily related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction.
(2)
Includes income of $58.8 million ($0.05 per share) for gain on sale of investment related to the sale of the Company’s minority ownership interest in Redbox Automated Retail, LLC.
(3)
Includes income of $109.0 million ($0.09 per share) for gain on sale of investment from the sale of the Company’s minority ownership interest in U.K.- based Pret A Manger.
(4)
Includes pretax operating charges of $1.7 billion ($1.32 per share) due to Impairment and other charges (credits), net primarily as a result of the Company’s sale of its businesses in 18 Latin American and Caribbean markets to a developmental licensee.
(5)
Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of an Internal Revenue Service examination of the Company’s 2003-2004 U.S. federal tax returns.
(6)
Includes income of $60.1 million ($0.05 per share) related to discontinued operations primarily from the sale of the Company’s investment in Boston Market.
(7)
Represents treasury stock purchases as reflected in Shareholders' equity.
(8)
While franchised sales are not recorded as revenues by the Company, management believes they are important in understanding the Company's financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. Franchised restaurants represent more than 80% of McDonald's restaurants worldwide.


 
McDonald's Corporation 2012 Annual Report 9

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
DESCRIPTION OF THE BUSINESS
The Company franchises and operates McDonald’s restaurants. Of the 34,480 restaurants in 119 countries at year-end 2012, 27,882 were franchised or licensed (including 19,869 franchised to conventional franchisees, 4,350 licensed to developmental licensees and 3,663 licensed to foreign affiliates ("affiliates")—primarily Japan) and 6,598 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe franchising is important to delivering great, locally-relevant customer experiences and driving profitability. However, directly operating restaurants is paramount to being a credible franchisor and is essential to providing Company personnel with restaurant operations experience. In our Company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced in the restaurants. We continually review, and as appropriate adjust, our mix of Company-operated and franchised or licensed (conventional franchised, developmental licensed and foreign affiliated) restaurants to help optimize overall performance.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is managed as distinct geographic segments. Significant reportable segments include the United States ("U.S."), Europe, and Asia/Pacific, Middle East and Africa ("APMEA"). In addition, throughout this report we present “Other Countries & Corporate” that includes operations in Canada and Latin America, as well as Corporate activities. The U.S., Europe and APMEA segments account for 32%, 39% and 23% of total revenues, respectively. The United Kingdom ("U.K."), France and Germany, collectively, account for 51% of Europe’s revenues; and China, Australia and Japan (a 50%-owned affiliate accounted for under the equity method), collectively, account for 56% of APMEA’s revenues. These six markets along with the U.S. and Canada are referred to as “major markets” throughout this report and comprise 70% of total revenues.
In analyzing business trends, management considers a variety of performance and financial measures, including
 
comparable sales and comparable guest count growth, Systemwide sales growth and returns.
▪
Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currencies and bases certain incentive compensation plans on these results because we believe this better represents the Company’s underlying business trends.
▪
Comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of acceptance of the Company’s initiatives as well as local economic and consumer trends. Increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions, respectively, from the same period in the prior year for all restaurants, whether operated by the Company or franchisees, in operation at least thirteen months, including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Comparable sales exclude the impact of currency translation. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Generally, the goal is to achieve a balanced contribution from both guest counts and average check.
McDonald’s reports on a calendar basis and therefore the comparability of the same month, quarter and year with the corresponding period of the prior year will be impacted by the mix of days. The number of weekdays and weekend days in a given timeframe can have a positive or negative impact on comparable sales and guest counts. The Company refers to these impacts as calendar shift/trading day adjustments. In addition, the timing of holidays can impact comparable sales and guest counts. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales and guest counts while the annual impacts are typically minimal.
▪
Systemwide sales include sales at all restaurants. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.
▪
Return on incremental invested capital ("ROIIC") is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the business units, the effectiveness of capital deployed and the future allocation of capital. The return is calculated by dividing the change in operating income plus depreciation and amortization (numerator) by the cash used for investing activities (denominator), primarily capital expenditures. The calculation uses a constant average foreign exchange rate over the periods included in the calculation.
STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE
The strength of the alignment between the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's success. This business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. In addition, it facilitates our ability to identify, implement and scale innovative ideas that meet customers' changing needs and preferences.



10 McDonald's Corporation 2012 Annual Report

McDonald's customer-focused Plan to Win ("Plan") provides a common framework for our global business while allowing for local adaptation. Through the execution of multiple initiatives surrounding the five pillars of our Plan—People, Products, Place, Price and Promotion—we have enhanced the restaurant experience for customers worldwide and grown global comparable sales and guest counts in each of the last nine years. This Plan, combined with financial discipline, has delivered strong results for our shareholders since its inception. To measure our performance as we continue 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 7%;
▪
ROIIC in the high teens.
Prior to 2012, we exceeded each of these financial targets every year since the Plan's implementation in 2003, after adjusting for the loss in 2007 from the Latin America developmental license transaction. These targets have enabled us to make the best decisions for the long-term benefit of our shareholders, and we believe they remain realistic and sustainable for a company of our size.
In 2012, Systemwide sales growth was 3% (5% in constant currencies), operating income growth was 1% (4% in constant currencies), one-year ROIIC was 15.4% and three-year ROIIC was 28.6% (see reconciliation on page 24). Persistent global economic headwinds, heightened competitive activity and inflationary costs impacted results. In addition, planned strategic decisions, such as the 2012 London Olympics sponsorship, investing in technology and the biennial Worldwide Owner/Operator convention, also impacted results.
In 2012, we continued to focus on customers' needs and remained aligned on our Plan and the three global growth priorities of optimizing our menu, modernizing the customer experience, and broadening accessibility to our brand. We believe these priorities are relevant and actionable, and combined with our competitive advantages, will drive long-term sustainable growth. Initiatives supporting these priorities resonated with customers and drove increases in global comparable sales and guest counts of 3.1% and 1.6%, respectively, despite challenging economies and a relatively flat or declining Informal Eating Out ("IEO") segment in most markets. In 2012, we continued to grow market share in the U.S., Europe and APMEA, amid a more competitive global environment and a slight decline in our fourth quarter comparable guest counts.
Comparable sales are impacted by guest counts, product mix shifts and menu pricing. Specific menu pricing actions across our system reflect local market conditions as well as other factors, notably food away from home and food at home inflation indices. In our Company-operated restaurants, we manage menu board prices to ensure value at all price points, increase profitability and mitigate inflation, all while trying to grow guest counts. In order to accomplish these objectives, we utilize a strategic pricing tool that balances price and product mix. Franchisees also have access to, and many utilize, this strategic pricing tool. In general, we believe franchisees employ a similar pricing strategy. We look to optimize product mix by utilizing a menu with entry-point value, core, premium and promotional offerings. We also introduce new products to meet customers' needs, which can expand average check and increase guest counts. In 2012, average prices increased at Company-operated restaurants in each area of the world, although increases varied by market and region.
U.S.
In the U.S., comparable sales increased for the tenth consecutive year, rising 3.3% in 2012, while comparable guest counts rose
 
