McDonald’s Corporation — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 31, 2014. Unaudited results; comparisons are with the quarter ended March 31, 2013 unless otherwise noted. McDonald’s operated or franchised 35,493 restaurants in 120 countries.
Financial performance
- Revenue: $6.70 billion, up 1% reported and 3% in constant currencies. Company-operated sales were $4.49 billion; franchised revenue was $2.21 billion.
- Profit and EPS: Operating income was $1.94 billion, down 1% reported but up 1% in constant currencies. Net income was $1.20 billion, down 5%; diluted EPS was $1.21, down 4% (down 2% in constant currencies). Foreign exchange reduced diluted EPS by $0.03.
- Sales and margins: Global comparable sales rose 0.5%, while comparable guest counts fell 3.1%. Combined operating margin was 28.9%, versus 29.5%. Company-operated restaurant margin was 16.1%, versus 16.2%; franchised margin was 81.1%, versus 81.7%.
- Cash flow and capital returns: Operating cash flow was $1.91 billion, up from $1.69 billion; capital expenditures were $568.8 million. Cash used for investing was $608.2 million and cash used for financing was $1.36 billion. The company paid $801.7 million in dividends and repurchased 4.5 million shares for $432.4 million.
- Liquidity and debt: Cash and equivalents were $2.74 billion at quarter-end; current assets were $4.84 billion and current liabilities $3.10 billion. Debt obligations totaled approximately $13.9 billion, down from $14.1 billion at December 31, 2013. Estimated fair value of debt was $15.1 billion.
- Other metrics: The effective tax rate was 32.4%, compared with 30.1%. Interest expense rose 6% to $135.5 million. The dividend declared per share increased to $0.81 from $0.77.
Material changes and operating trends
- U.S. comparable sales fell 1.7%, attributed to negative guest counts, challenging industry conditions and severe winter weather. Europe comparable sales rose 1.4%; APMEA rose 0.8%.
- Revenue growth reflected restaurant expansion, particularly in Europe. Segment operating income declined 3% in the U.S. and 10% in APMEA, while Europe increased 6%.
- SG&A rose 4% to $620.4 million, principally due to Winter Olympics costs and higher employee costs. The 2013 comparison included a nearly $50 million tax benefit, contributing to the higher 2014 effective tax rate.
- Operating cash flow increased mainly because of working-capital changes, including lower incentive-compensation payments. Debt declined primarily due to net repayments.
Outlook, commentary and risks
- The company did not provide specific EPS guidance. It expected net restaurant additions to contribute about 2.5 percentage points to 2014 systemwide sales growth in constant currencies. A one-percentage-point comparable-sales change in either the U.S. or Europe was estimated to affect annual diluted EPS by about $0.04, assuming no cost-structure change.
- 2014 outlook included commodity basket cost increases of 1%–2% in the U.S. and Europe; SG&A growth of approximately 8% in constant currencies; interest expense growth of 5%–7%; and an effective tax rate of 31%–33%.
- Planned 2014 capital expenditures were $2.9–$3.0 billion, with 1,000–1,100 net restaurant additions expected. The company expected to return approximately $5 billion to shareholders through dividends and repurchases.
- Management cited persistent competition, consumer price sensitivity, cost pressure and flat-to-modest growth expectations in the industry. Company-operated and franchised margins were expected to remain pressured. Key initiatives were menu optimization, customer-experience modernization and broader brand accessibility.
- Risks discussed include sales and guest-count weakness, commodity and labor costs, currency and interest-rate movements, franchisee performance, food safety and reputational issues, regulatory and litigation exposure, technology and data-security risks, and geopolitical or weather disruptions. Management reported no material changes to prior market-risk and legal-proceedings disclosures; no material subsequent events were reported.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, especially in the U.S., Germany, Australia and Japan.
- Whether the projected cost, SG&A, tax and capital-spending ranges are achieved and how they affect margins and earnings.
- How foreign-exchange movements, commodity and labor costs, and the prior-year tax benefit affect year-over-year results.
- Whether operating cash flow continues to cover capital investment and shareholder distributions, and how debt levels evolve.
- Whether planned restaurant expansion and the shift in restaurant ownership mix deliver expected systemwide growth and franchised revenue.