McDonald’s Corporation — Q1 2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022. Figures are unaudited; dollar amounts are in millions unless stated otherwise. McDonald’s operates and franchises restaurants worldwide; 93% of its 40,344 restaurants were franchised at quarter-end.
Financial performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $5,665.6 | $5,124.6; up 11% reported, 14% constant currency |
| Operating income | $2,312.6 | $2,281.3; up 1% reported, 3% constant currency |
| Operating margin | 40.8% | 44.5% |
| Net income | $1,104.4 | $1,537.2; down 28% |
| Diluted EPS | $1.48 | $2.05; down 28% |
| Cash provided by operations | $2,133.3 | $2,124.0 |
| Capital expenditures | $401.2 | $368.7 |
| Cash and equivalents at quarter-end | $2,335.7 | $4,709.2 at Dec. 31, 2021 |
| Long-term debt | $33,988.8 | $35,622.7 at Dec. 31, 2021 |
Global comparable sales rose 11.8%: U.S. 3.5%, International Operated Markets 20.4%, and International Developmental Licensed Markets 14.7%. Systemwide sales increased 10% reported and 14% constant currency. Revenue from franchised restaurants was $3,262.8, including $2,081.1 of rents and $1,168.7 of royalties.
Operating cash flow exceeded capital expenditures by $1.7 billion. Financing used $3,830.1, including $1,506.5 for treasury-stock purchases and $1,025.1 for dividends. Cash fell by $2,373.5 during the quarter, reflecting financing outflows and currency effects. Shareholders’ equity remained in deficit at $5,990.8.
Material changes and unusual items
- Q1 net income and EPS included a $500 million nonoperating reserve for a potential settlement of an international tax matter, or $0.67 per diluted share.
- Results included $127 million of operating costs related to Russia and Ukraine: $27 million for employee salaries, leases and supplier payments, and $100 million for inventory likely to be disposed of. Management’s adjusted comparison, excluding these costs, the tax reserve and prior-year strategic gains, showed diluted EPS of $2.28, up 19% reported and 22% constant currency. These are non-GAAP comparisons.
- Q1 2021 included $135 million of strategic gains, primarily from the sale of McDonald’s Japan stock. Reported operating margin declined year over year, while management’s non-GAAP operating margin was 43.1% versus 41.9%.
- Russia and Ukraine closures affected 827 company-operated restaurants. The company reported approximately $600 million of net investment in the two markets and $725 million of cumulative foreign-currency translation losses in accumulated other comprehensive income. No impairment was recorded in Q1.
- On April 1, 2022, the company sold Dynamic Yield; it expected approximately $320 million of cash proceeds and a pre-tax gain of approximately $260 million in Q2, subject to final working-capital adjustments.
Outlook, management commentary and risks
For 2022, management expected net restaurant unit expansion to contribute about 1.5% to Systemwide sales growth in constant currency; SG&A of about 2.3% of Systemwide sales; operating margin in the low-to-mid 40% range; interest expense relatively flat to 2021; and an effective tax rate of 20%–22%. Planned capital expenditures were $2.2–$2.4 billion, with approximately 1,700–1,800 restaurant openings and 1,300–1,400 net additions. Management expected free-cash-flow conversion above 90%.
Management said the Russia-Ukraine conflict would likely negatively affect revenue and income while closures continue, and planned to provide direction on those markets by the end of Q2. COVID-19 restrictions continued to affect some markets, particularly China. Principal disclosed risks include geopolitical disruption and sanctions, supply-chain and commodity inflation, labor availability and costs, foreign-exchange movements, COVID-19, competition, franchisee performance, technology and cybersecurity, and legal, regulatory and tax matters. The company stated disclosure controls were effective as of March 31, 2022.
Investor verification points
- Track the resolution, cash exposure and final outcome of the international tax matter behind the $500 million reserve.
- Monitor the duration and ultimate disposition of the Russia and Ukraine operations, including any further costs, asset impairment or currency effects.
- Compare reported results with management’s adjusted figures and review the specific exclusions used in those non-GAAP measures.
- Assess cash, debt, shareholder returns and planned capital spending against the 2022 outlook, including the expected Dynamic Yield sale proceeds and gain.
- Monitor China COVID-related restrictions, inflation, labor and supply-chain pressures, and progress toward the restaurant expansion and margin targets.