1.9%. These results were achieved despite only modest growth in the IEO segment and heightened competitive activity. In the second half of the year, we experienced softer performance; therefore, we adjusted our plans to re-energize our all-day everyday value offerings while providing the menu variety customers expect from McDonald's.
In 2012, we continued to highlight beverages, value, breakfast, and our classic core favorites. We expanded our McCafé beverage offerings with the Chocolate Chip Frappé and Cherry Berry Chiller. Limited-time offers, such as Chicken McBites and the Cheddar Bacon Onion premium sandwiches, complemented our core menu offerings.
Modernizing the customer experience continued through our major remodeling initiative, which provides contemporary restaurant designs and retailing efforts. The enhanced appearance and functionality of our restaurants deliver a more relevant experience for our customers. Over 900 existing restaurants were remodeled during 2012 with the majority adding drive-thru capacity to capture additional guest counts.
We broadened the accessibility of our convenient locations through extended hours and efficient drive-thru service. More than half of our restaurants use some form of multiple order points to maximize drive-thru capacity, including 1,500 with hand-held order takers to help improve customer service times. To further build on our competitive advantage, we focused on operations excellence initiatives to drive customer satisfaction as we strive to deliver fast, accurate and friendly service with every order.
Europe
In Europe, comparable sales rose 2.4%, marking the ninth consecutive year of comparable sales increases, while guest counts declined 0.5%. While low consumer confidence continues to negatively affect overall retail sales and the IEO segment, we outperformed the market and grew market share. Major contributors to comparable sales were the U.K. and Russia. Despite ongoing economic challenges, the segment's priority remains growing the overall business by balancing a strong focus on our unique value offerings, ongoing premium product innovation, and new products.
Europe continued to see the benefit of providing a relevant, contemporary customer experience and completed almost 750 restaurant reimages. By the end of 2012, over 90% of restaurant interiors and approximately 50% of exteriors had been reimaged. Europe also invested in a roll-out of a new point-of-sale system, which allows us to continue to expand our menu offerings and improve order accuracy. By the end of 2012, over 2,200 restaurants had deployed this system.
We expanded our coffee business and have over 1,600 McCafé locations, which in Europe are generally separate areas inside the restaurants that serve specialty coffees, desserts and snacks. In addition, we increased our accessibility and convenience with extended operating hours, self-order kiosks, optimized drive-thrus, and opened over 250 new restaurants.
APMEA
In APMEA, comparable sales rose 1.4% and comparable guest counts rose 2.2%, despite a challenging year of economic pressures, partly due to Japan's uneven recovery and China's slower economic growth. Positive performance was driven by China, Australia and many other markets. Unique value platforms, great tasting premium menu selections, locally-relevant menu variety, and convenience and service enhancements differentiated the McDonald's experience. Australia launched the “Loose Change Menu,” which is a branded affordability menu, while China focused on breakfast, lunch, and dinner value platforms. Value initiatives were balanced with mid-tier offers, such as Bubble Tea in China, and premium limited-time offers, such as the Serious Lamb Burger and Wrap in Australia.


 
McDonald's Corporation 2012 Annual Report 11

Our breakfast business has expanded and is offered in approximately 75% of APMEA restaurants. Desserts continued to play a meaningful role, particularly in China, where we remain one of the largest ice cream retailers.
We opened over 750 new restaurants in APMEA, of which over 250 were in China, where we have made significant progress toward our goal of 2,000 restaurants by the end of 2013. Nearly two-thirds of APMEA restaurants are offering some form of extended operating hours and over 5,400 restaurants are open 24 hours. Delivery is offered in many APMEA markets and is now available in over 1,700 restaurants, including nearly 550 in China.
Since Japan's natural disaster in March of 2011, the economy remains a challenge. Despite a declining IEO segment, McDonald's is gaining market share through a value platform of 100, 250, and 500 YEN offerings, and family sharing boxes, such as 15-piece Chicken McNuggets. Japan augmented its value platform with strategic couponing to encourage add-on and Extra Value Meal purchases.
Consolidated
Globally, our approach to offering affordable value to our customers is complemented by a focus on driving operating efficiencies and leveraging our scale, supply chain infrastructure and our suppliers' risk management practices to manage costs. We were able to execute our strategies in every area of the world, grow comparable sales and control selling, general and administrative expenses. However, in 2012 we faced top- and bottom-line pressures, some a result of planned strategic decisions, and others driven by the external environment. As a result, combined operating margin (operating income as a percent of total revenues) was 31.2% in 2012, down 0.4 percentage points as compared to 2011.
In 2012, cash from operations was nearly $7.0 billion. Our substantial cash flow, strong credit rating and continued access to credit provide us flexibility to fund capital expenditures as well as return cash to shareholders. Capital expenditures of approximately $3.0 billion were invested in our business primarily to reimage existing restaurants and open new restaurants. Across the System, over 1,400 restaurants were opened and about 2,400 existing locations were reimaged. In addition, we returned $5.5 billion to shareholders consisting of $2.9 billion in dividends and $2.6 billion in share repurchases.
Cash from operations continues to benefit from our heavily franchised business model as the rent and royalty income received from owner/operators is a stable revenue stream that has relatively low costs. In addition, the franchise business model is less capital intensive than the Company-owned model. We believe locally-owned and operated restaurants maximize brand performance and are at the core of our competitive advantages, making McDonald's not just a global brand but also a locally– relevant one.
HIGHLIGHTS FROM THE YEAR INCLUDED:
▪
Comparable sales grew 3.1% and guest counts rose 1.6%, building on 2011 increases of 5.6% and 3.7%, respectively.
▪
Revenues increased 2% (5% in constant currencies).
▪
Operating income increased 1% (4% in constant currencies).
▪
Diluted earnings per share was $5.36, an increase of 2% (5% in constant currencies).
▪
Cash provided by operations was nearly $7.0 billion.
▪
One-year ROIIC was 15.4% and three-year ROIIC was 28.6% for the period ended December 31, 2012.
 
