McDonald’s Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Results were significantly affected by COVID-19. At quarter-end, the system had 39,020 restaurants, of which 93% were franchised.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the prior-year period.
- Q2 revenue: $3,761.5, down 30% (29% in constant currencies). Company-operated restaurant sales fell 34%; franchised revenue fell 29%.
- Q2 profitability: Operating income was $961.1, down 58%; net income was $483.8, down 68%; diluted EPS was $0.65, down 67%. Operating margin for the six-month period was 31.3%, versus 41.9% in 2019.
- Six-month results: Revenue was $8,475.9, down 19%; operating income was $2,654.7, down 39%; net income was $1,590.7, down 44%; diluted EPS was $2.12, down 43%.
- Comparable sales: Global comparable sales declined 23.9% in Q2 and 14.0% for six months. Q2 declines were 8.7% in the U.S., 41.4% in International Operated Markets, and 24.2% in International Developmental Licensed Markets.
- Cash flow: Q2 cash used for operations was $213.1, versus $1,925.5 provided in Q2 2019. For six months, operations provided $1,332.9, down from $3,946.1. Six-month capital expenditures were $787.5; free cash flow was negative in Q2, according to management.
- Liquidity and debt: Cash and equivalents were $3,255.7 at June 30, versus $898.5 at year-end 2019. Debt obligations totaled $38.8 billion, compared with $34.2 billion at year-end; the balance sheet included $1.0 billion of short-term borrowings and $3.1 billion of current long-term debt maturities. The company had an additional $3.5 billion committed credit line undrawn at quarter-end. It repaid the $1.0 billion line-of-credit balance on July 30, 2020, leaving the facility available.
- Shareholder returns: The company declared $1.25 per share in Q2 dividends ($929.7 million). It suspended open-market repurchases in early March; six-month treasury-stock purchases totaled $904.9 million, primarily before the suspension.
Material changes and unusual items
- Restaurant closures, restricted operations, and changed customer behavior drove sharp sales declines. Monthly comparable sales improved sequentially during Q2 as locations reopened and restrictions eased.
- Management committed more than $200 million of incremental franchisee marketing support. Other items included $31 million of payments for obsolete inventory to support franchisee liquidity and higher bad-debt reserves of $45 million in Q2 and $92 million for six months.
- Rental income was recognized despite deferred collections. Approximately $300 million of rent and royalties was deferred in Q2 and $800 million for six months; most was expected to be collected in the second half of 2020. Management expected positive free cash flow for the remainder of 2020, subject to collection of deferrals.
- First-half financing included $5.5 billion of long-term debt issuance and a newly drawn $1.0 billion credit line, raising cash to support financial flexibility. Standard & Poor’s affirmed the BBB+ rating but placed the company on negative outlook; Moody’s affirmed Baa1.
- Q2 included about $12 million of software write-offs. Six-month results also included a $13 million income item, primarily a reserve reversal tied to the India Delhi business sale. No long-lived asset or goodwill impairment indicators were identified during the period.
- In July, the company announced plans to gradually divest part of its approximately 49% stake in McDonald’s Japan, retaining at least 35% ownership.
Outlook, management commentary, and risks
- Management stated it could not predict the duration or scope of the pandemic and warned that COVID-19 could continue to materially affect results, financial condition, and outlook. Drive-thru, delivery, contactless service, and simplified menus were highlighted as recovery priorities.
- Management expected 2020 capital expenditures of approximately $1.6 billion, about $800 million for the U.S.; roughly 950 restaurant openings and approximately 200 U.S. closures, or about 350 net additions globally. Development projects had been delayed by the pandemic.
- The company expected full-year 2020 interest expense to rise about 10%–12%, primarily due to higher average debt balances.
- Key risks include renewed or prolonged restaurant restrictions, weaker consumer demand, franchisee financial stress and delayed rent/royalty collections, supply-chain and labor disruption, foreign-exchange movements, competition, and execution risks in digital, delivery, and restaurant modernization initiatives.
Important facts for investors to verify
- Whether deferred rent and royalty receivables were collected as expected, and the resulting effect on operating cash flow and bad-debt reserves.
- How comparable sales, restaurant operating restrictions, and franchisee health developed after June 30, 2020.
- Debt maturities, borrowing costs, credit-rating outlook, and the company’s capacity to sustain dividends and planned capital spending.
- Progress and actual spending on the announced restaurant openings, U.S. closures, and capital expenditure plans.
- The timing, proceeds, and accounting impact of the planned McDonald’s Japan stake reduction.