McDonald’s Corporation — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012. Unaudited results; comparisons are with the quarter ended March 31, 2011 unless otherwise noted. McDonald’s operated and franchised 33,517 restaurants in 119 countries at quarter-end.
Financial performance
| Metric | Q1 2012 | Prior period / change |
|---|---|---|
| Total revenue | $6.547 billion | $6.112 billion; up 7% reported, 8% in constant currencies |
| Operating income | $1.965 billion | $1.826 billion; up 8% reported, 9% in constant currencies |
| Net income | $1.267 billion | $1.209 billion; up 5% reported, 6% in constant currencies |
| Diluted EPS | $1.23 | $1.15; up 7% reported, 8% in constant currencies |
| Cash provided by operations | $1.634 billion | $1.553 billion |
| Capital expenditures | $588 million | $509 million |
| Cash and equivalents | $2.289 billion at March 31 | $2.336 billion at December 31, 2011 |
| Debt obligations | $12.8 billion at March 31 | $12.5 billion at December 31, 2011 |
Combined operating margin was 30.0%, versus 29.9%. Company-operated restaurant margin was 17.5% of sales, down from 17.7%; food and paper costs rose to 34.3% of sales from 33.6%. Franchised margin was 82.3%, up from 81.9%. Interest expense increased 7% to $128.9 million. The effective tax rate rose to 31.4% from 28.8%; the prior-year rate benefited from a nonrecurring deferred tax benefit.
Operating cash flow exceeded capital expenditures by approximately $1.0 billion. Financing used $1.131 billion, including $812.6 million for treasury stock purchases and $712.3 million of dividends, partly offset by net financing proceeds. Cash decreased $46.6 million during the quarter. Current assets were $4.255 billion and current liabilities $3.646 billion. The filing estimates debt fair value at $14.4 billion, versus its $12.8 billion carrying amount.
Business trends and changes
- Global comparable sales rose 7.3%, with comparable guest counts up 4.8%; results benefited from one additional day due to leap year.
- Comparable sales increased 8.9% in the U.S., 5.0% in Europe, and 5.5% in APMEA. Europe’s growth was below its 5.7% prior-year rate; U.S. and APMEA growth accelerated from 2.9% and 3.2%, respectively.
- Systemwide sales increased 9% reported and 10% excluding currency translation. Reported revenue growth was partly offset by foreign currency translation, which reduced operating income by $22.7 million and diluted EPS by $0.01.
- Company-operated margin dollars increased 6%, but margin percentage declined as higher commodity costs—particularly in the U.S.—and labor and occupancy expenses offset sales growth. Franchise margin dollars increased 8%.
- Weighted-average diluted shares fell to 1.030 billion from 1.055 billion, supporting EPS growth. The company repurchased 8.1 million shares for approximately $803 million and declared dividends of $0.70 per share, up from $0.61.
Outlook, commentary, and risks
- McDonald’s did not provide specific EPS guidance. Management expected net restaurant additions to contribute approximately 2 percentage points to 2012 Systemwide sales growth in constant currencies.
- 2012 commodity basket costs were forecast to rise 4.5%–5.5% in the U.S. and 2.5%–3.5% in Europe, with greater pressure expected in the first half. Management said U.S. cost pressures would weigh on Company-operated margins at least through Q2.
- Management expected 2012 SG&A to increase approximately 6% in constant currencies, full-year interest expense to rise 8%–10%, and the effective tax rate to be 31%–33%. Forecast capital expenditures were approximately $2.9 billion; the company expected to open more than 1,300 restaurants and achieve about 900 net additions.
- Management cited economic uncertainty, European austerity, consumer value sensitivity, and commodity, labor, and occupancy inflation as ongoing pressures. Foreign exchange is also material: management estimated a 10% same-direction move in the Euro, British Pound, Australian Dollar, and Canadian Dollar would change annual diluted EPS by about $0.24.
- Other key risks include competition and changing customer preferences; execution of menu, service, reimaging, and technology initiatives; franchisee performance; food safety and supply disruptions; regulatory, nutritional, labor, privacy, and litigation matters; and adverse weather or geopolitical events.
- The filing reports no material changes to previously disclosed legal proceedings or market-risk disclosures, and no subsequent events requiring recognition or disclosure. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check whether comparable-sales and guest-count momentum continued after Q1, including the benefit from leap-year calendar timing.
- Track commodity, labor, and occupancy cost trends against the stated margin pressure and full-year commodity assumptions.
- Compare actual 2012 capital spending, restaurant openings, and net additions with management’s outlook.
- Monitor debt, interest expense, cash generation, and shareholder returns, including buybacks and dividends.
- Assess currency movements and the extent to which constant-currency growth translates into reported results.