McDonald’s Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unless noted otherwise, financial amounts are in millions of U.S. dollars. McDonald’s operated or franchised 32,466 restaurants in 117 countries; 81% were franchised.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $5,945.5 | $5,647.2 | $11,555.6 | $10,724.6 |
| Operating income | $1,845.3 | $1,681.5 | $3,519.4 | $3,081.9 |
| Net income | $1,225.8 | $1,093.7 | $2,315.6 | $2,073.2 |
| Diluted EPS | $1.13 | $0.98 | $2.13 | $1.85 |
| Operating margin | 31.0% | 29.8% | 30.5% | 28.7% |
- Quarterly revenue rose 5% and operating income 10%; six-month revenue rose 8% and operating income 14%. Net income increased 12% in both periods. Diluted EPS increased 15% in both periods.
- Global comparable sales increased 4.8% in Q2 and 4.5% for the six months. Comparable sales gains were reported across all geographic areas.
- For the quarter, company-operated restaurant margin was 19.9% versus 17.9% a year earlier; franchised margin was 82.7% versus 82.3%. Management cited comparable-sales growth and lower commodity costs as key contributors to company-operated margin growth.
- Interest expense fell 9% in both reported periods, primarily due to lower average interest rates. The effective tax rate was 29.4% for Q2 and 29.7% for the six months.
Cash flow, balance sheet and capital returns
- Six-month cash from operations was $2,671.4, up from $2,550.8; capital expenditures were $796.3, leaving operating cash flow above capital spending by approximately $1.9 billion. Working-capital changes used $441.7 of cash, with management citing higher income-tax payments as a factor.
- Cash and equivalents were $1,665.5 at June 30, down from $1,796.0 at December 31, 2009. Current assets were $3,166.5 and current liabilities $2,582.8 (current ratio approximately 1.23).
- Debt obligations were approximately $10.6 billion at June 30, 2010, including $334.9 of current maturities; long-term debt was $10,291.3. Estimated debt fair value was $11.9 billion versus $10.6 billion carrying value. No significant early debt retirement was planned.
- For the six months, the company repurchased 20.8 million shares for $1.4 billion and paid dividends of nearly $1.2 billion ($1.10 per share). Q2 repurchases were 14.1 million shares for nearly $1.0 billion; the quarterly dividend was $0.55 per share.
- In August 2010, after quarter-end, McDonald’s issued $450 million of 10-year notes at 3.5% and $300 million of 30-year bonds at 4.875%.
Material changes and unusual items
- Six-month 2010 results included $35.3 million after-tax impairment charges related to McDonald’s Japan’s planned closure of approximately 430 restaurants by mid-2011. The company did not expect significant additional charges for these closures in the second half of 2010.
- Six-month 2009 results included an after-tax $58.5 million gain ($0.05 per share) from the Redbox investment sale; there was no comparable gain in 2010. Consider this when assessing year-over-year growth.
- Six-month foreign-currency translation benefited revenue by $355.7 million and operating income by $86.0 million, and added $0.05 to diluted EPS. Translation had no impact on Q2 diluted EPS.
- Accumulated other comprehensive income moved from $747.4 at year-end 2009 to a loss of $278.9, largely reflecting foreign-currency translation losses. Q2 2010 total comprehensive income was $434.0, below net income because of those translation adjustments.
- Other operating expense included charges related to the voluntary Shrek glassware recall. Japan impairment charges were recorded separately.
Outlook, commentary and risks
- McDonald’s did not provide specific EPS guidance. It expected net restaurant additions to contribute 1.5–2 percentage points to 2010 Systemwide sales growth in constant currencies, and planned to open about 1,000 restaurants with net additions of about 325, reflecting Japan closures.
- 2010 commodity basket costs were expected to decrease 3–4% in the U.S. and 1–2% in Europe. SG&A was expected to increase slightly in constant currencies; full-year interest expense was expected to decline 3–5% versus 2009.
- Management expected a full-year effective tax rate of approximately 29–31%, capital expenditures of approximately $2.4 billion, and negative foreign-currency translation impact on full-year diluted EPS at then-current rates. It estimated a 10% common move in the Euro, British Pound, Australian Dollar and Canadian Dollar versus 2009 could change annual diluted EPS by about $0.17–$0.19.
- Strategic priorities included service improvements, restaurant reimaging, menu innovation, value offerings and refranchising. Planned capital investment included reimaging more than 2,000 locations worldwide.
- Disclosed risks include economic weakness and value-driven pricing pressure, competition, food safety and brand perception, regulatory and litigation exposure, labor and commodity costs, foreign-exchange and interest-rate movements, franchisee performance, and disruptions from severe weather or other events. Management reported no material change in market-risk disclosures from its 2009 Form 10-K.
- Management stated disclosure controls were effective as of June 30, 2010, with no material change in internal control over financial reporting during the quarter. No material change to previously disclosed legal proceedings was reported.
Key facts for investors to verify
- How comparable-sales momentum and restaurant traffic develop, and whether margin improvements persist as commodity, labor and occupancy costs change.
- The execution, timing and total costs of the Japan restaurant closures, including whether further impairment charges arise.
- The underlying earnings trend after accounting for the 2009 Redbox gain and the favorable six-month 2010 currency contribution.
- Whether the planned capital spending, restaurant openings and refranchising mix deliver expected returns while supporting franchisee health.
- Cash generation and liquidity after substantial share repurchases and dividends, including the $334.9 million of current debt maturities and the subsequent $750 million debt issuance.