▪
The Company increased the quarterly cash dividend per share 10% to $0.77 for the fourth quarter—bringing our current annual dividend to $3.08 per share.
▪
The Company returned $5.5 billion to shareholders through dividends and share repurchases.
OUTLOOK FOR 2013
We will continue to build the business in 2013 and beyond by enhancing the customer experience across all pillars of our Plan and our three global growth priorities to optimize our menu, modernize the customer experience and broaden accessibility to our brand. We remain focused on seizing the long-term opportunities in the $1 trillion IEO segment by leveraging our competitive advantages. We have a brand advantage in convenience, menu variety and value, a resilient business model, and the experience and alignment throughout the McDonald's System to navigate the current environment.
Our number one priority continues to be satisfying our customers' needs by serving great-tasting, high-quality food in contemporary restaurants. This focus on our customers is particularly critical in this uncertain environment, where ongoing volatility continues to negatively impact consumer sentiment and spending. We anticipate a continued flat to declining IEO segment in many of the markets where we operate. Growing market share will remain our focus to attain sustainable and profitable long-term growth.
We will highlight promotions of our core menu favorites, while strategically expanding our menu with relevant new offerings across all dayparts, including premium products that can deliver a higher average check. We will place an even greater emphasis on scaling success quickly around the globe. For example, in many markets we will expand our innovative McBites line-up, introduce existing products like our blended ice beverages and large McWraps into new markets, and offer even more of the unique, flavor-based promotional food events that have been successful. We will emphasize our dayparts—like breakfast and extended hours—that are still growing globally in both established and emerging markets. We will enhance the customer experience by continuing to reimage our building interiors and exteriors and by providing our restaurant teams with the appropriate tools, training, and technology. The accessibility efforts will include increasing the level and variety of conveniences provided to our customers through new restaurant openings, extended operating hours, stronger value platforms, and faster, more accurate service through innovative order taking. With operational and financial discipline, we will execute these priorities to increase McDonald's brand relevance.
We will continue to build customer trust through our commitment to sustainability—including nutrition and well-being, a sustainable supply chain, environmental responsibility, employee experience, and the community.
U.S.
In 2013, the U.S. business will focus on driving sales and guest counts by enhancing the entire customer experience through the pillars of the Plan and the three global priorities. Our menu pipeline is more balanced in 2013, with a continued focus on great taste, quality ingredients and variety. We will satisfy our customers' needs with the food they crave by balancing core favorites with limited time offers and innovative new products across the menu. Menu news will be augmented with brand messages that highlight our quality food ingredients, efforts around promoting children's well-being and community involvement. We will enhance our Dollar Menu and introduce new products to highlight McDonald's value at every price point, across all menu categories. We are continuing our major remodel program by updating about 800 locations in 2013. At the same time, we are continuing to improve



12 McDonald's Corporation 2012 Annual Report

restaurant operations through appropriate staffing and a focus on friendly, accurate service as well as innovative order taking. In addition, we will increase the number of restaurants that operate 24 hours a day and strive to be our customers' favorite eating-out destination.
Europe
In Europe, we see growth opportunities in breakfast, core menu items, beverages, and extended hours. Our business plans are focused on building market share by emphasizing value across all dayparts and new restaurant growth. In some markets, our value offerings will evolve from a low-end entry price to multiple entry prices across our menu. This value menu evolution is intended to grow guest counts with compelling affordability and enhanced trade-up opportunities through an extended range of options. In 2013, we will reimage approximately 450 restaurants as we progress towards our goal of having 100% of our interiors and over 85% of our exteriors reimaged by the end of 2015. We will also open nearly 300 restaurants. We will leverage production and service enhancements by optimizing kitchen platforms and accelerating the deployment of technologies, such as updating the point-of-sale system and rolling out multiple order points via self-order kiosks, hand-held order devices and side-by-side drive-thrus. These initiatives will enhance the customer experience, help drive guest counts and improve labor efficiency. We will also continue to reduce our impact on the environment with energy management tools. Despite the near-term headwinds due to economic uncertainty and government-initiated austerity measures implemented in many countries, Europe offers significant long-term opportunity, and we are well-positioned to capitalize on this segment's potential.
APMEA
In APMEA, we will advance efforts to become our customers' favorite place and way to eat and drink by reinvigorating our long-term value platforms, accelerating growth at breakfast, and focusing on menu variety and convenience. Value will continue to be a key strategy and growth driver to build traffic with a focus across the menu at all dayparts, combined with trade-up strategies to build average check. For example, Australia will evolve its Loose Change Menu, and Japan will focus on building average check through trade-up opportunities with promotional products and a focus on breakfast. We plan to grow breakfast traffic in APMEA through increased marketing efforts, value, accessibility and operations excellence. The markets will continue to balance core and limited-time offers and will execute a series of exciting food events that celebrate our core menu and the segment's all-time favorite product offerings. At the same time, we will continue to leverage the diversity of the segment to identify and scale new products and platforms. Convenience initiatives will focus on optimizing our drive-thru and delivery services through operation efficiencies and online capabilities. In China, for example, a new web-ordering system will enhance the customer experience and drive new demand through delivery. We will grow our business by opening approximately 850 new restaurants and reimaging about 225 existing restaurants while elevating our focus on service and operations. In China, we will continue to build a foundation for long-term growth by opening over 300 restaurants, consistent with our goal of reaching 2,000 restaurants by the end of 2013.
Consolidated
Globally, we will maintain financial discipline by effectively managing spending. In making capital allocation decisions, our goal is to make investments that elevate the McDonald's experience and drive sustainable growth in sales and market share. We focus on markets that generate acceptable returns or have opportunities for long-term growth. We remain committed to returning all of our free cash flow (cash from operations less
 
capital expenditures) to shareholders over the long-term via dividends and share repurchases.
McDonald's does not provide specific guidance on diluted earnings per share. The following information is provided to assist in analyzing the Company's results:
▪
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2013 Systemwide sales growth (in constant currencies), most of which will be due to the 1,135 net traditional restaurants added in 2012.
▪
The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in comparable sales for either the U.S. or Europe would increase annual diluted earnings per share by about 4 cents.
▪
With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2013, the total basket of goods cost is expected to increase 1.5-2.5% in the U.S. and 3-4% in Europe.
▪
The Company expects full-year 2013 selling, general and administrative expenses to increase approximately 2-3% in constant currencies, with fluctuations expected between the quarters.
▪
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2013 to increase approximately 4-6% compared with 2012.
▪
A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents.
▪
The Company expects the effective income tax rate for the full-year 2013 to be 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside the annual range. As a result of the American Taxpayer Relief Act of 2012, our income tax provision for the first quarter of 2013 will include a tax benefit of about $50 million reflecting the retroactive impact of certain tax benefits, which may result in a first quarter effective tax rate below the full year range.
▪
The Company expects capital expenditures for 2013 to be approximately $3.2 billion. Over half of this amount will be used to open new restaurants. The Company expects to open between 1,500 - 1,600 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of between 1,200 - 1,300 traditional restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. More than 1,600 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company.


