McDonald’s Corporation — Q1 2011 Form 10-Q
Reporting period: Quarter ended March 31, 2011; comparative period is Q1 2010 unless otherwise noted. Figures are in millions of dollars except per-share data. The company operated or franchised 32,805 restaurants in 117 countries at quarter-end.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $6,111.6 | $5,610.1; up 9% reported, 7% in constant currencies |
| Operating income | $1,825.9 | $1,674.1; up 9% reported, 7% constant currency |
| Net income | $1,209.0 | $1,089.8; up 11% |
| Diluted EPS | $1.15 | $1.00; up 15%, including $0.03 favorable currency translation in 2011 |
| Operating margin | 29.9% | 29.8% |
| Company-operated restaurant margin | 17.7% | 18.2% |
| Franchised restaurant margin | 81.9% | 81.2% |
| Cash provided by operations | $1,553.1 | $1,422.7 |
| Capital expenditures | $508.7 | $401.8 |
| Cash and equivalents at quarter-end | $1,939.9 | $2,387.0 at Dec. 31, 2010 |
| Debt obligations | Approximately $12.0 billion | Approximately $11.5 billion at Dec. 31, 2010 |
Cash from operations exceeded capital expenditures by about $1.0 billion. Cash declined $447.1 million during the quarter, as $1,370.6 million of share repurchases and $635.1 million of dividends contributed to $1,512.3 million of cash used in financing activities. Current assets were $3,824.2 million versus current liabilities of $4,254.1 million at March 31. The filing estimates debt fair value at $12.9 billion, compared with a $12.0 billion carrying amount.
Changes and operating drivers
- Global comparable sales increased 4.2%, matching Q1 2010; comparable guest counts rose 3.6% versus 3.3%.
- Comparable sales were up 2.9% in the U.S., 5.7% in Europe, and 3.2% in APMEA. APMEA’s growth moderated from 5.7% in Q1 2010.
- Revenue grew across all reported regions. Constant-currency revenue growth was strongest in APMEA and Other Countries & Corporate, at 10% each; Europe grew 8% and the U.S. 3%.
- Company-operated restaurant expenses rose faster than sales: food and paper costs increased to 33.6% of sales from 32.9%, and company-operated margin fell to 17.7% from 18.2%. Management cited higher commodity and labor costs, partly offset by comparable-sales growth.
- Franchised margin dollars increased 9% (8% constant currency), with margin percentage up to 81.9%. A contractual Japan royalty-rate increase contributed to APMEA results.
- Operating income increased in Europe and APMEA, but decreased 2% in the U.S. APMEA constant-currency growth benefited from the absence of Japan impairment charges recorded in Q1 2010.
Outlook, commentary and risks
- The company does not provide specific EPS guidance. Management expected net restaurant additions to contribute about 1.5 percentage points to 2011 systemwide sales growth in constant currencies.
- For full-year 2011, management expected the commodity basket to rise 4%–4.5% in the U.S. and Europe; SG&A to decrease about 2% in constant currencies; interest expense to increase approximately 6%–8%; and the effective tax rate to be 30%–32%.
- Planned 2011 capital expenditures were approximately $2.5 billion. The company expected to open about 1,100 restaurants and achieve net additions of about 750; over half of reinvestment spending was expected to support reimaging approximately 2,200 locations.
- Management cited commodity and labor inflation, uncertain consumer spending, competitive and pricing pressures, foreign exchange and interest-rate exposure, and regulatory, food-safety, supply-chain and execution risks. A 10% move in the Euro, British Pound, Australian Dollar and Canadian Dollar in the same direction could change annual diluted EPS by about $0.20.
- Japan’s natural disasters temporarily closed 285 restaurants; fewer than 40 remained closed at the time of the filing. Management said the effect on consolidated revenue and operating income was minor.
- Q1 2011’s effective tax rate of 28.8% included a nonrecurring deferred tax benefit related to certain foreign operations. Q1 2010 included a $30.0 million after-tax impairment charge for Japan restaurant closings.
- Management reported no material subsequent events, no material changes to previously reported legal proceedings or market-risk disclosures, and effective disclosure controls as of March 31, 2011.
Most important facts for investors to verify
- Whether comparable-sales momentum can offset higher commodity and labor costs, particularly given the decline in company-operated restaurant margin.
- Whether stated 2011 commodity, SG&A, interest, tax, capital spending and restaurant-opening expectations remain achievable.
- How much reported earnings growth reflected underlying operations versus currency translation and the prior-year Japan impairment comparison.
- Debt maturity classification: $919.1 million of long-term debt was current at March 31, 2011, partly because a credit line supporting prior-year classification expired within 12 months of the balance-sheet date.
- The pace and financial impact of Japan’s recovery and any further effects of natural disasters or other disruptions.