McDonald’s Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; filed August 4, 2021. Amounts are in U.S. dollars. McDonald’s operates and franchises restaurants; 36,717 of its 39,396 restaurants were franchised at quarter-end (93%).
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.888B | $3.762B | $11.013B | $8.476B |
| Operating income | $2.691B | $0.961B | $4.972B | $2.655B |
| Net income | $2.219B | $0.484B | $3.757B | $1.591B |
| Diluted EPS | $2.95 | $0.65 | $5.00 | $2.12 |
| Cash provided by operations | $1.733B | $(0.213)B | $3.857B | $1.333B |
| Capital expenditures | $0.483B | $0.305B | $0.851B | $0.788B |
- Q2 global comparable sales increased 40.5%; U.S. comparable sales rose 25.9%, International Operated Markets 75.1%, and International Developmental Licensed Markets 32.3%. Six-month global comparable sales increased 22.6%.
- Revenue grew 57% in Q2 and 30% for six months; constant-currency growth was 49% and 25%, respectively. Operating income rose 87% for the six-month period.
- Six-month free cash flow, defined as operating cash flow less capital expenditures, was approximately $3.006B. Dividends paid were $1.926B for the six months; Q2 dividends declared were $1.29 per share.
- Reported operating margin was 45.2% for the six months, compared with 31.3% a year earlier. The filing does not provide a clear comparative Q2 operating-margin figure in the cited summary table.
Balance sheet and liquidity
- At June 30, 2021, cash and equivalents were $3.049B, total current assets $5.701B, and current liabilities $3.935B.
- Debt carrying value totaled approximately $35.423B, including $0.500B of current maturities and $34.923B of long-term debt. The company also reported $13.839B of lease liabilities.
- Estimated fair value of debt was $40.3B, versus a $35.4B carrying amount. Shareholders’ equity remained in deficit at $(5.808)B.
- Cash declined $0.400B from year-end 2020. Six-month financing cash use was $3.570B, including $1.739B in long-term debt repayments and $1.926B in dividends.
Material changes, unusual items and management commentary
- Management attributed the strong year-over-year recovery largely to fewer restaurant closures and easing COVID-19 restrictions versus 2020; sales also benefited from larger average checks, pricing, marketing, delivery and digital channels. Digital sales in the top six markets were nearly $8B for the first half, up 70% year over year.
- Q2 and six-month operating results included strategic gains of $98M and $233M, primarily from sales of McDonald’s Japan stock. McDonald’s ownership in that affiliate was approximately 38% at quarter-end.
- Net income included a $364M tax benefit from remeasurement of deferred taxes following a change in the U.K. statutory tax rate. Reported effective tax rates were 6.6% for Q2 and 13.2% for six months; management cited adjusted rates of 21.7% and 21.3%, respectively, excluding the specified tax benefit and strategic-gain tax effects.
- Excluding strategic gains and the tax benefit, diluted EPS was $2.37 for Q2 and $4.29 for six months. Foreign-currency translation contributed $0.13 and $0.19 to reported diluted EPS, respectively.
- COVID-19 resurgences continued to cause restrictions on hours, dining-room capacity and, in some cases, closures. Management expects restrictions to persist in some markets while the pandemic continues.
Outlook and principal risks
- For 2021, management expected constant-currency Systemwide sales growth in the mid-to-high teens, with net restaurant unit expansion contributing about 1%; operating margin in the low-to-mid 40% range; and SG&A of approximately 2.4% of Systemwide sales.
- Other 2021 expectations: interest expense down 1%–3%; second-half effective tax rate of 21%–23%; capital expenditures of approximately $2.3B; over 1,300 gross restaurant openings and about 650 net additions; and free-cash-flow conversion above 90%.
- Management said it expected to reduce debt to return to pre-COVID-19 leverage ratios. The outlook is subject to uncertainty, including pandemic developments, supply-chain availability and costs, labor availability and expense, commodity inflation, consumer behavior, foreign exchange, competition, franchisee performance, and legal or regulatory changes.
- The filing reported no material change to previously disclosed legal proceedings or market-risk disclosures. Management concluded disclosure controls were effective as of June 30, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the sharp year-over-year sales and profit growth reflects recovery from the unusually weak 2020 comparison versus durable underlying demand.
- The contribution of the Japan stock-sale gains and U.K. tax remeasurement benefit to reported earnings; assess results using the filing’s adjusted figures as well as GAAP results.
- Whether the 2021 sales, margin, capital-spending and restaurant-expansion outlook is achieved, particularly if COVID-19 restrictions or cost pressures persist.
- Debt reduction, cash generation, dividend commitments and the company’s ability to maintain liquidity while funding investment and shareholder returns.