 
McDonald's Corporation 2012 Annual Report 13

Consolidated Operating Results
Operating results
 
 
 
 
2012

 
 
 
 
2011

 
 
2010

Dollars in millions, except per share data
 
Amount

 
Increase/ (decrease)

 
 
Amount

 
Increase/ (decrease)

 
 
Amount

Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
18,603

 
2
%
 
 
$
18,293

 
13
%
 
 
$
16,233

Revenues from franchised restaurants
 
8,964

 
3

 
 
8,713

 
11

 
 
7,842

Total revenues
 
27,567

 
2

 
 
27,006

 
12

 
 
24,075

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
15,224

 
3

 
 
14,838

 
14

 
 
13,060

Franchised restaurants-occupancy expenses
 
1,527

 
3

 
 
1,481

 
8

 
 
1,378

Selling, general & administrative expenses
 
2,455

 
3

 
 
2,394

 
3

 
 
2,333

Impairment and other charges (credits), net
 
8

 
nm

 
 
(4
)
 
nm

 
 
29

Other operating (income) expense, net
 
(252
)
 
(8
)
 
 
(233
)
 
(18
)
 
 
(198
)
Total operating costs and expenses
 
18,962

 
3

 
 
18,476

 
11

 
 
16,602

Operating income
 
8,605

 
1

 
 
8,530

 
14

 
 
7,473

Interest expense
 
517

 
5

 
 
493

 
9

 
 
451

Nonoperating (income) expense, net
 
9

 
(64
)
 
 
25

 
13

 
 
22

Income before provision for income taxes
 
8,079

 
1

 
 
8,012

 
14

 
 
7,000

Provision for income taxes
 
2,614

 
4

 
 
2,509

 
22

 
 
2,054

Net income
 
$
5,465

 
(1
%)
 
 
$
5,503

 
11
%
 
 
$
4,946

Earnings per common share—diluted
 
$
5.36

 
2
%
 
 
$
5.27

 
15
%
 
 
$
4.58

Weighted-average common shares outstanding—
diluted
 
1,020.2

 
(2
%)
 
 
1,044.9

 
(3
%)
 
 
1,080.3

nm Not meaningful
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS
While changes in foreign currency exchange rates affect reported results, McDonald’s mitigates exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows, and purchasing goods and services in local currencies.
In 2012, foreign currency translation had a negative impact on consolidated operating results primarily due to the weaker Euro, along with most other currencies. In 2011, foreign currency translation had a positive impact on consolidated operating results driven by the stronger Euro and Australian Dollar, as well as most other currencies. In 2010, foreign currency translation had a positive impact on consolidated operating results driven by stronger global currencies, primarily the Australian Dollar and Canadian Dollar, partly offset by the weaker Euro.

Impact of foreign currency translation on reported results
 
 
  
 
Reported amount
 
 
 
 
 
Currency translation benefit/(cost)
 
In millions, except per share data
 
2012

 
2011

 
2010

 
 
2012

 
2011

 
2010

Revenues
 
$
27,567

 
$
27,006

 
$
24,075

 
 
$
(726
)
 
$
944

 
$
188

Company-operated margins
 
3,379

 
3,455

 
3,173

 
 
(97
)
 
134

 
35

Franchised margins
 
7,437

 
7,232

 
6,464

 
 
(204
)
 
213

 
(14
)
Selling, general & administrative expenses
 
2,455

 
2,394

 
2,333

 
 
40

 
(55
)
 
(12
)
Operating income
 
8,605

 
8,530

 
7,473

 
 
(261
)
 
301

 
13

Net income
 
5,465

 
5,503

 
4,946

 
 
(178
)
 
195

 
13

Earnings per common share—diluted
 
5.36

 
5.27

 
4.58

 
 
(0.17
)
 
0.19

 
0.01

 


14 McDonald's Corporation 2012 Annual Report

NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2012, net income decreased 1% (increased 3% in constant currencies) to $5.5 billion and diluted earnings per common share increased 2% (5% in constant currencies) to $5.36. Foreign currency translation had a negative impact of $0.17 per share on diluted earnings per share. Net income and diluted earnings per share growth in constant currencies were positively impacted by growth in franchised margin dollars, partly offset by a higher effective income tax rate and higher selling, general and administrative expenses. A decrease of 2% in diluted weighted average shares outstanding also contributed to the diluted earnings per share growth in 2012.
In 2011, net income increased 11% (7% in constant currencies) to $5.5 billion and diluted earnings per common share increased
 
15% (11% in constant currencies) to $5.27. Foreign currency translation had a positive impact of $0.19 per share on diluted earnings per share. Net income and diluted earnings per share growth in 2011 in constant currencies were positively impacted by growth in franchised margin dollars, and to a lesser extent, Company-operated margin dollars, partly offset by a higher effective income tax rate. A decrease of 3% in diluted weighted average shares outstanding also contributed to the diluted earnings per share growth in 2011.
The Company repurchased 28.1 million shares of its stock for $2.6 billion in 2012 and 41.9 million shares of its stock for $3.4 billion in 2011, driving reductions in weighted average shares outstanding on a diluted basis in both periods.

