McDonald’s Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; comparisons are to the corresponding 2021 periods. McDonald’s operated or franchised 39,980 restaurants in 118 countries; 95% were franchised.
Financial performance
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Revenue | $5.87 billion; down 5% reported, up 2% in constant currencies | $17.26 billion; flat reported, up 6% in constant currencies |
| Comparable sales | Up 9.5% globally | Up 10.3% globally |
| Operating income | $2.76 billion; down 7% reported, up 1% in constant currencies | $6.79 billion; down 15% reported, down 9% in constant currencies |
| Net income | $1.98 billion; down 8% reported, down 1% in constant currencies | $4.27 billion; down 28% reported, down 23% in constant currencies |
| Diluted EPS | $2.68; down 6% reported, flat in constant currencies | $5.75; down 27% reported, down 22% in constant currencies |
| Cash from operations | Not separately highlighted in MD&A | $5.19 billion, versus $6.48 billion |
| Capital expenditures / free cash flow | Capital expenditures of $531 million | Capital expenditures of $1.37 billion; free cash flow approximately $3.8 billion |
Q3 U.S. comparable sales rose 6.1%, International Operated Markets 8.5%, and International Developmental Licensed Markets 16.7%. Nine-month increases were 4.5%, 13.5%, and 15.9%, respectively. Sales growth reflected menu pricing, digital and delivery activity, promotions, and market performance. Foreign exchange reduced Q3 revenue by approximately $464 million and nine-month revenue by approximately $1.01 billion.
Franchised restaurant margins rose 6% in Q3 and 9% for nine months (13% and 15% in constant currencies). Company-operated margins fell 30% and 21%, respectively, reflecting inflationary labor and commodity costs and Russia/Ukraine closures. Franchised margins contributed nearly 90% of restaurant margin dollars.
Balance sheet, liquidity and capital returns
- At September 30, cash and equivalents were $2.83 billion, versus $4.71 billion at year-end 2021; current assets were $5.74 billion and current liabilities $3.49 billion.
- Long-term debt was $34.87 billion, compared with $35.62 billion at December 31, 2021. Total shareholders’ equity was a deficit of $6.57 billion, versus a deficit of $4.60 billion.
- Nine-month cash used in financing was $5.06 billion, including $3.41 billion of share repurchases and $3.06 billion of dividends, partly offset by $3.37 billion of long-term financing issuances. The company repurchased 14.2 million shares for $3.5 billion.
- The company paid a Q3 dividend of $1.38 per share and announced in October a 10% increase to $1.52 per share, payable December 15, 2022.
Material changes and unusual items
- McDonald’s completed the sale of its Russian business in June 2022 and recorded a nine-month pretax charge of $1.281 billion, primarily for writing off its Russian net investment and cumulative currency translation losses. Certain restaurants in Ukraine began reopening in September; the company reported no Q3 impairment indicators and approximately $75 million invested there.
- Nine-month results included a $271 million pretax gain from the sale of Dynamic Yield and $537 million of nonoperating expense related to settling a French tax audit. The effective tax rate was 22.1% for the nine months, compared with 15.9% in 2021.
- Excluding disclosed gains and charges, nine-month operating income increased 2% (9% in constant currencies) and diluted EPS increased 7% (12% in constant currencies). These are company-presented non-GAAP comparisons.
- COVID-19 restrictions continued to affect restaurant operations, primarily in China. The company cited inflation, labor and commodity costs, foreign exchange, and Russia/Ukraine disruption as pressures on results.
Outlook and risks
For 2022, management expected net restaurant unit expansion to contribute about 1.5% to Systemwide sales growth in constant currencies, excluding Russia; SG&A of approximately 2.3%–2.4% of Systemwide sales; reported operating margin in the 40% range and adjusted margin in the mid-40% range; interest expense growth of about 2%; and an effective tax rate of 21%–22%. Capital expenditures were expected to be approximately $2.0 billion, with about 1,700 restaurant openings and roughly 1,300 net additions excluding Russia. Management expected free-cash-flow conversion above 90%.
Management highlighted risks from persistent inflation and labor availability, supply-chain and commodity disruptions, currency movements, COVID-19 restrictions, geopolitical uncertainty, franchisee financial health, competition, regulatory and tax matters, and technology, cybersecurity, privacy, and brand risks. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; the finance-systems transformation was described as an ordinary-course initiative, not a response to an identified control weakness.
Important facts for investors to verify
- Whether comparable-sales strength and constant-currency growth persist, and how much reflects pricing versus customer traffic and product mix.
- Whether inflation and labor costs continue to constrain company-operated margins, and whether franchised-margin growth offsets that pressure.
- The ongoing financial and operating effects of the Russia exit, Ukraine conditions, and COVID-related restrictions in China.
- Cash generation, debt and liquidity alongside substantial dividends and repurchases; reported equity remains in deficit.
- Progress against 2022 outlook assumptions and the effects of the France tax settlement and other nonrecurring items on comparisons.