McDonald’s Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; amounts are in U.S. dollars. The company operated or franchised 36,405 restaurants in 119 countries at quarter-end.
Financial performance
- Q3 revenue: $6.62 billion, down 5% year over year as reported, but up 7% in constant currencies. Company-operated sales were $4.28 billion; franchised revenue was $2.33 billion.
- Q3 operating income: $2.03 billion, down 2% reported and up 10% in constant currencies. Net income was $1.31 billion, up 23%; diluted EPS was $1.40, up 28%. The effective tax rate fell to 30.3% from 44.4% in Q3 2014.
- Nine-month revenue: $19.07 billion, down 9% reported and up 2% in constant currencies. Operating income was $5.27 billion, down 15% reported and 5% in constant currencies. Net income was $3.32 billion, down 9%; diluted EPS was $3.49, down 5%.
- Margins: Q3 company-operated restaurant margin was 15.8%, versus 15.7% a year earlier; franchised margin was 82.2%, versus 82.0%. Nine-month company-operated margin declined to 15.2% from 16.3%; franchised margin was 81.4% versus 81.8%. Nine-month combined operating margin was 27.6%, down from 29.7%.
- Cash flow: Nine-month operating cash flow was $5.16 billion, down from $5.23 billion. Capital expenditures were $1.22 billion, down from $1.82 billion; operating cash flow exceeded capital expenditures by $3.9 billion. Investing activities used $1.11 billion and financing activities used $3.48 billion. Cash and equivalents were $2.45 billion at quarter-end.
- Debt and liquidity: Long-term debt was $17.99 billion, up from $14.99 billion at December 31, 2014; management attributed the increase primarily to $4.2 billion of bond issuances, partly offset by $1.0 billion of repayments. Estimated debt fair value was $18.9 billion. Current assets were $4.49 billion and current liabilities $2.96 billion.
- Shareholder returns: The company repurchased $2.3 billion of shares in Q3 and $4.7 billion in the first nine months; it paid $2.4 billion of dividends year to date. Q3 shareholder returns totaled $3.1 billion. The company targeted $8–9 billion of returns for 2015.
Changes versus prior period
- Global comparable sales rose 4.0% in Q3, versus a 3.3% decline a year earlier; year-to-date comparable sales rose 0.4%. The Q3 improvement included recovery following the 2014 China supplier issue. Nine-month comparable guest counts fell 3.1%.
- Q3 comparable sales increased in all segments: U.S. 0.9%, International Lead Markets 4.6%, High Growth Markets 8.9%, and Foundational Markets & Corporate 6.1%. U.S. sales were positive for the first time in two years, while guest counts remained negative there.
- Currency translation reduced Q3 revenue by $837.6 million and diluted EPS by $0.17; the nine-month impact was $2.29 billion and $0.39 per diluted share. In constant currencies, revenue and operating income trends were materially stronger.
- Nine-month results included approximately $240 million of pretax strategic charges, primarily store closures, restructuring, and asset write-offs tied to refranchising. The company also cited weaker U.S. and Japan operating performance.
- Effective July 1, McDonald’s reorganized reporting from geographic segments to U.S., International Lead Markets, High Growth Markets, and Foundational Markets & Corporate. It also accelerated refranchising; the system included 29,851 franchised and 6,554 company-operated restaurants at September 30.
Outlook, commentary, and risks
- Management said Q4 comparable sales were expected to be positive in all segments. Further outlook was to be provided at the November 10, 2015 Investor Meeting; the filing provides no specific full-year financial guidance.
- Turnaround priorities include improving restaurant operations and customer relevance, restoring traffic, simplifying menus, strengthening value, optimizing restaurant ownership through refranchising, achieving cost savings, and returning cash to shareholders.
- Management attributed Q3 gains partly to product, service, and value initiatives and China’s sales recovery. In the U.S., higher wages and benefits effective July 1 contributed to lower company-operated margin percentages.
- Key stated risks include execution of the turnaround and refranchising plans, intense competition, changing consumer preferences, food safety and supply interruptions, commodity and labor costs, foreign currency movements, franchisee performance, regulation, litigation, cybersecurity, and tax or credit-rating changes.
- The filing reported no material changes to previously disclosed legal proceedings or market-risk disclosures, no material subsequent events requiring disclosure, and effective disclosure controls as of September 30, 2015.
Important facts for investors to verify
- Whether positive Q3 comparable sales persist, particularly whether U.S. guest counts and traffic recover.
- How much reported revenue and earnings remain affected by currency, refranchising, and China-related comparisons.
- Whether wage investment, commodity costs, and other operating expenses pressure company-operated margins.
- Progress against the 2015 shareholder-return target and the implications of higher debt and continued repurchases.
- Whether the turnaround and restaurant-ownership changes deliver sustainable operating-income and cash-flow improvement; the filing gives no full-year numerical outlook.