 

REVENUES
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees.
In 2012 and 2011, constant currency revenue growth was driven primarily by positive comparable sales as well as expansion.
Revenues
 
 
Amount
 
 
Increase/(decrease)
 
 
Increase/(decrease) excluding currency translation
 
Dollars in millions
 
2012

 
2011

 
2010

 
2012

 
2011

 
2012

 
2011

Company-operated sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
4,530

 
$
4,433

 
$
4,229

 
2
%
 
5
%
 
2
%
 
5
%
Europe
 
7,850

 
7,852

 
6,932

 
0

 
13

 
6

 
8

APMEA
 
5,350

 
5,061

 
4,297

 
6

 
18

 
5

 
11

Other Countries & Corporate
 
873

 
947

 
775

 
(8
)
 
22

 
(7
)
 
17

Total
 
$
18,603

 
$
18,293

 
$
16,233

 
2
%
 
13
%
 
4
%
 
8
%
Franchised revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
4,284

 
$
4,096

 
$
3,883

 
5
%
 
5
%
 
5
%
 
5
%
Europe
 
2,977

 
3,034

 
2,637

 
(2
)
 
15

 
5

 
9

APMEA
 
1,041

 
958

 
769

 
9

 
25

 
9

 
14

Other Countries & Corporate
 
662

 
625

 
553

 
6

 
13

 
11

 
8

Total
 
$
8,964

 
$
8,713

 
$
7,842

 
3
%
 
11
%
 
6
%
 
8
%
Total revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
8,814

 
$
8,529

 
$
8,112

 
3
%
 
5
%
 
3
%
 
5
%
Europe
 
10,827

 
10,886

 
9,569

 
(1
)
 
14

 
6

 
8

APMEA
 
6,391

 
6,019

 
5,066

 
6

 
19

 
6

 
11

Other Countries & Corporate
 
1,535

 
1,572

 
1,328

 
(2
)
 
18

 
0

 
14

Total
 
$
27,567

 
$
27,006

 
$
24,075

 
2
%
 
12
%
 
5
%
 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In the U.S., the increase in revenues in 2012 was primarily due to positive comparable sales. Everyday value offerings, menu variety and the enhanced customer experience due to reimaging contributed positively to results, despite broad competitive activity. Revenues in 2011 were positively impacted by the ongoing appeal of our iconic core products and the success of new products, including additions to the McCafé beverage line, as well as continued focus on everyday value, convenience and modernizing the customer experience.
Europe’s constant currency increases in revenues in 2012 and 2011 were primarily driven by positive comparable sales in the U.K. and Russia, the segment's two largest Company-operated restaurant markets, as well as expansion in Russia. Revenues in 2011 also benefited from comparable sales increases in France and Germany.
 
In APMEA, the constant currency increase in revenues in 2012 was driven by positive comparable sales in China, Australia and many other markets. The constant currency increase in revenues in 2011 was primarily driven by comparable sales increases in China and most other markets. Expansion, primarily in China, also contributed to revenue growth in both periods.


 
McDonald's Corporation 2012 Annual Report 15

The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):
Comparable sales and guest count increases/(decreases)
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
 
2010
 
  
 
Sales

 
Guest
Counts

 
Sales

 
Guest
Counts

 
Sales

 
Guest
Counts

U.S.
 
3.3
%
 
1.9
%
 
4.8
%
 
3.3
%
 
3.8
%
 
5.3
%
Europe
 
2.4

 
(0.5
)
 
5.9

 
3.4

 
4.4

 
2.7

APMEA
 
1.4

 
2.2

 
4.7

 
4.3

 
6.0

 
4.9

Other Countries & Corporate
 
7.7

 
3.0

 
10.1

 
4.5

 
11.3

 
8.3

Total
 
3.1
%
 
1.6
%
 
5.6
%
 
3.7
%
 
5.0
%
 
4.9
%
Systemwide sales increases/(decreases)
 
 
 
 
 
 
 
 
 
 
 
Excluding currency
translation
 

 
2012

 
2011

 
2012

 
2011

U.S.
 
4
%
 
5
%
 
4
%
 
5
%
Europe
 
(2
)
 
14

 
5

 
9

APMEA
 
5

 
16

 
6

 
7

Other Countries & Corporate
 
4

 
17

 
10

 
12

Total
 
3
%
 
11
%
 
5
%
 
7
%
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 financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases):
Franchised sales

 
Amount
 
 
Increase/(decrease)
 
 
Increase excluding currency translation
 
Dollars in millions
 
2012

 
2011

 
2010

 
2012

 
2011

 
2012

 
2011

U.S.
 
$
31,063

 
$
29,739

 
$
28,166

 
4
%
 
6
%
 
4
%
 
6
%
Europe
 
16,857

 
17,243

 
15,049

 
(2
)
 
15

 
5

 
9

APMEA
 
13,723

 
13,041

 
11,373

 
5

 
15

 
6

 
6

Other Countries & Corporate
 
8,044

 
7,625

 
6,559

 
5

 
16

 
12

 
12

Total
 
$
69,687

 
$
67,648

 
$
61,147

 
3
%
 
11
%
 
6
%
 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 RESTAURANT MARGINS
▪
Franchised margins
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about two-thirds of the combined restaurant margins in 2012, 2011 and 2010. Franchised margin dollars increased $205 million or 3% (6% in constant currencies) in 2012 and $768 million or 12% (9% in constant currencies) in 2011. Positive comparable sales were the primary driver of the constant currency growth in franchised margin dollars in both years.













 
Franchised margins
In millions
2012

 
2011

 
2010

U.S.
$
3,594

 
$
3,436

 
$
3,239

Europe
2,352

 
2,400

 
2,063

APMEA
924

 
858

 
686

Other Countries & Corporate
567

 
538

 
476

Total
$
7,437

 
$
7,232

 
$
6,464

 
 
 
 
 
 
Percent of revenues
 
 
 
 
 
U.S.
83.9
%
 
83.9
%
 
83.4
%
Europe
79.0

 
79.1

 
78.2

APMEA
88.8

 
89.5

 
89.3

Other Countries & Corporate
85.6

 
86.1

 
86.0

Total
83.0
%
 
83.0
%
 
82.4
%
In the U.S., the franchised margin percent was flat in 2012 as comparable sales performance was offset by higher depreciation related to reimaging. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses.
In Europe, the franchised margin percent decrease in 2012 reflected positive comparable sales and higher occupancy costs. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses.



16 McDonald's Corporation 2012 Annual Report

In APMEA, the franchised margin percent decrease in 2012 was primarily due to Australia, which was partly impacted by the 2012 change in classification of certain amounts from revenues to restaurant occupancy expenses. Although the change in classification resulted in a decrease to the franchised margin percentage, there was no impact on the reported franchised margin dollars. The increase in 2011 was primarily due to a contractual escalation in the royalty rate for Japan in addition to positive comparable sales in most markets, partly offset by a negative impact from the strengthening of the Australian dollar.
The franchised margin percent in APMEA and Other Countries & Corporate is higher relative to the U.S. and Europe due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.
▪
Company-operated margins
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. Company-operated margin dollars decreased $76 million or 2% (increased 1% in constant currencies) in 2012, and increased $282 million or 9% (5% in constant currencies) in 2011. In 2012, Company-operated margin dollars were negatively impacted by foreign currency translation of $97 million, primarily in Europe. On a constant currency basis, the increase in Company-operated margin dollars was due to positive performance in Europe, offset by lower results in APMEA and the U.S. as positive comparable sales were more than offset by higher costs. The growth in Company-operated margin dollars in 2011 was driven by positive comparable sales partly offset by higher costs, primarily commodity costs, in all segments. Foreign currency translation also had a positive impact on results.
Company-operated margins
In millions
2012

