McDonald’s Corporation — Q3 2013 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. McDonald’s operated or franchised 34,923 restaurants in 119 countries; 28,281 were franchised and 6,642 company-operated. The business combines company restaurant sales with franchise royalties, rents and fees.
Financial performance
- Revenue: Q3 revenue was $7.32 billion, up 2% year over year; nine-month revenue was $21.01 billion, up 2%. Franchise revenue rose 4% in Q3 and 3% over nine months. Growth was primarily supported by restaurant expansion.
- Profit and per-share results: Q3 operating income was $2.42 billion, up 6%, and net income was $1.52 billion, up 5%; diluted EPS was $1.52, up 6%. Nine-month operating income was $6.56 billion, up 2%, net income was $4.19 billion, up 3%, and diluted EPS was $4.16, up 5%. Currency translation reduced diluted EPS by $0.01 in Q3 and $0.03 over nine months.
- Margins: Q3 company-operated restaurant margin was 18.7%, versus 19.1% in 2012; nine-month margin was 17.6%, versus 18.3%. Franchised restaurant margin was 83.0% in Q3, versus 83.4%, and 82.5% for nine months, versus 83.0%. Nine-month combined operating margin was 31.2%, compared with 31.1%.
- Cash flow and capital returns: Nine-month operating cash flow was $5.25 billion, up from $5.12 billion; capital expenditures were $1.92 billion, down from $2.05 billion. Cash used for financing was $3.40 billion. The company paid $2.31 billion in dividends and repurchased $1.27 billion of stock during the nine months.
- Liquidity and debt: Cash and equivalents were $2.54 billion at September 30, versus $2.34 billion at December 31, 2012. Current assets were $4.73 billion and current liabilities $3.82 billion. Debt obligations were $13.5 billion, down from $13.6 billion at year-end; estimated fair value was $14.6 billion. Management said operating cash flow exceeded capital expenditures by $3.3 billion over nine months and that substantial credit capacity was available.
- Other metrics: Global comparable sales rose 0.9% in Q3 and 0.3% for nine months, while comparable guest counts fell 1.4% over nine months. Q3 comparable sales were up 0.7% in the U.S. and 0.2% in Europe, but down 1.4% in APMEA.
Material changes and management commentary
- Revenue and earnings increased, but guest-count trends weakened: nine-month comparable guest counts declined after increasing 2.2% in the prior-year period, and global comparable-sales growth slowed from 4.1% to 0.3%.
- Franchise margin dollars increased, while company-operated margin dollars decreased 3% over nine months. Management attributed company-operated pressure to soft comparable sales and higher occupancy, commodity and labor costs in certain markets.
- Regional results were mixed. Europe operating income increased, while APMEA operating income fell 5% for nine months, reflecting lower company-operated margins and weaker results in some markets. Management cited negative comparable sales in Japan, China and Australia.
- Selling, general and administrative expense fell 4% over nine months, partly reflecting lower incentive compensation and prior-year Olympic and owner/operator convention costs. The nine-month effective tax rate was 31.9%, including a nearly $50 million tax benefit related to the American Taxpayer Relief Act of 2012.
Outlook, risks and unusual items
- Management expected challenging conditions to continue: flat or declining informal eating-out markets, limited ability to raise menu prices, cost pressures and heightened competition. For Q4, it expected comparable-sales performance in line with recent quarterly trends and restaurant-margin percentage declines at a level relatively similar to Q1.
- For 2013, the company expected net restaurant additions to contribute about 2.5 percentage points to systemwide sales growth in constant currencies; U.S. and Europe commodity-basket costs to rise 1.5%–2.0%; SG&A to decline 2%–3% in constant currencies; interest expense to increase 1%–2%; and the effective tax rate to be 31%–33%.
- Planned 2013 capital expenditures were about $3.0 billion. The company expected to open about 1,500 restaurants, including about 1,200 net traditional additions, and reimage more than 1,600 restaurants. It expected total 2013 shareholder returns of $4.5–$5.0 billion.
- Foreign exchange is a significant exposure: management estimated that a 10% simultaneous move in the Euro, British Pound, Australian Dollar and Canadian Dollar would change annual diluted EPS by about $0.25. Commodity and labor-cost volatility, consumer sensitivity, franchisee execution, food safety, regulation, litigation, technology and cybersecurity, and economic or geopolitical disruption were also identified as risks.
- The board declared a Q4 cash dividend of $0.81 per share, a 5% increase. No subsequent events requiring recognition or disclosure were reported. Management stated disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter; no material change in legal-proceeding disclosures was reported.
Investor verification points
- Check whether weak guest counts and subdued comparable-sales growth persisted after Q3, particularly in APMEA and Europe.
- Track company-operated restaurant margins against commodity, labor and occupancy costs, and assess whether franchised-margin growth can offset pressure.
- Verify delivery of stated 2013 capital spending, restaurant-opening and reimaging plans, and the expected $4.5–$5.0 billion shareholder return.
- Review debt, cash generation and distributions together, including the gap between debt carrying value and estimated fair value.
- Assess currency exposure and the assumptions underlying management’s forward-looking estimates; the filing cautions that quarterly results do not necessarily indicate full-year results.