McDonald’s Corporation — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2021, compared with Q1 2020. McDonald’s operated 39,160 restaurants worldwide; 93% were franchised. Results were affected by ongoing COVID-19 restrictions and by comparison with the prior-year period, when pandemic impacts began in March.
Financial results
| Metric | Q1 2021 | Q1 2020 / change |
|---|---|---|
| Total revenue | $5.125 billion | $4.714 billion; up 9% (5% in constant currencies) |
| Operating income | $2.281 billion | $1.694 billion; up 35% (30% constant currency) |
| Net income | $1.537 billion | $1.107 billion; up 39% |
| Diluted EPS | $2.05 | $1.47; up 39% |
| Cash provided by operations | $2.124 billion | $1.546 billion |
| Capital expenditures | $368.7 million | $482.5 million |
| Free cash flow | $1.755 billion | Calculated as operating cash flow less capital expenditures |
| Dividends paid | $962.3 million | $930.7 million |
Operating margin was 44.5%, versus 35.9% a year earlier; excluding strategic gains, the company reported a 41.9% non-GAAP operating margin. Restaurant margins rose 14% to $2.650 billion, with franchised margins accounting for over 85% of restaurant margin dollars. The effective tax rate was 21.3%, versus 23.4%.
Cash and equivalents were $3.020 billion at March 31, down from $3.449 billion at year-end 2020. Current assets were $5.468 billion and current liabilities $4.580 billion. Long-term debt was $34.823 billion and current maturities were $900 million, or approximately $35.723 billion total debt carrying amount. Total liabilities exceeded assets by $7.236 billion, resulting in a shareholders’ deficit. The estimated fair value of debt was $39.8 billion, compared with its $35.7 billion carrying amount.
Material changes and notable items
- Global comparable sales increased 7.5%; U.S. comparable sales rose 13.6%, International Operated Markets rose 0.6%, and International Developmental Licensed Markets rose 6.4%. Guest counts remained negative across all segments.
- Systemwide sales increased 12% (8% constant currency). Results reflected stronger U.S. sales and improved performance in China, while restrictions weighed on some European markets.
- Reported operating income included $135 million of strategic gains, primarily from selling an additional 3% stake in McDonald’s Japan. Diluted EPS excluding $0.13 per share of gains was $1.92, up 31% year over year. McDonald’s owned approximately 41% of McDonald’s Japan at quarter-end.
- Operating cash flow increased by $578 million year over year, reflecting improved operating results and working-capital changes, partly offset by higher income-tax payments. Investing cash use was $245 million. Financing cash use was $2.264 billion, including $1.338 billion of long-term debt repayments.
- Q1 2020 financing included $5.539 billion of long-term debt issuance to bolster liquidity during the pandemic. Q1 2021 share purchases were limited to shares withheld for employee taxes; the open-market repurchase program remained suspended.
Guidance, commentary and risks
For 2021, management expected constant-currency Systemwide sales growth in the mid-teens, with net restaurant expansion contributing about 1%; operating margin in the low-to-mid 40% range; SG&A of approximately 2.4% of Systemwide sales; interest expense down 1%–3%; and an effective tax rate of 21%–23%. Capital expenditures were expected to be approximately $2.3 billion, with about 650 net restaurant additions, and free-cash-flow conversion above 90%. SG&A guidance was revised due to higher incentive-based compensation expense.
Management noted continued COVID-19-related limits on operating hours, dining-room capacity and dine-in service, particularly in parts of Europe, and expected restrictions to persist in some markets while the pandemic continued. The filing identifies risks from the pandemic and changing consumer behavior, franchisee financial health, labor and commodity costs, supply disruptions, competition, execution of digital and other strategic investments, technology and data-security issues, and legal and regulatory matters. The company reported no Q1 impairment indicators and no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- How comparable sales, guest counts and restaurant restrictions evolve after the unusually weak prior-year comparison.
- Underlying earnings and margin trends excluding the $135 million Japan-related strategic gains and currency effects.
- Debt repayment plans, liquidity needs and progress toward management’s stated pre-COVID leverage objectives.
- Whether 2021 sales, margin, capital expenditure, restaurant-opening and free-cash-flow expectations remain achievable.
- Franchisee sales and financial condition, particularly in markets subject to ongoing restrictions.