 
2011

 
2010

U.S.
$
883

 
$
914

 
$
902

Europe
1,501

 
1,514

 
1,373

APMEA
849

 
876

 
764

Other Countries & Corporate
146

 
151

 
134

Total
$
3,379

 
$
3,455

 
$
3,173

 
 
 
 
 
 
Percent of sales
 
 
 
 
 
U.S.
19.5
%
 
20.6
%
 
21.3
%
Europe
19.1

 
19.3

 
19.8

APMEA
15.9

 
17.3

 
17.8

Other Countries & Corporate
16.8

 
16.0

 
17.2

Total
18.2
%
 
18.9
%
 
19.6
%
In the U.S., the Company-operated margin percent decreased in 2012 primarily due to higher commodity and labor costs, partly offset by positive comparable sales. The margin percent decreased in 2011 due to higher commodity and occupancy costs, partly offset by positive comparable sales.
Europe’s Company-operated margin percent decreased in 2012 primarily due to higher labor and commodity costs across several markets, despite positive comparable sales in Russia and the U.K. The margin percent decreased in 2011 as higher commodity, labor, and occupancy costs were partly offset by positive comparable sales.
In APMEA, the Company-operated margin percent in 2012 decreased primarily due to higher labor and occupancy costs, partly offset by positive comparable sales. The margin percent decreased in 2011 as higher commodity, labor and occupancy costs were partly offset by positive comparable sales. Acceleration of new restaurant openings in China negatively impacted the
 
margin percent in both periods. Similar to other markets, new restaurants in China initially open with lower margins that grow significantly over time.
Supplemental information regarding Company-operated restaurants
We continually review our restaurant ownership mix with a goal of improving local relevance, profits and returns. In most cases, franchising is the best way to achieve these goals, but as previously stated, Company-operated restaurants are also important to our success.
We report results for Company-operated restaurants based on their sales, less costs directly incurred by that business including occupancy costs. We report the results for franchised restaurants based on franchised revenues, less associated occupancy costs. For this reason and because we manage our business based on geographic segments and not on the basis of our ownership structure, we do not specifically allocate selling, general and administrative expenses and other operating (income) expenses to Company-operated or franchised restaurants. Other operating items that relate to the Company-operated restaurants generally include gains/losses on sales of restaurant businesses and write-offs of equipment and leasehold improvements.
We believe the following information about Company-operated restaurants in our most significant segments provides an additional perspective on this business. Management of the Company considers this information when evaluating restaurant ownership mix, subject to other relevant considerations.
The following table seeks to illustrate the two components of our Company-operated margins. The first of these relates exclusively to restaurant operations, which we refer to as “Store operating margin.” The second relates to the value of our brand and the real estate interest we retain for which we charge rent and royalties. We refer to this component as “Brand/real estate margin.” Both Company-operated and conventional franchised restaurants are charged rent and royalties, although rent and royalties for Company-operated restaurants are eliminated in consolidation. Rent and royalties for both restaurant ownership types are based on a percentage of sales, and the actual rent percentage varies depending on the level of McDonald’s investment in the restaurant. Royalty rates may also vary by market.
As shown in the following table, in disaggregating the components of our Company-operated margins, certain costs with respect to Company-operated restaurants are reflected in Brand/real estate margin. Those costs consist of rent payable by McDonald’s to third parties on leased sites and depreciation for buildings and leasehold improvements and constitute a portion of occupancy & other operating expenses recorded in the Consolidated statement of income. Store operating margins reflect rent and royalty expenses, and those amounts are accounted for as income in calculating Brand/real estate margin.
While we believe that the following information provides a perspective in evaluating our Company-operated business, it is not intended as a measure of our operating performance or as an alternative to operating income or restaurant margins as reported by the Company in accordance with accounting principles generally accepted in the U.S. In particular, as noted previously, we do not allocate selling, general and administrative expenses to our Company-operated business. However, we believe that about $50,000 per restaurant, on average, is the typical cost to support this business in the U.S. The actual costs in markets outside the
U.S. will vary depending on local circumstances and the organizational structure of the market. These costs reflect the indirect services we believe are necessary to provide the appropriate support of the restaurant.
  


 
McDonald's Corporation 2012 Annual Report 17

 
U.S.
 
 
Europe
 
Dollars in millions
2012

 
2011

 
2010

 
2012

 
2011

 
2010

As reported
 
 
 
 
 
 
 
 
 
 
 
Number of Company-operated restaurants at
    year end

1,552

 
1,552

 
1,550

 
2,017

 
1,985

 
2,005

Sales by Company-operated restaurants
$
4,530

 
$
4,433

 
$
4,229

 
$
7,850

 
$
7,852

 
$
6,932

Company-operated margin
$
883

 
$
914

 
$
902

 
$
1,501

 
$
1,514

 
$
1,373

Store operating margin
 
 
 
 
 
 
 
 
 
 
 
Company-operated margin
$
883

 
$
914

 
$
902

 
$
1,501

 
$
1,514

 
$
1,373

Plus:
 
 
 
 
 
 
 
 
 
 
 
   Outside rent expense(1)
59

 
56

 
60

 
245

 
242

 
223

   Depreciation—buildings & leasehold
       improvements(1)
77

 
69

 
65

 
123

 
118

 
105

Less:
 
 
 
 
 
 
 
 
 
 
 
Rent & royalties(2)
(668
)
 
(651
)
 
(619
)
 
(1,603
)
 
(1,598
)
 
(1,409
)
Store operating margin
$
351

 
$
388

 
$
408

 
$
266

 
$
276

 
$
292

Brand/real estate margin
 
 
 
 
 
 
 
 
 
 
 
Rent & royalties(2)
$
668

 
$
651

 
$
619

 
$
1,603

 
$
1,598

 
$
1,409

Less:
 
 
 
 
 
 
 
 
 
 
 
   Outside rent expense(1)
(59
)
 
(56
)
 
(60
)
 
(245
)
 
(242
)
 
(223
)
   Depreciation—buildings & leasehold
       improvements(1)

(77
)
 
(69
)
 
(65
)
 
(123
)
 
(118
)
 
(105
)
Brand/real estate margin
$
532

 
$
526

 
$
494

 
$
1,235

 
$
1,238

 
$
1,081

(1)
Represents certain costs recorded as occupancy & other operating expenses in the Consolidated statement of income – rent payable by McDonald’s to third parties on leased sites and depreciation for buildings and leasehold improvements. This adjustment is made to reflect these occupancy costs in Brand/real estate margin. The relative percentage of sites that are owned versus leased varies by country.
(2)
Reflects average Company-operated rent and royalties (as a percent of sales: U.S.: 2012 – 14.7%; 2011 – 14.7%; 2010 – 14.6%; Europe: 2012 – 20.4%; 2011 – 20.4%; 2010 – 20.3%). This adjustment is made to reflect expense in Store operating margin and income in Brand/real estate margin. Countries within Europe have varying economic profiles and a wide range of rent and royalty rates as a percentage of sales.
 
