McDonald’s Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 9, 2020. McDonald’s operated 39,096 restaurants worldwide, of which 93% were franchised. Results reflect the significant effects of COVID-19 and related operating restrictions.
Key financial results
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $5,418.1 | $5,502.3 | $13,894.0 | $15,936.2 |
| Operating income | $2,526.4 | $2,409.3 | $5,181.1 | $6,777.2 |
| Net income | $1,762.6 | $1,607.9 | $3,353.3 | $4,453.2 |
| Diluted EPS | $2.35 | $2.11 | $4.47 | $5.80 |
| Cash provided by operations | — | $4,272.4 | $6,232.8 | |
| Capital expenditures | — | $1,177.7 | $1,661.8 |
- Q3 revenue fell 2% and operating income rose 5%; diluted EPS increased 11%. Q3 results included $139 million of pre-tax strategic gains from the sale of McDonald’s Japan stock. Excluding strategic gains and charges, management reported Q3 diluted EPS growth of 5%.
- For the nine months, revenue declined 13%, operating income 24%, net income 25%, and diluted EPS 23%. The reported operating margin was 37.3%, versus 42.5% in 2019. Nine-month results included the Japan stock-sale gain and net strategic charges; excluding the current- and prior-year items, operating income declined 26%.
- Q3 global comparable sales decreased 2.2%; U.S. comparable sales increased 4.6%, while International Operated Markets declined 4.4% and International Developmental Licensed Markets & Corporate declined 10.1%. Nine-month global comparable sales decreased 9.9%.
- Cash from operations exceeded capital expenditures by $3.1 billion for the first nine months. Operating cash flow was down about $2.0 billion year over year, reflecting lower earnings and working-capital changes, including deferred franchisee rent and royalty collections.
- At September 30, cash and equivalents were $3.684 billion; current assets were $6.736 billion and current liabilities $6.280 billion. Debt obligations were $37.8 billion, compared with $34.2 billion at year-end 2019. Shareholders’ equity was a deficit of $8.472 billion.
Material changes and notable items
- COVID-19-related closures and reduced operations weighed heavily on the first-half results. Comparable sales improved month over month during Q3, but operating-hour limits, restricted dine-in capacity, and dining-room closures returned in some markets as infections resurged.
- Approximately $1 billion of rent and royalty cash collections was deferred; about half had been collected by September 30. More than half of the remaining deferrals were expected to be collected in Q4 2020, with the balance expected in the first half of 2021. Revenue continued to be recognized as sales occurred.
- The company raised $5.5 billion of long-term debt in Q1 to bolster liquidity amid the pandemic. It repaid a $1 billion credit-line borrowing in Q3; that facility remained available. A separate $3.5 billion committed line was undrawn. Standard & Poor’s affirmed the BBB+ rating but placed the company on negative outlook; Moody’s affirmed Baa1.
- The company suspended open-market share repurchases in early March. Nine-month treasury-stock purchases were $905.6 million, largely reflecting purchases before suspension and related activity. Dividends paid totaled $2.8 billion for the nine months.
- The company recorded $26.3 million of impaired-software write-offs for the nine months. It also recorded $139 million of strategic gains related to reducing its McDonald’s Japan ownership by about 3%. The company reported no impairment indicators for long-lived assets or goodwill during the period.
Outlook, management commentary, and risks
- Management expected 2020 capital expenditures of approximately $1.6 billion and roughly 950 restaurant openings globally, with about 300 net restaurant additions. It expected full-year interest expense to rise about 8%–9%, a full-year effective tax rate of about 23%, and a Q4 tax rate of about 25%.
- For 2021 and 2022, the company projected mid-single-digit Systemwide sales growth, a low-to-mid-40% operating margin, SG&A of about 2.3% of Systemwide sales, and free-cash-flow conversion above 90%. It expected capital expenditures of about $2.3 billion in each year. These expectations were subject to ongoing pandemic uncertainty.
- Management announced its “Accelerating the Arches” strategy, emphasizing marketing, core menu categories, and digital, delivery, and drive-thru capabilities. Planned initiatives included a new U.S. Crispy Chicken Sandwich in early 2021 and a MyMcDonald’s digital platform rollout across six leading markets by the end of 2021.
- Principal risks include further COVID-19 disruption and government restrictions, weaker consumer demand, franchisee financial health and ability to fund investment, labor and supply-chain pressures, competition, technology and cybersecurity risks, and legal, regulatory, currency, and financing risks. Management stated it would continue reassessing expectations as conditions warranted.
- The filing reported no material changes to previously disclosed legal proceedings. Management concluded disclosure controls were effective as of September 30, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deferred franchisee rents and royalties are collected on the expected schedule, and whether credit-loss allowances or franchisee support needs increase.
- Whether renewed COVID-19 restrictions materially affect restaurant access, comparable sales, and results in international markets.
- How much Q3 and nine-month earnings depended on the Japan stock-sale gain and tax benefits, relative to underlying operating performance.
- Debt maturity, refinancing, liquidity, and credit-rating developments, particularly in light of the negative S&P outlook and higher interest expense.
- Whether the 2021–2022 sales, margin, capital-spending, restaurant-expansion, and free-cash-flow targets remain achievable as pandemic conditions evolve.