McDonald’s Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates and franchises restaurants, with 95% of its 39,696 restaurants franchised at quarter-end.
Financial performance
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue | $5.718 billion, down 3% reported; up 3% in constant currencies | $11.384 billion, up 3% reported; up 8% in constant currencies |
| Comparable sales | Global +9.7%; U.S. +3.7%; International Operated Markets +13.0%; International Developmental Licensed Markets +16.0% | Global +10.7%; U.S. +3.6%; International Operated Markets +16.4%; International Developmental Licensed Markets +15.3% |
| Operating income | $1.712 billion, down 36% reported | $4.024 billion, down 19% reported |
| Net income | $1.188 billion, down 46% | $2.292 billion, down 39% |
| Diluted EPS | $1.60, down 46% | $3.08, down 38% |
| Cash provided by operations | $618 million | $2.751 billion, versus $3.857 billion in 2021 |
Management’s adjusted diluted EPS, excluding specified gains, charges and tax effects, was $2.55 for Q2, up 8% (14% in constant currencies), and $4.83 for the half-year, up 13% (18% in constant currencies). These are non-GAAP measures.
Franchised restaurant margins rose 8% in Q2 and 12% for the half-year; company-operated margins fell 27% and 15%, respectively. Management attributed company-operated margin pressure to labor and commodity inflation, with closures in Russia and Ukraine also affecting international operations. Franchised margins contributed nearly 90% of restaurant margin dollars.
Cash, debt and liquidity
- Cash and equivalents were $1.873 billion at June 30, down from $4.709 billion at December 31, 2021.
- Six-month operating cash flow of $2.751 billion exceeded capital expenditures of $839 million by approximately $1.9 billion. The company cited payments related to the France tax audit settlement as a principal reason operating cash flow declined year over year.
- Long-term debt was $34.577 billion; its estimated fair value was $33.7 billion. Lease liabilities totaled approximately $13.009 billion. Shareholders’ equity was negative $6.370 billion.
- Six-month cash used for financing was $4.517 billion, including $2.538 billion of share repurchases and $2.042 billion of dividends.
Material changes and unusual items
- The company completed the sale of its Russian business in mid-June and exited the market. It recorded Russia-related pretax charges of $1.2 billion for Q2 and $1.3 billion for the first half, primarily for the write-off of its net investment and cumulative currency translation losses. More than 850 Russian restaurants were sold.
- The Russia charge and a $271 million gain on the sale of Dynamic Yield materially affected reported operating results. Q2 operating income excluding specified current- and prior-year items was essentially flat reported and up 7% in constant currencies; first-half adjusted operating income rose 6% and 12%, respectively.
- A France tax audit settlement resulted in nonoperating expense of $37 million for Q2 and $537 million for the first half. Effective tax rates were 15.7% for Q2 and 22.3% for the half-year.
- Restaurants in Ukraine remained closed throughout Q2. The company reported a Ukraine net investment of approximately $110 million and approximately $140 million of cumulative foreign currency translation losses; it recorded no impairment in Q2.
- Foreign currency translation reduced reported Q2 revenue by approximately $345 million and diluted EPS by $0.15; for the first half, the impacts were approximately $547 million and $0.16 per diluted share.
Outlook, commentary 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 about 2.3% of Systemwide sales; reported operating margin in the 40% range and adjusted operating margin in the mid-40% range; interest expense relatively flat with 2021; and an effective tax rate of 20%–22%. Planned capital expenditures were $2.0–$2.2 billion, with over 1,700 restaurant openings and more than 1,300 net additions excluding Russia. The company expected free-cash-flow conversion above 90%.
Management highlighted value, menu, marketing, digital, delivery and drive-thru initiatives. Digital channels represented nearly one-third of Systemwide sales in the top six markets in Q2, exceeding $6 billion and increasing more than 40% year over year. Risks discussed include COVID-19 disruptions, inflation and labor availability, supply-chain and commodity costs, geopolitical impacts, currency movements, competition, franchisee performance, technology and cybersecurity, and legal, regulatory and tax matters. The filing cautions that interim results do not necessarily indicate full-year results.
Investor facts to verify
- Whether comparable-sales growth and franchisee sales remain resilient amid inflation and changing consumer demand.
- The underlying operating trend after separating Russia-related charges, Dynamic Yield gains, France tax settlement effects and currency translation.
- Cash generation, liquidity and the pace of debt repayment, dividends and repurchases given lower cash balances and negative shareholders’ equity.
- Progress on the 2022 restaurant expansion, capital spending, margin and free-cash-flow outlook, especially if inflation or market closures persist.
- Developments in Ukraine, including restaurant reopening prospects and potential asset impairment or further currency effects.