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased 3% (4% in constant currencies) in 2012 and increased 3% (flat in constant currencies) in 2011. The growth rate for 2012 was primarily due to higher employee costs, the 2012 London Olympics sponsorship, higher technology related costs and the 2012 Worldwide Owner/Operator Convention, partly offset by lower incentive-based compensation. The growth rate for 2011 was flat as higher employee and other costs were offset by lower incentive-based compensation and costs in 2010 related to the Vancouver Olympics and the Company’s 2010 Worldwide Owner/Operator Convention.
Selling, general & administrative expenses
 
Amount
 
 
Increase/(decrease)
 
 
Increase/(decrease) excluding currency translation
 
Dollars in millions
2012

 
2011

 
2010

 
2012

 
2011

 
2012

 
2011

U.S.
$
782

 
$
779

 
$
781

 
0
%
 
0
%
 
0
%
 
0
%
Europe
695

 
699

 
653

 
(1
)
 
7

 
5

 
2

APMEA
353

 
341

 
306

 
4

 
12

 
3

 
5

Other Countries & Corporate(1)
625

 
575

 
593

 
9

 
(3
)
 
9

 
(4
)
Total
$
2,455

 
$
2,394

 
$
2,333

 
3
%
 
3
%
 
4
%
 
0
%
(1)
Included in Other Countries & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training.
Selling, general and administrative expenses as a percent of revenues were 8.9% in 2012 and 2011, and 9.7% in 2010. Selling, general and administrative expenses as a percent of Systemwide sales were 2.8% in 2012 and 2011, and 3.0% in 2010. Management believes that analyzing selling, general and administrative expenses as a percent of Systemwide sales, as well as revenues, is meaningful because these costs are incurred to support the overall McDonald's business.




18 McDonald's Corporation 2012 Annual Report

IMPAIRMENT AND OTHER CHARGES (CREDITS), NET
Impairment and other charges (credits), net
In millions
2012
 
2011
 
2010
 
Europe
 
$
7

 
 
 
$
1

APMEA
 
 
 
$
(4
)
 
49

Other Countries & Corporate
 
1

 
 
 
(21
)
Total
 
$
8

 
$
(4
)
 
$
29

In 2010, the Company recorded expense of $29 million primarily related to its share of restaurant closing costs in McDonald’s Japan in conjunction with the strategic review of the market’s restaurant portfolio, partly offset by income related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction.
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions
2012

 
2011

 
2010

Gains on sales of restaurant
businesses
$
(152
)
 
$
(82
)
 
$
(79
)
Equity in earnings of unconsolidated
affiliates
(144
)
 
(178
)
 
(164
)
Asset dispositions and other expense
44

 
27

 
45

Total
$
(252
)
 
$
(233
)
 
$
(198
)
▪
Gains on sales of restaurant businesses
Gains on sales of restaurant businesses include gains from sales of Company-operated restaurants. The Company’s purchases and sales of businesses with its franchisees are aimed at achieving an optimal ownership mix in each market. Resulting gains or losses
 
are recorded in operating income because the transactions are a recurring part of our business. Gains on sales of restaurant businesses increased in 2012 due primarily to sales of restaurants in China to developmental licensees, as well as sales of restaurants in Europe and Canada.
▪
Equity in earnings of unconsolidated affiliates
Unconsolidated affiliates and partnerships are businesses in which the Company actively participates, but does not control. The Company records equity in earnings from these entities representing McDonald’s share of results. For foreign affiliated markets—primarily Japan—results are reported after interest expense and income taxes. McDonald’s share of results for partnerships in certain consolidated markets such as the U.S. is reported before income taxes. These partnership restaurants are operated under conventional franchise arrangements and, therefore, are classified as conventional franchised restaurants. Equity in earnings of unconsolidated affiliates decreased in 2012 due to lower operating results, primarily in Japan. Results in 2011 reflected a benefit from stronger foreign currencies, partly offset by the decline in the number of unconsolidated partnerships in the U.S.
▪
Asset dispositions and other expense
Asset dispositions and other expense consists of gains or losses on excess property and other asset dispositions, provisions for restaurant closings and uncollectible receivables, asset write-offs due to restaurant reinvestment, and other miscellaneous income and expenses. Asset dispositions and other expense increased in 2012 primarily due to lower gains on unconsolidated partnership dissolutions in the U.S. Results in 2011 reflected higher gains on unconsolidated partnership dissolutions in the U.S.

 
OPERATING INCOME
Operating income
 
Amount
 
 
Increase/(decrease)
 
 
Increase excluding currency translation
 
Dollars in millions
2012

 
2011

 
2010

 
2012

 
2011

 
2012

 
2011

U.S.
$
3,751

 
$
3,666

 
$
3,446

 
2
%
 
6
%
 
2
%
 
6
%
Europe
3,196

 
3,227

 
2,797

 
(1
)
 
15

 
6

 
10

APMEA
1,566

 
1,526

 
1,200

 
3

 
27

 
3

 
17

Other Countries & Corporate
92

 
111

 
30

 
(17
)
 
nm

 
9

 
nm

Total
$
8,605

 
$
8,530

 
$
7,473

 
1
%
 
14
%
 
4
%
 
10
%
nm Not meaningful

In the U.S., results for 2012 increased due to higher franchised margin dollars, partly offset by lower other operating income and Company-operated margin dollars. Results for 2011 increased primarily due to higher combined restaurant margin dollars, mostly from franchised margin dollars.
In Europe, results for 2012 were driven by strong operating performance in Russia and the U.K. The segment's constant currency operating results benefited from higher franchised margin dollars, and to a lesser extent, Company-operated margin dollars. These results also benefited from higher gains on sales of restaurants, primarily in France and Germany, partly offset by incremental selling, general and administrative expenses related to the 2012 London Olympics. Results for 2011 were driven by stronger operating performance in France, the U.K., Russia and Germany, and higher combined restaurant margin dollars, primarily franchised margin dollars.
 
