McDonald’s Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. McDonald’s operated or franchised 34,010 restaurants in 119 countries at quarter-end.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $7,152.4 | $7,166.3 | $20,614.9 | $20,183.3 |
| Operating income | $2,287.2 | $2,394.7 | $6,406.8 | $6,409.7 |
| Net income | $1,455.0 | $1,507.3 | $4,068.7 | $4,126.5 |
| Diluted EPS | $1.43 | $1.45 | $3.98 | $3.94 |
| Cash from operations | $1,999.4 | $2,169.6 | $5,116.0 | $5,365.5 |
| Capital expenditures | $753.2 | $692.3 | $2,053.6 | $1,791.4 |
- Reported revenue was flat in Q3 and up 2% for the nine months; in constant currencies it increased 4% and 6%, respectively. Global comparable sales grew 1.9% in Q3 and 4.1% year to date.
- Q3 operating income fell 4% as reported and was flat in constant currencies. Nine-month operating income was flat as reported and up 4% in constant currencies. Currency translation reduced diluted EPS by $0.08 for Q3 and $0.16 year to date.
- Q3 company-operated restaurant margin was 19.1%, versus 20.0% a year earlier; franchised margin was 83.4%, versus 83.7%. Nine-month combined operating margin was 31.1%, versus 31.8%.
- Interest expense rose 3% in Q3 and 6% year to date, primarily due to higher average debt balances, partly offset by lower average rates. Effective tax rates were 32.4% for Q3 and 32.3% year to date.
Cash, debt, and liquidity
- At September 30, cash and equivalents were $2,178.5, down from $2,335.7 at December 31, 2011. Current assets were $4,207.9 and current liabilities $4,151.3.
- Debt obligations totaled $13.3 billion, up from $12.5 billion at year-end 2011, primarily reflecting $791.1 million of net debt issuances. Long-term debt was $12,752.0 and current maturities were $512.1.
- Nine-month operating cash flow exceeded capital expenditures by approximately $3.1 billion. Cash used in financing was $3.2 billion, including $2.2 billion in share repurchases and $2.1 billion in dividends.
- Estimated fair value of debt was $15.4 billion, compared with its $13.3 billion carrying amount.
Changes and management commentary
- Q3 net income declined 3% and diluted EPS declined 1% year over year; in constant currencies, they increased 1% and 4%, respectively. For the nine months, net income declined 1%, while diluted EPS increased 1% as reported.
- Management cited value initiatives, restaurant and technology investment, commodity and labor costs, and the London Olympics as pressures on results. The Olympics, technology costs, and the Worldwide Owner/Operator Convention contributed to higher SG&A.
- Company-operated expenses rose relative to sales: food and paper were 33.8% versus 33.7% in Q3, while occupancy and other operating expenses were 22.4% versus 21.8%. Management attributed margin pressure in part to higher commodity, labor, and occupancy costs.
- The company repurchased 24.1 million shares for $2.3 billion and paid $2.1 billion in dividends in the first nine months. It declared a Q4 dividend of $0.77 per share, a 10% increase, and expected at least $5.5 billion of total shareholder returns for 2012.
Outlook, risks, and other items
- Management expected revenue and operating income to remain under pressure for at least the next few quarters. It emphasized affordable value to support guest counts and market share, while noting that value offerings could weigh on average check.
- 2012 outlook included commodity-basket cost increases of 3.5%–4.5% in the U.S. and 2.5%–3.5% in Europe; SG&A growth of about 6% in constant currencies; interest expense growth of 4%–6%; an effective tax rate of 31%–33%; and capital expenditures of approximately $2.9 billion.
- The company expected more than 1,300 restaurant openings and about 900 net additions in 2012. Net restaurant additions were expected to contribute approximately two percentage points to systemwide sales growth in constant currencies.
- Principal risks discussed include weak economic conditions, intense competition and consumer price sensitivity, commodity and labor cost volatility, foreign exchange exposure, franchisee execution, food safety and reputational risks, and legal, regulatory, technology, and supply-chain risks. Management noted that a simultaneous 10% move in the Euro, British pound, Australian dollar, and Canadian dollar could change annual diluted EPS by about $0.24.
- No material changes to previously disclosed legal proceedings or market-risk disclosures were reported. No subsequent events requiring recognition or disclosure were identified. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales and guest-count momentum can offset value-related average-check pressure and rising operating costs.
- How much reported performance continues to differ from constant-currency results, particularly in Europe and other international markets.
- Whether the planned 2012 capital spending, restaurant openings, and reimaging support returns while operating margins remain pressured.
- Debt growth, cash generation, and the sustainability of the stated shareholder-return plans.
- Actual commodity costs, SG&A, interest expense, and tax rate against management’s 2012 outlook.