McDonald’s Corporation — Q2 2011 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the same periods in 2010. McDonald’s franchises and operates restaurants; at quarter-end it had 32,943 restaurants in 117 countries, including 26,598 franchised or licensed and 6,345 company-operated.
Financial performance
Amounts are in millions of dollars, except per-share data. Growth rates are year over year.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $6,905.4 (+16%) | $5,945.5 | $13,017.0 (+13%) | $11,555.6 |
| Operating income | $2,189.1 (+19%) | $1,845.3 | $4,015.0 (+14%) | $3,519.4 |
| Net income | $1,410.2 (+15%) | $1,225.8 | $2,619.2 (+13%) | $2,315.6 |
| Diluted EPS | $1.35 (+19%) | $1.13 | $2.49 (+17%) | $2.13 |
| Operating margin | 31.7% | 31.0% | 30.8% | 30.5% |
| Company-operated restaurant margin | 19.0% | 19.9% | 18.4% | 19.1% |
- Comparable sales grew 5.6% globally in Q2 and 4.9% for the first half. Q2 growth by segment: U.S. 4.5%, Europe 5.9%, APMEA 5.2%.
- Reported revenue growth exceeded constant-currency growth: total revenue rose 8% in constant currencies in both periods. Currency translation added $0.10 to Q2 diluted EPS and $0.12 to first-half EPS.
- Company-operated margins weakened primarily from higher commodity costs, and to a lesser extent labor and occupancy costs. Food and paper costs rose to 33.8% of company-operated sales in Q2 from 32.6%.
- Franchised margin dollars increased 15% in Q2 and 12% for the first half; franchised margin rates were 83.1% and 82.5%, respectively.
Cash flow, debt, and liquidity
- First-half cash provided by operations was $3,195.9, up $524.5 from 2010. Capital expenditures were $1,099.1; operating cash flow exceeded them by approximately $2.1 billion.
- Cash used for investing was $972.3 and cash used for financing was $2,637.7. Financing included $2,118.6 of share repurchases and $1,267.1 of dividends.
- Cash and equivalents were $2,070.0 at June 30, down $317.0 from December 31, 2010. Current assets were $4,025.4 and current liabilities $3,948.8 (current ratio approximately 1.0).
- Debt obligations totaled $12.3 billion, versus $11.5 billion at year-end 2010. The filing attributes the increase primarily to $515.3 of net issuances and $276.0 of foreign-exchange effects. Estimated debt fair value was $13.4 billion versus $12.3 billion carrying value.
- At June 30, short-term borrowings were $896.8 and current maturities of long-term debt were $322.6. A $1.2 billion amount previously classified as long-term at year-end was reclassified as current because its supporting credit line expires within 12 months; the line was unused.
Outlook, commentary, and risks
- Management did not provide specific EPS guidance. It expected 2011 net restaurant additions to contribute about 1.5 percentage points to systemwide sales growth in constant currencies, and projected approximately 750 net restaurant additions.
- 2011 outlook: commodity basket costs expected to rise 4%–4.5% in the U.S. and Europe; SG&A expected to decline about 2% in constant currencies; interest expense expected to increase 8%–10%; effective tax rate expected at 31%–32%; and capital expenditures expected to be about $2.5 billion.
- Management highlighted menu, value, convenience, restaurant modernization, and service initiatives. It said pricing sought to protect guest-count momentum while mitigating cost inflation. It continued to monitor consumer response to economic austerity measures in Europe.
- Foreign exchange remains a material sensitivity: management estimated that a 10% move in the Euro, British Pound, Australian Dollar, and Canadian Dollar in the same direction would change annual diluted EPS by about $0.20.
- Principal disclosed risks include weak economic conditions and consumer spending, competition and value sensitivity, commodity and labor inflation, foreign exchange and interest rates, food safety and supply-chain disruption, franchisee execution, regulatory and litigation exposure, and risks in developing markets. Management reported no material changes to prior annual-report disclosures on legal proceedings or market risk.
- Unusual/comparative items: first-half 2010 included $35.3 after-tax impairment charges related to strategic restaurant closures in Japan. Q2 2011 benefited from gains on U.S. partnership dissolutions; Q2 2010 included charges tied to the Shrek glassware recall.
Important facts for investors to verify
- Whether comparable-sales momentum and restaurant expansion can offset continued commodity inflation and the decline in company-operated margin rates.
- How much reported earnings growth reflects underlying operations versus favorable currency translation and the prior-year Japan impairment comparison.
- Debt maturity and liquidity implications of the $1.2 billion reclassification, alongside planned capital spending, dividends, and repurchases.
- Whether 2011 commodity-cost, interest-expense, tax-rate, capital-expenditure, and net-addition outlook assumptions remain achievable.
- Exposure to currency movements, especially the four currencies management identified as significant to non-U.S. operating income.