In APMEA, results for 2012 increased primarily due to higher franchised margin dollars and gains on sales of restaurants in China to developmental licensees, partly offset by lower Company-operated margin dollars and lower operating results in Japan. Results for 2011 increased due to stronger operating results in many markets. Impairment charges in 2010 also positively impacted the constant currency growth rate for 2011 by 4 percentage points.
▪
Combined operating margin
Combined operating margin is defined as operating income as a percent of total revenues. Combined operating margin for 2012, 2011 and 2010 was 31.2%, 31.6% and 31.0%, respectively.


 
McDonald's Corporation 2012 Annual Report 19

INTEREST EXPENSE
Interest expense increased 5% and 9% in 2012 and 2011, respectively, primarily due to higher average debt balances, partly offset by lower average interest rates. Stronger foreign currencies also contributed to the increase in 2011.
NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions
2012
 
2011
 
2010
 
Interest income
 
$
(28
)
 
$
(39
)
 
$
(20
)
Foreign currency and hedging activity
 
9

 
9

 
(2
)
Other expense
 
28

 
55

 
44

Total
 
$
9

 
$
25

 
$
22

Interest income consists primarily of interest earned on short-term cash investments. Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.
PROVISION FOR INCOME TAXES
In 2012, 2011 and 2010, the reported effective income tax rates were 32.4%, 31.3% and 29.3%, respectively.
In 2012, the effective income tax rate reflected the negative impact of certain tax benefits in the U.S. that had expired at December 31, 2011. In January 2013, the United States enacted the American Taxpayer Relief Act of 2012 ("Act"). The Act reinstated, retroactive to January 1, 2012, certain tax benefits that had previously expired. However, in accordance with the financial accounting standards for income taxes, the Company is required to account for the effects of changes in tax laws in the period the legislation is enacted.
In 2011, the effective income tax rate reflected lower tax benefits related to certain foreign tax credits, partially offset by nonrecurring deferred tax benefits related to certain foreign operations.
Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $1.5 billion in 2012 and 2011. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.
ACCOUNTING CHANGES
▪
Fair value measurements
In May 2011, the Financial Accounting Standards Board ("FASB") issued an update to Topic 820 – Fair Value Measurement of the Accounting Standards Codification ("ASC"). This update provides guidance on how fair value accounting should be applied where its use is already required or permitted by other standards and does not extend the use of fair value accounting. The Company adopted this guidance effective January 1, 2012, as required, and it did not have a significant impact on its consolidated financial statements.
 
▪
Comprehensive Income
In June 2011, the FASB issued an update to Topic 220 – Comprehensive Income of the ASC. The update is intended to increase the prominence of other comprehensive income in the financial statements. The guidance requires that the Company presents components of comprehensive income in either one continuous statement or two separate consecutive statements. The Company adopted this new guidance in 2012, as required, and included a separate Consolidated statement of comprehensive income in this Form 10-K.
 
Cash Flows
 
The Company generates significant cash from its operations and has substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
Cash provided by operations totaled $7.0 billion and exceeded capital expenditures by $3.9 billion in 2012, while cash provided by operations totaled $7.2 billion and exceeded capital expenditures by $4.4 billion in 2011. In 2012, cash provided by operations decreased $184 million or 3% compared with 2011 despite increased operating results, primarily due to higher income tax payments and the negative impact of foreign currency translation on operating results. In 2011, cash provided by operations increased $808 million or 13% compared with 2010 primarily due to higher operating results.
Cash used for investing activities totaled $3.2 billion in 2012, an increase of $596 million compared with 2011. The increase primarily reflected higher capital expenditures, an increase in other investing activities related to short-term time deposits, and lower proceeds from sales of restaurant businesses. Cash used for investing activities totaled $2.6 billion in 2011, an increase of $515 million compared with 2010. This reflected higher capital expenditures, partly offset by higher proceeds from sales of restaurant businesses.
Cash used for financing activities totaled $3.8 billion in 2012, a decrease of $683 million compared with 2011, primarily due to lower treasury stock purchases and higher net debt issuances, partly offset by higher dividend payments. Cash used for financing activities totaled $4.5 billion in 2011, an increase of $804 million compared with 2010, primarily due to higher treasury stock purchases, higher dividend payments and lower proceeds from stock option exercises, partly offset by higher net debt issuances.
The Company’s cash and equivalents balance was $2.3 billion at year end 2012 and 2011. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.
RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES
In 2012, the Company opened 1,404 traditional restaurants and 35 satellite restaurants (small, limited-menu restaurants for which the land and building are generally leased), and closed 269 traditional restaurants and 200 satellite restaurants. In 2011, the Company opened 1,118 traditional restaurants and 32 satellite restaurants, and closed 246 traditional restaurants and 131 satellite restaurants. The majority of restaurant openings and closings occurred in the major markets in both years. The Company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.
Systemwide restaurants at year end(1) 
 
2012

 
2011

 
2010

U.S.
14,157

 
14,098

 
14,027

Europe
7,368

 
7,156

 
6,969

APMEA
9,454

 
8,865

 
8,424

Other Countries & Corporate
3,501

 
3,391

 
3,317

Total
34,480

 
33,510

 
32,737

(1)
Includes satellite units at December 31, 2012, 2011 and 2010 as follows: U.S.—997, 1,084, 1,112; Europe—246, 240, 239; APMEA (primarily Japan)—871, 949, 1,010; Other Countries & Corporate—453, 459, 470.



20 McDonald's Corporation 2012 Annual Report

Approximately 65% of Company-operated restaurants and over 75% of franchised restaurants were located in the major markets at the end of 2012. Over 80% of the restaurants at year-end 2012 were franchised.
Capital expenditures increased $319 million or 12% in 2012, and increased $595 million or 28% in 2011, primarily due to higher reinvestment in existing restaurants and higher investment in new restaurants. The higher reinvestment reflects the Company's commitment to grow sales through initiatives such as reimaging in many markets around the world. The increase related to new restaurants reflects our commitment to broaden accessibility to our brand.
Capital expenditures invested in major markets, excluding Japan, represented about 70% of the total in 2012, 2011 and 2010. Japan is accounted for under the equity method, and accordingly its capital expenditures are not included in consolidated amounts.
Capital expenditures  
In millions
2012

 
2011

 
2010

New restaurants
$
1,340

 
$
1,193

 
$
968

Existing restaurants